SHAREHOLDER LETTER
Dear Shareholder:
This annual report for the Franklin Strategic Series covers the fiscal year
ended April 30, 1999.
A YEAR TO REMEMBER.
Looking back, the 12 months under review turned out to be an eventful year for
many investors. Despite economic and financial turmoil overseas, U.S. employment
rose, our economy grew at a remarkable pace, and inflation remained practically
non-existent. On April 30, 1998, the Dow Jones(R) Industrial Average (the Dow)
closed at 9063.37.(1) It climbed throughout most of the summer, but due to
investor concerns about economic crises in Asia and Russia, it fell to 8051.68
on August 28 and suffered an additional 512.61 point drop on August 31.
Concerned about the possible impact of global economic turmoil on the U.S.
economy, the Federal Reserve Board cut short-term interest rates three times in
the fall. This fueled an October rally, which set the Dow on the road to record
highs. Led by blue chip, technology and internet-related stocks, on March 29,
1999, it broke through the 10000 level for the first time in its history. And
that was just the beginning -- on April 30, 1999, the Dow closed at a record
high of 10789.04. The S&P 500(R) Composite Index, which represents many more
stocks, also performed well, closing at 1111.75 on April 30, 1998, and at
1335.18 on April 30, 1999.
(1.) Source: Standard & Poor's(R) Micropal. Dow Jones Industrial Average total
return calculated by Wilshire Associates, Inc.
CONTENTS
<TABLE>
<S> <C>
Shareholder Letter .................................................... 1
Fund Reports
Franklin Blue Chip Fund ............................................. 4
Franklin California
Growth Fund ......................................................... 10
Franklin MidCap
Growth Fund ......................................................... 18
Franklin Small Cap
Growth Fund ......................................................... 24
Financial Highlights &
Statement of Investments .............................................. 32
Financial Statements .................................................. 58
Notes to
Financial Statements .................................................. 63
Independent
Auditors' Report ...................................................... 71
Tax Information ....................................................... 72
</TABLE>
FUND CATEGORY
[PYRAMID GRAPHIC]
- -PAGE-
THINGS ARE NOT ALWAYS WHAT THEY SEEM.
A cursory look at the figures noted above might cause one to conclude that the
reporting period was a good year for all stocks. Nothing could be further from
the truth. The Dow represents only 19.5% of the value of all publicly traded
stocks,(2) and in 1998, the S&P 500 gained 28.72%, but only 100 stocks accounted
for 85% of its return.(3) In fact, in that same year, about 42% of its stocks
lost ground.
WHAT ABOUT NEXT YEAR?
As we look forward to the rest of 1999, it is important to realize that the
prolonged bull market we have been experiencing for the past four years is
extremely unusual, and that past performance is not predictive of future
results. Revived economic activity in Europe, Asia and Latin America could
increase demand for many goods and services. A tighter supply of these goods and
services might result in increased inflation and cause investors to become more
cautious. However, it is also important to remember that over the long term,
stocks and bonds have historically delivered impressive results. For this
reason, we encourage you to discuss your financial goals with your investment
representative, stay focused on the long term, and diversify your investments.
As you know, mutual funds offer a level of diversification almost impossible for
individual investors to achieve on their own.
(2.) Source: Wilshire Associates, Inc.
(3.) Source: Morgan Stanley Dean Witter & Co.
2
- -PAGE-
Whatever direction the market takes, you can rest assured that Franklin
Templeton's portfolio managers are dedicated to providing our shareholders with
careful selection and constant professional supervision. As always, we
appreciate your support, welcome your comments and look forward to serving your
investment needs.
Sincerely,
/s/ Rupert H. Johnson, Jr.
- -----------------------------
Rupert H. Johnson, Jr.
President
Franklin Strategic Series
3
- -PAGE-
FRANKLIN BLUE CHIP FUND
Your Fund's Goal: Franklin Blue Chip Fund seeks long-term capital appreciation
by investing primarily in high quality, blue chip companies with market
capitalization of $1 billion or more, that the managers believe are leaders in
their industries and are positioned for stable, long-term growth potential.
The fiscal year ended April 30, 1999, provided both good and bad news for
investors. The good news was relatively low interest rates and benign inflation,
while the bad news was widespread financial and political instability abroad.
Large-cap growth stocks generally appreciated in value as investors showed a
strong desire for stable earnings growth, while mid- and small-cap stocks did
not perform nearly as well. Within this environment, Franklin Blue Chip Fund
delivered a +16.18% one-year cumulative total return, as shown in the
Performance Summary on page 8, while the fund's benchmarks, the Morgan Stanley
Capital International(R) (MSCI) World Index and the Standard & Poor's (S&P(R))
500(R) Index, provided a return of 16.37% and 21.82% respectively.(1)
(1.) Source: Standard & Poor's(R) Micropal. The unmanaged MSCI World Index
tracks The performance of approximately 1,450 securities in 22 countries, and is
designed to measure world stock market performance. The unmanaged S&P 500 Index
includes 500 domestic securities.
Indices include reinvested dividends. One cannot invest directly in an index,
nor is an index representative of the fund's portfolio.
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 33 of
this report.
4
- -PAGE-
In selecting investments for the fund, we search for companies which demonstrate
market dominance, management excellence, and strong growth in revenues,
earnings, or earnings before interest, taxes, depreciation and amortization. Our
rigorous analysis helps us find high-quality companies, and our long-term
orientation usually leads to low portfolio turnover.
During the reporting period, we substantially re-allocated the fund's portfolio
to reflect the wealth of opportunities in the U.S. market, and our domestic
holdings rose from 60.5% of total net assets on April 30, 1998 to 87.9% on April
30, 1999. This change was reflected in the performance of the fund, which
delivered a return of +6.58% for the three months ended April 30, 1999, while
the S&P 500 Index delivered a return of 4.67% for the same period.(2)
The fund's portfolio was well diversified by industry, with the greatest
concentrations in high-growth industry groups such as electronic technology,
health technology, finance, and consumer durables. Prices of health and
electronic technology stocks generally rose, and our positions in Abbott Labs,
Intel and Cisco Systems strengthened the fund's performance. We added Pfizer,
Schering Plough and Bristol-Meyers Squibb (pharmaceuticals), as well as EMC
(peripherals) and Automatic Data Processing to the portfolio because we believed
they offer potential for sustainable long-term earnings growth.
(2.) Source: Standard & Poor's Micropal.
PORTFOLIO BREAKDOWN
FRANKLIN BLUE CHIP FUND
BASED ON TOTAL NET ASSETS
4/30/99
<TABLE>
<S> <C>
Finance 14.0%
Consumer Non-Durables 12.0%
Health Technology 11.4%
Electronic Technology 10.2%
Technology Services 7.7%
Telecommunications 7.6%
Producer Manufacturing 5.7%
Energy Minerals 5.0%
Process Industries 4.6%
Retail 4.5%
Other Industries 8.8%
Cash & Equivalents 8.5%
</TABLE>
5
- -PAGE-
TOP 10 HOLDINGS
Franklin Blue Chip Fund
Based on Total Net Assets
4/30/99
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- ------------------------------------------
<S> <C>
Microsoft Corp.
Technology Services, U.S. 2.9%
General Electric Co.
Producer Manufacturing, U.S. 2.9%
Intel Corp.
Electronic Technology, U.S. 2.2%
Royal Dutch Petroleum Co.,
N.Y.shs.
Energy Minerals, Netherlands 2.1%
Wal-Mart Stores Inc.
Retail Trade, U.S. 2.0%
Coca-Cola Co.
Consumer Non-Durables, U.S. 1.8%
Countrywide Credit
Industries Inc.
Finance, U.S. 1.7%
Avery Dennison Corp.
Producer Manufacturing, U.S. 1.7%
Marsh & McLennan Cos. Inc.
Finance, U.S. 1.7%
American International
Group Inc.
Finance, U.S. 1.7%
</TABLE>
Our holdings in the financial industry group delivered mixed results, with
strong performance from Charles Schwab Corp. and American International Group
Inc. helping offset flat performance from Merrill Lynch & Co., Inc. During the
reporting period, we added to our holdings in this sector by initiating
positions in Chase Manhattan Corp. and insurers Marsh & McLennan Cos. Inc. and
AFLAC Inc.
However, not all the news was good. The fund's performance was adversely
affected by its underweighting in telecommunications stocks, which appreciated
significantly during the year in review and were more heavily represented in the
index.
This discussion reflects our views, opinions and portfolio holdings as of April
30, 1999. However, market and economic conditions are changing constantly, which
can be expected to affect our strategies and the fund's portfolio composition.
Although historical performance is no guarantee of future results, these
insights may give you a better understanding of our investment and management
philosophy.
Looking forward, we believe prospects remain bright for companies with
high-quality assets, solid management, and sound competitive strategies, with
the potential to generate strong
6
- -PAGE-
growth well into the future. We thank you for your participation in Franklin
Blue Chip Fund and look forward to serving your investment needs in the years to
come.
Sincerely,
/s/ Sally E. Haff
- -----------------
Sally E. Haff
Portfolio Manager
Franklin Blue Chip Fund
SALLY EDWARDS HAFF, CFA
Sally Edwards Haff is a senior vice president of Franklin Advisers, Inc. She
is the portfolio manager of Franklin Blue Chip Fund and Franklin Utilities
Fund.
Ms. Haff joined Franklin in 1986 as a management trainee. Prior to her current
responsibilities, she managed Franklin Global Utilities Fund, Franklin
Convertible Securities Fund and Franklin Valuemark Global Utilities. She was
also an industry analyst specializing in re- search analysis of utility,
networking equipment, tobacco, food, consumer goods and emerging growth
industries.
Ms. Haff is a Chartered Financial Analyst (CFA) and holds a bachelor of arts
degree in economics from the University of California at Santa Barbara. She is
a member of the Security Analysts of San Francisco, the International Society
of Financial Analysts and the Association for Investment Management and
Research (AIMR).
7
- -PAGE-
FRANKLIN BLUE CHIP FUND
Class A (formerly Class I): Subject to the current,maximum 5.75% initial sales
charge. Prior to August 3, 1998,fund shares were offered at a lower initial
sales charge; thus actual total returns may differ.
PERFORMANCE SUMMARY AS OF 4/30/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities, as well as the
level of the fund's operating expenses. Past distributions are not indicative of
future results. All total returns include reinvested distributions at net asset
value.
PRICE AND DISTRIBUTION INFORMATION (5/1/98-4/30/99)
<TABLE>
<CAPTION>
Class A Change 4/30/99 4/30/98
--------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$1.95 $14.41 $12.46
Distributions
----------------------------------
Dividend Income $0.0571
</TABLE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR (6/3/96)
-----------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +16.18% +47.60%
Average Annual Total Return(2) +9.50% +12.03%
Value of $10,000 Investment(3) $10,950 $13,912
4/30/98 4/30/99
-------- -------
One-Year Total Return(4) +16.41% +16.18%
</TABLE>
(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 current,
applicable, maximum sales charge.
(3.) These figures represent the value of a hypothetical $10,000 investment
in the fund over the periods indicated and include the current, applicable,
maximum sales charge.
(4.) One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results.
8
- -PAGE-
FRANKLIN BLUE CHIP FUND
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged index differs from the fund in composition, does not pay
management fees or expenses and includes reinvested dividends. One cannot invest
directly in an index. Total return represents the change in value of an
investment over the periods shown. It includes the current, applicable, maximum
sales charge, fund expenses, account fees, and reinvested distributions.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
4/30/99
Class A
---------------------------------
<S> <C>
1-Year +9.50%
Since Inception (6/3/96) +12.03%
</TABLE>
TOTAL RETURN INDEX COMPARISON
Franklin Blue Chip Fund
$10,000 Investment (6/3/96 - 4/30/99)
[LINE GRAPH]
The following chart shows in graph format the cumulative total return of a
$10,000 investment in the Fund - Class A, June 3, 1996 (inception) as of April
30, 1999.
<TABLE>
<CAPTION>
DATE FRANKLIN BLUE MSCI S&P 500 MS WORLD S&P 500
CHIP FUND WORLD INDEX GT$
INDEX
<S> <C> <C> <C> <C> <C>
6/3/96 $9,425 $10,000 $10,000
6/30/96 $9,548 $10,052 $10,038 0.52% 0.38%
7/31/96 $9,274 $9,698 $9,594 -3.52% -4.42%
8/31/96 $9,359 $9,812 $9,797 1.17% 2.11%
9/30/96 $9,651 $10,197 $10,348 3.93% 5.63%
10/31/96 $9,651 $10,271 $10,634 0.72% 2.76%
11/30/96 $10,028 $10,848 $11,438 5.62% 7.56%
12/31/96 $9,955 $10,676 $11,211 -1.58% -1.98%
1/31/97 $10,126 $10,807 $11,912 1.22% 6.25%
2/28/97 $10,182 $10,933 $12,005 1.17% 0.78%
3/31/97 $10,021 $10,719 $11,512 -1.96% -4.11%
4/30/97 $10,287 $11,072 $12,199 3.29% 5.97%
5/31/97 $10,969 $11,757 $12,942 6.19% 6.09%
6/30/97 $11,358 $12,345 $13,522 5.00% 4.48%
7/31/97 $11,823 $12,915 $14,598 4.62% 7.96%
8/31/97 $10,884 $12,054 $13,780 -6.67% -5.60%
9/30/97 $11,358 $12,711 $14,536 5.45% 5.48%
10/31/97 $10,438 $12,043 $14,050 -5.25% -3.34%
11/30/97 $10,543 $12,259 $14,701 1.79% 4.63%
12/31/97 $10,696 $12,410 $14,953 1.23% 1.72%
1/31/98 $10,802 $12,757 $15,119 2.80% 1.11%
2/28/98 $11,446 $13,622 $16,210 6.78% 7.21%
3/31/98 $11,763 $14,200 $17,039 4.24% 5.12%
4/30/98 $11,974 $14,340 $17,212 0.99% 1.01%
5/31/98 $11,696 $14,162 $16,916 -1.24% -1.72%
6/30/98 $11,955 $14,501 $17,602 2.39% 4.06%
7/31/98 $11,946 $14,479 $17,414 -0.15% -1.07%
8/31/98 $10,235 $12,550 $14,896 -13.32% -14.46%
9/30/98 $10,658 $12,775 $15,851 1.79% 6.41%
10/31/98 $11,648 $13,932 $17,139 9.06% 8.13%
11/30/98 $12,272 $14,763 $18,178 5.96% 6.06%
12/31/98 $12,647 $15,486 $19,225 4.90% 5.76%
1/31/99 $13,053 $15,827 $20,029 2.20% 4.18%
2/28/99 $12,917 $15,408 $19,406 -2.65% -3.11%
3/31/99 $13,487 $16,052 $20,182 4.18% 4.00%
4/30/99 $13,912 $16,687 $20,963 3.96% 3.87%
</TABLE>
(*)Source: Standard & Poor's(R) Micropal. We are replacing the MSCI World
Index with the S&P 500 Index as the fund's benchmark. We believe its composition
provides a more appropriate comparison to the fund's current portfolio because
the fund now has a more domestic focus. The S&P 500 Index measures the
performance of 500 domestic stocks. The MSCI World Index, which may be excluded
from next year's report, includes approximately 1,450 companies representing the
stock markets of 22 countries, including the U.S., Australia, and several
countries in Europe and Asia. The indices include reinvested dividends. One
cannot invest directly in an index, nor is an index representative of the fund's
portfolio.
Past performance is not predictive of future results.
9
- -PAGE-
FRANKLIN CALIFORNIA GROWTH FUND
Your Fund's Goal: Franklin California Growth Fund seeks capital
appreciation through a policy of investing at least 65% of its assets
in the securities of companies either headquartered or conducting a
majority of their operations in the state of California. The fund may
also invest in foreign securities.
Dear Shareholder:
This annual report of Franklin California Growth Fund covers the year
ended April 30, 1999, a challenging period for the fund. During this
time, a number of California companies suffered a loss of business due
to financial woes in Asia and Latin America, but global economic
conditions improved toward the end of the period, and the U.S. equity
market reached record-breaking levels. However, gains were concentrated
in large-capitalization (cap) equities, while smaller companies' stocks
generally declined, and some commodity-related sectors remained weak.
Within this environment, Franklin California Growth Fund Class A
delivered a +6.39% one-year cumulative total return, as shown in the
Performance Summary on page 15. For the same period, the fund's
benchmarks, the Standard and Poor's(R) 500 (S&P 500(R)) Composite
Index, the Franklin California Growth 250 (CA 250) Index(R)(1) and the
Bloomberg California Index(2),
(1). The Franklin CA 250 Index consists of equal weightings of
California's top 250 companies, based on market capitalization, and is
rebalanced quarterly.
(2). We are introducing the Bloomberg California Index as an additional
benchmark for the fund because we believe its composition provides an
appropriate comparison to the fund's current and past portfolio. It is
a price-weighted index, and measures the performance of over 700
California-based companies.
You will find a complete listing of the fund's portfolio holdings,
including dollar value 10 and number of shares or principal amount,
beginning on page 39 of this report.
10
- -PAGE-
returned 21.82%,(3) 12.64%(4) and 4.90%,(5) respectively. While the fund's
return was lower than we would have liked, its performance greatly improved
during the latter part of the reporting period, and for the six months prior to
the end of the reporting period, it delivered a +22.70% cumulative total return.
The S&P 500, the Franklin CA 250 and the Bloomberg California Index returned
22.32%, 29.02% and 26.86%, respectively, for the same six months. It is also
important to view your investment with a long-term perspective. As you can see
in the Performance Summary, the fund delivered cumulative total returns of
+56.43% and +197.84%, respectively, for the three- and five-year periods ended
April 30, 1999.
On April 30, 1999, the fund held 91.7% of total net assets in equities, 0.8% in
convertible bonds and 7.5% in cash & equivalents. The portfolio included some
large-cap growth stocks, which advanced during the reporting period's
momentum-driven market, but more than 58% of assets represented shares of
companies with less than $10 billion in market capitalization, many of which
fell during the period.
The portfolio had large technology weightings, and the value of many of our
electronic technology shares appreciated significantly during the reporting
period. For example, the fund's top two positions on April 30, 1999, Cisco
Systems Inc. and Sun Microsystems Inc., rose in value 133% and 190%,
respectively. Stocks of on-line brokerage service companies also performed well,
as the price of the fund's fourth largest holding, Charles Schwab Corp., rose
370%, and our E(*)Trade Group Inc. shares appreciated an astounding 826%. Taking
advantage of this increase, we sold some of our E(*)Trade Group shares for a
substantial profit. Despite the fact that Internet-related stocks were highly
volatile, they have
(3.) Source: Standard & Poor's Micropal.
(4.) Source: CDA/Wiesenberger.
(5.) Source: Bloomberg.
Indices are unmanaged and include reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the fund's portfolio.
PORTFOLIO BREAKDOWN
Franklin California Growth Fund
Based on Total Net Assets
4/30/99
<TABLE>
<S> <C>
Electronic Technology 27.1%
Technology Services 13.0%
Finance 11.2%
Health Technology 7.4%
Real Estate 5.5%
Retail Trade 4.7%
Consumer Services 3.4%
Telecommunications 3.1%
Other Sectors 17.1%
Cash & Equivalents 7.5%
</TABLE>
11
- -PAGE-
TOP 10 HOLDINGS
Franklin California Growth Fund
4/30/99
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
INDUSTRY NET ASSETS
--------------------------------------
<S> <C>
Cisco Systems Inc.
Electronic Technology 3.6%
Sun Microsystems Inc.
Electronic Technology 2.9%
Providian Financial Corp.
Finance 2.7%
Charles Schwab Corp.
Finance 2.6%
Uniphase Corp.
Electronic Technology 1.9%
Hewlett-Packard Co.
Electronic Technology 1.9%
Safeway Inc.
Retail Trade 1.9%
Clorox Co.
Consumer Non-Durables 1.8%
Avery Dennison Corp.
Producer Manufacturing 1.8%
AirTouch Communications Inc.
Telecommunications 1.7%
</TABLE>
generally demonstrated phenomenal growth, and we initiated
positions in some of them, including At Home Corp., eBay Inc.,
and Yahoo! Inc.
Health technology was another sector on which we focused. Our positions in some
of the largest U.S. biotechnology companies, including Genentech Inc., Chiron
Corp. and Amgen Inc., gained value during the reporting period, and we purchased
shares of some smaller-cap companies such as Affymetrix Inc., a gene discovery
and analysis firm, and Gilead Sciences Inc., a developer of new human
therapeutics based on nucleotides (the building blocks of genes). At the end of
the reporting period, California was home to approximately one-third of all U.S.
biotechnology companies, and in our opinion, many of these companies have
extraordinary growth potential.
Although the fund's exposure to energy minerals and real estate was relatively
small, these sectors had a negative impact on its performance. The price of oil
dropped substantially during the reporting period, hurting the value of our
shares of Nuevo Energy Co. and Unocal Corp., and real estate investment trusts
in general experienced their lowest absolute and relative valuation levels since
Congress first made them an investment class in 1960.
Looking forward, we believe California companies are poised to benefit from both
domestic and foreign growth. We have recently witnessed an apparent broadening
of investment in U.S. markets, indicating a potential recovery for the small cap
sector; many Asian and Latin American economies appear to be recovering from the
period's turmoil; and over 100 interest rate reductions during the year by more
than 40 central banks around the world bodes well for the global economy.
California is already an economic powerhouse, representing almost 13% of U.S.
gross domestic product, and generating over $1 trillion in goods and services
during 1997 (more than all other western states combined).(6)
(6). Source: "California, An Economic Profile." California Trade and Commerce
Agency, Office of Economic Research, October 1998.
12
- -PAGE-
Among the nearly 1,400 publicly traded companies in Franklin Templeton's own
"backyard," we find no shortage of attractive opportunities on the investment
horizon. Using our focused management approach and our staff of more than 30
fundamental research analysts, we shall continue to search for companies
offering exceptional long-term investment opportunities.
It is important to remember that there are certain risks involved with investing
in a non-diversified fund concentrating in securities associated with a single
state, such as increased susceptibility to adverse economic or regulatory
developments. The fund also invests a portion of its assets in small or
relatively new or unseasoned companies, which involves the additional risks
related to relatively small revenues, limited product lines and small market
share. These and other risks are described in the prospectus.
This discussion reflects our views and opinions as of April 30, 1999, 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 past performance is not predictive of future
results, these insights may help you better understand our investment and
management philosophy.
Thank you for your participation in Franklin California Growth Fund. We welcome
any comment or suggestions you may have, and look forward to serving your
investment needs in the years to come.
Sincerely,
/s/ Conrad B. Herrmann
- ----------------------
Conrad B. Herrmann
Portfolio Manager
Franklin California Growth Fund
13
- -PAGE-
FRANKLIN CALIFORNIA
GROWTH FUND
Class A (formerly Class I):
Subject to the current,maximum 5.75% initial sales
charge.Prior to August 3,1998,fund shares were offered at a lower initial
sales charge; thus actual total returns may differ. Past expense reductions by
the fund's manager increased the fund's total returns. Without this
reduction,the fund's total returns would have been lower.
Class B:
Subject to no initial sales charge, but subject to a contingent deferred sales
charge (CDSC) declining from 4% to 0% over six years. These shares have higher
annual fees and expenses than Class A shares.
Class C (formerly Class II):
Subject to 1% initial sales charge and 1% CDSC
for shares redeemed within 18 months of investment. These shares have higher
annual fees and expenses than Class A shares.
PERFORMANCE SUMMARY AS OF 4/30/99
Distributions will vary based 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. All total returns include reinvested distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (5/1/98-4/30/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 4/30/99 4/30/98
----------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.85 $25.82 $24.97
DISTRIBUTIONS
--------------------------
Dividend Income $0.1462
Long-Term Capital Gain $0.2388
Short-Term Capital Gain $0.2869
TOTAL $0.6719
</TABLE>
<TABLE>
<CAPTION>
CLASS B CHANGE 4/30/99 1/1/99
-----------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$1.44 $25.75 $24.31
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 4/30/99 4/30/98
-----------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.82 $25.63 $24.81
DISTRIBUTIONS
--------------------------
Long-Term Capital Gain $0.2388
Short-Term Capital Gain $0.2869
TOTAL $0.5257
</TABLE>
Franklin California Growth Fund paid distributions derived from long-term
capital gains of 23.88 cents ($0.2388) per share in December 1998. The fund
hereby designates such distributions as capital gain dividends per Internal
Revenue Code Section 852 (b)(3).
Past performance is not predictive of future results.
14
- -PAGE-
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 3-YEAR 5-YEAR (10/30/91)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +6.39% +56.43% +197.84% +290.23%
Average Annual Total Return(2) +0.29% +13.82% +22.92% +18.96%
Value of $10,000 Investment(3) $10,029 $14,747 $28,061 $36,775
</TABLE>
<TABLE>
<CAPTION>
4/30/95 4/30/96 4/30/97 4/30/98 4/30/99
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) +29.09% +47.42% +8.94% +34.98% +6.39%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B (1/1/99)
---------------------------------------------------------------------------
<S> <C>
Cumulative Total Return(1) +5.88%
Aggregate Total Return(2) +1.88%
Value of $10,000 Investment(3) $10,188
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR (9/3/96)
----------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +5.67% +54.64%
Average Annual Total Return(2) +3.63% +17.41%
Value of $10,000 Investment(3) $10,363 $15,312
</TABLE>
<TABLE>
<CAPTION>
4/30/98 4/30/99
------------------------------------------------------------------------
<S> <C> <C>
One-Year Total Return(4) +34.02% +5.67%
</TABLE>
(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 current,
applicable, maximum sales charge(s) for that class. Since Class B shares have
existed for less than one year, aggregate total return for that class represents
total return since inception, including the maximum sales charge.
(3). These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
(4). One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or
loss when you sell your shares.
Past performance is not predictive of future results.
15
- -PAGE-
FRANKLIN CALIFORNIA
GROWTH FUND
AVERAGE ANNUAL TOTAL RETURN
4/30/99
<TABLE>
<CAPTION>
CLASS A
----------------------------------
<S> <C>
1-Year +0.29%
3-Year +13.82%
5-Year +22.92%
Since Inception -10/30/91) +18.96%
</TABLE>
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged indices differ from the fund in composition, do not pay management
fees or expenses and include reinvested dividends. One cannot invest directly in
an index. Total return represents the change in value of an investment over the
periods shown. It includes the current, applicable, maximum sales charge-s),
fund expenses, account fees, and reinvested distributions.
TOTAL RETURN INDEX COMPARISON
Franklin California Growth Fund - Class A
$10,000 Investment -10/30/91 - 4/30/99)
The following line graph compares the performance of Franklin California Growth
Fund, Class A with the Franklin CA 250 Growth Index* and the S&P 500-R)
Composite Index** since the inception of the fund.
* Source: CDA/Wiesenberger
** Source: Standard and Poor's Micropal.
<TABLE>
<CAPTION>
FRANKLIN
CALIFORNIA
GROWTH FUND - S&P 500 STOCK FRANKLIN CA 250
DATE CLASS A INDEX GROWTH INDEX S&P 500% Cal 250%
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/30/91 $ 9,424 $10,000 $10,000
10/31/91 $ 9,509 $10,004 $10,015 0.04% 0.15%
11/30/91 $ 8,744 $ 9,601 $ 9,199 -4.03% -8.15%
12/31/91 $ 9,714 $10,699 $10,301 11.44% 11.98%
1/31/92 $10,409 $10,500 $11,101 -1.86% 7.77%
2/28/92 $10,542 $10,636 $11,271 1.29% 1.53%
3/31/92 $ 9,829 $10,428 $10,527 -1.95% -6.60%
4/30/92 $ 9,319 $10,735 $10,093 2.94% -4.12%
5/31/92 $ 9,419 $10,787 $10,155 0.49% 0.61%
6/30/92 $ 8,835 $10,627 $ 9,578 -1.49% -5.68%
7/31/92 $ 9,093 $11,061 $ 9,898 4.09% 3.34%
8/31/92 $ 8,691 $10,835 $ 9,465 -2.05% -4.38%
9/30/92 $ 8,797 $10,961 $ 9,554 1.17% 0.94%
10/31/92 $ 9,218 $10,999 $10,083 0.34% 5.54%
11/30/92 $10,041 $11,373 $11,016 3.40% 9.26%
12/31/92 $10,249 $11,512 $11,302 1.23% 2.59%
1/31/93 $10,576 $11,609 $11,719 0.84% 3.69%
2/28/93 $10,143 $11,767 $11,237 1.36% -4.11%
3/31/93 $10,258 $12,015 $11,348 2.11% 0.99%
4/30/93 $ 9,835 $11,725 $10,922 -2.42% -3.76%
5/31/93 $10,547 $12,038 $11,744 2.67% 7.53%
6/30/93 $10,524 $12,072 $11,710 0.29% -0.29%
7/31/93 $10,282 $12,024 $11,742 -0.40% 0.27%
8/31/93 $10,970 $12,480 $12,318 3.79% 4.91%
9/30/93 $11,425 $12,384 $12,605 -0.77% 2.33%
10/31/93 $11,580 $12,640 $12,788 2.07% 1.45%
11/30/93 $11,551 $12,520 $12,628 -0.95% -1.25%
12/31/93 $12,050 $12,672 $13,010 1.21% 3.02%
1/31/94 $12,583 $13,102 $13,452 3.40% 3.40%
2/28/94 $12,747 $12,747 $13,340 -2.71% -0.83%
3/31/94 $12,460 $12,192 $12,574 -4.36% -5.74%
4/30/94 $12,347 $12,348 $12,523 1.28% -0.41%
5/31/94 $12,419 $12,550 $12,475 1.64% -0.38%
6/30/94 $12,057 $12,243 $11,921 -2.45% -4.44%
7/31/94 $12,490 $12,644 $12,316 3.28% 3.31%
8/31/94 $13,314 $13,163 $13,477 4.10% 9.43%
9/30/94 $13,412 $12,841 $13,421 -2.44% -0.42%
10/31/94 $13,867 $13,130 $13,688 2.25% 1.99%
11/30/94 $13,911 $12,652 $13,287 -3.64% -2.93%
12/31/94 $14,042 $12,840 $13,473 1.48% 1.40%
1/31/95 $14,030 $13,172 $13,800 2.59% 2.43%
2/28/95 $15,007 $13,686 $14,497 3.90% 5.05%
3/31/95 $15,575 $14,090 $15,109 2.95% 4.22%
4/30/95 $15,939 $14,504 $15,598 2.94% 3.24%
5/31/95 $16,575 $15,084 $16,062 4.00% 2.97%
6/30/95 $17,690 $15,434 $17,226 2.32% 7.25%
7/31/95 $19,197 $15,946 $18,671 3.32% 8.39%
8/31/95 $19,632 $15,986 $19,064 0.25% 2.10%
9/30/95 $20,115 $16,661 $19,452 4.22% 2.04%
10/31/95 $20,150 $16,601 $19,019 -0.36% -2.23%
11/30/95 $20,786 $17,330 $19,778 4.39% 3.99%
12/31/95 $20,730 $17,664 $19,538 1.93% -1.21%
1/31/96 $20,974 $18,265 $19,712 3.40% 0.89%
2/29/96 $21,682 $18,435 $20,434 0.93% 3.66%
3/31/96 $21,862 $18,612 $20,135 0.96% -1.46%
4/30/96 $23,509 $18,885 $22,161 1.47% 10.06%
5/31/96 $24,037 $19,372 $22,848 2.58% 3.10%
6/30/96 $23,315 $19,446 $21,296 0.38% -6.79%
7/31/96 $21,933 $18,587 $19,563 -4.42% -8.14%
8/31/96 $23,302 $18,979 $21,128 2.11% 8.00%
9/30/96 $24,799 $20,047 $22,763 5.63% 7.74%
10/31/96 $25,109 $20,600 $22,745 2.76% -0.08%
11/30/96 $26,929 $22,158 $24,278 7.56% 6.74%
12/31/96 $27,039 $21,719 $24,569 -1.98% 1.20%
1/31/97 $27,475 $23,077 $25,891 6.25% 5.38%
2/28/97 $26,708 $23,257 $24,780 0.78% -4.29%
3/31/97 $25,160 $22,301 $23,494 -4.11% -5.19%
4/30/97 $25,597 $23,632 $23,574 5.97% 0.34%
5/31/97 $28,058 $25,071 $26,215 6.09% 11.20%
6/30/97 $28,115 $26,195 $27,145 4.48% 3.55%
7/31/97 $30,558 $28,280 $29,974 7.96% 10.42%
8/31/97 $30,372 $26,696 $30,666 -5.60% 2.31%
9/30/97 $32,522 $28,159 $32,604 5.48% 6.32%
10/31/97 $31,461 $27,218 $30,475 -3.34% -6.53%
11/30/97 $31,792 $28,479 $30,177 4.63% -0.98%
12/31/97 $31,285 $28,968 $28,813 1.72% -4.52%
1/31/98 $30,829 $29,290 $30,769 1.11% 6.79%
2/28/98 $33,264 $31,402 $33,467 7.21% 8.77%
3/31/98 $33,956 $33,010 $34,036 5.12% 1.70%
4/30/98 $34,565 $33,343 $35,071 1.01% 3.04%
5/31/98 $32,738 $32,769 $32,707 -1.72% -6.74%
6/30/98 $33,507 $34,100 $33,535 4.06% 2.53%
7/31/98 $31,913 $33,735 $32,136 -1.07% -4.17%
8/31/98 $26,631 $28,857 $25,648 -14.46% -20.19%
9/30/98 $28,392 $30,707 $28,359 6.41% 10.57%
10/30/98 $29,972 $33,203 $30,616 8.13% 7.96%
11/30/98 $32,162 $35,215 $33,467 6.06% 9.31%
12/31/98 $34,638 $37,244 $36,884 5.76% 10.21%
1/31/99 $36,861 $38,800 $39,742 4.18% 7.75%
2/28/99 $33,954 $37,594 $36,483 -3.11% -8.20%
3/31/99 $35,963 $39,097 $37,851 4.00% 3.75%
4/30/99 $36,775 $40,611 $39,498 3.87% 4.35%
</TABLE>
TOTAL RETURN INDEX COMPARISON
Franklin California Growth Fund - Class A
$10,000 Investment -1/1/95 - 4/30/99)-***)
The following line graph compares the performance of Franklin California
Growth Fund, Class A with the Franklin CA 250 Growth Index*, the S&P 500-R)
Composite Index,** and the Bloomberg California Index**** since the beginning of
the Bloomberg California Index on 12/30/94.
*Source: CDA/Wiesenberger
**Source: Standard and Poor's Micropal.
****Source: Bloomberg. Reinvested dividends are reflected in the Bloomberg
California Index from October 1995 onward. Prior to that the index
represents simple price appreciation excluding dividends.
<TABLE>
<CAPTION>
FRANKLIN
CALIFORNIA
GROWTH FUND - S&P 500 STOCK FRANKLIN CA 250 BLOOMBERG CA S&P 500%
DATE CLASS A INDEX GROWTH INDEX INDEX
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1/1/95 $ 9,428 $10,000 $10,000 $10,000
1/31/95 $ 9,420 $10,259 $10,243 $10,016 2.59%
2/28/95 $10,076 $10,659 $10,760 $10,524 3.90%
3/31/95 $10,458 $10,974 $11,214 $10,861 2.95%
4/30/95 $10,702 $11,296 $11,577 $11,069 2.94%
5/31/95 $11,129 $11,748 $11,921 $11,337 4.00%
6/30/95 $11,878 $12,021 $12,786 $12,157 2.32%
7/31/95 $12,889 $12,420 $13,858 $13,188 3.32%
8/31/95 $13,182 $12,451 $14,149 $13,446 0.25%
9/30/95 $13,506 $12,976 $14,437 $13,876 4.22%
10/31/95 $13,529 $12,929 $14,115 $13,582 -0.36%
11/30/95 $13,956 $13,497 $14,679 $14,066 4.39%
12/31/95 $13,919 $13,757 $14,501 $13,883 1.93%
1/31/96 $14,083 $14,225 $14,630 $13,960 3.40%
2/29/96 $14,558 $14,358 $15,166 $14,576 0.93%
3/31/96 $14,679 $14,495 $14,944 $14,477 0.96%
4/30/96 $15,785 $14,708 $16,448 $15,522 1.47%
5/31/96 $16,139 $15,088 $16,957 $16,179 2.58%
6/30/96 $15,654 $15,145 $15,806 $15,025 0.38%
7/31/96 $14,727 $14,476 $14,520 $13,560 -4.42%
8/31/96 $15,646 $14,781 $15,681 $14,409 2.11%
9/30/96 $16,651 $15,613 $16,896 $15,359 5.63%
10/31/96 $16,859 $16,044 $16,882 $15,155 2.76%
11/30/96 $18,081 $17,257 $18,021 $15,867 7.56%
12/31/96 $18,155 $16,916 $18,238 $15,989 -1.98%
1/31/97 $18,448 $17,973 $19,219 $16,721 6.25%
2/28/97 $17,933 $18,113 $18,393 $16,146 0.78%
3/31/97 $16,894 $17,369 $17,438 $15,226 -4.11%
4/30/97 $17,187 $18,406 $17,497 $15,000 5.97%
5/31/97 $18,839 $19,526 $19,457 $16,847 6.09%
6/30/97 $18,878 $20,401 $20,148 $17,645 4.48%
7/31/97 $20,518 $22,025 $22,248 $19,047 7.96%
8/31/97 $20,393 $20,792 $22,761 $19,405 -5.60%
9/30/97 $21,908 $21,931 $24,201 $20,969 5.48%
10/31/97 $21,124 $21,199 $22,621 $19,748 -3.34%
11/30/97 $21,346 $22,180 $22,400 $19,466 4.63%
12/31/97 $21,006 $22,562 $21,388 $19,075 1.72%
1/31/98 $20,699 $22,812 $22,840 $18,905 1.11%
2/28/98 $22,335 $24,457 $24,843 $20,438 7.21%
3/31/98 $22,799 $25,709 $25,264 $20,963 5.12%
4/30/98 $23,208 $25,969 $26,033 $21,666 1.01%
5/31/98 $21,982 $25,522 $24,279 $20,567 -1.72%
6/30/98 $22,498 $26,558 $24,893 $20,765 4.06%
7/31/98 $21,427 $26,274 $23,856 $19,442 -1.07%
8/31/98 $17,881 $22,475 $19,039 $15,602 -14.46%
9/30/98 $19,063 $23,915 $21,052 $17,025 6.41%
10/30/98 $20,124 $25,860 $22,729 $17,912 8.13%
11/30/98 $21,595 $27,427 $24,845 $19,694 6.06%
12/31/98 $23,257 $29,007 $27,381 $21,150 5.76%
1/31/99 $24,749 $30,219 $29,504 $22,304 4.18%
2/28/99 $22,798 $29,279 $27,085 $20,830 -3.11%
3/31/99 $24,147 $30,451 $28,101 $21,436 4.00%
4/30/99 $24,692 $31,629 $29,324 $22,725 3.87%
</TABLE>
Past performance is not predictive of future results.
16
- -PAGE-
TOTAL RETURN INDEX COMPARISON
Franklin California Growth Fund - Class C
$10,000 Investment (9/3/96 - 4/30/99)
The following line graph compares the performance of Franklin California Growth
Fund, Class C with the Franklin CA 250 Growth Index*, the S&P 500(R) Composite
Index,** and the Bloomberg California Index.****
*Source: CDA/Wiesenberger
**Source: Standard and Poor's Micropal.
****Source: Bloomberg. Reinvested dividends are reflected in the Bloomberg
California Index from October 1995 onward. Prior to that the index represents
simple price appreciation excluding dividends.
<TABLE>
<CAPTION>
Date Franklin California S&P 500 Stock Franklin CA Bloomberg CA S&P 500%
Growth Fund - Index 250 Growth Index
Class C Index
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
9/3/96 $9,901 $10,000 $10,000 $10,000
9/30/96 $10,520 $10,563 $10,774 $10,659 5.63%
10/31/96 $10,641 $10,855 $10,766 $10,517 2.76%
11/30/96 $11,407 $11,675 $11,492 $11,012 7.56%
12/31/96 $11,446 $11,444 $11,631 $11,096 -1.98%
1/31/97 $11,619 $12,159 $12,256 $11,605 6.25%
2/28/97 $11,289 $12,254 $11,729 $11,205 0.78%
3/31/97 $10,627 $11,750 $11,120 $10,567 -4.11%
4/30/97 $10,806 $12,452 $11,158 $10,410 5.97%
5/31/97 $11,833 $13,210 $12,408 $11,692 6.09%
6/30/97 $11,854 $13,802 $12,849 $12,246 4.48%
7/31/97 $12,876 $14,901 $14,188 $13,218 7.96%
8/31/97 $12,787 $14,066 $14,515 $13,467 -5.60%
9/30/97 $13,730 $14,837 $15,433 $14,552 5.48%
10/31/97 $13,230 $14,342 $14,426 $13,705 -3.34%
11/30/97 $13,359 $15,006 $14,285 $13,509 4.63%
12/31/97 $13,140 $15,264 $13,639 $13,238 1.72%
1/31/98 $12,947 $15,433 $14,565 $13,120 1.11%
2/28/98 $13,963 $16,546 $15,843 $14,184 7.21%
3/31/98 $14,237 $17,393 $16,111 $14,548 5.12%
4/30/98 $14,488 $17,569 $16,602 $15,036 1.01%
5/31/98 $13,718 $17,266 $15,483 $14,274 -1.72%
6/30/98 $14,027 $17,967 $15,875 $14,411 4.06%
7/31/98 $13,350 $17,775 $15,213 $13,493 -1.07%
8/31/98 $11,138 $15,205 $12,141 $10,828 -14.46%
9/30/98 $11,867 $16,180 $13,425 $11,815 6.41%
10/30/98 $12,521 $17,495 $14,494 $12,431 8.13%
11/30/98 $13,420 $18,555 $15,844 $13,668 6.06%
12/31/98 $14,450 $19,624 $17,461 $14,678 5.76%
1/31/99 $15,370 $20,444 $18,815 $15,479 4.18%
2/28/99 $14,152 $19,808 $17,273 $14,456 -3.11%
3/31/99 $14,976 $20,601 $17,920 $14,877 4.00%
4/30/99 $15,312 $21,398 $18,700 $15,771 3.87%
</TABLE>
(*) Source: CDA/Wiesenberger.
(**) Source: Standard and Poor's Micropal.
(***) The Bloomberg California Index was not established until December 30,
1994, and therefore, the fund's Class A returns have been shown for the period
since then, in addition to the period since the fund's inception.
(****)Source: Bloomberg. Reinvested dividends are reflected in the Bloomberg
California Index from October 1995 onward. Prior to that the index represents
simple price appreciation excluding dividends.
AVERAGE ANNUAL TOTAL RETURN
4/30/99
<TABLE>
<CAPTION>
CLASS C
- --------------------------------
<S> <C>
1-Year +3.63%
Since Inception (9/3/96) +17.41%
</TABLE>
Past performance is not predictive of future results.
17
- -PAGE-
FRANKLIN MIDCAP GROWTH FUND
Your Fund's Goal: Franklin MidCap Growth Fund seeks long-term capital
growth by investing primarily in equity securities of
medium-capitalization companies - those with a market capitalization
between $200 million and $5 billion.
During the 12-month period ended April 30, 1999, the U.S. equity market
experienced significant volatility. During the summer, concerns about
Russia's economic meltdown, a potential slowdown of the U.S. economy,
and the possibility of currency crises in Latin America contributed to
market declines. The Federal Reserve's three interest rate reductions
in the fall sparked a market rally, as investors gained confidence in
the U.S. economy's ability to avoid a recession, but small and midcap
stocks underperformed relative to larger, more liquid stocks.
Within this environment, Franklin MidCap Growth Fund Class A delivered
a 12-month cumulative total return of -6.36%, as shown in the
performance summary on page 22. The fund's benchmark S&P MidCap
400(R) Index provided a one-year 6.43% cumulative total return,
significantly underperforming the S&P 500(R), as investors' desire
for liquidity continued to
You will find a complete listing of the fund's portfolio holdings,
including dollar value 18 and number of shares or principal amount, beginning on
page 45 of this report.
18
- -PAGE-
draw them to the large-cap sector.(1) However, the latter part of the reporting
period saw the fund's performance improve substantially, and it delivered a
+19.04% cumulative total return for the six months ended April 30, 1999.(2)
The fund underperformed its benchmark largely because investors bid up the price
of many technology and Internet-related stocks to unprecedented levels. As an
example, America Online, which was not owned by the fund as it is significantly
larger than the fund's upper-end market cap range, saw its stock price increase
nearly seven-fold in 1998, and on December 31, 1998, it represented
approximately 7.6% of the S&P MidCap 400 Index. This stock alone accounted for
over one-third of the S&P MidCap 400 Index's 1998 total return.(3)
The fund was also hindered by its exposure to several out-of-favor industry
segments. These included energy stocks, whose value fell after oil prices
dropped in mid-1998; healthcare stocks, which were negatively affected by
concerns over managed care pricing; and technology service stocks, which
experienced declines largely due to concerns of less widespread spending on
information technology as companies were focused on Y2K issues.
During the second half of the reporting period, we substantially rebalanced the
portfolio to reflect more closely the sector weightings of our benchmark. One of
the most affected sectors
PORTFOLIO BREAKDOWN
Franklin MidCap Growth Fund
Based on Total Net Assets
4/30/99
<TABLE>
<S> <C>
Finance 16.3%
Consumer Services 11.1%
Electronic Technology 9.7%
Retail Trade 6.2%
Consumer Non-Durables 4.9%
Technology Services 4.7%
Utilities 4.7%
Process Industries 4.4%
Industrial Services 3.7%
Real Estate 3.3%
Other 22.7%
Cash & Equivalents 8.3%
</TABLE>
(1). 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. The S&P 500 is a market value weighted index consisting of 500
domestic stocks, mainly those of large capitalization companies. For the period
ended April 30, 1999, the S&P 500 provided a cumulative total return of 21.82%.
Indices include reinvested dividends. One cannot invest directly in an index,
nor is the index representative of the fund's portfolio.
(2). For the same period, the S&P MidCap 400 Index earned a 19.71% six-month
cumulative total return.
(3). Source: Standard & Poor's Micropal.
19
- -PAGE-
TOP 10 HOLDINGS
Franklin MidCap Growth Fund
4/30/99
<TABLE>
<CAPTION>
Company, % of Total
Industry Net Assets
- ------------------------------------------
<S> <C>
Expeditors International
of Washington Inc.
Transportation 2.9%
Estee Lauder Cos.,A
Consumer Non-Durables 2.4%
Altera Corp.
Electronic Technology 2.3%
Tiffany & Co.
Retail Trade 2.2%
Countrywide Credit
Industries Inc.
Finance 2.1%
Ecolab Inc.
Consumer Services 2.0%
Chancellor Media Corp.
Consumer Services 1.9%
Providian Financial Corp.
Finance 1.9%
Tellabs Inc.
Electronic Technology 1.9%
Gentex Corp.
Producer Manufacturing 1.8%
</TABLE>
was finance, rising from 9.1% of total net assets at the beginning of the period
to 16.3% on April 30, 1999. We also began the process of concentrating the
portfolio into fewer, more selective names, and positive results began to show,
with the fund's performance improving significantly in early 1999. Gains in the
technology and telecommunications segments contributed to the improved
performance, while strong performers in other sectors included Providian
Financial Corp., a specialty finance company; Tiffany & Co., a jewelry retailer;
and Expeditors International of Washington Inc., a freight forwarding and
logistics company.
