SEMI
ANNUAL
REPORT
OCTOBER 31, 1998
FRANKLIN STRATEGIC SERIES
Franklin Biotechnology Discovery Fund
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin Global Health Care Fund
Franklin Global Utilities Fund
Franklin MidCap Growth Fund
Franklin Natural Resources Fund
Franklin Small Cap Growth Fund
Franklin Strategic Income Fund
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
Rupert H. Johnson, Jr.
President
Franklin Strategic Series
CONTENTS
Shareholder Letter ....................... 1
Fund Reports
Franklin Biotechnology
Discovery Fund........................... 3
Franklin Blue Chip Fund.................. 8
Franklin California
Growth Fund ............................. 13
Franklin Global
Health Care Fund......................... 20
Franklin Global
Utilities Fund .......................... 26
Franklin MidCap
Growth Fund ............................. 34
Franklin Natural
Resources Fund........................... 39
Franklin Small Cap
Growth Fund.............................. 46
Franklin Strategic
Income Fund.............................. 56
Financial Highlights &
Statement of Investments ................. 66
Financial Statements ..................... 118
Notes to
Financial Statements ..................... 132
SHAREHOLDER LETTER
Dear Shareholder:
This semiannual report for Franklin Strategic Series covers the six months ended
October 31, 1998.
A bumpy ride
If a pilot were to describe the performance of global securities markets during
the six months under review, he'd probably use the word "turbulent." On April
30, the Dow Jones(R) Industrial Average closed at 9063.37. By July 17, it
climbed to 9337.97. But due to investors' concerns about economic crises in Asia
and Russia, it fell to 8051.68 by August 28 and suffered an additional 512.61
point drop on August 31. Responding to the threat posed to the U.S. economy by
global financial problems, the Federal Reserve Board cut short-term interest
rates in late September and mid-October, fueling an October rally that raised
the Dow 749.48 points. On October 31, it stood at 8592.10.
Fasten your seatbelts!
What should you do when faced with widely fluctuating markets? In our opinion,
you should call your investment representative and review your current financial
plans, recalling your goals and the reasons you made your investment choices in
the first place. Then discuss whether your investments are properly diversified
to reduce the negative impact that any one holding will have upon your
portfolio. Finally, review your investment timeframe to help put recent gains
and losses into perspective. Maintaining a long-term outlook is one of the keys
to weathering market volatility.
One of the most important components of a long-term approach is setting up an
investment plan. Investing on a scheduled basis, regardless of market direction,
can help you take advantage of market downturns when prices are low, and benefit
from market rallies. Most importantly, adhering to such a plan can contribute
not only to your investment success, but also to your peace of mind.
Whatever direction the market takes, you can be confident that Franklin
Templeton's portfolio managers are dedicated to providing our shareholders with
careful investment selection and constant professional supervision of their
funds. 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
FRANKLIN BIOTECHNOLOGY
DISCOVERY FUND
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 67 of
this report.
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.
This semiannual report of Franklin Biotechnology Discovery Fund covers the six
months ended October 31, 1998. During the period, the biotechnology sector
experienced severe volatility due to product disappointments and general market
malaise. After most major market downturns in August, stock prices began to rise
by early September, and small-cap stocks, including the biotechnology sector,
roared back to life as the market picked up momentum in October. Within this
environment, the fund posted a -14.73% cumulative total return for the period,
as discussed in the Performance Summary on page 6.
At the end of the reporting period, the fund had over $55 million invested in
five industries. On October 31, our largest position was Inhale Therapeutic
Systems, a leading developer of an inhaled form of insulin. With this novel
product, diabetics may be able to breathe in a powder form of insulin rather
than injecting it. Although the product won't be available to the general public
for a year or two, we believe its potential could be substantial.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
During the reporting period, we increased the fund's weighting in the large-cap
biotech sector, establishing positions in Amgen, Inc. and Genzyme Corp. Amgen,
Inc. has had exceptional earnings growth this year as Epogen, its largest
selling drug, experienced an increase in sales. In our opinion, Genzyme Corp.
also has strong growth potential. By October 31, the company's stock rose 35%
from the time we bought it in July. During the period, we also increased our
position in Chiron Corp., which restructured its business, hired an experienced
chief executive officer and chief financial officer, and sold its low-margin
diagnostics division.
Establishing short positions (selling borrowed stock in hopes of buying it later
at a lower price) is a strategy the fund uses to help offset declines in a
sector and to reduce volatility within the fund. At the beginning of the period,
the fund's short position represented approximately 9% of total net assets.
After the market decline in August, the fund covered nearly all of its short
positions for substantial gains.
We are optimistic about the outlook for the biotechnology industry. Many of
these entrepreneurial companies are seeking new treatments for a variety of
diseases, and the potential reward is substantial, even if only a fraction of
the new drugs makes it to the market. Although the market valuation of the
approximately 260 publicly traded biotech companies is less than the market
value of Merck, we believe investors will be rewarded as this small but exciting
industry produces future treatments for diabetes, cancer and heart disease.
Biotechnology companies are often small, relatively new, or unseasoned. Such
companies can be particularly sensitive to changing economic conditions, and
have less certain growth prospects than larger, more established companies. And
since small company stocks are volatile, they may not be appropriate for
short-term investors. Also, the fund is non-diversified and concentrates in a
single industry, involving other risks, such as patent considerations, product
liability, government regulatory requirements, and regulatory approval for new
drugs and medical products. The fund may invest in foreign securities, which
involve additional risks, including political uncertainty and currency
volatility. These and other risks, including hedging strategies, are described
more fully in the fund's prospectus. The nature of the investments of this fund
require an investor to have a long-term investment horizon. These are developing
companies whose product introductions must face many hurdles before they become
commercially viable.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
better understand our investment and management philosophy.
Sincerely,
/s/ Kurt von Emster
Portfolio Manager
Franklin Biotechnology Discovery Fund
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
PERFORMANCE SUMMARY
Franklin Biotechnology Discovery Fund posted a -14.73% cumulative total return
for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge.
The fund's share price, as measured by net asset value, decreased $3.96, from
$26.89 on April 30, 1998, to $22.93 on October 31, 1998. During the reporting
period, shareholders did not receive distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses.
Performance
Franklin Biotechnology Discovery Fund
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR (9/15/97)
- ---------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -10.42% -8.10%
AVERAGE ANNUAL TOTAL RETURN2 -15.56% -11.99%
VALUE OF $10,000 INVESTMENT3 $8,444 $8,660
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total represents the average annual change in value of an
investment over the periods indicated and has been restated to reflect 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
would have been higher.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and have been restated to include 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 would have
been higher.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility, and the economic, social
and political climates of countries where the fund invests. You may have a gain
or loss when you sell your shares. Past expense reductions by the fund's manager
increased total return.
Past performance is not predictive of future results.
FRANKLIN BLUE CHIP FUND
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
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 70 of
this report.
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.
This semiannual report of Franklin Blue Chip Fund covers the six months ended
October 31, 1998. During the first part of the period, the U.S. stock market
reached all-time highs, as the economy experienced steady growth and benign
inflation. However, Asia's financial turmoil, coupled with Russia's economic
meltdown, led to severe volatility in global equity markets by late summer. The
Dow Jones(R) Industrial Average, which had peaked on July 17, fell 14.91% in
August. Even though it rallied in September and October, it was down 4.33% for
the reporting period. Within this environment, Franklin Blue Chip Fund posted a
- -2.73% six-month cumulative total return, as discussed in the Performance
Summary on page 11. The Morgan Stanley Capital International(R) World Index, the
fund's benchmark, delivered a total return of -2.85% for the same period.*
*Source: Standard & Poor's(R) Micropal. Dow Jones Industrial Average's total
return is calculated by Wilshire Associates Inc. The Morgan Stanley Capital
International (MSCI) World Index includes approximately 1,480 companies
representing the stock markets of 23 countries, including the U.S., Canada, the
United Kingdom, and Japan. Indices are unmanaged and total return includes
reinvested dividends. One cannot invest directly in an index.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Throughout the reporting period, we maintained our conservative, long-term
investment discipline. In our search for companies offering management
excellence, a healthy balance sheet, and solid long-term earnings potential, we
focused on industry leaders demonstrating sustainable competitive advantages. On
October 31, 1998, our holdings were diversified across 14 sectors, including
consumer non-durables, health technology, finance, and electronic technology.
During the reporting period, the health technology and electronic technology
sectors strengthened considerably, and our holdings of Abbott Laboratories,
Johnson & Johnson, Intel Corp., and Cisco Systems Inc. contributed positively to
the fund's performance. In our opinion, they offer sustainable earnings growth
potential in the long term.
After a long period of weak results, the retail and utilities sectors also
performed well. However, even though we added to our holdings of Wal-Mart Stores
Inc. and Bellsouth Corp., our exposure to these sectors remained low because we
believed they could experience slow growth and intense competition over the long
term.
On the negative side, the stock prices of many financial institutions, including
our holdings of Citigroup Inc. and Merrill Lynch & Co. Inc., fell largely due to
hedge fund losses and bad loans to emerging market countries. Fortunately, the
fund had a relatively small exposure to this sector, and our shares of The
Charles Schwab Corp. and American International Group Inc. rose in value,
offsetting much of the sector's decline.
Seeking to take advantage of market volatility, we added to our holdings of The
Coca Cola Co., the world's largest soft drink company, and Medtronic Inc., an
international manufacturer of medical devices. In our opinion, these companies
have strong growth potential.
GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Looking forward, we are optimistic about the outlook for the fund. Despite the
possibility of Asia's financial problems affecting the U.S. economy, we believe
prospects remain bright for companies with quality assets, solid management,
sound competitive strategies, and the potential to generate strong future
earnings. It is important to remember, however, that investing in the fund
involves the special risks of global, and especially emerging market, investing
related to market and currency volatility and adverse social and political
developments.
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although 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 the Franklin Blue Chip Fund and look
forward to serving your investment needs in the years to come.
Sincerely,
/s/ Suzanne W. Killea
Portfolio Manager
Franklin Blue Chip Fund
PERFORMANCE SUMMARY
Franklin Blue Chip Fund posted a -2.73% cumulative total return for the
six-month period ended October 31, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of all distributions,
and does not include the sales charge. We have always maintained a long-term
perspective when managing the fund, and we encourage shareholders to view their
investments in a similar manner. As you can see from the table on page 12, the
fund delivered a +23.58% cumulative total return since inception on June 3,
1996.
The fund's share price, as measured by net asset value, decreased $0.34, from
$12.46 on April 30, 1998, to $12.12 on October 31, 1998. During the reporting
period, shareholders did not receive any distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
Performance
Franklin Blue Chip Fund
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR (6/3/96)
- ---------------------------------------------------
CUMULATIVE TOTAL RETURN1 11.58% 23.58%
AVERAGE ANNUAL TOTAL RETURN2 5.18% 6.53%
VALUE OF $10,000 INVESTMENT3 $10,518 $11,648
10/31/97 10/31/98
- ---------------------------------------------------
ONE-YEAR TOTAL RETURN4 8.25% 11.58%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to reflect 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
would have been higher.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and have been restated to reflect 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 would have
been higher.
4. One-year total return represents the change in value of an investment over
the periods ended on the dates indicated and does not include the sales charge.
Past expense reductions by the fund's manager increased the fund's total return
to shareholders. Without this waiver, the fund's total return and distributions
would have been lower.
All calculations assume reinvestment of all distributions at net asset value.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where investments are made.
Emerging markets involve heightened risks related to the same factors, in
addition to those associated with their relatively small size and lesser
liquidity. You may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
FRANKLIN CALIFORNIA GROWTH FUND
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 75 of
this report.
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.
The six months ended October 31, 1998, were one of the most challenging
environments for stocks in the history of Franklin California Growth Fund.
During the first half of the calendar year, California's economy continued to
expand robustly, with June's unemployment rate falling to 5.7%, the lowest rate
in eight years. By summer, however, signs of slowing growth were beginning to
emerge. Trade, an important influence on California's economy, deteriorated,
with exports to Japan and much of the rest of Asia falling significantly.
Interestingly, though, shipments to Europe and U.S. NAFTA partners (Canada and
Mexico), rose appreciably. During the reporting period, Asia's financial turmoil
spread to Russia and Latin America, causing volatility in equity markets
throughout the world. Within this environment, Franklin California Growth Fund -
Class I posted a -13.29% six-month cumulative total return, as discussed in the
Performance Summary on page 17.
GRAPHIC MATERIAL 6 OMITTED - SEE APPENDIX AT END OF DOCUMENT
In the U.S., a variety of industry groups, especially the high technology
sector, were particularly hard hit. In an effort to support declining economies
in other countries and prevent a recession in the U.S., the Federal Reserve
Board (the Fed) reduced the federal funds rate from 5.5% to 5.25% at the
September meeting of the Federal Open Market Committee. Then, in October, Fed
Chairman Alan Greenspan cut the fed funds rate to 5% and the discount rate from
5.0% to 4.75%, before the next scheduled meeting.
As of October 31, 1998, about a third of the fund's total positions were
represented by companies with a market capitalization of less than $1 billion.
Because large caps generally performed better during the period, the small cap
sector hurt the fund's performance. As an example of how small cap stocks
performed, the Russell 2000, a broad barometer of small cap stocks, peaked on
April 21, 1998 at 491.41. On October 31, 1998, the index stood at 378.16,
representing a decline of 23%.
Real-estate related companies also hindered the fund's performance during the
period under review. The share price of one fund holding, Arden Realty, Inc., a
real-estate investment trust specializing in Southern California office
properties, fell 22.9%, despite the fact that the company continued to exhibit
double-digit cash flow growth. We maintained our position in this company
because its properties had higher occupancy rates than its peers and, in our
opinion, the company's portfolio consisted of high quality holdings.
Of course, the fund also held many large cap stocks, with several among the top
holdings at the end of the period. Such companies as Cisco Systems, Inc.,
Safeway, Inc., and Sun Microsystems, Inc., had relatively stable and predictable
earnings growth. The share prices for many of these larger companies held up
relatively well in the reporting period's volatile market environment, with some
holdings, such as Granite Construction, Inc., appreciating dramatically.
Benefiting from strong national infrastructure rejuvenation, its share price
rose 69.0% during the six months under review. In our opinion, this is a
well-run company that is positioned to benefit from spending under the
Intermodal Surface Transportation Efficiency Act.
Looking forward, we are optimistic about prospects for California's economy and
the Franklin California Growth Fund. In our opinion, this diverse and dynamic
state, with almost 1,400 publicly traded companies, represents tremendous
potential for investment opportunities. The market's volatility during the
reporting period helped create some terrific values in the small- and mid-cap
sectors, and we continue to maintain or invest in positions in these areas
anticipating potential for capital appreciation. While several of our holdings
in the small cap arena hurt the fund's performance during the period, we believe
many of these companies may prove to be substantial contributors to the fund's
performance in the years to come. As we scan the investment horizon for
opportunities, we find there is no shortage of potential investments for the
fund.
GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT
It should be remembered, of course, 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.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee 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 comments or suggestions you may have.
Sincerely,
/s/ Conrad B. Herrmann
Portfolio Manager
Franklin California Growth Fund
PERFORMANCE SUMMARY
Class I
Franklin California Growth Fund - Class I provided a -13.29% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. We always have
maintained a long-term perspective when managing the fund, and encourage
shareholders to view their investments in a similar manner. As you can see from
the table on page 18, the fund's Class I shares delivered a +218.04% cumulative
total return since inception on October 30, 1991.
The fund's share price, as measured by net asset value, decreased $3.36, from
$24.98 on April 30, 1998, to $21.62 on October 31, 1998. During the reporting
period, shareholders receives per-share distributions of 4.3 cents ($0.043) in
income dividends. 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.
Performance
Franklin California Growth Fund - Class I
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR 5-YEAR (10/30/91)
- ---------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -4.73% +158.82% +218.04%
AVERAGE ANNUAL TOTAL RETURN2 -10.22% +19.52% +16.97%
VALUE OF $10,000 INVESTMENT3 $8,978 $24,392 $29,972
10/31/94 10/31/95 10/31/96 10/31/97 10/31/98
- --------------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN4 +19.75% +45.31% +24.61% +25.40% -4.73%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to reflect 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
would have been higher.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and have been restated to include 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 would have
been higher.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, and you may have a gain or loss when you sell
your shares.
Past expense reductions by the fund's manager increased the fund's total
returns. Without this reduction, the fund's total returns would have been lower.
Class II
Franklin California Growth Fund - Class II provided a -13.58% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges.
The fund's share price, as measured by net asset value, decreased $3.37, from
$24.82 on April 30, 1998, to $21.45 on October 31, 1998. During the reporting
period, shareholders did not receive any distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses.
Performance
Franklin California Growth Fund - Class II
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR (9/3/96)
- ------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -5.36% +26.47%
AVERAGE ANNUAL TOTAL RETURN2 -7.21% +10.98%
VALUE OF $10,000 INVESTMENT3 $9,279 $12,522
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. All figures include the 1.0% initial
sales charge and 1.0% contingent deferred sales charge, applicable to shares
redeemed within 18 months of investment. Class II shares have higher annual fees
and expenses than Class I shares.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include sales charges.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, and you may have a gain or loss when you sell
your shares.
Past performance is not predictive of future results.
FRANKLIN GLOBAL HEALTH CARE FUND
GRAPHIC MATERIAL 8 OMITTED - SEE APPENDIX AT END OF DOCUMENT
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 81 of
this report.
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.
The six-month period under review was one of uncertainty and great volatility in
global equity markets. Economic turmoil overseas threatened continued growth of
the U.S. economy, and domestic stock markets reacted with wild price swings. As
a result of investors' flight to quality, many large-capitalization drug stocks
soared in value during the reporting period, while small cap health care stocks
generally slumped. Within this environment, Franklin Global Health Care Fund
Class I posted a -21.52% six-month cumulative total return, as discussed in the
Performance Summary on page 23.
During the period, we were attracted to what we believed were the superior
growth prospects of smaller, emerging health care companies, whose shares had,
in our opinion, extremely attractive prices. Although the lack of popularity of
small cap stocks hurt the fund's performance, we believe that over longer time
periods, small cap stocks may significantly outperform large caps.
One of the fund's top holdings, Serologicals Inc., performed well, advancing
over 13% during the six month period. This company operates a national network
of blood collection centers and identifies and retains donors with rare antigens
in their blood. These antigens are extracted from donated blood and sold to
large pharmaceutical companies. We find this niche attractive since there is a
tremendous shortage of blood products and Serologicals Inc. has little
competition and an excellent reputation.
On October 31, 1998, the fund's largest sector was medical specialties. We
discovered a number of companies in this area possessing what we believed were
excellent growth potential and attractive valuations. One of our largest
holdings in the sector was Penederm Inc., whose drug delivery technology is used
in topical compounds for skin disorders. In June, the company was acquired by
generic drug manufacturer Mylan Laboratories. Penederm Inc.'s stock price jumped
about 30% the day of the announcement and was up 87.7% from April 30 through
completion of the acquisition on October 5, 1998.
During the period, we increased the fund's exposure to the pharmaceutical
sector. Anticipating a rotation into these large cap stocks as investors sought
more liquid investments that would be more resistant to an economic slowdown, we
initiated a position in SmithKline Beecham. In our opinion, this company had a
strong product portfolio and promising new drugs in development, and its shares
were trading at a discount to its peers.
Looking forward, we are optimistic about prospects for investors in health care
stocks. In our opinion, expenditures in the health care industry will be driven
by an aging population and rapidly changing technology. Both of these factors
may result in a wider range of treatable conditions and increased life
expectancy. In addition, demand for health care products and services is not
necessarily affected by the cyclical swings of the business cycle. Our goal is
to seize upon investment opportunities in a timely and disciplined manner in an
attempt to provide our shareholders unique opportunities to invest in rapidly
growing, smaller cap companies with exciting technologies, limited competition,
and strong management teams.
GRAPHIC MATERIAL 9 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 10 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
better understand our investment and management philosophy.
Of course, there are special risks involved with investing globally in a
non-diversified fund concentrating its investments in a single industry. These
risks, which include currency fluctuations and increased susceptibility to
adverse economic, political, social and regulatory developments, are further
discussed in the fund's prospectus.
We appreciate your participation in Franklin Global Health Care Fund and look
forward to serving your future investment needs.
Sincerely,
/s/ Kurt von Emster
Portfolio Manager
Franklin Global Health Care Fund
PERFORMANCE SUMMARY
Class I
Franklin Global Health Care Fund - Class I provided a -21.52% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. While we expect
market volatility in the short term, we have always maintained a long-term
perspective when managing the fund, and we encourage shareholders to view their
investments in a similar manner. As you can see from the table on page 24, the
fund's Class I shares delivered a +99.46% cumulative total return since
inception on February 14, 1992.
The fund's share price, as measured by net asset value, decreased $4.15, from
$19.28 on April 30, 1998, to $15.13 on October 31, 1998. During the reporting
period, shareholders did not receive any distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses.
Performance
Franklin Global Health Care - Class I
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR 3-YEAR 5-YEAR (2/14/92)
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -22.14% +21.43% +95.40% +99.46%
AVERAGE ANNUAL TOTAL RETURN2 -26.62% +4.59% +13.00% +9.86%
VALUE OF $10,000 INVESTMENT3 $7,338 $11,442 $18,424 $18,799
10/31/94 10/31/95 10/31/96 10/31/97 10/31/98
- --------------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN4 +23.62% +30.17% +26.06% +23.73% -22.14%
1. Cumulative total return represents the change in value of an investment over
the periods shown and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to reflect 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 returns would
have been higher.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and have been restated to include 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 would have
been higher.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility, and the economic, social
and political climates of countries where the fund invests. You may have a gain
or loss when you sell your shares.
Past expense reductions by the fund's manager increased the fund's total
returns. Without this reduction, total returns would have been lower.
Class II
Franklin Global Health Care Fund - Class II provided a -21.86% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges.
The fund's share price, as measured by net asset value, decreased $4.19, from
$19.17 on April 30, 1998, to $14.98 on October 31, 1998. During the reporting
period, shareholders did not receive any distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses.
Performance
Franklin Global Health Care - Class II
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR (9/3/96)
- ---------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -22.71% -5.80%
AVERAGE ANNUAL TOTAL RETURN2 -24.20% -3.20%
VALUE OF $10,000 INVESTMENT3 $7,580 $9,433
1. Cumulative total return represents the change in value of an investment over
the periods shown and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and 1.0% contingent deferred sales charge, applicable to shares redeemed
within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include all sales charges.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility, and the economic, social
and political climates of countries where the fund invests. You may have a gain
or loss when you sell your shares.
Past performance is not predictive of future results.
FRANKLIN GLOBAL UTILITIES FUND
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 85 of
this report.
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 six months ended October 31, 1998, slow economic growth in Asia
adversely affected economies in Europe, Latin America and the U.S. This led to
severe volatility in global stock markets, and it was not uncommon for markets
to rise or fall 5% in a single day. On a regional basis, the U.S. and Europe
experienced the strongest performance, with Latin America and Asia generally
weaker. Within this environment, the Franklin Global Utilities Fund - Class I
posted a -10.61% six-month cumulative total return, as discussed in the
Performance Summary on page 30. However, the fund delivered a +9.18% cumulative
total return for the 12-month period ended October 31, 1998.
The fund's industry weightings remained relatively stable during the reporting
period, with electric utility companies comprising 46.3% of total net assets,
telecommunications companies 34.8%, and natural gas companies 11.9% on October
31, 1998. The fund's largest geographic exposure was the United States (63.2%),
followed by Continental Europe (20.2%), Latin America (5.0%), and Asia (2.7%).
United States
Domestic utility stocks were uncharacteristically volatile throughout the
reporting period, as investors speculated about the direction of the U.S.
economy and interest rates. Because many investors feared a slowing economy
might hinder subscriber growth, the share price of Rural Cellular Corp. fell
more than 32%. However, believing that domestic telecommunications stocks are
poised for healthy growth in the next few years, we added to our holdings of
Intermedia Communications Inc. and initiated a position in Bell Atlantic Corp.
Although domestic natural gas companies experienced relatively low prices and
high inventory levels, electric utility companies continued to improve cash flow
and were one of the strongest performing sectors during the six months under
review. Since electric utility companies are generally able to deliver stable
earnings and dividends even in times of economic uncertainty, we purchased
shares of Montana Power Co., which, in our opinion, has a solid balance sheet.
Europe
European utility markets delivered mixed results during the six months under
review. Profit-taking and investor uncertainty about the European Monetary Union
(EMU) adversely affected several of our holdings, including Portugal Telecom,
SA, which fell 12.2% in value.* During the period, we initiated a position in
AEM SpA, an Italian gas distribution and electric utility; Endesa, SA, a Spanish
electric utility; and Equant, NV, a Dutch telecommunications network company we
believe could benefit from the huge growth of data communications and the
Internet.
GRAPHIC MATERIAL 11 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 12 OMITTED - SEE APPENDIX AT END OF DOCUMENT
*Price depreciation is measured in U.S. dollars.
Latin America
The Asian economic crisis that began in late 1997 sent shock waves throughout
Latin America, and financial markets there plummeted. Many of our Latin American
holdings dropped in value, which hurt the fund's performance. During the
reporting period, we sold our shares of Telecomunicacoes Brasileiras, SA, and
several Brazilian electric utility companies. Consequently, our Latin American
exposure decreased from 8.7% of total net assets on April 30, 1998, to 5.0% on
October 31, 1998. Although we are cautious about Latin America in the short
term, we view the region's market-oriented reforms positively, and believe this
area could provide promising investment opportunities in the long term.
Asia
Many Asian utility stocks fell dramatically in value, as the Asian currency
crisis continued to make headlines during the reporting period. Although we
maintained a low weighting in Asia because we felt that the financial turmoil
could worsen, we will still search for Asian securities with low risk and
high-return potential.
Looking forward
We are optimistic about prospects for global utility companies because these
firms generally are able to deliver stable earnings and solid dividends even
during periods of economic downturn. Additionally, global demand for gas,
electric power and telecommunications appears to be growing, and many foreign
utility markets are experiencing regulatory changes that could produce high
levels of revenue for utility firms in the future. In the U.S., which remains a
core investment area for the fund, uncertainty caused by the electric utility
deregulation seems to be subsiding, and many utility stocks have experienced
significant declines in their share prices and now appear to be attractively
valued. This could make it easier for us to discover bargain stocks in the near
future.
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,
Sally E. Haff
Portfolio Manager
Franklin Global Utilities Fund
PERFORMANCE SUMMARY
Class I
Franklin Global Utilities Fund - Class I posted a -10.61% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. We have always
maintained a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see from
the table on page 31, the fund delivered a +130.74% cumulative total return
since inception on July 2, 1992.
The fund's share price, as measured by net asset value, decreased $1.95, from
$17.36 on April 30, 1998, to $15.41 on October 31, 1998. During the reporting
period, shareholders received per-share distributions of 11.4 cents ($0.114) in
income dividends. 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.
Performance
Franklin Global Utilities Fund - Class I
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR 3-YEAR 5-YEAR (7/2/92)
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 9.18% 53.49% 70.17% 130.74%
AVERAGE ANNUAL TOTAL RETURN2 2.88% 13.09% 9.90% 13.06%
VALUE OF $10,000 INVESTMENT3 $10,288 $14,464 $16,033 $21,748
10/31/94 10/31/95 10/31/96 10/31/97 10/31/98
- --------------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN4 -1.27% 12.29% 18.16% 18.98% 9.18%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to reflect 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
would have been higher.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and have been restated to reflect 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 returns would have been
higher.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
Past expense reductions by the fund's manager increased the fund's total
returns. Without this waiver, the fund's total return would have been lower.
All calculations assume reinvestment of all distributions at net asset value.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the economic,
social and political climates of countries where the fund invests. Emerging
markets involve heightened risks related to the same factors, in addition to
those associated with their relatively small size and lesser liquidity. You may
have a gain or loss when you sell your shares.
Class II
Franklin Global Utilities Fund - Class II posted a -11.00% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges. We have always maintained a
long-term perspective when managing the fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table on
page 33, the fund delivered a +67.24% cumulative total return since inception on
May 1, 1995.
The fund's share price, as measured by net asset value, decreased $1.97, from
$17.25 on April 30, 1998, to $15.28 on October 31, 1998. During the reporting
period, shareholders received per-share distributions of 7.74 cents ($0.0774) in
income dividends. 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.
Performance
Franklin Global Utilities Fund - Class II
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR 3-YEAR (5/1/95)
- -------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 8.39% 50.45% 67.24%
AVERAGE ANNUAL TOTAL RETURN2 6.36% 14.21% 15.50%
VALUE OF $10,000 INVESTMENT3 $10,636 $14,898 $16,561
10/31/96 10/31/97 10/31/98
- -------------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN4 17.48% 18.15% 8.39%
1. Cumulative total return represents the change in value of an investment over
the indicated periods and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge applicable to shares
redeemed within 18 months of purchase.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the indicated periods and include sales charges.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
All calculations assume reinvestment of all distributions at net asset value.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the economic,
social and political climates of countries where the fund invests. Emerging
markets involve heightened risks related to the same factors, in addition to
those associated with their relatively small size and lesser liquidity. You may
have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
FRANKLIN MIDCAP GROWTH FUND
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 89 of
this report.
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.
This semiannual report of Franklin MidCap Growth Fund covers the six months
ended October 31, 1998, a period of severe volatility for the U.S. stock market.
Even though the market's momentum began to wane in the spring, investors' desire
for liquidity continued to boost the share prices of many large-cap companies.
However, by the end of the period, Asia's economic crisis, Russia's financial
meltdown, and political uncertainty in Washington contributed to investors'
anxiety concerning the entire market. Fearing that the financial turmoil
overseas would adversely affect the U.S. economy, the Federal Reserve Board
lowered the federal funds rate in September, and again in October. Believing the
U.S. would not experience a recession, many investors gained confidence and the
market rallied. Although many mid-cap stocks outperformed their larger
counterparts in October, the Standard & Poor's(R) (S&P) MidCap 400 Index
underperformed the S&P 500 Stock Index during the period as a whole. Within this
environment, Franklin MidCap Growth Fund posted a -21.33% six-month cumulative
total return, as discussed in the Performance Summary on page 37.
The latter half of the reporting period was especially difficult for the fund as
several of our healthcare holdings were negatively impacted by investor concerns
about pressure on managed-care companies to lower their rates. Some of our
positions in the technology services sector also fell in value due to expenses
related to solving the Y2K (Year 2000) problem.
Taking advantage of market declines, we invested in firms with diversified
product lines, sustainable competitive advantages and proven earnings records.
