SHAREHOLDER LETTER
CONTENTS
Shareholder Letter ................ 1
Fund Reports
Franklin Aggressive
Growth Fund ....................... 4
Franklin Blue Chip Fund ........... 10
Franklin California
Growth Fund ....................... 15
Franklin Large Cap
Growth Fund ....................... 20
Franklin MidCap
Growth Fund ....................... 26
Franklin Small Cap
Growth Fund ....................... 30
Financial Highlights and
Statement of Investments .......... 36
Financial Statements .............. 79
Notes to the
Financial Statements .............. 88
[FUND CATEGORY PYRAMID GRAPHIC]
Dear Shareholder:
This semiannual report for the Franklin Strategic Series covers the six months
ended October 31, 1999.
FULL SPEED AHEAD.
During the second and third quarters of 1999, the U.S. economy performed like a
well-trained thoroughbred. Gross domestic product (GDP) grew significantly,
unemployment hovered around lows last seen in 1970, and inflation remained
surprisingly benign.(1) Unfortunately, most U.S. stocks and bonds did not
perform as well as the nation's economy.
UP, AND DOWN, AND UP AGAIN.
At the beginning of the six months under review, the Dow Jones(R) Industrial
Average (the Dow) stood at 10788. By August 25, after much backing and filling,
it posted a record high of 11326. But that was just the beginning of the story.
During the week ended October 15, it fell 630 points (5.9%), its biggest
percentage drop in a decade. Then, shrugging off worries about inflation and
rising interest rates, it proceeded to gain 710 points, and on October 29 closed
at 10729. The Standard & Poor's(R) 500 Composite Index, which
(1) Second quarter 1999 GDP grew at an annualized rate of 1.9%, while third
quarter GDP grew at an annualized rate of 5.5%. Source: Bloomberg.
<PAGE>
STANDARD & POOR'S 500(R) COMPOSITE INDEX (S&P 500(R))
AND DOW JONES INDUSTRIAL AVERAGE (DJIA)
Daily Prices
4/30/99 - 10/31/99
This chart shows the volatility of the Standard & Poor's 500 Composite Index
(S&P 500) and Dow Jones Industrial Average (DJIA), based on their daily prices
from 4/30/99 to 10/31/99.
Daily Prices
6-months ended
10/31/99
<TABLE>
<CAPTION>
DATE S&P 500 DJIA
---- ------- ----
<S> <C> <C>
04/30/99 1335.18 10789.04
05/03/99 1354.63 11014.69
05/04/99 1332.00 10886.11
05/05/99 1347.31 10955.41
05/06/99 1332.05 10946.82
05/07/99 1345.00 11031.59
05/10/99 1340.30 11007.25
05/11/99 1355.61 11026.15
05/12/99 1364.00 11000.37
05/13/99 1367.56 11107.19
05/14/99 1337.80 10913.32
05/17/99 1339.49 10853.47
05/18/99 1333.32 10836.95
05/19/99 1344.23 10887.39
05/20/99 1338.83 10866.74
05/21/99 1330.29 10829.28
05/24/99 1306.65 10654.67
05/25/99 1284.40 10531.09
05/26/99 1304.76 10702.16
05/27/99 1281.41 10466.93
05/28/99 1301.84 10559.74
06/01/99 1294.26 10596.26
06/02/99 1294.81 10577.89
06/03/99 1299.54 10663.69
06/04/99 1327.75 10799.84
06/07/99 1334.52 10909.38
06/08/99 1317.33 10765.64
06/09/99 1318.64 10690.29
06/10/99 1302.82 10621.27
06/11/99 1293.64 10490.51
06/14/99 1294.00 10563.33
06/15/99 1301.16 10594.99
06/16/99 1330.41 10784.95
06/17/99 1339.90 10841.63
06/18/99 1342.84 10855.56
06/21/99 1349.00 10815.98
06/22/99 1335.88 10721.63
06/23/99 1333.06 10666.86
06/24/99 1315.78 10534.83
06/25/99 1315.31 10552.56
06/28/99 1331.35 10655.15
06/29/99 1351.45 10815.35
06/30/99 1372.71 10970.80
07/01/99 1380.96 11066.42
07/02/99 1391.22 11139.24
07/06/99 1388.12 11135.12
07/07/99 1395.86 11187.36
07/08/99 1394.42 11126.89
07/09/99 1403.28 11193.70
07/12/99 1399.10 11200.98
07/13/99 1393.56 11175.02
07/14/99 1398.17 11148.10
07/15/99 1409.62 11186.41
07/16/99 1418.78 11209.84
07/19/99 1407.65 11187.68
07/20/99 1377.10 10996.13
07/21/99 1379.29 11002.78
07/22/99 1360.97 10969.22
07/23/99 1356.94 10910.96
07/26/99 1347.76 10863.16
07/27/99 1362.84 10979.04
07/28/99 1365.40 10972.07
07/29/99 1341.03 10791.29
07/30/99 1328.72 10655.15
08/02/99 1328.05 10645.96
08/03/99 1322.18 10677.31
08/04/99 1305.33 10674.77
08/05/99 1313.71 10793.82
08/06/99 1300.29 10714.03
08/09/99 1297.80 10707.70
08/10/99 1281.43 10655.15
08/11/99 1301.93 10787.80
08/12/99 1298.16 10789.39
08/13/99 1327.68 10973.65
08/16/99 1330.77 11046.79
08/17/99 1344.16 11117.08
08/18/99 1332.84 10991.38
08/19/99 1323.59 10963.84
08/20/99 1336.61 11100.61
08/23/99 1360.22 11299.76
08/24/99 1363.50 11283.30
08/25/99 1381.79 11326.04
08/26/99 1362.01 11198.45
08/27/99 1348.27 11090.17
08/30/99 1324.02 10914.13
08/31/99 1320.41 10829.28
09/01/99 1331.07 10937.88
09/02/99 1319.11 10843.21
09/03/99 1357.24 11078.45
09/07/99 1350.45 11034.13
09/08/99 1344.15 11036.34
09/09/99 1347.66 11079.40
09/10/99 1351.66 11028.43
09/13/99 1344.13 11030.33
09/14/99 1336.29 10910.33
09/15/99 1317.97 10801.42
09/16/99 1318.48 10737.46
09/17/99 1335.42 10803.63
09/20/99 1335.53 10823.90
09/21/99 1307.58 10598.47
09/22/99 1310.51 10524.07
09/23/99 1280.41 10318.59
09/24/99 1277.36 10279.33
09/27/99 1283.31 10303.39
09/28/99 1282.20 10275.53
09/29/99 1268.37 10213.48
09/30/99 1282.71 10336.95
10/01/99 1282.81 10273.00
10/04/99 1304.60 10401.23
10/05/99 1301.35 10400.59
10/06/99 1325.40 10588.34
10/07/99 1317.64 10537.05
10/08/99 1336.02 10649.76
10/11/99 1335.21 10648.18
10/12/99 1313.04 10417.06
10/13/99 1285.55 10232.16
10/14/99 1283.42 10286.61
10/15/99 1247.41 10019.71
10/18/99 1254.13 10116.28
10/19/99 1261.32 10204.93
10/20/99 1289.43 10392.36
10/21/99 1283.61 10297.69
10/22/99 1301.65 10470.25
10/25/99 1293.63 10349.93
10/26/99 1281.91 10302.13
10/27/99 1296.71 10394.89
10/28/99 1342.44 10622.53
10/29/99 1362.93 10729.86
</TABLE>
Source: Standard & Poor's Micropal and Dow Jones and Company. The S&P 500 is a
market-value weighted index of 500 stocks chosen for market size, liquidity, and
industry group presentation, with each stock's weight in the index proportionate
to its market value. The DJIA is a price-weighted index based on the average
market price of 30 blue chip stocks. Indexes are unmanaged.
The graph is intended to show the stock market's volatility, as reflected in the
S&P 500 and DJIA, and does not illustrate the past or future performance of any
fund in the Franklin Strategic Series.
represents more stocks than the Dow, opened the reporting period at 1335 and
ended it at 1362, see-sawing as violently as the Dow along the way.(2)
RIDING THE ROLLER COASTER.
While such turbulence can be unsettling for investors, it is important to
remember that volatility is a natural condition of securities markets. Over the
long term, stocks and bonds have provided impressive results, and while catching
the wave may be an appropriate pastime for surfers, it is not generally a good
strategy for investors. For that reason, we urge you to consult with your
investment representative and focus on your long-term goals rather than
short-term market cycles.
(2) Source: Standard & Poor's Micropal. Dow Jones Industrial Average total
return calculated by Wilshire Associates, Inc.
2
<PAGE>
We also encourage you to consider using an investment technique called dollar
cost averaging. By investing a fixed dollar amount at regular intervals, you buy
more shares when prices are low and fewer shares when prices are high, which can
reduce your average cost per share. A note of caution: no investment technique
can assure a profit or completely protect against loss, and before using this
strategy, you should consider your ability to continue purchases through periods
of changing economic conditions.(3)
Another good way to deal with market volatility is to diversify your
investments. As you know, mutual funds offer a level of diversification almost
impossible for individual investors to achieve on their own. In the following
pages, you will find discussions of the six funds that compose the Franklin
Strategic Series. While each of the funds has different objectives, their
management teams all pursue long-term investment goals and follow the
fundamental principles of careful selection and constant professional
supervision.
As we enter the new millennium, we would like to take this opportunity to thank
you for your support in the past. We welcome your comments and questions and
look forward to serving you in the years to come.
Sincerely,
/s/ Rupert H. Johnson, Jr.
- -------------------------
Rupert H. Johnson, Jr.
President
Franklin Strategic Series
(3) For more information on dollar cost averaging, contact your investment
representative, or call Franklin Templeton, toll free, at 1-800/DIAL BEN
(1-800/342-5236).
3
<PAGE>
FRANKLIN AGGRESSIVE GROWTH FUND
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Aggressive Growth Fund seeks capital appreciation by
investing primarily in the equity securities of companies demonstrating
accelerating growth, increasing profitability, or above-average growth or growth
potential, when compared to the overall economy.
- --------------------------------------------------------------------------------
Dear Shareholder:
It's a pleasure to bring you Franklin Aggressive Growth Fund's inaugural
semiannual report, covering the period since the fund's inception on June 23,
1999, through October 31, 1999. During this time, the broad U.S. equity market
posted a moderate performance due to investor concerns about inflation and
rising interest rates, but technology stocks, fueled by strong earnings,
generally performed well. These impressive earnings were largely the result of
increased demand from Asia, expanded corporate spending due to e-commerce and
the need for more advanced communications infrastructures. Benefiting from a
large position in the technology sector, Franklin Aggressive Growth Fund - Class
A shares posted a +63.90% cumulative total return for the period as shown in the
Performance Summary beginning on page 8. Its benchmarks, the Russell 3000(R)
Growth Index and the Standard & Poor's 400 Mid-Cap(R) Index, returned only 7.14%
and 1.86%, respectively, for the same period.(1)
(1) Indexes are unmanaged and include reinvested dividends. One cannot invest
directly in an index.
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 40 of
this report.
4
<PAGE>
During the four months under review, we searched for the best growth companies
in the most dynamic industries, relying heavily on the research efforts of our
large, experienced staff of research analysts. Reflecting our belief that
economic growth is encouraged by and made more efficient by new technologies, we
initiated several positions in various technology sectors. Because we felt that
overall demand will continue to outpace supply over the intermediate term, we
focused on semiconductor companies that supply chips to the communications
market. These companies included Broadcom Corp., a broadband applications
semiconductor manufacturer, and Alpha Industries Inc., a leading chip provider
for wireless telephone handsets. At the close of the period, we also held large
positions in several hardware companies such as Sun Microsystems Inc., whose
products were experiencing significant demand.
Positioning the fund to take advantage of companies allocating an increasingly
large percentage of their budgets to e-commerce, we invested in several leaders
in that field. On October 31, 1999, Sapient Corp., a leading provider of
consulting services for companies seeking to implement an e-commerce strategy,
was one of the fund's largest holdings, with 2.2% of total net assets. Sapient
is experiencing dramatic growth, as companies find themselves ill-equipped to
handle such projects internally.
During the review period, many companies made their stock available to the
public for the first time through initial public offerings (IPOs) and the fund
selectively participated in several of them. Among companies making their public
debut and positively impacting the fund's performance during the period were
Red Hat Inc., a software manufacturer, and TiVo, Inc., a provider of innovative
television subscription services. A significant portion of the fund's total
return for the period was attributable to IPOs. However, the "hot" IPO market we
experienced during the four months under review, which can produce extremely
high profits over a short period of time, may not continue. In addition, as the
size of a fund increases, the percentage IPOs will be able to contribute to the
fund's total return will decrease.
PORTFOLIO BREAKDOWN
Franklin Aggressive Growth Fund
Based On Total Net Assets
10/31/99
<TABLE>
<S> <C>
Electronic Technology ...................... 35.8%
Technology Services ........................ 25.8%
Telecommunications ......................... 9.3%
Retail Trade ............................... 4.5%
Health Technology .......................... 3.9%
Commercial Services ........................ 3.0%
Consumer Services .......................... 1.9%
Product Manufacturing ...................... 1.7%
Consumer Non-Durables ...................... 1.5%
Transportation ............................. 1.0%
Cash and Equivalents ....................... 11.6%
</TABLE>
5
<PAGE>
Top 10 Holdings
Franklin Aggressive Growth Fund
10/31/99
<TABLE>
<CAPTION>
% OF TOTAL
COMPANY NET ASSETS
- -------------------------------------------------------
<S> <C>
Microsoft Corp. 3.6%
Cisco Systems Inc. 2.4%
Sapient Corp. 2.2%
Apple Computer Inc. 1.9%
VoiceStream Wireless Corp. 1.8%
Qwest Communications
International Inc. 1.8%
Vitesse Semiconductor
Corp. 1.8%
Polycom Inc. 1.7%
Comverse Technology Inc. 1.7%
Partner Communications Co. 1.7%
</TABLE>
Amidst this period's market volatility, we elected to sell several positions,
because we felt the share price was excessive or the fundamental outlook for the
company had deteriorated. Among those sold during the period was Charles Schwab
Corp., a leading discount brokerage firm with a large presence in the online
trading market. This market is becoming more competitive, making the growth
outlook for Schwab less certain. Until Schwab's fundamental outlook improves, we
are more comfortable on the sidelines.
Looking forward, despite market uncertainty regarding interest rates, we remain
confident that the market will continue to reward companies with sustainable
competitive advantages and favorable growth prospects. The strong U.S. economy
provides a favorable backdrop for growth, and we expect the market leaders to
thrive in this environment. We anticipate the stock market advance could include
sectors that have been overlooked, understanding that this could negatively
impact valuations of some of the fund's holdings, particularly in technology,
over the short term. We shall continue to search for attractive growth stocks in
a wide range of sectors that would benefit from a broadening market.
6
<PAGE>
Sincerely,
/s/ Michael McCarthy
- --------------------
Michael McCarthy
/s/ John P. Scandalios
- ----------------------
John P. Scandalios
Portfolio Management Team
Franklin Aggressive Growth Fund
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1999, the end of the reporting period. Our strategies and the fund's
portfolio composition will change depending on market and economic conditions.
Although historical performance is no guarantee of future results, these
insights may help you understand our investment and management philosophy.
7
<PAGE>
FRANKLIN AGGRESSIVE GROWTH FUND
PERFORMANCE SUMMARY AS OF 10/31/99
Distributions will vary based on income earned by the fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
the fund's operating expenses. Past distributions are not indicative of future
trends. All total returns include reinvested distributions at net asset value.
CLASS A:
Subject to the current, maximum 5.75% initial sales charge.
CLASS B:
Subject to no initial sales charge, but subject to a contingent deferred sales
charge (CDSC) declining from 4% to 0% over six years. These shares have higher
annual fees and expenses than Class A shares.
CLASS C:
Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18
months of investment. These shares have higher annual fees and expenses than
Class A shares.
ADVISOR CLASS:
No initial sales charge or Rule 12b-1 fees and are available to a limited class
of investors.