Looking forward, we are optimistic about long-term prospects for the fund and
the midcap group as a whole. We intend to focus on leaders with earnings
visibility within growing segments, and believe our rebalancing of the fund to
more closely align with the benchmark will prove successful.
Of course, there are special risks associated with investing in a fund seeking
long-term capital growth from small-to-medium size companies, which have less
certain growth prospects than large-cap companies, as well as greater
sensitivity to changing economic conditions. These and other risks are further
discussed in the fund's prospectus.
This discussion reflects our views, opinions and portfolio holdings as of April
30, 1999, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historical performance
is no guarantee of future results, these insights may help give you a better
understanding of our investment and management philosophy.
20
- -PAGE-
We thank you for your participation in Franklin MidCap Growth Fund and look
forward to serving you in the future. Please feel free to contact us with your
questions or comments.
Sincerely,
/s/ Catherine Roberts Bowman
- ----------------------------
Catherine Bowman
Portfolio Manager
Franklin MidCap Growth Fund
CATHERINE BOWMAN
Catherine Bowman is a vice president and portfolio manager for Franklin
Advisers, Inc. She manages Franklin MidCap Growth Fund and specializes in
research analysis of the consumer products, consumer service and education
industries.
Ms. Bowman joined Franklin in 1990 as a securities analyst. Prior
to that, Ms. Bowman was a financial analyst at Prudential Bache
Capital Funding.
Ms. Bowman received a bachelor of arts degree from Princeton
University and an MBA from the J.L. Kellogg Graduate School of
Management at Northwestern University.
21
- -PAGE-
FRANKLIN MIDCAP
GROWTH FUND
CLASS A (formerly Class I): Subject to the current,maximum 5.75% initial sales
charge. Prior to August 3,1998,fund shares were offered at a lower initial sales
charge; thus actual total returns may differ. Effective June 1, 1996, the fund
implemented a Rule 12b-1 plan, which affects subsequent performance.
(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 current,
applicable, maximum sales charge.
(3). These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the current, applicable, maximum
sales charge.
(4). One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
(5). On January 2, 1996, the fund changed its investment objective, strategy,
and investment adviser.
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).
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.
PERFORMANCE SUMMARY AS OF 4/30/99
Distributions will vary based 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. All total returns include reinvested distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (5/1/98-4/30/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 4/30/99 4/30/98
-----------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE -$1.29 $16.15 $17.44
DISTRIBUTIONS
-------------------------------------
LONG-TERM CAPITAL GAIN $0.1472
SHORT-TERM CAPITAL GAIN $0.0097
TOTAL $0.1569
</TABLE>
Franklin MidCap Growth Fund paid distributions derived from long-term capital
gains of 14.72 cents ($0.1472) per share in December, 1998. The fund hereby
designates such distributions as capital gain dividends per Internal Revenue
Code Section 852 (b)(3).
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 3-YEAR 5-YEAR (8/17/93)(5)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) -6.36% +34.93% +101.08% +104.35%
Average Annual Total Return(2) -11.72% +8.34% +13.65% +12.18%
Value of $10,000 Investment(3) $8,828 $12,716 $18,957 $19,260
</TABLE>
<TABLE>
<CAPTION>
4/30/95 4/30/96 4/30/97 4/30/98 4/30/99
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) +10.06% +35.40% +6.47% +35.33% -6.36%
</TABLE>
Past performance is not predictive of future results.
22
- -PAGE-
TOTAL RETURN INDEX COMPARISON FOR
HYPOTHETICAL $10,000 INVESTMENT
The unmanaged index differs from the fund in composition, does not pay
management fees or expenses and includes reinvested dividends. One cannot invest
directly in an index. Total return represents the change in value of an
investment over the periods shown. It includes the current, applicable, maximum
sales charge, fund expenses, account fees, and reinvested distributions.
FRANKLIN MIDCAP
GROWTH FUND
AVERAGE ANNUAL TOTAL RETURN
4/30/99
<TABLE>
<CAPTION>
Class A
- ---------------------------------
<S> <C>
1-Year -11.72%
5-Year +13.65%
Since Inception (8/17/93) +12.18%
</TABLE>
TOTAL RETURN INDEX COMPARISON
Franklin MidCap Growth Fund - Class A
$10,000 Investment (8/17/93 - 4/30/99)
[LINE GRAPH]
The following chart shows in graph format the cumulative total return of a
$10,000 investment in the Fund - Class A, August 17, 1993 (inception) as of
April 30, 1999.
<TABLE>
<CAPTION>
DATE FRANKLIN MIDCAP S&P MIDCAP S&P MidCap
GROWTH FUND- CLASS A 400 INDEX %
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
8/17/93 $9,425 $10,000
8/31/93 $9,425 $10,187 1.87%
9/30/93 $9,783 $10,295 1.06%
10/31/93 $9,698 $10,329 0.33%
11/30/93 $9,416 $10,101 -2.21%
12/31/93 $9,883 $10,569 4.64%
1/31/94 $10,102 $10,816 2.33%
2/28/94 $9,893 $10,662 -1.42%
3/31/94 $9,454 $10,168 -4.63%
4/30/94 $9,578 $10,244 0.74%
5/31/94 $9,445 $10,146 -0.95%
6/30/94 $9,110 $9,797 -3.44%
7/31/94 $9,381 $10,129 3.39%
8/31/94 $9,943 $10,660 5.24%
9/30/94 $9,691 $10,461 -1.87%
10/31/94 $9,846 $10,575 1.09%
11/30/94 $9,459 $10,098 -4.51%
12/31/94 $9,596 $10,191 0.92%
1/31/95 $9,655 $10,298 1.05%
2/28/95 $10,123 $10,837 5.24%
3/31/95 $10,327 $11,026 1.74%
4/30/95 $10,542 $11,248 2.01%
5/31/95 $10,815 $11,519 2.41%
6/30/95 $11,393 $11,988 4.07%
7/31/95 $12,072 $12,613 5.22%
8/31/95 $12,338 $12,847 1.85%
9/30/95 $12,623 $13,158 2.42%
10/31/95 $12,486 $12,819 -2.57%
11/30/95 $12,879 $13,380 4.37%
12/31/95 $12,770 $13,346 -0.25%
1/31/96 $12,981 $13,540 1.45%
2/29/96 $13,192 $14,000 3.40%
3/31/96 $13,302 $14,168 1.20%
4/30/96 $14,274 $14,600 3.05%
5/31/96 $14,565 $14,797 1.35%
6/30/96 $14,113 $14,575 -1.50%
7/31/96 $13,087 $13,590 -6.76%
8/31/96 $14,113 $14,374 5.77%
9/30/96 $15,058 $15,001 4.36%
10/31/96 $14,857 $15,044 0.29%
11/30/96 $16,034 $15,891 5.63%
12/31/96 $15,767 $15,909 0.11%
1/31/97 $16,404 $16,505 3.75%
2/28/97 $15,733 $16,370 -0.82%
3/31/97 $14,868 $15,673 -4.26%
4/30/97 $15,198 $16,079 2.59%
5/31/97 $16,574 $17,484 8.74%
6/30/97 $16,961 $17,975 2.81%
7/31/97 $18,190 $19,755 9.90%
8/31/97 $18,212 $19,731 -0.12%
9/30/97 $19,748 $20,866 5.75%
10/31/97 $18,838 $19,958 -4.35%
11/30/97 $18,599 $20,253 1.48%
12/31/97 $18,122 $21,039 3.88%
1/31/98 $17,591 $20,639 -1.90%
2/28/98 $19,253 $22,348 8.28%
3/31/98 $19,899 $23,356 4.51%
4/30/98 $20,130 $23,784 1.83%
5/31/98 $19,276 $22,713 -4.50%
6/30/98 $19,715 $22,856 0.63%
7/31/98 $18,618 $21,970 -3.88%
8/31/98 $14,832 $17,881 -18.61%
9/30/98 $15,144 $19,551 9.34%
10/31/98 $15,836 $21,299 8.94%
11/30/98 $16,540 $22,362 4.99%
12/31/98 $17,789 $25,063 12.08%
1/31/99 $17,917 $24,088 -3.89%
2/28/99 $17,100 $22,826 -5.24%
3/31/99 $17,894 $23,463 2.79%
4/30/99 $19,260 $25,314 7.89%
</TABLE>
(*)Source: Standard and Poor's(R) Micropal.
Past performance is not predictive of future results.
23
- -PAGE-
FRANKLIN SMALL CAP GROWTH FUND
PORTFOLIO BREAKDOWN
Franklin Small Cap Growth Fund
Based on Total Net Assets
4/30/99
<TABLE>
<S> <C>
Electronic Technology 21.1%
Technology Services 16.9%
Finance 12.0%
Consumer Services 5.2%
Telecommunications 5.2%
Industrial Services 5.0%
Energy Minerals 4.0%
Transportation 3.7%
Producer Manufacturing 3.3%
Health Services 2.5%
Other 11.6%
Cash & Equivalents 9.5%
</TABLE>
Your Fund's Goal: Franklin Small Cap Growth Fund seeks long-term capital growth
by investing in equity securities of small-capitalization companies -- those
with a market capitalization of less than $1.5 billion at the time of
investment.
During the 12 months under review, Internet stocks experienced remarkable growth
as corporations scrambled to develop Internet capabilities. These corporations
were spurred into action by the success of early entrants like bookseller
Amazon.com and retail on-line broker E*Trade. As firms that help large
companies establish themselves on the Internet experienced tremendous revenue
growth, many investors staked their claims, hoping to own the next big winner in
this relatively new industry. But, apart from the Internet-related phenomenon,
most small-cap stocks actually declined in value, reflecting many investors'
concerns that the economic slowdown overseas would negatively impact the U.S.
economy. However, this didn't occur, and, by the end of the reporting period,
many economically sensitive stocks, including small caps, began to recover,
although they remained below prior-year levels. Within this environment,
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 51 of
this report.
24
- -PAGE-
Franklin Small Cap Growth Fund - Class A provided a -3.44% one-year cumulative
total return for the period ended April 30, 1999, as shown in the Performance
Summary on page 29. The Russell 2500 Index, the fund's benchmark, returned
- -5.86% for the same period. We have always maintained a long-term perspective
when managing the fund and encourage shareholders to do the same with their
investments. As you can also see in the Performance Summary, since inception on
February 14, 1992, Franklin Small Cap Growth Fund - Class A has returned
+237.59%.
The Internet phenomenon provides vivid examples of the types of corporate
characteristics we look for -- companies with strong management, well-positioned
to benefit from rapid sector growth, and with a competitive advantage such as a
unique marketing niche or proprietary intellectual property. While we were
excited about Internet-related stocks, we were concerned about their valuations
and believed that many stocks in the sector reflected unrealistically high
expectations for future prospects. With that in mind, we remained invested
mostly in franchises involved with corporate clients we thought could and would
pay large sums to stay competitive in a rapidly changing business landscape. For
example, we own shares of the consulting firm Sapient Corp., which specializes
in helping corporations establish their electronic commerce capabilities. We
also have a position in Exodus, a web site management company for large
corporations that outsource this function rather than attempt to develop it
internally.
25
- -PAGE-
Top 10 Holdings
Franklin Small Cap Growth Fund
4/30/99
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
INDUSTRY NET ASSETS
- ------------------------------------
<S> <C>
Uniphase Corp.,
Electronic Technology 2.01%
Gemstar International,
Electronic Technology 1.80%
PMC Sierra Inc.,
Electronic Technology 1.69%
Expeditors International,
Transportation 1.50%
Western Wireless Corp.,
Telecommunications 1.48%
i2 Technologies,
Technology Services 1.29%
Verio Inc.,
Technology Services 1.28%
Synopsys Inc.,
Electronic Technology 1.28%
E*Trade Group,
Finance 1.27%
Waters Corp.,
Electronic Technology 1.26%
</TABLE>
Although the fund's return for the year under review was less than we would have
liked to see, we believe the potential for small capitalization companies is
just beginning to be tapped. With our location near Silicon Valley and our team
of experienced technology analysts, we believe we are uniquely positioned to
take advantage of investment opportunities in this sector. However, stocks of
these companies often exhibit the higher volatility generally associated with
technology and small-cap investing, and, despite our relative overweighting in
technology, we intend to remain broadly diversified to take advantage of
potential growth in other sectors. These include apparel, advertising,
broadcasting, hotels, education, energy and energy services, banks and insurance
companies, health care, and transportation. In our opinion, this broad
diversification may help reduce volatility in the fund's holdings relative to a
more sector-concentrated portfolio.
Of course, there are special risks involved with investing in a fund seeking
long-term growth from small or relatively new or unseasoned companies, and from
foreign securities. These risks, which include relatively small revenues,
limited product lines and small market share, as well as the currency
fluctuations and political uncertainty associated with foreign investing are
further discussed in the fund's prospectus.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1999, the end of the reporting period. However, market
and economic conditions are changing constantly, which can be expected to affect
our strategies and
26
- -PAGE-
the fund's portfolio composition. Although historical performance is no
guarantee of future results, these insights may help you understand our
investment and management philosophy.
We thank you for participation in Franklin Small Cap Growth Fund and look
forward to serving you in the future. Please feel free to contact us with your
questions or comments.
Sincerely,
/s/ Edward B. Jamieson
- ----------------------
Edward B. Jamieson
Portfolio Manager
Franklin Small Cap Growth Fund
27
- -PAGE-
FRANKLIN SMALL CAP
GROWTH FUND
CLASS A (formerly Class I):
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective May 1, 1994,the fund implemented a Rule
12b-1 plan, which affects subsequent performance. 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.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% contingent deferred sales charge for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class A shares.
ADVISOR CLASS:
No initial sales charge or Rule 12b-1 fees and are available to a limited class
of investors. 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.
PERFORMANCE SUMMARY AS OF 4/30/99
Distributions will vary based 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. All total returns include reinvested distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (5/1/98-4/30/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 4/30/99 4/30/98
--------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$1.28 $24.65 $25.93
DISTRIBUTIONS
-------------------------------------
Dividend Income $0.1445
Long-Term Capital Gain $0.1605
Short-Term Capital Gain $0.0214
TOTAL $0.3264
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 4/30/99 4/30/98
--------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$1.27 $24.32 $25.59
DISTRIBUTIONS
-------------------------------------
Long-Term Capital Gain $0.1605
Short-Term Capital Gain $0.0214
TOTAL $0.1819
ADVISOR CLASS CHANGE 4/30/99 4/30/98
--------------------------------------------------------------------------
Net Asset Value -$1.28 $24.73 $26.01
DISTRIBUTIONS
-------------------------------------
Dividend Income $0.1950
Long-Term Capital Gain $0.1605
Short-Term Capital Gain $0.0214
TOTAL $0.3769
</TABLE>
Franklin Small Cap Growth Fund paid distributions derived from long-term capital
gains of 16.05 cents ($0.1605) per share in December 1998. The fund hereby
designates such distributions as capital gain dividends per Internal Revenue
Code Section 852(b)(3).
Past performance is not predictive of future results.
28
- -PAGE-
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR (2/14/92)
-------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) -3.44% +153.24% +237.59%
Average Annual Total Return(2) -8.99% +19.00% +17.42%
Value of $10,000 Investment(3) $9,101 $23,864 $31,818
</TABLE>
<TABLE>
<CAPTION>
4/30/95 4/30/96 4/30/97 4/30/98 4/30/99
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) +27.05% +44.06% +0.14% +43.16% -3.44%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (10/2/95)
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) -4.08% +35.32% +59.16%
Average Annual Total Return(2) -5.99% +10.24% +13.55%
Value of $10,000 Investment(3) $9,401 $13,396 $15,756
</TABLE>
<TABLE>
<CAPTION>
4/30/97 4/30/98 4/30/99
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
One-Year Total Return(4) -0.65% +42.06% -4.08%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS(5) 1-YEAR 5-YEAR (2/14/92)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) -3.12% +155.16% +240.15%
Average Annual Total Return(2) -3.12% +20.60% +18.51%
Value of $10,000 Investment(3) $9,688 $25,516 $34,015
</TABLE>
<TABLE>
<CAPTION>
4/30/95 4/30/96 4/30/97 4/30/98 4/30/99
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) +27.05 +44.06% +0.20% +43.68% -3.12%
</TABLE>
(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 current,
applicable, maximum sales charge(s) for that class.
(3.) These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
(4.) One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
(5.) 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
Class A performance, excluding the effect of the Class A sales charge, but
including the effect of Rule 12b-1 fees and other Class A expenses; 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 and average annual
total returns of Advisor Class shares were +28.88% and +11.54%, respectively.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results.
29
- -PAGE-
FRANKLIN SMALL CAP
GROWTH FUND
AVERAGE ANNUAL TOTAL RETURN
4/30/99
<TABLE>
<CAPTION>
CLASS A
--------------------------------
<S> <C>
1-Year -8.99%
5-Year +19.00%
Since Inception (2/14/92) +17.42%
</TABLE>
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged indices differ from the fund in composition, do not pay management
fees or expenses and include reinvested dividends. One cannot invest directly in
an index. Total return represents the change in value of an investment over the
periods shown. It includes the current, applicable, maximum sales charges, fund
expenses, account fees, and reinvested distributions.
TOTAL RETURN INDEX COMPARISON
Franklin Small Cap Growth Fund - Class A
$10,000 Investment (2/14/92 - 4/30/99)
The following line graph compares the performance of Franklin Small Cap Growth
Fund's Class A shares to the Standard & Poor's 500 Composite Index and the
Russell 2500 Index, based on a $10,000 investment from 2/14/92 to 4/30/99.
<TABLE>
<CAPTION>
Date Franklin Small Cap S&P 500 Russell
--- Growth Fund - Index 2500 Index
------------------ ------- ----------
Class A
-------
<S> <C> <C> <C>
02/14/1992 $9,425 $10,000 $10,000
02/29/1992 $9,566 $10,067 $10,137
03/31/1992 $9,293 $9,871 $9,813
04/30/1992 $9,029 $10,161 $9,617
05/31/1992 $8,992 $10,211 $9,705
06/30/1992 $8,772 $10,059 $9,367
07/31/1992 $8,923 $10,470 $9,717
08/31/1992 $8,791 $10,255 $9,462
09/30/1992 $8,810 $10,375 $9,623
10/31/1992 $9,255 $10,411 $9,911
11/30/1992 $10,014 $10,765 $10,564
12/31/1992 $10,472 $10,897 $10,933
01/31/1993 $10,757 $10,988 $11,196
02/28/1993 $9,806 $11,138 $11,039
03/31/1993 $10,272 $11,373 $11,452
04/30/1993 $9,721 $11,098 $11,125
05/31/1993 $10,634 $11,394 $11,572
06/30/1993 $10,591 $11,427 $11,692
07/31/1993 $10,591 $11,381 $11,767
08/31/1993 $11,487 $11,813 $12,288
09/30/1993 $11,916 $11,722 $12,519
10/31/1993 $12,136 $11,964 $12,669
11/30/1993 $12,193 $11,851 $12,263
12/31/1993 $12,752 $11,994 $12,742
01/31/1994 $13,254 $12,402 $13,145
02/28/1994 $13,392 $12,066 $13,097
03/31/1994 $12,732 $11,540 $12,461
04/30/1994 $12,565 $11,687 $12,533
05/31/1994 $12,338 $11,879 $12,404
06/30/1994 $11,908 $11,588 $12,020
07/31/1994 $12,353 $11,968 $12,345
08/31/1994 $13,316 $12,459 $13,012
09/30/1994 $13,482 $12,155 $12,880
10/31/1994 $14,124 $12,428 $12,901
11/30/1994 $13,803 $11,976 $12,341
12/31/1994 $13,928 $12,153 $12,608
01/31/1995 $13,671 $12,468 $12,583
02/28/1995 $14,913 $12,954 $13,215
03/31/1995 $15,674 $13,336 $13,539
04/30/1995 $15,963 $13,728 $13,780
05/31/1995 $16,328 $14,278 $14,071
06/30/1995 $17,650 $14,609 $14,746
07/31/1995 $19,135 $15,094 $15,616
08/31/1995 $19,597 $15,132 $15,866
09/30/1995 $19,740 $15,770 $16,163
10/31/1995 $18,970 $15,713 $15,657
11/30/1995 $19,586 $16,403 $16,326
12/31/1995 $19,806 $16,720 $16,605
01/31/1996 $19,631 $17,288 $16,723
02/29/1996 $20,714 $17,449 $17,226
03/31/1996 $21,215 $17,617 $17,577
04/30/1996 $22,996 $17,875 $18,390
05/31/1996 $24,079 $18,337 $18,888
06/30/1996 $22,961 $18,406 $18,308
07/31/1996 $20,900 $17,593 $16,968
08/31/1996 $22,880 $17,964 $17,944
09/30/1996 $24,126 $18,975 $18,720
10/31/1996 $23,683 $19,499 $18,597
11/30/1996 $24,789 $20,973 $19,495
12/31/1996 $25,167 $20,558 $19,762
01/31/1997 $25,677 $21,843 $20,308
02/28/1997 $24,596 $22,013 $20,005
03/31/1997 $22,871 $21,108 $19,099
04/30/1997 $23,017 $22,369 $19,341
05/31/1997 $26,260 $23,731 $21,123
06/30/1997 $27,147 $24,794 $21,987
07/31/1997 $28,786 $26,768 $23,275
08/31/1997 $29,017 $25,269 $23,599
09/30/1997 $31,714 $26,653 $25,142
10/31/1997 $30,232 $25,763 $24,013
11/30/1997 $29,491 $26,956 $24,121
12/31/1997 $29,139 $27,420 $24,577
01/31/1998 $28,923 $27,724 $24,201
02/28/1998 $31,223 $29,723 $25,958
03/31/1998 $32,393 $31,245 $27,098
04/30/1998 $32,952 $31,560 $27,201
05/31/1998 $30,753 $31,017 $25,938
06/30/1998 $30,906 $32,277 $25,970
07/31/1998 $27,919 $31,931 $24,185
08/31/1998 $21,654 $27,314 $19,624
09/30/1998 $23,624 $29,065 $21,017
10/31/1998 $25,111 $31,428 $22,167
11/30/1998 $27,068 $33,332 $23,264
12/31/1998 $29,133 $35,252 $24,674
01/31/1999 $30,747 $36,726 $24,632
02/28/1999 $28,023 $35,584 $23,014
03/31/1999 $29,662 $37,007 $23,506
04/30/1999 $31,818 $38,439 $25,610
</TABLE>
Past performance is not predictive of future results.
30
- -PAGE-
TOTAL RETURN INDEX COMPARISON
Franklin Small Cap Growth Fund - Class C
$10,000 Investment (10/2/95 - 4/30/99)
<TABLE>
<CAPTION>
Date Franklin Small Cap S&P 500 Russell
--- Growth Fund - Index 2500 Index
-------------------- ------- ----------
Class C
-------
<S> <C> <C> <C>
10/02/1995 $9,899 $10,000 $10,000
10/31/1995 $9,636 $9,964 $9,687
11/30/1995 $9,938 $10,401 $10,101
12/31/1995 $10,050 $10,602 $10,273
01/31/1996 $9,961 $10,963 $10,346
02/29/1996 $10,500 $11,065 $10,658
03/31/1996 $10,749 $11,171 $10,875
04/30/1996 $11,643 $11,335 $11,378
05/31/1996 $12,188 $11,627 $11,686
06/30/1996 $11,614 $11,672 $11,327
07/31/1996 $10,565 $11,156 $10,498
08/31/1996 $11,554 $11,391 $11,102
09/30/1996 $12,182 $12,032 $11,582
10/31/1996 $11,945 $12,365 $11,506
11/30/1996 $12,490 $13,299 $12,062
12/31/1996 $12,670 $13,036 $12,227
01/31/1997 $12,923 $13,851 $12,564
02/28/1997 $12,369 $13,959 $12,377
03/31/1997 $11,494 $13,385 $11,816
04/30/1997 $11,562 $14,184 $11,967
05/31/1997 $13,182 $15,048 $13,069
06/30/1997 $13,613 $15,722 $13,603
07/31/1997 $14,432 $16,974 $14,400
08/31/1997 $14,537 $16,023 $14,600
09/30/1997 $15,880 $16,901 $15,555
10/31/1997 $15,128 $16,337 $14,857
11/30/1997 $14,752 $17,093 $14,924
12/31/1997 $14,558 $17,387 $15,206
01/31/1998 $14,449 $17,580 $14,973
02/28/1998 $15,585 $18,848 $16,060
03/31/1998 $16,163 $19,813 $16,765
04/30/1998 $16,426 $20,013 $16,829
05/31/1998 $15,322 $19,668 $16,048
06/30/1998 $15,386 $20,467 $16,067
07/31/1998 $13,890 $20,248 $14,964
08/31/1998 $10,769 $17,320 $12,141
09/30/1998 $11,745 $18,430 $13,003
10/31/1998 $12,477 $19,929 $13,715
11/30/1998 $13,434 $21,136 $14,394
12/31/1998 $14,460 $22,354 $15,266
01/31/1999 $15,244 $23,288 $15,240
02/28/1999 $13,890 $22,564 $14,239
03/31/1999 $14,700 $23,467 $14,543
04/30/1999 $15,756 $24,375 $15,845
</TABLE>
TOTAL RETURN INDEX COMPARISON
Franklin Small Cap Growth Fund - Advisor Class(***)
$10,000 Investment (2/14/92 - 4/30/99)
The following line graph compares the performance of Franklin Small Cap Growth
Fund to that of the Standard & Poor's 500 Composite Index and the Russell 2500
Index, based on a $10,000 investment from 2/14/92 to 4/30/99.
<TABLE>
<CAPTION>
Date Franklin Small Cap S&P 500 Russell
--- Growth Fund - Advisor Index 2500 Index
-------------------- ------- ----------
Class
-------
<S> <C> <C> <C>
02/14/1992 $10,000 $10,000 $10,000
02/29/1992 $10,150 $10,067 $10,137
03/31/1992 $9,860 $9,871 $9,813
04/30/1992 $9,580 $10,161 $9,617
05/31/1992 $9,540 $10,211 $9,705
06/30/1992 $9,307 $10,059 $9,367
07/31/1992 $9,468 $10,470 $9,717
08/31/1992 $9,327 $10,255 $9,462
09/30/1992 $9,347 $10,375 $9,623
10/31/1992 $9,820 $10,411 $9,911
11/30/1992 $10,625 $10,765 $10,564
12/31/1992 $11,111 $10,897 $10,933
01/31/1993 $11,414 $10,988 $11,196
02/28/1993 $10,404 $11,138 $11,039
03/31/1993 $10,899 $11,373 $11,452
04/30/1993 $10,314 $11,098 $11,125
05/31/1993 $11,282 $11,394 $11,572
06/30/1993 $11,237 $11,427 $11,692
07/31/1993 $11,237 $11,381 $11,767
08/31/1993 $12,188 $11,813 $12,288
09/30/1993 $12,643 $11,722 $12,519
10/31/1993 $12,876 $11,964 $12,669
11/30/1993 $12,937 $11,851 $12,263
12/31/1993 $13,530 $11,994 $12,742
01/31/1994 $14,063 $12,402 $13,145
02/28/1994 $14,209 $12,066 $13,097
03/31/1994 $13,509 $11,540 $12,461
04/30/1994 $13,331 $11,687 $12,533
05/31/1994 $13,090 $11,879 $12,404
06/30/1994 $12,635 $11,588 $12,020
07/31/1994 $13,107 $11,968 $12,345
08/31/1994 $14,129 $12,459 $13,012
09/30/1994 $14,305 $12,155 $12,880
10/31/1994 $14,986 $12,428 $12,901
11/30/1994 $14,645 $11,976 $12,341
12/31/1994 $14,777 $12,153 $12,608
01/31/1995 $14,505 $12,468 $12,583
02/28/1995 $15,823 $12,954 $13,215
03/31/1995 $16,630 $13,336 $13,539
04/30/1995 $16,937 $13,728 $13,780
05/31/1995 $17,324 $14,278 $14,071
06/30/1995 $18,726 $14,609 $14,746
07/31/1995 $20,302 $15,094 $15,616
08/31/1995 $20,793 $15,132 $15,866
09/30/1995 $20,944 $15,770 $16,163
10/31/1995 $20,127 $15,713 $15,657
11/30/1995 $20,781 $16,403 $16,326
12/31/1995 $21,014 $16,720 $16,605
01/31/1996 $20,829 $17,288 $16,723
02/29/1996 $21,978 $17,449 $17,226
03/31/1996 $22,509 $17,617 $17,577
04/30/1996 $24,399 $17,875 $18,390
05/31/1996 $25,548 $18,337 $18,888
06/30/1996 $24,362 $18,406 $18,308
07/31/1996 $22,175 $17,593 $16,968
08/31/1996 $24,275 $17,964 $17,944
09/30/1996 $25,597 $18,975 $18,720
10/31/1996 $25,128 $19,499 $18,597
11/30/1996 $26,301 $20,973 $19,495
12/31/1996 $26,702 $20,558 $19,762
01/31/1997 $27,243 $21,843 $20,308
02/28/1997 $26,109 $22,013 $20,005
03/31/1997 $24,279 $21,108 $19,099
04/30/1997 $24,447 $22,369 $19,341
05/31/1997 $27,900 $23,731 $21,123
06/30/1997 $28,841 $24,794 $21,987
07/31/1997 $30,594 $26,768 $23,275
08/31/1997 $30,839 $25,269 $23,599
09/30/1997 $33,713 $26,653 $25,142
10/31/1997 $32,140 $25,763 $24,013
11/30/1997 $31,367 $26,956 $24,121
12/31/1997 $30,992 $27,420 $24,577
01/31/1998 $30,790 $27,724 $24,201
02/28/1998 $33,234 $29,723 $25,958
03/31/1998 $34,476 $31,245 $27,098
04/30/1998 $35,111 $31,560 $27,201
05/31/1998 $32,775 $31,017 $25,938
06/30/1998 $32,950 $32,277 $25,970
07/31/1998 $29,777 $31,931 $24,185
08/31/1998 $23,092 $27,314 $19,624
09/30/1998 $25,199 $29,065 $21,017
10/31/1998 $26,806 $31,428 $22,167
11/30/1998 $28,885 $33,332 $23,264
12/31/1998 $31,100 $35,252 $24,674
01/31/1999 $32,833 $36,726 $24,632
02/28/1999 $29,932 $35,584 $23,014
03/31/1999 $31,719 $37,007 $23,506
04/30/1999 $34,015 $38,439 $25,610
</TABLE>
(*)Source: Standard and Poor's(R) Micropal.
(**)Source: Standard and Poor's Micropal (Russell 2500).
(***)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
Class A performance, excluding the effect of the Class A sales charge, but
including the effect of Rule 12b-1 fees and other Class A expenses; and (b) for
periods after January 1, 1997, figures reflect actual Advisor Class performance,
including the deduction of all fees and expenses applicable to Advisor Class
shares.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
4/30/99
CLASS C
- ---------------------------------------
<S> <C>
1-Year -5.99%
3-Year +10.24%
Since Inception (10/2/95) +13.55%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
4/30/99
ADVISOR CLASS(***)
- -------------------------------------
<S> <C>
1-Year -3.12%
5-Year +20.60%
Since Inception (2/14/92) +18.51%
</TABLE>
Past performance is not predictive of future results.
31
- -PAGE-
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN BLUE CHIP FUND
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------
1999 1998 1997(1)
------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year . . . . . . . . $12.46 $10.85 $10.00
------------------------------
Income from investment operations:
Net investment income . . . . . . . . . . . . . . .04 .09 .09
Net realized and unrealized gains . . . . . . . . 1.97 1.67 .82
------------------------------
Total from investment operations . . . . . . . . . 2.01 1.76 .91
------------------------------
Less distributions from:
Net investment income . . . . . . . . . . . . . . (.06) (.06) (.06)
Net realized gains . . . . . . . . . . . . . . . . -- (.09) --
------------------------------
Total distributions . . . . . . . . . . . . . . . . (.06) (.15) (.06)
------------------------------
Net asset value,end of year . . . . . . . . . . . . $14.41 $12.46 $10.85
==============================
Total return(*) . . . . . . . . . . . . . . . . . . 16.18% 16.41% 9.14%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) . . . . . . . . . . $54,880 $16,836 $5,600
Ratios to average net assets:
Expenses . . . . . . . . . . . . . . . . . . . . . 1.25% 1.25% 1.25%(2)
Expenses excluding waiver and payments by affiliate 1.51% 1.95% 2.22%(2)
Net investment income . . . . . . . . . . . . . . . .55% 1.04% 1.07%(2)
Portfolio turnover rate . . . . . . . . . . . . . . 35.74% 57.67% 11.14%
</TABLE>
(*)Total return does not reflect sales commissions or the contingent deferred
sales charge,and is not annualized for periods less than one year.
(1)For the period June 3,1996 (effective date) to April 30,1997.
(2)Annualized
32
See notes to financial statements.
- -PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999
<TABLE>
<CAPTION>
FRANKLIN BLUE CHIP FUND COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 91.5%
CONSUMER DURABLES 1.3%
Sony Corp. . . . . . . . . . . . . . . . . . . . Japan 7,700 $ 719,264
-----------
CONSUMER NON-DURABLES 12.0%
Bestfoods . . . . . . . . . . . . . . . . . . . United States 17,100 858,206
Coca-Cola Co. . . . . . . . . . . . . . . . . . United States 14,300 972,400
Gillette Co. . . . . . . . . . . . . . . . . . . United States 15,700 819,344
L'OREAL . . . . . . . . . . . . . . . . . . . . France 665 426,345
Nestle SA . . . . . . . . . . . . . . . . . . . Switzerland 450 834,384
Nike Inc., B . . . . . . . . . . . . . . . . . United States 6,600 410,438
PepsiCo Inc. . . . . . . . . . . . . . . . . . . United States 16,500 609,469
Philip Morris Cos. Inc. . . . . . . . . . . . . United States 18,600 652,163
Procter & Gamble Co. . . . . . . . . . . . . . United States 5,900 553,494
Wm. Wrigley Jr. Co. . . . . . . . . . . . . . . United States 4,900 434,569
----------
6,570,812
----------
CONSUMER SERVICES 2.2%
Ecolab Inc. . . . . . . . . . . . . . . . . . . United States 6,000 251,625
McDonald's Corp. . . . . . . . . . . . . . . . . United States 10,500 444,938
The Walt Disney Co. . . . . . . . . . . . . . . United States 15,300 485,775
----------
1,182,338
----------
ELECTRONIC TECHNOLOGY 10.2%
(a)Applied Materials Inc. . . . . . . . . . . . . United States 10,400 557,700
(a)Cisco Systems Inc. . . . . . . . . . . . . . . United States 7,875 898,242
(a)Dell Computer Corp. . . . . . . . . . . . . . United States 7,000 288,313
Hewlett-Packard Co. . . . . . . . . . . . . . . United States 9,500 749,313
Intel Corp. . . . . . . . . . . . . . . . . . . United States 20,100 1,229,861
Lucent Technologies Inc. . . . . . . . . . . . United States 9,844 591,871
Molex Inc. . . . . . . . . . . . . . . . . . . United States 28,000 903,000
Motorola Inc. . . . . . . . . . . . . . . . . . United States 4,900 392,613
----------
5,610,913
----------
ENERGY MINERALS 5.0%
BP Amoco PLC,ADR . . . . . . . . . . . . . . . . United Kingdom 5,813 657,959
Exxon Corp. . . . . . . . . . . . . . . . . . . United States 11,000 913,688
Royal Dutch Petroleum Co., N.Y.shs. . . . . . . Netherlands 20,000 1,173,750
----------
2,745,397
----------
FINANCE 14.0%
AFLAC Inc. . . . . . . . . . . . . . . . . . . . United States 13,700 743,225
American International Group Inc. . . . . . . . United States 7,812 917,422
Capital One Financial Corp. . . . . . . . . . . United States 3,200 555,800
Charles Schwab Corp. . . . . . . . . . . . . . . United States 6,000 658,500
Chase Manhattan Corp. . . . . . . . . . . . . United States 7,900 653,725
Citigroup Inc. . . . . . . . . . . . . . . . . United States 10,150 763,788
Countrywide Credit Industries Inc. . . . . . . United States 21,000 951,563
Fannie Mae . . . . . . . . . . . . . . . . . . United States 12,900 915,094
</TABLE>
33
- -PAGE-
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1999 (cont.)
<TABLE>
<CAPTION>
FRANKLIN BLUE CHIP FUND COUNTRY SHARES VALUE
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FINANCE (CONT.)
Marsh & McLennan Cos. Inc. ...................... United States 12,000 $ 918,750
Merrill Lynch & Co. Inc. ........................ United States 7,100 595,956
-----------
7,673,823
-----------
HEALTH TECHNOLOGY 11.4%
Abbott Laboratories ............................ United States 14,100 682,969
Bristol-Myers Squibb Co. ........................ United States 11,100 705,544
Eli Lilly & Co. ................................. United States 9,100 669,988
Johnson & Johnson ............................... United States 6,100 594,750
Medtronic Inc. .................................. United States 10,100 726,569
Merck & Co. Inc. ................................ United States 7,800 547,950
Novartis AG ..................................... Switzerland 370 542,667
Pfizer Inc. ..................................... United States 4,900 563,806
Roche Holding AG ................................ Switzerland 40 471,330
Schering-Plough Corp. ........................... United States 15,500 748,844
-----------
6,254,417
-----------
INDUSTRIAL SERVICES 2.9%
(a)AES Corp. ..................................... United States 13,800 690,000
Schlumberger Ltd. ............................... United States 14,100 900,638
-----------
1,590,638
-----------
NON-ENERGY MINERALS 1.0%
De Beers Consolidated Mines AG, ADR ............. South Africa 22,600 553,700
-----------
PROCESS INDUSTRIES 4.6%
Avery Dennison Corp. ............................ United States 13,900 948,675
Monsanto Co. .................................... United States 9,000 407,250
Praxair Inc. .................................... United States 10,400 538,200
Sigma-Aldrich Corp. ............................. United States 20,100 653,250
-----------
2,547,375
-----------
PRODUCER MANUFACTURING 5.7%
General Electric Co. ............................ United States 15,100 1,593,050
Minnesota Mining & Manufacturing Co. ............ United States 10,000 890,000
Tyco International Ltd. ......................... United States 3,000 243,750
Xerox Corp. ..................................... United States 7,200 423,000
-----------
3,149,800
-----------
RETAIL TRADE 4.5%
(a)Safeway Inc. .................................. United States 17,000 916,938
Wal-Mart Stores Inc. ............................ United States 23,800 1,094,800
(a)Williams-Sonoma Inc. .......................... United States 15,000 435,000
-----------
2,446,738
-----------
TECHNOLOGY SERVICES 7.7%
(a)America Online Inc. ........................... United States 2,500 356,875
Automatic Data Processing Inc. .................. United States 12,500 556,250
(a)EMC Corp. ..................................... United States 3,700 403,069
</TABLE>
34
- -PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN BLUE CHIP FUND COUNTRY SHARES VALUE
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
TECHNOLOGY SERVICES (CONT.)
First Data Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 10,400 $ 441,350
(a)Microsoft Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 19,700 1,601,856
(a)Oracle Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 18,750 507,422
SAP AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany 1,200 385,307
-----------
4,252,129
-----------
TELECOMMUNICATIONS 7.6%
(a)AirTouch Communications Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . United States 5,000 466,875
AT&T Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 16,700 843,350
BellSouth Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 11,000 492,250
GTE Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 10,000 669,375
(a)MCI WorldCom Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 9,000 739,688
SBC Communications Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 12,000 672,000
Telefonica SA, ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain 1,960 273,236
-----------
4,156,774
-----------
UTILITIES 1.4%
Enron Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 6,000 451,500
Williams Cos. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 7,000 330,750
-----------
782,250
-----------
TOTAL LONG TERM INVESTMENTS ($43,957,346) . . . . . . . . . . . . . . . . . . . . 50,236,368
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
------
<S> <C> <C> <C>
(c)REPURCHASE AGREEMENT 12.2%
Joint Repurchase Agreement, 4.862%,5/03/99, (Maturity Value $6,720,802)
(COST $6,718,080) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States $6,718,080 6,718,080
Barclays Capital Inc.(Maturity Value $694,057)
Bear, Stearns & Co. Inc. (Maturity Value $378,584)
Chase Securities Inc. (Maturity Value $694,057)
CIBC Oppenheimer Corp. (Maturity Value $694,057)
Deutsche Bank Securities Inc. (Maturity Value $95,705)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $694,057)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $694,057)
Lehman Brothers Inc. (Maturity Value $694,057)
Paine Webber Inc. (Maturity Value $694,057)
Paribas Corp. (Maturity Value $694,057)
UBS Securities LLC (Maturity Value $694,057)
Collateralized by U.S.Treasury Bills & Notes
-----------
TOTAL INVESTMENTS (Cost $50,675,426) 103.7% . . . . . . . . . . . . . . . . . . . 56,954,448
OTHER ASSETS, LESS LIABILITIES (3.7%) . . . . . . . . . . . . . . . . . . . . . . (2,073,983)
-----------
NET ASSETS 100.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $54,880,465
===========
</TABLE>
(a)Non-income producing.
(c)See Note 1(c) regarding joint repurchase agreement.
See notes to financial statements.
35
- -PAGE-
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN CALIFORNIA GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------
YEAR ENDED APRIL 30,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $24.97 $19.35 $18.26 $14.03 $12.05
---------------------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .10 .14 .13 .20 .16
Net realized and unrealized gains ................. 1.42 6.48 1.51 6.03 3.04
---------------------------------------------------------------------------
Total from investment operations ................... 1.52 6.62 1.64 6.23 3.20
---------------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (.14) (.14) (.12) (.23) (.12)
Net realized gains ................................ (.53) (.86) (.43) (1.77) (1.10)
---------------------------------------------------------------------------
Total distributions ................................ (.67) (1.00) (.55) (2.00) (1.22)
---------------------------------------------------------------------------
Net asset value, end of year ....................... $25.82 $24.97 $19.35 $18.26 $14.03
===========================================================================
Total return(*) .................................... 6.39% 34.98% 8.94% 47.42% 29.09%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $780,598 $721,254 $282,898 $81,175 $13,844
Ratios to average net assets:
Expenses .......................................... 1.00% .99% 1.08% .71% .25%
Expenses excluding waiver and payments by affiliate 1.00% .99% 1.08% 1.09% 1.27%
Net investment income ............................. .41% .67% .84% 1.42% 1.63%
Portfolio turnover rate ............................ 52.76% 48.52% 44.81% 61.82% 79.52%
</TABLE>
(*)Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
36
- -PAGE-
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN CALIFORNIA GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
CLASS B
YEAR ENDED
APRIL 30,1999(3)
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........................... $24.31
----------------
Income from investment operations:
Net investment loss ........................................... (.01)
Net realized and unrealized gains ............................. 1.45
----------------
Total from investment operations ............................... 1.44
Net asset value, end of period ................................. $25.75
================
Total return(*) ................................................ 5.88%
RATIOS/SUPPLEMENTAL DATA
Net assets,end of period (000's) ............................... $2,657
Ratios to average net assets:
Expenses ...................................................... 1.75%(2)
Net investment loss ........................................... (.33%)(2)
Portfolio turnover rate ........................................ 52.76%
</TABLE>
(*) Total return does not reflect contingent deferred sales charge,and is not
annualized for periods less than one year.
(2) Annualized
(3) For the period January 1,1999 (effective date) to April 30,1999.
37
- -PAGE-
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN CALIFORNIA GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
--------------------------------------
YEAR ENDED APRIL 30,
--------------------------------------
1999 1998 1997(4)
--------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................. $24.81 $19.27 $18.05
--------------------------------------
Income from investment operations:
Net investment income (loss) .................................. (.07) -- .05
Net realized and unrealized gains ............................. 1.42 6.43 1.65
--------------------------------------
Total from investment operations ............................... 1.35 6.43 1.70
--------------------------------------
Less distributions from:
Net investment income ......................................... -- (.03) (.05)
Net realized gains ............................................ (.53) (.86) (.43)
--------------------------------------
Total distributions ............................................ (.53) (.89) (.48)
--------------------------------------
Net asset value, end of year ................................... $25.63 $24.81 $19.27
======================================
Total return(*) ................................................ 5.67% 34.02% 9.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................ $159,310 $122,701 $24,556
Ratios to average net assets:
Expenses ...................................................... 1.75% 1.74% 1.86%(2)
Net investment income (loss) .................................. (.33%) (.10%) .05%(2)
Portfolio turnover rate ........................................ 52.76% 48.52% 44.81%
</TABLE>
(*) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(2) Annualized
(4) For the period September 3,1996 (effective date) to April 30, 1997.
See notes to financial statements.
38
- -PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA GROWTH FUND SHARES VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 91.2%
(a)COMMERCIAL SERVICES 1.7%
NetGravity Inc. ......................................................... 30,000 $ 1,213,125
Probusiness Services Inc. ............................................... 130,000 4,663,750
(d)RemedyTemp Inc.,A ..................................................... 400,000 4,675,000
Robert Half International Inc. .......................................... 225,000 5,371,875
-----------
15,923,750
-----------
CONSUMER DURABLES 1.9%
(a)Electronic Arts Inc. .................................................. 150,000 7,621,875
K2 Inc. ................................................................. 148,400 1,511,825
Mattel Inc. ............................................................. 325,000 8,409,375
-----------
17,543,075
-----------
CONSUMER NON-DURABLES 2.5%
Clorox Co. .............................................................. 150,000 17,306,250
(a)Del Monte Foods Co. ................................................... 501,500 6,707,563
-----------
24,013,813
-----------
CONSUMER SERVICES 3.4%
(a)Foodmaker Inc. ........................................................ 200,000 4,825,000
(a)Fox Entertainment Group Inc.,A ........................................ 100,000 2,562,500
The McClatchy Co.,A ..................................................... 175,000 6,278,125
The Walt Disney Co. ..................................................... 150,000 4,762,500
United Television Inc. .................................................. 60,000 6,030,000
(a)Univision Communications Inc.,A ....................................... 135,000 7,813,125
-----------
32,271,250
-----------
ELECTRONIC TECHNOLOGY 26.6%
(a)Altera Corp. .......................................................... 100,000 7,225,000
(a)Applied Materials Inc. ................................................ 175,000 9,384,375
(a)Applied Micro Circuits Corp. .......................................... 175,000 9,329,688
(a)Catapult Communications Corp. ......................................... 175,000 2,723,438
(a)Cisco Systems Inc. .................................................... 300,000 34,218,750
(a)Coherent Inc. ......................................................... 175,000 2,603,125
(a)Cypress Semiconductor Corp. ........................................... 550,000 5,637,500
(a)Flextronics International Ltd. ........................................ 100,000 4,668,744
Hewlett-Packard Co. ..................................................... 225,000 17,746,875
Intel Corp. ............................................................. 250,000 15,296,875
(a)Javelin Systems Inc. .................................................. 300,000 3,525,000
(a)KLA-Tencor Corp. ...................................................... 150,000 7,443,750
(a)Lam Research Corp. .................................................... 200,000 6,300,000
Linear Technology Corp. ................................................. 250,000 14,218,750
(a)Maxim Integrated Products Inc. ........................................ 175,000 9,800,000
(a)Proxim Inc. ........................................................... 108,900 4,192,650
(a)Sanmina Corp. ......................................................... 100,000 6,637,500
(a)Seagate Technology Inc. ............................................... 200,000 5,575,000
(a)Solectron Corp. ....................................................... 250,000 12,125,000
(a)Spectra-Physics Lasers Inc. ........................................... 200,000 1,825,000
(a)Sun Microsystems Inc. ................................................. 450,000 26,915,625
</TABLE>
39
- -PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA GROWTH FUND SHARES VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
ELECTRONIC TECHNOLOGY (CONT.)