For example, we increased our weighting in the real estate investment trust
(REIT) sector by purchasing shares of Equity Residential Properties Trust, which
owns multifamily properties containing apartment units, and Cornerstone
Properties Inc., a developer in central business districts and major
metropolitan markets. We also found opportunities in other sectors and initiated
positions in CMS Energy Corp., an operator of gas and electric utilities;
AptarGroup Inc., a major manufacturer of consumer products dispensing systems;
and U.S. Foodservice Inc., one of the nation's largest food service
distributors.
During the reporting period, we sold our shares of companies whose valuations
appeared excessive or fundamentals seemed to be deteriorating. For instance, we
eliminated our position in ESC Medical Systems Ltd., a developer of medical
devices, and U.S. Filter Corp., a provider of industrial and municipal water and
wastewater treatment systems.
GRAPHIC MATERIAL 13 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 14 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Looking forward, we remain optimistic about growth opportunities for mid-cap
growth companies. In our opinion, they offer the best features of small- and
large-cap stocks. Medium-cap companies tend to be more established and more
stable than smaller companies, but unlike large-cap companies, which can offer
greater stability, they generally are still growing rapidly. Of course, there
are risks associated with investing in a fund seeking long-term capital growth
from small- to medium-size companies with less certain growth prospects and
greater sensitivity to changing economic conditions than large-cap companies.
These and other risks are discussed further in the prospectus.
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historical performance
is no guarantee of future results, these insights may help you understand our
investment and management philosophy.
We thank you for participating 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/ Edward B. Jamieson
Portfolio Manager
Franklin MidCap Growth Fund
PERFORMANCE SUMMARY
Franklin MidCap Growth Fund posted a -21.33% cumulative total return for the
six-month period ended October 31, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of all distributions,
and does not include the initial sales charge. We have always maintained a
long-term perspective when managing the fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table on
page 38, the fund delivered a +29.59% cumulative total return for the three-year
period ended October 31, 1998.
The fund's share price, as measured by net asset value, decreased $3.72, from
$17.44 on April 30, 1998, to $13.72 on October 31, 1998. During the reporting
period, shareholders did not receive any distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
Performance
Franklin MidCap Growth Fund
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR5 3-YEAR5 5-YEAR5 (8/17/93)5
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -14.11% 29.59% 66.83% 71.67%
AVERAGE ANNUAL TOTAL RETURN2 -19.05% 6.90% 9.47% 9.68%
VALUE OF $10,000 INVESTMENT3 $8,095 $12,217 $15,721 $16,180
10/31/94 10/31/95 10/31/96 10/31/97 10/31/98
- --------------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN4 1.52% 26.81% 19.00% 26.79% -14.11%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to reflect 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
would have been higher.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and have been restated to reflect 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 would have
been higher.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
5. On January 2, 1996, the fund changed its investment objective, strategy and
investment adviser.
Past expense reductions by the fund's manager increased the fund's total return
to shareholders. Without this waiver, the fund's total return would have been
lower. All calculations assume reinvestment of all distributions at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.
Past performance is not predictive of future results.
FRANKLIN NATURAL RESOURCES FUND
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 94 of
this report.
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 semiannual report of Franklin Natural Resources Fund covers the six months
ended October 31, 1998. During this time, financial and political turmoil in
Asia, Latin America and Russia led to severe volatility in global stock markets.
As a result of investor concerns about a possible global economic slowdown,
demand for energy, chemicals, steel and paper declined. Many commodity prices
fell, and the profitability of some natural resources companies were negatively
impacted. Within this environment, Franklin Natural Resources Fund - Class I
posted a -25.70% six-month cumulative total return, as discussed in the
Performance Summary on page 42.
Throughout the reporting period, we invested in what we believed to be
well-managed companies with fast-growing, highly efficient, technologically
advanced operations in the sectors shown in the chart to the right. Rather than
purchasing stocks solely on the assumption that commodity prices would rise, we
bought stock in companies we felt would fare best due to rapid production
growth, asset or technological edge, or lower costs, even in a flat-to-declining
commodity price environment.
GRAPHIC MATERIAL 15 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 16 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Energy Minerals, which was the fund's largest sector weighting, adversely
affected the fund's performance, as sluggish demand and high inventories led to
declining crude oil and natural gas prices. Crude oil prices dropped from on
$15.48 per barrel on April 30, 1998, to $11.61 on June 15, before rising to
$14.45 at the end of October, and natural gas prices slid to two-year lows
during the reporting period. Taking advantage of these declines, we added to our
holdings of YPF, SA, an integrated Argentine oil and gas company which reduced
costs and, in our opinion, is well positioned to benefit from strong demand for
hydrocarbon in Latin America. We also augmented our positions in Newfield
Exploration Co., an independent exploration and production company; Varco
International Inc., a major provider of technologically advanced drilling
equipment; and Transocean Offshore Inc., one of the world's leading
manufacturers of deepwater drilling rigs. Our low exposure to the international
integrated oil and gas sector also hurt the fund's performance.
During the reporting period, many natural resources companies consolidated in an
attempt to cut costs, improve their market share and diversify their service
capabilities. The British Petroleum Co. Ltd. merged with Amoco Corp., one of our
holdings, creating one of the world's leading integrated oil and gas companies.
In the forest products and paper industry, Bowater Inc., another holding,
acquired Halla Pulp & Paper Co. Ltd.'s Korean assets and Avenor Inc.'s North
American assets. Consolidation also occurred in the chemicals sector, with
Hercules Inc. buying BetzDearborn Inc., one of our positions in the chemicals
sector.
Looking forward, we anticipate a period of balanced supply and demand conditions
for a wide range of natural resources in the near future. In our opinion, this
should lead to moderate growth and sustained levels of profitability for
low-cost producers in commodity-related industries. Recent evidence of OPEC
production cutbacks and non-OPEC production declines also adds to our belief
that the stocks of energy companies offer significant value under today's
depressed conditions. It is important to remember, however, that investing in
the fund involves the special risks of investing in a non-diversified, sector
fund, as well as the currency volatility and political, economic or regulatory
uncertainty associated with foreign, and especially developing market,
investing.
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historical performance
is no guarantee of future results, these insights may help you understand our
investment and management philosophy.
We thank you for participating 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/ Suzanne W. Killea
Portfolio Manager
Franklin Natural Resources Fund
GRAPHIC MATERIAL 17 OMITTED - SEE APPENDIX AT END OF DOCUMENT
PERFORMANCE SUMMARY
Class I
Franklin Natural Resources Fund - Class I posted a -25.70% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. We have always
maintained a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see from
the table on page 43, the fund delivered a +28.40% cumulative total return since
inception on June 5, 1995.
The fund's share price, as measured by net asset value, decreased $4.04, from
$15.46 on April 30, 1998, to $11.42 on October 31, 1998. During the reporting
period, shareholders received per-share distributions of 7.4 cents ($0.074) in
income dividends. 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.
Performance
Franklin Natural Resources Fund - Class I
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR 3-YEAR (6/5/95)
- ------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -28.40% 29.83% 28.40%
AVERAGE ANNUAL TOTAL RETURN2 -32.51% 6.97% 5.76%
VALUE OF $10,000 INVESTMENT3 $6,749 $12,241 $12,102
10/31/96 10/31/97 10/31/98
- ------------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN4 46.74% 23.58% -28.40%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to reflect 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
would have been higher.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and have been restated to reflect 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 returns would have been
higher.
4. One-year total return represents the change in value of an investment over
the periods ended on the dates indicated and does not include the sales charge.
The fund's manager has agreed in advance to waive a portion of its management
fees, which reduces operating expenses and increases total return to
shareholders. Without this waiver, total return would have been lower. The
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.
All calculations assume reinvestment of all distributions at net asset value.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the economic,
social and political climates in countries where the fund invests. You may have
a gain or loss when you sell your shares.
Advisor Class
Franklin Natural Resources Fund - Advisor Class posted a -25.52% cumulative
total return for the six-month period ended October 31, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment of
all distributions.
The fund's share price, as measured by net asset value, decreased $4.06, from
$15.48 on April 30, 1998, to $11.42 on October 31, 1998. During the reporting
period, shareholders received per-share distributions of 12.1 cents ($0.121) in
income dividends. 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.
Performance
Franklin Natural Resources Fund - Advisor Class
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR* 3-YEAR* (6/5/95)*
- ----------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -28.05% 30.75% 29.31%
AVERAGE ANNUAL TOTAL RETURN1 -28.05% 9.35% 7.84%
VALUE OF $10,000 INVESTMENT2 $7,195 $13,075 $12,931
10/31/96 10/31/97 10/31/98
- ----------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN*,3 46.74% 23.84% -28.05%
*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I sales
charge, but including the effect of Class I expenses, including Rule 12b-1 fees;
and (b) for periods after January 1, 1997, figures reflect actual Advisor Class
performance, including the deduction of all fees and expenses applicable only to
that class. Since January 2, 1997 (commencement of sales), the cumulative total
return of Advisor Class shares was -15.58%.
1. Cumulative total return represents the change in value of an investment over
the periods indicated. Average annual total return represents the average annual
change in value of an investment over the periods indicated.
2. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated.
3. One-year total return represents the change in value of an investment over
the periods ended on the dates indicated and does not include the sales charge.
The fund's manager has agreed in advance to waive a portion of its management
fees, which reduces operating expenses and increases total return to
shareholders. Without this waiver, total returns would have been lower. The
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.
All calculations assume reinvestment of all distributions at net asset value.
Since markets can go down as well as up investment return and principal value
will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where the fund invests. You may
have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
FRANKLIN SMALL CAP GROWTH FUND
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 100 of
this report.
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.
The six months ended October 31, 1998 proved to be a difficult time for
small-cap stocks in general and the Franklin Small Cap Growth Fund in
particular. Because liquid, large-cap shares were viewed as a safe haven by
investors concerned about a global economic slowdown, small-cap stocks
underperformed their larger counterparts. The Russell(R) 2500 Index, which
measures the performance of small cap stocks, dropped 18.51%, whereas the Dow
Jones(R) Industrial Average, which is representative of large, blue chip
equities, declined only 4.33%.* Within this environment, Franklin Small Cap
Growth Fund - Class I posted a -23.79% six-month cumulative total return, as
discussed in the Performance Summary on page 50.
*Source: Standard & Poor's(R) Micropal. Dow Jones Industrial Average's total
return is calculated by Wilshire Associates Inc. Price depreciation includes
reinvested dividends. One cannot invest directly in an index.
Our investment style of buying growth stocks at a reasonable price led us to
invest in many companies we consider to have strong long-term potential, but did
not fare well in the face of a potential economic slowdown. For example, our
shares of Atwood Oceanics Inc., an operator of deep-water drilling rigs, fell
48.6% during the six months under review. But since deep water is believed to be
a fertile source of oil, it remains a focus of major exploration and production
efforts. Because the number of companies which supply deep water rigs is
limited, we feel that Atwood has strong growth potential.
Believing that use of the internet and corporate intranets could lead to
substantial growth for technology companies into the next century, we added to
some of our holdings in that sector. For example, we increased our position in
Etec Systems Inc., a developer of electron and laser beam systems applied in the
manufacture of integrated circuits. We also augmented our holdings of 24/7 Media
Inc., Entrust Technologies Inc., and BroadVision Inc., all of which help
companies set up internet commerce systems.
During the reporting period, our holdings of Access Health Inc., Pharmaceutical
Product Development Inc., and Serologicals Corp. appreciated in value, as many
investors bestowed favor upon industries that were relatively immune to cyclical
influences and had low exposure to international markets. The stock prices of
some of our technology holdings, including VERITAS Software Corp. and Gemstar
International Group Ltd., also rose because both companies delivered earnings
that exceeded many analysts' expectations.
GRAPHIC MATERIAL 18 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 19 OMITTED - SEE APPENDIX AT END OF DOCUMENT
On October 31, 1998, the fund's top 10 holdings were significantly different
than they were at the beginning of the reporting period. Wind River Systems Inc.
became one of our largest positions because we added to our holdings early in
the period and its share price appreciated following analyst upgrades of its
stock. We also took advantage of market volatility to add to or initiate
positions in Newfield Exploration Co., Waters Corp., Gemstar International Group
Ltd., Novellus Systems Inc., Intuit Inc., and Uniphase Corp.
Seven companies fell from the fund's top 10 holdings as their shares declined in
value. These included Atwood Oceanics Inc. and Barrett Resources Corp., two
energy firms adversely affected by lower oil prices. Due to investor concerns
about slowing economic growth, the stock prices of Komag Inc., Etec Systems
Inc., Tekelec, Carpenter Technology Corp., and Tommy Hilfiger Corp. fell.
Looking forward, we are optimistic about the prospects for small-cap stocks.
Although shares of small-cap companies have been out of favor for the past few
years, they may substantially outperform large cap stocks in the future.
Following the U.S. bear markets of 1974 and 1990, small-cap stocks performed
better than large-caps for a time. In our opinion, the same could be true again
when economies worldwide have stabilized.
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historical performance
is no guarantee of future results, these insights may help you understand our
investment and management philosophy.
Of course, there are risks involved in investing in a fund seeking long-term
growth from small or relatively new or unseasoned companies. These risks, which
include relatively small revenues, limited product lines and small market share,
are further discussed in the fund's prospectus.
We thank you for your participation in Franklin Small Cap Growth Fund and look
forward to serving you in the future. Please feel free to contact us with your
questions or comments.
Sincerely,
/s/ Edward B. Jamieson
Portfolio Manager
Franklin Small Cap Growth Fund
PERFORMANCE SUMMARY
Class I
Franklin Small Cap Growth Fund - Class I posted a -23.79% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. We have always
maintained a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see from
the table on page 51, the fund delivered a +166.43% cumulative total return
since inception on February 14, 1992.
The fund's share price, as measured by net asset value, decreased $6.17, from
$25.93 on April 30, 1998, to $19.76 on October 31, 1998. During the reporting
period, shareholders did not receive any distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
Performance
Franklin Small Cap Growth Fund - Class I
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR 3-YEAR 5-YEAR (2/14/92)
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -16.94% 32.37% 106.92% 166.43%
AVERAGE ANNUAL TOTAL RETURN2 -21.72% 7.66% 14.29% 14.70%
VALUE OF $10,000 INVESTMENT3 $7,828 $12,477 $19,497 $25,111
10/31/94 10/31/95 10/31/96 10/31/97 10/31/98
- --------------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN4 16.38% 34.31% 24.85% 27.65% -16.94%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to reflect 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 returns may
differ.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and have been restated to reflect 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 returns may differ.
4. One-year total return represents the change in value of an investment over
the indicated periods ended on the specified dates and does not include the
initial sales charge. Past expense reductions by the fund's manager increased
the fund's total returns. Without this waiver, the fund's total return would
have been lower.
All calculations assume reinvestment of all distributions at net asset value.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the economic,
social and political climates of countries where the fund invests. You may have
a gain or loss when you sell your shares.
Class II
Franklin Small Cap Growth Fund - Class II posted a -24.04% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges. We have always maintained a
long-term perspective when managing the fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table on
page 53, the fund delivered a +26.04% cumulative total return since inception on
October 2, 1995.
The fund's share price, as measured by net asset value, decreased $6.15, from
$25.58 on April 30, 1998, to $19.43 on October 31, 1998. During the reporting
period, shareholders did not receive any distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
Performance
Franklin Small Cap Growth Fund - Class II
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR 3-YEAR (10/2/95)
- ----------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -17.52% 29.48% 26.04%
AVERAGE ANNUAL TOTAL RETURN2 -19.14% 8.64% 7.45%
VALUE OF $10,000 INVESTMENT3 $8,086 $12,822 $12,477
10/31/96 10/31/97 10/31/98
- ----------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN4 23.96% 26.64% -17.52%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge applicable to shares
redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include sales charges.
4. One-year total return represents the change in value of an investment over
the indicated periods ended on the specified dates and does not include the
initial sales charge.
All calculations assume reinvestment of all distributions at net asset value.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where the fund invests. You may
have a gain or loss when you sell your shares.
Advisor Class
Franklin Small Cap Growth Fund - Advisor Class posted a -23.65% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions.
The fund's share price, as measured by net asset value, decreased $6.15, from
$26.00 on April 30, 1998, to $19.85 on October 31, 1998. During the reporting
period, shareholders did not receive any distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
Performance
Franklin Small Cap Growth Fund - Advisor Class
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR* 3-YEAR* 5-YEAR* (2/14/92)*
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -16.60% 33.18% 108.18% 168.06%
AVERAGE ANNUAL TOTAL RETURN1 -16.60% 10.02% 15.79% 15.82%
VALUE OF $10,000 INVESTMENT2 $8,340 $13,318 $20,818 $26,806
10/31/94 10/31/95 10/31/96 10/31/97 10/31/98
- --------------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN*,3 16.38% 34.31% 24.85% 27.91% -16.60%
*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I sales
charge, but including the effect of Class I expenses, including Rule 12b-1 fees;
and (b) for periods after January 1, 1997, figures reflect actual Advisor Class
performance, including the deduction of all fees and expenses applicable only to
that class. Since January 2, 1997 (commencement of sales), the cumulative total
return of Advisor Class shares was 1.57%.
1. Cumulative total return represents the change in value of an investment over
the periods indicated. Average annual total return represents the average annual
change in value of an investment over the periods indicated.
2. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated.
3. One-year total return represents the change in value of an investment over
the periods ended on the specified dates.
Past expense reductions by the fund's manager increased the fund's total
returns. Without this waiver, the fund's total return would have been lower.
All calculations assume reinvestment of all distributions at net asset value.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where the fund invests. You may
have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
FRANKLIN STRATEGIC INCOME FUND
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 109 of
this report.
Your Fund's Goal: Franklin Strategic Income Fund seeks a high level of current
income, with capital preservation over the long term as a secondary objective.
The fund uses an active asset allocation process and invests in securities of
foreign governments, U.S. and foreign high yield fixed-income securities,
asset-backed securities, preferred stock, common stock that pays dividends, and
income-producing securities convertible into common stock of such companies.
Although domestic inflation remained in check during this reporting period, the
financial markets recently experienced increased volatility as a result of
several factors. Concerns regarding the financial health of certain emerging
markets, including Russia, precipitated much of the capital markets' initial
downward movement. Subsequently, an outlook for slowing global economic growth
combined with the well-publicized difficulties of various financial institutions
caused a "flight to quality" toward U.S. Treasuries and reduced liquidity for
lower-rated, higher-risk securities.
By diversifying across the six distinct asset classes listed above in the fund's
goal, Franklin Strategic Income Fund was able to lessen the overall impact from
this price volatility. Anticipating declining market stability, the fund
increased its exposure to U.S. government securities, while moderately reducing
its weighting in the equity-sensitive convertible securities market during the
first half of the reporting period. Nonetheless, the fund's cumulative total
return over the past six months was still negatively impacted, declining by
3.11%. At the same time, valuations in such sectors as mortgage-backed
securities, high yield corporate bonds and emerging market fixed-income
securities became more attractively priced. The fund took advantage of rather
dramatic price fluctuations and increased its exposure to those countries and
companies, within impacted sectors, that maintained favorable fundamental
outlooks, believing that they should provide attractive, long-term risk-adjusted
returns to our shareholders.
Portfolio Breakdown
Franklin Strategic Income Fund
Based on Total Net Assets
APRIL 30, 1998 OCTOBER 31, 1998
- -----------------------------------------------------------------------
High Yield Corporate Bonds 28.0% 29.2%
Emerging Market Bonds 23.7% 23.6%
International Bonds 15.9% 14.2%
Convertible Securities 10.1% 7.1%
Mortgage Securities 7.6% 10.5%
U.S. Government Bonds 4.8% 8.6%
Preferred Stock (Non-Convertible) 0.6% 0.2%
Cash & Equivalents 9.3% 6.6%
High Yield Corporate Bonds - During the second half of the reporting period, the
high yield sector came under pressure due to concerns about a domestic economic
slowdown and a decline in trading liquidity. We selectively added to positions
that we viewed as fundamentally sound but that had, nonetheless, experienced
price declines resulting from this broader sector sell-off. At the beginning of
fourth quarter 1998, credit measures for high yield corporate issuers remained
generally healthy. The fund attempted to focus its high yield security holdings
on names we believed were better positioned to weather a temporary economic
slowdown. At the end of the period the portfolio remained moderately
overweighted in the high yield sector, due to its favorable, long-term total
return prospects and currently depressed pricing levels.
The fund maintained meaningful exposure to the telecommunications sectors, as
the forecasted growth in demand for telephone and data telecommunications
services over the next several years appeared robust. During the period, we
added to existing positions in competitive local exchange carriers Intermedia
Communications and Nextlink Communications, Inc., as well as fiber-optic network
provider Level 3 Communications, as these companies' longer-term credit
improvement outlook remained positive. Given the recent concerns about an
economic slowdown, certain of the portfolio's more defensive holdings provided
strong relative returns. Ball Corp., a recent fund purchase, is one of the
world's largest beverage can manufacturers. The steady credit improvement
expectation for this more recession-resistant company bolstered its securities'
prices. We also added to our position in Cablevision Systems Corp. (CSC
Holdings), one of the country's largest cable companies. The prospect for
increasing sales growth from new services, as well as the utility-like nature of
the company's base revenue streams, has supported Cablevision's security prices
over the past several months. Finally, during the period Sullivan Broadcasting,
a television broadcaster, was purchased by Sinclair Broadcasting. As a result of
this transaction, the fund was able to sell its Sullivan bonds and common shares
back to the company at a substantial premium.
Emerging Markets - During the past six months, concerns ignited by Russia's
financial crisis depressed prices in the emerging market fixed-income sector.
Although this decline was related partly to concerns about slowing global
economic growth, technical factors, including trading illiquidity and the flight
to quality across capital markets, appeared to drive much of the sell-off.
Despite a moderate reduction in the portfolio's emerging markets exposure prior
to the August 1998 decline, the fairly substantial, across-the-board drop in
emerging market bond prices negatively impacted the fund's performance.
Once again, the fund took advantage of this increased volatility to add
selectively to its positions in those countries with more favorable, long-term
fundamental outlooks. We focused this sector's core investments in Latin
America. During the period we increased our positions in Mexico and Argentina,
while reducing our exposure to Brazil and Venezuela. We had no exposure to
Russia prior to its publicized difficulties in August, but subsequently
initiated a small position in Russian bonds at significantly discounted levels.
The fund was moderately overweighted in this sector at the end of the reporting
period, although volatility is expected to remain relatively high over the near
term. We believe that, at recent, depressed price levels, the long-term prospect
for total return from selected countries in this sector appears favorable.
TOP FIVE COUNTRY HOLDINGS
Based on Total Net Assets
10/31/98
U.S. 51.46%
Mexico 6.68%
Argentina 3.78%
United Kingdom 3.50%
Germany 3.32%
International - The decline in global interest rates helped drive returns in
Franklin Strategic Income Fund's international holdings. Additionally, the fund
continued to selectively hedge its non-dollar foreign currency exposure in an
attempt to maximize its dollar-based total returns. Toward the end of the period
we moderately reduced hedged international positions, as the likelihood for
further, significant dollar appreciation began to decline. Over the past six
months, the portfolio's exposure to the international bond sector remained
relatively constant, as the opportunities to benefit from currency fluctuations
were somewhat offset by the relatively low, nominal interest rates offered in
many developed foreign countries.
Within Europe, Germany remained the fund's top holding. We increased exposure to
the U. K. and Belgium while reducing our relative position sizes in Spain,
Denmark and Sweden. In the dollar-bloc countries, the fund reduced its
weightings in Canada, while maintaining its exposure to Australia and New
Zealand.
Convertible Securities - The broad domestic equity markets experienced a
meaningful correction during the period, as the prospect for slower corporate
earnings growth caused stock market valuations to recede from their historically
high levels. The fund reduced its exposure to the convertible sector, prior to
its August decline, as the higher equity valuations limited the number of
attractive investment candidates. Although we held a moderately underweighted
position in this sector at the end of the reporting period, recent declines in
the equity and convertible securities markets may provide an opportunity to
increase our holdings at more attractive valuations going forward.
During the reporting period, the fund initiated a position in Texas Utilities
Co., one of the largest electric companies in the U.S. As a result of an
improving operating outlook and declining interest rates, this investment has
already performed strongly for the portfolio. Another new convertible sector
holding, Omnicare, is the country's largest independent pharmacy operator. We
believe Omnicare is well-positioned to benefit from growth in its target market
over the next several years, and the company's recent stock price declines
provided an attractive entry point to purchase its convertible securities.
U.S. Government Securities - The combination of modest inflationary pressures,
the prospect of slowing economic growth and a flight to quality across the
capital markets led to a significant U.S. interest rate decline over the past
six months. In the first half of the reporting period, the fund nearly doubled
its exposure to the U.S. government sector, as the prospect for further interest
rate declines appeared more evident. However, with subdued inflationary
pressures, the portfolio remained modestly underweighted in this sector at the
end of the period because, at recent interest-rate levels, the total return
potential for U.S. government securities appeared more limited.
U.S. Mortgage-Backed Securities - During the reporting period, increasing
refinancing risk and mortgage-backed securities' lower trading liquidity offset
the positive effect of lower domestic interest rates. Consequently, yields for
domestic mortgage-backed securities relative to Treasuries neared record highs
during the period, and the fund took advantage of this spread widening to
moderately increase its exposure to the sector.
Looking Forward
While global economic growth may slow in the fourth quarter of 1998 and early
1999, the outlook for subdued inflation, combined with an eventual return to
normal liquidity levels in the capital markets, should bolster securities of
fundamentally sound countries and companies. As the markets begin to stabilize,
the fund should benefit from its significant positions in selected high yield,
emerging market and mortgage-backed securities. Although we anticipate global
developed-market interest rates will remain low over the near term, their recent
levels promise more limited total return potential, accounting for the
portfolio's moderate exposure to the U.S. government and developed international
sectors. In the future, we will continue to look for opportunities to enhance
long-term returns, while reducing overall volatility by actively managing the
fund's sector and security allocations.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
Sincerely,
/s/ Christopher J. Molumphy
Portfolio Manager
Franklin Strategic Income Fund
PERFORMANCE SUMMARY
Class I
Franklin Strategic Income Fund - Class I produced a -3.11% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. We have always
maintained a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see from
the table on page 64, the fund delivered a +32.08% cumulative total return for
the three-year period ended October 31, 1998.
The fund's share price, as measured by net asset value, decreased 77 cents, from
$11.24 on April 30, 1998, to $10.47 on October 31, 1998. During the six-month
reporting period, shareholders received income distributions totaling 42.2 cents
($0.422) per share. Distributions will vary depending on the fund's income, and
past distributions are not indicative of future trends.
DIVIDEND DISTRIBUTIONS
Franklin Strategic Income Fund
Class I
5/1/98-10/31/98
Month Dividend per share
May 7.5 cents
June 7.5 cents
July 6.8 cents
August 6.8 cents
September 6.8 cents
October 6.8 cents
Total 42.2 cents
Performance
Franklin Strategic Income Fund - Class I
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR 3-YEAR (6/1/94)
- ------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 +2.69% +32.08% +55.44%
AVERAGE ANNUAL TOTAL RETURN2 -1.65% +8.14% +9.43%
VALUE OF $10,000 INVESTMENT3 $9,835 $12,646 $14,889
DISTRIBUTION RATE4 7.47%
30-DAY STANDARDIZED YIELD5 8.05%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the maximum 4.25% initial
sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the sales charge.
4. Distribution rate is based on an annualization of October's 6.8 cent per
share monthly dividend and the maximum offering price of $10.93 on October 31,
1998. 5. Yield, calculated as required by the SEC, is based on the earnings of
the fund's portfolio for the 30 days ended October 31, 1998.
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. Without these reductions, the fund's distribution rate
and total return would have been lower and the yield for the period would have
been 7.63%. The fee waiver may be discontinued at any time upon notice to the
fund's Board of Trustees.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where investments are made.
Emerging markets involve heightened risks related to the same factors, in
addition to those associated with their relatively small size and lesser
liquidity. You may have a gain or loss when you sell your shares.
Class II
Franklin Strategic Income Fund - Class II produced a -3.50% cumulative total
return from May 1, 1998, the date these shares became available, to the end of
the reporting period on October 31, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of all distributions,
and does not include sales charges.
The fund's share price, as measured by net asset value, decreased 72 cents, from
$11.19 on May 1, 1998, to $10.47 on October 31, 1998. During the reporting
period, shareholders received income distributions totaling 32.8 cents ($0.328)
per share. Distributions will vary depending on the fund's income, and past
distributions are not indicative of future trends.
DIVIDEND DISTRIBUTIONS
Franklin Strategic Income Fund
Class I
6/1/98-10/31/98
Month Dividend per share
June 7.12 cents
July 6.42 cents
August 6.42 cents
September 6.42 cents
October 6.42 cents
Total 32.8 cents
Performance
Franklin Strategic Income Fund - Class II
Period ended 10/31/98
SINCE INCEPTION
(5/1/98)
- -----------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -3.50%
AGGREGATE TOTAL RETURN2 -5.37%
VALUE OF $10,000 INVESTMENT3 $9,463
DISTRIBUTION RATE4 7.28%
30-DAY STANDARDIZED YIELD5 7.91%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Aggregate total return represents the average annual change in value of an
investment over the periods indicated and includes the 1.0% initial sales charge
and the 1.0% contingent deferred sales charge, as applicable. Since the fund has
existed for less than one year, the figures represent aggregate total return
from inception; therefore, average annual total returns are not provided.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the period indicated and include sales charges.
4. Distribution rate is based on an annualization of October's 6.42 cent per
share monthly dividend and the maximum offering price of $10.58 on October 31,
1998.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1998.
The fund's manager has agreed in advance to waive a portion of its management
fees and to make certain payments to reduce expenses. If the manager had not
taken this action, the fund's distribution rate and total return would have been
lower and the yield for the period would have been 7.49%. The fee waiver may be
discontinued at any time upon notice to the fund's Board of Trustees.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where investments are made.