PRICE INFORMATION
<TABLE>
<CAPTION>
INCEPTION
CHANGE 10/31/99 (6/23/99)
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS A
Net Asset Value +$6.39 $ 16.39 $ 10.00
CLASS B
Net Asset Value +$6.39 $ 16.39 $ 10.00
CLASS C
Net Asset Value +$6.38 $ 16.38 $ 10.00
ADVISOR CLASS
Net Asset Value +$6.41 $ 16.41 $ 10.00
</TABLE>
8 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
(6/23/99)
- -----------------------------------------------------------------------------
<S> <C>
CLASS A
Cumulative Total Return(1) +63.90%
Aggregate Total Return(2) +54.48%
Value of $10,000 Investment(3) $15,448
CLASS B
Cumulative Total Return(1) +63.90%
Aggregate Total Return(2) +59.90%
Value of $10,000 Investment(3) $15,990
CLASS C
Cumulative Total Return(1) +63.80%
Aggregate Total Return(2) +61.19%
Value of $10,000 Investment(3) $16,119
ADVISOR CLASS
Cumulative Total Return(1) +64.10%
Aggregate Total Return(2) +64.10%
Value of $10,000 Investment(3) $16,410
</TABLE>
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
(2) Since the fund has existed for less than one year, the figures represent
aggregate total return since inception, including the maximum sales charge.
(3) These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
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. 9
<PAGE>
FRANKLIN BLUE CHIP FUND
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Blue Chip Fund seeks long-term capital appreciation
by investing primarily in high quality, blue chip companies with market
capitalization of $1 billion or more, that the managers believe are leaders in
their industries and are positioned for stable, long-term growth potential.
- --------------------------------------------------------------------------------
We are pleased to report that Franklin Blue Chip Fund - Class A outperformed the
benchmark Standard & Poor's(R) 500 (S&P 500(R)) Composite Index over the
six-month reporting period, with a 7.49% total return, versus 2.74% for the S&P
500. The fund also performed well for the fiscal year through October 31, 1999,
delivering a +28.39% cumulative total return, compared with +25.67% for the S&P
500.(1)
The fund's positive performance took place against a backdrop of revived
international economic growth as global gross domestic product rose an
annualized rate of 2.7% for the second quarter '99. This rate is estimated to be
4.5% for the third quarter '99.(2) Most of this growth took place without
triggering inflation, but by period's end, commodity prices began to rise. For
most of the period, solid global growth and benign inflation contributed to
strong U.S. corporate earnings. Stocks of companies with the strongest earnings
growth and the least sensitivity to rising interest rates performed the best,
and the technology sector, which represents approximately a quarter of the S&P
500, outperformed all other industries. The health care and communication
services sectors also delivered above-average performances. Our overweight
allocation in these sectors contributed significantly to the fund's superior
returns relative to its benchmark for the six months ended October 31, 1999.
(1) The index is unmanaged and includes reinvested returns; one cannot invest
directly in an index.
(2) Source: J.P. Morgan Global Economic Forecast, 11/99.
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 44 of
this report.
10
<PAGE>
Although the technological revolution involving the Internet is transforming the
way business is conducted, we feel that in the short term, the only clear
winners are consumers and equipment makers building the backbone of the system.
Since no one knows how long the boom in many of the Internet stocks will last,
we believe telecommunications equipment stocks offer a more rational way to
participate in the Internet's growth. With data traffic doubling every three
months, traditional carriers are being challenged not only to add capacity to
existing networks but to build entirely new networks based on lower cost
technologies. This has produced extremely strong demand for telecommunications
equipment, benefiting some of our holdings such as Lucent Technologies Inc.,
Cisco Systems Inc., Comverse
PORTFOLIO BREAKDOWN
Franklin Blue Chip Fund
Based on Total Net Assets
10/31/99
<TABLE>
<S> <C>
Technology 26.4%
Financials 13.2%
Capital Goods 9.0%
Communication Services 8.6%
Consumer Staples 8.4%
Health Care 8.1%
Consumer Cyclicals 7.2%
Energy 4.8%
Basic Materials 4.3%
Utilities 2.4%
Cash & Equivalents 7.6%
</TABLE>
11
<PAGE>
TOP 10 HOLDINGS
Franklin Blue Chip Fund
Based on Total Net Assets
10/31/99
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- ---------------------------------------------------
<S> <C>
Microsoft Corp
Technology, U.S. 3.90%
General Electric Co.
Capital Goods, U.S. 3.25%
Intel Corp.
Technology, U.S. 2.38%
Wal-Mart Stores Inc.
Consumer Cyclicals, U.S. 2.20%
Citigroup Inc.
Financials, U.S. 2.11%
Capital One Financial Corp.
Financials, U.S. 2.01%
Chase Manhattan Corp.
Financials, U.S. 1.99%
Sony Corp.
Capital Goods, Japan 1.98%
MCI WorldCom Inc.
Communication Services,
U.S. 1.95%
Cisco Systems Inc.
Technology, U.S. 1.76%
</TABLE>
Technology Inc. and Tellabs Inc. Since, in our opinion, consumers probably will
continue to demand incremental speed and capacity improvements as cable modems
and digital subscriber lines (DSL) become more pervasive, we feel the long-term
outlook for carrier spending appears very positive. We shall, therefore,
continue to search for companies that can provide the "best of breed"
technologies for the next generation's core networks.
During the reporting period, we also increased our holdings of financial stocks
because we viewed the weakness induced in this sector by rising interest rates
as a buying opportunity. We believe that strong consumer demand and the U.S.
Congress' passage of the Financial Services Reform Act will benefit this sector
significantly. This act will end the separation of banking, insurance and
securities investment and legitimize last year's merger of the Travelers Group
insurance and Citicorp banking companies, which resulted in Citigroup Inc. --
our largest financial holding and one to which we added throughout the reporting
period.
Looking forward, we shall continue to focus on companies that are dominant in
their markets, boast excellent management and possess solid revenue growth,
strong EBITDA (earnings before interest, taxes, depreciation and amortization)
or stalwart earnings growth. This rigorous analysis should eliminate all but the
highest quality companies, and the fund's long-term orientation should lead to
lower portfolio turnover and associated costs -- strategies we believe should
benefit the fund's shareholders in the new millennium.
12
<PAGE>
Sincerely,
/s/ Sally E. Haff
- ----------------
Sally E. Haff
Portfolio Manager
Franklin Blue Chip Fund
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1999, the end of the reporting period. Our strategies and the fund's
portfolio composition will change depending on market and economic conditions.
Although historical performance is no guarantee of future results, these
insights may help you understand our investment and management philosophy.
SALLY EDWARDS HAFF, CFA
Sally Edwards Haff is a senior vice president of Franklin Advisers, Inc. She is
the portfolio manager of Franklin Blue Chip Fund and Franklin Utilities Fund.
Ms. Haff joined Franklin in 1986 as a management trainee. Prior to her current
responsibilities, she managed Franklin Global Utilities Fund, Franklin
Convertible Securities Fund and Franklin Valuemark Global Utilities. She was
also an industry analyst specializing in utilities, networking equipment,
tobacco, food, consumer goods and emerging growth industries.
Ms. Haff is a Chartered Financial Analyst (CFA) and holds a bachelor of arts
degree in economics from the University of California at Santa Barbara. She is a
member of the Security Analysts of San Francisco, the International Society of
Financial Analysts and the Association for Investment Management and Research
(AIMR).
13
<PAGE>
FRANKLIN BLUE CHIP FUND
PERFORMANCE SUMMARY AS OF 10/31/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
CLASS A (formerly Class I):
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. The fund's manager has agreed in advance to waive a
portion of its management fees, which reduces expenses and increases total
return to shareholders. If the manager had not taken this action, the fund's
total return would have been lower. The fee waiver may be discontinued at any
time, upon notice to the fund's Board of Directors.
PRICE INFORMATION
<TABLE>
<CAPTION>
CLASS A CHANGE 10/31/99 4/30/99
- ---------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$1.08 $15.49 $14.41
</TABLE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 6-MONTH 1-YEAR 3-YEAR (6/3/96)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +7.49% +28.39% +54.95% +58.67%
Average Annual Total Return(2) +1.31% +21.00% +13.47% +12.49%
Value of a $10,000 Investment(3) $10,131 $ 12,100 $ 14,610 $ 14,954
10/31/97 10/31/98 10/31/99
- ------------------------------------------------------------------------------------------------------------------------------------
One-Year Total Return(4) +8.25% +11.58% +28.39%
</TABLE>
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge. Six-month return has not been annualized.
(3) These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
(4) One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
14 Past performance is not predictive of future results.
<PAGE>
FRANKLIN CALIFORNIA GROWTH FUND
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin California Growth Fund seeks capital appreciation
through a policy of investing at least 65% of its assets in the securities of
companies either headquartered or conducting a majority of their operations in
the state of California. The fund also may invest in foreign securities.
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to bring you this semiannual report for the Franklin California
Growth Fund, which covers the six months ended October 31, 1999. During this
time, investors contended with rising interest rates, mounting political
tensions in the Far East, and a large supply of equity offerings. At the
beginning of the period, stocks of cyclical companies surged in popularity, with
smaller- and medium-capitalization stocks performing better than those of
large-cap companies. Technology stocks generally were weak and shares of many
Internet-related companies fell 50% from their all-time highs. During the
period's second half, the U.S. stock market shifted and technology stocks took
the lead. However, with seasonal summer weakness and concerns about potential
manufacturing constraints following the September earthquake in Taiwan, this
sector was extremely volatile.
Within this environment, we are happy to announce that the Franklin California
Growth Fund - Class A posted a +32.10% six-month cumulative total return as
shown in the Performance Summary beginning on page 18. The Standard & Poor's(R)
500 Index, the Franklin California 250 Growth Index(R) and the Bloomberg
California Index posted returns of 2.75%,(1) 27.12%(2) and 25.13%,(3)
respectively, for the same period.
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 50 of
this report.
15
<PAGE>
PORTFOLIO BREAKDOWN
Franklin California Growth Fund
Based on Total Net Assets
10/31/99
<TABLE>
<S> <C>
Electronic Technology ...................... 35.7%
Technology Services ........................ 18.2%
Health Technology .......................... 7.5%
Real Estate ................................ 5.8%
Finance .................................... 5.3%
Consumer Services .......................... 4.0%
Retail Trade ............................... 3.5%
Utilities .................................. 3.3%
Energy Minerals ............................ 1.9%
Commercial Services ........................ 1.8%
Industrial Services ........................ 1.6%
Consumer Durables .......................... 1.3%
Other Sectors .............................. 4.6%
Cash and Equivalents ....................... 5.5%
</TABLE>
The fund's strong performance during the reporting period was due primarily to
technology holdings such as JDS Uniphase, Sun Microsystems, BroadVision,
VERITAS, and Applied Micro Circuits. Because they provide the hardware,
software, and communications products used in electronic commerce, many of them
can be classified as "Internet infrastructure" investments. Primarily as a
result of the rise in value of these stocks, the technology sector represented
54.4% of the fund's portfolio (versus 48.2% for the Franklin California 250
Growth Index) on October 31, 1999. In our opinion, long-term demand for
communications, e-commerce growth, and the need for increased bandwidth should
benefit companies in this sector for an extended period of time. During the
period under review, we limited our holdings of software companies because some
firms were reducing spending in this area due to concerns about Y2K. However, we
may increase our holdings in this sector if Y2K fears decrease at the start of
2000.
Because interest rates appeared to be trending upward during the reporting
period, we remained underweighted in interest-rate sensitive financial and
electric utility companies. We did, however, increase our holdings in the real
estate investment trust (REIT) sector, which, in our opinion, has the potential
for solid capital appreciation prospects due to attractive fundamental
valuations. And since they tend to be negatively correlated with technology
stocks, our REIT exposure helped reduce the fund's overall volatility. Despite a
large weighting in the technology sector, the rest of the fund remains broadly
diversified across numerous industries, such as health care, retail, consumer
products, and consumer services.
(1) Source: Standard & Poor's Micropal. The Standard & Poor's 500 Index consists
of 500 stocks chosen for market size, liquidity, and industry group
representation. It is a market-value weighted index (stock price times number of
shares outstanding), with each stock's weight in the index proportionate to its
market value. It is one of the most widely used benchmarks of U.S. equity
performance.
(2) Source: CDA/Weisenberger. The Franklin California 250 Growth Index consists
of equal weightings of California's top 250 companies, based on market
capitalization, and is rebalanced quarterly.
(3) Source: Bloomberg. The Bloomberg California Index is price weighted and
measures the performance over 700 California-based companies.
16
<PAGE>
Looking forward, we are optimistic about the prospects for the Franklin
California Growth Fund. The U.S. economy is healthy, inflation appears to be
under control, and California is an economic powerhouse. Home to 12% of our
nation's population, it represents about 13% of the U.S. gross domestic product
and generates over $1 trillion of goods and services. With almost 1,400 publicly
traded companies doing business in the state, we have a plethora of investment
ideas from which to choose, and we shall continue to leverage our resources as
we seek to take advantage of these myriad opportunities for the fund's
shareholders.
It is important to remember that there are certain risks involved with investing
in a non-diversified fund concentrating in securities associated with a single
state, such as increased susceptibility to adverse economic or regulatory
developments. The fund also invests a portion of its assets in small or
relatively new or unseasoned companies, which involves the additional risks
related to relatively small revenues, limited product lines and small market
share. These and other risks are described in the prospectus.
Thank you for your participation in Franklin California Growth Fund. We welcome
any comments or suggestions you may have, and look forward to serving your
investment needs in the years to come.
Sincerely,
/s/ Conrad B. Herrmann
- ----------------------
Conrad B. Herrmann
Portfolio Manager
Franklin California Growth Fund
TOP 10 HOLDINGS
Franklin California Growth Fund
10/31/99
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY NET ASSETS
- --------------------------------------------------------
<S> <C>
JDS Uniphase Corp.
Electronic Technology 4.5%
Cisco Systems Inc.
Electronic Technology 3.5%
BroadVision Inc.
Technology Services 3.0%
VERITAS Software Co.
Technology Services 2.9%
Sun Microsystems Inc.
Electronic Technology 2.5%
Applied Micro Circuits Corp.
Electronic Technology 2.1%
Genentech Inc.
Health Technology 2.0%
Xilinx Inc.
Electronic Technology 1.8%
Siebel Systems Inc.
Technology Services 1.7%
Linear Technology Corp.
Electronic Technology 1.6%
</TABLE>
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1999, the end of the reporting period. Our strategies and the fund's
portfolio composition will change depending on market and economic conditions.
Although historical performance is no guarantee of future results, these
insights may help you understand our investment and management philosophy.
17
<PAGE>
FRANKLIN CALIFORNIA
GROWTH FUND
PERFORMANCE SUMMARY AS OF 10/31/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities, as well as each
class's level of expenses. Past distributions are not indicative of future
trends. All total returns include reinvested distributions at net asset value.
CLASS A (formerly Class I):
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge. Thus, actual
total returns may differ. Past expense reductions by the fund's manager
increased the fund's total returns. Without this reduction, the fund's total
returns would have been lower.
CLASS B:
Subject to no initial sales charge, but subject to a contingent deferred sales
charge (CDSC) declining from 4% to 0% over six years. These shares have higher
annual fees and expenses than Class A shares.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18
months of investment. These shares have higher annual fees and expenses than
Class A shares.
PRICE AND DISTRIBUTION INFORMATION
<TABLE>
<CAPTION>
CLASS A CHANGE 10/31/99 4/30/99
- ----------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$8.18 $33.99 $25.81
DISTRIBUTIONS (5/1/99 - 10/31/99)
Dividend Income $0.0788
CLASS B CHANGE 10/31/99 4/30/99
Net Asset Value +$8.04 $33.78 $25.74
DISTRIBUTIONS (5/1/99 - 10/31/99)
Dividend Income $0.0663
CLASS C CHANGE 10/31/99 4/30/99
Net Asset Value +$8.08 $33.71 $25.63
DISTRIBUTIONS (5/1/99 - 10/31/99)
Dividend Income $0.0175
</TABLE>
18 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 6-MONTH 1-YEAR 5-YEAR (10/30/91)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +32.10% +62.08% +250.31% +415.48%
Average Annual Total Return(2) +24.52% +52.76% +26.98% +21.84%
Value of $10,000 Investment(3) $12,452 $15,276 $33,018 $48,579
</TABLE>
<TABLE>
<CAPTION>
10/31/95 10/31/96 10/31/97 10/31/98 10/31/99
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) +45.31% +24.61% +25.40% -4.73% +62.08%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 6-MONTH (1/1/99)
- --------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +31.58% +39.32%
Aggregate Total Return(2) +27.58% +35.32%
Value of $10,000 Investment(3) $ 12,758 $ 13,532
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 6-MONTH 1-YEAR 3-YEAR (9/3/96)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +31.62% +60.94% +89.39% +103.54%
Average Annual Total Return(2) +29.30% +58.31% +23.30% +24.84%
Value of $10,000 Investment(3) $ 12,930 $ 15,831 $ 18,747 $ 20,153
</TABLE>
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class. Six-month return has not been
annualized. Since Class B shares have existed for less than one year, aggregate
total return for that class represents total return since inception, including
the maximum sales charge.