(a)Synopsys Inc. ............................................ 200,000 $ 9,425,000
(a)Tekelec .................................................. 305,000 2,754,547
(a)Uniphase Corp. ........................................... 150,000 18,206,250
(a)Xilinx Inc. .............................................. 300,000 13,687,500
------------
251,465,942
------------
ENERGY MINERALS 2.9%
Atlantic Richfield Co. ..................................... 90,000 7,554,375
Chevron Corp. .............................................. 90,000 8,977,500
(a)Nuevo Energy Co. ......................................... 200,000 3,175,000
Unocal Corp. ............................................... 175,000 7,273,438
------------
26,980,313
------------
FINANCE 11.2%
Charles Schwab Corp. ....................................... 225,000 24,693,750
Countrywide Credit Industries Inc. ......................... 250,000 11,328,125
(a)E*TRADE Group Inc. ....................................... 100,000 11,550,000
(a)Freedom Securities Corp. ................................. 90,000 1,636,875
(a)Golden State Bancorp Inc. ................................ 400,000 9,825,000
Mercury General Corp. ...................................... 100,000 3,612,500
The PMI Group Inc. ......................................... 50,000 2,790,625
Providian Financial Corp. .................................. 200,000 25,812,500
(a)Silicon Valley Bancshares ................................ 350,000 6,146,875
Washington Mutual Inc. ..................................... 193,750 7,967,969
------------
105,364,219
------------
(a)HEALTH SERVICES .2%
Total Renal Care Holdings Inc. ............................. 150,000 2,081,250
------------
HEALTH TECHNOLOGY 7.4%
(a)Affymetrix Inc. .......................................... 100,000 4,087,500
Allergan Inc. .............................................. 100,000 8,987,500
(a)Amgen Inc. ............................................... 70,000 4,300,625
(a)Cerus Corp. .............................................. 60,000 982,500
(a)Chiron Corp. ............................................. 255,500 5,141,938
(a)Dura Pharmaceuticals Inc. ................................ 100,000 1,200,000
(a)Genentech Inc. ........................................... 125,000 10,578,125
(a)Gilead Sciences Inc. ..................................... 75,000 3,454,688
(a)Inhale Therapeutic Systems Inc. .......................... 350,000 10,062,500
Mentor Corp. ............................................... 44,500 645,250
(a)Molecular Devices Corp. .................................. 300,000 7,200,000
(a)Nanogen Inc. ............................................. 190,000 1,496,250
(a)ResMed Inc. .............................................. 100,000 2,643,750
(a)Watson Pharmaceuticals Inc. .............................. 225,000 9,112,500
------------
69,893,126
------------
(a)INDUSTRIAL SERVICES 2.7%
Catalytica Inc. ............................................ 250,000 3,421,875
EMCON ...................................................... 268,700 1,494,644
</TABLE>
40
- -PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA GROWTH FUND SHARES VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a)INDUSTRIAL SERVICES (CONT.)
Granite Construction Inc. .......................................... 250,000 $ 7,140,625
Tetra Tech Inc. .................................................... 375,000 9,070,313
Varco International Inc. ........................................... 350,000 3,959,375
-----------
25,086,832
-----------
PROCESS INDUSTRIES .2%
Optical Coating Laboratory Inc. .................................... 30,000 1,848,750
-----------
PRODUCER MANUFACTURING 2.6%
Avery Dennison Corp. ............................................... 250,000 17,062,500
Reliance Steel & Aluminum Co. ...................................... 115,000 4,190,313
(a)Simpson Manufacturing Co. Inc .................................... 75,000 3,468,750
-----------
24,721,563
-----------
REAL ESTATE 5.0%
Alexandria Real Estate Equities Inc. ............................... 150,000 4,228,125
AMB Property Corp. ................................................. 175,000 3,850,000
Arden Realty Inc. .................................................. 450,000 11,250,000
Burnham Pacific Properties Inc. .................................... 450,000 5,175,000
(a)Catellus Development Corp. ....................................... 325,000 4,996,875
Irvine Apartment Communities Inc. .................................. 175,000 5,862,500
Spieker Properties Inc. ............................................ 300,000 11,775,000
-----------
47,137,500
-----------
(a)RETAIL TRADE 4.7%
Cost Plus Inc. ..................................................... 250,000 8,812,500
Costco Cos. Inc. ................................................... 150,000 12,140,625
Safeway Inc. ....................................................... 325,000 17,529,688
Williams-Sonoma Inc. ............................................... 200,000 5,800,000
-----------
44,282,813
-----------
(a)TECHNOLOGY SERVICES 12.7%
At Home Corp. ...................................................... 10,000 1,439,375
BroadVision Inc. ................................................... 100,000 5,806,250
Clarify Inc. ....................................................... 75,000 1,762,500
Computer Sciences Corp. ............................................ 200,000 11,912,500
EarthLink Network Inc. ............................................. 40,000 2,757,500
eBay Inc. .......................................................... 60,000 12,487,500
Excite Inc. ........................................................ 15,000 2,190,000
Exodus Communications Inc. ......................................... 15,000 1,351,875
Geocities .......................................................... 10,000 1,165,000
HNC Software Inc. .................................................. 175,000 3,762,500
i2 Technologies Inc. ............................................... 200,000 6,775,000
Infoseek Corp. ..................................................... 15,000 765,938
International Network Services ..................................... 300,000 11,400,000
Intuit Inc. ........................................................ 125,000 10,765,625
Legato Systems Inc. ................................................ 100,000 4,043,750
(b)Marimba Inc. ..................................................... 3,000 182,250
Micromuse Inc. ..................................................... 200,000 6,887,500
</TABLE>
41
- -PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA GROWTH FUND SHARES VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a)TECHNOLOGY SERVICES (CONT.)
Mpath Interactive Inc. ................................................... 6,800 $ 267,750
Oracle Corp. ............................................................. 225,000 6,089,063
Siebel Systems Inc. ...................................................... 200,000 7,687,500
VeriSign Inc. ............................................................ 15,000 1,725,000
VERITAS Software Corp. ................................................... 175,000 12,425,000
Wind River Systems Inc. .................................................. 300,000 4,500,000
Yahoo! Inc. .............................................................. 10,000 1,746,875
------------
119,896,251
------------
(a)TELECOMMUNICATIONS 3.1%
AirTouch Communications Inc. ............................................. 175,000 16,340,625
Covad Communications Group Inc. .......................................... 50,000 4,800,000
Pacific Gateway Exchange Inc. ............................................ 200,000 8,000,000
------------
29,140,625
------------
TRANSPORTATION 1.0%
Expeditors International of Washington Inc. .............................. 150,000 9,093,750
------------
UTILITIES 1.4%
American States Water Co. ................................................ 168,900 4,296,394
(a)California Water Service Group ......................................... 180,000 4,128,750
Edison International ..................................................... 200,000 4,900,000
------------
13,325,144
------------
TOTAL COMMON STOCKS (COST $628,732,448) .................................. 860,069,966
------------
CONVERTIBLE PREFERRED STOCKS .5%
Glenborough Realty Trust, 7.75%, cvt. pfd., A (COST $6,000,000) .......... 240,000 4,335,000
------------
PRINCIPAL
AMOUNT
------
CONVERTIBLE BONDS .8%
(a)ELECTRONIC TECHNOLOGY .5%
Aspect Telecommunications Corp., cvt. sub. deb., 144A, zero cpn., 8/10/18.. $ 10,500,000 2,073,750
Aspect Telecommunications Corp., cvt. sub. deb., zero cpn., 8/10/18 ....... 14,000,000 2,765,000
------------
4,838,750
------------
TECHNOLOGY SERVICES .3%
Activision Inc., cvt. sub. note, 144A, 6.75%, 1/01/05 ..................... 3,000,000 2,640,000
------------
TOTAL CONVERTIBLE BONDS (COST $7,878,601) ................................. 7,478,750
------------
TOTAL LONG TERM INVESTMENTS (COST $642,611,049) ........................... 871,883,716
------------
</TABLE>
42
- -PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA GROWTH FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(c)REPURCHASE AGREEMENT 7.0%
Joint Repurchase Agreement,4.862%, 5/03/99,(Maturity Value
$66,279,880) (COST $66,253,037) ............................................ $66,253,037 $ 66,253,037
Barclays Capital Inc.(Maturity Value $6,844,705)
Bear, Stearns & Co. Inc.(Maturity Value $3,733,475)
Chase Securities Inc.(Maturity Value $6,844,704)
CIBC Oppenheimer Corp.(Maturity Value $6,844,705)
Deutsche Bank Securities Inc.(Maturity Value $944,065)
Donaldson, Lufkin & Jenrette Securities Corp.(Maturity Value $6,844,704)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $6,844,705)
Lehman Brothers Inc.(Maturity Value $6,844,704)
Paine Webber Inc.(Maturity Value $6,844,705)
Paribas Corp.(Maturity Value $6,844,704)
UBS Securities LLC (Maturity Value $6,844,704)
Collateralized By U.S.Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $708,864,086) 99.5% .................................. 938,136,753
OTHER ASSETS, LESS LIABILITIES .5% ........................................... 4,427,891
------------
NET ASSETS 100.0% ............................................................ $942,564,644
============
</TABLE>
(a) Non-income producing.
(b) Sufficient collateral has been segregated for securities traded on a when-
issued or delayed delivery basis.
(c) See Note 1(c) regarding joint repurchase agreement.
(d) See Note 6 regarding holdings of 5% voting securities.
See notes to financial statements.
43
- -PAGE-
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN MIDCAP GROWTH FUND
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......................................... $17.44 $13.34 $14.24 $10.81 $10.05
-------------------------------------------------
Income from investment operations:
Net investment income (loss) ............................................... .04 -- (.02) .18 .21
Net realized and unrealized gains (losses) ................................. (1.17) 4.66 .93 3.59 .77
-------------------------------------------------
Total from investment operations ............................................ (1.13) 4.66 .91 3.77 .98
-------------------------------------------------
Less distributions from:
Net investment income ...................................................... -- -- (.05) (.21) (.20)
Net realized gains ......................................................... (.16) (.56) (1.76) (.13) (.02)
-------------------------------------------------
Total distributions ......................................................... (.16) (.56) (1.81) (.34) (.22)
-------------------------------------------------
Net asset value, end of year ................................................ $16.15 $17.44 $13.34 $14.24 $10.81
=================================================
Total return(*) ............................................................. (6.36%) 35.53% 6.31% 35.40% 10.06%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................................. $33,901 $29,864 $12,853 $7,575 $5,591
Ratios to average net assets:
Expenses ................................................................... 1.24% 1.17% 1.07% .16% --
Expenses excluding waiver and payments by affiliate ........................ 1.24% 1.17% 1.07% .96% .98%
Net investment income (loss) ............................................... .30% (.03%) (.22%) 1.42% 2.12%
Portfolio turnover rate ..................................................... 59.97% 50.16% 76.35% 102.65% 163.54%
</TABLE>
(*)Total return does not reflect sales commissions or the contingent deferred
sales charge,and is not annualized for periods less than one year.
See notes to financial statements.
44
- -PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999
<TABLE>
<CAPTION>
FRANKLIN MIDCAP GROWTH FUND SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 91.7%
(a)COMMERCIAL SERVICES 3.4%
Convergys Corp. ..................................................................... 12,000 $ 223,500
Robert Half International Inc. ...................................................... 20,000 477,500
U.S.Foodservice ..................................................................... 11,000 462,688
----------
1,163,688
----------
(a)CONSUMER DURABLES 1.0%
Electronic Arts Inc. ................................................................ 6,500 330,281
----------
CONSUMER NON-DURABLES 4.9%
Estee Lauder Cos., A ................................................................ 8,300 831,038
Hershey Foods Corp. ................................................................. 10,000 526,250
(a)Tommy Hilfiger Corp. .............................................................. 4,500 314,438
----------
1,671,726
----------
CONSUMER SERVICES 11.1%
(a)Apollo Group Inc., A .............................................................. 18,000 445,500
(a)Chancellor Media Corp. ............................................................ 11,800 647,525
(a)DeVry Inc. ........................................................................ 21,200 559,150
Ecolab Inc. ......................................................................... 16,000 671,000
(a)Education Management Corp. ........................................................ 15,800 315,013
The McClatchy Co., A ................................................................ 9,800 351,575
MeriStar Hospitality Corp. .......................................................... 17,000 391,000
(a)Starbucks Corp. ................................................................... 10,000 369,375
----------
3,750,138
----------
ELECTRONIC TECHNOLOGY 9.7%
(a)Altera Corp. ...................................................................... 11,000 794,750
Linear Technology Corp. ............................................................. 10,000 568,750
(a)Mettler-Toledo International Inc. ................................................. 21,000 548,625
(a)Seagate Technology Inc. ........................................................... 11,500 320,563
(a)Synopsys Inc. ..................................................................... 9,000 424,125
(a)Tellabs Inc. ...................................................................... 5,800 634,557
----------
3,291,370
----------
(a)ENERGY MINERALS 1.0%
Barrett Resources Corp. ............................................................. 11,500 349,313
----------
FINANCE 16.3%
Countrywide Credit Industries Inc. .................................................. 15,500 702,344
Federated Investors Inc. ............................................................ 32,000 514,000
Financial Security Assurance Holdings Ltd. .......................................... 7,600 434,150
HCC Insurance Holdings Inc. ......................................................... 22,000 464,750
National Commerce Bancorp ........................................................... 19,800 495,000
North Fork Bancorporation Inc. ...................................................... 15,300 344,250
The PMI Group Inc. .................................................................. 7,200 401,850
Protective Life Corp. ............................................................... 14,000 548,625
Providian Financial Corp. ........................................................... 5,000 645,313
</TABLE>
45
- -PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN MIDCAP GROWTH FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
FINANCE (CONT.)
Reinsurance Group of America .............................................. 11,250 $ 480,938
Zions Bancorp ............................................................. 7,200 480,150
----------
5,511,370
----------
HEALTH SERVICES 2.8%
(a)Cardinal Health Inc. .................................................... 6,000 358,875
Omnicare Inc. ............................................................. 25,000 601,563
----------
960,438
----------
(a)HEALTH TECHNOLOGY 4.1%
Centocor Inc. ............................................................. 5,800 257,375
Chiron Corp. .............................................................. 11,000 221,375
Genzyme Corp. ............................................................. 5,700 215,175
Quintiles Transnational Corp. ............................................. 10,000 405,625
Watson Pharmaceuticals Inc. ............................................... 7,500 303,750
----------
1,403,300
----------
INDUSTRIAL SERVICES 3.7%
(a)AES Corp. ............................................................... 9,200 460,000
Republic Services Inc., A ................................................. 21,500 442,094
Transocean Offshore Inc. .................................................. 11,800 350,313
----------
1,252,407
----------
PROCESS INDUSTRIES 4.4%
AptarGroup Inc. ........................................................... 11,400 319,200
Bowater Inc. .............................................................. 8,400 450,450
(a)Owens-Illinois Inc. ..................................................... 10,100 292,900
Sigma-Aldrich Corp. ....................................................... 13,300 432,250
----------
1,494,800
----------
(a)PRODUCER MANUFACTURING 3.5%
Gentex Corp. .............................................................. 20,200 607,263
Weatherford International Inc. ............................................ 16,600 562,325
----------
1,169,588
----------
REAL ESTATE 3.3%
Equity Office Properties Trust ............................................ 12,400 341,775
Equity Residential Properties Trust ....................................... 8,000 370,000
Security Capital Group Inc., B ............................................ 27,000 408,375
----------
1,120,150
----------
RETAIL TRADE 6.2%
Family Dollar Stores Inc. ................................................. 24,000 579,000
(a)Office Depot Inc. ....................................................... 19,500 429,000
(a)Safeway Inc. ............................................................ 6,000 323,625
Tiffany & Co. ............................................................. 9,000 756,000
----------
2,087,625
----------
</TABLE>
46
- -PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN MIDCAP GROWTH FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a)TECHNOLOGY SERVICES 4.7%
Affiliated Computer Services Inc., A ................................................. 8,500 $ 325,125
Computer Sciences Corp. .............................................................. 6,000 357,375
Sapient Corp. ........................................................................ 7,000 439,250
Siebel Systems Inc. .................................................................. 12,000 461,250
-----------
1,583,000
-----------
TELECOMMUNICATIONS 2.6%
Cincinnati Bell Inc. ................................................................. 16,000 362,000
(a)Western Wireless Corp., A .......................................................... 12,500 513,274
-----------
875,274
-----------
TRANSPORTATION 4.3%
C.H. Robinson Worldwide Inc. ......................................................... 15,600 467,025
Expeditors International of Washington Inc. .......................................... 16,500 1,000,313
-----------
1,467,338
-----------
UTILITIES 4.7%
CMS Energy Corp. ..................................................................... 8,500 374,000
Baltimore Gas and Electric Co. ....................................................... 10,700 300,938
El Paso Energy Corp. ................................................................. 9,500 349,125
Montana Power Co. .................................................................... 7,700 574,131
-----------
1,598,194
-----------
TOTAL LONG TERM INVESTMENTS (COST $25,018,148) ....................................... 31,080,000
-----------
PRINCIPAL
AMOUNT
---------
(c)REPURCHASE AGREEMENT 8.3%
Joint Repurchase Agreement,4.862%,5/03/99,(Maturity Value
$2,825,900) (COST $2,824,755) ...................................................... $2,824,755 2,824,755
Barclays Capital Inc.(Maturity Value $291,831)
Bear,Stearns & Co.Inc.(Maturity Value $159,180)
Chase Securities Inc. (Maturity Value $291,831)
CIBC Oppenheimer Corp.(Maturity Value $291,831)
Deutsche Bank Securities Inc.(Maturity Value $40,241)
Donaldson,Lufkin & Jenrette Securities Corp.(Maturity Value $291,831)
Dresdner Kleinwort Benson,North America LLC (Maturity Value $291,831)
Lehman Brothers Inc.(Maturity Value $291,831)
Paine Webber Inc.(Maturity Value $291,831)
Paribas Corp.(Maturity Value $291,831)
UBS Securities LLC (Maturity Value $291,831)
Collateralized by U.S.Treasury Bills & Notes
-----------
TOTAL INVESTMENTS (COST $27,842,903) 100.0% .......................................... 33,904,755
-----------
OTHER ASSETS, LESS LIABILITIES ....................................................... (3,822)
-----------
NET ASSETS 100.0% .................................................................... $33,900,933
===========
</TABLE>
(a) Non-income producing.
(c) See Note 1(c) regarding joint repurchase agreement.
See notes to financial statements.
47
- -PAGE-
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
FRANKLIN SMALL CAP GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------
YEAR ENDED APRIL 30,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value,beginning of year ............................ $25.93 $18.96 $19.75 $14.90 $12.75
---------------------------------------------------------------
Income from investment operations:
Net investment income ....................................... .06 .07 .03 .01 .03
Net realized and unrealized gains (losses) .................. (1.02) 7.92 .04 6.23 3.14
---------------------------------------------------------------
Total from investment operations ............................. (.96) 7.99 .07 6.24 3.17
---------------------------------------------------------------
Less distributions from:
Net investment income ....................................... (.14) (.09) (.06) (.01) (.02)
Net realized gains .......................................... (.18) (.93) (.80) (1.38) (1.00)
---------------------------------------------------------------
Total distributions .......................................... (.32) (1.02) (.86) (1.39) (1.02)
---------------------------------------------------------------
Net asset value,end of year .................................. $24.65 $25.93 $18.96 $19.75 $14.90
===============================================================
Total return(*) .............................................. (3.44%) 43.09% .14% 44.06% 27.05%
RATIOS/SUPPLEMENTAL DATA
Net assets,end of year (000's) ............................... $4,251,284 $3,957,972 $1,071,352 $444,912 $63,010
Ratios to average net assets:
Expenses .................................................... .94% .89% .92% .97% .69%
Expenses excluding waiver and payments by affiliate ......... .94% .89% .92% 1.00% 1.16%
Net investment income ....................................... .30% .32% .10% .09% .25%
Portfolio turnover rate ...................................... 46.73% 42.97% 55.27% 87.92% 104.84%
</TABLE>
(*) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
48
- -PAGE-
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
------------------------------------------------------
YEAR ENDED APRIL 30,
------------------------------------------------------
1999 1998 1997 1996(5)
------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value,beginning of year ............................ $25.59 $18.78 $19.66 $17.94
------------------------------------------------------
Income from investment operations:
Net investment loss ......................................... (.09) (.02) (.05) (.03)
Net realized and unrealized gains (losses) .................. (1.00) 7.76 (.03) 2.71
------------------------------------------------------
Total from investment operations ............................. (1.09) 7.74 (.08) 2.68
------------------------------------------------------
Less distributions from net realized gains ................... (.18) (.93) (.80) (.96)
------------------------------------------------------
Net asset value,end of year .................................. $24.32 $25.59 $18.78 $19.66
======================================================
Total return(*) .............................................. (4.08%) 42.06% (.65%) 15.98%
RATIOS/SUPPLEMENTAL DATA
Net assets,end of year (000's) ............................... $764,715 $731,707 $146,164 $24,102
Ratios to average net assets:
Expenses .................................................... 1.69% 1.64% 1.69% 1.76%(2)
Net investment loss ......................................... (.44%) (.42%) (.70%) (.69%)(2)
Portfolio turnover rate ...................................... 46.73% 42.97% 55.27% 87.92%
</TABLE>
(*) Total return does not reflect sales commissions or the contingent deferred
sales charge,and is not annualized for periods less than one year.
(2) Annualized
(5) For the period October 1,1995 (effective date) to April 30,1996.
49
- -PAGE-
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN SMALL CAP GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
ADVISOR CLASS
---------------------------------------------
YEAR ENDED APRIL 30,
---------------------------------------------
1999 1998 1997(6)
---------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value,beginning of year ..................................... $ 26.01 $ 18.97 $ 20.48
---------------------------------------------
Income from investment operations:
Net investment income ................................................ .10 .09 .01
Net realized and unrealized gains (losses) ........................... (1.00) 8.01 (1.52)
---------------------------------------------
Total from investment operations ...................................... (.90) 8.10 (1.51)
---------------------------------------------
Less distributions from:
Net investment income ................................................ (.20) (.13) --
Net realized gains ................................................... (.18) (.93) --
---------------------------------------------
Total distributions ................................................... (.38) (1.06) --
---------------------------------------------
Net asset value,end of year ........................................... $ 24.73 $ 26.01 $ 18.97
=============================================
Total return(*) ....................................................... (3.12%) 43.68% (7.37%)
RATIOS/SUPPLEMENTAL DATA
Net assets,end of year (000's) ........................................ $168,055 $118,683 $18,777
Ratios to average net assets:
Expenses ............................................................. .69% .64% .69%(2)
Net investment income ................................................ .56% .58% .30%(2)
Portfolio turnover rate ............................................... 46.73% 42.97% 55.27%
</TABLE>
(*) Total return is not annualized for periods less than one year.
(2 )Annualized
(6) For the period January 2,1997 (effective date) to April 30,1997.
See notes to financial statements.
50
- -PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS 90.1%
COMMERCIAL SERVICES 2.2%
(a)24/7 Media Inc. ................................................. 415,400 $ 18,485,300
(a)AnswerThink Consulting Group Inc. ............................... 75,000 1,664,063
(a,d)Applied Graphics Technologies Inc. ............................. 1,319,000 13,354,875
(a)The Corporate Executive Board Co. ............................... 93,500 2,629,688
(a)Lamar Advertising Co., A ........................................ 402,800 13,544,150
(a)NetGravity Inc. ................................................. 79,200 3,202,650
Norrell Corp. ..................................................... 931,100 13,966,500
(a)NOVA Corp. ...................................................... 888,800 23,108,800
(a)RemedyTemp Inc., A .............................................. 319,300 3,731,819
(a,d)SOS Staffing Services Inc. ..................................... 872,400 6,106,800
(a)Sylvan Learning Systems Inc. .................................... 687,900 17,283,488
------------
117,078,133
------------
(a)CONSUMER DURABLES .5%
(d)Activision Inc. ................................................. 1,294,400 13,510,300
Electronic Arts Inc. .............................................. 200,000 10,162,500
------------
23,672,800
------------
CONSUMER NON-DURABLES 2.2%
Alberto-Culver Co., A ............................................. 585,200 13,240,150
(a)Gerber Childrenswear Inc. ....................................... 360,000 2,790,000
(a)Sola International Inc. ......................................... 509,800 7,583,275
(a)Tommy Hilfiger Corp. ............................................ 898,900 62,810,638
(a,d)Tropical Sportswear International Corp. ........................ 400,500 8,785,969
Wolverine World Wide Inc. ......................................... 1,575,500 18,906,000
------------
114,116,032
------------
CONSUMER SERVICES 5.2%
(a)BEA Systems Inc. ................................................ 1,873,200 28,332,150
(a,d)Cumulus Media Inc., A .......................................... 785,000 12,707,188
(a)DeVry Inc. ...................................................... 1,064,800 28,084,100
(a)Foodmaker Inc. .................................................. 411,400 9,925,025
(a)Harrah's Entertainment Inc. ..................................... 1,170,600 25,753,200
(a)Jones Intercable Inc. ........................................... 12,500 565,625
(a)Jones Intercable Inc., A ........................................ 174,600 8,097,075
MeriStar Hospitality Corp. ........................................ 2,330,000 53,590,000
(a,d)MeriStar Hotels & Resorts Inc. ................................. 1,330,000 4,821,250
(a,d)Prime Hospitality Corp. ........................................ 3,020,500 36,812,344
(a)SFX Entertainment Inc. .......................................... 587,000 36,247,250
(a)Sotheby's Holdings Inc., A ...................................... 375,000 15,984,375
(a)Vail Resorts Inc. ............................................... 370,500 7,178,438
------------
268,098,020
------------
ELECTRONIC TECHNOLOGY 21.1%
(a)Advanced Energy Industries Inc. ................................. 916,600 25,378,363
(a)Aspect Telecommunications Corp. ................................. 1,065,000 8,486,772
(a,d)AVT Corp. ...................................................... 837,400 22,766,813
(a)Catapult Communications Corp. ................................... 627,000 9,757,688
(a,d)Coherent Inc. .................................................. 1,763,400 26,230,575
</TABLE>
51
- -PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
ELECTRONIC TECHNOLOGY (CONT.)
(a,d)Com21 Inc. ........................................................... 1,294,000 $ 40,275,750
(a)Conexant Systems Inc. ................................................. 218,300 8,895,725
(a)Cymer Inc. ............................................................ 50,000 912,500
EG&G Inc. ............................................................... 400,000 12,500,000
(a)Electro Scientific Industries Inc. .................................... 275,000 10,484,375
(a)Etec Systems Inc. ..................................................... 654,000 20,192,250
(a)Excel Switching Corp. ................................................. 733,300 15,215,975
(a)First Virtual Corp. ................................................... 400,000 2,700,000
(a)Flextronics International Ltd. ........................................ 850,000 39,684,375
(a,d)FLIR Systems Inc. .................................................... 1,028,600 14,143,250
(a)Gemstar International Group Ltd. ...................................... 883,300 93,077,738
(a,d)H.T.E. Inc ........................................................... 1,227,100 3,604,606
(a)Harmonic Lightwaves Inc. .............................................. 600,100 27,379,563
(a)hi/fn Inc. ............................................................ 52,500 2,835,000
(a,d)Itron Inc. ........................................................... 1,159,800 9,568,350
(a)Jabil Circuit Inc. .................................................... 943,400 43,927,063
(a,d)Javelin Systems Inc. ................................................. 499,100 5,864,425
(a,d)Komag Inc. ........................................................... 4,207,100 15,776,625
(a,d)Ladish Co.Inc ........................................................ 971,600 6,497,575
(a)Level One Communications Inc. ......................................... 675,000 34,678,125
(a)Mettler-Toledo International Inc. ..................................... 1,886,600 49,287,425
(a)Micrel Inc. ........................................................... 82,400 4,851,300
(a,d)Natural Microsystems Corp. ........................................... 646,600 3,313,825
(d)Newport Corp. ......................................................... 512,500 6,406,250
(a)Novellus Systems Inc. ................................................. 306,100 14,463,225
(a,d)Perceptron Inc. ...................................................... 793,500 4,314,656
(a)Photronics Inc. ....................................................... 587,500 14,063,281
(a)PLX Technology Inc. ................................................... 89,200 1,728,250
(a)PMC-Sierra Inc. ....................................................... 915,300 87,754,388
(a)Power Integrations Inc. ............................................... 500,000 19,625,000
(a)Proxim Inc. ........................................................... 101,600 3,911,600
(a)Sanmina Corp. ......................................................... 423,200 28,089,900
(a,d)Security Dynamics .................................................... 2,445,000 53,178,750
(a)SIPEX Corp. ........................................................... 450,000 6,300,000
(a,d)Spectra-Physics Lasers Inc. .......................................... 1,016,300 9,273,738
(a)Synopsys Inc. ......................................................... 1,405,000 66,210,625
(a)Tekelec ............................................................... 2,608,500 23,558,146
(a)Terayon Communication Systems Inc. .................................... 186,800 7,542,050
(a)TranSwitch Corp. ...................................................... 205,400 9,037,600
(a)TriStar Aerospace Co. ................................................. 490,700 5,213,688
(a)Uniphase Corp. ........................................................ 858,600 104,212,575
(a)Waters Corp. .......................................................... 619,800 65,156,475
(a)Western Digital Corp. ................................................. 824,300 6,542,881
--------------
1,094,869,109
--------------
ENERGY MINERALS 4.0%
(a,d)Barrett Resources Corp. .............................................. 1,790,900 54,398,588
(a)Denbury Resources Inc. ................................................ 1,003,800 4,768,050
</TABLE>
52
- -PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
ENERGY MINERALS (CONT.)
(a,d)Newfield Exploration Co. ............................................... 2,338,600 $ 62,849,875
(a,d)Nuevo Energy Co. ....................................................... 1,075,500 17,073,563
Range Resources Corp. ..................................................... 1,990,000 10,198,750
Snyder Oil Corp. .......................................................... 828,000 15,059,250
(a)Titan Exploration Inc. .................................................. 1,645,700 9,257,063
(a,d)Tom Brown Inc. ......................................................... 2,095,800 31,306,013
------------
204,911,152
------------
FINANCE 12.0%
(a)Affiliated Managers Group Inc. .......................................... 903,400 26,255,063
Allied Capital Corp. ...................................................... 667,000 12,006,000
(a)Amerin Corp. ............................................................ 1,085,500 25,441,406
Bank United Corp. ......................................................... 1,000,000 40,375,000
(a)E*TRADE Group Inc. ...................................................... 571,400 65,996,700
E.W.Blanch Holdings Inc. .................................................. 140,000 8,242,500
Espirito Santo Financial Group SA,ADR (Luxembourg) ........................ 801,500 12,924,187
EVEREN Capital Corp. ...................................................... 660,600 19,405,125
Federated Investors Inc. .................................................. 2,255,600 36,230,575
Financial Security Assurance Holdings Ltd. ................................ 1,069,300 61,083,763
Freedom Securities Corp. .................................................. 396,800 7,216,800
(a)Golden State Bancorp Inc. ............................................... 2,000,000 49,125,000
(a)Hambrecht & Quist Group ................................................. 400,000 14,100,000
HCC Insurance Holdings Inc. ............................................... 696,500 14,713,563
(a)HealthCare Financial Partners Inc. ...................................... 663,900 22,406,625
Heller Financial Inc. ..................................................... 461,100 12,507,338
(a)Knight/Trimark Group Inc., A ............................................ 318,500 48,790,219
Life USA Holding Inc. ..................................................... 292,800 2,928,000
(a)Mutual Risk Management Ltd. ............................................. 349,100 13,571,263
Reinsurance Group of America .............................................. 894,900 38,256,975
(a)Risk Capital Holdings Inc. .............................................. 751,900 10,902,550
Scor (France) ............................................................. 245,226 12,245,474
(a,d)Silicon Valley Bancshares .............................................. 1,293,600 22,718,850
(a)TeleBanc Financial Corp. ................................................ 257,600 26,693,800
Westamerica Bancorp ....................................................... 472,700 15,776,363
------------
619,913,139
------------
(a)HEALTH SERVICES 2.5%
American Dental Partners Inc. ............................................. 266,200 2,562,175
Beverly Enterprises Inc. .................................................. 2,131,800 13,856,700
Eclipsys Corp. ............................................................ 21,551 474,122
Integrated Health Services Inc. ........................................... 900,000 4,331,250
New American Healthcare Corp. ............................................. 382,800 574,200
PAREXEL International Corp. ............................................... 1,000,000 24,062,500
Pediatrix Medical Group Inc. .............................................. 558,600 10,578,488
(d)Pharmaceutical Product Development Inc. ................................. 1,300,000 37,862,500
Renal Care Group Inc. ..................................................... 1,303,800 27,216,825
</TABLE>
53
- -PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999(CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
(a)HEALTH SERVICES (CONT.)
Sabratek Corp. ..................................................... 195,000 $ 3,180,938
Total Renal Care Holdings Inc. ..................................... 237,366 3,293,453
------------
127,993,151
------------
HEALTH TECHNOLOGY 1.2%
(a)Heska Corp. ...................................................... 605,300 2,345,538
(a)Incyte Pharmaceuticals Inc. ...................................... 41,200 744,175
(a)Inhale Therapeutic Systems Inc. .................................. 811,000 23,316,250
Mentor Corp. ....................................................... 295,300 4,281,850
(a)OrthoLogic Corp. ................................................. 1,202,600 3,607,800
(a,d)Serologicals Corp. .............................................. 2,022,700 15,170,250
(a)SkyePharma PLC, ADR (United Kingdom) ............................. 229,190 2,320,549
(a)SkyePharma PLC, rts., 3/31/00 (United Kingdom) ................... 785,500 0
(a)Zonagen Inc. ..................................................... 438,800 10,037,550
------------
61,823,962
------------
(a)INDUSTRIAL SERVICES 5.0%
(d)Atwood Oceanics Inc. ............................................. 1,216,600 42,428,925
Casella Waste Systems Inc., A ...................................... 319,600 7,990,000
(d)Catalytica Inc. .................................................. 1,965,733 26,905,970
(d)Core Laboratories NV (Netherlands) ............................... 1,632,400 29,383,200
KTI Inc. ........................................................... 72,500 725,000
Marine Drilling Cos. Inc ........................................... 1,062,400 18,260,000
Safety-Kleen Corp. ................................................. 1,138,200 18,068,925
Tuboscope Inc. ..................................................... 2,000,000 27,250,000
(d)US Liquids Inc. .................................................. 1,500,800 30,391,200
(d)Varco International Inc. ......................................... 5,162,500 58,400,781
------------
259,804,001
------------
NON-ENERGY MINERALS .5%
Carpenter Technology Corp. ......................................... 800,000 25,050,000
------------
PROCESS INDUSTRIES .8%
ChemFirst Inc. ..................................................... 764,900 18,261,988
(a)CUNO Inc. ........................................................ 420,000 7,691,250
Optical Coating Laboratory Inc. .................................... 272,900 16,817,463
------------
42,770,701
------------
PRODUCER MANUFACTURING 3.3%
(a)Cable Design Technologies ........................................ 300,000 4,462,500
(a)Gentex Corp. ..................................................... 1,986,100 59,707,131
(d)Gibraltar Steel Corp. ............................................ 1,012,800 23,737,500
JLG Industries Inc. ................................................ 1,262,700 20,282,119
(a)Polycom Inc. ..................................................... 93,700 2,289,794
Reliance Steel & Aluminum Co. ...................................... 830,000 30,243,125
Roper Industries Inc. .............................................. 1,033,800 29,463,300
------------
170,185,469
------------
</TABLE>
54
- -PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
REAL ESTATE 2.5%
Arden Realty Inc. ..................................................... 1,330,400 $ 33,260,000
Camden Property Trust ................................................. 1,200,000 32,400,000
Colonial Properties Trust ............................................. 273,400 7,484,325
FelCor Lodging Trust Inc. ............................................. 687,300 16,452,244
Glenborough Realty Trust Inc. ......................................... 865,500 14,875,781
(d)Innkeepers USA Trust ................................................ 2,102,800 21,685,125
SL Green Realty Corp. ................................................. 394,100 7,832,738
------------
133,990,213
------------
(a)RETAIL TRADE 1.3%
Beyond.com Corp. ...................................................... 1,106,100 32,560,819
Claire's Stores Inc. .................................................. 612,800 20,299,000
Guitar Center Inc. .................................................... 916,800 14,325,000
------------
67,184,819
------------
(a)TECHNOLOGY SERVICES 16.9%
Affiliated Computer Services Inc., A .................................. 1,662,300 63,582,975
(b)AppliedTheory Corp. ................................................. 14,100 289,050
Aspen Technologies Inc. ............................................... 60,600 518,888
Brightpoint Inc. ...................................................... 550,000 3,385,965
Brio Technology Inc. .................................................. 369,000 5,166,000
BroadVision Inc. ...................................................... 444,700 25,820,394
Check Point Software Technologies Ltd. (Israel) ....................... 291,500 10,275,375
Citrix Systems Inc. ................................................... 600,000 25,500,000
Complete Business Solutions Inc. ...................................... 390,900 8,746,388
Concord Communications Inc. ........................................... 450,000 20,137,500
Deltek Systems Inc. ................................................... 448,100 3,864,862
Documentum Inc. ....................................................... 750,000 11,718,750
Doubleclick Inc. ...................................................... 394,400 55,142,050
EarthLink Network Inc. ................................................ 500,000 34,468,750
Entrust Technologies Inc. ............................................. 1,307,200 32,189,800
Exodus Communications Inc. ............................................ 149,400 13,464,675
Harbinger Corp. ....................................................... 124,600 1,362,812
(d)HNC Software Inc. ................................................... 1,348,200 28,986,283
i2 Technologies Inc. .................................................. 1,979,000 67,038,625
Information Advantage Inc. ............................................ 362,100 1,719,975
(d)Integrated Systems Inc. ............................................. 1,857,200 25,304,350
International Network Services ........................................ 1,355,550 51,510,900
InterVU Inc. .......................................................... 115,000 6,210,000
Intuit Inc. ........................................................... 505,400 43,527,575
ISS Group Inc. ........................................................ 100,200 5,316,863
Legato Systems Inc. ................................................... 613,500 24,808,406
(b)Marimba Inc. ........................................................ 16,400 996,300
(d)Micromuse Inc. ...................................................... 960,000 33,060,000
(d)MicroStrategy Inc. .................................................. 426,100 7,350,225
Mpath Interactive Inc. ................................................ 35,000 1,378,125
Proxicom Inc. ......................................................... 145,500 3,264,656
Sapient Corp. ......................................................... 623,900 39,149,725
</TABLE>
55
- -PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
(a)TECHNOLOGY SERVICES (CONT.)
Serena Software Inc. ................................................ 501,800 $ 5,143,450
SS&C Technologies Inc. .............................................. 171,000 2,458,125
Transaction Systems Architects Inc. ................................. 658,900 21,373,069
Vantive Corp. ....................................................... 970,400 7,763,200
Verio Inc. .......................................................... 936,600 66,498,600
VERITAS Software Corp. .............................................. 551,700 39,170,700
Vignette Corp. ...................................................... 154,200 14,649,000
Visio Corp. ......................................................... 204,400 5,518,800
Whittman-Hart Inc. .................................................. 1,041,500 29,422,375
Wind River Systems Inc. ............................................. 1,966,500 29,497,500
--------------
876,751,061
--------------
(a)TELECOMMUNICATIONS 5.2%
ICG Communications Inc. ............................................. 1,599,100 35,280,144
MetroNet Communications Corp., B (Canada) ........................... 113,800 6,315,900
Millicom International Cellular SA (Luxembourg) ..................... 1,465,200 50,549,400
(d)Pacific Gateway Exchange Inc. ..................................... 1,015,700 40,628,000
Pinnacle Holdings Inc. .............................................. 1,075,900 22,055,950
Primus Telecommunications Group Inc. ................................ 1,406,100 23,464,294
Rhythms NetConnections Inc. ......................................... 50,900 4,199,250
(d)Rural Cellular Corp., A ........................................... 690,800 12,261,700
Western Wireless Corp., A ........................................... 1,869,200 76,754,025
--------------
271,508,663
--------------
TRANSPORTATION 3.7%
Air Express International Corp. ..................................... 911,000 19,928,125
(a)Alaska Air Group Inc. ............................................. 175,000 7,710,938
(a,d)Atlantic Coast Airlines Inc. ..................................... 1,400,000 43,225,000
C.H. Robinson Worldwide Inc. ........................................ 1,046,200 31,320,613
(d)Expeditors International of Washington Inc. ....................... 1,281,100 77,666,688
(a,d)Mesa Air Group Inc. .............................................. 1,467,200 9,903,600
(a)Mesaba Holdings Inc. .............................................. 189,500 2,759,594
--------------
192,514,558
--------------
TOTAL COMMON STOCKS AND RIGHTS (COST $4,013,248,760) ................ 4,672,234,983
--------------
PRINCIPAL
AMOUNT
(a)CONVERTIBLE BONDS .4%
AMF Bowling Inc., cvt., zero cpn., A, 5/12/18 ....................... $ 12,900,000 1,451,250
Citrix Systems Inc., cvt., zero cpn., A, 3/22/19 .................... 30,000,000 11,475,000
Western Digital Corp., cvt. sub. deb., zero cpn., 144A, 2/18/18 ..... 23,800,000 5,146,750
--------------
TOTAL CONVERTIBLE BONDS (COST $23,169,030) .......................... 18,073,000
--------------
TOTAL LONG TERM INVESTMENTS (COST $4,036,417,790) ................... 4,690,307,983
--------------
</TABLE>
56
- -PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS,APRIL 30,1999(CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN SMALL CAP GROWTH FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(c)REPURCHASE AGREEMENT 11.5%
Joint Repurchase Agreement, 4.862%, 5/03/99, (Maturity Value $597,901,606)
(COST $597,659,458) ................................................................. $597,659,458 $ 597,659,458
Barclays Capital Inc. (Maturity Value $61,745,299)
Bear,Stearns & Co. Inc. (Maturity Value $33,679,797)
Chase Securities Inc. (Maturity Value $61,745,299)
CIBC Oppenheimer Corp. (Maturity Value $61,745,299)
Deutsche Bank Securities Inc. (Maturity Value $8,514,118)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $61,745,299)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $61,745,299)
Lehman Brothers Inc. (Maturity Value $61,745,299)
Paine Webber Inc. (Maturity Value $61,745,299)
Paribas Corp. (Maturity Value $61,745,299)
UBS Securities LLC (Maturity Value $61,745,299)
Collateralized by U.S. Treasury Bills & Notes
---------------
TOTAL INVESTMENTS (COST $4,634,077,248) 102.0% ........................................ 5,287,967,441
OTHER ASSETS, LESS LIABILITIES (2.0%) ................................................. (103,912,949)
---------------
NET ASSETS 100.0% ..................................................................... $5,184,054,492
===============
</TABLE>
(a) Non-income producing.
(b) Sufficient collateral has been segregated for securities traded on a when-
issued or delayed delivery basis.
(c) See Note 1(c) regarding joint repurchase agreement.
(d) See Note 6 regarding holdings of 5% voting securities.
See notes to financial statements.
57
- -PAGE-
FRANKLIN STRATEGIC SERIES
Financial Statements
STATEMENTS OF ASSETS AND LIABILITIES
APRIL 30,1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
FRANKLIN CALIFORNIA FRANKLIN MIDCAP SMALL CAP
BLUE CHIP FUND GROWTH FUND GROWTH FUND GROWTH FUND
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost - Unaffiliated issuers ....................... $43,957,346 $635,266,842 $25,018,148 $2,828,627,473
Cost - Non-controlled affiliated issuers .......... -- 7,344,207 -- 1,207,790,317
=========================================================================
Value - Unaffiliated issuers ...................... 50,236,368 867,208,716 31,080,000 3,620,295,883
Value - Non-controlled affiliated issuers ......... -- 4,675,000 -- 1,070,012,100
Repurchase agreements, at value and cost ........... 6,718,080 66,253,037 2,824,755 597,659,458
Receivables:
Investment securities sold ........................ 1,075,957 16,021,865 -- 9,039,659
Capital shares sold ............................... 316,948 1,463,068 107,597 36,010,668
Dividends and interest ............................ 38,434 261,825 21,899 802,876
-------------------------------------------------------------------------
Total assets .................................. 58,385,787 955,883,511 34,034,251 5,333,820,644
-------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ................... 3,275,081 7,889,941 -- 14,883,739
Capital shares redeemed ........................... 30,105 2,799,040 48,761 18,990,777
Affiliates ........................................ 62,946 1,426,018 45,130 7,070,552
Shareholders ...................................... 91,900 1,165,595 34,260 2,911,828
Payable upon return of securities loaned (Note 7) .. -- -- -- 105,416,707
Other liabilities .................................. 45,290 38,273 5,167 492,549
-------------------------------------------------------------------------
Total liabilities ............................. 3,505,322 13,318,867 133,318 149,766,152
-------------------------------------------------------------------------
Net assets, at value ......................... $54,880,465 $942,564,644 $33,900,933 $5,184,054,492
=========================================================================
Net assets consist of:
Undistributed net investment income ................ $ 70,790 $ 2,370,910 $ 91,060 $ 8,828,268
Net unrealized appreciation ........................ 6,282,971 229,272,667 6,061,852 653,890,193
Accumulated net realized gain (loss) ............... 1,075,396 (60,904,619) (1,577,405) (112,385,116)
Capital shares ..................................... 47,451,308 771,825,686 29,325,426 4,633,721,147
-------------------------------------------------------------------------
Net assets, at value ................................ $54,880,465 $942,564,644 $33,900,933 $5,184,054,492
=========================================================================
</TABLE>
See notes to financial statements.