Emerging markets involve heightened risks related to the same factors, in
addition to those associated with their relatively small size and lesser
liquidity. You may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Biotechnology Discovery Fund
Class I
---------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
--------------------
(unaudited) 19981
---------------------------------------
<S> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ..................................... $26.89 $25.00
---------------------------------------
Income from investment operations:
Net investment loss ..................................................... (.09) (.05)
Net realized and unrealized gains (losses) .............................. (3.87) 1.99
---------------------------------------
Total from investment operations ......................................... (3.96) 1.94
---------------------------------------
Less distributions from net realized gains ............................... -- (.05)
---------------------------------------
Net asset value, end of period ........................................... $22.93 $26.89
=======================================
Total return*............................................................. (14.73%) 7.78%
Ratios/supplemental data
Net assets, end of period (000's)......................................... $68,823 $73,546
Ratios to average net assets:
Expenses ................................................................ 2.00%** 1.50%**
Expenses excluding waiver and payments by affiliate ..................... 2.00%** 1.61%**
Net investment loss ..................................................... (.76%)** (.44%)**
Portfolio turnover rate .................................................. 67.33% 75.50%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
1For the period September 15, 1997 (effective date) to April 30, 1998.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1998 (unaudited)
Franklin Biotechnology Discovery Fund SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
a Common Stocks 80.6%
Biotechnology 50.4%
Agouron Pharmaceuticals, Inc. ................................................. 10,000 $ 387,500
Alteon, Inc. .................................................................. 115,000 395,313
Amgen, Inc. ................................................................... 35,300 2,773,256
Chiron Corp. .................................................................. 135,000 3,037,500
CuraGen Corp. ................................................................. 151,000 868,250
GelTex Pharmaceuticals, Inc. .................................................. 40,000 1,000,000
Genentech, Inc. ............................................................... 20,000 1,432,500
Genzyme Corp. (General Division) .............................................. 40,000 1,682,500
Gilead Sciences, Inc. ......................................................... 100,000 2,837,500
IDEC Pharmaceuticals Corp. .................................................... 70,000 2,091,250
ImClone Systems, Inc. ......................................................... 100,000 887,500
LifeCell Corp. ................................................................ 237,500 1,076,184
Ligand Pharmaceuticals, Inc., Class B.......................................... 200,000 2,175,000
Neurogen Corp. ................................................................ 107,500 1,464,688
SangStat Medical Corp. ........................................................ 40,000 830,000
Synaptic Pharmaceutical Corp. ................................................. 140,000 2,178,750
Texas Biotechnology Corp. ..................................................... 350,000 1,268,750
TRANSGENE SA, Sponsored ADR (France)........................................... 125,000 1,828,125
Triangle Pharmaceuticals, Inc. ................................................ 150,000 1,743,750
Vertex Pharmaceuticals, Inc. .................................................. 75,000 1,978,125
Vical, Inc. ................................................................... 115,000 1,495,000
ViroPharma, Inc. .............................................................. 70,000 1,268,750
-----------
34,700,191
-----------
Major Pharmaceuticals 4.2%
Chiroscience Group Plc. (United Kingdom)....................................... 623,000 2,921,258
-----------
Medical Specialties 14.8%
Anesta Corp. .................................................................. 40,600 677,513
Aradigm Corp. ................................................................. 116,600 1,355,475
DepoTech Corp. ................................................................ 182,300 267,762
Heska Corp. ................................................................... 210,000 1,036,875
Inhale Therapeutic Systems..................................................... 125,000 3,281,250
Molecular Devices Corp. ....................................................... 52,500 997,500
SYNSORB Biotech, Inc. (Canada)................................................. 278,000 557,078
Zonagen, Inc. ................................................................. 125,000 1,984,375
-----------
10,157,828
-----------
Other Pharmaceuticals 9.4%
Algos Pharmaceutical Corp. .................................................... 52,500 1,345,313
Aviron......................................................................... 146,000 2,774,000
Cell Therapeutics, Inc. ....................................................... 137,500 309,375
CollaGenex Pharmaceuticals, Inc. .............................................. 25,000 243,750
Medicis Pharmaceutical Corp., Class A.......................................... 30,000 1,503,750
Nastech Pharmaceutical, Inc. .................................................. 50,000 250,000
-----------
6,426,188
-----------
Precision Instruments 1.8%
The Perkin-Elmer Corp. ........................................................ 15,000 1,264,688
-----------
Total Long Term Investments (Cost $63,266,852)................................. 55,470,153
-----------
PRINCIPAL
Franklin Biotechnology Discovery Fund AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
c Repurchase Agreement 12.5%
Joint Repurchase Agreement, 5.350%, 11/02/98,
(Maturity Value $8,608,990) (Cost $8,605,154).................................. $8,605,154 $ 8,605,154
Barclays Capital Group, Inc. (Maturity Value $884,867)
Chase Securities, Inc. (Maturity Value $884,867)
CIBC Wood Gundy Securities Corp. (Maturity Value $884,867)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $884,867)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $884,867)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $645,187)
Greenwich Capital Markets, Inc. (Maturity Value $884,867)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $884,867)
Paribas Corp. (Maturity Value $884,867)
SBC Warburg Dillon Read, Inc. (Maturity Value $884,867)
Collateralized by U.S. Treasury Bills and Notes
-----------
Total Investments (Cost $71,872,006) 93.1%..................................... 64,075,307
Other Assets, less Liabilities 6.9%............................................ 4,747,247
-----------
Net Assets 100.0%.............................................................. $68,822,554
===========
aNon-income producing.
cSee Note 1(c) regarding joint repurchase agreement.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Blue Chip Fund
Class I
---------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
---------------------
(unaudited) 1998 19971
---------------------------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period .................................. $12.46 $10.85 $10.00
---------------------------------------
Income from investment operations:
Net investment income ................................................ .01 .09 .09
Net realized and unrealized gains (losses) ........................... (.35) 1.67 .82
---------------------------------------
Total from investment operations....................................... (.34) 1.76 .91
---------------------------------------
Less distributions from:
Net investment income ................................................ -- (.06) (.06)
Net realized gains ................................................... -- (.09) --
---------------------------------------
Total distributions ................................................... -- (.15) (.06)
---------------------------------------
Net asset value, end of period ........................................ $12.12 $12.46 $10.85
=======================================
Total return*.......................................................... (2.73%) 16.41% 9.14%
Ratios/supplemental data
Net assets, end of period (000's) ..................................... $22,323 $16,836 $5,600
Ratios to average net assets:
Expenses ............................................................. 1.25%** 1.25% 1.25%**
Expenses excluding waiver and payments by affiliate .................. 1.64%** 1.95% 2.22%**
Net investment income ................................................ .48%** 1.04% 1.07%**
Portfolio turnover rate ............................................... 11.12% 57.67% 11.14%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
1For the period June 3, 1996 (effective date) to April 30, 1997.
See notes to financial statement
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1998 (unaudited)
Franklin Blue Chip Fund COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks 86.8%
Consumer Durables 2.1%
Sony Corp. ........................................................ Japan 3,700 $ 234,961
Toyota Motor Corp. ................................................ Japan 10,000 240,281
-----------
475,242
-----------
Consumer Non-Durables 17.1%
Bestfoods.......................................................... United States 6,200 337,900
Gillette Co. ...................................................... United States 8,200 368,488
Kao Corp. ......................................................... Japan 12,000 243,028
L'OREAL............................................................ France 365 208,543
Nestle, SA, Registered Shares...................................... Switzerland 185 393,456
Nike, Inc., Class B................................................ United States 5,600 244,650
Panamerican Beverages, Inc., A Shares.............................. Mexico 10,400 210,600
PepsiCo, Inc. ..................................................... United States 6,600 222,750
Philip Morris Cos., Inc. .......................................... United States 6,500 332,313
Procter & Gamble Co. .............................................. United States 4,200 373,275
The Coca-Cola Co. ................................................. United States 6,800 459,850
Wm. Wrigley Jr. Co. ............................................... United States 5,300 428,969
-----------
3,823,822
-----------
Consumer Services 2.2%
Disney (Walt) Co. ................................................. United States 9,400 253,213
McDonald's Corp. .................................................. United States 3,400 227,375
-----------
480,588
-----------
Electronic Technology 10.2%
aApplied Materials, Inc. ........................................... United States 7,400 256,688
aCisco Systems, Inc. ............................................... United States 3,975 250,425
Compaq Computer Corp. ............................................. United States 4,500 142,312
Ericsson (L.M.) Telecommunications, Sponsored ADR.................. Sweden 14,500 328,063
Hewlett-Packard Co. ............................................... United States 5,400 325,013
Intel Corp. ....................................................... United States 4,000 356,750
Lucent Technologies, Inc. ......................................... United States 722 57,895
Molex, Inc. ....................................................... United States 8,500 303,343
Motorola, Inc. .................................................... United States 4,900 254,800
-----------
2,275,289
-----------
Energy Minerals 5.7%
British Petroleum Co., Plc., Sponsored ADR......................... United Kingdom 3,357 296,885
Exxon Corp. ....................................................... United States 5,200 370,500
Royal Dutch Petroleum Co., New York Shares ........................ Netherlands 7,800 384,150
YPF, SA, Sponsored ADR ............................................ Argentina 7,300 211,244
-----------
1,262,779
-----------
Finance 11.7%
American International Group, Inc. ................................ United States 6,912 589,248
Citigroup, Inc. ................................................... United States 5,250 247,078
Fannie Mae......................................................... United States 5,300 375,306
HSBC Holding, Plc. ................................................ United Kingdom 15,989 372,989
Finance (cont.)
J.P. Morgan & Co., Inc. ........................................... United States 2,200 $ 207,350
Merrill Lynch & Co., Inc. ......................................... United States 3,900 231,075
The Charles Schwab Corp. .......................................... United States 7,000 335,562
Tokio Marine & Fire Insurance Co., Sponsored ADR................... Japan 4,400 253,000
-----------
2,611,608
-----------
Health Technology 12.1%
Abbott Laboratories ............................................... United States 5,000 234,688
Eli Lilly & Co. ................................................... United States 4,400 356,125
Johnson & Johnson.................................................. United States 4,000 326,000
Medtronic, Inc. ................................................... United States 5,600 364,000
Merck & Co., Inc. ................................................. United States 2,900 392,225
Novartis, AG....................................................... Switzerland 230 414,430
Roche Holding, AG.................................................. Switzerland 28 326,699
Smithkline Beecham, Plc. .......................................... United Kingdom 23,186 288,883
-----------
2,703,050
-----------
Industrial Services 4.6%
aThe AES Corp. ..................................................... United States 11,000 450,312
Brambles Industries, Ltd. ......................................... Australia 12,700 277,302
Schlumberger, Ltd. ................................................ United States 6,000 315,000
-----------
1,042,614
-----------
Non-Energy Minerals .8%
De Beers Consolidated Mines, AG, ADR .............................. South Africa 12,200 175,375
-----------
Process Industries 6.1%
Avery Dennison Corp. .............................................. United States 9,300 385,369
Hutchison Whampoa, Ltd. ........................................... Hong Kong 38,000 272,270
Monsanto Co. ...................................................... United States 5,100 207,188
Praxair, Inc. ..................................................... United States 5,900 237,475
Sigma-Aldrich Corp. ............................................... United States 8,200 253,432
-----------
1,355,734
-----------
Producer Manufacturing 4.6%
General Electric Co. .............................................. United States 5,400 472,500
Minnesota Mining and Manufacturing Co. ............................ United States 4,200 336,000
Xerox Corp. ....................................................... United States 2,200 213,124
-----------
1,021,624
-----------
Retail Trade .8%
Wal-Mart Stores, Inc. ............................................. United States 2,600 179,400
-----------
Technology Services 3.8%
First Data Corp. .................................................. United States 9,600 254,400
aMicrosoft Corp. ................................................... United States 1,200 127,050
aOracle Corp. ...................................................... United States 8,500 251,281
SAP, AG............................................................ Germany 500 213,742
-----------
846,473
-----------
Utilities and Telecommunications 5.0%
aAirTouch Communications, Inc. ..................................... United States 3,400 $ 190,400
Bellsouth Corp. ................................................... United States 2,300 183,569
Enron Corp. ....................................................... United States 5,800 305,950
Telefonica de Espana, Sponsored ADR ............................... Spain 1,591 217,868
VEBA, AG........................................................... Germany 4,100 225,027
-----------
................................................................... 1,122,814
-----------
Total Long Term Investments (Cost $17,474,285)..................... 19,376,412
-----------
PRINCIPAL
AMOUNT
---------
c Repurchase Agreement 13.6%
Joint Repurchase Agreement, 5.350%, 11/02/98, (Maturity Value $3,029,704)
(Cost $3,028,354).................................................... United States $3,028,354 3,028,354
Barclays Capital Group, Inc. (Maturity Value $311,393)
Chase Securities, Inc. (Maturity Value $311,393)
CIBC Wood Gundy Securities Corp. (Maturity Value $311,393)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $311,393)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $311,393)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $227,167)
Greenwich Capital Markets, Inc. (Maturity Value $311,393)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $311,393)
Paribas Corp. (Maturity Value $311,393)
SBC Warburg Dillon Read, Inc. (Maturity Value $311,393)
Collateralized by U.S. Treasury Bills and Notes
-----------
Total Investments (Cost $20,502,639) 100.4%........................ 22,404,766
Other Assets, less Liabilities (.4%)............................... (82,262)
-----------
Net Assets 100.0%.................................................. $22,322,504
===========
aNon-income producing.
cSee Note 1(c) regarding joint repurchase agreement.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin California Growth Fund
Class I
---------------------------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
----------------------------------------------------
(unaudited) 1998 1997 1996 1995 1994
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period $24.97 $19.35 $18.26 $14.03 $12.05 $10.21
---------------------------------------------------------------------
Income from investment operations:
Net investment income ............. .06 .14 .13 .20 .16 .14
Net realized and unrealized gains (losses) (3.37) 6.48 1.51 6.03 3.04 2.43
---------------------------------------------------------------------
Total from investment operations ... (3.31) 6.62 1.64 6.23 3.20 2.57
---------------------------------------------------------------------
Less distributions from:
Net investment income ............. (.04) (.14) (.12) (.23) (.12) (.15)
Net realized gains ................ -- (.86) (.43) (1.77) (1.10) (.58)
---------------------------------------------------------------------
Total distributions ................ (.04) (1.00) (.55) (2.00) (1.22) (.73)
---------------------------------------------------------------------
Net asset value, end of period ..... $21.62 $24.97 $19.35 $18.26 $14.03 $12.05
=====================================================================
Total return*....................... (13.29%) 34.98% 8.94% 47.42% 29.09% 25.55%
Ratios/supplemental data
Net assets, end of period (000's) .. $661,395 $721,254 $282,898 $81,175 $13,844 $4,646
Ratios to average net assets:
Expenses .......................... 1.04%** .99% 1.08% .71% .25% .09%
Expenses excluding waiver and payments
by affiliate........................ 1.04%** .99% 1.08% 1.09% 1.27% 1.89%
Net investment income ............. .60%** .67% .84% 1.42% 1.63% 1.16%
Portfolio turnover rate ............ 17.62% 48.52% 44.81% 61.82% 79.52% 135.12%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
Prior to May 1, 1994, dividends from net investment income were reinvested at
the offering price.
**Annualized.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
Franklin California Growth Fund (cont.)
Class II
-----------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
----------------------
(unaudited) 1998 19971
-----------------------------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period .............................. $24.81 $19.27 $18.05
-----------------------------------------
Income from investment operations:
Net investment income (loss) ..................................... (.01) -- .05
Net realized and unrealized gains (losses) ....................... (3.35) 6.43 1.65
-----------------------------------------
Total from investment operations .................................. (3.36) 6.43 1.70
-----------------------------------------
Less distributions from:
Net investment income ............................................ -- (.03) (.05)
Net realized gains ............................................... -- (.86) (.43)
-----------------------------------------
Total distributions ............................................... -- (.89) (.48)
-----------------------------------------
Net asset value, end of period .................................... $21.45 $24.81 $19.27
=========================================
Total return*...................................................... (13.58%) 34.02% 9.32%
Ratios/supplemental data
Net assets, end of period (000's) ................................. $125,962 $122,701 $24,556
Ratios to average net assets:
Expenses ......................................................... 1.80%** 1.74% 1.86%**
Net investment income (loss) ..................................... (.16%)** (.10%) .05%**
Portfolio turnover rate ........................................... 17.62% 48.52% 44.81%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
1For the period September 3, 1996 (effective date) to April 30, 1997.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1998 (unaudited)
Franklin California Growth Fund SHARES VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks 90.1%
aCommercial Services 1.8%
fRemedyTemp, Inc., Class A.............................................. 375,000 $ 6,843,750
Robert Half International, Inc. ....................................... 175,000 7,021,875
-----------
13,865,625
-----------
Consumer Durables 3.8%
aActivision, Inc. ....................................................... 350,000 3,696,875
aElectronic Arts, Inc. .................................................. 250,000 10,281,250
K2, Inc. ............................................................... 250,000 2,750,000
Mattel, Inc. ........................................................... 375,000 13,453,125
-----------
30,181,250
-----------
Consumer Non-Durables 2.1%
aAurora Foods, Inc. ..................................................... 150,000 2,625,000
Clorox Co. ............................................................. 110,000 12,017,500
aGolden State Vintners, Inc., Class B.................................... 150,000 1,575,000
-----------
16,217,500
-----------
Consumer Services 2.6%
Disney (Walt) Co. ...................................................... 75,000 2,020,313
aFoodmaker, Inc. ........................................................ 50,000 790,625
aIDG Books Worldwide, Inc. .............................................. 72,600 1,125,300
The McClatchy Co., Class A ............................................. 175,000 5,939,063
United Television, Inc. ................................................ 60,000 6,615,000
aUnivision Communications Inc., Class A ................................. 125,000 3,687,500
-----------
20,177,801
-----------
Electronic Technology 22.3%
a3com Corp. ............................................................. 200,000 7,212,500
aApplied Materials, Inc. ................................................ 150,000 5,203,125
aApplied Micro Circuits Corp. ........................................... 300,000 7,200,000
aCisco Systems, Inc. .................................................... 337,500 21,262,500
aCoherent, Inc. ......................................................... 375,000 4,406,250
aCom21, Inc. ............................................................ 96,900 1,453,500
aComputer Sciences Corp. ................................................ 250,000 13,187,500
aCypress Semiconductor Corp. ............................................ 600,000 6,675,000
aEtec Systems, Inc. ..................................................... 150,000 5,081,250
aFlextronics International Ltd. ......................................... 175,000 9,089,063
Hewlett-Packard Co. .................................................... 175,000 10,532,813
Intel Corp. ............................................................ 100,000 8,918,750
aJavelin Systems, Inc. .................................................. 185,000 1,295,000
aKLA-Tencor Corp. ....................................................... 125,000 4,609,375
Linear Technology Corp. ................................................ 125,000 7,453,125
Northrop Grumman Corp. ................................................. 75,000 5,981,250
aSanmina Corp. .......................................................... 125,000 5,125,000
aSeagate Technology, Inc. ............................................... 375,000 9,890,625
aSolectron Corp. ........................................................ 125,000 7,156,250
aSpectra-Physics Lasers, Inc. ........................................... 176,500 1,318,243
aSun Microsystems, Inc. ................................................. 250,000 14,562,500
Electronic Technology (cont.)
aUniphase Corp. ......................................................... 180,000 $ 8,910,000
aXilinx, Inc. ........................................................... 200,000 8,931,260
-----------
175,454,879
-----------
Energy Minerals 6.2%
Atlantic Richfield Co. (ARCO)........................................... 175,000 12,053,125
Chevron Corp. .......................................................... 175,000 14,262,500
aNuevo Energy Co. ....................................................... 325,000 6,885,938
Ultramar Diamond Shamrock Corp. ........................................ 300,000 8,081,250
Unocal Corp. ........................................................... 225,000 7,635,938
-----------
48,918,751
-----------
Finance 8.7%
aBA Merchant Services, Inc., Class A..................................... 525,000 8,531,250
The Charles Schwab Corp. ............................................... 150,000 7,190,625
Countrywide Credit Industries, Inc. .................................... 225,000 9,717,188
aE*TRADE Group, Inc. .................................................... 150,000 2,700,000
aFreedom Securities Corp. ............................................... 95,900 1,306,638
Mercury General Corp. .................................................. 50,000 2,125,000
aPBOC Holdings, Inc. .................................................... 250,000 2,406,250
Providian Financial Corp. .............................................. 150,000 11,906,250
aSilicon Valley Bancshares............................................... 375,000 7,687,500
The PMI Group, Inc. .................................................... 40,000 2,017,500
Washington Mutual, Inc. ................................................ 168,750 6,317,578
Zenith National Insurance Corp. ........................................ 250,000 6,390,619
-----------
68,296,398
-----------
Health Services 2.0%
a,fCohr, Inc. ........................................................... 425,000 1,275,000
McKesson Corp. ......................................................... 85,000 6,545,000
aTotal Renal Care Holdings, Inc. ........................................ 325,000 7,962,500
-----------
15,782,500
-----------
Health Technology 4.3%
aChiron Corp. ........................................................... 300,000 6,750,000
aDura Pharmaceuticals, Inc. ............................................. 150,000 1,809,375
aInhale Therapeutic Systems.............................................. 325,000 8,531,250
Mentor Corp. ........................................................... 100,000 1,700,000
aMolecular Devices Corp. ................................................ 200,000 3,800,000
Mylan Laboratories, Inc. ............................................... 181,424 6,247,789
aNanogen, Inc. .......................................................... 175,000 875,000
aThe Cooper Companies, Inc. ............................................. 175,000 4,156,250
-----------
33,869,664
-----------
Industrial Services 3.0%
aCatalytica, Inc. ....................................................... 375,000 6,093,750
aEmcon................................................................... 275,400 963,900
Granite Construction, Inc. ............................................. 325,000 10,826,563
aVarco International, Inc. .............................................. 550,000 5,946,875
-----------
23,831,088
-----------
Process Industries 1.3%
Avery Dennison Corp. ................................................... 250,000 $ 10,359,375
-----------
Producer Manufacturing 2.1%
Reliance Steel & Aluminum Co. .......................................... 225,000 6,960,938
aSimpson Manufacturing Co., Inc. ........................................ 100,000 3,275,000
Superior Industries International, Inc. ................................ 250,000 6,546,875
-----------
16,782,813
-----------
Real Estate 7.2%
Alexandria Real Estate Equities, Inc. .................................. 175,000 4,670,313
AMB Property Corp. ..................................................... 325,000 7,475,000
Arden Realty, Inc. ..................................................... 475,000 10,271,875
Burnham Pacific Properties, Inc. ....................................... 600,000 7,875,000
aCatellus Development Corp. ............................................. 325,000 4,468,750
Innkeepers USA Trust.................................................... 200,000 2,300,000
Irvine Apartment Communities, Inc. ..................................... 200,000 5,250,000
ePacific Retail Trust.................................................... 359,922 3,984,337
Spieker Properties, Inc. ............................................... 300,000 10,350,000
-----------
56,645,275
-----------
aRetail Trade 5.1%
Cost Plus, Inc. ........................................................ 200,000 6,000,000
Costco Co., Inc. ....................................................... 150,000 8,512,500
Federated Department Stores, Inc. ...................................... 75,000 2,882,813
Office Depot, Inc. ..................................................... 250,000 6,250,000
Safeway, Inc. .......................................................... 310,000 14,821,875
Software.net Corp. ..................................................... 200,000 1,850,000
-----------
40,317,188
-----------
aTechnology Services 9.8%
Actuate Software Corp. ................................................. 44,200 469,625
Brio Technology, Inc. .................................................. 74,600 615,450
BroadVision, Inc. ...................................................... 125,000 1,875,000
Clarify, Inc. .......................................................... 250,000 3,406,250
Documentum, Inc. ....................................................... 75,000 2,550,000
EarthLink Network, Inc. ................................................ 50,000 1,925,000
HNC Software, Inc. ..................................................... 300,000 10,087,500
i2 Technologies, Inc. .................................................. 100,000 1,862,500
Inprise Corp. .......................................................... 300,000 1,481,250
Intuit, Inc. ........................................................... 163,800 8,271,900
Micromuse, Inc. ........................................................ 250,000 4,265,625
PeopleSoft, Inc. ....................................................... 50,000 1,059,375
Synopsys, Inc. ......................................................... 325,000 14,706,250
Vantive Corp. .......................................................... 250,000 1,828,125
VERITAS Software Corp. ................................................. 175,000 8,771,875
Wind River Systems, Inc. ............................................... 325,000 14,239,063
-----------
77,414,788
-----------
Transportation 1.8%
Air Express International Corp. ........................................ 350,000 $ 7,350,000
Expeditors International of Washington, Inc. ........................... 200,000 6,775,000
-----------
14,125,000
-----------
Utilities and Telecommunications 6.0%
aAirTouch Communications, Inc. ......................................... 225,000 12,600,000
American States Water Co. .............................................. 168,900 4,433,625
California Water Service Group.......................................... 180,000 4,747,500
Edison International.................................................... 450,000 11,868,750
Sempra Energy........................................................... 512,785 13,332,410
-----------
46,982,285
-----------
Total Common Stocks (Cost $659,758,904)................................. 709,222,180
-----------
Preferred Stocks .6%
Finance .6%
Glenborough Realty Trust, cvt. pfd.,7.75% Series A ..................... 240,000 4,605,000
-----------
Total Preferred Stocks (Cost $6,000,000) ............................... 4,605,000
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
---------
Convertible Bonds .3%
Technology Services .3%
<S> <C> <C>
Activision Inc., cvt. sub. notes, 144A, 6.75%, 1/01/05 ................... $ 3,000,000 2,625,000
------------
Total Convertible Bonds (Cost $3,000,000)................................. 2,625,000
------------
Total Long Term Investments (Cost $668,758,904)........................... 716,452,180
------------
cRepurchase Agreement 8.9%
Joint Repurchase Agreement, 5.350%, 11/02/98,
(Maturity Value $70,202,366) (Cost $70,171,082)........................ 70,171,082 70,171,082
Barclays Capital Group, Inc. (Maturity Value $7,215,685)
Chase Securities, Inc. (Maturity Value $7,215,685)
CIBC Wood Gundy Securities Corp. (Maturity Value $7,215,685)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $7,215,684)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $7,215,684)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $5,261,206)
Greenwich Capital Markets, Inc. (Maturity Value $7,215,684)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $7,215,685)
Paribas Corp. (Maturity Value $7,215,684)
SBC Warburg Dillon Read, Inc. (Maturity Value $7,215,684)
Collateralized by U.S. Treasury Bills and Notes
------------
Total Investments (Cost $738,929,986) 99.9%............................... 786,623,262
Other Assets, less Liabilities .1%........................................ 734,263
------------
Net Assets 100.0% ........................................................ $787,357,525
============
aNon-income producing.
cSee Note 1(c) regarding joint repurchase agreement.
eSee Note 8 regarding restricted securities.
fSee Note 9 regarding holdings of 5% voting securities.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Global Health Care Fund
Class I
-------------------------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
--------------------------------------------------
(unaudited) 1998 1997 1996 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period .... $19.28 $16.11 $19.34 $11.45 $10.43 $8.88
-------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) ........... (.09) (.14) (.06) .11 .08 .07
Net realized and unrealized gains (losses) (4.06) 4.58 (2.75) 8.96 1.56 1.86
-------------------------------------------------------------------
Total from investment operations ........ (4.15) 4.44 (2.81) 9.07 1.64 1.93
-------------------------------------------------------------------
Less distributions from:
Net investment income .................. -- (.09) (.04) (.13) (.06) (.08)
Net realized gains ..................... -- (1.18) (.38) (1.05) (.56) (.30)
-------------------------------------------------------------------
Total distributions ..................... -- (1.27) (.42) (1.18) (.62) (.38)
-------------------------------------------------------------------
Net asset value, end of period .......... $15.13 $19.28 $16.11 $19.34 $11.45 $10.43
===================================================================
Total return*............................ (21.52%) 28.22% (14.71%) 82.78% 16.33% 21.93%
Ratios/supplemental data
Net assets, end of period (000's) ....... $111,930 $176,545 $150,653 $108,914 $12,906 $5,795
Ratios to average net assets:
Expenses ............................... 1.32%** 1.15% 1.14% .73% .25% .10%
Expenses excluding waiver and payments by affiliate 1.32%** 1.15% 1.14% 1.16% 1.37% 1.74%
Net investment income (loss) ........... (.91%)** (.67%) (.39%) .50% .80% .68%
Portfolio turnover rate ................. 9.97% 66.84% 73.17% 54.78% 93.79% 110.82%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
Prior to May 1, 1994, dividends from net investment income were reinvested at
the offering price.
**Annualized.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
Franklin Global Health Care Fund (cont.)