(3) These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
(4) One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results. 19
<PAGE>
FRANKLIN LARGE CAP GROWTH FUND
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Large Cap Growth Fund seeks long-term capital
appreciation by investing primarily in companies with market capitalizations of
$8.5 billion or more.
- --------------------------------------------------------------------------------
Dear Shareholder:
It's a pleasure to bring you Franklin Large Cap Growth Fund's first semiannual
report, which covers the period since the fund's inception on June 7, 1999,
through October 31, 1999. During the four months under review, the U.S. economy
continued its robust expansion. Overall earnings for companies in the Standard &
Poor's(R) 500 (S&P 500(R)) Index, a market measure of large-cap companies, were
relatively strong during the period, but investor concerns about inflation and
rising interest rates led to modest returns for most stocks, including large-cap
growth stocks. Within this environment, Franklin Large Cap Growth Fund - Class A
shares provided a +12.3% cumulative total return for the reporting period as
shown in the Performance Summary beginning on page 24. The S&P 500, the fund's
benchmark, posted a return of 2.82% for the same period.(1)
As you know, Franklin Large Cap Growth Fund focuses on large, successful and
established public companies with better-than-average prospects for revenue
growth. We seek to buy shares of strong companies whose highly competitive and
innovative visions can help drive sustainable revenues and healthy earnings
increases. On October 31, 1999, the fund held 89% of total net assets in
equities and 11% in cash and equivalents. The portfolio was most heavily
weighted in higher growth industries such as electronic technology, health
technology, technology services and telecommunications.
(1) The index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
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 59 of
this report.
20
<PAGE>
The value of many of our electronic technology and technology services shares
rose substantially, with the fund's two largest positions, Microsoft Corp. and
Cisco Systems Inc., appreciating 15.3% and 28.3%, respectively, due to strong
demand for their products. Several of the fund's semiconductor holdings such as
Intel Corp., Texas Instruments Inc., Applied Materials Inc. and Xilinx Inc. also
performed extremely well, as the sector's cyclical upturn yielded better
earnings and robust results for several of the fund's holdings. Other solid
performers in the electronic technology industry included Nortel Networks Corp.,
Nokia Corp. and Sun Microsystems Inc., all of which gained more than 30% during
the period.
In technology services, Oracle Corp. and VERITAS Software Corp. advanced on
dramatic profit growth driven by their industry-leading software. However, not
all technology stocks performed well. International Business Machines Corp.
(IBM) and Hewlett-Packard Co. saw their stock prices fall, as investor concerns
mounted that clients would buy fewer mainframes and servers to make repairs
related to potential year-2000 computer problems.
Our health technology holdings, which consisted primarily of major
pharmaceuticals and biotechnology companies, provided mixed results. Within the
major pharmaceuticals sector, strength in Warner-Lambert Co. and Pfizer Inc. was
offset by Eli Lilly & Co. and Schering-Plough Corp.'s weaker performances. In
the biotechnology sector, Genentech Inc. produced strong gains following its
initial public offering but Biogen Inc.'s stock price suffered, when the company
announced it was halting clinical trials of a promising new drug. However, we
believe that health technology industry fundamentals remain sound due to a
rapidly aging U.S. population and the market potential for new blockbuster
drugs, and we intend to continue investing in this sector.
PORTFOLIO BREAKDOWN
Franklin Large Cap Growth Fund
Based on Total Net Assets
10/31/99
<TABLE>
<S> <C>
Telecommunications Equipment 9.9%
Major Pharmaceuticals 8.9%
Semiconductors 8.2%
Computer Software 7.4%
Major U.S. Telecommunications 5.7%
Computer Hardware 4.8%
Discount Stores 4.6%
Entertainment 3.8%
Consumer Staples 3.4%
Cellular 3.2%
Other Industries 29.1%
Cash and Equivalents 11.0%
</TABLE>
21
<PAGE>
Taking advantage of market volatility during the period, we purchased shares of
telecommunications firms with competitive advantages and dynamic growth
strategies. We initiated positions in telecommunications giants AT&T Corp. and
MCI WorldCom Inc. at what we believed to be bargain prices. Although these
stocks declined over the period, we feel strongly that these companies have
exciting growth prospects. We also initiated a position in Qwest Communications
International Inc., which should excel due to its newly computed, high-capacity
national fiber network, at attractive prices.
TOP 10 HOLDINGS
Franklin Large Cap Growth Fund
10/31/99
<TABLE>
<CAPTION>
% OF TOTAL
COMPANY NET ASSETS
- -------------------------------------------------
<S> <C>
Microsoft Corp. 3.8%
Cisco Systems Inc. 2.9%
General Electric Co. 2.7%
JDS Uniphase Corp. 2.2%
Nortel Networks Corp. 2.0%
Schering-Plough Corp. 2.0%
Qwest Communications
International Inc. 1.9%
Intel Corp. 1.8%
Citigroup Inc. 1.8%
Warner-Lambert Co. 1.8%
</TABLE>
22
<PAGE>
Looking forward, we are optimistic about prospects for well-run, large-cap
growth companies. Many of them have demonstrated an ability to maintain revenue
and earnings growth through their market leadership positions or ability to gain
market share. In our opinion, they have created high barriers to entry for
competitors while generating solid profit margins and offer attractive
investment opportunities for Franklin Large Cap Growth Fund's shareholders.
Sincerely,
/s/ Theresa Spath
- -----------------
Theresa Spath
/s/ Edward B. Jamieson
- ----------------------
Edward B. Jamieson
/s/ Jason R. Nunn
- -----------------
Jason R. Nunn
Portfolio Management Team
Franklin Large Cap Growth Fund
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1999, the end of the reporting period. Our strategies and the fund's
portfolio composition will change depending on market and economic conditions.
Although historical performance is no guarantee of future results, these
insights may help you understand our investment and management philosophy.
23
<PAGE>
FRANKLIN LARGE CAP GROWTH FUND
PERFORMANCE SUMMARY AS OF 10/31/99
Distributions will vary based on income earned by the fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
the fund's operating expenses. Past distributions are not indicative of future
trends. All total returns include reinvested distributions at net asset value.
CLASS A:
Subject to the current, maximum 5.75% initial sales charge.
CLASS B:
No initial sales charge, but subject to a contingent deferred sales charge
(CDSC) declining from 4% to 0% over six years. These shares have higher annual
fees and expenses than Class A shares.
CLASS C:
Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18
months of investment. These shares have higher annual fees and expenses than
Class A shares.
ADVISOR CLASS:
No initial sales charge or Rule 12b-1 fees and are available to a limited class
of investors.
PRICE INFORMATION
<TABLE>
<CAPTION>
INCEPTION
CLASS A CHANGE 10/31/99 (6/7/99)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$1.23 $ 11.23 $ 10.00
<CAPTION>
INCEPTION
CLASS B CHANGE 10/31/99 (6/7/99)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$1.20 $ 11.20 $ 10.00
<CAPTION>
INCEPTION
CLASS C CHANGE 10/31/99 (6/7/99)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$1.19 $ 11.19 $ 10.00
<CAPTION>
INCEPTION
ADVISOR CLASS CHANGE 10/31/99 (6/7/99)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$1.24 $ 11.24 $ 10.00
</TABLE>
24 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A (6/7/99)
- --------------------------------------------------------------------------------
<S> <C>
Cumulative Total Return(1) +12.30%
Aggregate Total Return(2) +5.84%
Value of $10,000 Investment(3) $ 10,584
<CAPTION>
INCEPTION
CLASS B (6/7/99)
- --------------------------------------------------------------------------------
<S> <C>
Cumulative Total Return(1) +11.90%
Aggregate Total Return(2) +8.00%
Value of $10,000 Investment(3) $ 10,800
<CAPTION>
INCEPTION
CLASS C (6/7/99)
- --------------------------------------------------------------------------------
<S> <C>
Cumulative Total Return(1) +11.90%
Aggregate Total Return(2) +9.80%
Value of $10,000 Investment(3) $ 10,980
<CAPTION>
INCEPTION
ADVISOR CLASS (6/7/99)
- --------------------------------------------------------------------------------
<S> <C>
Cumulative Total Return(1) +12.40%
Aggregate Total Return(2) +12.40%
Value of $10,000 Investment(3) $ 11,240
</TABLE>
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
(2) Since the fund has existed for less than one year, the figures represent
aggregate total return since inception, including the maximum sales charge.
(3) These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
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. 25
<PAGE>
FRANKLIN MIDCAP GROWTH FUND
PORTFOLIO BREAKDOWN
Franklin MidCap Growth Fund
Based on Total Net Assets
10/31/99
<TABLE>
<S> <C>
Electronic Technology ...................... 25.9%
Technology Services ........................ 15.6%
Utilities .................................. 7.8%
Finance .................................... 7.4%
Commercial Services ........................ 5.0%
Consumer Services .......................... 4.9%
Retail Trade ............................... 4.8%
Industrial Services ........................ 3.8%
Process Industries ......................... 3.3%
Transportation ............................. 2.5%
Other ...................................... 9.6%
Cash and Equivalents ....................... 9.4%
</TABLE>
- --------------------------------------------------------------------------------
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 $1 billion and $8 billion.(1)
- --------------------------------------------------------------------------------
During the six months ended October 31, 1999, a period of severe market
volatility, many investors concerned about rising interest rates balked at the
lofty valuations of large capitalization (large-cap) stocks and those with
higher price-to-earnings ratios generally were punished. At the same time,
strong demand for initial public offerings in the technology sector contributed
to the overall positive performance of small capitalization (small-cap) stocks.
Mid-cap stocks participated in the small-cap rally at the beginning of the
period, but began sagging in the summer months. Within this environment,
Franklin MidCap Growth Fund - Class A delivered a six-month cumulative total
return of +13.41% as shown in the Performance Summary on page 29. The Standard &
Poor's(R) MidCap 400 Index, the fund's benchmark, provided a return of 1.86% for
the same period.(2)
(1) There are special risks associated with investing in a fund seeking
long-term capital growth from small- to medium-size companies that have less
certain growth prospects than large-cap companies and greater sensitivity to
changing economic conditions. These and other risks are discussed in the fund's
prospectus.
(2) The Standard & Poor's MidCap 400 is a market value weighted index consisting
of 400 domestic stocks chosen for market size, liquidity and industry group
representation. Indices include reinvested dividends. One cannot invest directly
in an index, nor is the index representative of the fund's portfolio.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 63 of
this report.
26
<PAGE>
The fund's strong performance was due largely to its overweight allocation to
technology and telecommunications stocks, which rallied throughout the reporting
period. Specific contributors included VoiceStream Wireless Corporation, a
wireless communications company, and Siebel Systems Inc., a provider of sales
and marketing information software systems. In the telecommunications equipment
sector, we saw growth opportunities with such companies as Comverse Technology
Inc., General Instrument Corp. and JDS Uniphase Corp. Meanwhile, our moderate
positions in the Internet infrastructure sector, BroadVision Inc., Vignette
Corporation and Exodus Communications Inc., also appreciated significantly
during the reporting period.
Other holdings that performed well included AMFM Inc., which owns and operates
radio stations, and Tiffany & Co., a jewelry retailer highlighted in our
previous report.
During the period, we reduced our finance-sector exposure as rising interest
rates generated uncertainty in our minds about financial stocks' near-term
prospects. In our opinion, higher rates could increase these companies'
operating costs and decrease their lending activity. We also reduced our already
small health-care stock exposure because of concerns about managed-care pricing.
TOP 10 HOLDINGS
Based on Total Net Assets
10/31/99
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY NET ASSETS
- -------------------------------------------------------
<S> <C>
Siebel Systems Inc.
Technology Services 3.25%
VoiceStream Wireless Corp.
Utilities 3.05%
VERITAS Software Co.
Technology Services 2.66%
JDS Uniphase Corp.
Electronic Technology 2.31%
Tiffany & Co.
Retail Trade 2.06%
Altera Corp.
Electronic Technology 1.99%
Comverse Technology
Electronic Technology 1.96%
Vitesse Semiconductor
Electronic Technology 1.81%
General Instrument Co.
Electronic Technology 1.66%
Western Wireless Corp.
Utilities 1.63%
</TABLE>
27
<PAGE>
Looking forward, we are optimistic about long-term prospects for Franklin MidCap
Growth Fund. Although we have rebalanced the portfolio in an attempt to more
closely match the fund's benchmark sector weightings and reduce our holdings to
fewer, higher quality stocks, we remain committed to our strategy of broad
diversification across industries. We believe this strategy should minimize
company-specific risk, while allowing us to concentrate holdings in what we feel
are leading companies.
We thank you for your participation in Franklin MidCap Growth Fund and look
forward to serving you in the future. Please feel free to contact us with your
questions or comments.
Sincerely,
/s/Catherine Roberts Bowman
- ---------------------------
Catherine Roberts Bowman
Portfolio Manager
Franklin MidCap Growth Fund
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1999, the end of the reporting period. Our strategies and the fund's
portfolio composition will change depending on market and economic conditions.
Although historical performance is no guarantee of future results, these
insights may help you understand our investment and management philosophy.
28
<PAGE>
PERFORMANCE SUMMARY AS OF 10/31/99
Distributions will vary based on earnings of the fund's portfolio and
any profits realized from the sale of the portfolio's securities. Past
distributions are not indicative of future trends. All total returns include
reinvested distributions at net asset value.
FRANKLIN MIDCAP
GROWTH FUND
PRICE AND DISTRIBUTION INFORMATION
<TABLE>
<CAPTION>
CLASS A CHANGE 10/31/99 4/30/99
- ---------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$2.12 $18.27 $16.15
DISTRIBUTIONS (5/1/99 - 10/31/99)
---------------------------------
Dividend Income $0.0396
</TABLE>
PERFORMANCE
<TABLE>
<CAPTION>
Inception
Class A 6-Month 1-Year 5-Year (8/17/93)(5)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +13.41% +34.99% +121.83% +131.74%
Average Annual Total Return(2) +6.86% +27.20% +15.89% +13.42%
Value of $10,000 Investment(3) $10,686 $12,720 $20,908 $21,842
</TABLE>
<TABLE>
<CAPTION>
10/31/95 10/31/96 10/31/97 10/31/98 10/31/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) +26.81% +19.00% +26.79% -14.11% +34.99%
</TABLE>
CLASS A (formerly Class I):
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective May 1, 1994, the fund implemented a Rule
12b-1 plan, which affects subsequent performance.
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class. Six-month return has not been
annualized.
(3) These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the current, applicable, maximum
sales charge for that class.
(4) One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
(5) On January 2, 1996, the fund changed its investment objective, strategy, and
investment adviser.
On June 1, 1996, the fund became available to retail investors. Prior to that
date, it was only offered to institutional investors (without a sales charge or
12b-1 fees).
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results. 29
<PAGE>
FRANKLIN SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Dear Shareholder:
During the six months ended October 31, 1999, the U.S. stock market was buffeted
by contradictory and inconclusive inflation indicators, which depressed the
prices of most shares. Generally, when fears of inflation arise, prices of
growth stocks such as technology stocks decline. In the period under review, the
market was subjected to several brief periods of such fears and, as one would
expect, prices of technology shares fell. However, following each inflation
scare, the technology sector rebounded quickly, presenting us with an unusual
situation in which the broad market was weak due to inflationary fears while the
sector usually most vulnerable to inflationary fears appeared to be invincible.
In our opinion, the surprisingly good performance of technology stocks was
primarily due to strong earnings, resurgent Asian electronics demand and high
levels of communications infrastructure investment.
INDUSTRY BREAKDOWN
Franklin Small Cap Growth Fund
Based on Total Net Assets
10/31/99
<TABLE>
<S> <C>
Technology Services ........................ 27.5%
Electronic Technology ...................... 24.1%
Finance .................................... 7.1%
Telecommunications ......................... 4.0%
Consumer Services .......................... 3.7%
Energy Minerals ............................ 3.3%
Industrial Services ........................ 3.2%
Transportation ............................. 2.9%
Producer Manufacturing ..................... 2.5%
Health Services ............................ 0.9%
Other ...................................... 11.7%
Cash and Equivalents ....................... 9.1%
</TABLE>
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 69 of
this report.