58
- -PAGE-
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
APRIL 30,1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
FRANKLIN CALIFORNIA FRANKLIN MIDCAP SMALL CAP
BLUE CHIP FUND GROWTH FUND GROWTH FUND GROWTH FUND
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A:
Net assets, at value ............................ $54,880,465 $780,597,663 $33,900,933 $4,251,284,028
==========================================================================
Shares outstanding .............................. 3,809,111 30,235,845 2,098,874 172,471,799
==========================================================================
Net asset value per share(*) .................... $14.41 $25.82 $16.15 $4.65
==========================================================================
Maximum offering price per share
(net asset value per share / 94.25%) ........... $15.29 $27.40 $17.14 $26.15
==========================================================================
CLASS B:
Net assets, at value ............................ -- $ 2,656,978 -- --
==========================================================================
Shares outstanding .............................. -- 103,179 -- --
==========================================================================
Net asset value and maximum offering price
per share(*) .................................. -- $25.75 -- --
==========================================================================
CLASS C:
Net assets, at value ............................ -- $159,310,003 -- $ 764,715,028
==========================================================================
Shares outstanding .............................. -- 6,215,360 -- 31,445,648
==========================================================================
Net asset value per share(*) .................... -- $25.63 -- $24.32
==========================================================================
Maximum offering price per share
(net asset value per share / 99.00%) ........... -- $25.89 -- $24.57
==========================================================================
ADVISOR CLASS:
Net assets, at value ............................ -- -- -- $ 168,055,436
==========================================================================
Shares outstanding .............................. -- -- -- 6,794,290
==========================================================================
Net asset value and maximum offering price
per share ..................................... -- -- -- $24.73
==========================================================================
</TABLE>
(*)Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
59
- -PAGE-
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
FRANKLIN CALIFORNIA MIDCAP SMALL CAP
BLUE CHIP FUND GROWTH FUND GROWTH FUND GROWTH FUND
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:
Dividends:
Unaffiliated issuers(*) .................................... $ 276,198 $ 8,133,002 $ 274,569 $ 21,631,143
Non-controlled affiliated issuers (Note 6) ................. -- -- -- 4,948,935
Interest .................................................... 214,910 3,904,360 198,932 29,500,709
----------------------------------------------------------------
Total investment income ................................ 491,108 12,037,362 473,501 56,080,787
----------------------------------------------------------------
Expenses:
Management fees (Note 3) .................................... 205,441 4,066,764 199,753 20,630,510
Distribution fees (Note 3)
Class A .................................................... 82,646 1,783,516 78,777 9,197,204
Class B .................................................... -- 3,974 -- --
Class C .................................................... -- 1,357,061 -- 6,943,308
Transfer agent fees (Note 3) ................................ 80,316 1,736,957 65,427 7,621,758
Custodian fees .............................................. 881 8,734 280 61,706
Reports to shareholders ..................................... 15,111 342,008 13,728 1,314,529
Registration and filing fees ................................ 21,593 188,893 20,539 1,155,720
Professional fees ........................................... 1,684 27,128 1,866 156,470
Trustees' fees and expenses ................................. 358 11,711 446 61,599
Other ....................................................... 4,431 14,963 667 73,461
----------------------------------------------------------------
Total expenses ......................................... 412,461 9,541,709 381,483 47,216,265
Expenses waived/paid by affiliate (Note 3) ............. (71,389) -- -- --
----------------------------------------------------------------
Net expenses .......................................... 341,072 9,541,709 381,483 47,216,265
----------------------------------------------------------------
Net investment income ................................ 150,036 2,495,653 92,018 8,864,522
----------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain loss) from:
Investments in unaffiliated issuers ........................ 1,503,611 (60,704,565) (1,550,328) 4,475,296
Investments in non-controlled affiliated issuers (Note 6) .. -- (22,198) -- (114,318,769)
Foreign currency transactions .............................. (4,153) -- -- (20,032)
----------------------------------------------------------------
Net realized gain (loss) ............................... 1,499,458 (60,726,763) (1,550,328) (109,863,505)
Net unrealized appreciation on:
Investments ................................................ 3,966,983 115,471,275 72,048 7,888,123
Translation of assets and liabilities denominated in
foreign currencies ....................................... 7,905 -- -- --
----------------------------------------------------------------
Net unrealized appreciation ............................ 3,974,888 115,471,275 72,048 7,888,123
----------------------------------------------------------------
Net realized and unrealized gain (loss) ..................... 5,474,346 54,744,512 (1,478,280) (101,975,382)
----------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations ................................................. $5,624,382 $ 57,240,165 $(1,386,262) $ (93,110,860)
================================================================
</TABLE>
(*)Net of foreign taxes and fees of $13,767,$424, and $78,512 for the Franklin
Blue Chip Fund, Franklin MidCap Growth Fund, and Franklin Small Cap Growth
Fund, respectively.
See notes to financial statements.
60
- -PAGE-
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
BLUE CHIP FUND CALIFORNIA GROWTH FUND
1999 1998 1999 1998
----------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............................................. $ 150,036 $ 109,740 $ 2,495,653 $ 3,338,627
Net realized gain (loss) from investments and
foreign currency transactions .................................... 1,499,458 (371,433) (60,726,763) 42,533,146
Net unrealized appreciation on investments and
translation of assets and liabilities denominated
in foreign currencies ............................................ 3,974,888 2,021,063 115,471,275 104,216,403
---------------------------------------------------------
Net increase in net assets resulting from
operations ................................................... 5,624,382 1,759,370 57,240,165 150,088,176
Distributions to shareholders from:
Net investment income:
Class A .......................................................... (126,476) (61,919) (4,374,577) (2,778,436)
Class C .......................................................... -- -- (606) (56,235)
Net realized gains:
Class A .......................................................... -- (81,033) (15,717,424) (20,449,548)
Class C .......................................................... -- -- (3,127,611) (2,848,861)
---------------------------------------------------------
Total distributions to shareholders ................................ (126,476) (142,952) (23,220,218) (26,133,080)
Capital share transactions: (Note 2)
Class A ........................................................... 32,546,439 9,619,758 32,435,619 328,134,373
Class B ........................................................... -- -- 2,564,716 --
Class C ........................................................... -- -- 29,589,278 84,411,109
---------------------------------------------------------
Total capital share transactions ................................... 32,546,439 9,619,758 64,589,613 412,545,482
Net increase in net assets .................................... 38,044,345 11,236,176 98,609,560 536,500,578
Net assets:
Beginning of year .................................................. 16,836,120 5,599,944 843,955,084 307,454,506
---------------------------------------------------------
End of year ........................................................ $54,880,465 $16,836,120 $942,564,644 $843,955,084
=========================================================
Undistributed net investment income included in net assets:
End of year ....................................................... $ 70,790 $ 51,383 $ 2,370,910 $ 1,171,577
=========================================================
</TABLE>
See notes to financial statements.
61
- -PAGE-
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED APRIL 30,1999 AND 1998
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
MIDCAP GROWTH FUND SMALL CAP GROWTH FUND
-------------------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) .......................... $ 92,018 $ (6,092) $ 8,864,522 $ 6,367,212
Net realized gain (loss) from investments and
foreign currency transactions ........................ (1,550,328) 899,279 (109,863,505) 168,905,582
Net unrealized appreciation on investments and
translation of assets and liabilities denominated
in foreign currencies ................................ 72,048 4,795,383 7,888,123 660,877,005
-------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations .................................. (1,386,262) 5,688,570 (93,110,860) 836,149,799
Distributions to shareholders from:
Net investment income:
Class A .............................................. -- -- (24,920,845) (10,251,644)
Advisor Class ........................................ -- -- (1,373,343) (376,164)
Net realized gains:
Class A .............................................. (347,614) (759,611) (31,374,289) (103,290,267)
Class C .............................................. -- -- (6,067,928) (19,206,121)
Advisor Class ........................................ -- -- (1,280,976) (2,705,237)
-------------------------------------------------------------------
Total distributions to shareholders .................... (347,614) (759,611) (65,017,381) (135,829,433)
Capital share transactions:(Note 2)
Class A ............................................... 5,771,147 12,082,084 418,158,255 2,294,635,207
Class C ............................................... -- -- 64,646,406 492,492,347
Advisor Class ......................................... -- -- 51,015,284 84,621,122
-------------------------------------------------------------------
Total capital share transactions ....................... 5,771,147 12,082,084 533,819,945 2,871,748,676
Net increase in net assets ........................ 4,037,271 17,011,043 375,691,704 3,572,069,042
Net assets
Beginning of year ...................................... 29,863,662 12,852,619 4,808,362,788 1,236,293,746
-------------------------------------------------------------------
End of year ............................................ $33,900,933 $29,863,662 $5,184,054,492 $4,808,362,788
==================================================================
Undistributed net investment income included in net
assets:
End of year ........................................... $ 91,060 $ -- $ 8,828,268 $
==================================================================
</TABLE>
See notes to financial statements.
62
- -PAGE-
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 ten separate
series (the Funds). All Funds included in this report are diversified except the
Franklin California Growth Fund. The Funds' investment objective is capital
growth.
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, 1999, all outstanding repurchase
agreements had been entered into on that date.
d. 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 substantially all of its taxable income.
e. 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.
63
- -PAGE-
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
e. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: (CONT.)
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.
f. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the Funds are indicated below.
Effective January 1, 1999, Class I and Class II were renamed Class A and Class
C, respectively, and the Franklin California Growth Fund began offering a new
class of shares, Class B. The shares differ by their initial sales load,
distribution fees, voting rights on matters affecting a single class and the
exchange privilege of each class.
<TABLE>
<CAPTION>
CLASS A CLASS A, CLASS C, & ADVISOR CLASS CLASS A, CLASS B, & CLASS C
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Franklin Blue Chip Fund Franklin Small Cap Growth Fund Franklin California Growth Fund
Franklin MidCap Growth Fund
</TABLE>
At April 30, 1999, there were an unlimited number of shares authorized ($.01 par
value). Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
BLUE CHIP FUND CALIFORNIA GROWTH FUND
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Year ended April 30,1999
Shares sold .............................................. 3,618,266 $47,414,962 16,494,382 $ 386,947,861
Shares issued in reinvestment of distributions ........... 8,472 105,717 825,009 18,676,674
Shares redeemed .......................................... (1,168,867) (14,974,240) (15,966,155) (373,188,916)
-------------------------------------------------------------------
Net increase ............................................. 2,457,871 $32,546,439 1,353,236 $ 32,435,619
===================================================================
Year ended April 30,1998
Shares sold .............................................. 1,118,441 $12,925,246 20,145,76 $ 465,817,703
Shares issued in reinvestment of distributions ........... 12,437 135,809 978,677 21,399,872
Shares redeemed .......................................... (295,806) (3,441,297) (6,859,634) (159,083,202)
-------------------------------------------------------------------
Net increase ............................................. 835,072 $ 9,619,758 14,264,811 $ 328,134,373
===================================================================
</TABLE>
64
- -PAGE-
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
FRANKLIN
CALIFORNIA GROWTH FUND
-----------------------------
SHARES AMOUNT
-----------------------------
<S> <C> <C>
CLASS B SHARES:
Year ended April 30,1999(1)
Shares sold .......................................... 103,431 $ 2,570,873
Shares redeemed ...................................... (252) (6,157)
-----------------------------
Net increase ......................................... 103,179 $ 2,564,716
=============================
CLASS C SHARES:
Year ended April 30,1999
Shares sold .......................................... 3,010,549 $ 70,453,473
Shares issued in reinvestment of distributions ....... 128,580 2,895,577
Shares redeemed ...................................... (1,868,591) (43,759,772)
-----------------------------
Net increase ......................................... 1,270,538 $ 29,589,278
=============================
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
=============================
</TABLE>
(1) For the Franklin California Growth Fund, for the period January 1, 1999
(effective date) to April 30, 1999.
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
MIDCAP GROWTH FUND SMALL CAP GROWTH FUND
-----------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Year ended April 30,1999
Shares sold ........................................ 1,510,866 $ 22,694,848 161,810,259 $ 3,545,958,486
Shares issued in reinvestment of distributions ..... 16,973 236,773 2,486,084 51,561,607
Shares redeemed .................................... (1,140,923) (17,160,474) (144,463,351) (3,179,361,838)
-----------------------------------------------------------------------
Net increase ....................................... 386,916 $ 5,771,147 19,832,992 $ 418,158,255
=======================================================================
Year ended April 30,1998
Shares sold ........................................ 1,253,115 $ 20,195,538 136,826,460 $ 3,281,727,105
Shares issued in reinvestment of distributions ..... 47,614 724,287 4,660,368 102,667,738
Shares redeemed .................................... (551,956) (8,837,741) (45,358,271) (1,089,759,636)
-----------------------------------------------------------------------
Net increase ....................................... 748,773 $ 12,082,084 96,128,557 $ 2,294,635,207
=======================================================================
</TABLE>
65
- -PAGE-
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
FRANKLIN
SMALL CAP GROWTH FUND
---------------------------------
SHARES AMOUNT
---------------------------------
<S> <C> <C>
CLASS C SHARES:
Year ended April 30,1999
Shares sold .................................................................. 13,842,560 $ 300,359,397
Shares issued in reinvestment of distributions ............................... 260,342 5,339,598
Shares redeemed .............................................................. (11,256,132) (241,052,589)
---------------------------------
Net increase ................................................................. 2,846,770 $ 64,646,406
=================================
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
=================================
ADVISOR CLASS SHARES:
Year ended April 30,1999
Shares sold .................................................................. 6,726,880 $ 148,222,012
Shares issued in reinvestment of distributions ............................... 95,743 1,989,524
Shares redeemed .............................................................. (4,591,816) (99,196,252)
---------------------------------
Net increase ................................................................. 2,230,807 $ 51,015,284
=================================
Year ended April 30,1998
Shares sold .................................................................. 3,919,786 $ 93,330,082
Shares issued in reinvestment of distributions ............................... 90,328 1,991,723
Shares redeemed .............................................................. (436,261) (10,700,683)
---------------------------------
Net increase ................................................................. 3,573,853 $ 84,621,122
=================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), Franklin/Templeton Distributors, Inc.
(Distributors), Franklin Templeton Services, Inc. (FT Services), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Funds'
investment manager, principal underwriter, administrative manager and transfer
agent, respectively.
All Funds, except the Franklin Blue Chip Fund and the Franklin MidCap Growth
Fund, pay an investment management fee to Advisers based on the average net
assets of the Funds as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
----------------------------------------------------------------
<S> <C>
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million, up to and including $10 billion
</TABLE>
Fees are further reduced on net assets over $10 billion.
66
- -PAGE-
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES (CONT.)
The Franklin Blue Chip Fund pays an investment management fee to Advisers based
on the average net assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
--------------------------------------------------------------
<S> <C>
.750% First $500 million
.625% Over $500 million, up to and including $1 billion
.500% Over $1 billion
</TABLE>
The Franklin MidCap Growth Fund pays an investment management fee to Advisers of
.65% per year of the average daily net assets of the Fund.
Under an agreement with Advisers, FT Services provides administrative services
to the Funds. The fee is paid by Advisers based on the average daily net assets,
and is not an additional expense of the Funds.
Advisers agreed in advance to waive management fees for the Franklin Blue Chip
Fund, as noted in the Statements of Operations.
The Franklin Blue Chip Fund and Franklin MidCap Growth Fund reimburse
Distributors up to .35% per year of the Funds' average daily net assets, the
Franklin California Growth Fund reimburses Distributors up to .25%, 1.00%, and
1.00% per year of the average daily net assets of Class A, Class B, and Class C,
respectively, and the Franklin Small Cap Growth Fund reimburses Distributors up
to .25% and 1.00% per year of the average daily net assets of Class A and Class
C, respectively, for costs incurred in marketing the Fund's shares.
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
BLUE CALIFORNIA MIDCAP SMALL CAP
CHIP FUND GROWTH FUND GROWTH FUND GROWTH FUND
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Net commissions received (paid) ......... $49,226 $(812,703) $(11,740) $(7,281,303)
Contingent deferred sales charges ....... $ 8 $ 125,886 $ 12,053 $ 828,220
</TABLE>
The Funds paid transfer agent fees of $9,504,458, of which $7,369,946 was paid
to Investor Services.
At April 30, 1999, Franklin Resources Inc. owned 29.86% of the Franklin MidCap
Growth Fund.
4. INCOME TAXES
At April 30, 1999, the Franklin California Growth Fund, the Franklin MidCap
Growth Fund and the Franklin Small Cap Growth Fund had tax basis capital losses
of $55,141,885, $1,535,255, and $111,986,137, respectively, which may be carried
over to offset future capital gains. Such losses expire in 2007.
At April 30, 1999, the Franklin California Growth Fund has deferred capital
losses occurring subsequent to October 31, 1998 of $5,826,227. For tax purposes,
such losses will be reflected in the year ending April 30, 2000.
At April 30, 1999, the Franklin Blue Chip Fund and Franklin Small Cap Fund have
deferred currency losses occurring subsequent to October 31, 1998 of $1,663 and
$13,830, respectively. For tax purposes, such losses will be reflected in the
year ending April 30, 2000.
67
- -PAGE-
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (continued)
4. INCOME TAXES (CONT.)
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions.
Net realized capital gains differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.
At April 30, 1999, the net unrealized appreciation based on the cost of
investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BLUE CALIFORNIA MIDCAP SMALL CAP
CHIP FUND GROWTH FUND GROWTH FUND GROWTH FUND
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments at cost ......................... $50,675,426 $709,094,989 $27,884,115 $4,634,444,957
======================================================================
Unrealized appreciation ..................... $ 6,789,185 $275,666,254 $ 7,096,382 $1,267,795,604
Unrealized depreciation ..................... (510,163) (46,624,490) (1,075,742) (614,273,120)
----------------------------------------------------------------------
Net unrealized appreciation ................. $ 6,279,022 $229,041,764 $ 6,020,640 $ 653,522,484
======================================================================
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended April 30, 1999 were as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BLUE CALIFORNIA MIDCAP SMALL CAP
CHIP FUND GROWTH FUND GROWTH FUND GROWTH FUND
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases ................... $37,692,452 $452,553,570 $22,946,222 $2,399,924,941
Sales ....................... $ 8,670,005 $415,286,907 $16,186,663 $1,931,615,242
</TABLE>
6. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" as investments
in portfolio companies in which the Funds own 5% or more of the outstanding
voting securities. Investments in "affiliated companies" including dividends,
interest income, and net realized capital gains (losses) at April 30, 1999 were
as shown below.
<TABLE>
<CAPTION>
NUMBER OF
SHARES HELD NUMBER OF
AT BEGINNING GROSS GROSS SHARES HELD AT
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS END OF YEAR
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FRANKLIN CALIFORNIA GROWTH FUND:
RemedyTemp Inc. ............................................. 350,000 75,000 25,000 400,000
TOTAL NON-CONTROLLED AFFILIATED ISSUERS ...............
FRANKLIN SMALL CAP GROWTH FUND:
Activison Inc. .............................................. 1,344,400 -- 50,000 1,294,400
Advanced Energy Industries Inc. ............................. 1,374,300 244,700 702,400 916,600
Advanced Health Corp. ....................................... 970,000 -- 970,000 --
Applied Graphics Technologies Inc. .......................... 960,100 408,900 50,000 1,319,000
Arch Communications Group Inc. .............................. 2,000,000 -- 2,000,000 --
Atlantic Coast Airlines Inc. ................................ 700,000 700,000 -- 1,400,000
</TABLE>
<TABLE>
<CAPTION>
REALIZED
VALUE AT DIVIDEND CAPITAL
NAME OF ISSUER END OF YEAR INCOME GAIN (LOSS)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FRANKLIN CALIFORNIA GROWTH FUND:
RemedyTemp Inc. ............................................. $ 4,675,000 $ -- $ (22,198)
-----------------------------------------------
TOTAL NON-CONTROLLED AFFILIATED ISSUERS ............... $ 4,675,000 $ -- $ (22,198)
===============================================
FRANKLIN SMALL CAP GROWTH FUND:
Activison Inc. .............................................. 13,510,300 -- (127,493)
Advanced Energy Industries Inc. ............................. (*) -- 1,640,468
Advanced Health Corp. ....................................... (*) -- (15,930,752)
Applied Graphics Technologies Inc. .......................... 13,354,875 -- (1,778,994)
Arch Communications Group Inc. .............................. (*) -- (13,990,655)
Atlantic Coast Airlines Inc. ................................ 43,225,000 -- --
</TABLE>
68
- -PAGE-
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (continued)
6. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (CONT.)
<TABLE>
<CAPTION>
NUMBER OF
SHARES HELD NUMBER OF
AT BEGINNING GROSS GROSS SHARES HELD AT
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS END OF YEAR
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Atwood Oceanics Inc. ........................................... 1,216,600 -- -- 1,216,600
AVT Corp. ...................................................... -- 837,400 -- 837,400
Barrett Resources Corp. ........................................ 1,683,900 107,000 -- 1,790,900
Catalytica Inc. ................................................ 2,058,633 140,600 233,500 1,965,733
Clarify Inc. ................................................... 1,297,200 -- 1,297,200 --
Coherent Inc. .................................................. 1,763,400 -- -- 1,763,400
Com21 Inc. ..................................................... -- 1,294,000 -- 1,294,000
Consolidated Cigar Holdings Inc. ............................... 988,300 -- 988,300 --
Core Laboratories NV (Netherlands) ............................. 1,700,900 -- 68,500 1,632,400
Cumulus Media Inc., A .......................................... -- 1,225,000 440,000 785,000
Etec Systems Inc. .............................................. 983,000 387,500 716,500 654,000
Executive Risk Inc. ............................................ 426,400 305,300 731,700 --
Expeditors International of Washington Inc. .................... 1,016,100 265,000 -- 1,281,100
FLIR Systems Inc. .............................................. 184,800 843,800 -- 1,028,600
Gibraltar Steel Corp. .......................................... 1,012,800 -- -- 1,012,800
Harmonic Inc. .................................................. 961,500 -- 361,400 600,100
HBO & Co.( formerly known as Access Health Inc.) ............... 975,750 439,088 1,414,838 --
HNC Software Inc. .............................................. 1,079,900 468,300 200,000 1,348,200
H.T.E. Inc ..................................................... 665,400 665,400 103,700 1,227,100
Inhale Therapeutic Systems ..................................... 811,000 -- -- 811,000
Innkeepers USA Trust ........................................... 2,102,800 -- -- 2,102,800
Integrated Systems Inc. ........................................ 2,091,300 -- 234,100 1,857,200
Itron Inc. ..................................................... 1,157,700 100,000 97,900 1,159,800
Javelin Systems ................................................ -- 499,100 -- 499,100
K2 Inc. ........................................................ 960,500 -- 960,500 --
Komag Inc. ..................................................... 3,811,600 395,500 -- 4,207,100
Ladish Co.Inc .................................................. 802,300 180,000 10,700 971,600
Meristar Hospitality Corp.(formerly known
as CapStar Hotel Co.) ......................................... 1,330,000 1,000,000 -- 2,330,000
Meristar Hotels & Resorts Inc. ................................. -- 1,330,000 -- 1,330,000
Mesa Air Group Inc. ............................................ 1,646,100 -- 178,900 1,467,200
Micromuse Inc. ................................................. 754,500 355,500 150,000 960,000
MicroStrategy Inc., ............................................ -- 641,800 215,700 426,100
Mylan Laboratories (formerly known as Penederm Inc.) ........... 531,200 -- 531,200 --
Natural Microsystems Corp. ..................................... 646,600 -- -- 646,600
Newfield Exploration Co. ....................................... 938,600 1,400,000 -- 2,338,600
Newport Corp. .................................................. -- 512,500 -- 512,500
Nuevo Energy Co. ............................................... -- 1,075,500 -- 1,075,500
Omtool Ltd. .................................................... 938,600 -- 938,600 --
Pacific Gateway Exchange Inc. .................................. -- 1,015,700 -- 1,015,700
Pediatrix Medical Group Inc. ................................... 1,101,500 -- 542,900 558,600
</TABLE>
<TABLE>
<CAPTION>
REALIZED
VALUE AT DIVIDEND CAPITAL
NAME OF ISSUER END OF YEAR INCOME GAIN (LOSS)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Atwood Oceanics Inc. ........................................... $42,428,925 $ -- $ --
AVT Corp. ...................................................... 22,766,813 -- --
Barrett Resources Corp. ........................................ 54,398,588 -- --
Catalytica Inc. ................................................ 26,905,970 -- 1,571,186
Clarify Inc. ................................................... (*) -- (6,580,256)
Coherent Inc. .................................................. 26,230,575 -- --
Com21 Inc. ..................................................... 40,275,750 -- --
Consolidated Cigar Holdings Inc. ............................... (*) -- (7,777,795)
Core Laboratories NV (Netherlands) ............................. 29,383,200 -- 1,070,110
Cumulus Media Inc., A .......................................... 12,707,188 -- 196,040
Etec Systems Inc. .............................................. (*) -- (83,761)
Executive Risk Inc. ............................................ (*) 49,118 12,678,112
Expeditors International of Washington Inc. .................... 77,666,688 178,948 --
FLIR Systems Inc. .............................................. 14,143,250 -- --
Gibraltar Steel Corp. .......................................... 23,737,500 50,640 --
Harmonic Inc. .................................................. (*) -- (553,641)
HBO & Co.( formerly known as Access Health Inc.) ............... (*) -- --
HNC Software Inc. .............................................. 28,986,283 -- (2,410,976)
H.T.E. Inc ..................................................... 3,604,606 -- (595,481)
Inhale Therapeutic Systems ..................................... (*) -- --
Innkeepers USA Trust ........................................... 21,685,125 1,969,482 --
Integrated Systems Inc. ........................................ 25,304,350 -- (911,278)
Itron Inc. ..................................................... 9,568,350 -- (1,402,294)
Javelin Systems ................................................ 5,864,425 -- --
K2 Inc. ........................................................ (*) 208,780 (14,681,264)
Komag Inc. ..................................................... 15,776,625 -- --
Ladish Co.Inc .................................................. 6,497,575 -- (72,518)
Meristar Hospitality Corp.(formerly known
as CapStar Hotel Co.) ......................................... (*) 2,280,467 --
Meristar Hotels & Resorts Inc. ................................. 4,821,250 -- --
Mesa Air Group Inc. ............................................ 9,903,600 -- 512,114
Micromuse Inc. ................................................. 33,060,000 -- 3,204,134
MicroStrategy Inc., ............................................ 7,350,225 -- (813,855)
Mylan Laboratories (formerly known as Penederm Inc.) ........... (*) -- 5,828,241
Natural Microsystems Corp. ..................................... 3,313,825 -- --
Newfield Exploration Co. ....................................... 62,849,875 -- --
Newport Corp. .................................................. 6,406,250 15,500 --
Nuevo Energy Co. ............................................... 17,073,563 -- --
Omtool Ltd. .................................................... (*) -- (7,843,456)
Pacific Gateway Exchange Inc. .................................. 40,628,000 -- --
Pediatrix Medical Group Inc. ................................... (*) -- (9,318,754)
</TABLE>
69
- -PAGE-
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (continued)
6. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (CONT.)
<TABLE>
<CAPTION>
NUMBER OF
SHARES HELD NUMBER OF
AT BEGINNING GROSS GROSS SHARES HELD AT
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS END OF YEAR
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Perceptron Inc. ....................................... 793,500 -- -- 793,500
Pharmaceutical Product Development Inc. ............... 1,000,000 300,000 -- 1,300,000
Prime Hospitality Corp ................................ 1,720,500 1,300,000 -- 3,020,500
Primus Telecommunications Group Inc. .................. 1,003,000 403,100 -- 1,406,100
Rainbow Technologies Inc. ............................. 532,000 369,500 901,500 --
Range Resources Corp (formerly known as
Lomak Petroleum Inc.) ................................ 1,890,000 100,000 -- 1,990,000
RemedyTemp Inc., A .................................... 319,300 -- -- 319,300
RockShox Inc. ......................................... 965,800 -- 965,800 --
Rural Cellular Corp., A ............................... 700,800 -- 10,000 690,800
Security Dynamics ..................................... 650,000 1,795,000 -- 2,445,000
Serologicals Corp. .................................... 1,381,800 690,900 50,000 2,022,700
SFX Entertainment Inc.(formerly known as
Marquee Group Inc.) .................................. 1,327,500 -- 740,500 587,000
Silicon Valley Bancshares ............................. 490,600 803,000 -- 1,293,600
Skyepharma PLC (formerly known as DepoTech Corp.) ..... 995,700 229,190 995,700 229,190
SOS Staffing Services Inc. ............................ 872,400 -- -- 872,400
Spectra-Physics Lasers Inc. ........................... 1,016,300 -- -- 1,016,300
Spectralink Corp. ..................................... 1,050,000 -- 1,050,000 --
Tom Brown Inc. ........................................ 2,095,800 -- -- 2,095,800
Transcrypt International Inc. ......................... 1,212,700 -- 1,212,700 --
Tropical Sportswear International Corp. ............... 413,200 -- 12,700 400,500
U.S. Liquids Inc. ..................................... 726,200 774,600 -- 1,500,800
Vans Inc. ............................................. 1,045,500 -- 1,045,500 --
Varco International Inc. .............................. 3,462,500 1,700,000 -- 5,162,500
West Marine Inc. ...................................... 1,474,800 -- 1,474,800 --
Western Wireless Corp., A ............................. 1,719,200 250,000 100,000 1,869,200
Wind River Systems Inc. ............................... 834,000 1,648,100 515,600 1,966,500
XcelleNet Inc. ........................................ 780,100 -- 780,100 --
TOTAL NON-CONTROLLED AFFILIATED ISSUERS .........
</TABLE>
<TABLE>
<CAPTION>
REALIZED
VALUE AT DIVIDEND CAPITAL
NAME OF ISSUER END OF YEAR INCOME GAIN (LOSS)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Perceptron Inc. ....................................... $ 4,314,656 $ -- $ --
Pharmaceutical Product Development Inc. ............... 37,862,500 -- --
Prime Hospitality Corp ................................ 36,812,344 -- --
Primus Telecommunications Group Inc. .................. (*) -- --
Rainbow Technologies Inc. ............................. (*) -- (3,194,746)
Range Resources Corp (formerly known as
Lomak Petroleum Inc.) ................................ (*) 196,000 --
RemedyTemp Inc., A .................................... (*) -- --
RockShox Inc. ......................................... (*) -- (10,369,136)
Rural Cellular Corp., A ............................... 12,261,700 -- 50,083
Security Dynamics ..................................... 53,178,750 -- --
Serologicals Corp. .................................... 15,170,250 -- 833,960
SFX Entertainment Inc.(formerly known as
Marquee Group Inc.) .................................. (*) -- (22,925)
Silicon Valley Bancshares ............................. 22,718,850 -- --
Skyepharma PLC (formerly known as
DepoTech Corp.) ...................................... (*) -- (2,632,950)
SOS Staffing Services Inc. ............................ 6,106,800 -- --
Spectra-Physics Lasers Inc. ........................... 9,273,738 -- --
Spectralink Corp. ..................................... (*) -- (5,373,299)
Tom Brown Inc. ........................................ 31,306,013 -- --
Transcrypt International Inc. ......................... (*) -- (22,597,463)
Tropical Sportswear International Corp. ............... 8,785,969 -- 126,991
U.S.Liquids Inc. ...................................... 30,391,200 -- --
Vans Inc. ............................................. (*) -- (8,033,324)
Varco International Inc. .............................. 58,400,781 -- --
West Marine Inc. ...................................... (*) -- (17,460,272)
Western Wireless Corp., A ............................. (*) -- 2,300,984
Wind River Systems Inc. ............................... (*) -- 4,532,964
XcelleNet Inc. ........................................ (*) -- 5,693,184
------------------------------------------------
TOTAL NON-CONTROLLED AFFILIATED ISSUERS ......... $1,070,012,100 $4,948,935 $(114,318,769)
================================================
</TABLE>
(*)As of April 30,1999,no longer an affiliate.
7. LENDING OF PORTFOLIO SECURITIES
The Franklin Small Cap Growth Fund loans securities to certain brokers for which
it receives cash collateral against the loaned securities in an amount equal to
at least 102% of the market value of the loaned securities. Net interest income
from the investment of the cash collateral received was $4,936,194 for the
period ended April 30,1999. The value of the loaned securities for the Small Cap
Growth Fund was $103,803,765 at April 30, 1999.
70
- -PAGE-
FRANKLIN STRATEGIC SERIES
Independent Auditors' Report
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF
FRANKLIN STRATEGIC SERIES
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Blue Chip Fund, Franklin
California Growth Fund, Franklin MidCap Growth Fund, and Franklin Small Cap
Growth Fund (four of the portfolios constituting the Franklin Strategic Series,
hereafter referred to as the "Funds") at April 30, 1999, the results of each of
their operations for the year then ended, the changes in each of their net
assets for each of the two years in the period then ended and the financial
highlights for each of the periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements")are the
responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at April 30, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
June 4, 1999
71
- -PAGE-
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, 1999:
<TABLE>
<CAPTION>
CAPITAL GAINS
20% RATE GAIN
-------------
<S> <C>
Franklin Blue Chip Fund ................. $1,070,472
</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 end
April 30, 1999:
<TABLE>
<CAPTION>
<S> <C>
Franklin Blue Chip Fund .............................................. 100.00%
Franklin California Growth Fund ...................................... 31.71%
Franklin MidCap Growth Fund .......................................... 100.00%
Franklin Small Cap Growth Fund ....................................... 37.50%
</TABLE>
72
- -PAGE-
Page
SHAREHOLDER LETTER
Dear Shareholder:
This annual report for the Franklin Strategic Series covers the fiscal year
ended April 30, 1999.
A YEAR TO REMEMBER.
Looking back, the 12 months under review turned out to be an eventful year for
many investors. Despite economic and financial turmoil overseas, U.S. employment
rose, our economy grew at a remarkable pace, and inflation remained practically
non-existent. On April 30, 1998, the Dow Jones(R) Industrial Average (the Dow)
closed at 9063.37.(1) It climbed throughout most of the summer, but due to
investor concerns about economic crises in Asia and Russia, it fell to 8051.68
on August 28 and suffered an additional 512.61 point drop on August 31.
Concerned about the possible impact of global economic turmoil on the U.S.
economy, the Federal Reserve Board cut short-term interest rates three times in
the fall. This fueled an October rally, which set the Dow on the road to record
highs. Led by blue chip, technology and internet-related stocks, on March 29,
1999, it broke through the 10000 level for the first time in its history. And
that was just the beginning-- on April 30, 1999, the Dow closed at a record high
of 10789.04. The S&P 500(R) Composite Index, which represents many more
stocks, also performed well, closing at 1111.75 on April 30, 1998, and at
1335.18 on April 30, 1999.
1. Source: Standard & Poor's(R) Micropal. Dow Jones Industrial Average total
return calculated by Wilshire Associates, Inc.
CONTENTS
<TABLE>
<S> <C>
Shareholder Letter .................... 1
Fund Reports
Franklin Biotechnology
Discovery Fund ...................... 4
Franklin Global
Health Care Fund .................... 10
Franklin Global
Utilities Fund ...................... 17
Franklin Natural
Resources Fund ...................... 27
Financial Highlights &
Statement of Investments .............. 36
Financial Statements .................. 55
Notes to
Financial Statements .................. 60
Independent
Auditors' Report ...................... 66
Tax Information ....................... 67
</TABLE>
Page
THINGS ARE NOT ALWAYS WHAT THEY SEEM.
A cursory look at the figures noted above might cause one to conclude that the
reporting period was a good year for all stocks. Nothing could be further from
the truth. The Dow represents only 19.5% of the value of all publicly traded
stocks,(2) and in 1998, the S&P 500 gained 28.72%, but only 100 stocks accounted
for 85% of its return.(3) In fact, in that same year, about 42% of its stocks
lost ground.
WHAT ABOUT NEXT YEAR?
As we look forward to the rest of 1999, it is important to realize that the
prolonged bull market we have been experiencing for the past four years is
extremely unusual, and that past performance is not predictive of future
results. Revived economic activity in Europe, Asia and Latin America could
increase demand for many goods and services. A tighter supply of these goods and
services might result in increased inflation and cause investors to become more
cautious. However, it is also important to remember that over the long term,
stocks and bonds have historically delivered impressive results. For this
reason, we encourage you to discuss your financial goals with your investment
representative, stay focused on the long term, and diversify your investments.
As you know, mutual funds offer a level of diversification almost impossible for
individual investors to achieve on their own.
2. Source: Wilshire Associates, Inc.
3. Source: Morgan Stanley Dean Witter & Co.
2
Page
Whatever direction the market takes, you can rest assured that Franklin
Templeton's portfolio managers are dedicated to providing our shareholders with
careful selection and constant professional supervision. As always, we
appreciate your support, welcome your comments and look forward to serving your
investment needs.
Sincerely,
/s/ Rupert H. Johnson, Jr.
- -----------------------------
Rupert H. Johnson, Jr.
President
Franklin Strategic Series
3
Page
[PYRAMID GRAPHIC]
FRANKLIN BIOTECHNOLOGY
DISCOVERY FUND
Your Fund's Goal: Franklin Biotechnology Discovery Fund seeks capital
appreciation by investing primarily in equity securities of biotechnology
companies and discovery research firms located in the U.S. and other countries.
Dear Shareholder:
This annual report of Franklin Biotechnology Discovery Fund covers the fiscal
year ended April 30, 1999. Early in the reporting period, biotechnology
(biotech) stocks benefited from a bullish U.S. market, but global economic
turmoil caused severe market corrections during fall 1998, and many U.S.
investors began to favor a narrow range of large-capitalization (large-cap)
stocks. Although U.S. markets recovered and went on to record highs in 1999,
exceptional performance in the biotech sector was limited to a few select,
well-recognized names. By contrast, many small- and mid-cap biotech stocks
suffered declines in value for reasons ranging from product disappointments to
investor concerns about the economy. Within this environment,
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 37 of
this report.
4
Page
the fund posted a -11.46% one-year cumulative total return, as shown in the
Performance Summary on page 8. The fund's benchmark, the Amex Biotechnology
Index, which is an equal-dollar weighted index designed to measure the
performance of a cross section of biotech companies, rose 9.12% during the same
period.(1)
The fund's underperformance compared with its benchmark resulted largely from
our difficulty in finding bargain stocks in a momentum-driven market, and from
the significant declines among smaller-cap stocks discussed above. For example,
our position in Synaptic Pharmaceuticals Corp., a small firm working to discover
and clone human receptor genes, fell 55% during the reporting period, while
stock of Amgen Inc., the world's largest biotech firm, rose 106%.
Believing the sector's "blue chips" might draw new investors, we began to focus
more heavily on larger-cap equities during the reporting period. We purchased
shares of companies such as Immunex Corp., maker of Enbrel, a rheumatoid
arthritis treatment that has demonstrated substantial sales growth, and Amgen
Inc., which was our largest holding on April 30, 1999. Since Amgen derived a
large part of its over $2.6 billion sales during 1998 from Epogen, an
anti-anemia drug that has seen increased demand, this company could have
exceptional earnings growth. We also acquired shares of Genzyme Corp., a major
gene therapy firm, at what we believed to be a very attractive price.
1. Source: American Stock Exchange. Index is unmanaged and does not include
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
PORTFOLIO BREAKDOWN
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
BASED ON TOTAL NET ASSETS
4/30/99
[PIE CHART]
<TABLE>
<S> <C>
Biotechnology 65.1%
Medical Specialties 17.1%
Other Pharmaceuticals 8.7%
Precision Instruments 1.6%
Cash & Equivalents 7.5%
</TABLE>
5
Page
TOP 10 HOLDINGS
FRANKLIN BIOTECHNOLOGY
DISCOVERY FUND
4/30/99
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
INDUSTRY NET ASSETS
- ---------------------------------------------------
<S> <C>
Amgen Inc.
Biotechnology 6.2%
Inhale Therapeutic Systems Inc.
Medical Specialties 4.1%
Centocor Inc.
Biotechnology 3.8%
Zonagen Inc.
Medical Specialties 3.7%
Genentech Inc.
Biotechnology 3.7%
IDEC Pharmaceuticals Corp.
Biotechnology 3.7%
Chiron Corp.
Biotechnology 3.6%
Ligand Pharmaceuticals Inc., B
Biotechnology 3.6%
Gilead Sciences Inc.
Biotechnology 3.2%
Triangle Pharmaceuticals Inc.
Biotechnology 3.1%
</TABLE>
Attempting to counteract sector declines, we held several short positions, a
means of profiting from a stock's depreciation by selling borrowed stock, hoping
to buy it later at a lower price. In a rising market, we normally will add to
our short position in stocks that we believe to be overvalued, allowing the fund
to profit from periodic volatility inherent in the sector. On April 30, 1999,
the value of our short securities represented 4.2% of the fund's total net
assets.
Although the fund's return during the year under review was lower than we would
have liked, we are optimistic about long-term prospects for the biotech sector
and Franklin Biotechnology Discovery Fund. Highly specialized and
entrepreneurial companies are developing novel treatments and cures for a
multitude of ailments, and even if only a small number of these new products are
successful, the potential rewards to the fund could be significant. During the
upcoming year, the American Society for Clinical Oncology is scheduled to review
treatments designed by some of the companies whose stock is held in our
portfolio. And although the total valuation of the approximately 275 publicly
traded biotech companies today is less than the market value of Merck & Co.
Inc., the leading U.S. pharmaceutical
6
Page
company, we feel that our long-term investors may profit as this small, exciting
sector produces the next generation of treatments and cures for diseases that
affect so many lives.
Of course, investing in a fund that often focuses on small, relatively new, or
unseasoned companies involves additional risks, as set forth in the prospectus.
Please remember, this discussion reflects our views and opinions as of April 30,
1999, the end of the reporting period. However, market and economic conditions
are changing constantly, which can be expected to affect our strategies and
portfolio composition. Although past performance is not predictive of future
results, these insights may help you better understand our investment and
management philosophy.
Sincerely,
/s/ Kurt von Emster
- -----------------------------------------
Kurt von Emster
Portfolio Manager
Franklin Biotechnology Discovery Fund
7
Page
FRANKLIN BIOTECHNOLOGY
DISCOVERY FUND
CLASS A:
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. 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.
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 current, applicable,
maximum sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the current, applicable, maximum
sales charge.
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.
PERFORMANCE SUMMARY AS OF 4/30/99
Distributions will vary based 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. All total returns include reinvested distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (5/1/98-4/30/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 4/30/99 4/30/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$3.50 $23.39 $26.89
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
<S> <C>
Short-Term Capital Gain $0.4207
</TABLE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR (09/15/97)
- ---------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) -11.46% -4.58%
Average Annual Total Return(2) -16.55% -6.34%
Value of $10,000 Investment(3) $8,345 $8,992
</TABLE>
Past performance is not predictive of future results.
8
Page
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged indices differ from the fund in composition, do not pay management
fees or expenses and include reinvested dividends. One cannot invest directly in
an index. Total return represents the change in value of an investment over the
periods shown. It includes the current, applicable, maximum sales charge, fund
expenses, account fees, and reinvested distributions.
TOTAL RETURN INDEX COMPARISON
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND - CLASS A
$10,000 INVESTMENT (9/15/97 - 4/30/99)
The following line graph compares the performance of Franklin Biotechnology
Discovery Fund with the S&P 500(R) Composite Index* and the Amex Biotechnology
Index**.
*Source: Standard and Poor's Micropal.
**Source: American Stock Exchange.
<TABLE>
<CAPTION>
FRANKLIN BIOTECHNOLOGY
DISCOVERY FUND - AMEX S&P 500 AMEX BIOTECHNOLOGY
DATE CLASS A BIOTECHNOLOGY INDEX INDEX INDEX %
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9/15/97 $ 9,423 $10,000 $10,000
9/30/97 $10,019 $10,781 $10,274 7.81%
10/31/97 $ 9,688 $10,340 $ 9,931 - 4.09%
11/30/97 $ 9,514 $10,106 $10,391 - 2.27%
12/31/97 $ 8,774 $ 9,919 $10,569 - 1.84%
1/31/98 $ 9,121 $ 9,615 $10,687 - 3.07%
2/28/98 $ 9,665 $ 9,814 $11,457 2.07%
3/31/98 $ 9,514 $10,661 $12,044 8.62%
4/30/98 $10,156 $10,697 $12,165 0.34%
5/31/98 $ 9,843 $ 9,849 $11,956 - 7.93%
6/30/98 $ 8,932 $ 8,968 $12,442 - 8.95%
7/31/98 $ 8,592 $ 8,427 $12,308 - 6.03%
8/31/98 $ 6,678 $ 6,383 $10,529 -24.26%
9/30/98 $ 7,988 $ 8,513 $11,204 33.37%
10/31/98 $ 8,660 $10,022 $12,114 17.73%
11/30/98 $ 9,189 $ 9,993 $12,849 - 0.29%
12/31/98 $ 9,715 $11,306 $13,589 13.14%
1/31/99 $10,195 $11,999 $14,157 6.13%
2/28/99 $ 9,365 $10,798 $13,716 -10.01%
3/31/99 $ 9,200 $11,417 $14,265 5.73%
4/30/99 $ 8,992 $14,422 $14,817 2.24%
</TABLE>
(*) Source: American Stock Exchange.
(**) Source: Standard and Poor's(R) Micropal.
Past performance is not predictive of future results.
FRANKLIN BIOTECHNOLOGY
DISCOVERY FUND
AVERAGE ANNUAL TOTAL RETURN
4/30/99
<TABLE>
<S> <C>
1-Year -16.55%
Since Inception (9/15/97) -6.34%
</TABLE>
9
Page
[PYRAMID GRAPHIC]
FRANKLIN GLOBAL HEALTH CARE FUND
Your Fund's Goal: Franklin Global Health Care Fund seeks capital appreciation by
investing primarily in the equity securities of health care companies, including
small capitalization companies, located throughout the world.
Dear Shareholder:
This annual report of Franklin Global Health Care Fund covers the 12 months
ended April 30, 1999. During this period, many large-capitalization (cap) stocks
gained and most small-cap stocks languished as extraordinary market advances
were driven by an increasingly smaller number of stocks. In the U.S., for
example, the Standard and Poor's(R) 500 (S&P 500(R)) Composite Index, the fund's
benchmark, provided a 21.82% total return for the reporting period, versus the
small-cap stock Russell 2000(R) Index's -9.25% return.(1) This trend was
particularly prevalent in the health care sector where many small companies grew
at twice the rate of major pharmaceutical companies while their stock traded at
increasingly lower valuations.
Within this environment, Franklin Global Health Care Fund - Class A posted a
- -27.95% one-year cumulative total return, as shown in the Performance Summary on
page 15. Most of this
1. Source: Standard and Poor's Micropal. Indices are unmanaged and include
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
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 42 of
this report.
10
Page
decline occurred in the first half of the fiscal year and resulted largely from
the poor returns of our small-cap holdings. As you know, we have traditionally
sought out smaller health care companies with high growth rates and significant
appreciation potential, but due to political and economic instability around the
world, many investors chose to avoid such stocks during the year under review.
The most significant change in the portfolio over the past year was a
substantial increase in our exposure to major pharmaceutical companies. At the
beginning of the period, the fund had a 3.2% weighting in this sector. During
the reporting period, we added several pharmaceutical companies to the
portfolio, including Pfizer Inc., Merck & Co. Inc., Bristol-Myers Squibb Co. and
Schering-Plough Corp. As of April 30, 1999, American Home Products Corp. was the
fund's largest holding. This company has several products awaiting U.S. Food and
Drug Administration (FDA) approval, but we are particularly excited about its
pneumococcal conjugate vaccine. We expect this product to be launched later this
year and hope it may become part of a mandatory regime for all infants as a
safeguard against a broad range of infections.
At the end of the period, the fund had 35.1% of its total net assets invested in
major pharmaceuticals companies, which strongly meet our investment criteria.
Led by exceptional management teams, they have been growing faster than the S&P
500, and could directly benefit from many of the trends driving health care
today. Finally, we believe these companies deserve to trade at substantial
premiums, considering their historical stability and defensive nature.
During the period, we also increased our weighting in medical technology stocks.