Class II
--------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
-----------------------
(unaudited) 1998 19971
--------------------------------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ......................... $19.17 $16.07 $17.37
--------------------------------------------
Income from investment operations:
Net investment loss ......................................... (.11) (.20) (.07)
Net realized and unrealized gains (losses) .................. (4.08) 4.48 (.85)
--------------------------------------------
Total from investment operations ............................. (4.19) 4.28 (.92)
--------------------------------------------
Less distributions from net realized gains ................... -- (1.18) (.38)
--------------------------------------------
Net asset value, end of period ............................... $14.98 $19.17 $16.07
============================================
Total return*................................................. (21.86%) 27.22% (5.47%)
Ratios/supplemental data
Net assets, end of period (000's) ............................ $18,806 $25,321 $10,099
Ratios to average net assets:
Expenses .................................................... 2.07%** 1.90% 1.92%**
Net investment loss ......................................... (1.66%)** (1.44%) (1.29%)**
Portfolio turnover rate ...................................... 9.97% 66.84% 73.17%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
1For the period September 3, 1996 (effective date) to April 30, 1997.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1998 (unaudited)
Franklin Global Health Care Fund SHARES VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks 85.7%
aBiotechnology 7.8%
Ligand Pharmaceuticals, Class B............................................... 325,000 $ 3,534,371
Neurogen Corp. ............................................................... 124,600 1,697,675
Noven Pharmaceutical, Inc. ................................................... 113,800 462,313
Vertex Pharmaceuticals, Inc. ................................................. 170,000 4,483,750
------------
10,178,109
------------
Generic Drugs 6.5%
Mylan Laboratories, Inc. ..................................................... 249,000 8,574,938
------------
aHospital/Nursing Management 4.1%
New American Healthcare Corp. ................................................ 170,700 1,813,688
Tenet Healthcare Corp. ....................................................... 125,000 3,492,188
------------
5,305,876
------------
Major Pharmaceuticals 5.2%
Novartis, AG (Switzerland).................................................... 2,900 5,225,418
SmithKline Beecham, Plc., Sponsored ADR (United Kingdom)...................... 25,000 1,593,750
------------
6,819,16
------------
Managed Health Care 1.7%
United Healthcare Corp. ...................................................... 50,000 2,178,125
------------
aMedical Electronics 1.9%
OrthoLogic Corp. ............................................................. 500,000 1,562,500
Somnus Medical Technologies, Inc. ............................................ 290,000 906,250
------------
2,468,750
------------
Medical Specialties 27.8%
aAnesta Corp. ................................................................ 75,000 1,251,563
aBoston Scientific Corp. ..................................................... 50,000 2,721,875
a,fCIMA Labs, Inc. ........................................................... 437,500 1,093,750
Cochlear, Ltd. (Australia).................................................... 225,000 1,134,891
aDepoTech Corp. .............................................................. 350,000 514,080
aESC Medical Systems, Ltd. (Israel)........................................... 430,500 3,497,813
aHeska Corp. ................................................................. 125,000 617,188
aInhale Therapeutic Systems .................................................. 251,400 6,599,250
Mentor Corp. ................................................................. 120,000 2,040,000
aMolecular Devices Corp. ..................................................... 270,000 5,130,000
aSerologicals Corp. .......................................................... 338,650 7,661,956
aZonagen, Inc. ............................................................... 260,000 4,127,500
------------
36,389,866
------------
Medical/Dental Distributors 1.1%
Cardinal Health, Inc. ........................................................ 15,000 1,418,438
------------
aMedical/Nursing Services 12.0%
Pediatrix Medical Group, Inc. ................................................ 62,100 2,895,413
Renal Care Group, Inc. ....................................................... 300,000 8,737,500
Total Renal Care Holdings, Inc. .............................................. 163,200 3,998,400
------------
15,631,313
------------
aOther Pharmaceuticals 4.6%
Algos Pharmaceutical Corp. ................................................... 200,000 $ 5,125,000
Dura Pharmaceuticals, Inc. ................................................... 75,000 904,688
------------
6,029,688
------------
Services To The Health Industry 13.0%
aAccess Health, Inc. ......................................................... 175,000 6,278,124
a,fCohr, Inc. ................................................................ 405,500 1,216,500
HBO & Co. .................................................................... 100,000 2,625,000
aHealthcare Recoveries, Inc. ................................................. 210,000 2,126,250
aPharmaceutical Product Development, Inc. .................................... 100,000 2,700,000
aTransitions Systems, Inc. ................................................... 200,000 2,087,500
------------
17,033,374
------------
Total Long Term Investments (Cost $125,105,897)............................... 112,027,645
------------
PRINCIPAL
AMOUNT
---------
cRepurchase Agreement 11.5%
Joint Repurchase Agreement, 5.350%, 11/02/98, (Maturity Value $15,103,312)
(Cost $15,096,582).............................................................. $15,096,582 15,096,582
Barclays Capital Group, Inc. (Maturity Value $1,552,380)
Chase Securities, Inc. (Maturity Value $1,552,380)
CIBC Wood Gundy Securities Corp. (Maturity Value $1,552,380)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $1,552,380)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $1,552,380)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $1,131,892)
Greenwich Capital Markets, Inc. (Maturity Value $1,552,380)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $1,552,380)
Paribas Corp. (Maturity Value $1,552,380)
SBC Warburg Dillon Read, Inc. (Maturity Value $1,552,380 )
Collateralized by U.S. Treasury Bills and Notes
------------
Total Investments (Cost $140,202,479) 97.2%................................... 127,124,227
Other Assets, less Liabilities 2.8%........................................... 3,611,917
------------
Net Assets 100.0% ............................................................ $130,736,144
============
aNon-income producing.
cSee Note 1(c) regarding joint repurchase agreement.
fSee Note 9 regarding holdings of 5% voting securities.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Global Utilities Fund
Class I
-----------------------------------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
-----------------------------------------------------------
(unaudited) 1998 1997 1996 1995 1994
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ......... $17.36 $14.46 $14.28 $12.23 $12.60 $11.36
-----------------------------------------------------------------------------
Income from investment operations:
Net investment income ....................... .16 .33 .42 .37 .42 .30
Net realized and unrealized gains (losses)... (2.00) 4.69 1.35 2.39 (.07) 1.28
-----------------------------------------------------------------------------
Total from investment operations.............. (1.84) 5.02 1.77 2.76 .35 1.58
-----------------------------------------------------------------------------
Less distributions from:
Net investment income ....................... (.11) (.37) (.38) (.39) (.36) (.30)
Net realized gains .......................... -- (1.75) (1.21) (.32) (.36) (.04)
-----------------------------------------------------------------------------
Total distributions .......................... (.11) (2.12) (1.59) (.71) (.72) (.34)
-----------------------------------------------------------------------------
Net asset value, end of period ............... $15.41 $17.36 $14.46 $14.28 $12.23 $12.60
=============================================================================
Total return*................................. (10.61%) 37.02% 12.94% 23.27% 3.17% 14.04%
Ratios/supplemental data
Net assets, end of period (000's) ............ $195,108 $226,594 $174,023 $167,225 $119,250 $124,188
Ratios to average net assets:
Expenses .................................... 1.02%** 1.03% 1.00% 1.04% 1.12% .84%
Expenses excluding waiver and payments
by affiliate................................ 1.02%** 1.03% 1.00% 1.04% 1.12% 1.28%
Net investment income ....................... 1.97%** 2.02% 2.82% 2.85% 3.47% 2.95%
Portfolio turnover rate ...................... 26.89% 45.51% 47.55% 50.51% 16.65% 16.28%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
Prior to May 1, 1994, dividends from net investment income were reinvested at
the offering price.
**Annualized.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
Franklin Global Utilities Fund (cont.)
Class II
-------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
-------------------------------
(unaudited) 1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ................ $17.25 $14.37 $14.24 $12.23
-------------------------------------------------
Income from investment operations:
Net investment income .............................. .10 .24 .32 .37
Net realized and unrealized gains (losses) ......... (1.99) 4.66 1.33 2.32
-------------------------------------------------
Total from investment operations .................... (1.89) 4.90 1.65 2.69
-------------------------------------------------
Less distributions from:
Net investment income .............................. (.08) (.27) (.31) (.36)
Net realized gains ................................. -- (1.75) (1.21) (.32)
-------------------------------------------------
Total distributions ................................. (.08) (2.02) (1.52) (.68)
-------------------------------------------------
Net asset value, end of period ...................... $15.28 $17.25 $14.37 $14.24
=================================================
Total return*........................................ (11.00%) 36.21% 12.04% 22.63%
Ratios/supplemental data
Net assets, end of period (000's) ................... $15,892 $16,324 $8,467 $2,727
Ratios to average net assets:
Expenses ........................................... 1.77%** 1.78% 1.77% 1.81%
Net investment income .............................. 1.22%** 1.29% 1.98% 2.10%
Portfolio turnover rate ............................. 26.89% 45.51% 47.55% 50.51%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1998 (unaudited)
Franklin Global Utilities Fund COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks 89.1%
aElectronic Technology .5%
Applied Micro Circuits Corp. ................................ United States 40,700 $ 976,800
---------
Industrial Services 3.8%
aCogeneration Corp. of America............................... United States 260,500 2,328,219
The AES Corp. ............................................... United States 140,000 5,731,250
---------
8,059,469
---------
Process Industries 2.4%
VEBA, AG .................................................... Germany 60,700 3,331,500
Viag, AG..................................................... Germany 2,600 1,764,521
---------
5,096,021
---------
Producer Manufacturing .3%
Alcatel Alsthom.............................................. France 5,000 556,955
---------
aTechnology Services 1.4%
Equant NV.................................................... Netherlands 69,300 3,031,875
---------
Utilities and Telecommunications 80.7%
aAEM, SpA..................................................... Italy 1,055,000 1,430,923
AGL Resources, Inc. ......................................... United States 29,000 607,188
aAirTouch Communications, Inc. ............................... United States 135,150 7,568,400
Beijing Datang Power Generation Co., Ltd. ................... Hong Kong 509,000 157,707
Bell Atlantic Corp. ......................................... United States 60,000 3,187,500
BSES, Ltd., 144A............................................. India 21,400 263,220
CINergy Corp. ............................................... United States 67,000 2,311,500
Coastal Corp. ............................................... United States 68,000 2,397,000
Companhia Paranaense de Energia-Copel, Sponsored ADR......... Brazil 41,700 323,175
Dominion Resources, Inc. .................................... United States 40,000 1,847,500
Duke Energy Corp. ........................................... United States 95,701 6,190,658
Edison International......................................... United States 150,000 3,956,250
Electricidade de Portugal, SA ............................... Portugal 76,000 1,912,031
Endesa, SA................................................... Spain 110,000 2,767,149
Enron Corp. ................................................. United States 127,000 6,699,250
Entergy Corp. ............................................... United States 77,000 2,213,750
Espoon Sahko Oy, 144A........................................ Finland 195,000 4,547,478
EVN, AG...................................................... Austria 3,360 478,663
Florida Progress Corp. ...................................... United States 90,000 3,774,375
FPL Group, Inc. ............................................. United States 39,000 2,439,938
aGlobal Crossing, Ltd. ....................................... Bermuda 49,500 1,423,125
aGlobal TeleSystems Group, Inc. .............................. United States 145,300 5,821,081
Grupo Iusacell, SA, Series D................................. Mexico 44,400 26,751
aGrupo Iusacell, SA, Series L, Sponsored ADR.................. Mexico 53,200 365,750
Hellenic Telecommunications Organization, SA................. Greece 129,539 2,944,850
Hong Kong Electric Holdings, Ltd. ........................... Hong Kong 687,500 2,520,656
aICG Communications, Inc. .................................... United States 240,000 4,965,000
aIntermedia Communications, Inc. ............................. United States 116,900 2,162,650
aMCI WorldCom, Inc. .......................................... United States 50,000 2,762,500
MDU Resources Group, Inc. ................................... United States 133,200 3,538,125
Utilities and Telecommunications (cont.)
aMillicom International Cellular, SA.......................... Luxembourg 60,000 $ 2,002,500
Montana Power Co. ........................................... United States 46,900 2,031,356
National Fuel Gas Co. ....................................... United States 109,000 5,150,250
National Power, Plc. ........................................ United Kingdom 97,500 845,782
New Century Energies, Inc. .................................. United States 50,000 2,415,625
New Jersey Resources Corp. .................................. United States 125,400 4,820,063
Northwestern Corp. .......................................... United States 191,600 4,730,125
Pacific Gas & Electric Co. .................................. United States 100,000 3,043,750
PacifiCorp................................................... United States 175,000 3,335,938
aPaging Network, Inc. ........................................ United States 175,000 962,500
Pinnacle West Capital Corp. ................................. United States 80,000 3,505,000
Portugal Telecom, SA......................................... Portugal 119,900 5,685,477
PowerGen, Plc. .............................................. United Kingdom 104,626 1,484,920
aPrimus Telecommunications Group, Inc. ....................... United States 203,800 2,254,538
aRural Cellular Corp., Class A................................ United States 95,700 1,148,400
SBC Communications, Inc. .................................... United States 115,800 5,362,988
Scottish Power, Plc. ........................................ United Kingdom 180,000 1,767,927
Sempra Energy................................................ United States 264,668 6,881,368
Southern Co. ................................................ United States 146,500 4,129,469
aSwisscom, AG ................................................ Switzerland 10,100 3,423,476
TECO Energy, Inc. ........................................... United States 100,000 2,762,500
Telecom Italia, SpA ......................................... Italy 1,004,767 5,088,693
Telefonica de Argentina, ADS................................. Argentina 34,200 1,130,738
Telefonica de Espana, Sponsored ADR ......................... Spain 27,110 3,712,376
TNP Enterprises, Inc. ....................................... United States 140,000 4,725,000
Tokyo Electric Power Co. .................................... Japan 48,000 1,215,138
Transportadora de Gas del Sur, SA, Sponsored ADR............. Argentina 179,000 1,845,938
TRICOM, SA, Sponsored ADR.................................... Dominican Republic 150,000 871,875
Videsh Sanchar Nigam, Ltd., Sponsored GDR, 144A.............. India 140,000 1,470,000
Washington Water Power Co. .................................. United States 47,000 884,188
Western Resources, Inc. ..................................... United States 1,700 59,497
............................................................. 170,351,538
-----------
Total Common Stocks (Cost $146,036,866)...................... 188,072,658
-----------
Convertible Preferred Stocks 3.9%
eCMS Energy Trust I, 7.75% cvt. pfd. ........................ United States 35,000 1,892,188
Nortel Inversora, SA, 10.00% cvt. pfd. ...................... Argentina 80,000 4,510,000
Texas Utilities Co., 9.25% cvt. pfd. ........................ United States 31,000 1,747,625
---------
Total Convertible Preferred Stocks (Cost $8,629,000)......... 8,149,813
---------
Total Long Term Investments (Cost $154,665,866).............. 196,222,471
-----------
PRINCIPAL
Franklin Global Utilities Fund COUNTRY AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
cRepurchase Agreement 7.0%
Joint Repurchase Agreement, 5.350%, 11/02/98,
(Maturity Value $14,780,940)
(Cost $14,774,353) .......................................... United States $14,774,353 $ 14,774,353
Barclays Capital Group, Inc. (Maturity Value $1,519,253)
Chase Securities, Inc. (Maturity Value $1,519,253)
CIBC Wood Gundy Securities Corp. (Maturity Value $1,519,252)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $1,519,252)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $1,519,252)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $1,107,669)
Greenwich Capital Markets, Inc. (Maturity Value $1,519,252)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $1,519,253)
Paribas Corp. (Maturity Value $1,519,252)
SBC Warburg Dillon Read, Inc. (Maturity Value $1,519,252)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $169,440,219) 100.0%................. 210,996,824
-----------
Other Assets, less Liabilities .............................. 3,115
-----------
Net Assets 100.0% ........................................... $210,999,939
===========
aNon-income producing.
cSee Note 1(c) regarding joint repurchase agreement.
eSee Note 8 regarding restricted securities.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin MidCap Growth Fund
Class I
------------------------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
-------------------------------------------------
(unaudited) 1998 1997 1996 1995 19941
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ....... $17.44 $13.34 $14.24 $10.81 $10.05 $10.00
------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)............... .01 -- (.02) .18 .21 .15
Net realized and unrealized gains (losses) (3.73) 4.66 .93 3.59 .77 .01
------------------------------------------------------------------
Total from investment operations ........... (3.72) 4.66 .91 3.77 .98 .16
------------------------------------------------------------------
Less distributions from:
Net investment income ..................... -- -- (.05) (.21) (.20) (.08)
Net realized gains ........................ -- (.56) (1.76) (.13) (.02) (.03)
------------------------------------------------------------------
Total distributions ........................ -- (.56) (1.81) (.34) (.22) (.11)
------------------------------------------------------------------
Net asset value, end of period ............. $13.72 $17.44 $13.34 $14.24 $10.81 $10.05
==================================================================
Total return*............................... (21.33%) 35.53% 6.31% 35.40% 10.06% 1.62%
Ratios/supplemental data
Net assets, end of period (000's) .......... $29,163 $29,864 $12,853 $7,575 $5,591 $5,079
Ratios to average net assets:
Expenses .................................. 1.22%** 1.17% 1.07% .16% -- --
Expenses excluding waiver and payments
by affiliate.............................. 1.22%** 1.17% 1.07% .96% .98% .91%**
Net investment income (loss) .............. .20%** (.03%) (.22%) 1.42% 2.12% 2.21%**
Portfolio turnover rate .................... 24.88% 50.16% 76.35% 102.65% 163.54% 70.53%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
Prior to May 1, 1994, dividends from net investment income were reinvested at
the offering price.
**Annualized.
1For the period August 17, 1993 (effective date) to April 30, 1994.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1998 (unaudited)
Franklin MidCap Growth Fund SHARES VALUE
- -------------------------------------------------------------------------------------------------------
Common Stocks 78.1%
<S> <C> <C>
aCommercial Services 4.3%
Robert Half International, Inc. ....................................... 6,900 $ 276,863
Sylvan Learning Systems, Inc. ......................................... 20,950 646,830
U.S. Foodservice, Inc. ................................................ 7,000 332,500
----------
1,256,193
----------
Consumer Durables 2.7%
Clayton Homes, Inc. ................................................... 27,375 422,602
aElectronic Arts, Inc. ................................................. 6,500 267,313
K2, Inc. .............................................................. 7,400 81,400
----------
771,315
----------
Consumer Non-Durables 3.5%
The Estee Lauder Cos., Inc., Class A................................... 8,300 544,169
aJones Apparel Group, Inc. ............................................. 20,000 345,000
aTommy Hilfiger Corp. .................................................. 3,000 139,313
----------
1,028,482
----------
Consumer Services 11.1%
aApollo Group, Inc, Class A............................................. 18,000 578,250
aChancellor Media Corp. ................................................ 11,800 452,825
aDeVry, Inc. ........................................................... 25,200 554,400
aEducation Management Corp. ............................................ 7,900 290,325
aHost Marriott Corp. ................................................... 18,000 261,000
ITT Educational Services, Inc. ........................................ 14,000 415,625
aStarbucks Corp. ....................................................... 8,000 347,000
The McClatchy Co., Class A............................................. 9,800 332,588
----------
3,232,013
----------
Electronic Technology 7.8%
aAltera Corp. .......................................................... 7,900 328,838
aComputer Sciences Corp. ............................................... 6,000 316,500
Linear Technology Corp. ............................................... 5,500 327,938
aMettler-Toledo International, Inc. .................................... 18,000 393,750
aSeagate Technology, Inc. .............................................. 11,500 303,313
aTellabs, Inc. ......................................................... 5,800 319,000
aXilinx, Inc. .......................................................... 6,600 294,732
----------
2,284,071
----------
aEnergy Minerals .7%
Barrett Resources Corp. ............................................... 8,500 200,281
----------
Finance 11.0%
BankBoston Corp. ...................................................... 5,200 191,425
Countrywide Credit Industries, Inc. ................................... 9,500 410,281
Espirito Santo Financial Group, ADR (Luxembourg)....................... 11,400 192,375
EVEREN Capital Corp. .................................................. 2,800 57,050
Federated Investors, Inc. ............................................. 19,200 344,400
Financial Security Assurance Holdings, Ltd. ........................... 7,600 378,575
Hartford Life, Inc., Class A........................................... 5,000 231,250
HCC Insurance Holdings, Inc. .......................................... 18,000 322,875
Providian Financial Corp. ............................................. 4,300 341,313
Finance (cont.)
Reinsurance Group of America, Inc. .................................... 5,000 $ 275,625
Republic New York Corp. ............................................... 4,000 167,250
The PMI Group, Inc. ................................................... 6,000 302,625
----------
3,215,044
----------
aHealth Services 1.4%
HEALTHSOUTH Corp. ..................................................... 18,300 221,888
Total Renal Care Holdings, Inc. ....................................... 7,600 186,200
----------
408,088
----------
Health Technology 3.1%
Mentor Corp. .......................................................... 6,800 115,600
Omnicare, Inc. ........................................................ 12,000 414,750
aQuintiles Transnational Corp. ......................................... 8,500 384,625
----------
914,975
----------
Industrial Services 6.2%
aThe AES Corp. ......................................................... 9,200 376,625
Diamond Offshore Drilling, Inc. ....................................... 6,000 184,125
aRepublic Services, Inc. ............................................... 15,000 328,125
Transocean Offshore, Inc. ............................................. 11,800 435,863
aVarco International, Inc. ............................................. 17,400 188,138
Waste Management, Inc. ................................................ 6,500 293,313
----------
1,806,189
----------
Process Industries 3.0%
AptarGroup, Inc. ...................................................... 8,000 214,000
Bowater, Inc. ......................................................... 3,200 130,600
aOwens-Illinois, Inc. .................................................. 8,000 244,500
Sigma-Aldrich Corp. ................................................... 9,000 278,157
----------
867,257
----------
Producer Manufacturing 2.4%
aGentex Corp. .......................................................... 20,200 296,688
Mark IV Industries, Inc. .............................................. 13,450 206,794
aWeatherford International, Inc. ....................................... 7,100 193,030
----------
696,512
----------
Real Estate 3.8%
Arden Realty, Inc. .................................................... 10,300 222,738
Cornerstone Properties, Inc. .......................................... 12,600 195,300
Equity Residential Properties Trust.................................... 4,700 197,400
MeriStar Hospitality Corp. ............................................ 12,000 222,000
aSecurity Capital Group, Inc., Class B.................................. 16,200 258,188
----------
1,095,626
----------
Retail Trade 5.7%
aCost Plus, Inc. ....................................................... 10,000 300,000
Family Dollar Stores, Inc. ............................................ 24,000 435,000
aGuitar Center, Inc. ................................................... 5,300 90,760
aOffice Depot, Inc. .................................................... 13,000 325,000
Retail Trade (cont.)
aSafeway, Inc. ......................................................... 8,000 $ 382,500
Talbots, Inc. ......................................................... 6,300 142,930
----------
1,676,190
----------
aTechnology Services 4.1%
Affiliated Computer Services, Inc., Class A ........................... 8,500 314,500
BMC Software, Inc. .................................................... 3,000 144,188
Cambridge Technology Partners, Inc. ................................... 8,200 181,425
Sterling Commerce, Inc. ............................................... 8,211 289,438
Synopsys, Inc. ........................................................ 5,600 253,400
----------
1,182,951
----------
Transportation 3.2%
C.H. Robinson Worldwide, Inc. ......................................... 15,600 346,125
Expeditors International of Washington, Inc. .......................... 17,000 575,875
----------
922,000
----------
Utilities and Telecommunications 4.1%
CMS Energy Corp. ...................................................... 8,500 374,530
aICG Communications, Inc. .............................................. 11,000 227,560
aIntermedia Communications, Inc. ....................................... 9,400 173,900
aMillicom International Cellular, SA (Luxembourg) ...................... 6,800 226,950
Montana Power Co. ..................................................... 4,700 203,569
----------
1,206,509
----------
Total Long Term Investments (Cost $21,523,954)......................... 22,763,696
----------
PRINCIPAL
AMOUNT
-----------
cRepurchase Agreement 21.8%
Joint Repurchase Agreement, 5.350%, 11/02/98, (Maturity Value $6,363,492)
(Cost $6,360,656)..................................................................... $6,360,656 6,360,656
Barclays Capital Group, Inc. (Maturity Value $654,040)
Chase Securities, Inc. (Maturity Value $654,040)
CIBC Wood Gundy Securities Corp. (Maturity Value $654,040)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $654,040)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $654,040)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $477,132)
Greenwich Capital Markets, Inc. (Maturity Value $654,040)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $654,040)
Paribas Corp. (Maturity Value $654,040)
SBC Warburg Dillon Read, Inc. (Maturity Value $654,040)
Collateralized by U.S. Treasury Bills and Notes
-----------
Total Investments (Cost $27,884,610) 99.9% ............................................ 29,124,352
Other Assets, less Liabilities .1% .................................................... 38,681
-----------
Net Assets 100.0% ..................................................................... $29,163,033
===========
aNon-income producing.
cSee Note 1(c) regarding joint repurchase agreement.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Natural Resources Fund
Class I
------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
-------------------------------
(unaudited) 1998 1997 19961
------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ................ $15.46 $14.07 $13.14 $10.00
------------------------------------------------
Income from investment operations:
Net investment income .............................. .06 .10 .09 .08
Net realized and unrealized gains (losses) ......... (4.03) 2.26 1.25 3.22
------------------------------------------------
Total from investment operations..................... (3.97) 2.36 1.34 3.30
------------------------------------------------
Less distributions from:
Net investment income .............................. (.07) (.09) (.09) (.06)
Net realized gains ................................. -- (.88) (.32) (.10)
------------------------------------------------
Total distributions ................................. (.07) (.97) (.41) (.16)
------------------------------------------------
Net asset value, end of period....................... $11.42 $15.46 $14.07 $13.14
================================================
Total return*........................................ (25.70%) 17.57% 10.23% 33.36%
Ratios/supplemental data
Net assets, end of period (000's) ................... $40,491 $62,274 $45,386 $9,909
Ratios to average net assets:
Expenses ........................................... .95%** .96% .98% .99%**
Expenses excluding waiver and payments by affiliate 1.41%** 1.31% 1.31% 1.77%**
Net investment income .............................. .92%** .67% .72% 1.16%**
Portfolio turnover rate ............................. 33.22% 72.93% 46.31% 59.04%
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized.
**Annualized.
1For the period June 5, 1995 (effective date) to April 30, 1996.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
Franklin Natural Resources Fund (cont.)
Advisor Class
-----------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
-----------------------
(unaudited) 1998 19972
-----------------------------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ......................... $15.48 $14.07 $14.66
-----------------------------------------
Income from investment operations:
Net investment income ....................................... .06 .23 --
Net realized and unrealized gains (losses) .................. (4.00) 2.20 (.59)
-----------------------------------------
Total from investment operations ............................. (3.94) 2.43 (.59)
-----------------------------------------
Less distributions from:
Net investment income ....................................... (.12) (.14) --
Net realized gains .......................................... -- (.88) --
-----------------------------------------
Total distributions .......................................... (.12) (1.02) --
-----------------------------------------
Net asset value, end of period ............................... $11.42 $15.48 $14.07
-----------------------------------------
Total return*................................................. (25.52%) 18.11% (4.02%)
Ratios/supplemental data
Net assets, end of period (000's) ............................ $416 $892 $1,123
Ratios to average net assets:
Expenses .................................................... .65%** .64% .64%**
Expenses excluding waiver and payments by affiliate ......... 1.11%** 1.03% .86%**
Net investment income ....................................... 1.22%** 1.02% 1.03%**
Portfolio turnover rate ...................................... 33.22% 72.93% 46.31%
*Total return is not annualized.
**Annualized.
2For the period January 2, 1997 (effective date) to April 30, 1997.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1998 (unaudited)
SHARES/
Franklin Natural Resources Fund COUNTRY WARRANTS VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks and Warrants 90.6%
Energy Minerals 29.2%
Atlantic Richfield Co. (ARCO) ............................... United States 10,000 $ 688,750
Austral Coal, Ltd. .......................................... Australia 864,700 80,709
aBarrett Resources Corp. ..................................... United States 71,400 1,682,363
aBasin Exploration, Inc. ..................................... United States 40,900 654,400
Chesapeake Energy Corp. ..................................... United States 170,000 329,375
aConoco, Inc., Class A........................................ United States 22,200 552,225
Enron Oil and Gas Co. ....................................... United States 59,500 992,906
aGulf Canada Resources, Ltd. ................................. Canada 311,500 1,168,125
aNewfield Exploration Co...................................... United States 60,000 1,458,750
aNuevo Energy Co. ............................................ United States 44,000 932,250
aOcean Energy, Inc. .......................................... United States 24,420 305,250
Royal Dutch Petroleum Co., New York Shares................... Netherlands 15,500 763,375
aTitan Exploration, Inc. ..................................... United States 51,600 303,150
Ultramar Diamond Shamrock Corp. ............................. United States 8,800 237,050
Unocal Corp. ................................................ United States 15,400 522,638
YPF, SA, Sponsored ADR....................................... Argentina 43,500 1,258,781
-----------
11,930,097
-----------
Finance .9%
aUnited Rentals, Inc. ........................................ United States 13,000 349,375
-----------
Industrial Services 21.3%
aThe AES Corp. ............................................... United States 21,460 878,519
aAtwood Oceanics, Inc. ....................................... United States 19,800 556,875
aCal Dive International, Inc. ................................ United States 30,200 645,525
aCasella Waste Systems, Inc. ................................. United States 10,900 321,550
Diamond Offshore Drilling, Inc. ............................. United States 23,000 705,813
Halliburton Co. ............................................. United States 15,000 539,063
aMarine Drilling Cos., Inc. .................................. United States 40,000 447,500
Schlumberger, Ltd. .......................................... United States 10,000 525,000
Transocean Offshore, Inc. ................................... United States 27,000 997,313
aTuboscope, Inc. ............................................. United States 43,600 539,550
aVarco International, Inc. ................................... United States 80,200 867,163
aWeatherford International, Inc. ............................. United States 62,775 1,706,695
-----------
8,730,566
-----------
Non-Energy Minerals 21.0%
Aluminum Co. of America...................................... United States 5,400 427,950
Barrick Gold Corp. .......................................... Canada 28,000 598,500
aCanyon Resources Corp., wts., 3/20/99........................ United States 7,000 --
Carpenter Technology Corp. .................................. United States 12,900 452,306
Companhia Vale do Rio Doce, Sponsored ADR.................... Brazil 15,900 239,920
Compania de Minas Buenaventura, SA, Class B.................. Peru 1,236 7,425
Compania de Minas Buenaventura, SA, Sponsored ADR............ Peru 37,149 455,075
De Beers Consolidated Mines, AG, ADR......................... South Africa 45,000 646,875
Euro-Nevada Mining Corp. .................................... Canada 53,900 839,683
Franco-Nevada Mining Corp. .................................. Canada 36,000 692,308
Freeport-McMoRan Copper & Gold, Inc., Class A ............... United States 11,700 139,669
Non-Energy Minerals (cont.)
aIspat International, NV, New York Registered Shares.......... Netherlands 18,700 $ 139,081
LTV Corp. ................................................... United States 34,000 208,250
Newmont Mining Corp. ........................................ United States 18,735 398,119
Nucor Corp. ................................................. United States 11,400 516,563
Placer Dome, Inc. ........................................... Canada 42,600 670,950
Pohang Iron & Steel Co., Ltd., Sponsored ADR................. South Korea 32,500 585,000
Potash Corp. of Saskatchewan, Inc. .......................... Canada 11,385 789,834
Rio Tinto, Plc. ............................................. United Kingdom 65,600 801,956
-----------
8,609,464
-----------
Process Industries 11.5%
Asia Pulp & Paper Co., Ltd., ADR............................. Singapore 55,800 463,838
Avery Dennison Corp. ........................................ United States 12,700 526,256
Bemis Co., Inc. ............................................. United States 2,500 92,813
Bowater, Inc. ............................................... United States 7,100 289,769
Champion International Corp. ................................ United States 7,400 236,338
Du Pont (EI) De Nemours and Co. ............................. United States 4,000 230,000
aGibraltar Steel Corp. ....................................... United States 18,500 358,438
International Paper Co. ..................................... United States 4,300 199,681
Owens-Illinois, Inc. ........................................ United States 20,600 629,588
Praxair, Inc. ............................................... United States 21,200 853,300
Sigma-Aldrich Corp. ......................................... United States 19,100 590,310
Willamette Industries, Inc. ................................. United States 7,000 217,000
-----------
4,687,331
-----------
Real Estate 4.1%
Alexandria Real Estate Equities, Inc. ....................... United States 16,300 435,006
Irvine Apartment Communities, Inc. .......................... United States 17,500 459,375
Kilroy Realty Corp. ......................................... United States 16,000 355,000
Starwood Hotels & Resorts.................................... United States 7,300 206,681
Storage Trust Realty......................................... United States 10,700 240,081
-----------
1,696,143
-----------
Utilities and Telecommunications 2.6%
Enron Corp. ................................................. United States 16,700 880,925
Montana Power Co. ........................................... United States 3,900 168,919
-----------
1,049,844
-----------
Total Common Stocks and Warrants (Cost $43,922,782) ......... 37,052,820
-----------
Convertible Preferred Stocks .8%
Timet Capital Trust, 6.625%, cvt., pfd., 144A................ United States 4,600 113,846
USX Corp., 6.75%, cvt., pfd. ................................ United States 14,000 218,750
-----------
Total Convertible Preferred Stocks (Cost $526,650)........... 332,596
-----------
Total Long Term Investments (Cost $44,449,432)............... 37,385,416
-----------
PRINCIPAL
Franklin Natural Resources Fund COUNTRY AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
cRepurchase Agreement 10.3%..................................