30
<PAGE>
During the reporting period, energy-related stocks also performed extremely well
as global supply agreements and global economic optimism pushed the price of oil
higher. Overweighted in both the technology and energy sectors, Franklin Small
Cap Growth Fund - Class A provided a +26.17% six-month cumulative total return,
as discussed in the Performance Summary on page 34. The Russell 2000(R) Small
Stock Index and the Standard & Poor's 500(R) Composite Index posted returns of
only -0.25% and 2.74% for the same period.(1)
Believing that the ability of technology to deliver more value at lower cost
would mitigate incipient inflation, we made many Internet-related investments
during the period under review. These included Internet service providers,
communications hardware suppliers, technology consulting services and Internet
software companies. Convinced that the inefficiencies of many markets (financial
services, retail and communications to name a few) can be exposed and exploited
by new Internet applications, we searched for companies that can provide them.
TOP 10 HOLDINGS
Franklin Small Cap Growth Fund
10/31/99
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY NET ASSETS
- ------------------------------------------------------
<S> <C>
JDS Uniphase Corp.
Electronic Technology 3.4%
VoiceStream Wireless Corp.
Utilities 2.6%
PMC Sierra Inc.
Electronic Technology 2.5%
i2 Technologies Inc.
Technology Services 2.2%
VERITAS Software Corp.
Technology Services 1.7%
BroadVision Inc.
Technology Services 1.7%
Gemstar International
Group Ltd.
Electronic Technology 1.5%
Expeditors International
of Washington Inc.
Transportation 1.4%
Micromuse Inc.
Technology Services 1.3%
Synopsys Inc.
Electronic Technology 1.3%
</TABLE>
(1) Source: Standard & Poor's(R) Micropal (Frank Russell).
31
<PAGE>
Because economic growth is fueled by new technologies, we expect to continue to
overweight the technology sector. However, we also expect investor interest in
the stock market to broaden to sectors that have been overlooked, and we
understand this may negatively affect valuations of our technology holdings,
including our Internet-related holdings. We shall therefore continue to invest
in a wide range of sectors that may benefit from such a market broadening.
32
<PAGE>
Of course, special risks are involved with investing in a fund seeking long-term
growth from small or relatively new or unseasoned companies, as well as from
foreign securities. These risks, which include relatively small revenues,
limited product lines and small market share, along with currency fluctuations
and the political uncertainty associated with foreign investing, 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
- ---------------------
Edward B. Jamieson
Portfolio Manager
Franklin Small Cap Growth Fund
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1999, the end of the reporting period. Our strategies and the fund's
portfolio composition will change depending on market and economic conditions.
Although historical performance is no guarantee of future results, these
insights may help you understand our investment and management philosophy.
33
<PAGE>
FRANKLIN SMALL CAP GROWTH FUND
PERFORMANCE SUMMARY AS OF 10/31/99
Distributions will vary based on income earned by the fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
each class's operating expenses. Past distributions are not indicative of future
trends. All total returns include reinvested distributions at net asset value.
CLASS A (formerly Class I):
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective May 1, 1994, the fund implemented a Rule
12b-1 plan, which affects subsequent performance. Past expense reductions by the
fund's manager increased the fund's total return to shareholders. Without this
waiver, the fund's total returns would have been lower.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% contingent deferred sales charge for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class A shares.
ADVISOR CLASS:
No initial sales charge or Rule 12b-1 fees and are available to a limited class
of investors. Past expense reductions by the fund's manager increased the fund's
total return to shareholders. Without this waiver, the fund's total returns
would have been lower.
PRICE INFORMATION
<TABLE>
<CAPTION>
CLASS A CHANGE 10/31/99 4/30/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$6.45 $ 31.10 $ 24.65
<CAPTION>
CLASS C CHANGE 10/31/99 4/30/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$6.25 $ 30.57 $ 24.32
<CAPTION>
ADVISOR CLASS CHANGE 10/31/99 4/30/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$6.51 $ 31.25 $ 24.74
</TABLE>
34 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 6-MONTH 1-YEAR 3-YEAR 5-YEAR (2/14/92)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +26.17% +59.87% +69.50% +184.22% +325.92%
Average Annual
Total Return(2) +18.93% +50.64% +16.90% +21.79% +19.75%
Value of $10,000
Investment(3) $ 11,893 $ 15,064 $15,976 $ 26,792 $40,144
</TABLE>
<TABLE>
<CAPTION>
10/31/95 10/31/96 10/31/97 10/31/98 10/31/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) +34.31% +24.85% +27.65% -16.94% +59.87%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 6-MONTH 1-YEAR 3-YEAR (10/2/95)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +25.70% +58.73% +65.80% +100.06%
Average Annual Total Return(2) +23.43% +56.12% +17.97% +18.21%
Value of $10,000 Investment(3) $ 12,343 $ 15,612 $ 16,417 $ 19,805
</TABLE>
<TABLE>
<CAPTION>
10/31/96 10/31/97 10/31/98 10/31/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One-Year Total Return(4) +23.96% +26.64% -17.52% +58.73%
</TABLE>
<TABLE>
INCEPTION
ADVISOR CLASS(5) 6-MONTH 1-YEAR 3-YEAR 5-YEAR (2/14/92)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +26.31% +60.29% +72.99% +190.77% +334.69%
Average Annual
Total Return(2) +26.31% +60.29% +20.04% +23.74% +20.99%
Value of $10,000
Investment(3) $ 12,631 $ 16,029 $ 17,299 $ 29,007 $ 43,469
</TABLE>
<TABLE>
<CAPTION>
10/31/95 10/31/96 10/31/97 10/31/98 10/31/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) +34.31% +24.85% +27.91% -16.60% +60.29%
</TABLE>
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class. Six-month return has not been
annualized.
(3) These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
(4) One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
(5) On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
Class A performance, excluding the effect of the Class A sales charge, but
including the effect of Rule 12b-1 fees and other Class A expenses; and (b) for
periods after January 1, 1997, figures reflect actual Advisor Class performance,
including the deduction of all fees and expenses applicable to that class. Since
January 2, 1997 (commencement of sales), the cumulative and average annual total
returns of Advisor Class shares were +62.79% and +18.77%, respectively.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results. 35
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN AGGRESSIVE GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
------------------
OCTOBER 31, 1999
(UNAUDITED)(2),(9)
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ...................................................................... $10.00
------------------
Income from investment operations:
Net investment loss ...................................................................................... (.02)
Net realized and unrealized gains ........................................................................ 6.41
------------------
Total from investment operations .......................................................................... 6.39
------------------
Net asset value, end of period ............................................................................ $ 16.39
==================
Total return* ............................................................................................. 63.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ......................................................................... $11,363
Ratios to average net assets:
Expenses ................................................................................................. 1.23%(1)
Expenses excluding waiver and payments by affiliate ...................................................... 1.61%(1)
Net investment loss ...................................................................................... (.44)%(1)
Portfolio turnover rate ................................................................................... 91.19%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(1) Annualized
(2) For the period June 23, 1999 (effective date) to October 31, 1999.
(9) Based on average shares outstanding.
36
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN AGGRESSIVE GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
CLASS B
------------------
OCTOBER 31, 1999
(UNAUDITED)(2),(9)
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................................................. $10.00
------------------
Income from investment operations:
Net investment loss .................................................................. (.05)
Net realized and unrealized gains .................................................... 6.44
------------------
Total from investment operations ...................................................... 6.39
------------------
Net asset value, end of period ........................................................ $16.39
==================
Total return* ......................................................................... 63.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ..................................................... $1,494
Ratios to average net assets:
Expenses ............................................................................. 1.80%(1)
Expenses excluding waiver and payments by affiliate .................................. 2.18%(1)
Net investment loss .................................................................. (1.05)%(1)
Portfolio turnover rate ............................................................... 91.19%
</TABLE>
* Total return does not reflect contingent deferred sales charge, and is not
annualized for periods less than one year.
(1) Annualized
(2) For the period June 23, 1999 (effective date) to October 31, 1999.
(9) Based on average shares outstanding.
37
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN AGGRESSIVE GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
------------------
OCTOBER 31, 1999
(UNAUDITED)(2),(9)
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................................................. $10.00
------------------
Income from investment operations:
Net investment loss .................................................................. (.05)
Net realized and unrealized gains .................................................... 6.43
------------------
Total from investment operations ...................................................... 6.38
------------------
Net asset value, end of period ........................................................ $16.38
==================
Total return* ......................................................................... 63.80%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ..................................................... $3,999
Ratios to average net assets:
Expenses ............................................................................. 1.83%(1)
Expenses excluding waiver and payments by affiliate .................................. 2.21%(1)
Net investment loss .................................................................. (1.11)%(1)
Portfolio turnover rate ............................................................... 91.19%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(1) Annualized
(2) For the period June 23, 1999 (effective date) to October 31, 1999.
(9) Based on average shares outstanding.
38
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN AGGRESSIVE GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
ADVISOR CLASS
------------------
OCTOBER 31, 1999
(UNAUDITED)(2),(9)
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................................................. $10.00
------------------
Income from investment operations:
Net investment loss .................................................................. (.01)
Net realized and unrealized gains .................................................... 6.42
------------------
Total from investment operations ...................................................... 6.41
------------------
Net asset value, end of period ........................................................ $16.41
==================
Total return* ......................................................................... 64.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ..................................................... $29,510
Ratios to average net assets:
Expenses ............................................................................. .90%(1)
Expenses excluding waiver and payments by affiliate .................................. 1.28%(1)
Net investment loss .................................................................. (.15)%(1)
Portfolio turnover rate ............................................................... 91.19%
</TABLE>
* Total return is not annualized for periods less than one year.
(1) Annualized
(2) For the period June 23, 1999 (effective date) to October 31, 1999.
(9) Based on average shares outstanding.
See notes to financial statements. 39
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN AGGRESSIVE GROWTH FUND SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 88.4%
(a) COMMERCIAL SERVICES 3.0%
Aether Systems Inc. .............................................................. 500 $ 34,781
Chemdex Corp. .................................................................... 15,000 571,875
Concord EFS Inc. ................................................................. 28,350 767,222
-----------
1,373,878
-----------
(a) CONSUMER NON-DURABLES 1.5%
Tommy Hilfiger Corp. ............................................................. 25,000 706,250
-----------
(a) CONSUMER SERVICES 1.9%
Insweb Corp. ..................................................................... 32,000 576,000
Spanish Broadcasting Systems Inc. ................................................ 2,200 58,575
TiVo Inc. ........................................................................ 6,000 257,250
-----------
891,825
-----------
ELECTRONIC TECHNOLOGY 35.8%
(a) Alpha Industries Inc. ............................................................ 12,000 663,000
(a) Apple Computer Inc. .............................................................. 11,000 881,375
(a) Applied Micro Circuits Corp. ..................................................... 9,000 700,313
(a) Broadcom Corp., A ................................................................ 4,000 511,250
(a) Chartered Semiconductor Manufacturing, ADR (Singapore) ........................... 1,500 49,781
(a) Cisco Systems Inc. ............................................................... 15,000 1,110,000
(a) Comverse Technology Inc. ......................................................... 7,000 794,500
(a) Dell Computer Corp. .............................................................. 12,000 481,500
(a) EMC Corp. ........................................................................ 5,600 408,800
(a,e) eMachines Inc. ................................................................... 31,328 199,998
(a) Fairchild Semiconductor Corp., A ................................................. 23,000 580,750
(a) Flextronics International Ltd. (Singapore) ....................................... 10,000 710,000
(a) Foundry Networks Inc. ............................................................ 1,500 284,250
(a) General Instrument Corp. ......................................................... 7,000 376,688
Intel Corp. ...................................................................... 6,000 464,625
International Business Machines Corp. ............................................ 4,000 393,500
(a) JDS Uniphase Corp. ............................................................... 3,300 550,688
(a) JNI Corp. ........................................................................ 5,200 277,875
(a) KLA-Tencor Corp. ................................................................. 7,000 554,313
(a) MCK Communications Inc. .......................................................... 200 4,500
Nortel Networks Corp. (Canada) ................................................... 1,750 108,391
(a) PC-Tel Inc. ...................................................................... 10,800 324,000
(a) PMC-Sierra Inc. (Canada) ......................................................... 6,000 565,500
(a) RF Micro Devices Inc. ............................................................ 13,000 671,125
(a) Sun Microsystems Inc. ............................................................ 7,000 740,688
(a) Sycamor Networks Inc. ............................................................ 1,000 215,000
(a) Tellabs Inc. ..................................................................... 7,000 442,750
(a) Teradyne Inc. .................................................................... 11,000 423,500
(a) Varian Semiconductor Equipment Associates Inc. ................................... 20,000 452,500
(a) Visual Networks Inc. ............................................................. 16,000 666,000
(a) Vitesse Semiconductor Corp. ...................................................... 18,000 825,750
(a) Waters Corp. ..................................................................... 10,000 531,250
(a) Xilinx Inc. ...................................................................... 8,000 629,000
-----------
16,593,160
-----------
</TABLE>
40
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN AGGRESSIVE GROWTH FUND SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a)HEALTH TECHNOLOGY 3.9%
Medimmune Inc. ................................. 6,000 $ 672,000
Minimed Inc. ................................... 3,500 265,344
Roberts Pharmaceutical Corp. ................... 11,000 354,750
Visx Inc. ...................................... 8,000 500,500
----------
1,792,594
----------
(a)PRODUCER MANUFACTURING 1.7%
Polycom Inc. ................................... 16,000 800,000
----------
(a)RETAIL TRADE 4.5%
Best Buy Co. Inc. .............................. 7,000 388,938
eToys Inc. ..................................... 7,000 418,250
IGO Corp. ...................................... 15,000 211,875
Liquid Audio Inc. .............................. 20,000 705,000
PlanetRx.Com Inc. .............................. 15,200 357,200
----------
2,081,263
----------
(a)TECHNOLOGY SERVICES 25.8%
Agile Software Corp. ........................... 6,000 588,000
Akamai Technologies Inc. ....................... 800 116,150
Bsquare Corp. .................................. 15,000 593,438
Citrix Systems Inc. ............................ 8,000 513,000
Cysive Inc. .................................... 200 11,513
Daleen Technologies Inc. ....................... 20,000 587,500
Data Return Corp. .............................. 300 4,519
Exodus Communications Inc. ..................... 6,500 559,000
i2 Technologies Inc. ........................... 8,300 655,181
Internap Network Services Corp. ................ 6,000 554,250
Intertrust Technologies Corp. .................. 200 10,900
Looksmart Ltd. ................................. 15,000 403,125
Microsoft Corp. ................................ 18,000 1,666,125
Navisite Inc. .................................. 600 28,200
Netsolve Inc. .................................. 26,000 620,750
Predictive Systems Inc. ........................ 7,000 304,500
Sapient Corp. .................................. 8,000 1,023,000
Siebel Systems Inc. ............................ 7,000 768,688
Tanning Technology Corp. ....................... 22,000 772,750
Tenfold Corp. .................................. 20,000 470,000
VERITAS Software Corp. ......................... 6,900 744,338
Verity Inc. .................................... 6,000 413,250
Yahoo! Inc. .................................... 3,000 537,188
----------
11,945,365
----------
(a)TELECOMMUNICATIONS 9.3%
Allied Riser Communications Corp. .............. 10,000 180,625
MCI WorldCom Inc. .............................. 8,000 686,500
Nextlink Communications Inc., A ................ 5,200 311,025
Partner Communications Co. Ltd., ADR (Israel) .. 49,700 782,775
</TABLE>
41
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN AGGRESSIVE GROWTH FUND SHARES VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a)TELECOMMUNICATIONS (CONT.)
Qwest Communications International Inc. ............... 23,000 $ 828,000
Sprint Corp. (PCS Group) .............................. 8,000 663,500
Triton PCS Holdings Inc., A ........................... 200 7,050
VoiceStream Wireless Corp. ............................ 8,500 839,373
------------
4,298,848
------------
TRANSPORTATION 1.0%
Expeditors International of Washington Inc. ........... 13,000 485,875
------------
TOTAL LONG TERM INVESTMENTS (COST $33,287,921) ........ 40,969,058
------------
SHORT TERM INVESTMENT 14.9%
(d)Franklin Institutional Fiduciary Trust
Money Market Portfolio (Cost $6,914,086) .............. 6,914,086 6,914,086
------------
TOTAL INVESTMENTS (COST $40,202,007) 103.3% ........... 47,883,144
OTHER ASSETS, LESS LIABILITIES (3.3%) ................. (1,517,291)
------------
NET ASSETS 100.0% ..................................... $ 46,365,853
============
</TABLE>
(a) Non-income producing
(d) See Note 3 regarding investments in the "Sweep Money Fund."
(e) See Note 6 regarding restricted securities.