We have a positive view about this sector because the FDA has shortened its
approval process and we
GEOGRAPHIC DISTRIBUTION
FRANKLIN GLOBAL HEALTH CARE FUND
BASED ON TOTAL NET ASSETS
4/30/99
[PIE CHART]
<TABLE>
<S> <C>
United States 85.5%
United Kingdom 3.7%
Switzerland 3.3%
Australia 2.0%
Cash & Equivalents 5.5%
</TABLE>
11
Page
PORTFOLIO BREAKDOWN
FRANKLIN GLOBAL HEALTH CARE FUND
BASED ON TOTAL NET ASSETS
4/30/99
[BAR GRAPH]
<TABLE>
<S> <C>
Major Pharmaceuticals 35.1%
Medical Specialties 21.9%
Biotechnology 9.2%
Services to the Health Industry 7.5%
Medical Electronics 4.6%
Medical/Dental Distributors 4.5%
Medical/Nursing Services 4.1%
Hospital/Nursing Management 3.7%
Other Sectors 3.9%
Cash & Equivalents 5.5%
</TABLE>
believe that industry consolidation may lessen between companies in the sector.
We initiated positions in the leading electro-physiology companies, Medtronic
Inc. and Guidant Corp., both of which market broad lines of pacemakers,
implantable defibrillators and coronary stents. While product developments are
rapid and market share shifts occur frequently between them, both are led by
excellent management teams, and have created considerable distance between
themselves and their next-largest competitors through superior technological
innovation.
Despite our positive moves, we had a few big disappointments during the period.
First, ESC Medical Systems Ltd., a manufacturer of cosmetic surgery devices and
one of our largest holdings, experienced difficulty meeting sales projections
last summer amid the emerging markets turmoil. We were optimistic that demand
for cosmetic surgery would be insulated from any short-term economic
uncertainty, but underestimated the severity of the problem in several of the
company's foreign markets. Second, Serologicals Corp., one of our largest
long-time holdings, suffered a delay in orders from two major clients. This
company operates a national network of centers that collect blood and remarket
specialty blood products to large medical-supply manufacturers. Unfortunately,
two of its customers temporarily cut back orders because they unexpectedly had
to shut down plants in order to meet FDA requirements. Last, Total Renal Care
Holdings Inc., an operator of dialysis clinics, suffered higher-than-expected
costs related to its Renal Treatment Centers acquisition earlier in the year.
These three stocks accounted for roughly one-third of the decline in the fund's
performance.
Although we were disappointed by the fund's performance during the year under
review, we are optimistic about long-term prospects for Franklin Global Health
Care Fund, and shall continue doing our best to provide our shareholders unique
12
Page
opportunities for investing in today's newest and fastest growing health care
companies. In our opinion, health care expenditures will be driven by an aging
population and rapidly changing technology, which will both result in a wider
range of treatable conditions and increase life expectancy. In addition,
cyclical swings in the business cycle do not necessarily affect demand for
health care services and products.
There are, of course, special risks involved with investing in a non-diversified
fund concentrating its investments in a single industry around the globe. 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 and opinions as of April 30, 1999, 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 past performance is not predictive of future
results, these insights may help you better understand our investment and
management philosophy.
We appreciate your participation in Franklin Global Health
Care Fund.
Sincerely,
/s/ Kurt von Emster
- ------------------------------------
Kurt von Emster
Portfolio Manager
Franklin Global Health Care Fund
TOP 10 HOLDINGS
FRANKLIN GLOBAL HEALTH CARE FUND
4/30/99
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- ---------------------------------------------------
<S> <C>
American Home Products Corp.
Major Pharmaceuticals,
United States 5.2%
Pharmacia & Upjohn Inc.
Major Pharmaceuticals,
United States 5.1%
Baxter International Inc.
Medical Specialties,
United States 3.9%
Pfizer Inc.
Major Pharmaceuticals,
United States 3.7%
Schering-Plough Corp.
Major Pharmaceuticals,
United States 3.6%
Omnicare Inc.
Services to the Health Industry,
United States 3.4%
Bausch & Lomb Inc.
Medical Specialties,
United States 3.4%
Inhale Therapeutic Systems Inc.
Medical Specialties,
United States 3.3%
Bristol-Myers Squibb Co.
Major Pharmaceuticals,
United States 3.2%
Vertex Pharmaceuticals Inc.
Biotechnology, United States 3.1%
</TABLE>
13
Page
FRANKLIN GLOBAL
HEALTH CARE FUND
CLASS A (formerly Class I):
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Past expense reductions by the fund's manager
increased the fund's total returns. Without this reduction, total returns would
have been lower.
CLASS B:
Subject to no initial sales charge, but subject to a contingent deferred sales
charge (CDSC) declining from 4% to 0% over six years. These shares have higher
annual fees and expenses than Class A shares.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18
months of investment. These shares have higher annual fees and expenses than
Class A shares.
PERFORMANCE SUMMARY AS OF 4/30/99
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. All total returns include reinvested distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (5/1/98-4/30/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 4/30/99 4/30/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$5.40 $13.88 $19.28
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
-----------------------------------------
<S> <C>
Long-Term Capital Gain $0.0134
</TABLE>
<TABLE>
CLASS B CHANGE 4/30/99 1/1/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$3.13 $13.84 $16.97
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 4/30/99 4/30/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$5.46 $13.71 $19.17
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
-----------------------------------------
<S> <C>
Long-Term Capital Gain $0.0134
</TABLE>
Franklin Global Health Care Fund paid distributions derived from long-term
capital gains of 1.34 cents ($0.0134) per share in December 1998. The fund
hereby designates such distributions as capital gain dividends per Internal
Revenue Code Section 852 (b)(3).
Past performance is not predictive of future results.
14
Page
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 3-YEAR 5-YEAR (2/14/92)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) -27.95% -21.16% +67.54% +83.14%
Average Annual Total Return(2) -32.10% -9.43% +9.56% +7.87%
Value of $10,000 Investment(3) $6,790 $7,430 $15,785 $17,261
</TABLE>
<TABLE>
<CAPTION>
4/30/95 4/30/96 4/30/97 4/30/98 4/30/99
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) +16.33% +82.78% -14.71% +28.22% -27.95%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B (1/1/99)
- -----------------------------------------------------------------------
<S> <C>
Cumulative Total Return(1) -18.44%
Aggregate Total Return(2) -21.71%
Value of $10,000 Investment(3) $7,829
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR (9/3/96)
- ---------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) -28.42% -13.71%
Average Annual Total Return(2) -29.83% -5.77%
Value of $10,000 Investment(3) $7,017 $8,540
</TABLE>
<TABLE>
<CAPTION>
4/30/98 4/30/99
- -----------------------------------------------------------------------------
<S> <C> <C>
One-Year Total Return(4) +27.22% -28.42%
</TABLE>
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 current, applicable,
maximum sales charge(s) for that class. Since Class B shares have existed for
less than one year, aggregate total return for that class represents total
return since inception, including the maximum sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
4. One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results.
15
Page
FRANKLIN GLOBAL
HEALTH CARE FUND
AVERAGE ANNUAL TOTAL RETURN
4/30/99
<TABLE>
<CAPTION>
CLASS A
- -------------------------------------
<S> <C>
1-Year -32.10%
3-Year -9.43%
5-Year +9.56%
Since Inception (2/14/92) +7.87%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
4/30/99
<TABLE>
<CAPTION>
CLASS C
- -------------------------------------
<S> <C>
1-Year -29.83%
Since Inception (9/3/96) -5.77%
</TABLE>
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged index differs from the fund in composition, does not pay
management fees or expenses and includes reinvested dividends. One cannot invest
directly in an index. Total return represents the change in value of an
investment over the periods shown. It includes the current, applicable, maximum
sales charge(s), fund expenses, account fees, and reinvested distributions.
TOTAL RETURN INDEX COMPARISON
FRANKLIN GLOBAL HEALTH CARE FUND - CLASS A
$10,000 INVESTMENT (2/14/92 - 4/30/99)
The following line graph compares to the performance of Franklin Global Health
Care Fund, Class A with the S&P 500(R) Composite Index.
* Source: Standard and Poor's Micropal.
<TABLE>
<CAPTION>
FRANKLIN GLOBAL S&P 500 INDEX
HEALTH CARE FUND
- CLASS A
- ----------------------------------------------------
<S> <C> <C> <C>
2/14/92 $ 9,425 $10,000 S&P 500
$T
2/92 $ 9,661 $10,067 0.67%
3/92 $ 8,963 $ 9,870 -1.95%
4/92 $ 8,332 $10,161 2.94%
5/92 $ 8,549 $10,210 0.49%
6/92 $ 8,229 $10,058 -1.49%
7/92 $ 8,779 $10,470 4.09%
8/92 $ 8,485 $10,255 -2.05%
9/92 $ 8,296 $10,375 1.17%
10/92 $ 8,693 $10,410 0.34%
11/92 $ 9,328 $10,764 3.40%
12/92 $ 9,477 $10,897 1.23%
1/93 $ 9,477 $10,988 0.84%
2/93 $ 8,211 $11,138 1.36%
3/93 $ 8,306 $11,373 2.11%
4/93 $ 8,449 $11,097 -2.42%
5/93 $ 8,877 $11,394 2.67%
6/93 $ 9,172 $11,427 0.29%
7/93 $ 8,684 $11,381 -0.40%
8/93 $ 8,837 $11,812 3.79%
9/93 $ 9,057 $11,721 -0.77%
10/93 $ 9,621 $11,964 2.07%
11/93 $ 9,917 $11,850 -0.95%
12/93 $10,065 $11,994 1.21%
1/94 $11,063 $12,402 3.40%
2/94 $10,974 $12,065 -2.71%
3/94 $10,411 $11,539 -4.36%
4/94 $10,302 $11,687 1.28%
5/94 $10,421 $11,879 1.64%
6/94 $ 9,964 $11,588 -2.45%
7/94 $10,406 $11,968 3.28%
8/94 $11,431 $12,459 4.10%
9/94 $11,622 $12,155 -2.44%
10/94 $11,893 $12,428 2.25%
11/94 $11,783 $11,976 -3.64%
12/94 $11,503 $12,153 1.48%
1/95 $11,566 $12,468 2.59%
2/95 $12,027 $12,954 3.90%
3/95 $12,561 $13,336 2.95%
4/95 $11,985 $13,728 2.94%
5/95 $12,341 $14,277 4.00%
6/95 $12,741 $14,608 2.32%
7/95 $13,921 $15,093 3.32%
8/95 $14,701 $15,131 0.25%
9/95 $15,565 $15,770 4.22%
10/95 $15,481 $15,713 -0.36%
11/95 $16,250 $16,403 4.39%
12/95 $17,783 $16,719 1.93%
1/96 $19,097 $17,288 3.40%
2/96 $20,037 $17,449 0.93%
3/96 $20,773 $17,616 0.96%
4/96 $21,894 $17,875 1.47%
5/96 $22,246 $18,336 2.58%
6/96 $21,170 $18,406 0.38%
7/96 $18,267 $17,592 -4.42%
8/96 $19,696 $17,964 2.11%
9/96 $21,272 $18,975 5.63%
10/96 $19,514 $19,499 2.76%
11/96 $19,968 $20,973 7.56%
12/96 $20,712 $20,557 -1.98%
1/97 $21,385 $21,842 6.25%
2/97 $21,385 $22,013 0.78%
3/97 $19,541 $21,108 -4.11%
4/97 $18,682 $22,368 5.97%
5/97 $20,897 $23,730 6.09%
6/97 $22,683 $24,793 4.48%
7/97 $23,333 $26,767 7.96%
8/97 $23,136 $25,268 -5.60%
9/97 $25,664 $26,653 5.48%
10/97 $24,145 $25,762 -3.34%
11/97 $23,240 $26,955 4.63%
12/97 $22,825 $27,419 1.72%
1/98 $22,800 $27,723 1.11%
2/98 $23,347 $29,722 7.21%
3/98 $24,117 $31,244 5.12%
4/98 $23,955 $31,559 1.01%
5/98 $22,502 $31,017 -1.72%
6/98 $22,079 $32,276 4.06%
7/98 $20,712 $31,931 -1.07%
8/98 $16,065 $27,313 -14.46%
9/98 $18,165 $29,064 6.41%
10/98 $18,799 $31,427 8.13%
11/98 $19,967 $33,332 6.06%
12/98 $21,103 $35,251 5.76%
1/99 $21,265 $36,725 4.18%
2/99 $18,840 $35,583 -3.11%
3/99 $18,504 $37,006 4.00%
4/99 $17,261 $38,438 3.87%
</TABLE>
TOTAL RETURN INDEX COMPARISON
FRANKLIN GLOBAL HEALTH CARE FUND - CLASS C
$10,000 INVESTMENT (9/3/96 - 4/30/99)
The following line graph compares the performance of Franklin Global Health Care
Fund, Class C with the S&P 500(R) Composite Index.
*Source: Standard and Poor's Micropal.
<TABLE>
<CAPTION>
FRANKLIN GLOBAL S&P 500 INDEX
HEALTH CARE FUND
- CLASS C
- ----------------------------------------------------
<S> <C> <C> <C>
9/3/96 $ 9,897 $10,000 S&P 500
$T
9/96 $10,720 $10,563 5.63%
10/96 $ 9,823 $10,855 2.76%
11/96 $10,040 $11,675 7.56%
12/96 $10,417 $11,444 -1.98%
1/97 $10,743 $12,159 6.25%
2/97 $10,738 $12,254 0.78%
3/97 $ 9,810 $11,750 -4.11%
4/97 $ 9,378 $12,452 5.97%
5/97 $10,475 $13,210 6.09%
6/97 $11,368 $13,802 4.48%
7/97 $11,683 $14,901 7.96%
8/97 $11,578 $14,066 -5.60%
9/97 $12,838 $14,837 5.48%
10/97 $12,062 $14,342 -3.34%
11/97 $11,601 $15,006 4.63%
12/97 $11,389 $15,264 1.72%
1/98 $11,370 $15,433 1.11%
2/98 $11,632 $16,546 7.21%
3/98 $12,011 $17,393 5.12%
4/98 $11,931 $17,569 1.01%
5/98 $11,196 $17,266 -1.72%
6/98 $10,985 $17,967 4.06%
7/98 $10,300 $17,775 -1.07%
8/98 $ 7,979 $15,205 -14.46%
9/98 $ 9,018 $16,180 6.41%
10/98 $ 9,323 $17,495 8.13%
11/98 $ 9,895 $18,555 6.06%
12/98 $10,458 $19,624 5.76%
1/99 $10,533 $20,444 4.18%
2/99 $ 9,325 $19,808 -3.11%
3/99 $ 9,157 $20,601 4.00%
4/99 $ 8,540 $21,398 3.87%
</TABLE>
(*) Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
16
Page
FRANKLIN GLOBAL UTILITIES FUND
[PYRAMID GRAPHIC]
Your Fund's Goal: Franklin Global Utilities Fund seeks to provide total return
by investing in the equity and debt securities of utility companies located in
the United States and around the world.
During the 12 months under review, the utilities industry provided mixed
results. Telecommunications stocks generally performed well, while many electric
and gas utilities struggled as they faced uncertainty pertaining to the
deregulation of their industries. The telecom industry's strong performance,
driven primarily by unexpected growth in data traffic and wireless
communications, resulted from increasing Internet usage and rising demand for
wireless phone service.
Geographically, Europe and the United States experienced the strongest
performance, with Latin America and Asia posting weaker results. Within this
environment, Franklin Global Utilities Fund - Class A produced a +4.02% one-year
cumulative total return, as shown in the Performance Summary on page 25. The
Financial Times/Standard and Poor's(R) All World Utilities Index provided a
21.52% return for the same period.
You will find a complete listing of the fund's portfolio holdings, including
dollar value 17 and number of shares or principal amount, beginning on page 47
of this report.
17
Page
GEOGRAPHIC DISTRIBUTION
FRANKLIN GLOBAL UTILITIES FUND
BASED ON TOTAL NET ASSETS
4/30/99
[PIE CHART]
<TABLE>
<S> <C>
United States 61.5%
Continental Europe 20.7%
Asia 6.4%
Latin America 3.0%
United Kingdom 3.6%
Cash & Equivalents 4.8%
</TABLE>
The fund's underperformance relative to the FT/S&P All World Utilities Index was
due largely to the fact that electric and gas issues provided disappointing
performance and the fund was overweighted in such issues compared with the
index. During the reporting period, the fund's industry weightings remained
relatively stable. On April 30, 1999, our largest country weighting was the
U.S., with 61.5% of total net assets, while our European, Asian and Latin
American holdings were 24.3%, 6.4%, and 3.0% of net assets, respectively.
UNITED STATES
Driven by increasing traffic volume, continued deregulation and strong growth in
wireless services, our holdings of MCI World-Com Inc., SBC Communications Inc.,
AirTouch Communications Inc., and Ascend Communications Inc. appreciated
significantly in value during the reporting period. When investing, we look for
companies that are leaders in their industries and have the potential to deliver
significant shareholder value over the long term. Sprint Corp. (PCS Group),
another of our holdings, is one such example. In our opinion, the company is
uniquely positioned to take advantage of the growth in wireless communications
due to its state-of-the-art network, well-known brand and strong balance sheet.
Since we purchased this stock in December, the company has experienced record
levels of subscriber growth and many now consider it one of the world's premier
wireless telecom companies.
18
Page
The year, however, proved to be more challenging for electric and gas utility
investors. Since passage of the National Energy Policy Act in 1992,
uncertainties about deregulation have plagued this group, and strong domestic
economic growth caused many investors to seek opportunities in industries more
sensitive to economic cycles. During the reporting period, we focused on
companies better prepared to compete in a deregulated environment, with
significant cash flow, and those that we believe have valuable untapped assets.
For example, we initiated a position in Montana Power Corp., which has used its
existing right-of-way assets and expertise to build a nationwide
telecommunications network. Due to the growing need for electricity by data and
voice transmission networks, the company's stock appreciated 90% from our
purchase price until the close of the period. Other holdings that we feel have
long-term potential include Entergy Corp., Northwestern Corp., and CMS Energy
Corp.
EUROPE
During the 12 months under review, European telecommunications companies
generally provided excellent returns as they addressed underdeveloped telecom
infrastructures there. Many regions still have significant pent-up demand for
basic phone service. Telecom Italia SpA, an example of a provider that was
formerly a monopoly, is streamlining existing operations and achieving success
in new areas such as wireless communications.
19
Page
European communications is one of the fastest growing areas in the utilities
sector, and we have several investments in emerging companies such as Equant NV,
Global TeleSystems Group Inc., and COLT Telecom Group PLC that are attempting to
capitalize on the growing need for bandwidth.
European electric companies delivered mixed results for the period. Strong
returns in Italy offset mostly flat returns for other countries where we had
positions. All of our holdings were from developed Western European countries,
and the severe downturn in Eastern European economies did not affect us. In late
February 1999, we sold our shares of AEM SpA, an Italian electric company, after
watching the value of our investment increase more than 140% from our initial
purchase in July 1998. At the same time, we made several new investments in
United Kingdom companies, such as PowerGen PLC, Scottish & Southern Energy PLC,
Scottish Power PLC, and Severn Trent PLC, all of which we believe have excellent
management teams.
LATIN AMERICA
Whipsawed by the economic crises engulfing Asia and Eastern Europe, Latin
American markets experienced significant volatility during the period, and we
maintained a relatively small weighting in the region. In January 1999, Brazil
succumbed to financial and speculative pressures and devalued its currency. This
initially sent stock markets throughout the region reeling as speculative
pressures on currencies of neighboring countries peaked and
20
Page
investors contemplated the long-term economic impact of the devaluation on the
region's intertwined economies. In the days immediately following the
devaluation, shares of Telecomunicacoes Brasileiras SA, ADR, experienced severe
negative market pressure; however, since then, global investors appear to have
taken a collective sigh of relief, as sentiment toward Brazil and the rest of
the region has improved at a surprisingly rapid pace. Shares of Telecomunicacoes
Brasileiras SA, ADR, which dipped briefly into the low $50 range on the heels of
the devaluation, were trading in the mid $80 range by the end of the period.
ASIA
Most Asian markets suffered significant volatility during the year as the region
attempted to recover from the lingering financial crisis beginning in late 1997,
and we maintained a relatively small weighting there (6.0% of total net assets
on April 30, 1999). We searched for opportunities to invest in financially sound
companies with promising growth prospects at attractive prices, and initiated a
position in Nippon Telegraph & Telephone Corp. of Japan, the world's largest
telephone company in terms of sales. We believe that the company is poised to
benefit from the deregulation of Japan's telecommunications industry. Its
business will be split into local and long-distance units, which, in our
opinion, should improve the visibility of operations and aid in creating
shareholder value. We also invested in Korea
TOP 10 HOLDINGS
FRANKLIN GLOBAL UTILITIES FUND
4/30/99
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
COUNTRY NET ASSETS
- -------------------------------------------------
<S> <C>
Frontier Corp., United States 3.4%
Equant NV, N.Y. shares,
Netherlands 3.1%
SBC Communications Inc.,
United States 3.0%
Telecom Italia SpA, Italy 2.9%
Enron Corp., United States 2.8%
MCI WorldCom Inc.,
United States 2.7%
GTE Corp., United States 2.6%
Endesa SA, Spain 2.4%
Global TeleSystems Group Inc.,
United States 2.4%
Korea Telecom Corp.,
South Korea 2.4%
</TABLE>
21
Page
Telecom Corp. because, despite solid and improving fundamentals, its shares were
trading at a significant discount to its regional peers. The company has only
recently been privatized and, in our opinion, has strong growth prospects
because of expected economic expansion in Korea and a pent-up demand for
telecommunication services.
LOOKING FORWARD
Although many utility stocks underperformed the market during the reporting
period, we believe utilities such as electric and telephone service companies
will continue to play an integral part in the world's economic development.
Developed countries are aware that improving communications and access to
information is essential to maximizing economic growth. The U.S. already has
over 70 million wireless telecom subscribers, and new applications for the
Internet must be accompanied by improvements in telecom infrastructure that will
allow the content to reach the end users. Utilities servicing the developing
world also have an enormous opportunity to provide necessities such as
electricity, clean water, and telephone service. In our opinion, the continued
economic development of these emerging countries depends on utility services,
which should provide global utility investors with excellent, future investment
opportunities.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1999, the end of the reporting period. However, market
and economic conditions are changing constantly, which can be expected to affect
our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
22
Page
Of course, there are special risks involved with investing globally in a
non-diversified fund. These risks, which include currency fluctuations and
increased susceptibility to adverse economic, political, social and regulatory
developments, are further discussed in the fund's prospectus.
We thank you for your participation in Franklin Global Utilities Fund and look
forward to serving you in the future. Please feel free to contact us with your
questions or comments.
Sincerely,
/s/ Ian Link
- ----------------------------------
Ian Link
Portfolio Manager
Franklin Global Utilities Fund
IAN LINK
Ian Link is a vice president and portfolio manager of Franklin Advisers, Inc. He
manages Franklin Global Utilities Fund, Franklin Utilities Fund and Franklin
Valuemark Global Utility Equity Fund. He also specializes in research analysis
of the domestic electric utilities, international and domestic
telecommunications services and wireless communications sectors.
Mr. Link joined Franklin as a management trainee in 1989. He received his
bachelor's degree in economics from the University of California at Davis and
his MBA in finance from the University of California at Berkeley. He is a member
of the Securities Analysts of San Francisco (SASF), Association for Investment
Management and Research (AIMR), International Society of Financial Analysts
(ISFA) and is a Chartered Financial Analyst (CFA).
23
Page
FRANKLIN GLOBAL
UTILITIES FUND
CLASS A (formerly Class I):
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective May 1, 1994, the fund implemented a Rule
12b-1 plan, which affects subsequent performance. 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.
CLASS B:
Subject to no initial sales charge, but subject to a contingent deferred sales
charge (CDSC) declining from 4% to 0% over six years. These shares have higher
annual fees and expenses than Class A shares.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18
months of investment. These shares have higher annual fees and expenses than
Class A shares.
PERFORMANCE SUMMARY AS OF 4/30/99
Distributions will vary based 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. All total returns include reinvested distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (5/1/98-4/30/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 4/30/99 4/30/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.39 $16.97 $17.36
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
------------------------------------------
<S> <C>
Dividend Income $0.1883
Long-Term Capital Gain $0.5937
Short-Term Capital Gain $0.1809
Total $0.9629
</TABLE>
<TABLE>
<CAPTION>
CLASS B CHANGE 4/30/99 1/1/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$1.08 $16.92 $15.84
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 4/30/99 4/30/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.41 $16.84 $17.25
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
------------------------------------------
<S> <C>
Dividend Income $0.0774
Long-Term Capital Gain $0.5937
Short-Term Capital Gain $0.1809
Total $0.8520
</TABLE>
Franklin Global Utilities Fund paid distributions derived from long-term capital
gains of 59.37 cents ($0.5937) per share in December, 1998. The fund hereby
designates such distributions as capital gain dividends per Internal Revenue
Code Section 852 (b)(3).
Past performance is not predictive of future results.
24
Page
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR (7/2/92)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +4.02% +104.72% +168.51%
Average Annual Total Return(2) -1.97% +14.05% +14.57%
Value of $10,000 Investment(3) $9,803 $19,293 $25,307
</TABLE>
<TABLE>
<CAPTION>
4/30/95 4/30/96 4/30/97 4/30/98 4/30/99
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) +3.17% +23.27% +12.94% +37.02% +4.02%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B (1/1/99)
- --------------------------------------------------------------------------------------------
<S> <C>
Cumulative Total Return(1) +6.82%
Aggregate Total Return(2) +2.82%
Value of $10,000 Investment(3) $10,282
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (5/1/95)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +3.19% +57.47% +93.89%
Average Annual Total Return(2) +1.21% +15.96% +17.71%
Value of $10,000 Investment(3) $10,121 $15,594 $19,200
</TABLE>
<TABLE>
<CAPTION>
4/30/96 4/30/97 4/30/98 4/30/99
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One-Year Total Return(4) +22.63% +12.04% +36.21% +3.19%
</TABLE>
Past performance is not predictive of future results.
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 current, applicable,
maximum sales charge(s) for that class. Since Class B shares have existed for
less than one year, aggregate total return for that class represents total
return since inception, including the maximum sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
4. One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
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.
25
Page
FRANKLIN GLOBAL
UTILITIES FUND
AVERAGE ANNUAL TOTAL RETURN
4/30/99
<TABLE>
<CAPTION>
CLASS A
- -----------------------------------
<S> <C>
1-Year -1.97%
5-Year +14.05%
Since Inception (7/2/92) +14.57%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
4/30/99
<TABLE>
<CAPTION>
CLASS C
- ----------------------------------
<S> <C>
1-Year +1.21%
3-Year +15.96%
Since Inception (5/1/95) +17.71%
</TABLE>
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged index differs from the fund in composition, does not pay
management fees or expenses and includes reinvested dividends. One cannot invest
directly in an index. Total return represents the change in value of an
investment over the periods shown. It includes the current, applicable, maximum
sales charges, fund expenses, account fees, and reinvested distributions.
TOTAL RETURN INDEX COMPARISON
FRANKLIN GLOBAL UTILITIES FUND - CLASS A
$10,000 INVESTMENT (7/2/92 - 4/30/99)
The following line graph compares the performance of Franklin Global Utilities
Fund's Class A shares to that of the Standard & Poor's 500 Composite Index,
based on a $10,000 investment from 7/2/92 to 4/30/99.
<TABLE>
<CAPTION>
FRANKLIN
GLOBAL
UTILITIES S&P 500
FUND-CLASS COMPOSITE
A* e
---------- ---------
<S> <C> <C>
7/2/92 $9,425 $10,000
7/92 $9,510 $10,409
8/92 $9,491 $10,196
9/92 $9,453 $10,315
10/92 $9,529 $10,350
11/92 $9,680 $10,702
12/92 $9,943 $10,834
1/93 $10,124 $10,925
2/93 $10,506 $11,073
3/93 $10,764 $11,307
4/93 $10,840 $11,033
5/93 $10,964 $11,328
6/93 $11,134 $11,361
7/93 $11,357 $11,315
8/93 $12,083 $11,744
9/93 $12,209 $11,654
10/93 $12,780 $11,895
11/93 $12,296 $11,782
12/93 $13,068 $11,924
1/94 $13,284 $12,330
2/94 $12,588 $11,996
3/94 $12,195 $11,473
4/94 $12,362 $11,619
5/94 $12,362 $11,810
6/94 $11,881 $11,521
7/94 $12,413 $11,899
8/94 $12,700 $12,386
9/94 $12,516 $12,084
10/94 $12,618 $12,356
11/94 $12,137 $11,906
12/94 $11,919 $12,082
1/95 $12,180 $12,395
2/95 $12,284 $12,879
3/95 $12,420 $13,259
4/95 $12,754 $13,649
5/95 $13,473 $14,195
6/95 $13,409 $14,524
7/95 $13,676 $15,006
8/95 $13,505 $15,044
9/95 $14,147 $15,678
10/95 $14,169 $15,622
11/95 $14,639 $16,308
12/95 $15,193 $16,622
1/96 $15,480 $17,188
2/96 $15,502 $17,347
3/96 $15,469 $17,514
4/96 $15,722 $17,771
5/96 $16,030 $18,230
6/96 $16,306 $18,299
7/96 $15,646 $17,490
8/96 $16,116 $17,859
9/96 $16,328 $18,865
10/96 $16,741 $19,386
11/96 $17,378 $20,851
12/96 $17,474 $20,438
1/97 $18,371 $21,716
2/97 $18,285 $21,885
3/97 $17,622 $20,986
4/97 $17,757 $22,238
5/97 $19,083 $23,593
6/97 $19,782 $24,650
7/97 $20,380 $26,612
8/97 $19,445 $25,122
9/97 $20,778 $26,498
10/97 $19,919 $25,613
11/97 $20,915 $26,799
12/97 $22,185 $27,260
1/98 $21,933 $27,563
2/98 $23,068 $29,550
3/98 $24,764 $31,063
4/98 $24,330 $31,377
5/98 $23,377 $30,837
6/98 $24,105 $32,089
7/98 $23,709 $31,746
8/98 $20,139 $27,155
9/98 $20,986 $28,896
10/98 $21,748 $31,245
11/98 $22,312 $33,138
12/98 $23,622 $35,047
1/99 $23,622 $36,512
2/99 $22,713 $35,377
3/99 $23,399 $36,792
4/99 $25,307 $38,216
</TABLE>
TOTAL RETURN INDEX COMPARISON
FRANKLIN GLOBAL UTILITIES FUND - CLASS C
$10,000 INVESTMENT (5/1/95 - 4/30/99)
The following line graph compares the performance of Franklin Global Utilities
Fund's Class C shares to that of the Standard & Poor's 500 Composite Index,
based on a $10,000 investment from 5/1/95 to 4/30/99.
<TABLE>
<CAPTION>
FRANKLIN
GLOBAL
UTILITIES
FUND- S&P 500
CLASS C* COMPOSITE
---------- ---------
<S> <C> <C>
5/1/95 $9,902 $10,000
5/95 $10,504 $10,400
6/95 $10,449 $10,641
7/95 $10,641 $10,995
8/95 $10,507 $11,022
9/95 $10,991 $11,487
10/95 $11,008 $11,446
11/95 $11,358 $11,948
12/95 $11,825 $12,179
1/96 $12,030 $12,593
2/96 $12,039 $12,710
3/96 $12,004 $12,832
4/96 $12,193 $13,021
5/96 $12,424 $13,357
6/96 $12,628 $13,407
7/96 $12,116 $12,815
8/96 $12,472 $13,085
9/96 $12,619 $13,822
10/96 $12,932 $14,203
11/96 $13,409 $15,277
12/96 $13,480 $14,975
1/97 $14,155 $15,911
2/97 $14,089 $16,035
3/97 $13,566 $15,376
4/97 $13,661 $16,294
5/97 $14,678 $17,286
6/97 $15,221 $18,060
7/97 $15,663 $19,498
8/97 $14,942 $18,406
9/97 $15,951 $19,415
10/97 $15,278 $18,766
11/97 $16,038 $19,635
12/97 $17,000 $19,973
1/98 $16,806 $20,195
2/98 $17,658 $21,651
3/98 $18,952 $22,759
4/98 $18,607 $22,989
5/98 $17,863 $22,594
6/98 $18,403 $23,511
7/98 $18,089 $23,259
8/98 $15,358 $19,896
9/98 $15,997 $21,171
10/98 $16,561 $22,893
11/98 $16,983 $24,280
12/98 $17,980 $25,678
1/99 $17,957 $26,752
2/99 $17,250 $25,920
3/99 $17,764 $26,956
4/99 $19,200 $28,000
</TABLE>
(*) Source: Standard and Poor's(R) Micropal.
Past performance is not predictive of future results.
26
Page
FRANKLIN NATURAL RESOURCES FUND
[PYRAMID GRAPHIC]
Your Fund's Goal: Franklin Natural Resources Fund seeks long-term capital
appreciation by investing at least 65% of its total assets in securities of
companies that own, produce, refine, process or market natural resources, as
well as those that provide support services for natural resources companies.
This report of Franklin Natural Resources Fund covers the fiscal year ended
April 30, 1999 -- a challenging period for investors in natural resources
stocks. During the first half of the year, financial crises in Asia, Latin
America and Russia led to lower demand for commodities in these regions. The
resulting price decline contributed to poor profitability for natural resource
companies worldwide, and major commodity indices traded near their 10-year lows.
The second half of the period saw signs of an economic recovery in Asia which,
along with interest rate cuts worldwide, bolstered investors' enthusiasm about
the global economy and led to a partial recovery in commodity prices.
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 52
of this report.
27
Page
PORTFOLIO BREAKDOWN
FRANKLIN NATURAL RESOURCES FUND
BASED ON TOTAL NET ASSETS
4/30/99
[PIE CHART]
<TABLE>
<S> <C>
Energy Minerals 35.7%
Industrial Services 21.4%
Non-Energy Minerals 14.5%
Process Industries 14.4%
Utilities 4.2%
Producer Manufacturing 2.1%
Cash & Equivalents 7.7%
</TABLE>
Within this environment, Franklin Natural Resources Fund-Class A delivered a
- -13.42% cumulative total return for the year ended April 30, 1999. The Financial
Times/Standard & Poor's(R) (FT/S&P(R)) Energy and Basic Industries Index, the
fund's benchmark, delivered a cumulative total return of 6.94% over the same
period.(1) During the latter part of the reporting period, the fund's
performance improved substantially, delivering a +16.53% cumulative total return
for the six months ended April 30, 1999, while its benchmark returned 21.66%
over the same period.(2)
The fund's performance was helped by the rise in value of some of our energy
holdings such as Atlantic Richfield Co., Enron Corp., and Texaco Inc. Prices of
oil stocks were boosted in March by OPEC's agreement to cut oil production, and
by investors' expectations of higher profits resulting from merger and
acquisition activity. Announced mergers in this sector included Exxon's
acquisition of Mobil Oil, and British Petroleum's acquisition of Amoco and
Atlantic Richfield Co. These mergers created two of the world's largest
integrated oil and gas companies.
During the first six months of the reporting period, we increased our exposure
to energy minerals due to improving industry fundamentals. We added several
exploration and production
1. The FT/S&P Energy and Basic Industries Index includes various natural
resources industries dealing with: construction and building materials,
chemicals, mining, metals, minerals, precious metals and minerals, forestry and
paper products, and fabricated metal products industries as well as oil
internationals, crude producers, petroleum products and refineries, non-oil
energy sources, and energy equipment and services industries. It includes
reinvested dividends. One cannot invest directly in an index, nor is the index
representative of the fund's portfolio.
2. Source: Standard & Poor's Micropal.
28
Page
companies that we believe will benefit from higher natural gas prices, and
maintained our positions in quality companies such as Barrett Resources Corp.
and Newfield Exploration Co. We also added to our holdings in the industrial
services industry. Our buying in this area ranged across the board and was not
focused on any one particular stock. For example, we added Weatherford
International Inc. and Cal Dive International Inc. to the portfolio, and
maintained our position in another oilfield service company, Transocean Offshore
Inc. Weatherford International Inc. supplies a wide range of products to the
drilling industry. Cal Dive International Inc. provides sub-sea construction,
services, and maintenance in the Gulf of Mexico, and Transocean Offshore Inc. is
a leader in the worldwide market for deepwater offshore drilling.
The fund's underperformance relative to its benchmark index during the fiscal
year was partially due to its overweighted position in the steel and the gold
and precious metals sectors, which underperformed other natural resource sectors
such as energy. It was also hindered by its relatively small position in the
chemical and the paper and forest product sectors. Due to excess capacity
issues, we remained underweighted in the chemicals sector. However, at the end
of the period we were looking for a re-entry
GEOGRAPHIC DISTRIBUTION
FRANKLIN NATURAL RESOURCES FUND
BASED ON TOTAL NET ASSETS
4/30/99
[BAR CHART]
<TABLE>
<S> <C>
United States 74.5%
Canada 5.3%
Europe 4.5%
Africa 2.9%
Asia 2.9%
Latin America 2.2%
Cash & Equivalents 7.7%
</TABLE>
29
Page
TOP 10 HOLDINGS
FRANKLIN NATURAL RESOURCES FUND
4/30/99
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- ---------------------------------------------------
<S> <C>
Atlantic Richfield Co.
Energy Minerals, U.S. 3.4%
Barrett Resources Corp.
Energy Minerals, U.S. 3.4%
Texaco Inc.
Energy Minerals, U.S. 2.9%
De Beers Consolidated
Mines AG, ADR
Non-Energy Minerals,
South Africa 2.9%
Newfield Exploration Co.
Energy Minerals, U.S. 2.9%
Mobil Corp.
Energy Minerals, U.S. 2.7%
Weatherford International Inc.
Producer Manufacturing, U.S. 2.7%
Royal Dutch Petroleum Co.,
N.Y. shs.
Energy Minerals,
Netherlands 2.5%
Enron Oil & Gas Co.
Energy Minerals, U.S. 2.3%
Enron Corp.
Utilities, U.S. 2.3%
</TABLE>
into the paper and forest products sector because many companies in this sector
have introduced voluntary supply constraints. We believe this should improve
their prospects, particularly if an economic recovery in Asia spurs demand.
Looking forward, we are optimistic about future prospects for Franklin Natural
Resources Fund. In our opinion, the downward trend in commodity prices probably
has bottomed out, and prices should rise in the future. However, we do not
purchase securities based solely on the assumption that commodity prices will
rise. Investments in the fund's portfolio tend to have strong market positions,
superior management, healthy balance sheets, and visible earnings growth. We
believe long-term prospects are improving for companies in the natural resources
sector and that the fund is well-positioned with investments in companies having
superior management, relatively low costs, and capability to add value
throughout commodity-price cycles. It is important to remember, however, that
investing in the fund involves the special risks of 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.
30
Page
This discussion reflects our views, opinions and portfolio holdings as of
April 30, 1999, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historical performance
is no guarantee of future results, these insights may help you understand our
investment and management philosophy.
We thank you for your participation in Franklin Natural Resources Fund and look
forward to serving you in the future. Please feel free to contact us with your
questions or comments.
Sincerely,
/s/ Michael R. Ward
- -----------------------------------
Michael R. Ward
Portfolio Manager
Franklin Natural Resources Fund
MICHAEL WARD
Michael Ward is a portfolio manager of Franklin Natural Resources Fund and
Franklin Valuemark Natural Resources Fund.
Mr. Ward joined Franklin Templeton in 1992 and worked as an equity analyst for
Templeton Global Investors, Inc. for three years.
Mr. Ward received a bachelor of science degree in engineering from Kansas State
University. He is a Chartered Financial Analyst (CFA) level III candidate.
31
Page
FRANKLIN NATURAL
RESOURCES FUND
CLASS A (formerly Class I):
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ.
ADVISOR CLASS:
No initial sales charge or Rule 12b-1 fees and are available to a limited class
of investors.
PERFORMANCE SUMMARY AS OF 4/30/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities, as well as the
level of each class' operating expenses. Past distributions are not indicative
of future trends. All total returns include reinvested distributions at net
asset value.
PRICE AND DISTRIBUTION INFORMATION (5/1/98-4/30/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 4/30/99 4/30/98
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$2.21 $13.25 $15.46
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
---------------------------------------
<S> <C>
Dividend Income $0.1173
</TABLE>
<TABLE>
<CAPTION>
ADVISOR CLASS CHANGE 4/30/99 4/30/98
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$1.85 $13.63 $15.48
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
---------------------------------------
<S> <C>
Dividend Income $0.1918
</TABLE>
Past performance is not predictive of future results.
32
Page
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 3-YEAR (6/5/95)
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) -13.42% +12.20% +49.63%
Average Annual Total Return(2) -18.38% +1.89% +9.20%
Value of $10,000 Investment(3) $8,162 $10,576 $14,103
</TABLE>
<TABLE>
<CAPTION>
4/30/97 4/30/98 4/30/99
- -------------------------------------------------------------------------
<S> <C> <C> <C>
One-Year Total Return(4) +10.23% +17.57% -13.42%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS(5) 1-YEAR 3-YEAR (6/5/95)
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) -10.48% +16.55% +55.43%
Average Annual Total Return(2) -10.48% +5.24% +11.96%
Value of $10,000 Investment(3) $8,952 $11,655 $15,543
</TABLE>
<TABLE>
<CAPTION>
4/30/97 4/30/98 4/30/99
- --------------------------------------------------------------------------
<S> <C> <C> <C>
One-Year Total Return(4) +10.23% +18.11% -10.48%
</TABLE>
Past performance is not predictive of future results.
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 current, applicable,
maximum sales charge(s) for that class.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
4. One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
5. 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
Class A performance, excluding the effect of the Class A sales charge, but
including the effect of Rule 12b-1 fees and other Class A expenses; 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 and
average annual total returns of Advisor Class shares were +1.48% and +0.63%,
respectively.
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.
33
Page
FRANKLIN NATURAL
RESOURCES FUND
AVERAGE ANNUAL TOTAL RETURN
4/30/99
<TABLE>
<CAPTION>
CLASS A
- -------------------------------------
<S> <C>
1-Year -18.38%
3-Year +1.89%
Since Inception (6/5/95) +9.20%
</TABLE>
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged index differs from the fund in composition, does not pay
management fees or expenses and includes reinvested dividends. One cannot invest
directly in an index. Total return represents the change in value of an
investment over the periods shown. It includes the current, applicable, maximum
sales charge(s), fund expenses, account fees, and reinvested distributions.
The following chart shows in graph format the cumulative total return of a
$10,000 investment in the Fund -- Class A, June 5, 1995 (inception) as of April
30, 1999.
TOTAL RETURN INDEX COMPARISON
FRANKLIN NATURAL RESOURCES FUND - CLASS A
$10,000 INVESTMENT (6/5/95 - 4/30/99)
[LINE GRAPH]
<TABLE>
<CAPTION>
DATE FRANKLIN NATURAL S&P 500 INDEX FT S&P AW ENERGY S&P 500 $T FT S&P AW
RESOURCES FUND - & BASIC INDUSTRIES Energy & Bas.
CLASS A Inds. $T
<S> <C> <C> <C> <C> <C>
6/5/95 $ 9,425 $10,000 $10,000
6/30/95 $ 9,538 $10,193 $ 9,824 1.93% -1.76%
7/31/95 $ 9,727 $10,531 $10,302 3.32% 4.87%
8/31/95 $ 9,764 $10,558 $ 9,997 0.25% -2.96%
9/30/95 $ 9,698 $11,003 $10,107 4.22% 1.10%
10/31/95 $ 9,321 $10,964 $ 9,896 -0.36% -2.09%
11/30/95 $ 9,783 $11,445 $10,242 4.39% 3.49%
12/31/95 $10,436 $11,666 $10,624 1.93% 3.73%
1/31/96 $10,943 $12,062 $10,821 3.40% 1.86%
2/29/96 $11,048 $12,175 $10,895 0.93% 0.68%
3/31/96 $11,737 $12,292 $11,348 0.96% 4.16%
4/30/96 $12,569 $12,472 $11,653 1.47% 2.69%
5/31/96 $12,798 $12,794 $11,604 2.58% -0.42%
6/30/96 $12,796 $12,843 $11,571 0.38% -0.29%
7/31/96 $11,952 $12,275 $11,184 -4.42% -3.34%
8/31/96 $12,719 $12,534 $11,394 2.11% 1.88%
9/30/96 $13,170 $13,240 $11,745 5.63% 3.08%
10/31/96 $13,678 $13,605 $11,994 2.76% 2.12%
11/30/96 $14,493 $14,634 $12,421 7.56% 3.56%
12/31/96 $14,574 $14,344 $12,359 -1.98% -0.50%
1/31/97 $14,968 $15,240 $12,424 6.25% 0.52%
2/28/97 $14,416 $15,359 $12,328 0.78% -0.77%
3/31/97 $13,796 $14,728 $12,501 -4.11% 1.40%
4/30/97 $13,855 $15,607 $12,502 5.97% 0.01%
5/31/97 $15,076 $16,558 $13,226 6.09% 5.79%
6/30/97 $15,231 $17,299 $13,691 4.48% 3.52%
7/31/97 $15,716 $18,677 $14,183 7.96% 3.59%
8/31/97 $16,290 $17,631 $13,526 -5.60% -4.63%
9/30/97 $17,497 $18,597 $14,097 5.48% 4.22%
10/31/97 $16,904 $17,976 $13,255 -3.34% -5.97%
11/30/97 $15,182 $18,808 $12,777 4.63% -3.61%
12/31/97 $15,108 $19,131 $12,538 1.72% -1.87%
1/31/98 $14,192 $19,344 $12,521 1.11% -0.13%
2/28/98 $14,950 $20,738 $13,235 7.21% 5.70%
3/31/98 $15,688 $21,800 $13,794 5.12% 4.22%
4/30/98 $16,289 $22,020 $14,165 1.01% 2.69%
5/31/98 $14,993 $21,642 $13,864 -1.72% -2.12%
6/30/98 $14,073 $22,520 $13,480 4.06% -2.77%
7/31/98 $12,484 $22,279 $12,686 -1.07% -5.89%
8/31/98 $ 9,527 $19,058 $10,957 -14.46% -13.63%
9/30/98 $11,318 $20,279 $11,842 6.41% 8.07%
10/31/98 $12,102 $21,928 $12,449 8.13% 5.13%
11/30/98 $11,201 $23,257 $12,637 6.06% 1.51%
12/31/98 $11,176 $24,597 $12,519 5.76% -0.93%
1/31/99 $10,633 $25,625 $11,900 4.18% -4.95%
2/28/99 $10,313 $24,828 $11,928 -3.11% 0.24%
3/31/99 $11,878 $25,821 $13,240 4.00% 11.00%
4/30/99 $14,103 $26,820 $15,144 3.87% 14.38%
</TABLE>
Past performance is not predictive of future results.