Joint Repurchase Agreement, 5.350%, 11/02/98,
(Maturity Value, $4,232,867)
(Cost $4,230,981) ........................................... United States $4,230,981 $ 4,230,981
Barclays Capital Group, Inc. (Maturity Value $435,071)
Chase Securities, Inc. (Maturity Value $435,071)
CIBC Wood Gundy Securities Corp. (Maturity Value $435,071)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $435,071)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $435,071)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $317,228)
Greenwich Capital Markets, Inc. (Maturity Value $435,071)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $435,071)
Paribas Corp. (Maturity Value $435,071)
SBC Warburg Dillon Read, Inc. (Maturity Value $435,071)
Collateralized by U.S. Treasury Bills and Notes ------------
Total Investments (Cost $48,680,413) 101.7% ................. 41,616,397
Other Assets, less Liabilities (1.7%) ....................... (709,181)
------------
Net Assets 100.0% ........................................... $40,907,216
============
aNon-income producing.
cSee Note 1(c) regarding joint repurchase agreement.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Small Cap Growth Fund
Class I
-------------------------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
-------------------------------------------------
(unaudited) 1998 1997 1996 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period .. $25.93 $18.96 $19.75 $14.90 $12.75 $10.22
-------------------------------------------------------------------
Income from investment operations:
Net investment income ................ .04 .07 .03 .01 .03 .03
Net realized and unrealized gains (losses) (6.21) 7.92 .04 6.23 3.14 2.94
-------------------------------------------------------------------
Total from investment operations....... (6.17) 7.99 .07 6.24 3.17 2.97
-------------------------------------------------------------------
Less distributions from:
Net investment income ................ -- (.09) (.06) (.01) (.02) (.04)
Net realized gains ................... -- (.93) (.80) (1.38) (1.00) (.40)
-------------------------------------------------------------------
Total distributions ................... -- (1.02) (.86) (1.39) (1.02) (.44)
-------------------------------------------------------------------
Net asset value, end of period ........ $19.76 $25.93 $18.96 $19.75 $14.90 $12.75
===================================================================
Total return*.......................... (23.79%) 43.09% .14% 44.06% 27.05% 29.26%
Ratios/supplemental data
Net assets, end of period (000's) ..... $3,401,893 $3,957,972 $1,071,352 $444,912 $63,010 $23,915
Ratios to average net assets:
Expenses ............................. .97%** .89% .92% .97% .69% .30%
Expenses excluding waiver and payments
by affiliate.......................... .97%** .89% .92% 1.00% 1.16% 1.58%
Net investment income ................ .44%** .32% .10% .09% .25% .24%
Portfolio turnover rate ............... 17.64% 42.97% 55.27% 87.92% 104.84% 89.60%
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized.
Prior to May 1, 1994, dividends from net investment income were reinvested at the offering price.
**Annualized.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
Franklin Small Cap Growth Fund (cont.)
Class II
------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
------------------------------
(unaudited) 1998 1997 19961
------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ......................... $25.59 $18.78 $19.66 $17.94
------------------------------------------------
Income from investment operations:
Net investment loss ......................................... (.02) (.02) (.05) (.03)
Net realized and unrealized gains (losses) .................. (6.14) 7.76 (.03) 2.71
------------------------------------------------
Total from investment operations ............................. (6.16) 7.74 (.08) 2.68
Less distributions from net realized gains.................... -- (.93) (.80) (.96)
------------------------------------------------
Net asset value, end of period ............................... $19.43 $25.59 $18.78 $19.66
================================================
Total return*................................................. (24.04%) 42.06% (.65%) 15.98%
Ratios/supplemental data
Net assets, end of period (000's) ............................ $643,993 $731,707 $146,164 $24,102
Ratios to average net assets:
Expenses .................................................... 1.72%** 1.64% 1.69% 1.76%**
Net investment loss ......................................... (.31%)** (.42%) (.70%) (.69%)**
Portfolio turnover rate ...................................... 17.64% 42.97% 55.27% 87.92%
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized.
**Annualized.
1For the period October 1, 1995 (effective date) to April 30, 1996.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
Franklin Small Cap Growth Fund (cont.)
Advisor Class
-----------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
----------------------
(unaudited) 1998 19972
-----------------------------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ............................ $26.01 $18.97 $20.48
-----------------------------------------
Income from investment operations:
Net investment income .......................................... .06 .09 .01
Net realized and unrealized gains (losses) ..................... (6.22) 8.01 (1.52)
-----------------------------------------
Total from investment operations ................................ (6.16) 8.10 (1.51)
-----------------------------------------
Less distributions from:
Net investment income .......................................... -- (.13) --
Net realized gains ............................................. -- (.93) --
-----------------------------------------
Total distributions ............................................. -- (1.06) --
-----------------------------------------
Net asset value, end of period .................................. $19.85 $26.01 $18.97
=========================================
Total return*.................................................... (23.65%) 43.68% (7.37%)
Ratios/supplemental data
Net assets, end of period (000's) ............................... $140,772 $118,683 $18,777
Ratios to average net assets:
Expenses ....................................................... .72%** .64% .69%**
Net investment income .......................................... .71%** .58% .30%**
Portfolio turnover rate ......................................... 17.64% 42.97% 55.27%
*Total return is not annualized.
**Annualized.
2For the period January 2, 1997 (effective date) to April 30, 1997.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1998 (unaudited)
Franklin Small Cap Growth Fund SHARES VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks 87.9%
Commercial Services 2.6%
a24/7 Media, Inc. ...................................................... 515,400 $ 5,894,888
aAnswerThink Consulting Group, Inc. .................................... 75,000 1,448,438
a,fApplied Graphics Technologies, Inc. ................................. 1,369,000 16,342,438
aLamar Advertising Co., Class A......................................... 502,800 15,696,813
Norrell Corp. .......................................................... 931,100 12,628,044
aNOVA Corp. ............................................................ 688,800 19,889,100
aPegasystems, Inc. ..................................................... 456,300 4,819,669
a,fRemedyTemp, Inc., Class A............................................ 319,300 5,827,225
a,fSOS Staffing Services, Inc. ......................................... 872,400 7,360,875
aSylvan Learning Systems, Inc. ......................................... 687,900 21,238,913
------------
111,146,403
------------
Consumer Durables .9%
a,fActivision, Inc. .................................................... 1,344,400 14,200,225
aElectronic Arts, Inc. ................................................. 200,000 8,225,000
fK2, Inc. .............................................................. 527,100 5,798,100
aSola International, Inc. .............................................. 534,800 10,261,475
------------
38,484,800
------------
Consumer Non-Durables 2.5%
Alberto-Culver Co. ..................................................... 900,000 21,712,500
a,fConsolidated Cigar Holdings, Inc. ................................... 988,300 11,365,450
aGerber Childrenswear, Inc. ............................................ 360,000 3,060,000
aNorth Face, Inc. ...................................................... 486,400 5,806,400
aTommy Hilfiger Corp. .................................................. 748,900 34,777,044
a,fTropical Sportswear International Corp. ............................. 413,200 8,264,000
Wolverine World Wide, Inc. ............................................. 1,550,500 20,253,406
------------
105,238,800
------------
Consumer Services 3.7%
aAMF Bowling, Inc. ..................................................... 190,800 822,825
aCumulus Media Inc., Class A ........................................... 760,000 7,980,000
aDeVry, Inc. ........................................................... 1,064,800 23,425,600
aFoodmaker, Inc. ....................................................... 100,000 1,581,250
a,fMarquee Group, Inc. ................................................. 1,327,500 3,899,531
fMeriStar Hospitality Corp. ............................................ 2,330,000 43,105,000
aMeriStar Hotels & Resorts, Inc. ....................................... 1,330,000 3,158,750
a,fPrime Hospitality Corp. ............................................. 3,020,500 27,562,063
aRio Hotel and Casino, Inc. ............................................ 1,170,600 16,388,400
aSFX Entertainment, Inc. ............................................... 550,000 17,393,750
aVail Resorts, Inc. .................................................... 295,800 7,912,650
------------
153,229,819
------------
Electronic Technology 16.6%
a,fAdvanced Energy Industries, Inc. .................................... 1,619,000 21,249,375
aBrio Technology, Inc. ................................................. 321,300 2,650,725
aCarrier Access Corp. .................................................. 173,000 3,330,250
a,fCoherent, Inc. ...................................................... 1,763,400 20,719,950
Electronic Technology (cont.)
aCom21, Inc. ........................................................... 492,300 $ 7,384,500
aDupont Photomasks, Inc. ............................................... 24,400 884,500
EG&G, Inc. ............................................................. 107,800 2,708,475
a,fEtec Systems, Inc. .................................................. 1,245,500 42,191,313
aFlextronics International Ltd. ........................................ 200,000 10,387,500
a,fFLIR Systems, Inc. .................................................. 1,028,600 17,357,625
aGemstar International Group Ltd. ...................................... 983,300 53,712,763
a,fH.T.E., Inc. ........................................................ 1,330,800 13,474,350
a,fHarmonic Lightwaves, Inc. ........................................... 694,900 7,600,469
a,fItron, Inc. ......................................................... 1,257,700 9,747,175
aJabil Circuit, Inc. ................................................... 626,700 29,024,044
a,fKomag, Inc. ......................................................... 4,207,100 23,664,938
a,fLadish Co., Inc. .................................................... 982,300 8,410,944
aLevel One Communications, Inc. ........................................ 1,400,000 36,837,500
aMettler-Toledo International, Inc. .................................... 1,700,000 37,187,500
a,fNatural Microsystems Corp. .......................................... 646,600 5,799,226
fNewport Corp. ......................................................... 512,500 7,303,125
aNovellus Systems, Inc. ................................................ 1,285,200 49,881,825
a,fPerceptron, Inc. .................................................... 793,500 4,513,031
aPhotronics, Inc. ...................................................... 587,500 12,814,844
aPMC-Sierra, Inc. ...................................................... 1,065,300 47,805,338
aPower Integrations, Inc. .............................................. 500,000 8,000,000
a,fRainbow Technologies, Inc. .......................................... 901,500 12,733,688
aSanmina Corp. ......................................................... 568,200 23,296,200
a,fSecurity Dynamics.................................................... 2,445,000 25,061,250
a,fSpectralink Corp. ................................................... 866,800 2,058,650
a,fSpectra-Physics Lasers, Inc. ........................................ 1,016,300 7,590,541
aTekelec................................................................ 2,583,500 46,341,531
a,fTranscrypt International, Inc. ...................................... 547,100 1,778,075
aTriStar Aerospace Co. ................................................. 490,700 5,029,675
aWaters Corp. .......................................................... 769,800 56,580,300
aWestern Digital Corp. ................................................. 324,300 3,405,150
aXylan Corp. ........................................................... 1,580,000 25,280,000
------------
693,796,345
------------
Energy Minerals 4.3%
a,fBarrett Resources Corp. ............................................. 1,790,900 42,198,081
aDenbury Resources, Inc. ............................................... 1,003,800 6,587,438
Devon Energy Corp. ..................................................... 331,500 11,229,563
a,fNewfield Exploration Co. ............................................ 2,338,600 56,857,213
aNuevo Energy Co. ...................................................... 635,900 13,473,131
fRange Resources Corp. ................................................. 1,990,000 11,318,125
aTitan Exploration, Inc. ............................................... 1,645,700 9,668,488
a,fTom Brown, Inc. ..................................................... 2,095,800 30,127,125
------------
181,459,164
------------
Finance 9.6%
aAffiliated Managers Group, Inc. ....................................... 712,500 $ 15,853,125
aAmerin Corp. .......................................................... 992,000 21,204,000
Bank United Corp. ...................................................... 199,700 7,956,807
aE*TRADE Group, Inc. ................................................... 700,000 12,600,000
Espirito Santo Financial Group, SA (Luxembourg)......................... 1,324,600 22,352,625
EVEREN Capital Corp. ................................................... 660,600 13,459,725
fExecutive Risk, Inc. .................................................. 731,700 34,755,750
Federated Investors, Inc. .............................................. 1,408,800 25,270,350
Financial Security Assurance Holdings Ltd. ............................. 919,300 45,792,631
Freedom Securities Corp. ............................................... 396,800 5,406,400
aGolden State Bancorp, Inc. ............................................ 1,788,700 34,320,681
HCC Insurance Holdings, Inc. ........................................... 556,500 9,982,219
aHealthCare Financial Partners, Inc. ................................... 663,900 20,331,938
Heller Financial, Inc. ................................................. 681,500 16,356,000
Life Real Estate Corp. ................................................. 265,600 24,783,800
Life USA Holding, Inc. ................................................. 586,100 7,289,619
Reinsurance Group of America............................................ 449,700 24,789,713
aRisk Capital Holdings, Inc. ........................................... 751,900 15,601,925
Scor (France)........................................................... 311,000 17,830,592
a,fSilicon Valley Bancshares............................................ 1,293,600 26,518,800
------------
402,456,700
------------
aHealth Services 5.3%
fAccess Health, Inc. ................................................... 975,750 35,005,031
American Dental Partners, Inc. ......................................... 291,200 2,984,800
Medaphis Corp. ......................................................... 1,977,800 6,427,850
New American Healthcare Corp. .......................................... 540,000 5,737,500
PAREXEL International Corp. ............................................ 1,000,000 22,062,500
fPediatrix Medical Group, Inc. ......................................... 1,076,500 50,191,813
fPharmaceutical Product Development, Inc. .............................. 1,300,000 35,100,000
PhyCor, Inc. ........................................................... 1,000,000 7,250,000
Renal Care Group, Inc. ................................................. 1,303,800 37,973,175
Total Renal Care Holdings, Inc. ........................................ 515,666 12,633,817
Transitions Systems, Inc. .............................................. 507,300 5,294,944
------------
220,661,430
------------
Health Technology 4.2%
aCurative Health Services, Inc. ........................................ 250,000 6,812,500
a,fDepoTech Corp. ...................................................... 798,500 1,172,837
aHeska Corp. ........................................................... 675,300 3,334,294
a,fInhale Therapeutic Systems........................................... 811,000 21,288,750
Mentor Corp. ........................................................... 496,200 8,435,400
Mylan Laboratories, Inc. ............................................... 361,216 12,439,376
aNeurogen Corp. ........................................................ 492,000 6,703,500
aOrthoLogic Corp. ...................................................... 1,250,000 3,906,250
a,fSerologicals Corp. .................................................. 2,072,700 46,894,838
The Cooper Companies, Inc. ............................................. 250,000 5,937,500
Health Technology (cont.)
aUniphase Corp. ........................................................ 1,022,000 $ 50,589,000
aZonagen, Inc. ......................................................... 448,800 7,124,700
------------
174,638,945
------------
Industrial Services 5.2%
a,fAtwood Oceanics, Inc. ............................................... 1,216,600 34,216,875
a,fCatalytica, Inc. .................................................... 2,199,233 35,737,536
a,fCore Laboratories, NV (Netherlands).................................. 1,657,400 37,395,088
aMarine Drilling Cos., Inc. ............................................ 1,062,400 11,885,600
aTuboscope, Inc. ....................................................... 2,000,000 24,750,000
a,fU.S. Liquids, Inc. .................................................. 1,103,900 16,696,488
fVarco International, Inc. ............................................. 5,162,500 55,819,531
------------
216,501,118
------------
Non-Energy Minerals .7%
Carpenter Technology Corp. ............................................. 874,500 30,662,156
------------
Process Industries .4%
ChemFirst, Inc. ........................................................ 764,900 14,819,938
Optical Coating Laboratory, Inc. ....................................... 200,000 3,325,000
------------
18,144,938
------------
Producer Manufacturing 2.8%
aCable Design Technologies ............................................. 400,000 6,600,000
aGentex Corp. .......................................................... 2,271,400 33,361,188
a,fGibraltar Steel Corp. ............................................... 1,012,800 19,623,000
JLG Industries, Inc. ................................................... 1,262,700 20,913,469
Reliance Steel & Aluminum Co. .......................................... 580,000 17,943,750
Roper Industries, Inc. ................................................. 1,033,800 18,414,563
------------
116,855,970
------------
Real Estate 3.8%
Arden Realty, Inc. ..................................................... 1,330,400 28,769,900
Camden Property Trust .................................................. 1,200,000 32,250,000
Colonial Properties Trust .............................................. 303,400 8,343,500
Cornerstone Properties, Inc. ........................................... 43,000 666,500
FelCor Lodging Trust, Inc. ............................................. 687,300 16,194,506
Glenborough Realty Trust, Inc. ......................................... 702,700 15,064,131
fInnkeepers USA Trust .................................................. 2,102,800 24,182,200
Omega Healthcare Investors, Inc. ....................................... 150,000 4,650,000
SL Green Realty Corp. .................................................. 394,100 7,463,269
Storage Trust Realty.................................................... 704,700 15,811,706
Winston Hotels, Inc. ................................................... 490,500 4,199,906
------------
157,595,618
------------
Retail Trade .6%
aGuitar Center, Inc. ................................................... 556,800 9,535,200
aSoftware.net Corp. .................................................... 455,000 4,208,750
Retail Trade (cont.)
Talbots, Inc. .......................................................... 476,900 $ 10,819,669
a,fWest Marine, Inc. ................................................... 155,600 1,098,925
------------
25,662,544
------------
aTechnology Services 17.4%
Affiliated Computer Services, Inc., Class A............................. 1,662,300 61,505,100
Aspen Technology, Inc. ................................................. 489,200 6,848,800
BroadVision, Inc. ...................................................... 773,100 11,596,500
Cambridge Technology Partners, Inc. .................................... 622,100 13,763,963
Check Point Software Technologies Ltd. (Israel)......................... 316,500 7,200,375
Concord Communications, Inc. ........................................... 400,000 14,850,000
Documentum, Inc. ....................................................... 611,600 20,794,400
EarthLink Network, Inc. ................................................ 400,000 15,400,000
Entrust Technologies, Inc. ............................................. 1,307,200 21,732,200
Envoy Corp. ............................................................ 596,800 17,605,600
Equant NV (Netherlands)................................................. 226,200 9,896,250
Evolving Systems, Inc. ................................................. 100,000 168,750
Excite, Inc. ........................................................... 400,000 15,425,000
Genesys Telecommunications Laboratories, Inc. .......................... 535,000 14,043,750
Harbinger Corp. ........................................................ 1,694,100 11,223,413
HNC Software, Inc. ..................................................... 1,279,900 43,036,638
i2 Technologies, Inc. .................................................. 1,447,600 26,961,550
Information Advantage, Inc. ............................................ 1,005,400 5,969,563
Inprise Corp. .......................................................... 1,000,000 4,937,500
fIntegrated Systems, Inc. .............................................. 2,091,300 23,527,125
International Network Services.......................................... 903,700 38,407,250
InterVU, Inc. .......................................................... 150,000 1,218,750
Intuit, Inc. ........................................................... 1,015,400 51,277,700
fMicromuse, Inc. ....................................................... 1,110,000 18,939,375
MicroStrategy Inc. ..................................................... 57,000 1,389,375
Network Associates, Inc. ............................................... 212,363 9,025,428
fOmtool, Ltd. .......................................................... 739,300 2,125,488
Sapient Corp. .......................................................... 650,800 29,326,675
Sterling Commerce, Inc. ................................................ 225,058 7,933,295
Synopsys, Inc. ......................................................... 1,405,000 63,576,250
Transaction Systems Architects, Inc. ................................... 658,900 23,782,205
USWeb Corp. ............................................................ 750,000 10,781,250
Vantive Corp. .......................................................... 1,223,500 8,946,844
VERITAS Software Corp. ................................................. 611,700 30,661,463
Visio Corp. ............................................................ 350,000 9,318,750
Whittman-Hart, Inc. .................................................... 525,000 10,434,358
fWind River Systems, Inc. .............................................. 1,439,000 63,046,188
------------
726,677,121
------------
Transportation 3.1%
Air Express International Corp. ........................................ 911,000 19,131,000
a,fAtlantic Coast Airlines, Inc. 1,400,000 33,600,000
Transportation (cont.)
C.H. Robinson Worldwide, Inc. .......................................... 1,046,200 $ 23,212,563
Circle International Group, Inc. ....................................... 201,100 4,034,569
fExpeditors International of Washington, Inc. .......................... 1,281,100 43,397,263
a,fMesa Air Group, Inc. ................................................ 1,617,200 8,187,075
------------
131,562,470
------------
aUtilities and Telecommunications 4.2%
ICG Communications, Inc. ............................................... 1,599,100 33,081,381
Intermedia Communications, Inc. ........................................ 1,782,600 32,978,100
Millicom International Cellular, SA (Luxembourg)........................ 1,041,800 34,770,075
Paging Network, Inc. ................................................... 2,017,200 11,094,600
fPrimus Telecommunications Group, Inc. ................................. 1,406,100 15,554,981
fRural Cellular Corp., Class A.......................................... 700,800 8,409,600
fWestern Wireless Corp., Class A........................................ 1,969,200 39,876,300
------------
175,765,037
------------
Total Common Stocks (Cost $4,066,613,577)............................... 3,680,539,378
------------
PRINCIPAL
AMOUNT
----------
Convertible Bonds .4%
Consumer Services
aAMF Bowling Inc., zero coupon, cvt., 144A, 5/12/18..................... $ 12,900,000 1,144,875
---------------
Electronic Technology .1%
aWestern Digital Corp., cvt. sub. deb., 144A, zero coupon, 2/18/18...... 23,800,000 5,117,000
---------------
Technology Services .2%
Activision Inc., cvt. sub. notes, 144A, 6.75%, 1/01/05 ................. 4,900,000 4,287,500
Wind River Systems, cvt. sub. notes, 144A, 5.00%, 8/01/02 .............. 3,100,000 3,332,500
---------------
7,620,000
---------------
Transportation .1%
Atlantic Coast Airlines, cvt. sub. notes, 144A, 7.00%, 7/01/04 ......... 500,000 1,345,625
---------------
Total Convertible Bonds (Cost $20,291,502).............................. 15,227,500
---------------
Total Long Term Investments (Cost $4,086,905,079) ...................... 3,695,766,878
---------------
cRepurchase Agreement 15.6%
Joint Repurchase Agreement, 5.350%, 11/02/98,
(Maturity Value $655,835,067) (Cost $655,542,812)..................... $655,542,812 $ 655,542,812
Barclays Capital Group, Inc. (Maturity Value $67,409,393)
Chase Securities, Inc. (Maturity Value $67,409,393)
CIBC Wood Gundy Securities Corp. (Maturity Value $67,409,393)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $67,409,393)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $67,409,393)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $49,150,530)
Greenwich Capital Markets, Inc. (Maturity Value $67,409,393)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $67,409,393)
Paribas Corp. (Maturity Value $67,409,393)
SBC Warburg Dillon Read, Inc. (Maturity Value $67,409,393)
Collateralized by U.S. Treasury Bills and Notes ---------------
Total Investments (Cost $4,742,447,891) 103.9% ......................... 4,351,309,690
Other Assets, less Liabilities (3.9%) .................................. (164,651,611)
---------------
Net Assets 100.0% ...................................................... $4,186,658,079
===============
aNon-income producing.
cSee Note 1(c) regarding joint repurchase agreement.
fSee Note 9 regarding holding of 5% voting securities.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Strategic Income Fund
Class I
----------------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
----------------------------------------
(unaudited) 1998 1997 1996 19951
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ................ $11.24 $10.86 $10.77 $10.18 $10.00
----------------------------------------------------------
Income from investment operations:
Net investment income............................... .43 .87 .93 .85 .70
Net realized and unrealized gains (losses) ......... (.78) .50 .39 .67 .15
----------------------------------------------------------
Total from investment operations .................... (.35) 1.37 1.32 1.52 .85
----------------------------------------------------------
Less distributions from:
Net investment income .............................. (.42) (.90) (.96) (.82) (.67)
Net realized gains ................................. -- (.09) (.27) (.11) --
----------------------------------------------------------
Total distributions ................................. (.42) (.99) (1.23) (.93) (.67)
----------------------------------------------------------
Net asset value, end of period ...................... $10.47 $11.24 $10.86 $10.77 $10.18
==========================================================
Total return*........................................ (3.11%) 13.10% 12.64% 15.59% 8.94%
Ratios/supplemental data
Net assets, end of period (000's) ................... $218,226 $166,633 $34,864 $13,022 $6,736
Ratios to average net assets:
Expenses ........................................... .50%** .25% .23% .25% .25%**
Expenses excluding waiver and payments by affiliate 1.04%** 1.05% 1.05% 1.08% 1.38%**
Net investment income .............................. 7.92%** 7.65% 8.60% 8.53% 7.93%**
Portfolio turnover rate ............................. 23.89% 47.47% 114.26% 73.95% 68.43%
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized.
**Annualized.
1For the period May 24, 1994 (effective date) to April 30, 1995.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
Franklin Strategic Income Fund (cont.)
Class II
-----------------
Six Months Ended
October 31, 19982
(unaudited)
-----------------
<S> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ................................................... $11.19
-----------------
Income from investment operations:
Net investment income ................................................................. .36
Net realized and unrealized losses .................................................... (.75)
-----------------
Total from investment operations ....................................................... (.39)
-----------------
Less distributions from net investment income .......................................... (.33)
-----------------
Net asset value, end of period.......................................................... $10.47
=================
Total return*........................................................................... (3.50%)
Ratios/supplemental data
Net assets, end of period (000's) ...................................................... $22,117
Ratios to average net assets:
Expenses .............................................................................. .91%**
Expenses excluding waiver and payments by affiliate ................................... 1.45%**
Net investment income ................................................................. 7.51%**
Portfolio turnover rate ................................................................ 23.89%
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized.