42 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN BLUE CHIP FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 1999 ------------------------------------
(UNAUDITED)(9) 1999 1998 1997(3)
--------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period $14.41 $12.46 $10.85 $10.00
--------------------------------------------------------
Income from investment operations:
Net investment income -- .04 .09 .09
Net realized and unrealized gains 1.08 1.97 1.67 .82
--------------------------------------------------------
Total from investment operations 1.08 2.01 1.76 .91
--------------------------------------------------------
Less distributions from:
Net investment income -- (.06) (.06) (.06)
Net realized gains -- -- (.09) --
--------------------------------------------------------
Total distributions -- (.06) (.15) (.06)
--------------------------------------------------------
Net asset value, end of period $15.49 $14.41 $12.46 $10.85
========================================================
Total return* 7.49% 16.18% 16.41% 9.14%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $74,779 $54,880 $16,836 $5,600
Ratios to average net assets:
Expenses 1.25%(1) 1.25% 1.25% 1.25%(1)
Expenses excluding waiver and payments by affiliate 1.39%(1) 1.51% 1.95% 2.22%(1)
Net investment income (loss) (.06)%(1) .55% 1.04% 1.07%(1)
Portfolio turnover rate 29.38% 35.74% 57.67% 11.14%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(1) Annualized
(3) For the period June 3, 1996 (effective date) to April 30, 1997.
(9) Based on average shares outstanding.
See notes to financial statements. 43
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN BLUE CHIP FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 92.4%
COMMERCIAL SERVICES .7%
(a)Robert Half International Inc. .......................... United States 18,000 $ 487,125
----------
CONSUMER DURABLES 2.0%
Sony Corp. .............................................. Japan 9,500 1,480,165
----------
CONSUMER NON-DURABLES 6.2%
Coca-Cola Co. ........................................... United States 17,500 1,032,500
Nestle SA ............................................... Switzerland 450 868,281
PepsiCo Inc. ............................................ United States 16,500 572,344
Philip Morris Cos. Inc. ................................. United States 21,000 528,938
Procter & Gamble Co. .................................... United States 12,000 1,258,500
Wm. Wrigley Jr. Co. ..................................... United States 4,900 391,694
----------
4,652,257
----------
CONSUMER SERVICES 1.5%
McDonald's Corp. ........................................ United States 16,000 660,000
The Walt Disney Co. ..................................... United States 18,300 482,663
----------
1,142,663
----------
ELECTRONIC TECHNOLOGY 18.6%
(a)Applied Materials Inc. .................................. United States 5,200 467,025
(a)Cisco Systems Inc. ...................................... United States 17,750 1,313,500
(a)Comverse Technology Inc. ................................ United States 9,000 1,021,500
(a)Dell Computer Corp. ..................................... United States 15,000 601,875
(a)EMC Corp. ............................................... United States 11,400 832,200
(a)General Instrument Corp. ................................ United States 8,500 457,406
Hewlett-Packard Co. ..................................... United States 5,000 370,313
Intel Corp. ............................................. United States 23,000 1,781,063
International Business Machines Corp. ................... United States 10,000 983,750
(a)JDS Uniphase Corp. ...................................... United States 6,000 1,001,250
Lucent Technologies Inc. ................................ United States 10,844 696,727
Motorola Inc. ........................................... United States 5,500 535,906
Nokia Corp., ADR, A ..................................... Finland 8,300 959,169
(a)Solectron Corp. ......................................... United States 11,000 827,750
(a)Sun Microsystems Inc. ................................... United States 5,000 529,063
(a)Tellabs Inc. ............................................ United States 12,000 759,000
(a)Waters Corp. ............................................ United States 14,400 765,000
----------
13,902,497
----------
ENERGY MINERALS 3.1%
BP Amoco PLC, ADR ....................................... United Kingdom 11,626 671,402
Conoco Inc., B .......................................... United States 27,000 732,375
Exxon Corp. ............................................. United States 12,000 888,750
----------
2,292,527
----------
FINANCE 13.2%
AFLAC Inc. .............................................. United States 13,700 700,413
American International Group Inc. ....................... United States 12,365 1,272,822
Capital One Financial Corp. ............................. United States 28,400 1,505,200
</TABLE>
44
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN BLUE CHIP FUND COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FINANCE (CONT.)
Charles Schwab Corp. ..................................... United States 12,000 $467,250
Chase Manhattan Corp. .................................... United States 17,000 1,485,375
Citigroup Inc. ........................................... United States 29,125 1,576,391
Countrywide Credit Industries Inc. ....................... United States 27,000 916,313
Fannie Mae ............................................... United States 8,800 622,600
Marsh & McLennan Cos. Inc. ............................... United States 16,300 1,288,719
---------
9,835,083
---------
HEALTH TECHNOLOGY 8.2%
Abbott Laboratories ...................................... United States 20,000 807,500
Eli Lilly & Co. .......................................... United States 12,100 833,388
(a)Genentech Inc. ........................................... United States 2,725 397,169
Johnson & Johnson ........................................ United States 7,000 733,250
Medtronic Inc. ........................................... United States 31,200 1,080,300
Merck & Co. Inc. ......................................... United States 7,800 620,588
Pfizer Inc. .............................................. United States 17,700 699,150
Schering-Plough Corp. .................................... United States 19,000 940,500
---------
6,111,845
---------
INDUSTRIAL SERVICES 2.5%
(a)AES Corp. ................................................ United States 10,000 564,375
Schlumberger Ltd. ........................................ United States 12,100 732,806
Transocean Offshore Inc. ................................. Cayman Islands 21,000 570,938
---------
1,868,119
---------
NON-ENERGY MINERALS .7%
Barrick Gold Corp. ....................................... Canada 18,000 329,625
De Beers Consolidated Mines AG, ADR ...................... South Africa 8,500 230,031
---------
559,656
---------
PROCESS INDUSTRIES 6.2%
Ecolab Inc. .............................................. United States 15,500 524,094
General Electric Co. ..................................... United States 17,900 2,426,569
Monsanto Co. ............................................. United States 14,000 539,000
Praxair Inc. ............................................. United States 15,400 719,950
Sigma-Aldrich Corp. ...................................... United States 15,000 427,500
---------
4,637,113
---------
PRODUCER MANUFACTURING 3.9%
Avery Dennison Corp. ..................................... United States 16,500 1,031,250
Dana Corp. ............................................... United States 17,600 520,300
Minnesota Mining & Manufacturing Co. ..................... United States 10,000 950,625
Weyerhaeuser Co. ......................................... United States 7,300 435,719
---------
2,937,894
---------
RETAIL TRADE 6.5%
(a)Best Buy Co. Inc. ........................................ United States 13,000 722,313
Dayton Hudson Corp. ...................................... United States 9,000 581,625
Home Depot Inc. .......................................... United States 10,000 755,000
</TABLE>
45
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN BLUE CHIP FUND COUNTRY SHARES VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
RETAIL TRADE (CONT.)
Wal-Mart Stores Inc. .................................... United States 29,000 $1,643,938
(a)Williams-Sonoma Inc. .................................... United States 22,000 1,182,500
------------
4,885,376
------------
TECHNOLOGY SERVICES 8.9%
(a)America Online Inc. ..................................... United States 9,000 1,167,188
Automatic Data Processing Inc. .......................... United States 12,500 602,344
First Data Corp. ........................................ United States 11,000 502,563
(a)Microsoft Corp. ......................................... United States 31,500 2,915,719
(a)Oracle Corp. ............................................ United States 21,000 998,813
(a)Yahoo! Inc. ............................................. United States 2,600 465,563
------------
6,652,190
------------
TELECOMMUNICATIONS 8.6%
AT&T Corp. .............................................. United States 18,700 874,225
BellSouth Corp. ......................................... United States 13,000 585,000
GTE Corp. ............................................... United States 11,000 825,000
(a)MCI WorldCom Inc. ....................................... United States 17,000 1,458,813
(a)Qwest Communications International Inc. ................. United States 22,500 810,000
SBC Communications Inc. ................................. United States 12,000 611,250
(a)Sprint Corp. (PCS Group) ................................ United States 7,000 580,563
Vodafone AirTouch PLC, ADR .............................. United Kingdom 15,000 719,051
------------
6,463,902
------------
UTILITIES 1.6%
Edison International .................................... United States 24,000 711,000
Enron Corp. ............................................. United States 13,000 519,188
------------
1,230,188
------------
TOTAL COMMON STOCKS (COST $58,987,716) .................. 69,138,600
------------
SHORT TERM INVESTMENTS 10.7%
(d)Franklin Institutional Fiduciary Trust Money
Market Portfolio (Cost $7,980,051) ...................... United States 7,980,051 7,980,051
------------
TOTAL INVESTMENTS (COST $66,967,767) 103.1% .............. 77,118,651
OTHER ASSETS, LESS LIABILITIES (3.1%) .................... (2,339,255)
------------
NET ASSETS 100.0% ........................................ $ 74,779,396
============
</TABLE>
(a) Non-income producing
(d) See Note 3 regarding investments in the "Sweep Money Fund."
46 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN CALIFORNIA GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 1999 ----------------------------------------------------------
(UNAUDITED)(9) 1999 1998 1997 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .. $25.82 $24.97 $19.35 $18.26 $14.03 $12.05
------------------------------------------------------------------------------
Income from investment operations:
Net investment income ................ .01 .10 .14 .13 .20 .16
Net realized and unrealized gains .... 8.25 1.42 6.48 1.51 6.03 3.04
------------------------------------------------------------------------------
Total from investment operations ...... 8.26 1.52 6.62 1.64 6.23 3.20
------------------------------------------------------------------------------
Less distributions from:
Net investment income ................ (.06) (.14) (.14) (.12) (.23) (.12)
In excess of net investment income ... (.02) -- -- -- -- --
Net realized gains ................... -- (.53) (.86) (.43) (1.77) (1.10)
------------------------------------------------------------------------------
Total distributions ................... (.08) (.67) (1.00) (.55) (2.00) (1.22)
------------------------------------------------------------------------------
Net asset value, end of period ........ $34.00 $25.82 $24.97 $19.35 $18.26 $14.03
==============================================================================
Total return* ......................... 32.10% 6.39% 34.98% 8.94% 47.42% 29.09%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $1,063,395 $780,598 $721,254 $282,898 $81,175 $13,844
Ratios to average net assets:
Expenses ............................. .96%(1) 1.00% .99% 1.08% .71% .25%
Expenses excluding waiver and payments
by affiliate ......................... .96%(1) 1.00% .99% 1.08% 1.09% 1.27%
Net investment income ................ .04%(1) .41% .67% .84% 1.42% 1.63%
Portfolio turnover rate ............... 38.20% 52.76% 48.52% 44.81% 61.82% 79.52%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(1) Annualized
(9) Based on average shares outstanding.
47
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN CALIFORNIA GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
CLASS B
----------------------------------
SIX MONTHS ENDED
OCTOBER 31, 1999 YEAR ENDED
(UNAUDITED)(9) APRIL 30,1999(4)
----------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $25.75 $24.31
----------------------------------
Income from investment operations:
Net investment loss .......................... (.10) (.01)
Net realized and unrealized gains ............ 8.20 1.45
----------------------------------
Total from investment operations .............. 8.10 1.44
----------------------------------
Less distributions from:
Net investment income ........................ (.06) --
In excess of net investment income ........... (.01) --
----------------------------------
Total distributions ........................... (.07) --
----------------------------------
Net asset value, end of period ................ $33.78 $25.75
=================================-
Total return* ................................. 31.58% 5.88%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $10,469 $2,657
Ratios to average net assets:
Expenses ..................................... 1.71%(1) 1.75%(1)
Net investment loss .......................... (.68)%(1) (.33)%(1)
Portfolio turnover rate ....................... 38.20% 52.76%
</TABLE>
* Total return does not reflect contingent deferred sales charge, and is not
annualized for periods less than one year.
(1) Annualized
(4) For the period January 1, 1999 (effective date) to April 30, 1999.
(9) Based on average shares outstanding.
48
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN CALIFORNIA GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 1999 -----------------------------------------------------
(UNAUDITED)(9) 1999 1998 1997(5)
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $25.63 $24.81 $19.27 $18.05
------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) ................. (.10) (.07) -- .05
Net realized and unrealized gains ............ 8.20 1.42 6.43 1.65
------------------------------------------------------------------------
Total from investment operations .............. 8.10 1.35 6.43 1.70
------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (.02)(10) -- (.03) (.05)
Net realized gains ........................... -- (.53) (.86) (.43)
------------------------------------------------------------------------
Total distributions ........................... (.02) (.53) (.89) (.48)
------------------------------------------------------------------------
Net asset value, end of period ................ $33.71 $25.63 $24.81 $19.27
========================================================================
Total return* ................................. 31.62% 5.67% 34.02% 9.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $214,780 $159,310 $122,701 $24,556
Ratios to average net assets:
Expenses ..................................... 1.71%(1) 1.75% 1.74% 1.86%(1)
Net investment income (loss) ................. (.72)%(1) (.33)% (.10)% .05%(1)
Portfolio turnover rate ....................... 38.20% 52.76% 48.52% 44.81%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(1) Annualized
(5) For the period September 3, 1996 (effective date) to April 30, 1997.
(9) Based on average shares outstanding.
(10) Includes distributions in excess of net investment income in the amount of
$.004.
See notes to financial statements. 49
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA GROWTH FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 93.7%
(a) COMMERCIAL SERVICES 1.8%
Chemdex Corp. .............................................................. 150,000 $ 5,718,750
Intertrust Technologies Corp. .............................................. 6,800 370,600
Netcentives Inc. ........................................................... 203,500 3,408,625
Probusiness Services Inc. .................................................. 25,000 628,125
(f) RemedyTemp Inc., A ......................................................... 400,000 4,300,000
Robert Half International Inc. ............................................. 150,000 4,059,375
Stamps.com Inc. ............................................................ 75,000 4,312,500
Wink Communications Inc. ................................................... 20,000 702,500
-----------
23,500,475
-----------
CONSUMER DURABLES 1.3%
(a) Electronic Arts Inc. ....................................................... 175,000 14,142,188
Mattel Inc. ................................................................ 175,000 2,340,625
-----------
16,482,813
-----------
CONSUMER NON-DURABLES .8%
Clorox Co. ................................................................. 100,000 4,093,750
(a) Del Monte Foods Co. ........................................................ 450,000 6,271,875
-----------
10,365,625
-----------
CONSUMER SERVICES 4.0%
(a) Fox Entertainment Group Inc., A ............................................ 200,000 4,325,000
(a) Jack in the Box Inc. ....................................................... 400,000 9,625,000
McClatchy Co., A ........................................................... 150,000 5,887,500
(a) Pixar Inc. ................................................................. 125,000 4,757,813
(a) Quokka Sports Inc. ......................................................... 200,000 1,637,500
(a) Salem Communications Corp., A .............................................. 100,000 2,487,500
(a) TiVo Inc. .................................................................. 20,000 857,500
(a) United Television Inc. ..................................................... 50,000 6,362,500
(a) Univision Communications Inc., A ........................................... 150,000 12,759,375
The Walt Disney Co. ........................................................ 100,000 2,637,500
-----------
51,337,188
-----------
ELECTRONIC TECHNOLOGY 35.7%
(a) Altera Corp. ............................................................... 250,000 12,156,250
(a) Apple Computer Inc. ........................................................ 200,000 16,025,000
(a) Applied Materials Inc. ..................................................... 125,000 11,226,563
(a) Applied Micro Circuits Corp. ............................................... 350,000 27,234,375
(a) Catapult Communications Corp. .............................................. 225,000 3,571,875
(a) Cisco Systems Inc. ......................................................... 600,000 44,400,000
(a) Coherent Inc. .............................................................. 175,000 3,598,438
(a) Cypress Semiconductor Corp. ................................................ 400,000 10,225,000
(a) Ditech Communications Corp. ................................................ 65,000 5,711,875
(a,e)eMachines Inc. ............................................................ 783,208 5,000,000
(a) Flextronics International Ltd. (Singapore) ................................. 100,000 7,100,000
(a) Foundry Networks Inc. ...................................................... 20,500 3,884,750
(a) Gemstar International Group Ltd. ........................................... 50,000 4,343,750
Hewlett-Packard Co. ........................................................ 100,000 7,406,250
</TABLE>
50
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA GROWTH FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
ELECTRONIC TECHNOLOGY (CONT.)