34
Page
TOTAL RETURN INDEX COMPARISON
FRANKLIN NATURAL RESOURCES FUND - ADVISOR CLASS(**)
$10,000 INVESTMENT (6/5/95 - 4/30/99)
[LINE GRAPH]
<TABLE>
<CAPTION>
DATE FRANKLIN NATURAL RESOURCES S&P 500 INDEX FT S&P AW ENERGY & S&P 500 $T FT S&P AW Energy &
FUND - ADVISOR CLASS BASIC INDUSTRIES Bas. Inds. $T
<S> <C> <C> <C> <C> <C>
6/5/95 $10,000 $10,000 $10,000
6/30/95 $10,120 $10,193 $ 9,824 1.93% -1.76%
7/31/95 $10,320 $10,531 $10,302 3.32% 4.87%
8/31/95 $10,360 $10,558 $ 9,997 0.25% -2.96%
9/30/95 $10,290 $11,003 $10,107 4.22% 1.10%
10/31/95 $ 9,890 $10,964 $ 9,896 -0.36% -2.09%
11/30/95 $10,380 $11,445 $10,242 4.39% 3.49%
12/31/95 $11,072 $11,666 $10,624 1.93% 3.73%
1/31/96 $11,610 $12,062 $10,821 3.40% 1.86%
2/29/96 $11,722 $12,175 $10,895 0.93% 0.68%
3/31/96 $12,453 $12,292 $11,348 0.96% 4.16%
4/30/96 $13,336 $12,472 $11,653 1.47% 2.69%
5/31/96 $13,579 $12,794 $11,604 2.58% -0.42%
6/30/96 $13,576 $12,843 $11,571 0.38% -0.29%
7/31/96 $12,681 $12,275 $11,184 -4.42% -3.34%
8/31/96 $13,495 $12,534 $11,394 2.11% 1.88%
9/30/96 $13,973 $13,240 $11,745 5.63% 3.08%
10/31/96 $14,513 $13,605 $11,994 2.76% 2.12%
11/30/96 $15,378 $14,634 $12,421 7.56% 3.56%
12/31/96 $15,463 $14,344 $12,359 -1.98% -0.50%
1/31/97 $15,870 $15,240 $12,424 6.25% 0.52%
2/28/97 $15,285 $15,359 $12,328 0.78% -0.77%
3/31/97 $14,637 $14,728 $12,501 -4.11% 1.40%
4/30/97 $14,700 $15,607 $12,502 5.97% 0.01%
5/31/97 $16,006 $16,558 $13,226 6.09% 5.79%
6/30/97 $16,163 $17,299 $13,691 4.48% 3.52%
7/31/97 $16,689 $18,677 $14,183 7.96% 3.59%
8/31/97 $17,320 $17,631 $13,526 -5.60% -4.63%
9/30/97 $18,592 $18,597 $14,097 5.48% 4.22%
10/31/97 $17,972 $17,976 $13,255 -3.34% -5.97%
11/30/97 $16,153 $18,808 $12,777 4.63% -3.61%
12/31/97 $16,061 $19,131 $12,538 1.72% -1.87%
1/31/98 $15,096 $19,344 $12,521 1.11% -0.13%
2/28/98 $15,915 $20,738 $13,235 7.21% 5.70%
3/31/98 $16,722 $21,800 $13,794 5.12% 4.22%
4/30/98 $17,362 $22,020 $14,165 1.01% 2.69%
5/31/98 $15,982 $21,642 $13,864 -1.72% -2.12%
6/30/98 $15,014 $22,520 $13,480 4.06% -2.77%
7/31/98 $13,327 $22,279 $12,686 -1.07% -5.89%
8/31/98 $10,179 $19,058 $10,957 -14.46% -13.63%
9/30/98 $12,081 $20,279 $11,842 6.41% 8.07%
10/31/98 $12,931 $21,928 $12,449 8.13% 5.13%
11/30/98 $11,980 $23,257 $12,637 6.06% 1.51%
12/31/98 $11,951 $24,597 $12,519 5.76% -0.93%
1/31/99 $11,369 $25,625 $11,900 4.18% -4.95%
2/28/99 $11,039 $24,828 $11,928 -3.11% 0.24%
3/31/99 $12,726 $25,821 $13,240 4.00% 11.00%
4/30/99 $15,543 $26,820 $15,144 3.87% 14.38%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
4/30/99
<TABLE>
<CAPTION>
ADVISOR CLASS(**)
<S> <C>
1-Year -10.48%
3-Year +5.24%
Since Inception (6/5/95) +11.96%
</TABLE>
* Source: Standard and Poor's(R) Micropal. We are replacing the S&P 500 Index
with the Financial Times (FT)/S&P 500 Energy & Basic Industries Index as the
fund's benchmark because we believe its composition provides a more appropriate
comparison to the fund's current and past portfolio. The FT/S&P Energy and Basic
Industries Index includes various natural resources industries dealing with:
construction and building materials, chemicals, mining, metals, minerals,
precious metals and minerals, forestry and paper products, and fabricated metal
products industries as well as oil internationals, crude producers, petroleum
products and refineries, non-oil energy sources, and energy equipment and
services industries. The S&P 500 Index, which may be excluded from next year's
report, measures the performance of 500 domestic stocks. The indices include
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
** 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
Class A performance, excluding the effect of the Class A sales charge, but
including the effect of Rule 12b-1 fees and other Class A expenses; and (b) for
periods after January 1, 1997, figures reflect actual Advisor Class performance,
including the deduction of all fees and expenses applicable to that class.
Past performance is not predictive of future results.
35
Page
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------
1999 1998(1)
------- ---------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C>
Net asset value, beginning of year ..................... $ 26.89 $ 25.00
------- -------
Income from investment operations:
Net investment loss ................................... (.10) (.05)
Net realized and unrealized gains (losses) ............ (2.96) 1.99
------- -------
Total from investment operations ....................... (3.06) 1.94
------- -------
Less distributions from net realized gains ............. (.42) (.05)
------- -------
Net asset value, end of year ........................... $ 23.41 $ 26.89
======= =======
Total return(*) ........................................ (11.46%) 7.78%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................ $69,450 $73,546
Ratios to average net assets:
Expenses .............................................. 1.52% 1.50%(2)
Expenses excluding waiver and payments by affiliate ... 1.52% 1.61%(2)
Net investment loss ................................... (.40%) (.44%)(2)
Portfolio turnover rate ................................ 97.62% 75.50%
</TABLE>
(*) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(1) For the period September 15, 1997 (effective date) to April 30, 1998.
(2) Annualized
See notes to financial statements.
36
Page
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999
<TABLE>
<CAPTION>
SHARES/
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND RIGHTS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS 92.5%
(a)BIOTECHNOLOGY 65.1%
Affymetrix Inc. ............................... 35,000 $ 1,430,625
Amgen Inc. .................................... 70,600 4,337,488
Biogen Inc. ................................... 15,000 1,425,938
Centocor Inc. ................................. 60,000 2,662,500
Chiron Corp. .................................. 125,000 2,515,625
COR Therapeutics Inc. ......................... 175,000 2,045,313
CuraGen Corp. ................................. 151,000 906,000
GelTex Pharmaceuticals Inc. ................... 70,000 1,198,750
Genentech Inc. ................................ 30,000 2,538,750
Genzyme Corp. ................................. 50,000 1,887,500
Gilead Sciences Inc. .......................... 48,000 2,211,000
IDEC Pharmaceuticals Corp. .................... 50,000 2,537,500
ImClone Systems Inc. .......................... 110,000 1,986,875
Immunex Corp. ................................. 10,000 955,000
LifeCell Corp. ................................ 237,500 1,009,375
Ligand Pharmaceuticals Inc., B ................ 250,000 2,468,750
Medimmune Inc. ................................ 35,000 1,929,375
QLT PhotoTherapeutics Inc. .................... 25,000 1,142,188
Sepracor Inc. ................................. 17,000 1,436,500
Synaptic Pharmaceutical Corp. ................. 75,000 421,875
Texas Biotechnology Corp. ..................... 350,000 1,400,000
Transgene SA, ADR (France) .................... 100,000 1,237,500
Triangle Pharmaceuticals Inc. ................. 150,000 2,175,000
US Bioscience ................................. 60,000 645,000
Vertex Pharmaceuticals Inc. ................... 65,000 1,373,125
Vical Inc. .................................... 117,500 1,336,563
-----------
45,214,115
-----------
(a)MEDICAL SPECIALTIES 17.1%
Anesta Corp. .................................. 50,600 708,400
Aradigm Corp. ................................. 116,600 706,888
Heska Corp. ................................... 210,000 813,750
Inhale Therapeutic Systems Inc. ............... 100,000 2,875,000
Invitrogen Corp. .............................. 38,000 681,625
Molecular Devices Corp. ....................... 82,500 1,980,000
Serologicals Corp. ............................ 150,000 1,125,000
SYNSORB Biotech Inc. (Canada) ................. 278,000 391,334
Zonagen Inc. .................................. 112,500 2,573,434
-----------
11,855,431
-----------
(a)OTHER PHARMACEUTICALS 8.7%
Abgenix Inc. .................................. 50,000 731,250
Algos Pharmaceutical Corp. .................... 52,500 1,529,063
Aviron ........................................ 110,000 2,076,250
CollaGenex Pharmaceuticals Inc. ............... 25,000 215,625
Medicis Pharmaceutical Corp., A ............... 35,000 850,938
Nastech Pharmaceutical Co. Inc. ............... 50,000 132,815
</TABLE>
37
Page
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND RIGHTS VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS (cont.)
(a)OTHER PHARMACEUTICALS (cont.)
SkyePharma PLC, ADR (United Kingdom) .......................................................... 53,190 $ 538,550
SkyePharma PLC, rts., 3/31/00 (United Kingdom) ................................................ 182,300 --
------------
6,074,491
------------
PRECISION INSTRUMENTS 1.6%
PE Corp. PE Biosystems Group .................................................................. 10,000 1,081,250
------------
TOTAL LONG TERM INVESTMENTS (Cost $67,620,572) ................................................ 64,225,287
------------
PRINCIPAL
AMOUNT
------------
(b)REPURCHASE AGREEMENT 4.3%
Joint Repurchase Agreement, 4.862%, 5/03/99 (Maturity Value $2,958,065) (COST $2,956,867) ..... $ 2,956,867 2,956,867
Barclays Capital Inc. (Maturity Value $305,479)
Bear, Stearns & Co. Inc. (Maturity Value $166,630)
Chase Securities Inc. (Maturity Value $305,479)
CIBC Oppenheimer Corp. (Maturity Value $305,479)
Deutsche Bank Securities Inc. (Maturity Value $42,124)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $305,479)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $305,479)
Lehman Brothers Inc. (Maturity Value $305,479)
Paine Webber Inc. (Maturity Value $305,479)
Paribas Corp. (Maturity Value $305,479)
UBS Securities LLC (Maturity Value $305,479)
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $70,577,439) 96.8% .................................................... 67,182,154
SECURITIES SOLD SHORT (4.2%) .................................................................. (2,883,750)
OTHER ASSETS, LESS LIABILITIES 7.4% ........................................................... 5,151,441
------------
NET ASSETS 100.0% ............................................................................ $69,449,845
=============
(a,c)SECURITIES SOLD SHORT
ISSUER SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
BioChem Pharma Inc. ........................................................................... 25,000 $ 518,750
ICOS Corp. .................................................................................... 40,000 1,590,000
Transkaryotic Therapies Inc. .................................................................. 25,000 775,000
------------
TOTAL (PROCEEDS $2,967,401) ................................................................... $ 2,883,750
============
</TABLE>
(a) Non-income producing.
(b) See Note 1(c) regarding joint repurchase agreement.
(c) See Note 1(d) regarding securities sold short.
See notes to financial statements.
38
Page
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
FRANKLIN GLOBAL HEALTH CARE FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------
YEAR ENDED APRIL 30,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $ 19.28 $ 16.11 $ 19.34 $ 11.45 $ 10.43
-------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) ......................... (.16) (.14) (.06) .11 .08
Net realized and unrealized gains (losses) ........... (5.23) 4.58 (2.75) 8.96 1.56
-------------------------------------------------------------------
Total from investment operations ...................... (5.39) 4.44 (2.81) 9.07 1.64
-------------------------------------------------------------------
Less distributions from:
Net investment income ................................ -- (.09) (.04) (.13) (.06)
Net realized gains ................................... (.01) (1.18) (.38) (1.05) (.56)
-------------------------------------------------------------------
Total distributions ................................... (.01) (1.27) (.42) (1.18) (.62)
-------------------------------------------------------------------
Net asset value, end of year .......................... $ 13.88 $ 19.28 $ 16.11 $ 19.34 $ 11.45
===================================================================
Total return(*) ....................................... (27.95%) 28.22% (14.71%) 82.78% 16.33%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ....................... $ 74,252 $ 176,545 $ 150,653 $ 108,914 $ 12,906
Ratios to average net assets:
Expenses ............................................. 1.34% 1.15% 1.14% .73% .25%
Expenses excluding waiver and payments by affiliate... 1.34% 1.15% 1.14% 1.16% 1.37%
Net investment income (loss) ......................... (.72%) (.67%) (.39%) .50% .80%
Portfolio turnover rate ............................... 66.54% 66.84% 73.17% 54.78% 93.79%
</TABLE>
(*) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
39
Page
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GLOBAL HEALTH CARE FUND (CONT.)
<TABLE>
<CAPTION>
CLASS B
----------------
YEAR ENDED
APRIL 30, 1999(1)
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ......................................................... $ 16.97
----------------
Income from investment operations:
Net investment loss ......................................................................... (.03)
Net realized and unrealized losses .......................................................... (3.10)
----------------
Total from investment operations ............................................................. (3.13)
----------------
Net asset value, end of period ............................................................... $ 13.84
================
Total return(*)............................................................................... (18.44%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............................................................ $ 208
Ratios to average net assets:
Expenses .................................................................................... 1.84%(2)
Net investment loss ......................................................................... (1.22%)(2)
Portfolio turnover rate ...................................................................... 66.54%
</TABLE>
(*) Total return does not reflect contingent deferred sales charge, and is not
annualized for periods less than one year.
(1) For the period January 1, 1999 (effective date) to April 30, 1999.
(2) Annualized
40
Page
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GLOBAL HEALTH CARE FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------
YEAR ENDED APRIL 30,
---------------------------------------------
1999 1998 1997(1)
---------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $ 19.17 $ 16.07 $ 17.37
---------------------------------------------
Income from investment operations:
Net investment loss .................................. (.29) (.20) (.07)
Net realized and unrealized gains (losses) ........... (5.16) 4.48 (.85)
---------------------------------------------
Total from investment operations ...................... (5.45) 4.28 (.92)
---------------------------------------------
Less distributions from net realized gains ............ (.01) (1.18) (.38)
---------------------------------------------
Net asset value, end of year .......................... $ 13.71 $ 19.17 $ 16.07
=============================================
Total return(*) ....................................... (28.42%) 27.22% (5.47%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ....................... $ 13,747 $ 25,321 $ 10,099
Ratios to average net assets:
Expenses ............................................. 2.07% 1.90% 1.92%(2)
Net investment loss .................................. (1.45%) (1.44%) (1.29%)(2)
Portfolio turnover rate ............................... 66.54% 66.84% 73.17%
</TABLE>
(*) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(1) For the period September 3, 1996 (effective date) to April 30, 1997.
(2) Annualized
See notes to financial statements.
41
Page
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999
<TABLE>
<CAPTION>
SHARES/
FRANKLIN GLOBAL HEALTH CARE FUND COUNTRY RIGHTS VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND RIGHTS 94.5%
(a) BIOTECHNOLOGY 9.2%
Amgen Inc. ...................................................... United States 40,000 $ 2,457,500
Ligand Pharmaceuticals Inc., B .................................. United States 235,000 2,320,625
Noven Pharmaceuticals Inc. ...................................... United States 113,800 597,450
Vertex Pharmaceuticals Inc. ..................................... United States 130,000 2,746,250
------------
8,121,825
------------
(a) GENERIC DRUGS 1.1%
Watson Pharmaceuticals Inc. ..................................... United States 25,000 1,012,500
------------
(a) HOSPITAL/NURSING MANAGEMENt 3.7%
Beverly Enterprises Inc. ........................................ United States 210,000 1,365,000
HCR Manor Care Inc. ............................................. United States 40,000 1,110,000
Health Management Associates Inc., A ............................ United States 50,000 781,250
------------
3,256,250
------------
MAJOR PHARMACEUTICALS 35.1%
American Home Products Corp. .................................... United States 75,000 4,575,000
AstraZenica PLC, ADR ............................................ United Kingdom 40,000 1,570,000
Baxter International Inc. ....................................... United States 55,000 3,465,000
Bristol-Myers Squibb Co. ........................................ United States 45,000 2,860,313
Merck & Co. Inc. ................................................ United States 24,000 1,686,000
Novartis AG ..................................................... Switzerland 1,200 1,760,000
Pfizer Inc. ..................................................... United States 28,000 3,221,750
Pharmacia & Upjohn Inc. ......................................... United States 80,000 4,480,000
Roche Holding AG ................................................ Switzerland 100 1,178,325
Schering-Plough Corp. ........................................... United States 65,000 3,140,313
SmithKline Beecham PLC, ADR ..................................... United Kingdom 20,000 1,313,750
Warner-Lambert Co. .............................................. United States 25,000 1,698,438
------------
30,948,889
------------
(a) MANAGED HEALTH CARE 2.4%
Wellpoint Health Networks Inc. .................................. United States 30,000 2,107,500
------------
MEDICAL/DENTAL DISTRIBUTORS 4.5%
Cardinal Health Inc. ............................................ United States 37,500 2,242,969
McKesson HBOC Inc. .............................................. United States 49,750 1,741,250
------------
3,984,219
------------
MEDICAL ELECTRONICS 4.6%
Medtronic Inc. .................................................. United States 25,000 1,798,438
(a) OrthoLogic Corp. ................................................ United States 494,300 1,482,900
(a) Somnus Medical Technologies Inc. ................................ United States 252,000 740,250
------------
4,021,588
------------
(a) MEDICAL/NURSING SERVICES 4.1%
Renal Care Group Inc. ........................................... United States 125,000 2,609,375
Total Renal Care Holdings Inc. .................................. United States 75,200 1,043,400
------------
3,652,775
------------
</TABLE>
42
Page
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN GLOBAL HEALTH CARE FUND COUNTRY RIGHTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
MEDICAL SPECIALTIES 21.9%
Bausch & Lomb Inc. ................................................................ United States 40,000 $ 3,000,000
Becton, Dickinson & Co. ........................................................... United States 25,000 929,688
(a) CIMA Labs Inc. .................................................................... United States 432,500 1,162,340
Cochlear Ltd. ..................................................................... Australia 225,000 1,737,239
(a) Cooper Cos. Inc. .................................................................. United States 120,300 1,894,725
(a) Guidant Corp. ..................................................................... United States 20,000 1,073,750
(a) Inhale Therapeutic Systems Inc. ................................................... United States 100,000 2,875,000
Mentor Corp. ...................................................................... United States 71,600 1,038,200
(a) Molecular Devices Corp. ........................................................... United States 101,300 2,431,200
(a) Serologicals Corp. ................................................................ United States 273,650 2,052,375
(a) Zonagen Inc. ...................................................................... United States 50,000 1,143,750
------------
19,338,267
------------
(a) OTHER PHARMACEUTICALS .4%
SkyePharma PLC, ADR ............................................................... United Kingdom 36,551 370,079
SkyePharma PLC, rts., 3/31/00 ..................................................... United Kingdom 344,500 --
-----------
370,079
-----------
SERVICES TO THE HEALTH INDUSTRY 7.5%
(a) MedQuist Inc. ..................................................................... United States 36,000 1,233,000
Omnicare Inc. ..................................................................... United States 125,000 3,007,813
(a) Pharmaceutical Product Development Inc. ........................................... United States 80,000 2,330,000
------------
6,570,813
------------
TOTAL LONG TERM INVESTMENTS (COST $92,395,797) .................................... 83,384,705
------------
PRINCIPAL
AMOUNT
-------------
(b) REPURCHASE AGREEMENT 4.7%
Joint Repurchase Agreement, 4.862%, 5/03/99 (Maturity Value $4,101,279)
(Cost $4,099,618) .............................................................. United States $ 4,099,618 4,099,618
Barclays Capital Inc. (Maturity Value $423,538)
Bear, Stearns & Co. Inc. (Maturity Value $231,020) Chase Securities Inc.
(Maturity Value $423,538) CIBC Oppenheimer Corp. (Maturity Value $423,538)
Deutsche Bank Securities Inc. (Maturity Value $58,417)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $423,538)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $423,538)
Lehman Brothers Inc. (Maturity Value $423,538)
Paine Webber Inc. (Maturity Value $423,538)
Paribas Corp. (Maturity Value $423,538)
UBS Securities LLC (Maturity Value $423,538)
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $96,495,415) 99.2% ........................................ 87,484,323
OTHER ASSETS, LESS LIABILITIES .8% ................................................ 722,483
------------
NET ASSETS 100.0% ................................................................. $88,206,806
------------
</TABLE>
(a) Non-income producing.
(b) See Note 1(c) regarding joint repurchase agreement.
See notes to financial statements.
43
Page
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
FRANKLIN GLOBAL UTILITIES FUND
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------------------------------
Year Ended April 30,
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)...
Net asset value, beginning of year ............. $ 17.36 $ 14.46 $ 14.28 $ 12.23 $ 12.60
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income ......................... .27 .33 .42 .37 .42
Net realized and unrealized gains (losses) .... .31 4.69 1.35 2.39 (.07)
--------------------------------------------------------------------------------
Total from investment operations ............... .58 5.02 1.77 2.76 .35
--------------------------------------------------------------------------------
Less distributions from:
Net investment income ......................... (.19) (.37) (.38) (.39) (.36)
Net realized gains ............................ (.78) (1.75) (1.21) (.32) (.36)
--------------------------------------------------------------------------------
Total distributions ............................ (.97) (2.12) (1.59) (.71) (.72)
--------------------------------------------------------------------------------
Net asset value, end of year ................... $ 16.97 $ 17.36 $ 14.46 $ 14.28 $ 12.23
--------------------------------------------------------------------------------
Total return(*) ................................ 4.02% 37.02% 12.94% 23.27% 3.17%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $ 199,824 $ 226,594 $ 174,023 $ 167,225 $ 119,250
Ratios to average net assets:
Expenses ...................................... 1.05% 1.03% 1.00% 1.04% 1.12%
Net investment income ......................... 1.55% 2.02% 2.82% 2.85% 3.47%
Portfolio turnover rate ........................ 68.50% 45.51% 47.55% 50.51% 16.65%
</TABLE>
(*) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
44
Page
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GLOBAL UTILITIES FUND (CONT.)
<TABLE>
<CAPTION>
CLASS B
--------------
YEAR ENDED
APRIL 30, 1999(1)
--------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................................................. $15.84
--------------
Income from investment operations:
Net investment income ............................................................... .02
Net realized and unrealized gains ................................................... 1.06
--------------
Total from investment operations ..................................................... 1.08
--------------
Net asset value, end of period ....................................................... $16.92
--------------
Total return(*) ...................................................................... 6.82%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................................................... $ 79
Ratios to average net assets:
Expenses ............................................................................ 1.80%(2)
Net investment income ............................................................... .83%(2)
Portfolio turnover rate .............................................................. 68.50%
</TABLE>
(*) Total return does not reflect contingent deferred sales charge, and is not
annualized for periods less than one year.
(1) For the period January 1, 1999 (effective date) to April 30, 1999.
(2) Annualized
45
Page
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GLOBAL UTILITIES FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------
YEAR ENDED APRIL 30,
-----------------------------------------------------------
1999 1998 1997 1996
-----------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $ 17.25 $ 14.37 $ 14.24 $ 12.23
-----------------------------------------------------------
Income from investment operations:
Net investment income ................................ .14 .24 .32 .37
Net realized and unrealized gains .................... .32 4.66 1.33 2.32
-----------------------------------------------------------
Total from investment operations ...................... .46 4.90 1.65 2.69
-----------------------------------------------------------
Less distributions from:
Net investment income ................................ (.08) (.27) (.31) (.36)
Net realized gains ................................... (.78) (1.75) (1.21) (.32)
-----------------------------------------------------------
Total distributions ................................... (.86) (2.02) (1.52) (.68)
-----------------------------------------------------------
Net asset value, end of year .......................... $ 16.85 $ 17.25 $ 14.37 $ 14.24
-----------------------------------------------------------
Total return(*) ....................................... 3.19% 36.21% 12.04% 22.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ....................... $ 16,807 $ 16,324 $ 8,467 $ 2,727
Ratios to average net assets:
Expenses ............................................. 1.80% 1.78% 1.77% 1.81%
Net investment income ................................ .81% 1.29% 1.98% 2.10%
Portfolio turnover rate ............................... 68.50% 45.51% 47.55% 50.51%
</TABLE>
(*) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
See notes to financial statements.
46
Page
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999
<TABLE>
<CAPTION>
FRANKLIN GLOBAL UTILITIES FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 93.0%
(a) 3Com Corp. .......................................................... United States 50,000 $1,306,250
(a) AES Corp. ........................................................... United States 45,000 2,250,000
(a) AirTouch Communications Inc. ........................................ United States 25,000 2,334,375
(a) Allegiance Telecom Inc. ............................................. United States 35,400 1,628,400
(a) Ascend Communications Inc. .......................................... United States 20,100 1,942,163
AT&T Corp. .......................................................... United States 51,750 2,613,375
Avista Corp. ........................................................ United States 47,000 705,000
Beijing Datang Power Generation Co. Ltd. ............................ Hong Kong 509,000 152,691
Bell Atlantic Corp. ................................................. United States 80,000 4,610,000
BellSouth Corp. ..................................................... United States 24,000 1,074,000
BSES Ltd., GDR, 144A ................................................ India 21,400 209,185
Cincinnati Bell Inc. ................................................ United States 100,000 2,262,500
(a) Cisco Systems Inc. .................................................. United States 5,500 627,344
(a) Citizens Utilities Co., B ........................................... United States 124,600 1,253,788
CMS Energy Corp. .................................................... United States 50,000 2,200,000
Coastal Corp. ....................................................... United States 62,000 2,371,500
(a) Cogeneration Corp. of America ....................................... United States 260,500 2,930,625
(a) COLT Telecom Group PLC .............................................. United Kingdom 65,000 1,219,208
Companhia Paranaense de Energia-Copel, ADR .......................... Brazil 41,700 341,419
Corning Inc. ........................................................ United States 44,500 2,547,625
Duke Energy Corp. ................................................... United States 70,701 3,959,256
Edison International ................................................ United States 135,000 3,307,500
Electricidade de Portugal SA ........................................ Portugal 76,000 1,431,201
Endesa SA ........................................................... Spain 229,200 5,101,847
Enron Corp. ......................................................... United States 80,000 6,020,000
Entergy Corp. ....................................................... United States 77,000 2,406,250
(a) Equant NV, N.Y. shs. ................................................ Netherlands 74,500 6,649,125
Ericsson (L.M.) Telecommunications, ADR ............................. Sweden 55,000 1,485,000
(a) Estonia Telecom, GDR, 144A .......................................... Estonia 16,500 348,975
EVN AG .............................................................. Austria 3,360 502,212
(a) FORE Systems Inc. ................................................... United States 31,300 1,056,375
Fortum Corp. ........................................................ Finland 410,700 2,172,510
FPL Group Inc. ...................................................... United States 20,000 1,127,500
Frontier Corp. ...................................................... United States 133,000 7,339,938
(a) Global TeleSystems Group Inc. ....................................... United States 80,000 5,290,000
(a) Globalstar Telecommunications ....................................... United States 57,000 1,147,125
GTE Corp. ........................................................... United States 84,000 5,622,750
Hellenic Telecommunications Organization SA ......................... Greece 145,138 3,375,851
Hong Kong Electric Holdings Ltd. .................................... Hong Kong 714,095 2,275,758
(a) ICG Communications Inc. ............................................. United States 92,000 2,029,750
(a) Intermedia Communications Inc. ...................................... United States 2,300 74,031
Korea Electric Power Corp., ADR ..................................... South Korea 124,200 2,049,300
Korea Telecom Corp. ................................................. South Korea 104,160 5,278,690
(a) MCI WorldCom Inc. ................................................... United States 70,000 5,753,125
MDU Resources Group Inc. ............................................ United States 100,000 2,131,250
(a) Millicom International Cellular SA .................................. Luxembourg 60,000 2,070,000
Montana Power Co. ................................................... United States 48,000 3,579,000
National Fuel Gas Co. ............................................... United States 50,000 2,187,500
</TABLE>
47
Page
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN GLOBAL UTILITIES FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
New Century Energies Inc. .................................... United States 26,400 $ 924,000
(a) Nextel Communications Inc. ................................... United States 100,000 4,093,750
Nippon Telegraph & Telephone Corp. ........................... Japan 110 1,198,006
NiSource Inc. ................................................ United States 40,800 1,132,200
Northwestern Corp. ........................................... United States 191,600 4,957,650
(a) Pacific Gateway Exchange Inc. ................................ United States 90,000 3,600,000
PECO Energy Co. .............................................. United States 12,400 588,225
PG&E Corp. ................................................... United States 80,000 2,485,000
Pinnacle West Capital Corp. .................................. United States 60,000 2,328,750
Portugal Telecom SA .......................................... Portugal 90,000 3,756,268
PowerGen PLC ................................................. United Kingdom 204,626 2,238,663
(a) PrimaCom AG .................................................. Germany 15,200 619,115
(a) Primus Telecommunications Group Inc. ......................... United States 163,800 2,733,413
(a) Rhythms NetConnections Inc. .................................. United States 2,200 181,500
(a) Rural Cellular Corp., A ...................................... United States 95,700 1,698,675
SBC Communications Inc. ...................................... United States 115,800 6,484,800
Scottish & Southern Energy PLC ............................... United Kingdom 227,400 2,158,305
Scottish Power PLC ........................................... United Kingdom 200,000 1,651,908
Severn Trent PLC ............................................. United Kingdom 40,000 526,485
Southern Co. ................................................. United States 70,000 1,894,375
(a) Sprint Corp.(PCS Group) ...................................... United States 70,000 2,966,250
Swisscom AG .................................................. Switzerland 10,100 3,714,943
TECO Energy Inc. ............................................. United States 100,000 2,131,250
Telebras SA, ADR ............................................. Brazil 9,500 866,281
Telecom Italia SpA ........................................... Italy 1,172,000 6,300,049
(a) Telecomunicacoes Brasileiras SA, ADR ......................... Brazil 9,500 742
Telefonica SA, ADR ........................................... Spain 28,205 3,931,077
(a) Telegate AG .................................................. Germany 3,400 153,954
(a) Teligent Inc., A ............................................. United States 15,500 842,813
Tokyo Electric Power Co. ..................................... Japan 48,000 1,025,426
Transportadora de Gas del Sur SA, ADR ........................ Argentina 179,000 1,711,688
(a) TRICOM SA, ADR ............................................... Dominican Republic 150,000 1,368,750
U.S. West Inc. ............................................... United States 38,000 1,987,875
Unicom Corp. ................................................. United States 14,000 543,375
VEBA AG ...................................................... Germany 60,700 3,323,274
Videsh Sanchar Nigam Ltd., GDR, 144A ......................... India 140,000 1,676,500
Washington Gas Light Co. ..................................... United States 102,700 2,419,867
Williams Cos. Inc. ........................................... United States 18,200 859,950
------------
TOTAL COMMON STOCKS (COST $162,584,495) ...................... 201,426,419
------------
CONVERTIBLE PREFERRED STOCKS 2.2%
CMS Energy Corp., 7.75%, cvt. pfd. ........................... United States 35,000 1,977,500
Nortel Inversora SA, 10.00%, cvt. pfd. ....................... Argentina 35,000 2,082,500
Texas Utilities Co., 9.25%, cvt. pfd. ........................ United States 16,000 823,000
------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $4,881,438) ......... 4,883,000
------------
TOTAL LONG TERM INVESTMENTS (COST $167,465,933) .............. 206,309,419
------------
</TABLE>
48
Page
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN GLOBAL UTILITIES FUND COUNTRY AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(b) REPURCHASE AGREEMENT 5.3%
Joint Repurchase Agreement, 4.862%, 5/03/99 (Maturity Value $11,484,419)
(COST $11,479,768) ............................................................. United States $11,479,768 $ 11,479,768
Barclays Capital Inc. (Maturity Value $1,185,996)
Bear, Stearns & Co. Inc. (Maturity Value $646,917)
Chase Securities Inc. (Maturity Value $1,185,996)
CIBC Oppenheimer Corp.(Maturity Value $1,185,996)
Deutsche Bank Securities Inc. (Maturity Value $163,538)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $1,185,996)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $1,185,996)
Lehman Brothers Inc. (Maturity Value $1,185,996)
Paine Webber Inc. (Maturity Value $1,185,996)
Paribas Corp. (Maturity Value $1,185,996)
UBS Securities LLC (Maturity Value $1,185,996)
Collateralized by U.S. Treasury Bills & Notes
--------------
TOTAL INVESTMENTS (COST $178,945,701) 100.5% .................................... 217,789,187
OTHER ASSETS, LESS LIABILITIES (.5%) ............................................ (1,078,957)
--------------
NET ASSETS 100.0% ............................................................... $ 216,710,230
==============
</TABLE>
(a) Non-income producing.
(b) See Note 1(c) regarding joint repurchase agreement.
See notes to financial statements.
49
Page
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN NATURAL RESOURCES FUND
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------
YEAR ENDED APRIL 30,
---------------------------------------------------------------
1999 1998 1997 1996(1)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ..................... $ 15.46 $ 14.07 $ 13.14 $ 10.00
---------- ---------- ---------- ----------
Income from investment operations:
Net investment income ................................. .12 .10 .09 .08
Net realized and unrealized gains (losses) ............ (2.21) 2.26 1.25 3.22
---------- ---------- ---------- ----------
Total from investment operations ....................... (2.09) 2.36 1.34 3.30
---------- ---------- ---------- ----------
Less distributions from:
Net investment income ................................. (.12) (.09) (.09) (.06)
Net realized gains .................................... -- (.88) (.32) (.10)
---------- ---------- ---------- ----------
Total distributions .................................... (.12) (.97) (.41) (.16)
---------- ---------- ---------- ----------
Net asset value, end of year ........................... $ 13.25 $ 15.46 $ 14.07 $ 13.14
========== ========== ========== ==========
Total return(*) ........................................ (13.42%) 17.57% 10.23% 33.36%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................ $ 44,014 $ 62,274 $ 45,386 $ 9,909
Ratios to average net assets:
Expenses .............................................. .97% .96% .98% .99%(2)
Expenses excluding waiver and payments by affiliate ... 1.47% 1.31% 1.31% 1.77%(2)
Net investment income ................................. .97% .67% .72% 1.16%(2)
Portfolio turnover rate ................................ 74.03% 72.93% 46.31% 59.04%
</TABLE>
(*) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(1) For the period June 5, 1995 (effective date) to April 30, 1996.
(2) Annualized
50
Page
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN NATURAL RESOURCES FUND (CONT.)
<TABLE>
<CAPTION>
ADVISOR CLASS
-------------------------------------------
YEAR ENDED APRIL 30,
-------------------------------------------
1999 1998 1997(1)
--------- --------- ---------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ..................... $ 15.48 $ 14.07 $ 14.66
--------- --------- ---------
Income from investment operations:
Net investment income ................................. .19 .23 --
Net realized and unrealized gains (losses) ............ (1.85) 2.20 (.59)
--------- --------- ---------
Total from investment operations ....................... (1.66) 2.43 (.59)
--------- --------- ---------
Less distributions from:
Net investment income ................................. (.19) (.14) --
Net realized gains .................................... -- (.88) --
--------- --------- ---------
Total distributions .................................... (.19) (1.02) --
--------- --------- ---------
Net asset value, end of year ........................... $ 13.63 $ 15.48 $ 14.07
========= ========= =========
Total return(*) ........................................ (10.48%) 18.11% (4.02%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................ $ 319 $ 892 $ 1,123
Ratios to average net assets:
Expenses .............................................. .65% .64% .64%(2)
Expenses excluding waiver and payments by affiliate ... 1.15% 1.03% .86%(2)
Net investment income ................................. 1.29% 1.02% 1.03%(2)
Portfolio turnover rate ................................ 74.03% 72.93% 46.31%
</TABLE>
(*)Total return is not annualized for periods less than one year.
(1)For the period January 2, 1997 (effective date) to April 30, 1997.
(2)Annualized
See notes to financial statements.
51
Page
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999
<TABLE>
<CAPTION>
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 92.3%
ENERGY MINERALS 35.7%
Atlantic Richfield Co. ..................................................... United States 18,000 $ 1,510,875
(a)Barrett Resources Corp. .................................................... United States 49,400 1,500,525
(a)Basin Exploration Inc. ..................................................... United States 40,900 700,413
Chesapeake Energy Corp. .................................................... United States 170,000 393,125
Conoco Inc., A ............................................................. United States 24,500 664,563
Devon Energy Corp. ......................................................... United States 7,000 232,750
Enron Oil & Gas Co. ........................................................ United States 54,500 1,035,500
(a)Gulf Canada Resources Ltd. ................................................. Canada 141,800 567,200
(a)Houston Exploration Co. .................................................... United States 23,000 437,000
Mobil Corp. ................................................................ United States 11,600 1,215,100
(a)Newfield Exploration Co. ................................................... United States 47,700 1,281,938
(a)Nuevo Energy Co. ........................................................... United States 44,000 698,500
Royal Dutch Petroleum Co., N.Y. shs. ....................................... Netherlands 18,900 1,109,194
(a)Santa Fe Snyder Corp. ...................................................... United States 51,600 464,400
Texaco Inc. ................................................................ United States 20,800 1,305,200
Tosco Corp. ................................................................ United States 25,100 671,425
Ultramar Diamond Shamrock Corp. ............................................ United States 17,800 410,513
Unocal Corp. ............................................................... United States 16,200 673,313
YPF SA, ADR ................................................................ Argentina 23,000 966,000
-----------
15,837,534
-----------
INDUSTRIAL SERVICES 21.4%
(a)AES Corp. .................................................................. United States 14,160 708,000
(a)Atwood Oceanics Inc. ....................................................... United States 12,300 428,963
Baker Hughes Inc. .......................................................... United States 7,200 215,100
(a)BJ Services Co. ............................................................ United States 8,300 222,025
(a)Cal Dive International Inc. ................................................ United States 30,200 966,400
(a)Casella Waste Systems Inc., A .............................................. United States 28,000 700,000
Diamond Offshore Drilling Inc. ............................................. United States 18,000 595,125
ENSCO International Inc. ................................................... United States 11,000 204,188
Halliburton Co. ............................................................ United States 15,000 639,375
(a)Safety-Kleen Corp. ......................................................... United States 23,700 376,238
Schlumberger Ltd. .......................................................... United States 14,000 894,250
Transocean Offshore Inc. ................................................... United States 27,300 810,469
(a)Tuboscope Inc. ............................................................. United States 43,600 594,050
(a)Varco International Inc. ................................................... United States 80,200 907,263
Weatherford International Inc. ............................................. United States 35,775 1,211,878
-----------
9,473,324
-----------
NON-ENERGY MINERALS 14.5%
Aluminum Co. of America .................................................... United States 10,800 672,300
Barrick Gold Corp. ......................................................... Canada 28,100 565,513
De Beers Consolidated Mines AG, ADR ........................................ South Africa 52,900 1,296,050
Franco-Nevada Mining Corp. Ltd. ............................................ Canada 36,000 697,109
Freeport-McMoRan Copper & Gold Inc., A ..................................... United States 11,700 170,381
Newmont Mining Corp. ....................................................... United States 27,335 657,748
Pohang Iron & Steel Co. Ltd., ADR .......................................... South Korea 27,500 708,125
</TABLE>
52
Page
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
NON-ENERGY MINERALS (CONT.)
Potash Corp. of Saskatchewan Inc. .......................................... Canada 8,385 $ 507,293
Rio Tinto PLC .............................................................. United Kingdom 50,600 885,154
(a)Stillwater Mining Co. ...................................................... United States 10,000 283,125
-----------
6,442,798
-----------
PROCESS INDUSTRIES 14.4%
(a)Asia Pulp & Paper Co. Ltd., ADR ............................................ Singapore 55,800 585,900
Avery Dennison Corp. ....................................................... United States 13,700 935,025
Bemis Co. Inc. ............................................................. United States 2,500 87,500
Bowater Inc. ............................................................... United States 7,100 380,731
E.I. du Pont de Nemours and Co. ............................................ United States 4,000 282,500
Ecolab Inc. ................................................................ United States 5,400 226,463
Hercules Inc. .............................................................. United States 5,700 215,531
Monsanto Co. ............................................................... United States 5,500 248,875
(a)Owens-Illinois Inc. ........................................................ United States 20,600 597,400
Praxair Inc. ............................................................... United States 17,200 890,100
Sigma-Aldrich Corp. ........................................................ United States 25,300 822,250
(a)Smurfit-Stone Container Corp. .............................................. United States 34,200 799,425
Willamette Industries Inc. ................................................. United States 7,000 327,250
-----------
6,398,950
-----------
PRODUCER MANUFACTURING 2.1%
Gibraltar Steel Corp. ...................................................... United States 18,500 433,594
Masco Corp. ................................................................ United States 8,300 243,813
Reliance Steel & Aluminum Co. .............................................. United States 6,500 236,844
-----------
914,251
-----------
UTILITIES 4.2%
Baltimore Gas and Electric Co. ............................................. United States 15,700 441,563
Enron Corp. ................................................................ United States 13,300 1,000,825
KN Energy Inc. ............................................................. United States 19,200 396,000
-----------
1,838,388
-----------
TOTAL LONG TERM INVESTMENT (COST $39,093,017) .............................. 40,905,245
-----------
</TABLE>
53
Page
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN NATURAL RESOURCES FUND COUNTRY AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(b)REPURCHASE AGREEMENT 10.5%
Joint Repurchase Agreement, 4.862%, 5/03/99 (Maturity Value $4,668,274)
(COST $4,666,383) ......................................................... United States $ 4,666,383 $ 4,666,383
Barclays Capital Inc. (Maturity Value $482,093)
Bear, Stearns & Co. Inc. (Maturity Value $262,964)
Chase Securities Inc. (Maturity Value $482,093)
CIBC Oppenheimer Corp. (Maturity Value $482,093)
Deutsche Bank Securities Inc. (Maturity Value $66,473)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $482,093)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $482,093)
Lehman Brothers Inc. (Maturity Value $482,093)
Paine Webber Inc. (Maturity Value $482,093)
Paribas Corp. (Maturity Value $482,093)
UBS Securities LLC (Maturity Value $482,093)
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $43,759,400) 102.8% ................................ 45,571,628
OTHER ASSETS, LESS LIABILITIES (2.8%) ...................................... (1,238,471)
------------
NET ASSETS 100.0% .......................................................... $44,333,157
===========
</TABLE>
(a)Non-income producing.
(b)See Note 1(c) regarding joint repurchase agreement.
54
See notes to financial statements.
Page
FRANKLIN STRATEGIC SERIES
Financial Statements
STATEMENTS OF ASSETS AND LIABILITIES
APRIL 30, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BIOTECHNOLOGY GLOBAL HEALTH GLOBAL NATURAL
DISCOVERY FUND CARE FUND UTILITIES FUND RESOURCES FUND
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost ................................................... $ 67,620,572 $ 92,395,797 $ 167,465,933 $ 39,093,017
============= ============= ============= =============
Value .................................................. 64,225,287 83,384,705 206,309,419 40,905,245
Repurchase agreements, at value and cost ................ 2,956,867 4,099,618 11,479,768 4,666,383
Receivables:
Investment securities sold ............................. 2,639,487 3,196,019 -- 456,753
Capital shares sold .................................... 184,747 85,573 105,636 106,417
Dividends and interest ................................. -- 53,924 417,142 61,245
Affiliates ............................................. -- 222 -- 38,804
Deposits with brokers for securities sold short ......... 4,646,849 -- -- --
------------- ------------- ------------- -------------
Total assets ....................................... 74,653,237 90,820,061 218,311,965 46,234,847
------------- ------------- ------------- -------------
Liabilities:
Payables:
Investment securities purchased ........................ 1,613,906 1,210,500 -- 1,694,969
Capital shares redeemed ................................ 435,796 754,576 867,925 100,887
Affiliates ............................................. 142,053 215,474 300,619 43,996
Shareholders ........................................... 121,812 423,001 407,782 52,470
Securities sold short, at value (proceeds $2,967,401) ... 2,883,750 -- -- --
Other liabilities ....................................... 6,075 9,704 25,409 9,368
------------- ------------- ------------- -------------
Total liabilities .................................. 5,203,392 2,613,255 1,601,735 1,901,690
------------- ------------- ------------- -------------
Net assets, at value ............................. $ 69,449,845 $ 88,206,806 $ 216,710,230 $ 44,333,157
============= ============= ============= =============
Net assets consist of:
Undistributed net investment income ..................... $ -- $ -- $ 2,918,850 $ 252,338
Accumulated net operating loss .......................... (7,680) -- -- --
Net unrealized appreciation (depreciation) .............. (3,311,634) (9,011,092) 38,842,964 1,812,264
Accumulated net realized gain (loss) .................... (4,260,086) (14,670,983) 18,774,263 (6,706,833)
Capital shares .......................................... 77,029,245 111,888,881 156,174,153 48,975,388
------------- ------------- ------------- -------------
Net assets, at value ............................... $ 69,449,845 $ 88,206,806 $ 216,710,230 $ 44,333,157
============= ============= ============= =============
</TABLE>
See notes to financial statements.
55
Page
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
APRIL 30, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BIOTECHNOLOGY GLOBAL HEALTH GLOBAL NATURAL
DISCOVERY FUND CARE FUND UTILITIES FUND RESOURCES FUND
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
CLASS A:
Net assets, at value ...................................... $ 69,449,845 $ 74,251,597 $199,824,489 $ 44,014,110
============== ============ ============ ============
Shares outstanding ........................................ 2,966,401 5,349,171 11,774,467 3,321,951
============== ============ ============ ============
Net asset value per share(*) .............................. $ 23.41 $ 13.88 $ 16.97 $ 13.25
============== ============ ============ ============
Maximum offering price per share
(net asset value per share divided by 94.25%) ............ $ 24.84 $ 14.73 $ 18.01 $ 14.06
============== ============ ============ ============
CLASS B:
Net assets, at value ...................................... -- $ 208,126 $ 78,997 --
============== ============ ============ ============
Shares outstanding ........................................ -- 15,036 4,668 --
============== ============ ============ ============
Net asset value and maximum offering price per share(*) ... -- $ 13.84 $ 16.92 --
============== ============ ============ ============
CLASS C:
Net assets, at value ...................................... -- $ 13,747,083 $ 16,806,744 --
============== ============ ============ ============
Shares outstanding ........................................ -- 1,002,602 997,701 --
============== ============ ============ ============
Net asset value per share(*) .............................. -- $ 13.71 $ 16.85 --
============== ============ ============ ============
Maximum offering price per share
(net asset value per share divided by 99.00%) ............ -- $ 13.85 $ 17.02 --
============== ============ ============ ============
ADVISOR CLASS:
Net assets, at value ...................................... -- -- -- $ 319,047
============== ============ ============ ============
Shares outstanding ........................................ -- -- -- 23,405
============== ============ ============ ============
Net asset value and maximum offering price per share ...... -- -- -- $ 13.63
============== ============ ============ ============
</TABLE>
(*)Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
56
See notes to financial statements.