**Annualized.
2For the period May 1, 1998 (effective date) to October 31,1998.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1998 (unaudited)
SHARES/
Franklin Strategic Income Fund COUNTRY WARRANTS VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
aCommon Stocks, Warrants and Rights
Gulf States Steel, warrants................................. United States 200 $ 200
Loral Space & Communications, Ltd., warrants................ United States 300 2,694
Venezuela Oil Value Recovery, rights........................ Venezuela 3,035 --
-----------
Total Common Stocks, Warrants and Rights (Cost $3,731)...... 2,894
-----------
Preferred Stocks .2%
aCSC Holdings, Inc., 11.125% pfd. .......................... United States 1,331 144,412
Fresenius Medical Care, 9.00% pfd. ......................... Germany 100 99,500
Sinclair Capital, 11.625% pfd. ............................. United States 3,000 309,750
-----------
Total Preferred Stocks (Cost $499,966)...................... 553,662
-----------
Convertible Preferred Stocks 4.5%
El Paso Energy, 4.75% cvt. pfd. ............................ United States 32,000 1,552,000
Host Marriott Financial Trust, 6.75%, cvt. pfd. ............ United States 40,000 1,615,000
MediaOne Group, Inc., 6.25% cvt. pfd. ...................... United States 33,800 1,820,975
Protective Life Capital Trust II, 6.50% cvt. pfd.............. United States 12,100 753,225
Ralston Purina Co., 7.00% cvt. pfd. ........................ United States 9,300 460,931
Salomon, Inc., 6.25% cvt. pfd. ............................. United States 6,700 330,813
Texas Utilities Co., 9.25% cvt. pfd. ....................... United States 40,000 2,255,000
Triathlon Broadcasting, 9.00% cvt. pfd. .................... United States 20,000 193,750
Union Pacific Capital Trust, 6.25% cvt. pfd. ............... United States 40,000 1,860,000
-----------
Total Convertible Preferred Stocks (Cost $11,083,904)....... 10,841,694
-----------
PRINCIPAL
AMOUNT*
---------
Bonds 29.5%
Commercial Services 1.0%
Ameriserv Food Co., senior sub. notes, 10.125%, 7/15/07..... United States $ 1,000,000 815,000
Ameriserv Food Distribution, senior notes, 8.875%, 10/15/06. United States 500,000 426,250
Big Flower Press Holdings, senior disc. notes, 8.875%, 7/01/07 United States 300,000 290,250
Iron Mountain, Inc., senior sub. notes, 8.75%, 9/30/09 ..... United States 350,000 348,250
Outdoor Systems, Inc., senior sub. notes, 8.875%, 6/15/07... United States 500,000 522,500
-----------
2,402,250
-----------
Consumer Durables .9%
AMF Group, Inc., senior disc. notes, zero coupon to 3/15/00,
12.25% thereafter, 3/15/06 .............................. United States 1,118,000 542,230
Revlon Consumer Products Corp., senior sub. notes,
8.625%, 2/01/08 ............................................. United States 1,500,000 1,361,250
Sealy Corp., senior sub. notes, 9.875%, 12/15/07............ United States 200,000 180,000
Sealy Corp., zero coupon to 12/15/02, 10.875% thereafter, 12/15/07 United States 300,000 168,000
-----------
2,251,480
-----------
Consumer Non-Durables .2%
Compania Alimentos Fargo, senior notes, 144A, 13.25%, 8/1/08 Argentina 500,000 300,000
Doane Products Co., senior notes, 10.625%, 3/01/06 ......... United States 100,000 116,084
-----------
416,084
-----------
Consumer Services 6.7%
Chancellor Media Corp., senior sub notes, 144A, 9.00%, 10/01/08 United States $ 1,000,000 $ 1,010,000
Chancellor Media Corp., senior sub. notes, 8.75%, 6/15/07... United States 500,000 495,000
CSC Holdings, Inc., 9.875%, 4/01/23......................... United States 1,750,000 1,881,250
Diamond Cable Communications, Plc., senior disc. notes,
zero coupon to 2/15/02, 10.75% thereafter, 2/15/07....... United Kingdom 150,000 95,063
Diamond Cable Communications Plc., senior disc. notes,
zero coupon to 12/15/00, 11.75% thereafter, 12/15/05.... United Kingdom 150,000 113,250
Diamond Holdings Plc., 9.125%, 2/01/08...................... United Kingdom 1,000,000 932,500
Fox Family Worldwide, Inc., senior disc. notes,
zero coupon to 11/01/02, 10.25% thereafter, 11/01/07.... United States 150,000 89,250
Fox/Liberty Networks, LLC., senior disc. notes,
zero coupon to 8/15/02, 9.75% thereafter, 8/15/07........ United States 2,000,000 1,305,000
LA Petite Academy Inc., Series B, 10.00%, 5/15/08........... United States 1,500,000 1,462,500
Lin Holdings Corp. senior disc. notes,
zero coupon to 3/1/03, 10.00% thereafter, 3/1/08........ United States 1,500,000 971,250
Prime Hospitality Corp., senior sub. notes, Series B, 9.75%, 4/01/07 United States 2,000,000 1,900,000
Regal Cinemas, Inc., senior sub. notes, 144A, 9.50%, 6/01/08 United States 2,000,000 1,965,000
Sinclair Broadcast Group Inc., senior sub notes, 8.75%, 12/15/07 United States 1,700,000 1,632,000
Six Flags Entertainment., senior notes, 8.875%, 4/01/06..... United States 600,000 602,250
Telewest, Plc., senior deb., zero coupon to 10/01/00,
11.00% thereafter, 10/01/07............................... United Kingdom 2,000,000 1,600,000
-----------
16,054,313
-----------
Energy Minerals 2.2%
Abraxas Petroleum Corp., senior notes, Series B, 11.50%, 11/01/04 United States 880,000 682,000
Chesapeake Energy Corp., senior notes, Series B, 9.625%, 5/1/05 United States 300,000 256,500
Clark R&M, Inc., senior sub. notes, 8.875%, 11/15/07........ United States 1,000,000 855,000
Conproca, SA, S.F., secured senior notes, 144A, 12.00%, 6/16/10 Mexico 1,800,000 1,566,000
Nuevo Energy Co., senior sub notes, Series B, 8.875%, 6/1/08 United States 400,000 398,000
P & L Coal Holdings Corp., senior sub. notes, 144A, 9.625%, 5/15/08 United States 1,500,000 1,492,500
-----------
5,250,000
-----------
Finance .4%
Homeside Finance, Inc., senior notes, Series B, 11.25%, 5/15/03 United States 100,000 117,500
Pera Financial Services, secured notes, 9.375%, 10/15/02 ... Turkey 1,000,000 695,000
Pera Financial Services, secured notes, 9.375%, 10/15/02 ... Turkey 160,000 111,200
-----------
923,700
-----------
Health Services 1.5%
Fresenius Medical Care, 7.875%, 2/1/08...................... Germany 1,000,000 935,000
Magellan Health Services, Inc., senior sub. notes, 9.00%, 2/15/08 United States 1,000,000 832,500
Pharmerica, Inc., senior sub. notes, 8.375%, 4/01/08........ United States 350,000 302,750
Tenet Healthcare Corp., senior sub. notes, 8.625%, 1/15/07.. United States 200,000 209,000
Vencor Operating Inc., senior sub notes, 9.875%, 5/1/05..... United States 1,500,000 1,200,000
-----------
3,479,250
-----------
Industrial Services .1%
Dailey International, Inc., senior sub. notes, Series B, 9.50%, 2/15/08 United States 300,000 136,500
-----------
Non-Energy Minerals .4%
LTV Corp., senior notes, 8.20%, 9/15/07..................... United States $ 1,000,000 $ 950,000
-----------
Process Industries 3.7%
Anchor Glass, first mortgage notes, 11.25%, 4/01/05......... United States 300,000 308,250
Anchor Glass Container, senior notes, 9.875%, 3/15/08....... United States 700,000 679,000
Ball Corp., senior notes, 144A, 7.75%, 8/01/06.............. United States 500,000 520,000
Ball Corp., senior sub.notes, 144A, 8.25%, 8/01/08.......... United States 350,000 363,125
Four M Corp., senior notes, Series B, 12.00%, 6/01/06....... United States 200,000 151,000
Graham Packaging Corp., senior sub. notes, 8.75%, 1/15/08... United States 200,000 187,500
Graham Packaging Corp., senior disc. notes,
zero coupon to 1/15/03,10.75% thereafter, 1/15/09....... United States 1,700,000 1,045,500
Huntsman Corp., senior sub. notes, 144A, 9.50%, 7/01/07..... United States 1,000,000 945,000
Pillowtex Corp., senior sub. Notes, 9.00%, 12/18/07......... United States 2,000,000 2,030,000
Pindo Deli Finance Mauritius, Ltd., senior notes, 10.25%, 10/01/02 Indonesia 700,000 372,750
Purina Mills Inc., senior sub notes, 144A, 9.00%, 3/15/10... United States 600,000 589,500
Repap New Brunswick, senior notes, 9.00%, 6/1/04............ Canada 700,000 651,000
Universal Compression Inc., senior disc. notes,
zero coupon to 2/15/03, 9.875% thereafter, 2/15/08...... United States 1,250,000 693,750
Windmere - Durable holdings, senior sub notes, 10.00%, 7/31/08 United States 500,000 427,500
-----------
8,963,875
-----------
Producer Manufacturing 3.3%
Aetna Industries, Inc., senior notes, 11.875%, 10/01/06..... United States 200,000 203,000
Allied Waste Industries, Inc., senior disc. notes,
zero coupon to 6/01/02, 11.30% thereafter, 6/01/07....... United States 500,000 375,000
Cambridge Industries, Inc., senior sub. notes, 10.25%, 7/15/07 United States 600,000 544,500
Collins & Aikman Products, senior sub. notes, 11.50%, 4/15/06 United States 100,000 99,500
Falcon Building Products, Inc., senior disc. sub. notes, Series B,
zero coupon to 6/15/02, 10.50% thereafter, 6/15/07...... United States 250,000 125,000
Falcon Building Products, Inc., senior sub. notes, United States 1,000,000 827,500
Series B, 9.50%, 6/15/07
a,dHarvard Industries, Inc., senior notes, 11.125%, 8/01/05.. United States 300,000 48,000
International Comfort Products, senior notes, Series B, 8.625%, 5/15/08 United States 1,500,000 1,440,000
Intertek Finance, Plc., senior sub. notes, Series B, 10.25%, 11/01/06 United Kingdom 100,000 90,500
LES, Inc., senior sub. notes, 144A, 9.25%, 6/01/08 ......... United States 1,350,000 1,350,000
LDM Technologies, Inc., senior sub. notes, 10.75%, 1/15/07.. United States 200,000 178,000
Nortek, Inc., senior notes, 144A, 8.875%, 8/01/08........... United States 500,000 485,000
Nortek, Inc., senior notes, Series B, 9.125%, 9/01/07....... United States 300,000 294,000
Oshkosh Truck Corp., senior sub. notes 8.75%, 3/01/08....... United States 400,000 370,000
Talon Automotive Group, senior sub. Notes, Series B, 9.625%, 5/1/08 United States 800,000 708,000
Terex Corp., senior sub notes, 8.875%, 4/1/08............... United States 1,000,000 910,000
-----------
8,048,000
-----------
Retail Trade .3%
Fleming Cos., Inc., senior sub. notes, 10.50%, 12/01/04..... United States 500,000 467,500
Shoppers Food Warehouse, senior notes, 9.75%, 6/15/04....... United States 125,000 133,125
Specialty Retailers, Inc., senior notes, 8.50%, 7/15/05..... United States 250,000 231,250
-----------
831,875
-----------
Transportation .7%
American Commercial Lines, 144A, 10.25%, 6/30/08............ United States $ 1,000,000 $ 980,000
Ultrapetrol Ltd., mortgage notes, 10.50%, 4/1/08............ Bahamas 1,000,000 630,000
-----------
1,610,000
-----------
Utilities and Telecommunications 8.1%
AES Corp., senior sub. notes, 8.50%, 11/01/07............... United States 750,000 708,750
AES China Generating Co., Ltd., senior notes, 10.125%, 12/15/06 Bermuda 100,000 57,750
Allegiance Telecom, Inc., senior disc. notes, Series B, zero
coupon to 2/15/03,11.75%, thereafter, 2/15/08.............. United States 2,000,000 810,000
Arch Communications Group, Inc., senior disc. notes, zero coupon
to 3/15/01, 10.875% thereafter, 3/15/08.................... United States 300,000 111,000
Comcast Cellular, senior notes, Series B, 9.50%, 5/01/07.... United States 400,000 414,000
ESI Tractebel Acq. Corp., 7.99%, 12/30/11................... United States 250,000 233,452
Flag Ltd, senior notes, 8.250%, 1/30/08..................... Bermuda 200,000 186,000
IXC Communications Inc., senior sub. notes, 9.00%, 4/15/08.. United States 650,000 641,875
IntelCom Group, Inc., senior disc. notes, zero coupon to
5/01/01, 12.50% thereafter, 5/01/06 ...................... United States 2,250,000 1,552,500
Intermedia Communications, senior disc. notes, Series B,
zero coupon to 7/15/02, 11.25% thereafter, 7/15/07....... United States 2,000,000 1,330,000
Iridium L.L.C., senior notes, Series D, 10.875%, 7/15/05.... United States 2,000,000 1,520,000
Level 3 Communications, senior notes, 9.125%, 5/1/08........ United States 2,000,000 1,890,000
Metrocall, Inc., senior sub. notes, 9.75%, 11/01/07......... United States 1,000,000 915,000
Microcell Telecommunication, senior disc. notes, Series B,
zero coupon to 12/01/01, 14.00% thereafter, 6/01/06..... Canada 600,000 387,000
Millicom International Cellular, SA, senior disc. notes,
zero coupon to 6/01/01, 13.50% thereafter, 6/01/06........ Luxembourg 300,000 180,000
Netia Holdings B.V., senior notes,10.25%, 11/01/07.......... Poland 200,000 154,500
Netia Holdings BV, senior disc. notes, zero coupon to 11/01/01,11.25%
thereafter, 11/01/07..................................... Poland 500,000 256,250
Nextel Communications, senior disc. notes, zero coupon to
10/31/02, 9.75% thereafter, 10/31/07..................... United States 500,000 280,000
Nextel Communications, senior disc. notes, zero coupon to
2/15/99, 9.75% thereafter, 8/15/04....................... United States 500,000 470,000
Nextel Communications, senior disc. notes, zero coupon to
2/15/03, 9.95% thereafter, 2/15/08....................... United States 1,300,000 708,500
Nextlink Communications, Inc., senior notes, 9.625%, 10/01/07 United States 250,000 232,500
Nextlink Communications, Inc., senior notes, 9.00%, 3/15/08. United States 750,000 686,250
Nextlink Communications, Inc., senior disc. notes, zero coupon
to 4/15/03, 9.45% thereafter 4/15/08..................... United States 650,000 354,250
Niagara Mohawk Power Corp., senior disc. notes, Series H,
zero coupon to 7/01/03, 8.50% thereafter, 7/01/10....... United States 1,500,000 1,106,250
Orion Network Systems, Inc., SA, senior disc. notes
zero coupon to 1/15/02, 12.50% thereafter, 1/15/07..... United States 300,000 178,500
Paging Network, Inc., senior sub. notes, 10.125%, 8/01/07... United States 400,000 392,000
RSL Communications Plc., senior disc. notes, 144A,
zero coupon to 3/01/03, 10.125% thereafter, 3/1/08..... United Kingdom 1,000,000 500,000
Sprint Spectrum, L.P., senior disc. notes, zero coupon to
8/01/01, 12.50% thereafter, 8/15/06...................... United States 300,000 263,250
Utilities and Telecommunications (cont.)
Sygnet Wireless, Inc., senior notes, 11.50%, 10/01/06....... United States $ 2,000,000 $ 2,250,000
Triton Communications L.L.C., senior disc. notes, 144A,
zero coupon to 5/1/03, thereafter 11%, 5/1/08........... United States 1,750,000 700,000
-----------
19,469,577
-----------
Total Bonds (Cost $77,627,147).............................. 70,786,904
-----------
Convertible Bonds 2.5%
Electronic Technology .4%
Dovatron International, Inc., cvt., sub. notes, 6.00%, 10/15/02 United States 1,000,000 955,000
-----------
Finance .4%
Macerich Co., cvt., sub. deb., 144A, 7.25%, 12/15/02........ United States 1,000,000 955,000
-----------
Health Services .9%
Omnicare, Inc., cvt., 5.00%, 12/01/07....................... United States 2,000,000 2,150,000
-----------
Industrial Services .8%
Diamond Offshore Drilling, Inc., cvt., 3.75%, 2/15/07....... United States 2,000,000 2,007,500
-----------
Total Convertible Bonds (Cost $6,214,493)................... 6,067,500
-----------
Other Mortgages 2.3%
MLMI, 1998-C2 A2, 6.39%, 2/15/30............................ United States 1,500,000 1,525,208
Morgan Stanley Capital I, 6.55%, 12/15/07................... United States 2,000,000 2,052,500
Delta Home Equity, 6.37%, 7/15/28........................... United States 2,000,000 1,965,000
-----------
Total Other Mortgages (Cost $5,579,900)..................... 5,542,708
-----------
U.S. Government Securities and Agencies/Mortgages 9.5%
U.S. Government Agencies/Mortgages 8.2%
FHLMC, 6.00%, 4/01/09....................................... United States 19,194 19,323
FHLMC, 7.00%, 1/01/09....................................... United States 16,642 16,887
FHLMC, 6.00%, 1/01/11....................................... United States 17,677 17,741
FHLMC, 6.50%, 4/01/11....................................... United States 29,536 29,818
FHLMC, 7.00%, 9/01/11....................................... United States 36,004 36,479
FHLMC, 6.00%, 5/01/13....................................... United States 731,200 735,142
FHLMC, 6.00%, 9/01/13....................................... United States 493,240 495,900
FHLMC, 7.00%, 4/01/24....................................... United States 42,545 43,312
FHLMC, 7.50%, 4/01/24....................................... United States 34,241 35,044
FHLMC, 8.50%, 12/01/24 ..................................... United States 19,771 20,605
FHLMC, 9.00%, 12/01/24 ..................................... United States 9,909 10,430
FHLMC, 7.00%, 11/01/25 ..................................... United States 24,939 25,383
FHLMC, 8.00%, 11/01/25 ..................................... United States 18,751 19,262
FHLMC, 6.50%, 12/01/25 ..................................... United States 33,067 33,373
FHLMC, 8.00%, 1/01/26....................................... United States 15,270 15,686
FHLMC, 7.50%, 1/01/26....................................... United States 25,991 26,597
FHLMC, 6.50%, 3/01/26....................................... United States 44,679 45,076
FHLMC, 7.00%, 9/01/26....................................... United States 22,222 22,618
FHLMC, 7.50%, 1/01/27....................................... United States 45,013 46,059
FHLMC, 7.00%, 4/01/28....................................... United States 210,743 215,237
FHLMC, 7.00%, 4/01/28....................................... United States 144,420 147,501
U.S. Government Agencies/Mortgages (cont.)
FHLMC, 7.00%, 5/01/28....................................... United States $ 628,789 $ 642,151
FNMA, 7.50%, 10/01/07....................................... United States 24,147 24,825
FNMA, 6.50%, 2/01/09........................................ United States 23,932 24,353
FNMA, 6.50%, 4/01/11........................................ United States 19,514 19,832
FNMA, 6.50%, 6/01/13........................................ United States 971,531 986,787
FNMA, 6.50%, 1/01/24........................................ United States 30,835 31,125
FNMA, 7.00%, 5/01/24........................................ United States 18,995 19,378
FNMA, 8.00%, 1/01/25........................................ United States 19,343 20,002
FNMA, 9.00%, 3/01/25........................................ United States 8,072 8,512
FNMA, 9.00%, 5/01/25........................................ United States 4,242 4,473
FNMA, 8.50%, 7/01/25........................................ United States 14,034 14,616
FNMA, 8.00%, 12/01/25....................................... United States 653,728 675,876
FNMA, 7.00%, 1/01/26........................................ United States 44,585 45,482
FNMA, 7.00%, 3/01/26........................................ United States 45,356 46,260
FNMA, 7.50%, 3/01/26........................................ United States 27,087 27,729
FNMA, 8.00%, 5/01/26........................................ United States 17,542 18,135
FNMA, 8.00%, 6/01/26........................................ United States 11,840 12,240
FNMA, 7.50%, 8/01/26........................................ United States 26,599 27,230
FNMA, 7.50%, 10/01/26....................................... United States 13,672 13,996
FNMA, 8.00%, 1/01/27........................................ United States 35,865 37,121
FNMA, 7.00%, 4/01/27........................................ United States 879,433 899,645
FNMA, 6.50%, 3/01/28........................................ United States 2,913,759 2,939,482
FNMA, 7.00%, 6/01/28........................................ United States 1,461,529 1,495,213
FNMA, 6.00%, 9/01/28........................................ United States 988,214 977,483
FNMA, 6.00%, 10/01/28....................................... United States 1,009,469 998,507
bFNMA, 6.50%, 11/01/28....................................... United States 1,000,000 1,007,813
GNMA, SF, 7.00%, 7/15/08 ................................... United States 1,010,000 1,038,674
GNMA, SF, 7.50%, 9/15/23.................................... United States 16,007 16,522
GNMA, SF, 6.50%, 3/15/24.................................... United States 45,709 46,270
GNMA, SF, 8.00%, 6/15/24.................................... United States 37,255 38,649
GNMA, SF, 9.00%, 1/15/25.................................... United States 4,866 5,190
GNMA, SF, 8.00%, 2/15/25.................................... United States 14,788 15,338
GNMA, SF, 9.50%, 6/15/25.................................... United States 9,937 10,736
GNMA, SF, 7.50%, 1/15/26.................................... United States 18,570 19,154
GNMA, SF, 7.50%, 1/15/26.................................... United States 20,570 21,217
GNMA, SF, 7.50%, 2/15/26.................................... United States 21,355 22,026
GNMA, SF, 7.00%, 3/15/26.................................... United States 20,377 20,865
GNMA, SF, 9.00%, 3/15/26.................................... United States 34,259 36,530
GNMA, SF, 8.00%, 6/15/26.................................... United States 41,256 42,782
GNMA, SF, 8.50%, 7/15/26.................................... United States 18,487 19,559
GNMA, SF, 7.50%, 9/15/27.................................... United States 926,806 956,251
GNMA, SF, 8.50%, 8/15/24.................................... United States 9,528 10,099
GNMA, SF, 7.50%, 5/15/27.................................... United States 1,009,999 1,042,088
GNMA, SF, 7.00%, 11/15/27................................... United States 1,009,999 1,034,732
GNMA, SF, 8.00%, 4/15/28.................................... United States 992,464 1,029,372
U.S. Government Agencies/Mortgages (cont.)
GNMA, SF, 7.00%, 5/15/28.................................... United States $ 49,340 $ 50,531
GNMA, SF, 7.00%, 6/15/28.................................... United States 1,002,120 1,026,311
-----------
19,578,635
-----------
U.S. Government Securities 1.3%
U.S. Treasury Bonds, 7.125%, 2/15/23........................ United States 400,000 494,125
U.S. Treasury Note, 5.625%, 12/31/02........................ United States 2,500,000 2,617,970
-----------
3,112,095
-----------
Total U.S. Government Securities and Agencies/Mortgages
(Cost $22,322,284)....................................... 22,690,730
-----------
Other U.S. Government and Agency Securities 7.3%
Fannie Mae, 5.75%, 4/15/03.................................. United States 11,000,000 11,421,575
Fannie Mae, 5.75%, 6/15/05.................................. United States 6,000,000 6,208,050
-----------
Total Other U.S. Government and Agency Securities (Cost $17,027,046) 17,629,625
-----------
Foreign Government and Agency Securities 37.4%
Australian Government, Series 705, 7.50%, 7/15/05........... Australia 3,600,000 AUD 2,585,503
Belgium Kingdom, 6.25%, 3/28/07............................. Belgium 106,245,000 BEF 3,545,958
Bundesobligation, Series 110, 5.375%, 2/22/99 .............. Germany 1,205,000 DEM 731,644
Bundesobligation, Series 118, 5.25%, 2/21/01 ............... Germany 2,565,000 DEM 1,611,295
Bundesrepublic Deutschland, Series 97, 6.00%, 1/04/07....... Germany 3,110,000 DEM 2,107,822
Bundesschatzanweisungen, 6.875%, 2/24/99.................... Germany 1,035,000 DEM 631,111
Buoni Poliennali del Tesoro, 10.50%, 7/15/00................ Italy 2,055,000,000 ITL 1,392,119
Buoni Poliennali del Tesoro, 7.75%, 11/01/06................ Italy 2,815,000,000 ITL 2,097,869
Deutschland Republic, 6.00%, 1/05/06........................ Germany 1,175,000 DEM 793,171
Government of Canada, 10.50%, 7/01/00 ...................... Canada 935,000 CAD 659,671
Government of Canada, 10.50%, 3/01/01 ...................... Canada 1,645,000 CAD 1,196,001
Government of Canada, 10.00%, 5/01/02 ...................... Canada 1,515,000 CAD 1,139,776
Government of Canada, 6.50%, 6/01/04 ....................... Canada 1,000,000 CAD 696,891
Government of Canada, 10.00%, 6/01/08....................... Canada 700,000 CAD 618,109
Government of France, 5.50%, 4/25/07........................ France 6,000,000 FRF 1,181,321
Government of Jamaica, 9.625%, 7/02/02 ..................... Jamaica 1,750,000 1,426,250
Kingdom of Denmark, 9.00%, 11/15/00......................... Denmark 1,785,000 DKK 310,215
Kingdom of Denmark, 7.00%, 12/15/04......................... Denmark 6,000,000 DKK 1,082,003
Netherlands Government, Series 1 & 2, 6.00%, 1/15/06 ....... Netherlands 2,385,000 NEG 1,424,973
New Zealand Government, 6.50%, 2/15/00 ..................... New Zealand 1,295,000 NZD 696,944
Peru - PDI., Series 20YR, 4.00%, 3/07/17.................... Peru 5,100,000 2,932,500
Republic of Korea, 8.875%, 4/15/08.......................... South Korea 3,100,000 2,865,578
Republic of Argentina, 9.25%, 2/23/01....................... Argentina 275,000 270,188
Republic of Argentina, 11.00%, 10/09/06..................... Argentina 2,950,000 2,935,250
Republic of Argentina, 5.75%, 3/31/23....................... Argentina 2,000,000 1,390,000
Republic of Argentina, 9.75%, 9/19/27....................... Argentina 730,000 633,731
Republic of Argentina, Bonos Del Tesoro, 8.75%, 5/09/02 .... Argentina 3,800,000 3,379,150
Republic of Argentina, Global, 11.375%, 1/30/17............. Argentina 160,000 155,200
Republic of Brazil, 8.875%, 11/05/01........................ Brazil 2,295,000 2,094,188
Republic of Brazil, 9.375%, 4/07/08......................... Brazil 3,000,000 2,055,000
Republic of Brazil, 6.188%, 4/15/12......................... Brazil $ 300,000 $ 159,189
Republic of Brazil, 10.125%, 5/15/27........................ Brazil 2,200,000 1,524,600
Republic of Brazil, C Bond, 5.00%, 4/15/14 ................. Brazil 2,355,240 1,474,335
Republic of Bulgaria, floating rate deb., Series A, 6.688%, 7/28/11 Bulgaria 4,820,000 3,235,425
Republic of Bulgaria, floating rate deb., 6.688%, 7/28/11... Bulgaria 110,000 73,838
Republic of Ecuador Disc, 6.625%, 2/28/25 .................. Ecuador 1,250,000 642,188
Republic of Ecuador, unsub., 11.25%, 4/25/02 ............... Ecuador 1,500,000 1,215,000
Republic of Ecuador, unsub., 144A, 11.25%, 4/25/02 ......... Ecuador 750,000 607,500
Republic of Panama, 8.875%, 9/30/27......................... Panama Republic of 1,500,000 1,383,750
Republic of Turkey, 144A, 9.875%, 2/23/05 .................. Turkey 850,000 707,625
Republic of Turkey, 144A, 10.00%, 9/19/07................... Turkey 875,000 755,781
Republic of Venezuela, 6.625%, 12/18/07..................... Venezuela 904,762 554,732
Republic of Venezuela, 9.25%, 9/15/27....................... Venezuela 5,383,000 3,310,545
Republic of Venezuela, Disc. W-A, 6.563%, 3/31/20........... Venezuela 250,000 153,750
Republic of Venezuela, senior unsub. notes, 9.125%, 6/18/07. Venezuela 1,200,000 807,000
Republic of Venezuela, 144A, 9.125%, 6/18/07................ Venezuela 100,000 67,250
Russian Federation, 10.00%, 6/26/07......................... Russia 8,000,000 1,970,000
SEI Holdings IX, Inc., senior notes, 144A, 11.00%, 11/30/00 Trinidad And Tobago 125,000 118,750
Spanish Government, 8.80%, 4/30/06 ......................... Spain 200,000,000 ESP 1,817,248
Swedish Government, 10.25%, 5/05/03......................... Sweden 7,000,000 SEK 1,115,395
Treuhandanstalt, 7.75%, 10/01/02............................ Germany 1,530,000 DEM 1,062,002
Turkey Republic of, 144A, 9.875%, 2/23/05 .................. Turkey 1,680,000 1,398,600
Turkey Republic of, Reg S, 10.00%, 9/19/07 ................. Turkey 1,315,000 1,135,831
United Kingdom Treasury, 9.50%, 4/18/05 .................... United Kingdom 880,000 GBP 1,820,893
United Kingdom Treasury, 7.50%, 4/18/06 .................... United Kingdom 1,681,000 GBP 3,248,608
United Mexican States, 9.75%, 2/06/01....................... Mexico 1,950,000 2,013,375
United Mexican States, 8.625%, 3/12/08 ..................... Mexico 7,470,000 6,708,060
United Mexican States, 11.375%, 9/15/16 .................... Mexico 2,810,000 2,799,463
United Mexican States, 11.50%, 5/15/26 ..................... Mexico 2,850,000 2,949,750
World Bank IBRD-Global Bond, 4.50%, 3/20/03 ................ Japan 45,000,000 JPY 454,409
-----------
Total Foreign Government and Agency Securities (Cost $94,817,958) 89,924,323
-----------
Total Long Term Investments (Cost $235,176,429) ............ 224,040,040
-----------
cRepurchase Agreement 4.5%...................................
Joint Repurchase Agreement, 5.350%, 11/02/98, (Maturity Value
$10,687,852) (Cost $10,683,089)........................... United States $10,683,089 $ 10,683,089
Barclays Capital Group, Inc. (Maturity Value $1,098,541)
Chase Securities, Inc. (Maturity Value $1,098,541)
CIBC Wood Gundy Securities Corp. (Maturity Value $1,098,541)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $1,098,541)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $1,098,541)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $800,983)
Greenwich Capital Markets, Inc. (Maturity Value $1,098,541)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $1,098,541)
Paribas Corp. (Maturity Value $1,098,541)
SBC Warburg Dillon Read, Inc. (Maturity Value $1,098,541)
Collateralized by U.S. Treasury Bills and Notes -----------
Total Investments (Cost $245,859,518) 97.7%................. 234,723,129
Other Assets, less Liabilities 2.3%......................... 5,620,061
-----------
Net Assets 100.0% .......................................... $240,343,190
-----------
Currency Abbreviations
AUD -Australian Dollar
BEF -Belguim Franc
CAD -Canadian Dollar
DEM -German Mark
DKK -Danish Krone
ESP -Spanish Peseta
FRF -French Franc
GBP -British Pound
ITL -Italian Lira
JPY -Japanese Yen
NEG -Netherland Guilder
NZD -New Zealand Dollar
SEK -Swedish Krona
*Securities traded in U.S. dollars unless otherwise indicated.
aNon-income producing.
bSufficient collateral has been segregated for securities traded on a when issued or delayed delivery.
cSee Note 1(c) regarding joint repurchase agreement.
dSee Note 7 regarding defaulted securities.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements
Statements of Assets and Liabilities
October 31, 1998 (unaudited)
Franklin Franklin Franklin
Biotechnology Blue Chip California
Discovery Fund Fund Growth Fund
-----------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost - Unaffiliated issuers........................ $63,266,852 $17,474,285 $654,470,383
Cost - Non-controlled affiliated issuers........... -- -- 14,288,521
-----------------------------------------------
Value - Unaffiliated issuers....................... 55,470,153 19,376,412 708,333,430
Value - Non-controlled affiliated issuers.......... -- -- 8,118,750
Repurchase agreements, at value and cost............ 8,605,154 3,028,354 70,171,082
Cash................................................ 164,587 79,794 2,134,042
Receivables:
Investment securities sold......................... 54,998 67,745 114,058
Capital shares sold................................ 184,456 10,938 632,775
Dividends and interest............................. -- 24,427 575,173
Affiliates......................................... -- 12,705 --
Deposits with brokers for securities sold short..... 4,645,845 -- --
-----------------------------------------------
Total assets......................................... 69,125,193 22,600,375 790,079,310
-----------------------------------------------
Liabilities:
Payables:
Investment securities purchased.................... -- 29,812 --
Capital shares redeemed............................ 46,074 13,325 888,938
Affiliates......................................... 216,628 20,103 1,097,045
Shareholders....................................... 3,216 184,849 671,073
Other liabilities................................... 36,721 29,782 64,729
-----------------------------------------------
Total liabilities.................................... 302,639 277,871 2,721,785
-----------------------------------------------
Net assets, at value................................ $68,822,554 $22,322,504 $787,357,525
===============================================
Net assets consist of:
Undistributed net investment income (loss).......... $ (254,973) $ 97,402 $ 1,809,446
Net unrealized appreciation (depreciation).......... (7,796,699) 1,902,864 47,693,276
Accumulated net realized loss....................... (1,076,282) (538,148) (33,386,136)
Capital shares...................................... 77,950,508 20,860,386 771,240,939
-----------------------------------------------
Net assets, at value................................. $68,822,554 $22,322,504 $787,357,525
===============================================
Franklin Franklin Franklin
Biotechnology Blue Chip California
Discovery Fund Fund Growth Fund
Class I:
Net assets, at value................................ $68,822,554 $22,322,504 $661,395,057
===============================================
Shares outstanding.................................. 3,001,137 1,842,461 30,586,754
===============================================
Net asset value per share*.......................... $22.93 $12.12 $21.62
===============================================
Maximum offering price per share
(net asset value per share / 94.25%).............. $24.33 $12.86 $22.94
===============================================
Class II:
Net assets, at value................................ -- -- $125,962,468
===============================================
Shares outstanding.................................. -- -- 5,873,153
===============================================
Net asset value per share*.......................... -- -- $21.45
===============================================
Maximum offering price per share
(net asset value per share / 99.00%).............. -- -- $21.67
===============================================
*Redemption price is equal to net asset value less any applicable contingent deferred sales charge.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Assets and Liabilities (cont.)