Intel Corp. .......................................................... 200,000 $15,487,500
(a)Javelin Systems Inc. ................................................. 300,000 2,475,000
(a)JDS Uniphase Corp. ................................................... 350,000 58,406,250
(a)JNI Corp. ............................................................ 8,800 470,250
(a)Juniper Networks Inc. ................................................ 25,000 6,890,625
(a)KLA-Tencor Corp. ..................................................... 125,000 9,898,438
Linear Technology Corp. .............................................. 300,000 20,981,250
Lucent Technologies Inc. ............................................. 211,825 13,609,756
(a)Maxim Integrated Products Inc. ....................................... 225,000 17,760,938
(a)Netopia Inc. ......................................................... 100,000 5,337,500
(a)PC-Tel Inc. .......................................................... 42,500 1,275,000
(a)Proxim Inc. .......................................................... 100,000 4,681,250
(a)QUALCOMM Inc. ........................................................ 55,000 12,251,250
(a)QuickLogic Corp. ..................................................... 19,100 350,963
(a)Sanmina Corp. ........................................................ 125,000 11,257,813
(a)SDL Inc. ............................................................. 70,000 8,631,875
(a)Silicon Image Inc. ................................................... 2,800 123,725
(a)Solectron Corp. ...................................................... 250,000 18,812,500
(a)Spectra-Physics Lasers Inc. .......................................... 200,000 2,062,500
(a)Sun Microsystems Inc. ................................................ 300,000 31,743,750
(a)Synopsys Inc. ........................................................ 200,000 12,462,500
(a)Varian Inc. .......................................................... 375,000 7,078,125
(a)Vitesse Semiconductor Corp. .......................................... 300,000 13,762,500
(a)Xilinx Inc. .......................................................... 300,000 23,587,500
-----------
461,282,884
-----------
ENERGY MINERALS 1.9%
Atlantic Richfield Co. ............................................... 75,000 6,989,063
Chevron Corp. ........................................................ 100,000 9,131,250
Unocal Corp. ......................................................... 225,000 7,762,500
-----------
23,882,813
-----------
FINANCE 5.3%
Charles Schwab Corp. ................................................. 325,000 12,654,688
Countrywide Credit Industries Inc. ................................... 200,000 6,787,500
(a)E*TRADE Group Inc. ................................................... 140,000 3,333,750
(a)Golden State Bancorp Inc. ............................................ 550,000 11,481,250
The PMI Group Inc. ................................................... 225,000 11,671,875
Providian Financial Corp. ............................................ 65,000 7,085,000
(a)Silicon Valley Bancshares ............................................ 475,000 15,496,875
-----------
68,510,938
-----------
HEALTH SERVICES .9%
(a)Tenet Healthcare Corp. ............................................... 400,000 7,775,000
(a)Wellpoint Health Networks Inc. ....................................... 75,000 4,350,000
-----------
12,125,000
-----------
</TABLE>
51
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA GROWTH FUND SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
HEALTH TECHNOLOGY 7.0%
a Affymetrix Inc. .......................... 100,000 $ 8,812,500
Allergan Inc. ............................ 100,000 10,737,500
a Amgen Inc. ............................... 100,000 7,975,000
a Cerus Corp. .............................. 75,000 2,076,563
a Collateral Therapeutics Inc. ............. 125,000 1,765,625
a Genentech Inc. ........................... 175,000 25,506,250
a Gilead Sciences Inc. ..................... 65,000 4,107,188
a Inhale Therapeutic Systems Inc. .......... 225,000 6,201,563
a Minimed Inc. ............................. 25,000 1,895,313
a Molecular Devices Corp. .................. 300,000 11,100,000
a Nanogen Inc. ............................. 175,000 1,225,000
a Ocular Sciences Inc. ..................... 300,000 5,512,500
a Visx Inc. ................................ 50,000 3,128,125
-----------
90,043,127
-----------
INDUSTRIAL SERVICES 1.6%
a Calpine Corp. ............................ 118,600 6,834,325
a Catalytica Inc. .......................... 250,000 3,140,625
Granite Construction Inc. ................ 225,000 4,654,688
a Tetra Tech Inc. .......................... 375,000 5,953,125
-----------
20,582,763
-----------
PROCESS INDUSTRIES 1.0%
a ECO Soil Systems Inc. .................... 350,000 1,771,875
Optical Coating Laboratory Inc. .......... 100,000 10,687,500
-----------
12,459,375
-----------
PRODUCER MANUFACTURING 1.1%
Avery Dennison Corp. ..................... 175,000 10,937,500
a Simpson Manufacturing Co. Inc. ........... 75,000 3,042,188
-----------
13,979,688
-----------
REAL ESTATE 5.5%
Alexandria Real Estate Equities Inc. ..... 150,000 4,312,500
AMB Property Corp. ....................... 400,000 7,950,000
Arden Realty Inc. ........................ 475,000 9,559,375
Burnham Pacific Properties Inc. .......... 225,000 2,250,000
a Catellus Development Corp. ............... 425,000 4,993,750
Essex Property Trust Inc. ................ 350,000 11,396,875
Health Care Property Investors Inc. ...... 397,100 10,423,875
Spieker Properties Inc. .................. 450,000 15,721,875
TriNet Corporate Realty Trust Inc. ....... 157,700 3,636,956
-----------
70,245,206
-----------
RETAIL TRADE 3.5%
a Cost Plus Inc. ........................... 187,500 6,843,750
Costco Cos. Inc. ......................... 90,000 7,228,125
a eToys Inc. ............................... 75,000 4,481,250
</TABLE>
52
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA GROWTH FUND SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
RETAIL TRADE (CONT.)
GAP Inc. ..................................... 175,000 $ 6,496,875
a Safeway Inc. ................................. 175,000 6,179,688
a Williams-Sonoma Inc. ......................... 250,000 13,437,500
--------------
44,667,188
--------------
a TECHNOLOGY SERVICES 18.2%
Avant! Corp. ................................. 300,000 3,862,500
BroadVision Inc. ............................. 525,000 38,653,125
Computer Sciences Corp. ...................... 200,000 13,737,500
eBay Inc. .................................... 60,000 8,107,500
eGain Communications Corp. ................... 75,000 2,184,375
Exodus Communications Inc. ................... 100,000 8,600,000
HNC Software Inc. ............................ 150,000 5,990,625
Interwoven Inc ............................... 5,900 462,413
Intuit Inc. .................................. 375,000 10,921,875
Legato Systems Inc. .......................... 225,000 12,093,750
Liberate Technologies Inc. ................... 41,600 2,834,000
Micromuse Inc. ............................... 170,000 18,168,750
Mpath Interactive Inc. ....................... 200,000 2,250,000
Oracle Corp. ................................. 250,000 11,890,625
Siebel Systems Inc. .......................... 200,000 21,962,500
Tumbleweed Communications Corp. .............. 88,300 2,207,500
VeriSign Inc. ................................ 40,000 4,940,000
VERITAS Software Corp. ....................... 350,000 37,756,250
Verity Inc. .................................. 145,000 9,986,875
Vitria Technology Inc. ....................... 10,200 672,563
Women.com Networks Inc. ...................... 105,200 1,893,600
Yahoo! Inc. .................................. 75,000 13,429,688
ZapMe! Corp. ................................. 339,500 2,546,250
--------------
235,152,264
--------------
TRANSPORTATION .8%
Expeditors International of Washington Inc. .. 275,000 10,278,125
--------------
UTILITIES 3.3%
American States Water Co. .................... 165,000 5,661,563
California Water Service Group ............... 180,000 5,220,000
Edison International ......................... 550,000 16,293,740
a Leap Wireless International Inc. ............. 100,000 3,850,000
a Pacific Gateway Exchange Inc. ................ 100,000 2,275,000
Vodafone AirTouch PLC, ADR (United Kingdom)... 200,000 9,587,500
--------------
42,887,803
--------------
TOTAL COMMON STOCKS (COST $726,481,115) ...... 1,207,783,275
--------------
CONVERTIBLE PREFERRED STOCKS .3%
Glenborough Realty Trust, 7.75%, cvt.
pfd., A (COST $6,000,000) .................... 240,000 3,675,000
--------------
</TABLE>
53
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA GROWTH FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS .5%
<S> <C> <C>
Inhale Therapeutic Systems Inc., cvt., 144A, 6.75%, 10/13/06 (COST $6,000,000) ......... $ 6,000,000 $ 6,161,250
---------------
TOTAL LONG TERM INVESTMENTS (COST $738,481,115) ........................................ 1,217,619,525
---------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
SHORT TERM INVESTMENTS 4.3% ----------
<S> <C> <C>
d Franklin Institutional Fiduciary Trust Money Market Portfolio (Cost $55,193,734) ......... 55,193,734 55,193,734
--------------
TOTAL INVESTMENTS (COST $793,674,849) 98.8% .............................................. 1,272,813,259
OTHER ASSETS, LESS LIABILITIES 1.2% ...................................................... 15,829,801
--------------
NET ASSETS 100.0% ........................................................................ $1,288,643,060
==============
</TABLE>
(a) Non-income producing
(d) See Note 3 regarding investments in the "Sweep Money Fund."
(e) See Note 6 regarding restricted securities.
(f) See Note 7 regarding holdings of 5% voting securities.
54 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
FRANKLIN LARGE CAP GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
------------------
OCTOBER 31, 1999
(UNAUDITED)(6),(9)
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period $10.00
------------------
Income from investment operations:
Net investment loss ..................................................................................... (.01)
Net realized and unrealized gains ....................................................................... 1.24
------------------
Total from investment operations ......................................................................... 1.23
------------------
Net asset value, end of period ........................................................................... $ 11.23
==================
Total return* ............................................................................................ 12.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $6,040
Ratios to average net assets:
Expenses ................................................................................................ 1.21%(1)
Expenses excluding waiver and payments by affiliate ..................................................... 1.71%(1)
Net investment loss ..................................................................................... (.31)%(1)
Portfolio turnover rate .................................................................................. 52.60%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(1) Annualized
(6) For the period June 7, 1999 (effective date) to October 31, 1999.
(9) Based on average shares outstanding.
55
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
56
FRANKLIN LARGE CAP GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
CLASS B
------------------
OCTOBER 31, 1999
(UNAUDITED)(6),(9)
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............................................................. $ 10.00
------------------
Income from investment operations:
Net investment loss .............................................................................. (.04)
Net realized and unrealized gains ................................................................ 1.24
------------------
Total from investment operations .................................................................. 1.20
------------------
Net asset value, end of period .................................................................... $ 11.20
==================
Total return* ..................................................................................... 12.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................................................................. $ 976
Ratios to average net assets:
Expenses ......................................................................................... 1.85%(1)
Expenses excluding waiver and payments by affiliate .............................................. 2.35%(1)
Net investment loss .............................................................................. (.94)%(1)
Portfolio turnover rate ........................................................................... 52.60%
</TABLE>
*Total return does not reflect contingent deferred sales charge, and is not
annualized for periods less than one year.
(1) Annualized
(6) For the period June 7, 1999 (effective date) to October 31, 1999.
(9) Based on average shares outstanding.
56
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN LARGE CAP GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
------------------
OCTOBER 31, 1999
(UNAUDITED)(6),(9)
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............................................................ $ 10.00
------------------
Income from investment operations:
Net investment loss ............................................................................ (.04)
Net realized and unrealized gains .............................................................. 1.23
------------------
Total from investment operations ................................................................ 1.19
------------------
Net asset value, end of period .................................................................. $ 11.19
==================
Total return* ................................................................................... 11.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............................................................... $ 6,750
Ratios to average net assets:
Expenses ....................................................................................... 1.86%(1)
Expenses excluding waiver and payments by affiliate ............................................ 2.36%(1)
Net investment income .......................................................................... (.97)%(1)
Portfolio turnover rate ......................................................................... 52.60%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(1) Annualized
(6) For the period June 7, 1999 (effective date) to October 31, 1999.
(9) Based on average shares outstanding.
57
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN LARGE CAP GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
ADVISOR CLASS
------------------
OCTOBER 31, 1999
(UNAUDITED)(6),(9)
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................................................................. $ 10.00
------------------
Income from investment operations - net realized and unrealized gains ................................ 1.24
------------------
Net asset value, end of period ....................................................................... $ 11.24
==================
Total return* ........................................................................................ 12.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................................................................... $ 10,925
Ratios to average net assets:
Expenses ............................................................................................ .89%(1)
Expenses excluding waiver and payments by affiliate ................................................. 1.39%(1)
Net investment income ............................................................................... .07%(1)
Portfolio turnover rate .............................................................................. 52.60%
</TABLE>
*Total return is not annualized for periods less than one year.
(1) Annualized
(6) For the period June 7, 1999 (effective date) to October 31, 1999.
(9) Based on average shares outstanding.
58 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN LARGE CAP GROWTH FUND SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 90.5%
CONSUMER NON-DURABLES 3.4%
Colgate-Palmolive Co. .................... 4,700 $ 284,350
Estee Lauder Cos. Inc., A ................ 6,000 279,750
Procter & Gamble Co. ..................... 2,700 283,163
----------
847,263
----------
CONSUMER SERVICES 6.6%
a Clear Channel Communications Inc. ........ 4,400 353,650
a Comcast Corp., A ......................... 7,900 332,788
a Harrah's Entertainment Inc. .............. 3,900 112,856
Seagrams Co. Ltd. (Canada) ............... 4,300 212,313
Time Warner Inc. ......................... 5,400 376,313
a Viacom Inc., A ........................... 3,900 177,694
a Viacom Inc., B ........................... 1,100 49,225
----------
1,614,839
----------
ELECTRONIC TECHNOLOGY 28.3%
a Applied Materials Inc. ................... 1,100 98,794
a Cisco Systems Inc. ....................... 9,800 725,200
a Comverse Technology Inc. ................. 3,300 374,550
a Dell Computer Corp. ...................... 6,000 240,750
a EMC Corp. ................................ 4,800 350,400
a General Instrument Corp. ................. 6,500 349,781
Hewlett-Packard Co. ...................... 2,400 177,750
Intel Corp. .............................. 5,700 441,394
International Business Machines Corp. .... 4,300 423,013
a JDS Uniphase Corp. ....................... 3,200 534,000
Linear Technology Corp. .................. 5,200 363,675
Lucent Technologies Inc. ................. 5,700 366,225
Motorola Inc. ............................ 2,900 282,569
Nokia Corp., ADR, A (Finland) ............ 2,500 288,906
Nortel Networks Corp. (Canada) ........... 8,000 495,500
a Solectron Corp. .......................... 3,300 248,325
a Sun Microsystems Inc. .................... 3,300 349,181
a Tellabs Inc. ............................. 4,700 297,275
Texas Instruments Inc. ................... 2,300 206,425
a Xilinx Inc. .............................. 4,700 369,538
----------
6,983,251
----------
FINANCE 5.0%
Capital One Financial Corp. .............. 5,200 275,600
Citigroup Inc. ........................... 8,100 438,413
Marsh & McLennan Cos. Inc. ............... 2,000 158,125
Providian Financial Corp. ................ 3,300 359,700
----------
1,231,838
----------
HEALTH TECHNOLOGY 14.3%
American Home Products Corp. ............. 5,600 292,600
a Amgen Inc. ............................... 2,800 223,300
</TABLE>
59
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN LARGE CAP GROWTH FUND SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
HEALTH TECHNOLOGY (CONT.)
a Biogen Inc. .................................. 3,700 $ 274,263
Eli Lilly & Co. .............................. 6,000 413,250
a Genentech Inc. ............................... 1,500 218,625
a Medimmune Inc. ............................... 2,300 257,600
Medtronic Inc. ............................... 10,600 367,025
Merck & Co. Inc. ............................. 2,500 198,906
Pfizer Inc. .................................. 9,400 371,300
Schering-Plough Corp. ........................ 9,800 485,100
Warner-Lambert Co. ........................... 5,500 438,969
----------
3,540,938
----------
INDUSTRIAL SERVICES 1.0%
a AES Corp. .................................... 4,300 242,681
----------
PROCESS INDUSTRIES 2.7%
General Electric Co. ......................... 4,900 664,256
----------
PRODUCER MANUFACTURING 1.0%
Tyco International Ltd. ...................... 6,400 255,600
----------
RETAIL TRADE 6.1%
a Costco Wholesale Corp. ....................... 4,800 385,500
Dayton Hudson Corp. .......................... 5,000 323,125
Home Depot Inc. .............................. 4,800 362,400
Wal-Mart Stores Inc. ......................... 7,600 430,825
----------
1,501,850
----------
TECHNOLOGY SERVICES 10.4%
Automatic Data Processing Inc. ............... 4,700 226,481
a Compuware Corp. .............................. 7,100 197,469
First Data Corp. ............................. 5,200 237,575
a Microsoft Corp. .............................. 10,200 944,138
a Oracle Corp. ................................. 5,800 275,863
a VERITAS Software Corp. ....................... 3,700 399,133
a Yahoo! Inc. .................................. 1,600 286,500
----------
2,567,159
----------
TELECOMMUNICATIONS 11.7%
AT&T Corp. ................................... 5,600 261,800
a Global Crossing Ltd. (Bermuda) ............... 6,330 219,176
GTE Corp. .................................... 3,000 225,000
a MCI WorldCom Inc. ............................ 3,600 308,925
a Qwest Communications International Inc. ...... 12,900 464,400
SBC Communications Inc. ...................... 5,600 285,250
Sprint Corp. (FON Group) ..................... 4,500 334,406
a Sprint Corp. (PCS Group) ..................... 3,200 265,400
Vodafone AirTouch PLC, ADR (United Kingdom) .. 6,850 328,372
a VoiceStream Wireless Corp. ................... 2,100 207,375
----------
2,900,104
----------
TOTAL COMMON STOCKS (COST $19,842,106) ....... 22,349,779
----------
</TABLE>
60
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN LARGE CAP GROWTH FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENTS 11.0%
d Franklin Institutional Fiduciary Trust Money Market Portfolio (Cost $2,707,205) ......... 2,707,205 $ 2,707,205
-------------
TOTAL INVESTMENTS (COST $22,549,311) 101.5% ............................................. 25,056,984
OTHER ASSETS, LESS LIABILITIES (1.5%) ................................................... (366,142)
------------
NET ASSETS 100.0% ....................................................................... $ 24,690,842
=============
</TABLE>
(a) Non-income producing
(d) See Note 3 regarding investments in the "Sweep Money Fund."