Page
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BIOTECHNOLOGY GLOBAL HEALTH GLOBAL NATURAL
DISCOVERY FUND CARE FUND UTILITIES FUND RESOURCES FUND
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Investment income:(*)
Dividends ........................................................ $ 2,550 $ 283,632 $ 5,238,168 $ 542,680
Interest ......................................................... 798,570 587,206 484,945 251,180
------------ ------------ ------------ ------------
Total investment income ..................................... 801,120 870,838 5,723,113 793,860
------------ ------------ ------------ ------------
Expenses:
Management fees (Note 3) ......................................... 445,914 824,463 1,225,638 256,117
Administrative fees (Note 3) ..................................... 108,947 -- -- --
Distribution fees (Note 3)
Class A ......................................................... 220,755 302,908 509,843 128,240
Class B ......................................................... -- 235 141 --
Class C ......................................................... -- 194,847 162,963 --
Transfer agent fees (Note 3) ..................................... 213,734 544,380 356,316 144,758
Custodian fees ................................................... -- 8,233 37,022 1,590
Reports to shareholders .......................................... 28,252 90,925 68,237 30,256
Registration and filing fees ..................................... 32,599 42,232 47,454 30,334
Professional fees ................................................ 15,904 6,178 9,002 3,231
Trustees' fees and expenses ...................................... 998 1,998 3,117 593
Amortization of offering costs (Note 1) .......................... 19,669 -- -- --
Other ............................................................ -- 4,282 13,649 3,186
------------ ------------ ------------ ------------
Total expenses .............................................. 1,086,772 2,020,681 2,433,382 598,305
Expenses waived/paid by affiliate (Note 3) .................. -- -- -- (203,312)
------------ ------------ ------------ ------------
Net expenses .............................................. 1,086,772 2,020,681 2,433,382 394,993
------------ ------------ ------------ ------------
Net investment income (loss) ............................. (285,652) (1,149,843) 3,289,731 398,867
------------ ------------ ------------ ------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ..................................................... (3,455,850) (14,672,104) 18,871,597 (6,096,776)
Foreign currency transactions ................................... (7,680) (6,415) (359,820) (3,579)
Securities sold short ........................................... 557,542 -- -- --
------------ ------------ ------------ ------------
Net realized gain (loss) ....................................... (2,905,988) (14,678,519) 18,511,777 (6,100,355)
Net unrealized appreciation (depreciation) on:
Investments ..................................................... (5,962,288) (32,520,914) (15,630,851) (4,510,227)
Translation of assets and liabilities denominated
in foreign currencies .......................................... -- -- (427) 36
------------ ------------ ------------ ------------
Net unrealized depreciation ................................... (5,962,288) (32,520,914) (15,631,278) (4,510,191)
------------ ------------ ------------ ------------
Net realized and unrealized gain (loss) ........................... (8,868,276) (47,199,433) 2,880,499 (10,610,546)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets resulting from operations ... $ (9,153,928) $(48,349,276) $ 6,170,230 $(10,211,679)
============ ============ ============ ============
</TABLE>
(*)Net of foreign taxes and fees of $15,182, $105,843, and $17,140 for the
Franklin Global Health Care Fund, Franklin Global Utilities Fund, and Franklin
Natural Resources Fund, respectively.
See notes to financial statements.
57
Page
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
<TABLE>
<CAPTION>
FRANKLIN BIOTECHNOLOGY FRANKLIN
DISCOVERY FUND GLOBAL HEALTH CARE FUND
--------------------------------- ------------------------------
1999 1998(*) 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment loss .................................... $ (285,652) $ (137,225) $ (1,149,843) $ (1,510,292)
Net realized gain (loss) from investments and
foreign currency transactions ......................... (2,905,988) 78,552 (14,678,519) 7,343,486
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies ......... (5,962,288) 2,650,654 (32,520,914) 39,299,172
------------- ------------- ------------- -------------
Net increase (decrease) in net assets
resulting from operations ........................ (9,153,928) 2,591,981 (48,349,276) 45,132,366
Distributions to shareholders from:
Net investment income:
Class A ............................................... -- -- -- (839,395)
Net realized gains:
Class A ............................................... (1,272,491) (92,644) (98,214) (10,783,573)
Class C ............................................... -- -- (16,744) (1,181,824)
------------- ------------- ------------- -------------
Total distributions to shareholders ..................... (1,272,491) (92,644) (114,958) (12,804,792)
Capital share transactions: (Note 2)
Class A ................................................ 6,330,107 71,046,820 (60,533,341) (4,628,248)
Class B ................................................ -- -- 222,435 --
Class C ................................................ -- -- (4,883,689) 13,414,237
------------- ------------- ------------- -------------
Total capital share transactions ........................ 6,330,107 71,046,820 (65,194,595) 8,785,989
Net increase (decrease) in net assets .............. (4,096,312) 73,546,157 (113,658,829) 41,113,563
Net assets:
Beginning of year ...................................... 73,546,157 -- 201,865,635 160,752,072
------------- ------------- ------------- -------------
End of year ............................................ $ 69,449,845 $ 73,546,157 $ 88,206,806 $ 201,865,635
============= ============= ============= =============
Accumulated net operating loss included in net assets:
End of year ............................................ $ (7,680) -- -- --
============= ============= ============= =============
</TABLE>
(*)For the period September 15,1997 (effective date) to April 30,1998.
58
See notes to financial statements.
Page
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
GLOBAL UTILITIES FUND NATURAL RESOURCES FUND
------------------------------ ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .................................... $ 3,289,731 $ 4,178,656 $ 398,867 $ 387,952
Net realized gain (loss) from investments and
foreign currency transactions ........................... 18,511,777 22,067,993 (6,100,355) 3,269,031
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies ........... (15,631,278) 39,396,240 (4,510,191) 4,698,245
------------- ------------- ------------- -------------
Net increase (decrease) in net assets
resulting from operations .......................... 6,170,230 65,642,889 (10,211,679) 8,355,228
Distributions to shareholders from:
Net investment income:
Class A ................................................. (2,419,109) (4,337,700) (424,272) (290,715)
Class C ................................................. (75,113) (173,616) -- --
Advisor Class ........................................... -- -- (10,798) (11,637)
Net realized gains:
Class A ................................................. (9,673,260) (20,433,197) -- (3,235,588)
Class C ................................................. (818,825) (1,296,647) -- --
Advisor Class ........................................... -- -- -- (65,092)
------------- ------------- ------------- -------------
Total distributions to shareholders ....................... (12,986,307) (26,241,160) (435,070) (3,603,032)
Capital share transactions: (Note 2)
Class A .................................................. (20,312,303) 15,321,019 (7,774,548) 12,387,988
Class B .................................................. 72,761 -- -- --
Class C .................................................. 847,862 5,705,054 -- --
Advisor Class ............................................ -- -- (411,581) (483,354)
------------- ------------- ------------- -------------
Total capital share transactions .......................... (19,391,680) 21,026,073 (8,186,129) 11,904,634
Net increase (decrease) in net assets ................ (26,207,757) 60,427,802 (18,832,878) 16,656,830
Net assets:
Beginning of year ......................................... 242,917,987 182,490,185 63,166,035 46,509,205
------------- ------------- ------------- -------------
End of year ............................................... $ 216,710,230 $ 242,917,987 $ 44,333,157 $ 63,166,035
============= ============= ============= =============
Undistributed net investment income included in net assets:
End of year .............................................. $ 2,918,850 $ 1,555,065 $ 252,338 $ 293,376
============= ============= ============= =============
</TABLE>
See notes to financial statements.
59
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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-end investment company, consisting of ten separate series
(the Funds). All Funds included in this report are non-diversified. The
investment objectives of the Funds included in this report are:
<TABLE>
<CAPTION>
CAPITAL GROWTH TOTAL RETURN
------------------------------------- -------------------------------
<S> <C>
Franklin Biotechnology Discovery Fund Franklin Global Utilities Fund
Franklin Global Health Care Fund Franklin Natural Resources Fund
</TABLE>
The following summarizes the Funds' significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. 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, 1999, all outstanding repurchase
agreements had been entered into on that date.
d. SECURITIES SOLD SHORT:
The Franklin Biotechnology Discovery Fund is engaged in selling securities
short, which obligates the Fund to replace a borrowed security with the same
security at current market value. The Fund would incur a loss if the price of
the security
60
Page
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
d. SECURITIES SOLD SHORT: (CONT.)
increases between the date of the short sale and the date on which the Fund
replaces the borrowed security. The Fund would realize a gain if the price of
the security declines between those dates.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit for the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short.
e. 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 substantially all of its taxable income.
f. 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. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. Other expenses are
charged to each Fund on a specific identification basis.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
g. OFFERING COSTS:
Offering costs are amortized on a straight-line basis over twelve months.
h. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the Funds are indicated below.
Effective January 1, 1999, Class I and Class II were renamed Class A and Class
C, respectively, and the Franklin Global Heath Care Fund and the Franklin Global
Utilities Fund began offering a new class of shares, Class B. The shares differ
by their initial sales load, distribution fees, voting rights on matters
affecting a single class and the exchange privilege of each class.
<TABLE>
<CAPTION>
CLASS A CLASS A & ADVISOR CLASS CLASS A, CLASS B & CLASS C
- ------------------------------------- ------------------------------- --------------------------------
<S> <C> <C>
Franklin Biotechnology Discovery Fund Franklin Natural Resources Fund Franklin Global Health Care Fund
Franklin Global Utilities Fund
</TABLE>
61
Page
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
At April 30, 1999, there were an unlimited number of shares authorized ($.01 par
value). Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
FRANKLIN BIOTECHNOLOGY FRANKLIN FRANKLIN
DISCOVERY FUND GLOBAL HEALTH CARE FUND GLOBAL UTILITIES FUND
-------------------------- ----------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES:
Year ended April 30, 1999
Shares sold ..................... 1,483,341 $ 35,796,702 9,005,885 $ 143,541,952 2,575,785 $ 41,641,164
Shares issued in reinvestment
of distributions ............... 41,475 975,481 5,766 90,654 688,144 10,403,432
Shares redeemed ................. (1,293,474) (30,442,076) (12,818,888) (204,165,947) (4,540,259) (72,356,899)
---------- ------------ ----------- ------------- ---------- ------------
Net increase (decrease) ......... 231,342 $ 6,330,107 (3,807,237) $ (60,533,341) (1,276,330) $(20,312,303)
========== ============ =========== ============= ========== ============
Year ended April 30, 1998(1)
Shares sold ..................... 3,010,054 $ 77,917,478 5,859,007 $ 114,702,245 3,212,803 $ 52,323,466
Shares issued in reinvestment
of distributions ............... 3,075 72,075 579,437 10,337,126 1,370,293 20,834,692
Shares redeemed ................. (278,070) (6,942,733) (6,631,021) (129,667,619) (3,569,029) (57,837,139)
---------- ------------ ----------- ------------- ---------- ------------
Net increase (decrease) ......... 2,735,059 $ 71,046,820 (192,577) $ (4,628,248) 1,014,067 $ 15,321,019
========== ============ =========== ============= ========== ============
CLASS B SHARES:
Year ended April 30, 1999(2)
Shares sold ..................... 15,040 $ 222,495 4,668 $ 72,761
Shares redeemed ................. (4) (60) -- --
----------- ------------- ---------- ------------
Net increase .................... 15,036 $ 222,435 4,668 $ 72,761
=========== ============= ========== ============
CLASS C SHARES:
Year ended April 30, 1999
Shares sold ..................... 375,736 $ 6,135,515 348,707 $ 5,558,866
Shares issued in reinvestment
of distributions ............... 1,001 15,481 51,063 765,827
Shares redeemed ................. (695,236) (11,034,685) (348,295) (5,476,831)
----------- ------------- ---------- ------------
Net increase (decrease) ......... (318,499) $ (4,883,689) 51,475 $ 847,862
=========== ============= ========== ============
Year ended April 30, 1998
Shares sold ..................... 977,854 $ 18,978,351 374,083 $ 6,062,631
Shares issued in reinvestment
of distributions ............... 59,618 1,060,013 83,729 1,266,098
Shares redeemed ................. (344,952) (6,624,127) (100,619) (1,623,675)
----------- ------------- ---------- ------------
Net increase .................... 692,520 $ 13,414,237 357,193 $ 5,705,054
=========== ============= ========== ============
</TABLE>
(1)For the Franklin Biotechnology Discovery Fund, for the period September 15,
1997 (effective date) to April 30, 1998.
(2)For the Franklin Global Health Care Fund and the Franklin Global Utilities
Fund, for the period January 1, 1999 (effective date) to April 30, 1999.
62
Page
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
FRANKLIN
NATURAL RESOURCES FUND
------------------------------
SHARES AMOUNT
---------- ------------
<S> <C> <C>
CLASS A SHARES:
Year ended April 30, 1999
Shares sold ...................................... 3,435,836 $ 39,238,044
Shares issued in reinvestment of distributions ... 33,594 390,527
Shares redeemed .................................. (4,175,956) (47,403,119)
---------- ------------
Net decrease ..................................... (706,526) $ (7,774,548)
========== ============
Year ended April 30, 1998
Shares sold ...................................... 3,460,003 $ 53,383,689
Shares issued in reinvestment of distributions ... 233,153 3,232,567
Shares redeemed .................................. (2,890,715) (44,228,268)
---------- ------------
Net increase ..................................... 802,441 $ 12,387,988
========== ============
ADVISOR CLASS SHARES:
Year ended April 30, 1999
Shares sold ...................................... 117,744 $ 1,462,201
Shares issued in reinvestment of distributions ... 897 10,797
Shares redeemed .................................. (152,874) (1,884,579)
---------- ------------
Net decrease ..................................... (34,233) $ (411,581)
========== ============
Year ended April 30, 1998
Shares sold ...................................... 477,715 $ 7,274,080
Shares issued in reinvestment of distributions ... 5,516 76,729
Shares redeemed .................................. (505,389) (7,834,163)
---------- ------------
Net decrease ..................................... (22,158) $ (483,354)
========== ============
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), Franklin/Templeton Distributors, Inc.
(Distributors), Franklin Templeton Services, Inc. (FT Services), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Funds'
investment manager, principal underwriter, administrative manager and transfer
agent, respectively.
All Funds pay an investment management fee to Advisers based on the average net
assets of the Funds as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
---------- ---------------------------------------------------
<S> <C>
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million, up to and including $10 billion
</TABLE>
Fees are further reduced on net assets over $10 billion.
63
Page
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES (CONT.)
The Franklin Biotechnology Discovery Fund pays an administrative fee to FT
Services based on the Fund's average net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
---------- ---------------------------------------------------
<S> <C>
.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
</TABLE>
Under an agreement with Advisers, FT Services provides administrative services
to the Funds, except the Franklin Biotechnology Discovery Fund. The fee is paid
by Advisers based on the average daily net assets, and is not an additional
expense of the Funds.
Advisers agreed in advance to waive management fees for the Franklin Natural
Resources Fund as noted in the Statements of Operations.
The Franklin Biotechnology Discovery Fund and the Franklin Natural Resources
Fund reimburse Distributors up to .35% per year of the Funds' average daily net
assets of Class A; the Franklin Global Health Care Fund and the Franklin Global
Utilities Fund reimburse Distributors up to .25%, 1.00%, and 1.00% per year of
the Funds' average daily net assets of Class A, Class B, and Class C,
respectively, for costs incurred in marketing the Funds' shares.
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 BIOTECHNOLOGY FRANKLIN GLOBAL FRANKLIN GLOBAL FRANKLIN NATURAL
DISCOVERY FUND HEALTH CARE FUND UTILITIES FUND RESOURCES FUND
---------------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net commissions received (paid) ..... $ 121,172 $(362,193) $ (16,719) $ 4,705
Contingent deferred sales charges ... $ 2,150 $ 37,292 $ 10,473 $ 4,269
</TABLE>
The Funds paid transfer agent fees of $1,259,188, of which $1,146,094 was paid
to Investor Services.
4. INCOME TAXES
At April 30, 1999, the Franklin Biotechnology Discovery Fund, the Franklin
Global Health Care Fund and the Franklin Natural Resources Fund had tax basis
capital losses of $329,494, $3,510,661, and $3,235,849, respectively, which may
be carried over to offset future capital gains. Such losses expire in 2007.
At April 30, 1999, the Franklin Biotechnology Discovery Fund, the Franklin
Global Health Care Fund and the Franklin Natural Resources Fund have deferred
capital losses occurring subsequent to October 31, 1998 of $2,029,546,
$10,664,364, and $3,461,955, respectively. For tax purposes, such losses will be
reflected in the year ending April 30, 2000.
At April 30, 1999, the Franklin Biotechnology Discovery Fund and the Franklin
Global Utilities Fund have deferred currency capital losses occurring subsequent
to October 31, 1998 of $7,680 and $334,090, respectively. For tax purposes, such
losses will be reflected in the year ending April 30, 2000.
64
Page
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (continued)
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.
At April 30, 1999, the net unrealized appreciation (depreciation) based on the
cost of investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
FRANKLIN BIOTECHNOLOGY FRANKLIN GLOBAL FRANKLIN GLOBAL FRANKLIN NATURAL
DISCOVERY FUND HEALTH CARE FUND UTILITIES FUND RESOURCES FUND
---------------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Investments at cost .......................... $ 69,511,215 $ 96,992,511 $ 178,947,519 $ 43,768,634
============ ============ ============= ============
Unrealized appreciation ...................... $ 7,432,641 $ 6,176,193 $ 47,023,803 $ 5,459,939
Unrealized depreciation ...................... (12,645,452) (15,684,381) (8,182,135) (3,656,945)
------------ ------------ ------------- ------------
Net unrealized appreciation (depreciation) ... $ (5,212,811) $ (9,508,188) $ 38,841,668 $ 1,802,994
============ ============ ============= ============
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended April 30, 1999 were as follows:
<TABLE>
<CAPTION>
FRANKLIN BIOTECHNOLOGY FRANKLIN GLOBAL FRANKLIN GLOBAL FRANKLIN NATURAL
DISCOVERY FUND HEALTH CARE FUND UTILITIES FUND RESOURCES FUND
---------------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Purchases .................................... $ 65,243,989 $ 85,365,119 $ 144,332,459 $ 28,376,108
Sales ........................................ $ 54,873,777 $144,448,834 $ 179,770,419 $ 33,336,999
</TABLE>
6. LENDING OF PORTFOLIO SECURITIES
The Franklin Natural Resources Fund loans securities to certain brokers for
which it receives cash collateral against the loaned securities in an amount
equal to at least 102% of the market value of the loaned securities. Net
interest income from the investment of the cash collateral received was $48,846
for the year ended April 30, 1999.
65
Page
FRANKLIN STRATEGIC SERIES
Independent Auditors' Report
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF
FRANKLIN STRATEGIC SERIES
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Biotechnology Discovery
Fund, Franklin Global Health Care Fund, Franklin Global Utilities Fund, and
Franklin Natural Resources Fund (four of the portfolios constituting the
Franklin Strategic Series, hereafter referred to as the "Funds") at April 30,
1999, the results of each of their operations for the year then ended, the
changes in each of their net assets for each of the two years in the period then
ended and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Funds' management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at April 30, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
June 4, 1999
66
Page
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, 1999:
<TABLE>
<CAPTION>
CAPITAL GAINS
20% RATE GAIN
-------------
<S> <C>
Franklin Global Utilities Fund............... $14,699,520
</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, 1999:
<TABLE>
<S> <C>
Franklin Biotechnology Discovery Fund........... .20%
Franklin Global Utilities Fund ................. 71.28%
Franklin Natural Resources Fund ................ 70.46%
</TABLE>
67
Page
This page intentionally left blank.
SHAREHOLDER LETTER
Your Fund's Goal: Franklin Strategic Income Fund seeks a high level of current
income, with capital appreciation over the long term as a secondary objective.
The fund uses an active asset allocation process and invests in securities of
foreign governments, U.S. and foreign high yield, fixed-income securities,
asset-backed securities, preferred stock, common stock that pays dividends, and
income-producing securities convertible into common stock of such companies.
It's a pleasure to bring you Franklin Strategic Income Fund's annual report for
the period ended April 30, 1999.
During the 12 months under review, significant developments in the economic and
fiscal outlooks for a number of developed and emerging countries drove the
performance of global fixed-income markets. In the U.S., inflation remained
benign and economic growth continued at a brisk pace. However, increasing
concerns regarding the financial health of certain emerging markets in the late
summer of 1998, combined with fears of slowing global economic growth and the
well-publicized difficulties of various financial institutions, caused a
temporary "flight to quality" within the capital markets and reduced liquidity
for lower-rated, higher-volatility securities.
By diversifying across six distinct asset classes -- foreign government bonds,
emerging market debt securities, high yield corporate bonds, U.S. government
bonds, convertible
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 17 of
this report.
CONTENTS
<TABLE>
<S> <C>
Shareholder Letter .................................................... 1
Performance Summary ................................................... 10
Financial Highlights &
Statement of Investments .............................................. 14
Financial Statements .................................................. 26
Notes to
Financial Statements .................................................. 29
Independent
Auditors' Report ...................................................... 33
Tax Information ....................................................... 34
</TABLE>
[PYRAMID GRAPH]
- -PAGE-
securities and mortgage-backed securities -- Franklin Strategic Income Fund was
able to take advantage of selective opportunities that arose during these
periods of market instability, while still looking to reduce overall price
volatility through sector and security diversification. More specifically, the
fund decreased its exposure to higher-volatility convertible securities and
emerging markets sectors, and increased its holdings in U.S. government
securities prior to the late summer sell-off, which helped to mitigate the
impact from the subsequent period of market volatility.
Following this period of instability in the fixed-income markets, the fund
increased its exposure to certain sectors such as mortgages, emerging markets
and high yield corporate bonds that on a fundamental basis appeared to have been
oversold. Subsequently, the fund began to benefit from these sector allocation
decisions as these markets' yield spreads, the additional interest rate paid to
investors for lower-rated securities, significantly declined from their recent
highs, leading to solid price appreciation for the underlying securities.
Although volatility across fixed-income markets did negatively impact returns
for certain fixed-income sectors over the past year, the fund's Class A shares
generated a cumulative total return of +4.23% for the 12 months ended April 30,
1999, largely as a result of successful sector and security allocation
decisions. Cumulative total return measures the change in value of an
investment, assuming reinvestment of all distributions, and does not include
sales charges. This total return compares favorably with the performance of many
of our mutual fund peers that invest in multiple fixed-income sectors.
HIGH YIELD CORPORATE BONDS
A strong domestic economy combined with low nominal interest rates created a
generally favorable operating environment for high yield issuers over the
12-month period. Although the high yield sector did experience a pull-back
during the third quarter of 1998 as a result of declining financial market
liquidity and a
2
- -PAGE-
less bullish economic outlook, the actual fundamentals for most high yield
credits remained healthy. Over the course of the fund's fiscal year, the fund
selectively added to positions with sound fundamental outlooks, taking advantage
of short-term price dips in the market to purchase bonds at more favorable
prices. At the close of the period, the fund's high yield sector remained
overweighted relative to other sectors, at 30.0% of total net assets, as we felt
that yield levels were attractive relative to other fixed-income investment
alternatives and the credit outlook was favorable for this sector.
During the period under review, the fund benefited from its exposure to various
industry sectors within the broad high yield market. Given the continued
strength in the domestic economy, advertising-driven high yield media companies
generally posted improving operating results. Our position in Fox/Liberty
Networks LLC, an operator of regional sports cable channels, was a prime
recipient of these advertising trends as well as the growing demand for
sports-related television programming. Moreover, investment-grade-rated The News
Corporation Ltd. recently agreed to acquire the company, prompting meaningful
price gains for the Fox/Liberty bonds. We are still confident concerning the
long-term growth and consolidation prospects for wireless and emerging
telecommunications providers and continue to maintain significant exposure to
these two industry sectors. Our position in Sygnet Wireless Inc., a cellular
communications provider, was tendered at a substantial premium as a result of
that company's sale to another wireless provider, Dobson Communications Corp.
The fund subsequently reinvested in the new Dobson/Sygnet Communications Co.
wireless entity, and these new bonds have already performed well based upon
positive market sentiment toward this sector and a recent minority investment in
the company from AT&T Corp. Finally, during the first quarter of 1999, the fund
invested in R&B Falcon Corp., a leading oilfield services company specializing
in deepwater
3
- -PAGE-
drilling. We were able to purchase the company's bonds at attractive yields, due
to the prevailing bearish market sentiment toward oil-related industries. The
outlook for energy issuers recently improved with a rise in crude oil prices,
and the fund's investments in R&B Falcon have already posted healthy price
gains.
EMERGING MARKETS
Due to relatively tight yield spreads over Treasuries and concerns about
inauspicious news coming out of certain developing markets, the fund reduced its
exposure to the emerging markets sector prior to its late summer 1998 sell-off.
However, after the severe sector sell-off following Russia's financial crisis,
which sent yield spreads to near historical highs, many of the sovereign issues
in this market appeared to be oversold based on their long-term fundamental
outlook. Consequently, we took advantage of these opportunities to increase our
exposure to this sector in the third quarter of 1998, with a particular focus on
Latin America. Over the second half of the reporting period, the fixed-income
emerging market sector experienced a meaningful rebound from its 1998 lows, as
these regions' outlook for access to capital and long-term economic growth
significantly improved. The fund benefited from this recent rise while we
selectively reduced our positions in securities we felt were fully valued. At
the end of the reporting period, the emerging markets represented the fund's
second-largest sector, comprising 23.4% of total net assets.
Our exposure to this sector reflects our more positive outlook for total returns
relative to other fixed-income sectors over the intermediate to long term. Latin
America remained the sector's top region, at 17.3% of total net assets on April
30, 1999. We added to our holdings in Mexico and Argentina and initiated a
position in Peru, while we reduced our exposure to Brazil and Venezuela because
of the more challenging near-term outlook for these countries. The fund's
positions in Korea experienced
4
- -PAGE-
substantial gains, as that country was able to stabilize its currency reserves,
and as a result, its debt was upgraded back to investment grade. Finally, the
fund did not hold any positions in Russian securities prior to that country's
well-publicized crisis; however, as Russian Eurobond prices dropped
precipitously on the heels of this news, the fund did initiate a position in
Russia at significantly discounted levels. Although the Russian economic picture
remains cloudy, improving sentiment for these securities pushed up the price of
Russian Eurobonds significantly over recent months, resulting in a profitable
investment for the fund.
INTERNATIONAL
During the first six months under review, falling global interest rates
benefited the fund's international developed markets sovereign bond positions.
However, the fund has subsequently trimmed its exposure to this sector as the
total return prospects for developed market bonds appear more limited in the
recent interest-rate environment. In an attempt to maximize our dollar-based
total returns in this sector, we hedged our non-dollar foreign currency exposure
over the course of the fund's fiscal year as opportunities arose. At the end of
the 12 months under review, we had substantially reduced our hedged foreign
currency bond positions, as we felt the outlook for meaningful additional dollar
appreciation declined following its significant rise over the past several
months.
On April 30, 1999, Germany remained the fund's top holding in Europe with 2.5%
of total net assets, while we more than doubled our U.K. exposure, to 2.0% of
total net assets over the course of the reporting period. The U.K.'s higher
interest rates and the prospect for additional government-directed rate cuts
increased the relative attractiveness of the country's sovereign bonds. The fund
also added to its holdings in Belgium while reducing exposure to Spain and
Sweden following rate declines in those two countries. In the dollar-bloc
countries, the fund
5
- -PAGE-
increased its exposure to New Zealand while cutting its Canadian holdings, as
the relative value of that country's sovereign debt became less attractive over
the course of the year.
CONVERTIBLE SECURITIES
After experiencing a temporary correction, which began during the summer of
1998, U.S. equity markets sharply rebounded during the fourth quarter of 1998
and into early 1999. The combination of relatively low nominal interest rates
and a healthy domestic economy helped to support equity stock prices. However,
considering the record-high valuation levels across the domestic equity market,
the fund was underweighted in this sector at the end of the period.
During the year under review, we did find value in select convertible security
issues. The fund initiated a position in wireless communications operator
AirTouch Communications Inc. through a purchase of MediaOne Group Inc.
convertible preferred stock, which boasted solid operating results and favorable
long-term growth prospects. Subsequent to our purchase, the company agreed to
merge with Vodafone Group PLC, a U.K.-based wireless communications company,
which led to significant price appreciation for the fund's position. The fund
also increased its exposure to offshore oil driller Diamond Offshore Drilling.
Falling oil prices had pressured the stocks and convertible bonds of most
oil-related companies in 1998; however, with the recent strengthening in
worldwide oil prices following OPEC's announced supply reductions, these
convertible bonds rebounded from their 1998 purchase levels.
The fund also exited certain convertible positions, which we viewed as having
negative fundamental operating outlooks, during the 12-month period under
review. For example, the fund sold its positions in assisted living-residence
operator Assisted
6
- -PAGE-
PORTFOLIO BREAKDOWN
BASED ON TOTAL NET ASSETS
<TABLE>
<CAPTION>
4/30/99 4/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
High Yield Corporate Bonds 30.0% 28.0%
Emerging Market Bonds 23.4% 23.7%
International Bonds 11.7% 15.9%
Mortgage Securities 11.3% 7.6%
Convertible Securities 8.6% 10.1%
U.S. Government Bonds 7.9% 4.8%
Preferred Stock (Non-Convertible) 0.5% 0.6%
Cash & Equivalents 6.6% 9.3%
</TABLE>
Living Concepts Inc. and telecommunications and computer equipment leasing
company Leasing Solutions Inc. before these companies announced disappointing
results that pushed down their stock prices. Going forward, the fund will
continue to look for select opportunities to invest in the equities of
undervalued companies with favorable fundamental outlooks.
U.S. GOVERNMENT SECURITIES
Although the fund held a limited exposure to the U.S. government securities
sector at the beginning of the reporting period, during the summer of 1998 the
fund nearly doubled its weighting in this sector in anticipation of rising
volatility in the fixed-income markets. This increased sector allocation
subsequently benefited the fund, as U.S. interest rates experienced a
significant drop in the third quarter of 1998, pushing the price of bonds
upward. However, given our expectations for more limited total return from U.S.
government securities at current interest rate levels, the fund remained
underweighted in this sector at the end of the fund's fiscal year.
7
- -PAGE-
U.S. MORTGAGE-BACKED SECURITIES
The fund began the 12-month reporting period with an underweighted exposure to
the mortgage-backed securities market, as relatively low nominal yields and
growing refinancing risk reduced the sector's attractiveness. However, the
destabilization of the fixed-income markets during the third quarter of 1998
pushed mortgage yield spreads over Treasuries to near historical highs. As a
result, the fund increased its exposure to this sector as the magnitude of this
spread widening appeared overdone. Since the third quarter, the fund has already
benefited from this increased allocation as mortgage yield spreads began to
contract.
LOOKING FORWARD
Although domestic economic growth in 1999, as measured by gross domestic
product, may not sustain the 4.1% pace set in the first quarter of 1999, the
outlook for moderate economic growth combined with benign levels of inflation
should continue to benefit the fund's domestic fixed-income holdings. Moreover,
the stabilization of the global financial markets combined with the possibility
for additional interest rate cuts in select markets should support the fund's
holdings in the developed as well as emerging international markets. Given this
stable-to-improving global economic outlook, we continue to favor more
growth-oriented sectors, such as high yield corporate bonds and emerging market
securities, particularly considering the yield spreads offered in these sectors
at the end of the period. The fund's lower exposure to interest-rate sensitive
sectors reflects our opinion that they will continue to offer relatively low
nominal yields and more limited intermediate-term total return than other
sectors. As in prior periods, the fund will continue to look for opportunities
to enhance its long-term returns while reducing overall volatility by actively
managing its sector and security allocations.
8
- -PAGE-
Please remember that this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1999. However, market and economic conditions are
changing constantly, which can be expected to affect our strategies and the
fund's portfolio composition. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
Sincerely,
/s/ Christopher J. Molumphy
- ----------------------------------
Christopher J. Molumphy
Portfolio Manager
Franklin Strategic Income Fund
DIVIDEND DISTRIBUTIONS
5/1/98 - 4/30/99
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
---------------------------------------------------------
MONTH CLASS A CLASS B(*) CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
May 7.5 cents -- --
June 7.5 cents -- 7.12 cents
July 6.8 cents -- 6.42 cents
August 6.8 cents -- 6.42 cents
September 6.8 cents -- 6.42 cents
October 6.8 cents -- 6.42 cents
November 6.8 cents -- 6.42 cents
December 6.8 cents -- 6.42 cents
January 6.8 cents 6.80 cents 6.42 cents
February 6.8 cents 6.12 cents 6.42 cents
March 6.8 cents 6.43 cents 6.42 cents
April 6.8 cents 6.43 cents 6.42 cents
- --------------------------------------------------------------------------------
Total 83.0 cents 25.78 cents 71.32 cents
</TABLE>
(*)January 1, 1999, the fund began offering Class B shares to investors. See the
prospectus for details.
9
- -PAGE-
CLASS A (FORMERLY CLASS I):
Subject to the maximum 4.25%
initial sales charge.(*)
CLASS B:
Subject to no initial sales charge, but subject to a contingent deferred sales
charge (CDSC) declining from 4% to 0% over six years. These shares have higher
annual fees and expenses than Class A shares.(*)
Class C (formerly Class II): Subject to 1% initial sales charge and 1% CDSC for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class A shares.(*)
(*)The fund's manager has agreed in advance to waive a portion of its management
fees, which reduces expenses and increases distribution rate, yield and total
return to shareholders. If the manager had not taken this action, the fund's
distribution rate and total return would have been lower and yield for the
period would have been 7.24%, 7.16% and 7.08% for Classes A, B and C
respectively. The fee waiver may be discontinued at any time, upon notice to the
fund's Board of Directors.
PERFORMANCE SUMMARY AS OF 4/30/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (5/1/98-4/30/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 4/30/99 4/30/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.40 $10.84 $11.24
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
-----------------------------------------
<S> <C> <C> <C>
Dividend Income $0.83
</TABLE>
<TABLE>
<CAPTION>
CLASS B CHANGE 4/30/99 1/1/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.10 $10.86 $10.76
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
-----------------------------------------
<S> <C>
Dividend Income $0.2578
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 4/30/99 5/1/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.35 $10.84 $11.19
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
-----------------------------------------
<S> <C>
Dividend Income $0.7132
</TABLE>
Past performance is not predictive of future results.
10
- -PAGE-
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 3-YEAR (6/1/94)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +4.23% +32.79% +67.22%
Average Annual Total Return(2) -0.21% +8.33% +10.06%
Value of $10,000 Investment(3) $9,979 $12,713 $16,017
</TABLE>
<TABLE>
<S> <C>
Distribution Rate(4) 7.21%
30-Day Standardized Yield(5) 7.53%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B (1/1/99)
- --------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +3.40%
Aggregate Total Return(2) -0.60%
Value of $10,000 Investment(3) $9,940
Distribution Rate(4) 7.10%
30-Day Standardized Yield(5) 7.47%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR (5/1/98)
- --------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +3.59% +3.59%
Average Annual Total Return(2) +1.62% +1.62%
Value of $10,000 Investment(3) $10,162 $10,162
</TABLE>
<TABLE>
<S> <C>
Distribution Rate(4) 7.04%
30-Day Standardized Yield(5) 7.39%
</TABLE>
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 current, applicable,
maximum sales charge(s) for that class. Since Class B shares have existed for
less than one year, aggregate total return for that class represents total
return since inception, including the maximum sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include sales charges.
4. Distribution rate is based on an annualization of the respective class's
April monthly dividend and the maximum offering price per share on April 30,
1999.
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, 1999.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
11
- -PAGE-
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charge(s), fund
expenses, account fees and reinvested distributions. The indices portrayed
include price appreciation or depreciation and income as a percentage of the
original investment. Going forward, we will replace the Salomon Non-U.S. World
Government Bond Index and the Salomon High Yield Index with the Lehman Brothers
U.S. Aggregate Index. The Lehman Brothers U.S. Aggregate Index is a broader
measure of U.S. bond performance, representing the U.S. investment-grade
fixed-rate bond market including government, corporate, mortgage pass-through
and asset-backed securities. The composite index includes an even weighting
among the following indices: Goldman Sachs Convertible Bond Index, Salomon
Brothers High Yield Index, Salomon Brothers U.S. Mortgage Index, Salomon
Brothers U.S. Treasury Index, Salomon Brady Bond Index, and Salomon Brothers
Non-U.S. World Government Bond Index. Indices are unmanaged and include
reinvested dividends, and one cannot invest directly in an index.
Past performance is not predictive of future results.
12
- -PAGE-
CLASS A
(6/1/94 - 4/30/99)
The following line graph compares the performance of the Franklin Strategic
Income Fund's Class A shares to that of Salomon Non-U.S. World Government Bond
Index, Salomon Brothers High Yield Index, a Composite Index and Lehman Brothers
U.S. Aggregate Index based on a $10,000 investment from 6/1/94 to 4/30/99.
<TABLE>
<CAPTION>
Franklin Lehman Brothers Solomon Non-U.S. Salomon Brothers Composite
Strategic U.S. Aggregate World Government High Yield Bond Index
Income Fund - Index Bond Index Index
Class A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6/1/94 $9,579 $10,000 $10,000 $10,000 $10,000
6/30/94 $9,492 -0.22% $9,978 2.42% $10,242 0.11% $10,011 -0.92% $9,908
7/31/94 $9,617 1.99% $10,177 0.26% $10,269 0.98% $10,109 1.66% $10,072
8/31/94 $9,761 0.12% $10,189 -0.58% $10,209 0.56% $10,166 2.04% $10,278
9/30/94 $9,808 -1.47% $10,039 1.98% $10,411 -0.26% $10,139 -0.14% $10,264
10/31/94 $9,825 -0.09% $10,030 2.58% $10,680 0.02% $10,141 -0.12% $10,251
11/30/94 $9,793 -0.22% $10,008 -2.01% $10,465 -1.10% $10,030 -1.09% $10,140
12/31/94 $9,746 0.69% $10,077 0.05% $10,470 1.12% $10,142 -0.72% $10,067
1/31/95 $9,753 1.98% $10,276 2.18% $10,699 1.44% $10,288 1.32% $10,199
2/28/95 $10,023 2.38% $10,521 2.83% $11,001 3.33% $10,631 1.26% $10,328
3/31/95 $10,182 0.61% $10,585 8.91% $11,982 1.04% $10,741 1.81% $10,515
4/30/95 $10,435 1.40% $10,733 2.14% $12,238 2.35% $10,994 3.34% $10,866
5/31/95 $10,731 3.87% $11,149 2.18% $12,505 2.98% $11,321 3.93% $11,293
6/30/95 $10,780 0.73% $11,230 0.50% $12,567 0.71% $11,402 1.35% $11,446
7/31/95 $11,007 -0.22% $11,205 0.53% $12,634 1.20% $11,539 0.84% $11,542
8/31/95 $11,035 1.21% $11,341 -5.72% $11,911 0.62% $11,610 0.00% $11,542
9/30/95 $11,180 0.07% $11,451 2.95% $12,263 1.16% $11,745 1.90% $11,761
10/31/95 $11,273 1.30% $11,600 0.32% $12,302 0.84% $11,843 0.06% $11,758
11/30/95 $11,366 1.50% $11,774 0.87% $12,409 0.91% $11,951 1.91% $11,993
12/31/95 $11,566 1.40% $11,939 0.87% $12,517 1.59% $12,141 2.17% $12,253
1/31/96 $11,771 0.66% $12,018 -2.21% $12,240 1.47% $12,320 2.06% $12,505
2/29/96 $11,779 -1.74% $11,808 0.29% $12,276 0.62% $12,396 -1.06% $12,373
3/31/96 $11,864 -0.70% $11,726 0.25% $12,306 -0.50% $12,334 0.37% $12,419
4/30/96 $12,062 -0.56% $11,660 -0.20% $12,282 -0.03% $12,330 0.72% $12,508
5/31/96 $12,228 -0.20% $11,637 0.05% $12,288 0.56% $12,399 0.60% $12,583
6/30/96 $12,281 1.34% $11,793 0.56% $12,357 0.77% $12,495 0.98% $12,706
7/31/96 $12,289 0.27% $11,825 2.76% $12,698 0.65% $12,576 0.21% $12,733
8/31/96 $12,526 -0.17% $11,805 0.67% $12,783 1.04% $12,707 1.36% $12,906
9/30/96 $12,938 1.74% $12,010 -0.19% $12,759 2.34% $13,004 2.48% $13,226
10/31/96 $13,063 2.22% $12,277 1.69% $12,974 1.15% $13,154 1.17% $13,381
11/30/96 $13,419 1.71% $12,486 1.15% $13,123 1.92% $13,406 2.48% $13,713
12/31/96 $13,538 -0.93% $12,370 -0.71% $13,030 0.79% $13,512 -0.21% $13,684
1/31/97 $13,679 0.31% $12,409 -4.06% $12,501 0.75% $13,614 0.55% $13,759
2/28/97 $13,759 0.25% $12,440 -1.16% $12,356 1.70% $13,845 0.43% $13,819
3/31/97 $13,443 -1.11% $12,302 -0.64% $12,277 -1.03% $13,702 -1.37% $13,629
4/30/97 $13,587 1.50% $12,486 -2.03% $12,028 0.72% $13,801 1.10% $13,779
5/31/97 $13,883 0.95% $12,605 3.68% $12,471 2.02% $14,080 2.70% $14,151
6/30/97 $14,117 1.19% $12,755 1.23% $12,624 1.69% $14,318 1.74% $14,397
7/31/97 $14,430 2.70% $13,099 -2.61% $12,294 2.29% $14,646 2.48% $14,755
8/31/97 $14,437 -0.85% $12,988 0.45% $12,350 0.25% $14,682 -0.36% $14,701
9/30/97 $14,728 1.47% $13,179 2.43% $12,650 1.75% $14,939 2.52% $15,072
10/31/97 $14,500 1.45% $13,370 2.24% $12,933 0.80% $15,059 -0.99% $14,923
11/30/97 $14,690 0.46% $13,431 -2.56% $12,602 0.51% $15,136 0.52% $15,000
12/31/97 $14,895 1.01% $13,567 -1.01% $12,475 1.05% $15,294 0.95% $15,143
1/31/98 $15,063 1.28% $13,741 0.68% $12,560 2.26% $15,640 0.98% $15,291
2/28/98 $15,177 -0.08% $13,730 1.41% $12,737 0.67% $15,745 1.55% $15,528
3/31/98 $15,306 0.34% $13,776 -1.65% $12,527 1.08% $15,915 1.02% $15,687
4/30/98 $15,368 0.52% $13,848 2.20% $12,802 0.54% $16,001 0.81% $15,814
5/31/98 $15,278 0.95% $13,979 -0.16% $12,782 0.27% $16,044 -0.55% $15,727
6/30/98 $15,230 0.85% $14,098 -0.36% $12,736 0.22% $16,079 0.03% $15,731
7/31/98 $15,338 0.21% $14,128 0.12% $12,751 0.80% $16,208 0.15% $15,755
8/31/98 $13,904 1.63% $14,358 2.74% $13,100 -6.70% $15,122 -5.76% $14,847
9/30/98 $14,593 2.34% $14,694 6.56% $13,960 1.23% $15,308 3.63% $15,386
10/31/98 $14,889 -0.53% $14,616 4.51% $14,589 -1.38% $15,097 1.96% $15,688
11/30/98 $15,487 0.57% $14,700 -2.04% $14,292 5.02% $15,855 2.48% $16,077
12/31/98 $15,498 0.30% $14,744 2.82% $14,695 -0.07% $15,844 0.79% $16,204
1/31/99 $15,567 0.71% $14,848 -1.57% $14,464 1.50% $16,081 -0.01% $16,202
2/28/99 $15,360 -1.75% $14,589 -3.51% $13,956 -0.84% $15,946 -1.37% $15,981
3/31/99 $15,592 0.55% $14,669 0.19% $13,983 0.85% $16,082 1.99% $16,299
4/30/99 $16,017 0.32% $14,716 -0.15% $13,962 2.09% $16,418 2.26% $16,667
Total 60.17% 47.16% 39.62% 64.18% 66.67%
Return
</TABLE>
CLASS C
(5/1/98 - 4/30/99)
The following line graph compares the performance of the Franklin Strategic
Income Fund's Class C shares to that of Salomon Non-U.S. World Government Bond
Index, Salomon Brothers High Yield Index, a Composite Index and Lehman Brothers
U.S. Aggregate Index based on a $10,000 investment from 5/1/98 to 4/30/99.
<TABLE>
<CAPTION>
Franklin Lehman Salomon Non- Salomon Composite
Strategic Brothers U.S. U.S. World Brothers High Index*
Income Fund Aggregate Government Yield Bond
-Class C Index Bond Index Index
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5/1/98 9,903 $10,000 $10,000 $10,000 $10,000
5/31/98 9,832 0.95% $10,095 -0.16% $9,984 0.27% $10,027 -0.55% $9,945
6/30/98 9,789 0.85% $10,181 -0.36% $9,948 0.22% $10,049 0.03% $9,948
7/31/98 9,855 0.21% $10,202 0.12% $9,960 0.80% $10,129 0.15% $9,963
8/31/98 8,940 1.63% $10,368 2.74% $10,233 -6.70% $9,451 -5.76% $9,389
9/30/98 9,369 2.34% $10,611 6.56% $10,904 1.23% $9,567 3.63% $9,730
10/31/98 9,556 -0.53% $10,555 4.51% $11,396 -1.38% $9,435 1.96% $9,921
11/30/98 9,936 0.57% $10,615 -2.04% $11,163 5.02% $9,909 2.48% $10,167
12/31/98 9,940 0.30% $10,647 2.82% $11,478 -0.07% $9,902 0.79% $10,247
1/31/99 9,980 0.71% $10,722 -1.57% $11,298 1.50% $10,050 -0.01% $10,246
2/28/99 9,844 -1.75% $10,535 -3.51% $10,902 -0.84% $9,966 -1.37% $10,106
3/31/99 9,989 0.55% $10,593 0.19% $10,922 0.85% $10,051 1.99% $10,307
4/30/99 2.69%* 10,162 0.32% $10,627 -0.15% $10,906 2.09% $10,261 2.26% $10,541
*Note: 1% CDSC taken out of last value. Fund
less than 18 months old.
Total 1.62% 6.27% 9.06% 2.61% 5.41%
Return
</TABLE>
(*)Source for Salomon Brothers U.S. Treasury Index: Salomon Brothers. Source for
other indices: Standard and Poor's(R) Micropal.
Past performance is not predictive of future results.
AVERAGE ANNUAL TOTAL RETURN
5/31/99
<TABLE>
<CAPTION>
CLASS A
- ----------------------------------------------
<S> <C>
1-Year -0.21%
3-Year +8.33%
Since Inception (6/1/94) +10.06%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
5/31/99
<TABLE>
<CAPTION>
CLASS C
- ----------------------------------------------
<S> <C>
1-Year +1.62%
Since Inception (5/1/98) +1.62%
</TABLE>
13
- -PAGE-
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------
YEAR ENDED APRIL 30,
---------------------------------------------------------------------
1999 1998 1997 1996 1995(1)
---------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ..................... $ 11.24 $ 10.86 $ 10.77 $ 10.18 $10.00
------------------------------------------------------------------
Income from investment operations:
Net investment income ................................. 0.86 .87 .93 .85 .70
Net realized and unrealized gains ..................... (0.43) .50 .39 .67 .15
------------------------------------------------------------------
Total from investment operations ....................... .43 1.37 1.32 1.52 .85
------------------------------------------------------------------
Less distributions from:
Net investment income ................................. (0.83) (.90) (.96) (.82) (.67)
Net realized gains .................................... -- (.09) (.27) (.11) --
------------------------------------------------------------------
Total distributions .................................... (.83) (.99) (1.23) (.93) (.67)
------------------------------------------------------------------
Net asset value, end of year ........................... $ 10.84 $ 11.24 $ 10.86 $ 10.77 $10.18
==================================================================
Total return(*) ........................................ 4.23% 13.10% 12.64% 15.59% 8.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................ $247,574 $166,633 $34,864 $13,022 $6,736
Ratios to average net assets:
Expenses .............................................. .58% .25% .23% .25% .25%(2)
Expenses excluding waiver and payments by affiliate ... .99% 1.05% 1.05% 1.08% 1.38%(2)
Net investment income ................................. 7.99% 7.65% 8.60% 8.53% 7.93%(2)
Portfolio turnover rate ................................ 48.68% 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 for periods less than one year.