October 31, 1998 (unaudited)
Franklin Franklin Franklin
Global Health Global MidCap
Care Fund Utilities Fund Growth Fund
-----------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost - Unaffiliated issuers........................ $117,752,450 $154,665,866 $21,523,954
Cost - Non-controlled affiliated issuers........... 7,353,447 -- --
-----------------------------------------------
Value - Unaffiliated issuers....................... 110,811,145 196,222,471 22,763,696
Value - Non-controlled affiliated issuers.......... 1,216,500 -- --
Repurchase agreements, at value and cost............ 15,096,582 14,774,353 6,360,656
Cash................................................ -- -- 57,596
Receivables:
Investment securities sold......................... 4,421,110 548,746 23,645
Capital shares sold................................ 150,701 167,415 47,157
Dividends and interest............................. 5,293 300,864 19,093
-----------------------------------------------
Total assets......................................... 131,701,331 212,013,849 29,271,843
-----------------------------------------------
Liabilities:
Payables:
Investment securities purchased.................... -- -- 31,500
Capital shares redeemed............................ 458,549 521,283 38,809
Affiliates......................................... 257,114 271,698 33,504
Shareholders....................................... 226,060 215,389 4,997
Other liabilities................................... 23,464 5,540 --
-----------------------------------------------
Total liabilities.................................... 965,187 1,013,910 108,810
-----------------------------------------------
Net assets, at value................................ $130,736,144 $210,999,939 $29,163,033
===============================================
Net assets consist of:
Undistributed net investment income (loss).......... $ (796,124) $ 2,148,363 $ 28,654
Net unrealized appreciation (depreciation).......... (13,078,252) 41,557,823 1,239,742
Accumulated net realized loss....................... (3,641,897) (4,184,889) (2,002,155)
Capital shares...................................... 148,252,417 171,478,642 29,896,792
-----------------------------------------------
Net assets, at value................................. $130,736,144 $210,999,939 $29,163,033
-----------------------------------------------
Franklin Franklin Franklin
Global Health Global MidCap
Care Fund Utilities Fund Growth Fund
-----------------------------------------------
Class I:
<S> <C> <C> <C>
Net assets, at value................................ $111,930,388 $195,108,025 $29,163,033
===============================================
Shares outstanding.................................. 7,399,617 12,661,219 2,126,354
===============================================
Net asset value per share*.......................... $15.13 $15.41 $13.72
===============================================
Maximum offering price per share
(net asset value per share / 94.25%).............. $16.05 $16.35 $14.56
===============================================
Class II:
Net assets, at value................................ $ 18,805,756 $ 15,891,914 --
===============================================
Shares outstanding.................................. 1,255,570 1,039,843 --
===============================================
Net asset value per share*.......................... $14.98 $15.28 --
===============================================
Maximum offering price per share
(net asset value per share / 99.00%).............. $15.13 $15.43 --
===============================================
*Redemption price is equal to net asset value less any applicable contingent deferred sales charge.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Assets and Liabilities (cont.)
October 31, 1998 (unaudited)
Franklin Franklin Franklin
Natural Resources Small Cap Strategic
Fund Growth Fund Income Fund
--------------------------------------------------
Assets:
Investments in securities:
<S> <C> <C> <C>
Cost - Unaffiliated issuers........................ $44,449,432 $2,594,798,322 $235,176,429
Cost - Non-controlled affiliated issuers........... -- 1,492,106,757 --
--------------------------------------------------
Value - Unaffiliated issuers....................... 37,385,416 2,499,492,851 224,040,040
Value - Non-controlled affiliated issuers.......... -- 1,196,274,027 --
Repurchase agreements, at value and cost............ 4,230,981 655,542,812 10,683,089
Cash................................................ 7,216 10,533,465 566,582
Receivables:
Investment securities sold......................... 14,859 3,707,601 1,298,496
Capital shares sold................................ 31,972 12,531,007 767,016
Dividends and interest............................. 30,498 1,654,946 4,756,761
Affiliates......................................... -- -- 44,550
Unrealized gain on forward exchange contracts (Note 6) -- -- 51,086
--------------------------------------------------
Total assets......................................... 41,700,942 4,379,736,709 242,207,620
--------------------------------------------------
Liabilities:
Payables:
Investment securities purchased.................... -- 48,974,888 1,327,977
Capital shares redeemed............................ 43,528 12,073,297 144,246
Affiliates......................................... 42,343 5,278,752 183,576
Shareholders....................................... 74,690 1,128,294 71,102
Payable upon return of securities loaned (Note 10).. 617,967 125,442,031 --
Unrealized loss on forward exchange contracts (Note 6) -- -- 98,567
Other liabilities................................... 15,198 181,368 38,962
--------------------------------------------------
Total liabilities.................................... 793,726 193,078,630 1,864,430
--------------------------------------------------
Net assets, at value................................ $40,907,216 $4,186,658,079 $240,343,190
==================================================
Net assets consist of:
Undistributed net investment income................. $ 214,800 $ 7,081,080 $ 457,081
Net unrealized depreciation......................... (7,063,928) (391,138,201) (11,087,275)
Accumulated net realized loss....................... (3,242,626) (112,107,738) (1,477,742)
Capital shares...................................... 50,998,970 4,682,822,938 252,451,126
--------------------------------------------------
Net assets, at value................................. $40,907,216 $4,186,658,079 $240,343,190
==================================================
Franklin Franklin Franklin
Natural Resources Small Cap Strategic
Fund Growth Fund Income Fund
==================================================
Class I:
<S> <C> <C> <C>
Net assets, at value................................ $40,491,217 $3,401,892,984 $218,226,419
==================================================
Shares outstanding.................................. 3,546,439 172,126,040 20,850,948
==================================================
Net assets value per share*......................... $11.42 $19.76 $10.47
==================================================
Maximum offering price per share
(net asset value per share / 94.25%,
94.25%, 95.75%, respectively)................... $12.12 $20.97 $10.93
==================================================
Class II:
Net assets, at value................................ -- $ 643,993,026 $ 22,116,771
==================================================
Shares outstanding.................................. -- 33,144,437 2,112,826
==================================================
Net asset value per share*.......................... -- $19.43 $10.47
==================================================
Maximum offering price per share (net asset
value per share / 99.00%)......................... -- $19.63 $10.58
==================================================
Advisor Class:
Net assets, at value................................ $ 415,999 $ 140,772,069 --
==================================================
Shares outstanding.................................. 36,424 7,093,446 --
==================================================
Net asset value and maximum offering price per share $11.42 $19.85 --
==================================================
*Redemption price is equal to net asset value less any applicable contingent deferred sales charge.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Operations
for the six months ended October 31, 1998 (unaudited)
Franklin Franklin Franklin
Biotechnology Blue Chip California
Discovery Fund Fund Growth Fund
-----------------------------------------------
Investment income:*
<S> <C> <C> <C>
Dividends........................................... $-- $107,743 $ 4,403,937
Interest............................................ 414,929 57,718 2,165,168
-----------------------------------------------
Total investment income.............................. 414,929 165,461 6,569,105
-----------------------------------------------
Expenses:
Management fees (Note 3)............................ 211,008 71,771 1,934,213
Administrative fees (Note 3)........................ 50,772 -- --
Distribution fees (Note 3)
Class I.............................................. 105,344 28,540 858,983
Class II............................................. -- -- 622,225
Transfer agent fees (Note 3)........................ 193,573 22,799 754,190
Custodian fees...................................... 4,865 2,243 8,191
Reports to shareholders............................. 15,047 5,595 222,628
Registration and filing fees........................ 38,224 14,675 180,038
Professional fees................................... 23,701 1,423 12,079
Trustees' fees and expenses......................... 3,326 44 5,304
Amortization of offering costs (Note 1)............. 19,669 -- --
Other............................................... 4,373 8,227 42,945
-----------------------------------------------
Total expenses....................................... 669,902 155,317 4,640,796
Expenses waived/paid by affiliate (Note 3).......... -- (35,875) --
-----------------------------------------------
Net expenses......................................... 669,902 119,442 4,640,796
-----------------------------------------------
Net investment income (loss)........................ (254,973) 46,019 1,928,309
-----------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments.......................................... (2,094,618) (107,443) (55,132,178)
Foreign currency transactions........................ -- (2,490) --
Securities sold short................................ 1,107,625 -- --
-----------------------------------------------
Net realized loss................................... (986,993) (109,933) (55,132,178)
Net unrealized appreciation (depreciation) on:
Investments........................................ (10,447,353) (409,913) (66,108,116)
Translation of assets and liabilities
denominated in foreign currencies................. -- 4,694 --
-----------------------------------------------
Net unrealized depreciation......................... (10,447,353) (405,219) (66,108,116)
-----------------------------------------------
Net realized and unrealized loss..................... (11,434,346) (515,152) (121,240,294)
-----------------------------------------------
Net decrease in net assets resulting from operations. $(11,689,319) $(469,133) $(119,311,985)
===============================================
*Net of foreign taxes of $7,169 for the Franklin Blue Chip Fund.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Operations (cont.)
for the six months ended October 31, 1998 (unaudited)
Franklin Franklin Franklin
Global Health Global MidCap
Care Fund Utilities Fund Growth Fund
-----------------------------------------------
Investment income:*
<S> <C> <C> <C>
Dividends........................................... $ 95,332 $ 3,080,958 $ 106,471
Interest............................................ 228,783 282,057 98,152
-----------------------------------------------
Total investment income.............................. 324,115 3,363,015 204,623
-----------------------------------------------
Expenses:
Management fees (Note 3)............................ 456,985 625,182 94,854
Distribution fees (Note 3)
Class I............................................ 174,049 263,812 38,030
Class II........................................... 105,695 80,772 --
Transfer agent fees (Note 3)........................ 267,490 145,543 22,929
Custodian fees...................................... 8,414 17,907 142
Reports to shareholders............................. 64,049 41,600 6,430
Registration and filing fees........................ 34,726 17,326 11,145
Professional fees................................... 3,998 4,094 1,883
Trustees' fees and expenses......................... 1,014 1,054 202
Other............................................... 3,819 6,002 354
-----------------------------------------------
Total expenses....................................... 1,120,239 1,203,292 175,969
-----------------------------------------------
Net investment income (loss)........................ (796,124) 2,159,723 28,654
-----------------------------------------------
Realized and unrealized gains (losses):
Net realized loss from:
Investments:
Unaffiliated issuers.............................. (3,657,354) (15,482,006) (2,321,733)
Non-controlled affiliated issuers................. (86,485) -- --
Foreign currency transactions...................... (14,137) (25,730) --
-----------------------------------------------
Net realized loss................................... (3,757,976) (15,507,736) (2,321,733)
Net unrealized appreciation (depreciation) on:
Investments........................................ (36,588,074) (12,917,733) (4,750,062)
Translation of assets and liabilities denominated
in foreign currencies............................ -- 1,314 --
-----------------------------------------------
Net unrealized depreciation......................... (36,588,074) (12,916,419) (4,750,062)
-----------------------------------------------
Net realized and unrealized loss..................... (40,346,050) (28,424,155) (7,071,795)
-----------------------------------------------
Net decrease in net assets resulting from operations. $(41,142,174) $(26,264,432) $(7,043,141)
===============================================
*Net of foreign taxes of $1,255, $67,048, and $424 for the Franklin Global
Health Care Fund, the Franklin Global Utilities Fund, and the Franklin MidCap
Growth Fund, respectively.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Operations (cont.)
for the six months ended October 31, 1998 (unaudited)
Franklin Franklin Franklin
Natural Resources Small Cap Strategic
Fund Growth Fund Income Fund
---------------------------------------------------
Investment income:*
Dividends:
<S> <C> <C> <C>
Unaffiliated issuers ................................ $ 251,438 $ 12,796,304 $ 259,749
Non-controlled affiliated issuers (Note 9)........... -- 2,093,374 --
Interest............................................ 178,911 15,115,984 8,608,348
---------------------------------------------------
Total investment income.............................. 430,349 30,005,662 8,868,097
---------------------------------------------------
Expenses:
Management fees (Note 3)............................ 142,518 9,709,133 587,713
Distribution fees (Note 3)
Class I............................................ 67,215 4,375,163 250,607
Class II........................................... -- 3,339,823 37,506
Transfer agent fees (Note 3)........................ 60,781 3,481,031 73,454
Custodian fees...................................... 2,914 33,104 15,184
Reports to shareholders............................. 20,176 794,984 26,100
Registration and filing fees........................ 24,906 1,047,485 79,749
Professional fees................................... 1,678 54,073 2,572
Trustees' fees and expenses......................... 344 32,552 1,209
Other............................................... 2,314 57,234 24,002
---------------------------------------------------
Total expenses....................................... 322,846 22,924,582 1,098,096
Expenses waived/paid by affiliate (Note 3).......... (105,762) -- (545,713)
---------------------------------------------------
Net expenses......................................... 217,084 22,924,582 552,383
---------------------------------------------------
Net investment income............................... 213,265 7,081,080 8,315,714
---------------------------------------------------
Realized and unrealized gains (losses):
Net realized loss from:
Investments:
Unaffiliated issuers ............................... (2,625,865) (87,998,287) (1,240,583)
Non-controlled affiliated issuers................... -- (86,562,766) --
Foreign currency transactions...................... (3,884) (6,201) (102,982)
---------------------------------------------------
Net realized loss................................... (2,629,749) (174,567,254) (1,343,565)
Net unrealized appreciation (depreciation) on:
Investments........................................ (13,386,471) (1,037,140,271) (13,430,188)
Translation of assets and liabilities denominated
In foreign currencies............................ 88 -- 90,438
---------------------------------------------------
Net unrealized depreciation......................... (13,386,383) (1,037,140,271) (13,339,750)
---------------------------------------------------
Net realized and unrealized loss..................... (16,016,132) (1,211,707,525) (14,683,315)
---------------------------------------------------
Net decrease in net assets resulting from operations. $(15,802,867) $(1,204,626,445) $ (6,367,601)
===================================================
*Net of foreign taxes of $9,453 and $78,512 for the Franklin Natural Resources Fund and the Franklin Small Cap
Growth Fund, respectively.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Changes in Net Assets
for the six months ended October 31, 1998 (unaudited)
and the year ended April 30, 1998
Franklin Biotechnology Franklin
Discovery Fund Blue Chip Fund
----------------------------------------------------------------
Six Months Year Six Months Year
Ended Ended Ended Ended
October 31, 1998 April 30, 1998* October 31, 1998 April 30, 1998
----------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss).................. $ (254,973) $ (137,225) $ 46,019 $ 109,740
Net realized gain (loss) from investments and
foreign currency transactions.................. (986,993) 78,552 (109,933) (371,433)
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies.. (10,447,353) 2,650,654 (405,219) 2,021,063
----------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations...................... (11,689,319) 2,591,981 (469,133) 1,759,370
Distributions to shareholders from:
Net investment income:
Class I....................................... -- -- -- (61,919)
Net realized gains:
Class I....................................... -- (92,644) -- (81,033)
----------------------------------------------------------------
Total distributions to shareholders............. -- (92,644) -- (142,952)
Capital share transactions: (Note 2)
Class I........................................ 6,965,716 71,046,820 5,955,517 9,619,758
----------------------------------------------------------------
Net increase (decrease) in net assets......... (4,723,603) 73,546,157 5,486,384 11,236,176
Net assets:
Beginning of period............................ 73,546,157 -- 16,836,120 5,599,944
----------------------------------------------------------------
End of period.................................. $68,822,554 $73,546,157 $22,322,504 $16,836,120
================================================================
Undistributed net investment income (loss)
included in net assets
End of period................................. $ (254,973) $-- $ 97,402 $ 51,383
================================================================
*For the period September 15, 1997 (effective date) to April 30, 1998.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
for the six months ended October 31, 1998 (unaudited)
and the year ended April 30, 1998
Franklin Franklin
California Growth Fund Global Health Care Fund
----------------------------------------------------------------
Six Months Year Six Months Year
Ended Ended Ended Ended
October 31, 1998 April 30, 1998 October 31, 199 April 30, 1998
----------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss).................. $ 1,928,309 $ 3,338,627 $ (796,124) $ (1,510,292)
Net realized gain (loss) from investments and
foreign currency transactions.................. (55,132,178) 42,533,146 (3,757,976) 7,343,486
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies.. (66,108,116) 104,216,403 (36,588,074) 39,299,172
----------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations...................... (119,311,985) 150,088,176 (41,142,174) 45,132,366
Distributions to shareholders from:
Net investment income:
Class I....................................... (1,290,440) (2,778,436) -- (839,395)
Class II...................................... -- (56,235) -- --
Net realized gains:
Class I....................................... -- (20,449,548) -- (10,783,573)
Class II...................................... -- (2,848,861) -- (1,181,824)
----------------------------------------------------------------
Total distributions to shareholders............. (1,290,440) (26,133,080) -- (12,804,792)
Capital share transactions: (Note 2)
Class I........................................ 42,420,021 328,134,373 (28,989,391) (4,628,248)
Class II....................................... 21,584,845 84,411,109 (997,926) 13,414,237
----------------------------------------------------------------
Total capital share transactions................ 64,004,866 412,545,482 (29,987,317) 8,785,989
----------------------------------------------------------------
Net increase (decrease) in net assets........... (56,597,559) 536,500,578 (71,129,491) 41,113,563
Net assets:
Beginning of period............................ 843,955,084 307,454,506 201,865,635 160,752,072
----------------------------------------------------------------
End of period.................................. $787,357,525 $843,955,084 $130,736,144 $201,865,635
================================================================
Undistributed net investment income (loss)
included in net assets
End of period................................. $ 1,809,446 $ 1,171,577 $ (796,124) $--
================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
for the six months ended October 31, 1998 (unaudited)
and the year ended April 30, 1998
Franklin Franklin
Global Utilities Fund MidCap Growth Fund
----------------------------------------------------------------
Six Months Year Six Months Year
Ended Ended Ended Ended
October 31, 1998 April 30, 1998 October 31, 1998 April 30, 1998
----------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss).................. $ 2,159,723 $ 4,178,656 $ 28,654 $ (6,092)
Net realized gain (loss) from investments and
foreign currency transactions.................. (15,507,736) 22,067,993 (2,321,733) 899,279
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies.. (12,916,419) 39,396,240 (4,750,062) 4,795,383
----------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations...................... (26,264,432) 65,642,889 (7,043,141) 5,688,570
Distributions to shareholders from:
Net investment income:
Class I....................................... (1,491,278) (4,337,700) -- --
Class II...................................... (75,147) (173,616) -- --
Net realized gains:
Class I....................................... -- (20,433,197) -- (759,611)
Class II...................................... -- (1,296,647) -- --
----------------------------------------------------------------
Total distributions to shareholders............. (1,566,425) (26,241,160) -- (759,611)
Capital share transactions: (Note 2)
Class I........................................ (5,644,039) 15,321,019 6,342,512 12,082,084
Class II....................................... 1,556,848 5,705,054 -- --
----------------------------------------------------------------
Total capital share transactions................ (4,087,191) 21,026,073 6,342,512 12,082,084
----------------------------------------------------------------
Net increase (decrease) in net assets........... (31,918,048) 60,427,802 (700,629) 17,011,043
Net assets:
Beginning of period............................ 242,917,987 182,490,185 29,863,662 12,852,619
----------------------------------------------------------------
End of period.................................. $210,999,939 $242,917,987 $29,163,033 $29,863,662
================================================================
Undistributed net investment income
included in net assets
End of period.................................. $ 2,148,363 $ 1,555,065 $ 28,654 $--
================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
for the six months ended October 31, 1998 (unaudited)
and the year ended April 30, 1998
Franklin Franklin
Natural Resources Fund Small Cap Growth Fund
------------------------------------------------------------------
Six Months Year Six Months Year
Ended Ended Ended Ended
October 31, 1998 April 30, 1998 October 31, 1998 April 30, 1998
------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income......................... $ 213,265 $ 387,952 $ 7,081,080 $ 6,367,212
Net realized gain (loss) from investments and
foreign currency transactions.................. (2,629,749) 3,269,031 (174,567,254) 168,905,582
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies.. (13,386,383) 4,698,245 (1,037,140,271) 660,877,005
------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations...................... (15,802,867) 8,355,228 (1,204,626,445) 836,149,799
Distributions to shareholders from:
Net investment income:
Class I....................................... (283,075) (290,715) -- (10,251,644)
Advisor Class................................. (8,766) (11,637) -- (376,164)
Net realized gains:
Class I....................................... -- (3,235,588) -- (103,290,267)
Class II...................................... -- -- -- (19,206,121)
Advisor Class................................. -- (65,092) -- (2,705,237)
------------------------------------------------------------------
Total distributions to shareholders............. (291,841) (3,603,032) -- (135,829,433)
Capital share transactions: (Note 2)
Class I........................................ (5,900,107) 12,387,988 421,462,438 2,294,635,207
Class II....................................... -- -- 103,625,056 492,492,347
Advisor Class.................................. (264,004) (483,354) 57,834,242 84,621,122
------------------------------------------------------------------
Total capital share transactions................ (6,164,111) 11,904,634 582,921,736 2,871,748,676
------------------------------------------------------------------
Net increase (decrease) in net assets........... (22,258,819) 16,656,830 (621,704,709) 3,572,069,042
Net assets:
Beginning of period............................ 63,166,035 46,509,205 4,808,362,788 1,236,293,746
------------------------------------------------------------------
End of period.................................. $40,907,216 $63,166,035 $4,186,658,079 $4,808,362,788
==================================================================
Undistributed net investment income
included in net assets
End of period................................. $ 214,800 $ 293,376 $ 7,081,080 $--
==================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
for the six months ended October 31, 1998 (unaudited)
and the year ended April 30, 1998
Franklin
Strategic Income Fund
---------------------------------
Six Months Year Ended
Ended Ended
October 31, 1998 April 30, 1998
---------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C>
Net investment income................................................ $ 8,315,714 $ 6,590,381
Net realized gain (loss) from investments and foreign
currency transactions.............................................. (1,343,565) 335,312
Net unrealized appreciation (depreciation) on investments
and translation of assets and
liabilities denominated in foreign currencies......................... (13,339,750) 2,122,179
---------------------------------
Net increase (decrease) in net assets resulting from operations........ (6,367,601) 9,047,872
Distributions to shareholders from:
Net investment income:
Class I.............................................................. (7,628,162) (6,541,159)
Class II............................................................. (361,518) --
Net realized gains:
Class I.............................................................. -- (692,982)
Class II............................................................. -- --
---------------------------------
Total distributions to shareholders.................................... (7,989,680) (7,234,141)
Capital share transactions: (Note 2)
Class I............................................................... 65,392,664 129,955,768
Class II.............................................................. 22,674,409 --
---------------------------------
Total distributions to shareholders.................................... 88,067,073 129,955,768
Net increase in net assets............................................. 73,709,792 131,769,499
Net assets:
Beginning of period................................................... 166,633,398 34,863,899
---------------------------------
End of period......................................................... $240,343,190 $166,633,398
=================================
Undistributed net investment income included in net assets
End of period......................................................... $ 457,081 $ 131,047
=================================
See notes to financial statements.
</TABLE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited)
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 nine separate
series (the Funds). All Funds are non-diversified except the Franklin Blue Chip
Fund, the Franklin MidCap Growth Fund, and the Franklin Small Cap Growth Fund.
The Funds and their investment policies are:
<TABLE>
<CAPTION>
Capital Growth Growth and Income Total Return
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Biotechnology Discovery Fund Strategic Income Fund Global Utilities Fund
Blue Chip Fund Natural Resources Fund
California Growth Fund
Global Health Care Fund
MidCap Growth Fund
Small Cap Growth Fund
</TABLE>
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 October 31, 1998, all outstanding repurchase
agreements had been entered into on October 30, 1998.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
d. Forward Exchange Contracts:
The Strategic Income Fund may enter into forward exchange contracts to hedge
against foreign exchange risks. These contracts are valued daily and the Fund's
equity therein is included in the Statement of Assets and Liabilities. Realized
and unrealized gains and losses are included in the Statement of Operations.
e. Securities Sold Short:
The Biotechnology Discovery Fund is engaged in selling securities short, which
obligates the Fund to replace a security borrowed by purchasing the same
security at the current market value. The Fund would incur a loss if the price
of the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund would realize a gain if
the price of the security declines between those dates.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit for the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short.
f. Income Taxes:
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute all of its taxable income.
g. Security Transactions, Investment Income, Expenses and Distributions:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount is
amortized on an income tax basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. Other expenses are
charged to each Fund on a specific identification basis.
Distributions received by the Trust from securities may be a return of capital
(ROC). Such distributions reduce the cost basis of the securities, and any
distributions in excess of the cost basis are recognized as capital gains.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
h. Offering Costs:
Offering costs are amortized on a straight-line basis over twelve months.
i. Accounting Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the Funds are indicated below. The
shares have the same rights except for their initial sales load, distribution
fees, voting rights on matters affecting a single class and the exchange
privilege of each class.
<TABLE>
<CAPTION>
Class I, Class II,
Class I Class I & Class II Class I & Advisor Class & Advisor Class
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Biotechnology Discovery Fund California Growth Fund Natural Resources Fund Small Cap Growth Fund
Blue Chip Fund Global Health Care Fund
MidCap Growth Fund Global Utilities Fund
Strategic Income Fund
</TABLE>
At October 31, 1998, 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 Blue Chip Fund California Growth Fund
-----------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
-----------------------------------------------------------------------------------
Class I Shares:
Six months ended October 31,1998
<S> <C> <C> <C> <C> <C> <C>
Shares sold 830,603 $19,698,279 1,022,297 $12,293,012 8,195,755 $184,761,654
Shares issued in reinvestment
of distributions -- -- -- -- 51,921 1,181,762
Shares redeemed (564,525) (12,732,563) (531,076) (6,337,495) (6,543,531) (143,523,395)
-----------------------------------------------------------------------------------
Net increase 266,078 $ 6,965,716 491,221 $ 5,955,517 1,704,145 $ 42,420,021
===================================================================================
Year ended April 30, 19981
Shares sold 3,010,054 $77,917,478 1,118,441 $12,925,246 20,145,768 $465,817,703
Shares issued in reinvestment
of distributions 3,075 72,075 12,437 135,809 978,677 21,399,872
Shares redeemed (278,070) (6,942,733) (295,806) (3,441,297) (6,859,634) (159,083,202)
-----------------------------------------------------------------------------------
Net increase 2,735,059 $71,046,820 835,072 $ 9,619,758 14,264,811 $328,134,373
===================================================================================
Class II Shares:
Six months ended October 31,1998
Shares sold............................................................................ 1,658,254 $ 37,616,971
Shares redeemed........................................................................ (729,923) (16,032,126)
----------------------------
Net increase........................................................................... 928,331 $ 21,584,845
============================
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
============================
1For the Biotechnology Fund, for the period September 15,1997 (effective date) to April 30, 1998.
</TABLE>
<TABLE>
<CAPTION>
2. SHARES OF BENEFICIAL INTEREST (cont.)
Franklin Franklin Franklin
Global Health Care Fund Global Utilities Fund MidCap Growth Fund
------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------------
Class I Shares:
Six months ended October 31,1998
<S> <C> <C> <C> <C> <C> <C>
Shares sold........................ 4,078,597 $ 66,128,445 1,750,468 $28,580,744 691,251 $10,444,854
Shares issued in reinvestment
of distributions................... -- -- 76,618 1,248,894 -- --
Shares redeemed.................... (5,835,388) (95,117,836) (2,216,664) (35,473,677) (276,855) (4,102,342)
------------------------------------------------------------------------------------
Net increase (decrease)............ (1,756,791) $ (28,989,391) (389,578) $ (5,644,039) 414,396 $ 6,342,512
====================================================================================
Year ended April 30, 1998
Shares sold........................ 5,859,007 $114,702,245 3,212,803 $52,323,466 1,253,115 $20,195,538
Shares issued in reinvestment
of distributions................... 579,437 10,337,126 1,370,293 20,834,692 47,614 724,287
Shares redeemed.................... (6,631,021) (129,667,619) (3,569,029) (57,837,139) (551,956) (8,837,741)
------------------------------------------------------------------------------------
Net increase (decrease)............ (192,577) $ (4,628,248) 1,014,067 $15,321,019 748,773 $12,082,084
====================================================================================
Class II Shares:
Six months ended October 31, 1998
Shares sold........................ 203,557 $ 3,390,527 236,326 $ 3,793,734
Shares issued in reinvestment
of distributions................... -- -- 3,803 61,656
Shares redeemed.................... (269,088) (4,388,453) (146,512) (2,298,542)
----------------------------------------------------------
Net increase (decrease)............ (65,531) $ (997,926) 93,617 $ 1,556,848
==========================================================
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>
<TABLE>
<CAPTION>
2. SHARES OF BENEFICIAL INTEREST (cont.)
Franklin Franklin Franklin
Natural Resources Fund Small Cap Growth Fund Strategic Income Fund
--------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------------
Class I Shares:
Six months ended October 31, 1998
<S> <C> <C> <C> <C> <C> <C>
Shares sold........................ 1,271,855 $15,290,724 72,157,670 $1,535,901,300 9,640,705 $103,649,227
Shares issued in reinvestment
of distributions................... 20,556 260,542 -- -- 446,281 4,757,015
Shares redeemed.................... (1,774,449) (21,451,373) (52,670,437) (1,114,438,862) (4,067,306) (43,013,578)
--------------------------------------------------------------------------------------
Net increase (decrease)............ (482,038) $ (5,900,107) 19,487,233 $ 421,462,438 6,019,680 $ 65,392,664
======================================================================================
Year ended April 30, 1998
Shares sold........................ 3,460,003 $53,383,689 136,826,460 $3,281,727,105 13,008,094 $145,482,936
Shares issued in reinvestment
of distributions................... 233,153 3,232,567 4,660,368 102,667,738 433,246 4,823,299
Shares redeemed.................... (2,890,715) (44,228,268) (45,358,271) (1,089,759,636) (1,820,464) (20,350,467)
--------------------------------------------------------------------------------------
Net increase....................... 802,441 $12,387,988 96,128,557 $2,294,635,207 11,620,876 $129,955,768
======================================================================================
Class II Shares:
Six months ended October 31, 1998
Shares sold.................................................. 8,777,974 $ 189,231,387 2,250,351 $ 24,100,571
Shares issued in reinvestment of distributions............... -- -- 22,716 235,997
Shares redeemed.............................................. (4,232,415) (85,606,331) (160,241) (1,662,159)
-----------------------------------------------------------
Net increase................................................. 4,545,559 $ 103,625,056 2,112,826 $ 22,674,409
===========================================================
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
==============================
</TABLE>
<TABLE>
<CAPTION>
Advisor Class Shares:
Six months ended October 31, 1998
<S> <C> <C> <C> <C>
Shares sold........................ 75,954 $ 1,017,947 3,809,840 $ 83,434,404
Shares issued in reinvestment
of distributions................... 693 8,766 -- --
Shares redeemed.................... (97,861) (1,290,717) (1,279,877) (25,600,162)
-------------------------------------------------------
Net increase (decrease)............ (21,214) $ (264,004) 2,529,963 $ 57,834,242
=======================================================
Year ended April 30, 1998
Shares sold........................ 477,715 $ 7,274,080 3,919,786 $ 93,330,082
Shares issued in reinvestment
of distributions................... 5,516 76,729 90,328 1,991,723
Shares redeemed.................... (505,389) (7,834,163) (436,261) (10,700,683)
-------------------------------------------------------
Net increase (decrease)............ (22,158) $ (483,354) 3,573,853 $ 84,621,122
=======================================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), Franklin/Templeton Distributors, Inc.