See notes to financial statements. 61
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN MIDCAP GROWTH FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 1999 ---------------------------------------------------------
(UNAUDITED)(9) 1999 1998 1997 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $16.15 $17.44 $13.34 $14.24 $10.81 $10.05
------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) ................. (.02) .04 -- (.02) .18 .21
Net realized and unrealized gains (losses) ... 2.18 (1.17) 4.66 .93 3.59 .77
------------------------------------------------------------------------------
Total from investment operations .............. 2.16 (1.13) 4.66 .91 3.77 .98
------------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (.02) -- -- (.05) (.21) (.20)
In excess of net investment income ........... (.02) -- -- -- -- --
Net realized gains ........................... -- (.16) (.56) (1.76) (.13) (.02)
------------------------------------------------------------------------------
Total distributions ........................... (.04) (.16) (.56) (1.81) (.34) (.22)
------------------------------------------------------------------------------
Net asset value, end of period ................ $18.27 $16.15 $17.44 $13.34 $14.24 $10.81
==============================================================================
Total return* ................................. 13.41% (6.36)% 35.53% 6.31% 35.40% 10.06%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $40,535 $33,901 $29,864 $12,853 $7,575 $5,591
Ratios to average net assets:
Expenses ..................................... 1.24%(1) 1.24% 1.17% 1.07% .16% --
Expenses excluding waiver and payments
by affiliate ................................. 1.24%(1) 1.24% 1.17% 1.07% .96% .98%
Net investment income (loss) ................. (.24)%(1) .30% (.03)% (.22)% 1.42% 2.12%
Portfolio turnover rate ....................... 33.79% 59.97% 50.16% 76.35% 102.65% 163.54%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(1) Annualized
(9) Based on average shares outstanding.
62 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN MIDCAP GROWTH FUND SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 90.6%
a COMMERCIAL SERVICES 4.9%
Concord EFS Inc........................................ 21,300 $ 576,431
Convergys Corp......................................... 12,000 234,750
DoubleClick Inc........................................ 2,200 308,000
Robert Half International Inc.......................... 15,000 405,938
U.S. Foodservice....................................... 25,000 479,688
-----------
2,004,807
-----------
CONSUMER DURABLES 2.0%
a Electronic Arts Inc.................................... 6,500 525,281
Leggett & Platt Inc.................................... 14,000 310,625
-----------
835,906
-----------
CONSUMER NON-DURABLES 2.1%
Estee Lauder Cos. Inc., A.............................. 12,600 587,475
a Tommy Hilfiger Corp.................................... 9,000 254,250
-----------
841,725
-----------
CONSUMER SERVICES 4.9%
a AMFM Inc............................................... 9,000 630,000
a Apollo Group Inc., A................................... 18,000 473,625
a DeVry Inc.............................................. 21,200 446,525
a Martha Stewart Living Omnimedia Inc., A................ 400 14,750
McClatchy Co., A....................................... 9,800 384,650
a Spanish Broadcasting Systems Inc....................... 2,000 53,250
-----------
2,002,800
-----------
ELECTRONIC TECHNOLOGY 25.9%
a Altera Corp............................................. 16,600 807,175
a,b Chartered Semiconductor Manufacturing, ADR (Singapore).. 600 19,913
a Comverse Technology Inc................................. 7,000 794,500
a Epcos AG, ADR (Germany)................................. 7,600 309,700
a Fairchild Semiconductor Corp., A........................ 6,000 151,500
a Flextronics International Ltd. (Singapore).............. 3,000 213,000
a General Instrument Corp................................. 12,500 672,656
a JDS Uniphase Corp....................................... 5,600 934,500
Linear Technology Corp.................................. 9,000 629,438
a Mettler-Toledo International Inc........................ 21,000 626,063
a Micrel Inc.............................................. 11,000 598,125
a Novellus Systems Inc.................................... 5,000 387,500
a PMC-Sierra Inc. (Canada)................................ 6,000 565,500
a QLogic Corp............................................. 1,500 156,188
a Sanmina Corp............................................ 2,000 180,125
a SDL Inc................................................. 1,500 184,969
a Seagate Technology Inc.................................. 11,500 338,531
a Sycamor Networks Inc.................................... 1,000 215,000
a Synopsys Inc............................................ 4,000 249,250
a Tellabs Inc............................................. 8,000 506,000
</TABLE>
63
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN MIDCAP GROWTH FUND SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
ELECTRONIC TECHNOLOGY (CONT.)
a Teradyne Inc. .............................. 8,000 $ 308,000
a Vitesse Semiconductor Corp. ................ 16,000 734,000
a Waters Corp. ............................... 7,000 371,875
a Xilinx Inc. ................................ 7,000 550,375
-----------
10,503,883
-----------
a ENERGY MINERALS 1.0%
Barrett Resources Corp. .................... 11,500 385,969
-----------
FINANCE 7.4%
Capital One Financial Corp. ................ 11,000 583,000
Countrywide Credit Industries Inc. ......... 15,500 526,031
Federated Investors Inc., B ................ 19,000 327,750
Financial Security Assurance Holdings Ltd. . 7,600 428,450
National Commerce Bancorp .................. 14,000 350,000
Protective Life Corp. ...................... 14,000 506,625
Zions Bancorp .............................. 5,000 294,688
-----------
3,016,544
-----------
a HEALTH TECHNOLOGY 1.3%
Chiron Corp. ............................... 11,000 314,188
Genzyme Corp. .............................. 5,700 218,025
-----------
532,213
-----------
INDUSTRIAL SERVICES 3.8%
a AES Corp. .................................. 7,500 423,281
a,b Calpine Corp. ............................ 2,000 115,250
a Republic Services Inc., A .................. 21,500 263,375
Transocean Offshore Inc. ................... 11,800 320,813
a Weatherford International Inc. ............. 12,000 406,500
-----------
1,529,219
-----------
PROCESS INDUSTRIES 3.3%
AptarGroup Inc. ............................ 13,900 373,563
Bowater Inc. ............................... 8,400 441,000
Ecolab Inc. ................................ 16,000 541,000
-----------
1,355,563
-----------
a PRODUCER MANUFACTURING 1.0%
Gentex Corp. ............................... 23,000 395,313
-----------
REAL ESTATE 2.2%
Equity Office Properties Trust ............. 12,400 274,350
Equity Residential Properties Trust ........ 8,000 334,500
MeriStar Hospitality Corp. ................. 17,000 273,063
-----------
881,913
-----------
RETAIL TRADE 4.8%
a Abercrombie & Fitch Co., A ................. 7,000 190,750
Family Dollar Stores Inc. .................. 24,000 495,000
</TABLE>
64
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN MIDCAP GROWTH FUND SHARES VALUE
- ---------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
RETAIL TRADE (CONT.)
Tiffany & Co. ..................................... 14,000 $ 833,000
a Williams-Sonoma Inc. .............................. 8,000 430,000
-----------
1,948,750
-----------
a TECHNOLOGY SERVICES 15.6%
Affiliated Computer Services Inc., A .............. 8,500 323,000
b Akamai Technologies Inc. .......................... 800 116,150
BEA Systems Inc. .................................. 5,400 246,375
BroadVision Inc. .................................. 6,000 441,750
Computer Sciences Corp. ........................... 4,000 274,750
Exodus Communications Inc. ........................ 2,500 215,000
Inktomi Corp. ..................................... 1,300 131,869
Internap Network Services Corp. ................... 6,500 600,438
Intuit Inc. ....................................... 5,700 166,013
Rational Software Corp. ........................... 9,200 393,300
Sapient Corp. ..................................... 5,000 639,374
Siebel Systems Inc. ............................... 12,000 1,317,750
VERITAS Software Corp. ............................ 10,000 1,078,750
Vignette Corp. .................................... 2,500 395,000
-----------
6,339,519
-----------
a TELECOMMUNICATIONS 6.0%
Cincinnati Bell Inc. .............................. 25,000 520,312
VoiceStream Wireless Corp. ........................ 12,500 1,234,374
Western Wireless Corp., A ......................... 12,500 660,937
-----------
2,415,623
-----------
TRANSPORTATION 2.5%
C.H. Robinson Worldwide Inc. ...................... 13,000 439,562
Expeditors International of Washington Inc. ....... 15,000 560,624
-----------
1,000,186
-----------
UTILITIES 1.9%
CMS Energy Corp. .................................. 8,500 313,437
Montana Power Co. ................................. 15,400 437,936
-----------
751,373
-----------
TOTAL LONG TERM INVESTMENTS (COST $25,942,121) .... 36,741,306
-----------
SHORT TERM INVESTMENTS 9.1%
d Franklin Institutional Fiduciary Trust Money Market
Portfolio (COST $3,689,999) ....................... 3,689,999 3,689,999
-----------
TOTAL INVESTMENTS (COST $29,632,120) 99.7% ........ 40,431,305
OTHER ASSETS, LESS LIABILITIES .3% ................ 103,339
-----------
NET ASSETS 100.0% ................................. $40,534,644
===========
</TABLE>
(a) Non-income producing
(b) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
(d) See Note 3 regarding investments in the "Sweep Money Fund."
See notes to financial statements. 65
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN SMALL CAP GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 1999 --------------------------------------------------------------
(UNAUDITED)(9) 1999 1998 1997 1996 1995
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ...... $24.65 $25.93 $18.96 $19.75 $14.90 $12.75
----------------------------------------------------------------------------------
Income from investment operations:
Net investment income .................... .01 .06 .07 .03 .01 .03
Net realized and unrealized gains (losses) 6.44 (1.02) 7.92 .04 6.23 3.14
----------------------------------------------------------------------------------
Total from investment operations .......... 6.45 (.96) 7.99 .07 6.24 3.17
----------------------------------------------------------------------------------
Less distributions from:
Net investment income .................... -- (.14) (.09) (.06) (.01) (.02)
Net realized gains ....................... -- (.18) (.93) (.80) (1.38) (1.00)
----------------------------------------------------------------------------------
Total distributions ....................... -- (.32) (1.02) (.86) (1.39) (1.02)
----------------------------------------------------------------------------------
Net asset value, end of period ............ $31.10 $24.65 $25.93 $18.96 $19.75 $14.90
==================================================================================
Total return* ............................. 26.17% (3.44)% 43.09% .14% 44.06% 27.05%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ......... $5,754,813 $4,251,284 $3,957,972 $1,071,352 $444,912 $63,010
Ratios to average net assets:
Expenses ................................. .91%(1) .94% .89% .92% .97% .69%
Expenses excluding waiver and payments
by affiliate ............................. .91%(1) .94% .89% .92% 1.00% 1.16%
Net investment income .................... .06%(1) .30% .32% .10% .09% .25%
Portfolio turnover rate ................... 17.18% 46.73% 42.97% 55.27% 87.92% 104.84%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(1) Annualized
(9) Based on average shares outstanding.
66
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 1999 -------------------------------------------------------
(UNAUDITED)(9) 1999 1998 1997 1996(7)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $24.32 $25.59 $18.78 $19.66 $17.94
-------------------------------------------------------------------------------
Income from investment operations:
Net investment loss .......................... (.09) (.09) (.02) (.05) (.03)
Net realized and unrealized gains (losses) ... 6.34 (1.00) 7.76 (.03) 2.71
-------------------------------------------------------------------------------
Total from investment operations .............. 6.25 (1.09) 7.74 (.08) 2.68
-------------------------------------------------------------------------------
Less distributions from net realized gains .... -- (.18) (.93) (.80) (.96)
-------------------------------------------------------------------------------
Net asset value, end of period ................ $30.57 $24.32 $25.59 $18.78 $19.66
===============================================================================
Total return* ................................. 25.70% (4.08)% 42.06% (.65)% 15.98%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $993,786 $764,715 $731,707 $146,164 $24,102
Ratios to average net assets:
Expenses ..................................... 1.66%(1) 1.69% 1.64% 1.69% 1.76%(1)
Net investment loss .......................... (.69)%(1) (.44)% (.42)% (.70)% (.69)%(1)
Portfolio turnover rate ....................... 17.18% 46.73% 42.97% 55.27% 87.92%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(1) Annualized
(7) For the period October 1, 1995 (effective date) to April 30, 1996.
(9) Based on average shares outstanding.
67
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
ADVISOR CLASS
------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 1999 ------------------------------------------------
(UNAUDITED)(9) 1999 1998 1997(8)
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............... $24.73 $26.01 $18.97 $20.48
------------------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .04 .10 .09 .01
Net realized and unrealized gains (losses) ........ 6.48 (1.00) 8.01 (1.52)
------------------------------------------------------------------------
Total from investment operations ................... 6.52 (.90) 8.10 (1.51)
------------------------------------------------------------------------
Less distributions from:
Net investment income ............................. -- (.20) (.13) --
Net realized gains ................................ -- (.18) (.93) --
------------------------------------------------------------------------
Total distributions ................................ -- (.38) (1.06) --
------------------------------------------------------------------------
Net asset value, end of period ..................... $31.25 $24.73 $26.01 $18.97
========================================================================
Total return* ...................................... 26.31% (3.12)% 43.68% (7.37)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $228,329 $168,055 $118,683 $18,777
Ratios to average net assets:
Expenses .......................................... .66%(1) .69% .64% .69%(1)
Net investment income ............................. .31%(1) .56% .58% .30%(1)
Portfolio turnover rate ............................ 17.18% 46.73% 42.97% 55.27%
</TABLE>
* Total return is not annualized for periods less than one year.
(1) Annualized
(8) For the period January 2, 1997 (effective date) to April 30, 1997.
(9) Based on average shares outstanding.