(1)For the period May 24, 1994 (effective date) to April 30, 1995.
(2)Annualized
14
- -PAGE-
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
CLASS B
-----------------
YEAR ENDED
APRIL 30, 1999(3)
-----------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C>
Net asset value, beginning of period ...................... $ 10.76
---------
Income from investment operations:
Net investment income .................................... 0.29
Net realized and unrealized losses ....................... 0.07
---------
Total from investment operations .......................... 0.36
---------
Less distributions from net investment income ............. (0.26)
---------
Net asset value, end of period ............................ $ 10.86
=========
Total return(*) ........................................... 3.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ......................... $ 4,281
Ratios to average net assets:
Expenses ................................................. .98%(2)
Expenses excluding waiver and payments by affiliate ...... 1.39%(2)
Net investment income .................................... 7.59%(2)
Portfolio turnover rate ................................... 48.68%
</TABLE>
(*)Total return does not reflect contingent deferred sales charge, and is not
annualized for periods less than one year.
(2)Annualized
(3)For the period January 1, 1999 (effective date) to April 30, 1999.
15
- -PAGE-
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS C
-----------------
YEAR ENDED
APRIL 30, 1999(4)
-----------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C>
Net asset value, beginning of year .......................... $ 11.19
----------
Income from investment operations:
Net investment income ...................................... 0.76
Net realized and unrealized losses ......................... (0.40)
----------
Total from investment operations ............................ 0.36
----------
Less distributions from net investment income ............... (0.71)
----------
Net asset value, end of year ................................ $ 10.84
==========
Total return(*) ............................................. 3.59%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................. $ 36,245
Ratios to average net assets:
Expenses ................................................... .98%
Expenses excluding waiver and payments by affiliate ........ 1.39%
Net investment income ...................................... 7.59%
Portfolio turnover rate ..................................... 48.68%
</TABLE>
(*)Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(4)For the period May 1, 1998 (effective date) to April 30, 1999.
See notes to financial statements.
16
- -PAGE-
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, APRIL 30, 1999
<TABLE>
<CAPTION>
SHARES/
COUNTRY WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(a)COMMON STOCKS AND WARRANTS
Gulf States Steel, wts., 4/15/03 ........................................ United States 200 $ 2
Harvard Industries Inc. ................................................. United States 8,240 70,040
Loral Orion Network System, wts., 1/15/07 ............................... United States 300 2,774
Venezuela Oil Value Recovery, wts., 4/15/20 ............................. Venezuela 3,035 --
-----------
TOTAL COMMON STOCKS AND WARRANTS (COST $190,548) ........................ 72,816
-----------
PREFERRED STOCKS .5%
(a)CSC Holdings Inc.,11.125%, pfd., M, PIK ................................. United States 1,406 164,509
Fresenius Medical Care AG, 9.00%, pfd ................................... Germany 100 103,500
R & B Falcon Corp., 144A, 13.875%, pfd., PIK ............................ United States 750 785,625
Sinclair Capital, 11.625%, pfd .......................................... United States 3,000 327,750
-----------
TOTAL PREFERRED STOCKS (COST $1,249,966) ................................ 1,381,384
-----------
CONVERTIBLE PREFERRED STOCKS 5.7%
CONSUMER NON-DURABLES .6%
Ralston Purina Group, 7.00%, cvt. pfd ................................... United States 35,000 1,627,500
-----------
CONSUMER SERVICES .8%
Host Marriott Corp., 6.75%, cvt. pfd .................................... United States 46,000 2,113,125
Triathlon Broadcasting Co., 9.00%, cvt. pfd ............................. United States 20,000 218,750
-----------
2,331,875
-----------
FINANCE .7%
Protective Life Capital Trust II, 6.50%, cvt. pfd ....................... United States 30,000 1,923,750
-----------
PROCESS INDUSTRIES .6%
Owens-Illinois Inc., 4.75%, cvt. pfd .................................... United States 46,500 1,883,250
-----------
TELECOMMUNICATIONS .9%
MediaOne Group Inc., 6.25%, cvt. pfd .................................... United States 27,000 2,163,375
Salomon Smith Barney Holdings Inc., 6.25%, cvt. pfd ..................... United States 6,700 469,000
-----------
2,632,375
-----------
TRANSPORTATION .8%
Union Pacific Capital Trust, 6.25%, cvt. pfd ............................ United States 40,000 2,180,000
-----------
UTILITIES 1.3%
K N Energy Inc., 8.25%, cvt. pfd ........................................ United States 50,000 1,725,000
Texas Utilities Co., 9.25%, cvt. pfd .................................... United States 40,000 2,057,500
-----------
3,782,500
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $15,925,947) ................... 16,361,250
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT(*)
---------
<S> <C> <C> <C>
BONDS 30.0%
COMMERCIAL SERVICES .8%
AmeriServe Food Distribution Inc., senior note, 8.875%, 10/15/06 ........ United States $ 500,000 466,250
AmeriServe Food Distribution Inc., senior sub. note, 10.125%, 7/15/07 ... United States 1,000,000 815,000
Fleming Cos. Inc., senior sub. note, B, 10.50%, 12/01/04 ................ United States 500,000 493,750
Outdoor Systems Inc., senior sub. note, 8.875%, 6/15/07 ................. United States 500,000 537,500
-----------
2,312,500
-----------
</TABLE>
17
- -PAGE-
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT(*) VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
CONSUMER DURABLES 2.0%
Dura Operating Corp., senior sub. note, 144A, 9.00%, 5/01/09 ............ United States $1,000,000 $ 1,017,500
Pillowtex Corp., senior sub. note, B, 9.00%, 12/15/07 ................... United States 2,000,000 2,035,000
Revlon Consumer Products Corp., senior note, 9.00%, 11/01/06 ............ United States 500,000 508,750
Revlon Consumer Products Corp., senior sub. note, 8.625%, 2/01/08 ....... United States 1,500,000 1,432,500
Sealy Mattress Co., senior sub. note, B, 9.875%, 12/15/07 ............... United States 200,000 201,500
Sealy Mattress Co., senior disc. note, B, zero cpn. to 12/15/02,
10.875% thereafter, 12/15/07 ........................................... United States 300,000 195,000
Windmere-Durable Holdings Inc., senior sub. note, 10.00%, 7/31/08 ....... United States 500,000 477,500
-----------
5,867,750
-----------
CONSUMER NON-DURABLES .2%
Compania De Alimentos Fargo SA, senior note, 144A, 13.25%, 8/01/08 ...... Argentina 500,000 435,000
-----------
CONSUMER SERVICES 7.2%
AMF Bowling Worldwide Inc., senior disc. note, B, zero cpn. to
3/15/01, 12.25% thereafter, 3/15/06 .................................... United States 1,118,000 648,440
Chancellor Media Corp., senior sub. note, 9.00%, 10/01/08 ............... United States 1,000,000 1,072,500
Chancellor Media Corp., senior note, 144A, 8.00%, 11/01/08 .............. United States 500,000 515,625
Charter Communications Holdings LLC, senior note, 144A, zero cpn. to
4/01/04, 9.92% thereafter, 4/01/11 ..................................... United States 3,250,000 2,128,750
CSC Holdings Inc., senior sub. deb., 9.875%, 4/01/23 .................... United States 1,750,000 1,960,000
Diamond Holdings PLC, senior note, 9.125%, 2/01/08 ...................... United Kingdom 1,000,000 1,052,500
Fox/Liberty Networks LLC, senior disc. note, zero cpn. to 8/15/02,
9.75% thereafter, 8/15/07 .............................................. United States 2,000,000 1,650,000
Harrah's Operating Co. Inc., senior sub. note, 7.875%, 12/15/05 ......... United States 1,750,000 1,767,500
La Petite Academy Inc., senior note, B, 10.00%, 5/15/08 ................. United States 1,500,000 1,503,750
Prime Hospitality Corp., senior sub. note, B, 9.75%, 4/01/07 ............ United States 2,000,000 2,105,000
Regal Cinemas Inc., senior sub. note, 9.50%, 6/01/08 .................... United States 2,000,000 2,005,000
Sinclair Broadcast Group Inc., senior sub. note, 8.75%, 12/15/07 ........ United States 1,700,000 1,712,750
Six Flags Entertainment Corp., senior note, 8.875%, 4/01/06 ............. United States 600,000 618,000
Telewest Communications PLC, senior disc. deb., zero cpn. to
10/01/00, 11.00% thereafter, 10/01/07 .................................. United Kingdom 2,000,000 1,790,000
Telewest Communications PLC, senior disc. note, 144A, zero cpn. to
4/15/04, 9.25% thereafter, 4/15/09 ..................................... United Kingdom 500,000 338,750
-----------
20,868,565
-----------
ENERGY MINERALS 1.9%
Abraxas Petroleum Corp., senior note, D, 11.50%, 11/01/04 ............... United States 880,000 519,200
Chesapeake Energy Corp., senior note, B, 9.625%, 5/01/05 ................ United States 300,000 274,500
Clark R&M Inc., senior sub. note, 8.875%, 11/15/07 ...................... United States 1,000,000 871,250
Conproca SA, S.F., senior secured note, 144A, 12.00%, 6/16/10 ........... Mexico 1,800,000 1,791,000
Nuevo Energy Co., senior sub. note, B, 8.875%, 6/01/08 .................. United States 400,000 398,000
P&L Coal Holdings Corp., senior sub. note, B, 9.625%, 5/15/08 ........... United States 1,500,000 1,563,750
-----------
5,417,700
-----------
HEALTH SERVICES .9%
Fresenius Medical Care Capital Trust, 7.875%, 2/01/08 ................... Germany 1,000,000 985,000
Magellan Health Services Inc., senior sub. note, 9.00%, 2/15/08 ......... United States 1,000,000 855,000
</TABLE>
18
- -PAGE-
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT(*) VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
HEALTH SERVICES (CONT.)
Pharmerica Inc., senior sub. note, 8.375%, 4/01/08 ...................... United States $ 350,000 $ 368,375
Vencor Operating Inc., senior sub. note, 9.875%, 5/01/05 ................ United States 1,500,000 262,500
-----------
2,470,875
-----------
INDUSTRIAL SERVICES 1.4%
Allied Waste North America Inc., senior note, B, 7.875%, 1/01/09 ........ United States 2,000,000 1,985,000
Dailey International Inc., senior note, B, 9.50%, 2/15/08 ............... United States 300,000 91,500
R & B Falcon Corp., senior note, 144A, 12.25%, 3/15/06 .................. United States 1,000,000 1,045,000
Universal Compression Inc., senior disc. note, zero cpn. to 2/15/03,
9.875% thereafter, 2/15/08 ............................................. United States 1,250,000 775,000
-----------
3,896,500
-----------
NON-ENERGY MINERALS .3%
LTV Corp., senior note, 8.20%, 9/15/07 .................................. United States 1,000,000 980,000
-----------
PROCESS INDUSTRIES 2.4%
Anchor Glass Container, senior note, 9.875%, 3/15/08 .................... United States 700,000 649,250
Anchor Glass, first mortgage, 11.25%, 4/01/05 ........................... United States 300,000 318,375
Ball Corp., senior note, 7.75%, 8/01/06 ................................. United States 500,000 515,625
Ball Corp., senior sub. note, 8.25%, 8/01/08 ............................ United States 350,000 361,813
Four M Corp., senior note, B, 12.00%, 6/01/06 ........................... United States 200,000 152,000
Graham Packaging Co., senior disc. note, B, zero cpn. to 1/15/03,
10.75% thereafter, 1/15/09 ............................................. United States 1,700,000 1,198,500
Graham Packaging Co., senior sub. note, B, 8.75%, 1/15/08 ............... United States 200,000 203,000
Packaging Corp. of America, senior sub. note, 144A, 9.625%, 4/01/09 ..... United States 500,000 516,875
Pindo Deli Finance Mauritius Ltd., senior note, 10.25%, 10/01/02 ........ Indonesia 700,000 479,500
Purina Mills Inc., senior sub. note, 9.00%, 3/15/10 ..................... United States 2,000,000 1,760,000
Repap New Brunswick, senior note, 9.00%, 6/01/04 ........................ Canada 700,000 675,500
-----------
6,830,438
-----------
PRODUCER MANUFACTURING 2.2%
American Axle & Manufacturing, senior sub. note, 144A, 9.75%, 3/01/09 ... United States 1,500,000 1,563,750
Cambridge Industries Inc., senior sub. note, B, 10.25%, 7/15/07 ......... United States 600,000 525,000
Falcon Building Products Inc., senior sub. disc. note, B, zero cpn ......
to 6/15/02, 10.50% thereafter, 6/15/07 ................................. United States 250,000 163,125
Falcon Building Products Inc., senior sub. note, B, 9.50%, 6/15/07 ...... United States 1,000,000 972,500
Nortek Inc., senior note, 144A, 8.875%, 8/01/08 ......................... United States 500,000 520,000
Nortek Inc., senior note, B, 9.125%, 9/01/07 ............................ United States 300,000 314,250
Talon Automotive Group Inc., senior sub. note, B, 9.625%, 5/01/08 ....... United States 800,000 704,000
Terex Corp., senior sub. note, 8.875%, 4/01/08 .......................... United States 1,000,000 995,000
Terex Corp., senior sub. note, 144A, 8.875%, 4/01/08 .................... United States 500,000 497,500
-----------
6,255,125
-----------
RETAIL TRADE .1%
Shoppers Food Warehouse Corp., senior note, 9.75%, 6/15/04 .............. United States 125,000 128,906
Specialty Retailers Inc., senior note, B, 8.50%, 7/15/05 ................ United States 250,000 191,250
-----------
320,156
-----------
</TABLE>
19
- -PAGE-
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT(*) VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
TELECOMMUNICATIONS 8.8%
Allegiance Telecom Inc., senior disc. note, B, zero cpn. to 2/15/03,
11.75%, thereafter, 2/15/08 ............................................ United States $ 2,000,000 $ 1,340,000
Arch Communications Group, senior disc. note, zero cpn. to 3/15/01,
10.875% thereafter, 3/15/08 ............................................ United States 300,000 151,500
Clearnet Communications Inc., senior disc. note, zero cpn. to
5/01/04, 10.125% thereafter, 5/01/09 ................................... Canada 3,250,000 2,051,563
Comcast Cellular Corp., senior note, B, 9.50%, 5/01/07 .................. United States 400,000 455,500
Dobson/Sygnet Communications Co., senior note, 144A, 12.25%, 12/15/08 ... United States 2,000,000 2,225,000
IntelCom Group Inc., senior secured disc. note, zero cpn. to 5/01/01,
12.50% thereafter, 5/01/06 ............................................. United States 2,250,000 1,878,750
Intermedia Communications Inc., senior disc. note, B, zero cpn. to
7/15/02, 11.25% thereafter, 7/15/07 .................................... United States 2,000,000 1,530,000
Iridium LLC/CAP, senior note, D, 10.875%, 7/15/05 ....................... Bermuda 2,000,000 570,000
IXC Communications Inc., senior sub. note, 9.00%, 4/15/08 ............... United States 650,000 650,000
Level 3 Communications Inc, senior disc. note, 144A, zero cpn. to
12/01/03, 10.50% thereafter, 12/01/08 .................................. United States 3,000,000 1,920,000
Loral Space and Communications Ltd., senior disc. note, zero cpn. to
1/15/02, 12.50% thereafter, 1/15/07 .................................... United States 300,000 184,500
McLeodUSA Inc., senior note, 144A, 8.125%, 2/15/09 ...................... United States 2,000,000 1,995,000
Metrocall Inc., senior sub. note, 9.75%, 11/01/07 ....................... United States 1,000,000 830,000
Metrocall Inc., senior sub. note, 144A, 11.00%, 9/15/08 ................. United States 1,000,000 895,000
Microcell Telecommunications, senior disc. note, B, zero cpn. to
12/01/01, 14.00% thereafter, 6/01/06 ................................... Canada 450,000 380,250
Millicom International Cellular SA, senior disc. note, zero cpn. to
6/01/01, 13.50% thereafter, 6/01/06 .................................... Luxembourg 300,000 233,250
Netia Holdings BV, senior note, B, 10.25%, 11/01/07 ..................... Poland 200,000 190,500
Netia Holdings BV, senior disc. note, B, zero cpn. to 11/01/01,
11.25% thereafter, 11/01/07 ............................................ Poland 500,000 346,250
Nextel Communications Inc., senior disc. note, 9.75%, 8/15/04 ........... United States 500,000 521,250
Nextel Communications Inc., senior disc. note, zero cpn. to 10/31/02,
9.75% thereafter, 10/31/07 ............................................. United States 500,000 387,500
Nextel Communications Inc., senior disc. note, zero cpn. to 2/15/03,
9.95% thereafter, 2/15/08 .............................................. United States 1,300,000 997,750
NEXTLINK Communications Inc., senior note, 9.625%, 10/01/07 ............. United States 250,000 254,375
NEXTLINK Communications Inc., senior disc. note, zero cpn. to
4/15/03, 9.45% thereafter, 4/15/08 ..................................... United States 650,000 419,250
NEXTLINK Communications Inc., senior note, 9.00%, 3/15/08 ............... United States 750,000 746,250
Paging Network, senior sub. note, 10.125%, 8/01/07 ...................... United States 400,000 326,000
RSL Communications PLC, senior note, 12.00%, 11/01/08 ................... United Kingdom 750,000 832,500
RSL Communications PLC, senior disc. note, zero cpn. to 3/01/03,
10.125% thereafter, 3/01/08 ............................................ United Kingdom 1,000,000 647,500
Spectrasite Holdings Inc., senior disc. note, 144A, zero cpn. to
4/15/04, 11.25% thereafter, 4/15/09 .................................... United States 1,500,000 881,250
Sprint Spectrum LP, senior disc. note, zero cpn. to 8/15/01, 12.50%
thereafter, 8/15/06 .................................................... United States 300,000 274,500
Triton PCS Inc., sub. disc. note, zero cpn. to 5/01/03, 11.00%
thereafter, 5/01/08 .................................................... United States 1,750,000 1,111,250
-----------
25,226,438
-----------
</TABLE>
20
- -PAGE-
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT(*) VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
TRANSPORTATION .6%
American Commercial Lines LLC, senior note, 10.25%, 6/30/08 ............. United States $ 1,000,000 $ 1,037,500
Ultrapetrol (Bahamas) Ltd., first mortgage, 10.50%, 4/01/08 ............. Bahamas 1,000,000 825,000
-----------
1,862,500
-----------
UTILITIES 1.2%
AES China Generating Co., senior note, 10.125%, 12/15/06 ................ China 100,000 68,500
AES Corp., senior sub. note, 8.50%, 11/01/07 ............................ United States 750,000 744,375
CMS Energy Corp., senior note, 7.50%, 1/15/09 ........................... United States 1,650,000 1,658,250
Niagara Mohawk Power Corp., senior disc. note, H, zero cpn. to
7/01/03, 8.50% thereafter, 7/01/10 ..................................... United States 1,500,000 1,147,500
-----------
3,618,625
-----------
TOTAL BONDS (COST $89,335,698) .......................................... 86,362,172
-----------
CONVERTIBLE BONDS 2.9%
ELECTRONIC TECHNOLOGY .7%
Sanmina Corp., cvt., 144A, 4.25%, 5/01/04 ............................... United States 2,000,000 2,000,000
-----------
FINANCE .3%
Macerich Co., cvt., senior sub. note, 144A, 7.25%, 12/15/02 ............. United States 1,000,000 935,000
-----------
HEALTH SERVICES .6%
Omnicare Inc., cvt., 5.00%, 12/01/07 .................................... United States 2,000,000 1,825,100
-----------
INDUSTRIAL SERVICES .8%
Diamond Offshore Drilling, cvt. sub. note, 3.75%, 2/15/07 ............... United States 2,000,000 2,157,500
-----------
TELECOMMUNICATIONS .5%
Global Telesystems Group Inc., cvt., 5.75%, 7/01/10 ..................... Luxembourg 1,000,000 1,332,500
-----------
TOTAL CONVERTIBLE BONDS (COST $8,312,780) ............................... 8,250,100
-----------
OTHER MORTGAGES 1.9%
Delta Home Equity, 6.37%, 7/15/28 ....................................... United States 2,000,000 1,988,110
MLMI, 1998-C2 A2, 6.39%, 2/15/30 ........................................ United States 1,500,000 1,499,813
Morgan Stanley Capital I, 6.55%, 12/15/07 ............................... United States 2,000,000 2,034,375
-----------
TOTAL OTHER MORTGAGES (COST $5, 579,900) ................................ 5, 522,298
-----------
U.S. GOVERNMENT SECURITIES AND AGENCIES/MORTGAGES 11.4%
U.S. GOVERNMENT AGENCIES/MORTGAGES 9.4%
FHLMC, 7.00%, 1/01/09 ................................................... United States 14,360 14,746
FHLMC, 6.50%, 4/01/11 ................................................... United States 25,283 25,624
FHLMC, 7.00%, 9/01/11 ................................................... United States 28,719 29,479
FHLMC, 7.00%, 4/01/24 ................................................... United States 29,458 30,010
FHLMC, 7.50%, 4/01/24 ................................................... United States 28,308 29,153
FHLMC, 8.50%, 12/01/24 .................................................. United States 13,554 14,295
FHLMC, 9.00%, 12/01/24 .................................................. United States 7,295 7,778
FHLMC, 7.00%, 11/01/25 .................................................. United States 22,676 23,098
FHLMC, 8.00%, 11/01/25 .................................................. United States 16,506 17,211
FHLMC, 6.50%, 12/01/25 .................................................. United States 30,016 29,944
FHLMC, 7.50%, 1/01/26 ................................................... United States 20,042 20,633
FHLMC, 8.00%, 1/01/26 ................................................... United States 12,026 12,540
FHLMC, 6.50%, 3/01/26 ................................................... United States 42,681 42,572
</TABLE>
21
- -PAGE-
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT(*) VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT SECURITIES AND AGENCIES/MORTGAGES (CONT.)
U.S. GOVERNMENT AGENCIES/MORTGAGES (CONT.)
FHLMC, 7.00%, 9/01/26 ................................................... United States $ 22,071 $ 22,476
FHLMC, 7.50%, 1/01/27 ................................................... United States 35,686 36,737
FHLMC, 7.00%, 4/01/28 ................................................... United States 119,351 121,303
FHLMC, 7.00%, 4/01/28 ................................................... United States 206,389 209,765
FHLMC, 7.00%, 5/01/28 ................................................... United States 511,724 520,058
FNMA, 7.50%, 10/01/07 ................................................... United States 20,457 21,150
FNMA, 6.50%, 2/01/09 .................................................... United States 21,828 22,092
FNMA, 6.50%, 4/01/11 .................................................... United States 17,770 17,961
FNMA, 6.50%, 6/01/13 .................................................... United States 898,854 908,355
(b)FNMA, 6.00%, 5/01/14 .................................................... United States 1,000,000 991,250
FNMA, 6.50%, 1/01/24 .................................................... United States 28,297 28,270
FNMA, 7.00%, 5/01/24 .................................................... United States 13,289 13,516
FNMA, 8.00%, 1/01/25 .................................................... United States 13,802 14,379
FNMA, 9.00%, 3/01/25 .................................................... United States 3,412 3,636
FNMA, 9.00%, 5/01/25 .................................................... United States 4,224 4,501
FNMA, 8.50%, 7/01/25 .................................................... United States 11,485 12,103
FNMA, 8.00%, 12/01/25 ................................................... United States 478,439 498,424
FNMA, 7.00%, 1/01/26 .................................................... United States 37,416 38,039
FNMA, 7.00%, 3/01/26 .................................................... United States 39,919 40,575
FNMA, 7.50%, 3/01/26 .................................................... United States 25,100 25,867
FNMA, 8.00%, 5/01/26 .................................................... United States 13,056 13,601
FNMA, 8.00%, 6/01/26 .................................................... United States 9,290 9,678
FNMA, 7.50%, 8/01/26 .................................................... United States 20,974 21,615
FNMA, 7.50%, 10/01/26 ................................................... United States 7,219 7,439
FNMA, 8.00%, 1/01/27 .................................................... United States 11,994 12,493
FNMA, 7.00%, 4/01/27 .................................................... United States 633,740 643,814
FNMA, 7.50%, 11/01/27 ................................................... United States 874,793 901,039
FNMA, 6.50%, 3/01/28 .................................................... United States 2,850,001 2,837,556
FNMA, 7.00%, 6/01/28 .................................................... United States 1,335,989 1,355,934
FNMA, 6.00%, 9/01/28 .................................................... United States 975,580 947,569
FNMA, 6.00%, 10/01/28 ................................................... United States 977,825 949,750
FNMA, 6.50%, 12/01/28 ................................................... United States 962,565 958,362
FNMA, 7.50%, 12/01/28 ................................................... United States 811,705 835,677
FNMA, 6.00%, 1/01/29 .................................................... United States 1,002,055 973,284
FNMA, 6.00%, 1/01/29 .................................................... United States 1,006,633 977,731
(b)FNMA, 7.00%, 5/01/29 .................................................... United States 1,000,000 1,013,750
GNMA I, 7.50%, 5/15/27 .................................................. United States 825,342 852,414
GNMA I, 8.00%, 4/15/28 .................................................. United States 723,948 755,709
GNMA, SF, 7.00%, 7/15/08 ................................................ United States 921,824 950,597
GNMA, SF, 7.50%, 9/15/23 ................................................ United States 13,221 13,673
GNMA, SF, 6.50%, 3/15/24 ................................................ United States 40,289 40,215
GNMA, SF, 8.00%, 6/15/24 ................................................ United States 27,331 28,543
GNMA, SF, 8.50%, 8/15/24 ................................................ United States 6,689 7,096
GNMA, SF, 9.00%, 1/15/25 ................................................ United States 4,832 5,166
GNMA, SF, 8.00%, 2/15/25 ................................................ United States 11,652 12,168
GNMA, SF, 9.50%, 6/15/25 ................................................ United States 6,457 6,970
GNMA, SF, 7.50%, 1/15/26 ................................................ United States 14,705 15,189
</TABLE>
22
- -PAGE-
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT(*) VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT SECURITIES AND AGENCIES/MORTGAGES (CONT.)
U.S. GOVERNMENT AGENCIES/MORTGAGES (CONT.)
GNMA, SF, 7.50%, 1/15/26 ................................................ United States $ 16,706 $ 17,256
GNMA, SF, 7.50%, 2/15/26 ................................................ United States 18,924 19,547
GNMA, SF, 7.00%, 3/15/26 ................................................ United States 19,064 19,392
GNMA, SF, 9.00%, 3/15/26 ................................................ United States 30,134 32,220
GNMA, SF, 8.00%, 7/15/26 ................................................ United States 22,583 23,580
GNMA, SF, 8.00%, 7/15/26 ................................................ United States 22,373 23,362
GNMA, SF, 8.50%, 7/15/26 ................................................ United States 12,293 13,018
GNMA, SF, 8.00%, 9/15/26 ................................................ United States 361,386 377,355
GNMA, SF, 8.00%, 9/15/26 ................................................ United States 483,037 504,382
GNMA, SF, 8.00%, 12/15/26 ............................................... United States 478,084 499,210
GNMA, SF, 7.50%, 9/15/27 ................................................ United States 509,891 526,616
GNMA, SF, 8.00%, 9/15/27 ................................................ United States 423,836 442,433
GNMA, SF, 7.00%, 11/15/27 ............................................... United States 951,104 967,295
GNMA, SF, 7.00%, 5/15/28 ................................................ United States 45,004 45,766
GNMA, SF, 7.00%, 6/15/28 ................................................ United States 996,601 1,013,472
GNMA, SF, 6.50%, 12/15/28 ............................................... United States 491,672 489,615
GNMA, SF, 6.50%, 1/15/29 ................................................ United States 1,007,716 1,003,236
GNMA, SF, 6.50%, 2/15/29 ................................................ United States 1,008,133 1,003,651
GNMA, SF, 6.50%, 2/15/29 ................................................ United States 1,008,162 1,003,680
GNMA, SF, 8.00%, 6/15/26 ................................................ United States 31,743 33,145
-----------
27,052,803
-----------
U.S. GOVERNMENT SECURITIES 2.0%
U.S. Treasury Bond, 7.125%, 2/15/23 ..................................... United States 400,000 460,125
U.S. Treasury Note, 5.625%, 12/31/02 .................................... United States 2,500,000 2,530,470
U.S. Treasury Note, 8.875%, 2/15/19 ..................................... United States 2,000,000 2,680,626
-----------
5,671,221
-----------
TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES/MORTGAGES
(COST $32,770,228) ..................................................... 32,724,024
-----------
OTHER U.S. GOVERNMENT AND AGENCY SECURITIES 5.9%
Fannie Mae, 5.75%, 4/15/03 .............................................. United States 11,000,000 11,065,494
Fannie Mae, 5.75%, 6/15/05 .............................................. United States 6,000,000 6,027,858
-----------
TOTAL OTHER U.S. GOVERNMENT AND AGENCY SECURITIES (COST $17,027,046) .... 17,093,352
-----------
FOREIGN GOVERNMENT AND AGENCY SECURITIES 35.1%
Argentina Government, 9.75%, 9/19/27 .................................... Argentina 730,000 638,750
Australian Government, 10.00%, 10/15/07 ................................. Australia 3,400,000 AUD 2,944,236
Belgium Kingdom, 26, 6.25%, 3/28/07 ..................................... Belgium 619,734 EUR 757,797
Belgium Kingdom, 28, 5.75%, 3/28/08 ..................................... Belgium 2,716,417 EUR 3,230,189
Bundesobligation, 118, 5.25%, 2/21/01 ................................... Germany 1,311,464 EUR 1,449,065
Bundesrepublic Deutschland, 97, 6.00%, 1/04/07 .......................... Germany 2,336,228 EUR 2,848,036
Buoni Poliennali del Tesoro, 10.50%, 7/15/00 ............................ Italy 1,061,319 EUR 1,223,205
Buoni Poliennali del Tesoro, 6.75%, 2/01/07 ............................. Italy 1,513,219 EUR 1,906,043
Deutschland Republic, 6.00%, 1/05/06 .................................... Germany 600,768 EUR 727,678
Federal Republic of Germany, 7.375%, 1/03/05 ............................ Germany 1,000,000 EUR 1,269,810
Government of Canada, 7.00%, 12/01/06 ................................... Canada 685,000 CAD 524,496
Government of France, 5.50%, 4/25/07 .................................... France 914,694 EUR 1,081,311
</TABLE>
23
- -PAGE-
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT(*) VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONT.)
Government of Jamaica, Reg S, 9.625%, 7/02/02 ........................... Jamaica $ 1,750,000 $ 1,653,750
Kingdom of Denmark, 9.00%, 11/15/00 ..................................... Denmark 1,785,000 DKK 276,417
Kingdom of Denmark, 7.00%, 12/15/04 ..................................... Denmark 6,000,000 DKK 997,863
Kingdom of Denmark, 7.00%, 11/15/07 ..................................... Denmark 9,000,000 DKK 1,538,981
Netherlands Government, 8.50%, 6/01/06 .................................. Netherlands 1,619,708 EUR 2,216,845
New Zealand Government, 7.00%, 7/15/09 .................................. New Zealand 2,000,000 NZD 1,224,058
Peru - Pdi., FRN, 3/07/17 ............................................... Peru 5,100,000 3,471,213
Republic of Argentina Bonos Del Tesoro, BT02, 8.75%, 5/09/02 ............ Argentina 5,400,000 5,159,700
Republic of Argentina, 9.25%, 2/23/01 ................................... Argentina 275,000 280,844
Republic of Argentina, 11.375%, 1/30/17 ................................. Argentina 2,000,000 1,991,250
Republic of Argentina, FRN, 3/31/23 ..................................... Argentina 2,000,000 1,425,000
Republic of Brazil - DCB, FRN, 4/15/12 .................................. Brazil 300,000 192,375
Republic of Brazil, 8.875%, 11/05/01 .................................... Brazil 2,295,000 2,254,838
Republic of Brazil, 11.625%, 4/15/04 .................................... Brazil 1,500,000 1,453,125
Republic of Brazil, 9.375%, 4/07/08 ..................................... Brazil 4,000,000 3,412,500
Republic of Brazil, FRN, 4/15/14 ........................................ Brazil 1,458,242 1,016,007
Republic of Bulgaria, FRN, 7/28/11 ...................................... Bulgaria 6,220,000 4,217,969
Republic of Bulgaria, FRN, 7/28/11 ...................................... Bulgaria 110,000 74,594
Republic of Bulgaria, FRN, Series A, 7/28/24 ............................ Bulgaria 1,000,000 686,880
Republic of Ecuador, 11.25%, 4/25/02 .................................... Ecuador 1,500,000 1,087,500
Republic of Ecuador, 4.00%, 2/28/25 ..................................... Ecuador 1,000,000 425,000
Republic of Ecuador, 144A, 11.25%, 4/25/02 .............................. Ecuador 750,000 543,750
Republic of Ecuador, FRN, 2/28/25 ....................................... Ecuador 2,050,000 1,063,438
Republic of Korea, 8.875%, 4/15/08 ...................................... South Korea 3,100,000 3,377,078
Republic of Panama, 8.875%, 9/30/27 ..................................... Panama 1,500,000 1,417,500
Republic of Turkey, 144A, 9.875%, 2/23/05 ............................... Turkey 1,680,000 1,591,091
Republic of Turkey, 144A, 9.875%, 2/23/05 ............................... Turkey 850,000 805,016
Republic of Turkey, 144A, 10.00%, 9/19/07 ............................... Turkey 875,000 828,625
Republic of Turkey, Reg S, 10.00%, 9/19/07 .............................. Turkey 1,315,000 1,245,305
Republic of Venezuela - DCB, FRN, 12/18/07 .............................. Venezuela 857,143 691,071
Republic of Venezuela, 144A, 9.125%, 6/18/07 ............................ Venezuela 100,000 77,500
Republic of Venezuela, 9.125%, 6/18/07 .................................. Venezuela 1,200,000 930,000
Republic of Venezuela, FRN, 3/31/20 ..................................... Venezuela 250,000 180,938
Russia Ministry of Finance, 10.00%, 6/26/07 ............................. Russia 8,000,000 3,210,000
SEI Holdings IX Inc., 144A, 11.00%, 11/30/00 ............................ Trinidad And Tobago 125,000 120,000
Spanish Government, 6.00%, 1/31/08 ...................................... Spain 1,376,318 EUR 1,662,911
Swedish Government, 10.25%, 5/05/03 ..................................... Sweden 7,000,000 SEK 1,046,946
Treuhandanstalt, 7.75%, 10/01/02 ........................................ Germany 782,277 EUR 953,902
U.K. Treasury, 6.50%, 12/07/03 .......................................... United Kingdom 995,000 GBP 1,754,346
U.K. Treasury, 7.50%, 12/07/06 .......................................... United Kingdom 2,081,000 GBP 3,923,444
United Mexican States, 9.75%, 2/06/01 ................................... Mexico 1,950,000 2,033,363
United Mexican States, 9.75%, 4/06/05 ................................... Mexico 2,000,000 2,077,500
United Mexican States, 8.625%, 3/12/08 .................................. Mexico 7,470,000 7,357,950
United Mexican States, 11.375%, 9/15/16 ................................. Mexico 2,810,000 3,210,425
United Mexican States, 11.50%, 5/15/26 .................................. Mexico 2,850,000 3,387,938
Venezuela Government, 9.25%, 9/15/27 .................................... Venezuela 5,383,000 3,932,950
------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $100,143,401) ...... 101,080,312
------------
TOTAL LONG TERM INVESTMENTS (COST $270,535,514) ......................... 268,847,708
------------
</TABLE>
24
- -PAGE-
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT(*) VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(c)REPURCHASE AGREEMENT 6.9%
Joint Repurchase Agreement, 4.8619%, 5/03/99, (Maturity Value
$20,006,116) (COST $19,998,014) ........................................ UNITED STATES $19,998,014 $ 19,998,014
Barclays Capital Inc.
Bear, Stearns & Co. Inc.
Chase Securities Inc.
CIBC Oppenheimer Corp.
Deutsche Bank Securities Corp.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson, North America, LLC
Lehman Brothers Inc.
Paine Webber Inc.
Paribas Corp.
UBS Securities, LLC
Collateralized By U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $290,533,528) 100.3% ............................ 288,845,722
OTHER ASSETS, LESS LIABILITIES (.3%) .................................... (746,203)
------------
NET ASSETS 100.0% ....................................................... $288,099,519
============
</TABLE>
CURRENCY ABBREVIATIONS
AUD - Australian Dollar
CAD - Canadian Dollar
DKK - Danish Krone
EUR - European Union Euro
GBP - British Pound
NZD - New Zealand Dollar
SEK - Swedish Krona
(*)Securities traded in U.S. dollars unless otherwise indicated.
(a)Non-income producing.
(b)Sufficient collateral has been segregated for securities traded on a when
issued or delayed delivery.
(c)Investment is through participation in a joint account with other funds
managed by the investment advisor. At April 30, 1999, all repurchase agreements
had been entered into on that date.
See notes to financial statements.
25
- -PAGE-
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30,1999
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $290,533,528) ...................................................... $ 288,845,722
Receivables:
Investment securities sold .................................................................................. 2,010,371
Capital shares sold ......................................................................................... 1,668,951
Dividends and interest ...................................................................................... 4,755,571
-------------
Total assets ............................................................................................ 297,280,615
-------------
Liabilities:
Payables:
Investment securities purchased ............................................................................. 7,798,298
Capital shares redeemed ..................................................................................... 821,039
Affiliates .................................................................................................. 280,165
Shareholders ................................................................................................ 256,594
Other liabilities ............................................................................................ 25,000
-------------
Total liabilities ....................................................................................... 9,181,096
-------------
Net assets, at value ................................................................................... $ 288,099,519
=============
Net assets consist of:
Undistributed net investment income .......................................................................... $ 761,552
Net unrealized depreciation .................................................................................. (1,725,535)
Accumulated net realized loss ................................................................................ (1,925,585)
Capital shares ............................................................................................... 290,989,087
=============
Net assets, at value .................................................................................... $ 288,099,519
=============
CLASS A:
Net asset value per share ($247,573,598 divided by 22,844,778 shares outstanding)(*) ......................... $ 10.84
=============
Maximum offering price per share ($10.84 divided by 95.75%) .................................................. $ 11.32
=============
CLASS B:
Net asset value and maximum offering price per share ($4,281,231 divided by 394,213 shares outstanding)(*) ... $ 10.86
=============
CLASS C:
Net asset value per share ($36,244,690 divided by 3,344,523 shares outstanding)(*) ........................... $ 10.84
=============
Maximum offering price per share ($10.84 divided by 99.00%) .................................................. $ 10.95
=============
</TABLE>
(*)Redemption price is equal to net asset value less any applicable contingent
deferred sales charges.
See notes to financial statements.
26
- -PAGE-
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Financial Statements (CONTINUED)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1999
<TABLE>
Investment income:
<S> <C>
Dividends .................................................................. $ 746,731
Interest ................................................................... 19,572,342
------------
Total investment income ............................................... 20,319,073
------------
Expenses:
Management fees (Note 3) ................................................... 1,308,242
Distribution fees (Note 3)
Class A ................................................................... 541,434
Class B ................................................................... 4,050
Class C ................................................................... 130,244
Transfer agent fees (Note 3) ............................................... 219,435
Custodian fees ............................................................. 38,009
Reports to shareholders .................................................... 48,638
Registration and filing fees ............................................... 106,274
Professional fees .......................................................... 8,781
Trustees' fees and expenses ................................................ 3,335
Other ...................................................................... 33,671
Total expenses ........................................................ 2,442,113
Expenses waived/paid by affiliate (Note 3) ............................ (980,107)
------------
Net expenses ......................................................... 1,462,006
------------
Net investment income ............................................... 18,857,067
------------
Realized and unrealized gains (losses): Net realized gain (loss) from:
Investments ............................................................... (1,791,406)
Foreign currency transactions ............................................. (303,038)
------------
Net realized loss ..................................................... (2,094,444)
Net unrealized appreciation (depreciation) on:
Investments ............................................................... (3,934,123)
Translation of assets and liabilities denominated in foreign currencies ... (43,887)
------------
Net unrealized depreciation ........................................... (3,978,010)
------------
Net realized and unrealized loss ............................................ (6,072,454)
------------
Net increase in net assets resulting from operations ........................ $ 12,784,613
============
</TABLE>
See notes to financial statements.
27
- -PAGE-
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Financial Statements (continued)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ...................................................................... $ 18,857,067 $ 6,590,381
Net realized gain (loss) from investments and foreign currency transactions ................ (2,094,444) 335,312
Net unrealized appreciation (depreciation) on investments and translation of assets and
liabilities denominated in foreign currencies ............................................. (3,978,010) 2,122,179
------------- -------------
Net increase in net assets resulting from operations ................................... 12,784,613 9,047,872
Distributions to shareholders from:
Net investment income:
Class A ................................................................................... (16,526,206) (6,541,159)
Class B ................................................................................... (34,549) --
Class C ................................................................................... (1,362,771) --
Net realized gains:
Class A ................................................................................... -- (692,982)
------------- -------------
Total distributions to shareholders ......................................................... (17,923,526) (7,234,141)
Capital share transactions: (Note 2)
Class A .................................................................................... 86,606,278 129,955,768
Class B .................................................................................... 4,206,050 --
Class C .................................................................................... 35,792,706 --
------------- -------------
Total capital share transactions ............................................................ 126,605,034 129,955,768
Net increase in net assets ............................................................. 121,466,121 131,769,499
Net assets:
Beginning of period ......................................................................... 166,633,398 34,863,899
------------- -------------
End of period ............................................................................... $ 288,099,519 $ 166,633,398
============= =============
Undistributed net investment income included in net assets:
End of period ............................................................................... $ 761,552 $ 131,047
============= =============
</TABLE>
See notes to financial statements.
28
- -PAGE-
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
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 ten separate
series (the Funds). The Franklin Strategic Income Fund (the Fund) is a
non-diversified, open-end investment company. The Fund seeks to obtain a high
level of current income while seeking capital appreciation.
On March 25, 1999, the Board of Trustees for the Franklin Strategic Series
approved a proposal to merge Franklin Managed Trust Investment Grade Income Fund
into the Franklin Strategic Income Fund, subject to shareholder approval.
The following summarizes the Fund's significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. 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 Fund does 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. FORWARD EXCHANGE CONTRACTS:
The 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).
d. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
f. 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.
29
- -PAGE-
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
f. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: (CONT.)
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. Other expenses are
charged to each Fund on a specific identification basis.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
g. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The fund offers three classes of shares: Class A, Class B and Class C. Effective
January 1, 1999, Class I and Class II were renamed Class A and Class C,
respectively, and the fund began offering a new class of shares, Class B. The
shares differ by their initial sales load, distribution fees, voting rights on
matters affecting a single class and the exchange privilege of each class.
At April 30, 1999, there were an unlimited number of shares authorized ($.01 par
value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Shares sold ...................................... 14,954,299 $ 160,265,362 13,008,094 $ 145,482,936
Shares issued in reinvestment of distributions ... 955,604 10,163,162 433,246 4,823,299
Share redeemed ................................... (7,896,393) (83,822,246) (1,820,464) (20,350,467)
---------- ------------- ---------- -------------
Net increase ..................................... 8,013,510 $ 86,606,278 11,620,876 $ 129,955,768
========== ============= ========== =============
CLASS B SHARES:(1)
Shares sold ...................................... 392,984 $ 4,193,206
Shares issued in reinvestment of distributions ... 2,081 21,959
Share redeemed ................................... (852) (9,115)
---------- -------------
Net increase ..................................... 394,213 $ 4,206,050
========== =============
CLASS C SHARES:(2)
Shares sold ...................................... 3,660,567 $ 39,127,644
Shares issued in reinvestment of distributions ... 81,594 860,843
Share redeemed ................................... (397,638) (4,195,781)
---------- -------------
Net increase ..................................... 3,344,523 $ 35,792,706
========== =============
</TABLE>
(1)For the period January 1, 1999 (effective date) to April 30, 1999.
(2)For the period May 1, 1998 (effective date) to April 30, 1999.
30
- -PAGE-
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Notes to Financial Statements (continued)
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.
The Fund pays an investment management fee to Advisers based on the average net
assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
-----------------------------------------------------------------
<S> <C>
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million, up to and including $10 billion
</TABLE>
Fees are further reduced on net assets over $10 billion.
Under a subadvisory agreement, Templeton Investment Counsel, Inc. (TICI)
provides subadvisory services to the 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 Fund. The fee is paid by Advisers based on the average daily net assets,
and is not an additional expense of the Fund.
Advisers agreed in advance to waive management fees for the Fund, as noted in
the Statements of Operations.
The Fund reimburses Distributors up to .25%, .65%, and .65% per year of the
average net assets of Class A, Class B, and Class C, respectively, for costs
incurred in marketing the Fund's shares.
Distributors paid net commission on sales of the Funds' shares, and received
contingent deferred sales charges for the period of $305,216 and $16,052,
respectively.
The Fund paid transfer agent fees of $219,435, of which $194,528 was paid to
Investor Services.
4. INCOME TAXES
At April 30, 1999, the Fund had tax basis capital losses of $771,147, which may
be carried over to offset future capital gains. Such losses expire in 2007.
At April 30, 1999, the Fund has deferred capital losses occurring subsequent to
October 31, 1998 of $629,824. For tax purposes, such losses will be reflected in
the year ending April 30, 2000.
31
- -PAGE-
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Notes to Financial Statements (continued)
4. INCOME TAXES. (CONT.)
At April 30,1999, the net unrealized appreciation (depreciation) based on the
cost of investments for income tax purposes was as follows:
<TABLE>
<S> <C>
Investments at cost..................................... $ 291,062,244
=============
Unrealized appreciation................................. $ 8,681,583
Unrealized depreciation................................. (10,898,105)
-------------
Net unrealized depreciation............................. $ (2,216,522)
=============
</TABLE>
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions.
Net realized capital gains differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended April 30,1999 aggregated $226,223,368 and $105,259,658, respectively.
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The 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
30,1999, the Fund did not have any outstanding forward exchange contracts.
7. CREDIT RISK AND DEFAULTED SECURITIES
The Fund has 56.1% 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.
The 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.
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FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Independent Auditors' Report
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF
FRANKLIN STRATEGIC SERIES
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Strategic Series Income
Fund (one of the portfolios constituting the Franklin Strategic Series,
hereafter referred to as the "Fund") at April 30,1999, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at April 30, 1999 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Francisco, California
June 4, 1999
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FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Tax Information
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
3.73% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year end April 30, 1999.
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