(Distributors), Franklin Templeton Services, Inc. (FT Services), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Funds'
investment manager, principal underwriter, administrative manager and transfer
agent, respectively.
All Funds, except the Blue Chip Fund and the MidCap Growth Fund, pay an
investment management fee to Advisers based on the average net assets of the
Funds as follows:
Annualized
Fee Rate Average Daily Net Assets
--------------------------------------------------------------
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million, up to and including $10 billion
Fees are further reduced on net assets over $10 billion.
The Blue Chip Fund pays an investment management fee to Advisers based on the
average net assets of the Fund as follows:
Annualized
Fee Rate Average Daily Net Assets
------------------------------------------------------------
.750% First $500 million
.625% Over $500 million, up to and including $1 billion
.500% Over $1 billion
The MidCap Growth Fund pays an investment management fee to Advisers of .650%
per year of the average daily net assets of the Fund.
The Biotechnology Discovery Fund pays an administrative fee to FT Services based
on the Fund's average net assets as follows:
Annualized
Fee Rate Average Daily Net Assets
--------------------------------------------------------------
.150% First $200 million
.135% Over $200 million, up to and including $700 million
.100% Over $700 million, up to and including $1.2 billion
.075% Over $1.2 billion
Under a subadvisory agreement, Templeton Investment Counsel, Inc. (TICI)
provides subadvisory services to the Strategic Income Fund and receives from
Advisers fees based on the average daily net assets of the Fund.
Under an agreement with Advisers, FT Services provides administrative services
to the Funds, except the Biotechnology Discovery Fund. The fee is paid by
Advisers based on the average daily net assets, and is not an additional expense
of the Funds.
Advisers agreed in advance to waive management fees for the Blue Chip Fund, the
Natural Resources Fund, and the Strategic Income Fund, as noted in the
Statements of Operations.
3. TRANSACTIONS WITH AFFILIATES (cont.)
The Funds reimburse Distributors annually based on their average daily net
assets for costs incurred in marketing the Funds' shares as follows:
<TABLE>
<CAPTION>
Biotechnology Discovery Fun California Growth Fund
Blue Chip Fund Global Health Care Fund
MidCap Growth Fund Global Utilities Fund
Strategic Income Fund Natural Resources Fund Small Cap Growth Fund
------------------------------------------------------------------------
<S> <C> <C> <C>
Class I ............................. .25% .35% .25%
Class II ............................ .65% -- 1.00%
</TABLE>
Distributors received (paid) net commission on sales of the Funds' shares, and
received contingent deferred sales charges for the period as follows:
<TABLE>
<CAPTION>
Franklin Franklin Franklin Franklin Franklin
Biotechnology Blue California Global Health Global
Discovery Fund Chip Fund Growth Fund Care Fund Utilities Fund
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net commissions received (paid)... $70,273 $18,387 $(335,840) $(56,042) $(11,591)
Contingent deferred sales charges. $ -- $ -- $ 50,533 $12,642 $ 3,626
</TABLE>
<TABLE>
<CAPTION>
Franklin Franklin Franklin Franklin
MidCap Natural Resources Small Cap Strategic
Growth Fund Fund Growth Fund Income Fund
--------------------------------------------------------
<S> <C> <C> <C> <C>
Net commissions received (paid)...................... $3,225 $15,103 $(2,430,935) $(182,499)
Contingent deferred sales charges.................... $ 510 $ -- $ 265,915 $ 3,720
</TABLE>
The Funds paid transfer agent fees of $5,021,790, of which $3,796,709 was paid
to Investor Services.
4. INCOME TAXES
At April 30, 1998, the Blue Chip Fund, the Natural Resources Fund and the
Strategic Income Fund had deferred capital losses occurring subsequent to
October 31, 1997 of $428,215, $542,930, and $132,813, respectively. For tax
purposes, such losses will be reflected in the year ending April 30, 1999.
At October 31, 1998, the net unrealized appreciation (depreciation) based on the
cost of investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
Franklin Franklin Franklin Franklin Franklin
Biotechnology Blue California Global Health Global
Discovery Fund Chip Fund Growth Fund Care Fund Utilities Fund
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost.................... $73,872,217 $20,502,639 $739,077,699 $139,969,301 $169,442,037
===========================================================================
Unrealized appreciation................ $ 4,211,805 $ 2,693,631 $111,339,269 $ 23,835,799 $ 52,024,026
Unrealized depreciation................ (14,008,715) (791,504) (63,793,706) (36,680,873) (10,469,239)
---------------------------------------------------------------------------
Net unrealized appreciation (depreciation) $(9,796,910) $ 1,902,127 $ 47,545,563 $(12,845,074) $ 41,554,787
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
4. INCOME TAXES (cont.)
Franklin Franklin Franklin Franklin
MidCap Natural Resources Small Cap Strategic
Growth Fund Fund Growth Fund Income Fund
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments at cost.................... $27,895,715 $48,680,485 $4,742,494,664 $245,959,472
=============================================================
Unrealized appreciation................ $ 2,949,072 $ 1,587,978 $ 443,614,483 $ 4,611,335
Unrealized depreciation................ (1,720,435) (8,652,066) (834,799,457) (15,847,678)
-------------------------------------------------------------
Net unrealized appreciation (depreciation) $ 1,228,637 $ (7,064,088 $(391,184,974) $ (11,236,343)
=============================================================
</TABLE>
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of \oreign currency transactions and passive foreign
investment company shares.
Net realized capital gains differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, and passive foreign investment company shares.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended October 31, 1998 were as follows:
<TABLE>
<CAPTION>
Franklin Franklin Franklin Franklin Franklin
Biotechnology Blue California Global Health Global
Discovery Fund Chip Fund Growth Fund Care Fund Utilities Fund
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases....................... $34,692,479 $6,029,697 $187,469,560 $14,679,261 $57,248,894
Sales........................... $35,817,395 $1,879,256 $129,914,153 $51,981,141 $71,043,722
</TABLE>
<TABLE>
<CAPTION>
Franklin Franklin Franklin Franklin
MidCap Natural Resources Small Cap Strategic
Growth Fund Fund Growth Fund Income Fund
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases................................... $10,272,232 $13,976,784 $1,260,102,884 $131,454,400
Sales....................................... $ 6,217,226 $17,049,517 $ 677,475,315 $ 45,147,812
</TABLE>
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK\][poiu8ytrq?.,
The Strategic Income Fund has been a party to financial instruments with
off-balance sheet risk, primarily forward exchange contracts, in order to
minimize the impact on the Fund from adverse changes in the relationship between
the U.S. dollar and foreign currencies and interest rates. These instruments
involve market risk in excess of the amount recognized on the Statement of
Assets and Liabilities. Some of these risks have been minimized by offsetting
contracts. Risks arise from the possible inability of counterparties to meet the
terms of their contracts, future movement in currency values and interest rates
and contract positions that are not exact offsets. The contract amount indicates
the extent of the Fund's involvement in such contracts.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. At October 31,
1998, the Strategic Income Fund has outstanding forward exchange contracts for
the sale of a currency as set out on the next page. The contracts are reported
in the financial statements at the Fund's net equity, as measured by the
difference between the forward exchange rates at the reporting date and the
forward exchange rates at the day of entry into the contracts.
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (cont.)
<TABLE>
<CAPTION>
Unrealized
Contracts to Sell (Foreign exchange currency) In Exchange for Settlement Date Gain (Loss)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4,000,000 Australian Dollar U.S.$ 2,500,000 11/04/98 U.S. $10,892
3,000,000 Deutschemark 1,818,182 11/05/98 6,433
3,000,000 Deutschemark 1,837,560 11/23/98 24,128
---------- -------
U.S.$ 6,155,742 41,453
========== =======
Contracts to Buy (Foreign exchange currency)
825,000 British Pound U.S.$ 1,373,127 11/24/98 6,580
280,000 British Pound 465,128 11/24/98 3,053
---------- -------
U.S.$ 1,838,255 9,633
========== -------
Unrealized gain on forward foreign currency contracts 51,086
=======
Contracts to Sell (Foreign exchange currency)
825,000 British Pound U.S.$ 1,333,621 11/24/98 (46,097)
280,000 British Pound 453,085 11/27/98 (15,096)
2,500,000 Deutschemarks 1,500,781 11/02/98 (8,777)
51,200,000 Japanese Yen 435,745 11/16/98 (4,632)
---------- -------
U.S.$ 3,723,232 (74,602)
========== =======
Contracts to Buy (Foreign exchange currency)
4,000,000 Australian Dollar U.S.$ 2,496,000 11/04/98 (6,892)
2,500,000 Deutschemark 1,511,853 11/02/98 (2,296)
3,000,000 Deutschemark 1,828,209 11/23/98 (14,777)
---------- -------
U.S.$16,959,036 (23,965)
========== -------
Unrealized loss on forward foreign currency contracts (98,567)
-------
Net unrealized loss on forward foreign currency contracts U.S.$(47,481)
=======
</TABLE>
7. CREDIT RISK AND DEFAULTED SECURITIES
The Strategic Income Fund has 56% of its portfolio invested in lower rated and
comparable quality unrated high yield securities, which tend to be more
sensitive to economic conditions than higher rated securities. The risk of loss
due to default by the issuer may be significantly greater for the holders of
high yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer. At October 31, 1998, the
Fund held defaulted securities with a value aggregating $48,000 representing
.02% of the Fund's net assets. For information as to specific securities, see
the accompanying Statement of Investments.
For financial reporting purposes, the Fund discontinues accruing income on
defaulted bonds and provides an estimate for losses on interest receivable.
The Strategic Income Fund has investments in excess of 10% of its total net
assets in Foreign Government Bonds. Such concentration may subject the Fund more
significantly to economic changes occurring within those sectors.
8. RESTRICTED SECURITIES
The Funds may purchase securities through a private offering that generally
cannot be resold to the public without prior registration under the Securities
Act of 1933. The cost of registering such securities are paid by the issuer.
Restricted securities held at October 31, 1998 were as follows:
<TABLE>
<CAPTION>
Shares Issuer Acquisition Date Cost Value
- ---------------------------------------------------------------------------------------------------------------
Franklin California Growth Fund
<S> <C> <C> <C> <C>
359,922 Pacific Retail Trust (.51% of Net Assets).............. 8/30/96 - 12/16/97 $4,267,257 $3,984,337
Franklin Global Utilities Fund
35,000 CMS Energy Trust I, 7.75% cvt. pfd. (.90% of Net Assets) 6/18/97 $1,750,000 $1,892,188
</TABLE>
9. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" as investments
in portfolio companies in which the Funds own 5% or more of the outstanding
voting securities. Investments in "affiliated companies" including dividends and
interest income, at October 31, 1998 were as shown below.
<TABLE>
<CAPTION>
Number of Shares Number of Shares
Held At Gross Gross Held At Value At Dividend
Name of Issuer Beginning of Period Additions Reductions End of Perio End of Period Income
- ----------------------------------------------------------------------------------------------------------------------------
Franklin California Growth Fund:
<S> <C> <C> <C> <C> <C> <C>
Cohr, Inc. ....................... 425,000 -- -- 425,000 $ 1,275,000 --
RemedyTemp, Inc., Class A ........ 350,000 25,000 -- 375,000 6,843,750 --
Total non-controlled affiliated issuers 8,118,750 --
Franklin Global Health Care Fund:
CIMA Labs, Inc. .................. 625,000 -- 187,500 437,500 * --
Cohr, Inc. ....................... 405,500 -- -- 405,500 1,216,500 --
Penederm, Inc. ................... 525,000 -- 525,000 -- * --
Total non-controlled affiliated issuers 1,216,500 --
Franklin Small Cap Growth Fund:
Access Health, Inc. .............. 975,750 -- -- 975,750 * --
Activision, Inc. ................. 1,344,400 -- -- 1,344,400 14,200,225 --
Advanced Energy Industries, Inc. . 1,374,300 244,700 -- 1,619,000 21,249,375 --
Advanced Health Corp. ............ 970,000 -- 970,000 -- * --
Applied Graphics Technologies, Inc. 960,100 408,900 -- 1,369,000 16,342,438 --
Arch Communications Group, Inc. .. 2,000,000 -- 2,000,000 -- * --
Atlantic Coast Airlines, Inc. .... 700,000 700,000 -- 1,400,000 33,600,000 --
Atwood Oceanics, Inc. ............ 1,216,600 -- -- 1,216,600 34,216,875 --
Barrett Resources Corp. .......... 1,683,900 107,000 -- 1,790,900 42,198,081 --
CapStar Hotel Co. ................ 1,330,000 -- 1,330,000 -- * --
Catalytica, Inc. ................. 2,058,633 140,600 -- 2,199,233 35,737,536 --
Clarify, Inc. .................... 1,297,200 -- 1,297,200 -- * --
Coherent, Inc. ................... 1,763,400 -- -- 1,763,400 20,719,950 --
Consolidated Cigar Holdings, Inc. 988,300 -- -- 988,300 11,365,450 --
</TABLE>
<TABLE>
<CAPTION>
9. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (cont.)
Number of Shares Number of Shares
Held At Gross Gross Held At Value At Dividend
Name of Issuer Beginning of Period Additions Reductions End of Period End of Period Income
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Core Laboratories NV (Netherlands) 1,700,900 -- 43,500 1,657,400 $ 37,395,088 --
DepoTech Corp. ................... 995,700 -- 197,200 798,500 1,172,837 --
Etec Sysytems, Inc. .............. 983,000 387,500 125,000 1,245,500 42,191,313 --
Executive Risk, Inc. ............. 426,400 305,300 -- 731,700 34,755,750 25,268
Expeditors International of
Washington, Inc. ............... 1,016,100 265,000 -- 1,281,100 43,397,263 89,271
FLIR Systems ..................... 184,800 843,800 -- 1,028,600 17,357,625 --
Gibraltar Steel Corp. ............ 1,012,800 -- -- 1,012,800 19,623,000 --
Harmonic Lightwaves, Inc. ........ 961,500 -- 266,600 694,900 7,600,469 --
H.T.E., Inc. ..................... 665,400 665,400 -- 1,330,800 13,474,350 --
Inhale Therapeutic Systems ....... 811,000 -- -- 811,000 21,288,750 --
Innkeepers USA Trust ............. 2,102,800 -- -- 2,102,800 24,182,200 1,177,568
Integrated Systems, Inc. ......... 2,091,300 -- -- 2,091,300 23,527,125 --
Itron, Inc. ...................... 1,157,700 100,000 -- 1,257,700 9,747,175 --
K2, Inc. ......................... 960,500 -- 433,400 527,100 * 208,780
Komag, Inc. ...................... 3,811,600 395,500 -- 4,207,100 23,664,938 --
Ladish Co., Inc. ................. 802,300 180,000 -- 982,300 8,410,944 --
Lomak Petroleum, Inc. ............ 1,890,000 -- 1,890,000 -- * 56,700
Marquee Group, Inc. .............. 1,327,500 -- -- 1,327,500 3,899,531 --
Meristar Hospitality Corp. ....... -- 2,330,000 -- 2,330,000 43,105,000 470,837
Mesa Air Group, Inc. ............. 1,646,100 -- 28,900 1,617,200 8,187,075 --
Micromuse, Inc. .................. 754,500 355,500 -- 1,110,000 18,939,375 --
Natural Microsystems Corp. ....... 646,600 -- -- 646,600 5,799,226 --
Newfield Exploration Co. ......... 938,600 1,400,000 -- 2,338,600 56,857,213 --
Newport Corp. .................... -- 512,500 -- 512,500 7,303,125 5,250
Omtool, Ltd. ..................... 938,600 -- 199,300 739,300 2,125,488 --
Pediatrix Medical Group, Inc. .... 1,101,500 -- 25,000 1,076,500 50,191,813 --
Penederm, Inc. ................... 531,200 -- 531,200 -- * --
Perceptron, Inc. ................. 793,500 -- -- 793,500 4,513,031 --
Pharmaceutical Product
Development, Inc. .............. 1,000,000 300,000 -- 1,300,000 35,100,000 --
Prime Hospitality Corp ........... 1,720,500 1,300,000 -- 3,020,500 27,562,063 --
Primus Telecommunications Group, Inc. 1,003,000 403,100 -- 1,406,100 15,554,981 --
Rainbow Technologies, Inc. ....... 532,000 369,500 -- 901,500 12,733,688 --
Range Resources Corp ............. -- 1,990,000 -- 1,990,000 11,318,125 59,700
RemedyTemp, Inc., Class A ........ 319,300 -- -- 319,300 * --
RockShox, Inc. ................... 965,800 -- 965,800 -- * --
Rural Cellular Corp., Class A .... 700,800 -- -- 700,800 8,409,600 --
SOS Staffing Services, Inc. ...... 872,400 -- -- 872,400 7,360,875 --
Security Dynamics ................ 650,000 1,795,000 -- 2,445,000 25,061,250 --
Serologicals Corp. ............... 1,381,800 690,900 -- 2,072,700 46,894,838 --
Silicon Valley Bancshares ........ 490,600 803,000 -- 1,293,600 26,518,800 --
Spectra-Physics Lasers, Inc. ..... 1,016,300 -- -- 1,016,300 7,590,541 --
Spectralink Corp. ................ 1,050,000 -- 183,200 866,800 * --
</TABLE>
<TABLE>
<CAPTION>
9. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (cont.)
Number of Shares Number of Shares
Held At Gross Gross Held At Value At Dividend
Name of Issuer Beginning of Perio Additions Reductions End of Period End of Period Income
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tom Brown, Inc. .................. 2,095,800 -- -- 2,095,800 $ 30,127,125 --
Transcrypt International, Inc. ... 1,212,700 -- 665,600 547,100 * --
Tropical Sportswear International
Corp. .......................... 413,200 -- -- 413,200 8,264,000 --
U.S. Liquids, Inc. ............... 726,200 377,700 -- 1,103,900 16,696,488 --
Vans, Inc. ....................... 1,045,500 -- 1,045,500 -- * --
Varco International, Inc. ........ 3,462,500 1,700,000 -- 5,162,500 55,819,531 --
West Marine, Inc. ................ 1,474,800 -- 1,319,200 155,600 * --
Western Wireless Corp., Class A .. 1,719,200 250,000 -- 1,969,200 39,876,300 --
Wind River Systems, Inc. ......... 834,000 681,600 76,600 1,439,000 63,046,188 --
XcelleNet, Inc. .................. 780,100 -- 780,100 -- * --
Total non-controlled affiliated issuers .................................................. 1,196,274,027 2,093,374
</TABLE>
10. LENDING OF PORTFOLIO SECURITIES
The Natural Resources Fund and the Small Cap Growth Fund loan securities to
certain brokers for which they receive cash collateral against the loaned
securities in an amount equal to at least 102% of the market value of the loaned
securities. Net interest income from the investment of the cash collateral
received was $45,875, and $2,301,140, respectively, for the period ended October
31, 1998. The value of the loaned securities for the Natural Resources Fund and
the Small Cap Growth Fund was $585,000, and $125,255,500, respectively, at
October 31, 1998. The risks to the Funds of securities lending are that the
borrower may not provide additional collateral when required or return the
securities when due.
Franklin Strategic Series
Semiannual Report
October 31, 1998
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM
304(a) OF REGULATIONS - T)
GRAPHIC MATERIAL (1)
This charts shows in pie format the portfolio industry breakdown of Franklin
Biotechnology Discovery Fund, based on total net assets as of 10/31/98.
Biotechnology 50.4%
Medical Specialties 14.8%
Other Pharmaceuticals 9.4%
Major Pharmaceuticals 4.2%
Precision Instruments 1.8%
Cash & Equivalents 19.4%
GRAPHIC MATERIAL (2)
This chart lists the top 10 holdings, including industry, of Franklin
Biotechnology Discovery Fund, based on total net assets as of 10/31/98.
Inhale Therapeutic Systems, Medical Specialties 4.77%
Chiron Corp., Biotechnology 4.41%
Chiroscience Group Plc., Major Pharmaceuticals 4.24%
Gilead Sciences, Biotechnology 4.12%
Aviron, Other Pharmaceuticals 4.03%
Amgen, Inc., Biotechnology 4.03%
Synaptic Pharmaceutical Corp., Biotechnology 3.17%
Ligand Pharmaceuticals, Biotechnology 3.16%
IDEC Pharmaceuticals Corp., Biotechnology 3.04%
Zonagen, Inc., Medical Specialties 2.88%
GRAPHIC MATERIAL (3)
This chart shows in pie format the geographic distribution breakdown of the
fund's securities on October 31, 1998, based on total net assets.
Geographic Distribution
United States 60.9%
Europe 16.4%
Japan 4.4%
Pacific Rim (excluding Japan) 2.4%
Latin America 1.9%
South Africa 0.8%
Cash & Equivalents 13.2%
GRAPHIC MATERIAL (4)
This chart shows in bar format the portfolio breakdown of the fund's
securities on October 31, 1998, based on total net assets.
Portfolio Breakdown
Consumer Non-Durables 17.1%
Health Technology 12.1%
Finance 11.7%
Electronic Technology 10.2%
Energy Minerals 5.7%
Utilities & Telecommunications 5.0%
Producer Manufacturing 4.6%
Technology Services 3.8%
Other Industries 16.6%
Cash & Equivalents 13.2%
GRAPHIC MATERIAL (5)
This chart lists the top 10 holdings, including industry, of Franklin Blue
Chip Fund, based on total net assets as of 10/31/98.
American International Group Inc,. Finance, U.S. 2.6%
General Electric Co.; Producer Manufacturing, U.S. 2.1%
The Coca Cola Co., Consumer Non-Durables, U.S. 2.1%
The AES Corp., Industrial Services, U.S. 2.0%
Wm. Wrigly Jr. Co., Consumer Non-Durables, U.S. 1.9%
Novartis, AG, Health Technology, Switzerland 1.9%
Nestle, SA, Registered Shares, Consumer Non-Durables; Switzerland 1.8%
Merck & Co. Inc., Heath Technology, Switzerland 1.8%
Avery Dennison Corp.; Process Industries, U.S. 1.7%
Royal Dutch Petroleum Co., New York Shares 1.7%
Energy Minerals, Netherlands
GRAPHIC MATERIAL (6)
This chart shows in bar format the portfolio breakdown of Franklin California
Growth Fund, based on total net asset as of 10/31/98
Electronic Technology 22.3%
Technology Services 10.1%
Finance 9.3%
Real Estate 7.2%
Energy Minerals 6.2%
Retail 5.1%
Health Technology 4.3%
Other 26.5%
Cash & Equivalents 9.0%
[Top Holdings]
GRAPHIC MATERIAL (7)
This chart lists the top 10 holdings, including industry, of Franklin
California Growth Fund, based on total net assets as of 10/31/98.
Cisco Systems, Inc., Electronic Technology 2.70%
Safeway, Inc., Retail Trade 1.88%
Synopsys, Inc., Technology Services 1.87%
Sun Microsystems, Inc., Electronic Technology 1.85%
Chevron Corp., Energy Minerals 1.81%
Wind River Systems, Inc., Technology Services 1.81%
Mattel, Inc., Consumer Durables 1.71%
Sempra Energy, Utilities & Telecommunications 1.69%
Computer Sciences Corp., Electronic Technology 1.67%
AirTouch Communications, Inc., Utilities & Telecommunications 1.60%
GRAPHIC MATERIAL (8)
This chart shows in pie format the geographic distribution breakdown of the
fund's securities on October 31, 1998, based on total net assets.
Geographic Distribution
United States 76.9%
Switzerland 4.0%
Israel 2.7%
United Kingdom 1.2%
Australia 0.9%
Cash & Equivalents 14.3%
GRAPHIC MATERIAL (9)
This chart shows in bar format the portfolio breakdown of Franklin Global
Heath Care Fund, based on total net asset as of 10/31/98
Medical Specialties 27.8%
Services to the Health Industry 13.0%
Medical/Nursing Services 12.0%
Biotechnology 7.8%
Generic Drugs 6.5%
Major Pharmaceuticals 5.2%
Other Pharmaceuticals 4.6%
Hospital/Nursing Management 4.1%
Medical Electronics 1.9%
Managed Health Care 1.7%
Medical/Dental Distributors 1.1%
Cash & Equivalents 14.3%
GRAPHIC MATERIAL (10)
This chart lists the top 10 holdings, including industry, of Franklin Global
Heath Care Fund, based on total net assets as of 10/31/98.
Renal Care Group Inc., Alternate Site Providers, U.S. 6.68%
Mylan Laboratories, Specialty Pharmaceuticals, U.S. 6.56%
Serologicals Corp., Biotechnology, U.S. 5.86%
Inhale Therapeutics, Specialty Pharmaceuticals, U.S. 5.05%
Access Health Inc., Software and Information Systems, U.S. 4.80%
Novartis AG, Pharmaceuticals, Switzerland 4.00%
Molecular Devices Corp., Medical Technology and Supplies, U.S. 3.92%
Algos Pharmaceutical Corp., Specialty Pharmaceuticals, U.S. 3.92%
Vertex Pharmaceuticals, Inc., Biotechnology, U.S. 3.43%
Total Renal Care Holdings, Inc., Alternate Site Providers, U.S. 3.06%
GRAPHIC MATERIAL (11)
This chart shows in pie format the geographic distribution breakdown of the
fund's securities on October 31, 1998, based on total net assets.
Geographic Distribution
United States 63.2%
Continental Europe 20.2%
Latin America 5.0%
Asia 2.7%
United Kingdom 1.9%
Cash & Equivalents 7.0%
GRAPHIC MATERIAL (12)
This chart lists the top 10 holdings, including industry, of Franklin Global
Utilities Fund, based on total net assets as of 10/31/98.
AirTouch Communications Inc. 3.6%
Utilities and Telecommunications, U.S.
Sempra Energy 3.3%
Utilities and Telecommunications, U.S.
Enron Corp. 3.2%
Utilities and Telecommunications, U.S.
Duke Energy Corp. 2.9%
Utilities and Telecommunications, U.S.
Global TeleSystems Group Inc. 2.8%
Utilities and Telecommunications, U.S.
The AES Corp. 2.7%
Industrial Services, U.S.
Portugal Telecom, SA 2.7%
Utilities and Telecommunications, U.S.
SBC Communications Inc. 2.5%
Utilities and Telecommunications, U.S.
National Fuel Gas Co. 2.4%
Utilities and Telecommunications, U.S.
Telecom Italia, SpA 2.4%
Utilities and Telecommunications, U.S.
GRAPHIC MATERIAL (13)
This chart shows in bar format the portfolio breakdown of the fund's
securities on
October 31, 1998, based on total net assets.
Portfolio Breakdown
Consumer Services 11.1%
Financials 11.0%
Electronic Technology 7.8%
Industrial Services 6.2%
Retail Trade 5.7%
Health Technology 4.5%
Commercial Services 4.3%
Technology Services 4.1%
Real Estate 3.8%
Consumer Non-Durables 3.5%
Other 16.1%
Cash & Equivalents 21.9%
GRAPHIC MATERIAL (14)
This chart lists the top 10 holdings, including industry, of Franklin MidCap
Growth Fund, based on total net assets as of 10/31/98.
Sylvan Learning Systems Inc. 2.2%
Commercial Services
Apollo Group Inc., Class A 2.0%
Consumer Services
Expeditors International of Washington Inc. 2.0%
Transportation
DeVry Inc. 1.9%
Consumer Services
The Estee Lauder Cos. Inc.,
Class A 1.9%
Consumer Non-Durables
Chancellor Media Corp. 1.6%
Consumer Services
Transocean Offshore Inc. 1.5%
Industrial Services
Family Dollar Store Inc. 1.5%
Retail Trade
Clayton Homes Inc. 1.4%
Consumer Durables
ITT Educational Services Inc. 1.4%
Consumer Services
GRAPHIC MATERIAL (15)
This chart shows in bar format the portfolio breakdown of the fund's
securities on
October 31, 1998, based on total net assets.
Portfolio Breakdown
Energy Minerals 29.2%
Industrial Services 21.3%
Non-Energy Minerals 21.0%
Process Industries 11.5%
REITs 4.1%
Utilities and Telecommunications 2.6%
Service/Related Industries 1.7%
Cash & Equivalents 8.6%
GRAPHIC MATERIAL (16)
This chart shows in bar format the geographic distribution breakdown of the
fund's securities on October 31, 1998, based on total net assets.
Geographic Distribution
United States 66.4%
Canada 11.6%
Latin America 4.8%
Europe 4.2%
Asia 2.6%
Africa 1.6%
Australia 0.2%
Cash & Equivalents 8.6%
GRAPHIC MATERIAL (17)
This chart lists the top 10 holdings, including industry, of Franklin Natural
Resources Fund, based on total net assets as of 10/31/98.
Weatherford International Inc. 4.2%
Industrial Services, U.S.
Barrett Resources Corp. 4.1%
Energy Minerals, U.S.
Newfield Exploration Co. 3.6%
Energy Minerals, U.S.
YPF, SA, Sponsored ADR 3.1%
Energy Minerals, Argentina
Gulf Canada Resources Ltd. 2.9%
Energy Minerals, Canada
Transocean Offshore, Inc. 2.4%
Industrial Services, U.S.
Enron Oil and Gas Co. 2.4%
Energy Minerals, U.S.
Nuevo Energy Co. 2.3%
Energy Minerals, U.S.
Enron Corp. 2.2%
Utilities and Telecommunications, U.S.
The AES Corp. .1%
Industrial Services, U.S.
GRAPHIC MATERIAL (18)
This chart shows in pie format the portfolio breakdown of the fund's
securities on
October 31, 1998, based on total net assets.
Portfolio Breakdown
Technology Services 17.6%
Electronic Technology 16.7%
Finance 9.6%
Health Services 5.3%
Industrial Services 5.2%
Energy Minerals 4.3%
Utilities and Telecommunications 4.2%
Other 25.4%
Cash & Equivalents 11.7%
GRAPHIC MATERIAL (19)
This chart lists the top 10 holdings, including industry, of Franklin Small
Cap Growth Fund, based on total net assets as of 10/31/98.
Synopsys Inc. 1.5%
Technology Services
Wind River Systems Inc. 1.5%
Technology Services
Affiliated Computer Systems Inc., Class A 1.5%
Technology Services
Newfield Exploration Co. 1.4%
Energy Minerals
Waters Corp. 1.4%
Electronic Technology
Varco International Inc. 1.3%
Industrial Services
Gemstar International Group Ltd. 1.3%
Electronic Technology
Intuit Inc. 1.2%
Technology Services
Uniphase Corp. 1.2%
Health Technology
Pediatrix Medical Group Inc. 1.2%
Health Services