68 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS 89.9%
a COMMERCIAL SERVICES 1.5%
Aether Systems Inc. ............................... 85,000 $ 5,912,813
f Applied Graphics Technologies Inc. ................ 1,200,000 8,550,000
Chemdex Corp. ..................................... 178,200 6,793,875
Corporate Executive Board Co. ..................... 93,500 3,529,625
Cybergold Inc. .................................... 373,900 2,523,825
Flycast Communications Corp. ...................... 37,700 1,899,138
FreeShop.com Inc. ................................. 22,300 377,706
Hotjobs.com Ltd. .................................. 267,300 6,164,606
Loislaw.com Inc. .................................. 69,200 1,211,000
Netcentives Inc. .................................. 83,700 1,401,975
NOVA Corp. ........................................ 888,800 23,108,800
Probusiness Services Inc. ......................... 262,200 6,587,775
RemedyTemp Inc., A ................................ 319,300 3,432,475
f SOS Staffing Services Inc. ........................ 872,400 4,416,525
Stamps.com Inc. ................................... 291,500 16,761,250
Sylvan Learning Systems Inc. ...................... 681,200 8,813,025
Wink Communications Inc. .......................... 41,300 1,450,663
------------
102,935,076
------------
a CONSUMER DURABLES .3%
f Activision Inc. ................................... 1,294,400 18,283,400
Audiovox Corp., A ................................. 218,200 4,445,825
------------
22,729,225
------------
CONSUMER NON-DURABLES 1.1%
a Sola International Inc. ........................... 509,800 7,137,200
a Tommy Hilfiger Corp. .............................. 1,997,800 56,437,850
Wolverine World Wide Inc. ......................... 1,575,500 16,148,875
------------
79,723,925
------------
CONSUMER SERVICES 3.7%
a Acme Communications Inc. .......................... 69,100 2,487,600
a,f Cumulus Media Inc., A ............................. 1,000,000 35,875,000
a DeVry Inc. ........................................ 1,064,800 22,427,350
a Emmis Communications Corp., A ..................... 90,300 6,512,888
a E-Stamp Corp. ..................................... 95,400 2,218,050
a Harrah's Entertainment Inc. ....................... 1,123,500 32,511,281
a Homestore.com Inc. ................................ 11,000 516,313
a Insight Communications Co. Inc., A ................ 346,600 8,188,425
a Jack in the Box Inc. .............................. 1,299,700 31,274,031
a Martha Stewart Living Omnimedia Inc., A ........... 66,400 2,448,500
a MeriStar Hotels & Resorts Inc. .................... 1,330,000 3,325,000
a,f Prime Hospitality Corp. ........................... 3,020,500 23,597,656
a Quotesmith.com Inc. ............................... 591,700 4,881,525
a Radio One Inc. .................................... 100,000 4,987,500
a SFX Entertainment Inc. ............................ 1,021,350 35,683,416
Sotheby's Holdings Inc., A ........................ 375,000 10,757,813
a Spanish Broadcasting Systems Inc. ................. 358,300 9,539,738
</TABLE>
69
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STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
CONSUMER SERVICES (CONT.)
a TiVo Inc. .................................. 83,800 $3,592,925
a Vail Resorts Inc. .......................... 370,500 8,243,625
a XM Satellite Radio Holdings Inc. ........... 455,900 8,833,063
-----------
257,901,699
-----------
ELECTRONIC TECHNOLOGY 24.0%
a Advanced Energy Industries Inc. ............ 876,600 36,050,175
a Alpha Industries Inc. ...................... 292,100 16,138,525
a Alteon Websystems Inc. ..................... 28,100 2,016,175
a Ancor Communications Inc. .................. 61,400 1,945,613
a Antec Corp. ................................ 94,200 4,568,700
a Apex Inc. .................................. 200,000 3,400,000
a,f AVT Corp. .................................. 837,400 28,052,900
a Brocade Communications Systems Inc. ........ 24,700 6,644,300
a Carrier Access Corp. ....................... 346,000 17,105,375
a,f Catapult Communications Corp. .............. 656,800 10,426,700
a C-Cor.net Corp. ............................ 176,500 6,927,625
a Cirrus Logic Inc. .......................... 300,000 2,981,250
a,f Coherent Inc. .............................. 1,763,400 36,259,913
a Com21 Inc. ................................. 557,600 7,388,200
a Copper Mountain Networks Inc. .............. 17,800 1,312,750
a Cymer Inc. ................................. 200,000 7,387,500
a Digital Microwave Corp. .................... 798,300 11,874,713
a DII Group Inc. ............................. 141,500 5,094,000
a Ditech Communications Corp. ................ 114,000 10,017,750
a Electro Scientific Industries Inc. ......... 375,000 20,250,000
a,e eMachines Inc. ............................. 1,378,446 8,799,999
a Emcore Corp. ............................... 516,800 7,106,000
a Etec Systems Inc. .......................... 654,000 24,974,625
a Excel Switching Corp. ...................... 623,100 22,158,994
a Flextronics International Ltd. (Singapore) . 850,000 60,350,000
a,f FLIR Systems Inc. .......................... 1,028,600 14,593,263
a Foundry Networks Inc. ...................... 40,600 7,693,700
a FVC.COM Inc. ............................... 400,000 5,250,000
a Gadzoox Networks Inc. ...................... 40,100 1,909,763
a Gemstar International Group Ltd. ........... 1,229,200 106,786,750
a Harmonic Inc. .............................. 463,400 27,514,375
a Interspeed Inc. ............................ 35,300 390,506
a,f Itron Inc. ................................. 1,159,800 5,436,563
a Jabil Circuit Inc. ......................... 853,400 44,590,150
a,f Javelin Systems Inc. ....................... 593,100 4,893,075
a JDS Uniphase Corp. ......................... 1,417,200 236,495,250
a JNI Corp. .................................. 47,200 2,522,250
a Juniper Networks Inc. ...................... 7,900 2,177,438
a,f Komag Inc. ................................. 4,207,100 6,968,009
a,f Ladish Co. Inc. ............................ 816,700 5,716,900
a Lattice Semiconductor Corp. ................ 442,000 15,635,750
a LTX Corp. .................................. 140,900 2,227,981
</TABLE>
70
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STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
ELECTRONIC TECHNOLOGY (CONT.)
a MCK Communications Inc. ......................... 62,400 $ 1,404,000
a,f Mettler-Toledo International Inc. ............... 2,477,900 73,872,394
a Micrel Inc. ..................................... 364,200 19,803,375
a Mirapoint Inc., 144A ............................ 682,128 4,999,998
a Natural MicroSystems Corp. ...................... 364,200 8,718,038
a Netopia Inc. .................................... 256,100 13,669,338
a Netro Corp. ..................................... 162,400 3,704,750
f Newport Corp. ................................... 512,500 9,993,750
a Novellus Systems Inc. ........................... 306,100 23,722,750
a PC-Tel Inc. ..................................... 411,100 12,333,000
a,f Perceptron Inc. ................................. 793,500 2,802,047
Perkinelmer Inc. ................................ 400,000 16,325,000
a Photronics Inc. ................................. 587,500 12,300,781
a PMC-Sierra Inc. (Canada) ........................ 1,830,600 172,534,050
a Power Integrations Inc. ......................... 600,000 61,162,500
a Proxim Inc. ..................................... 136,800 6,403,950
a Quicklogic Corp. ................................ 101,700 1,868,738
a Radiant Systems Inc. ............................ 188,400 2,967,300
a,f RSA Security Inc. ............................... 2,220,000 78,810,000
a Sanmina Corp. ................................... 423,200 38,114,450
a Semtech Corp. ................................... 195,600 7,493,925
a Silicon Image ................................... 15,300 676,069
a SIPEX Corp. ..................................... 500,000 5,750,000
a,f Spectra-Physics Lasers Inc. ..................... 1,016,300 10,480,594
a Synopsys Inc. ................................... 1,405,000 87,549,063
a Tekelec ......................................... 1,823,300 23,133,119
a Triquint Semiconductor Inc. ..................... 85,700 6,856,000
a TriStar Aerospace Co. ........................... 490,700 3,250,888
a Varian Inc. ..................................... 847,800 16,002,225
a Varian Semiconductor Equipment Associates Inc. .. 50,000 1,131,250
a Veeco Instruments Inc. .......................... 314,900 10,686,919
a Visual Networks Inc. ............................ 286,600 11,929,725
a Vixel Corp. ..................................... 62,900 2,012,800
a Waters Corp. .................................... 1,239,600 65,853,750
a Western Digital Corp. ........................... 824,300 2,627,456
--------------
1,670,977,497
--------------
ENERGY MINERALS 3.3%
a,f Barrett Resources Corp. ......................... 1,660,900 55,743,956
a Basin Exploration Inc. .......................... 674,100 11,080,519
a Denbury Resources Inc. .......................... 1,553,000 6,988,500
a Forest Oil Corp. ................................ 798,800 10,683,950
a,f Newfield Exploration Co. ........................ 2,138,600 62,955,038
a,f Nuevo Energy Co. ................................ 1,075,500 15,258,656
a,f Pennaco Energy Inc. ............................. 1,400,000 15,487,500
Range Resources Corp. ........................... 1,990,000 7,462,500
a Santa Fe Snyder Corp. ........................... 1,000,400 8,628,450
</TABLE>
71
<PAGE>
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STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
ENERGY MINERALS (CONT.)
a Titan Exploration Inc. ....................... 1,553,700 $ 6,506,119
a,f Tom Brown Inc. ............................... 1,944,800 26,741,000
------------
227,536,188
------------
FINANCE 6.9%
a Affiliated Managers Group Inc. ............... 903,400 24,165,950
Allied Capital Corp. ......................... 1,497,200 30,037,575
a AmeriCredit Corp. ............................ 650,300 11,298,963
Bank United Corp., A ......................... 1,000,000 39,000,000
E.W. Blanch Holdings Inc. .................... 228,900 14,821,275
Federated Investors Inc., B .................. 2,255,600 38,909,100
Financial Security Assurance Holdings Ltd. ... 1,069,300 60,281,788
Freedom Securities Corp. ..................... 396,800 5,902,400
a Golden State Bancorp Inc. .................... 2,000,000 41,750,000
a Hambrecht & Quist Group ...................... 400,000 19,750,000
HCC Insurance Holdings Inc. .................. 746,000 8,392,500
a Knight/Trimark Group Inc., A ................. 415,900 10,839,394
a Labranche & Co. Inc. ......................... 1,347,600 18,024,150
Metris Cos. Inc. ............................. 199,100 6,856,506
a Mortgage.com Inc. ............................ 463,900 4,233,088
Mutual Risk Management Ltd. (Bermuda) ........ 769,200 11,634,150
a National Discount Brokers Group Inc. ......... 297,300 7,116,619
Radian Group Inc. ............................ 578,897 30,572,998
Reinsurance Group of America Inc. ............ 988,900 32,880,925
a Risk Capital Holdings Inc. ................... 574,500 7,504,406
a,f Silicon Valley Bancshares .................. 1,293,600 42,203,700
Westamerica Bancorp. ......................... 472,700 16,278,606
a WIT Capital Group Inc. ....................... 70,500 1,238,156
------------
483,692,249
------------
a HEALTH SERVICES .9%
American Dental Partners Inc. ................ 266,200 3,028,025
Beverly Enterprises Inc. ..................... 2,131,800 8,393,963
Integrated Health Services Inc. .............. 850,000 239,063
Novamed Eyecare Inc. ......................... 333,000 2,185,313
PAREXEL International Corp. .................. 1,000,000 9,562,500
f Pharmaceutical Product Development Inc. ...... 1,300,000 13,081,250
Renal Care Group Inc. ........................ 1,303,800 24,283,275
Total Renal Care Holdings Inc. ............... 44,500 325,406
------------
61,098,795
------------
a HEALTH TECHNOLOGY .7%
Collateral Therapeutics Inc. ................. 312,000 4,407,000
Heska Corp. .................................. 575,300 970,819
Inhale Therapeutic Systems Inc. .............. 811,000 22,353,188
f Serologicals Corp. ........................... 2,022,700 7,837,963
SkyePharma PLC, ADR (United Kingdom) ......... 219,189 1,698,715
SkyePharma PLC, rts., 3/31/00 (United Kingdom) 785,500 79
</TABLE>
72
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STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
a HEALTH TECHNOLOGY (CONT.)
Wesley Jessen Visioncare Inc. ............ 396,400 $ 10,653,250
Zonagen Inc. ............................. 429,800 1,316,263
------------
49,237,277
------------
a INDUSTRIAL SERVICES 3.2%
f Atwood Oceanics Inc. ..................... 1,216,600 35,357,438
Casella Waste Systems Inc., A ............ 639,200 8,589,250
f Catalytica Inc. .......................... 1,965,733 24,694,521
f Core Laboratories NV (Netherlands) ....... 1,632,400 29,995,350
Dycom Industries Inc. .................... 381,400 12,419,338
Grey Wolf Inc. ........................... 3,129,400 8,214,675
Marine Drilling Cos. Inc. ................ 1,096,200 17,744,738
Tuboscope Inc. ........................... 2,000,000 22,250,000
f US Liquids Inc. .......................... 1,003,400 6,710,238
f Varco International Inc. ................. 5,162,500 54,528,906
------------
220,504,454
------------
NON-ENERGY MINERALS .3%
Carpenter Technology Corp. ............... 736,000 17,940,000
------------
PROCESS INDUSTRIES 1.1%
Chemfirst Inc. ........................... 764,900 20,556,688
a CUNO Inc. ................................ 531,900 10,638,000
Optical Coating Laboratory Inc. .......... 413,800 44,224,875
------------
75,419,563
------------
PRODUCER MANUFACTURING 2.5%
a Cable Design Technologies Corp. .......... 300,000 5,812,500
a Gentex Corp. ............................. 1,986,100 34,136,094
f Gibraltar Steel Corp. .................... 1,012,800 24,750,300
JLG Industries Inc. ...................... 1,262,700 16,178,344
a Polycom Inc. ............................. 631,700 31,585,000
a Power-One Inc. ........................... 196,900 3,938,000
Reliance Steel & Aluminum Co. ............ 1,245,000 26,145,000
Roper Industries Inc. .................... 1,033,800 31,918,575
a Tower Automotive Inc. .................... 200,000 3,262,500
------------
177,726,313
------------
REAL ESTATE 2.5%
Arden Realty Inc. ........................ 1,330,400 26,774,300
Camden Property Trust .................... 1,200,000 32,475,000
Colonial Properties Trust ................ 273,400 6,971,700
FelCor Lodging Trust Inc. ................ 687,300 11,684,100
General Growth Properties ................ 398,500 11,531,594
Glenborough Realty Trust Inc. ............ 818,900 10,696,881
Health Care Property Investors Inc. ...... 543,500 14,266,875
f Innkeepers USA Trust ..................... 2,102,800 18,136,650
MeriStar Hospitality Corp. ............... 2,330,000 37,425,625
SL Green Realty Corp. .................... 394,100 7,167,694
------------
177,130,419
------------
</TABLE>
73
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
a RETAIL TRADE .2%
Beyond.com Corp. .............................. 1,001,500 $ 9,263,875
Drugstore.com Inc. ............................ 17,500 636,563
E4L Inc. ...................................... 792,800 2,081,100
PlanetRx.com Inc. ............................. 78,400 1,842,400
------------
13,823,938
------------
a TECHNOLOGY SERVICES 27.3%
Accrue Software Inc. .......................... 300,500 16,151,875
Active Software Inc. .......................... 33,800 1,223,138
Actuate Corp. ................................. 300,000 10,200,000
Affiliated Computer Services Inc., A .......... 1,862,300 70,767,400
Agile Software Corp. .......................... 19,100 1,871,800
Allaire Corp. ................................. 126,300 9,212,006
Appnet Inc. ................................... 501,000 21,824,813
Ardent Software Inc. .......................... 385,200 8,498,475
Art Technology Group Inc. ..................... 130,000 7,020,000
Aspect Telecommunications Corp. ............... 1,065,000 26,824,688
Backweb Technologies Ltd. ..................... 20,000 421,250
BEA Systems Inc. .............................. 1,823,200 83,183,500
Bindview Development Corp. .................... 815,000 24,450,000
Bluestone Software Inc. ....................... 107,700 3,971,438
Breakaway Solutions Inc. ...................... 23,400 1,244,588
Brightpoint Inc. .............................. 550,000 4,314,063
Brio Technology Inc. .......................... 393,600 9,544,800
BroadVision Inc. .............................. 1,602,000 117,947,250
Check Point Software Technologies Ltd. (Israel) 291,500 33,722,906
Citrix Systems Inc. ........................... 600,000 38,475,000
Commerce One Inc. ............................. 41,000 7,021,250
Complete Business Solutions Inc. .............. 1,490,900 21,618,050
Concord Communications Inc. ................... 450,000 23,371,875
Cybersource Corp. ............................. 241,200 15,316,200
Cysive Inc. ................................... 32,700 1,882,294
Data Return Corp. ............................. 44,800 674,800
Deltek Systems Inc. ........................... 188,900 2,195,963
Digex Inc. .................................... 91,900 2,630,638
Digital Insight Corp. ......................... 38,400 1,521,600
Digital Island Inc. ........................... 276,800 18,684,000
Documentum Inc. ............................... 500,000 14,187,500
E.piphany Inc. ................................ 38,100 3,276,600
Egain Communications Corp. .................... 74,800 2,178,550
Entrust Technologies Inc. ..................... 1,307,200 32,843,400
Exchange Applications Inc. .................... 231,700 6,313,825
Exodus Communications Inc. .................... 166,000 14,276,000
F5 Networks Inc. .............................. 139,600 19,369,500
H.T.E. Inc. ................................... 609,100 1,256,269
High Speed Access Corp. ....................... 175,600 4,620,475
f HNC Software Inc. ............................. 1,736,200 69,339,488
i2 Technologies Inc. .......................... 1,979,000 156,217,313
</TABLE>
74
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
a TECHNOLOGY SERVICES (CONT.)
Inet Technologies Inc. ....................... 271,700 $10,392,525
Informatica Corp. ............................ 22,000 1,589,500
Infospace.com Inc. ........................... 25,000 1,390,625
f Integrated Systems Inc. ...................... 1,702,200 28,618,238
Interactive Pictures Corp. ................... 137,000 3,228,063
Internap Network Services Corp. .............. 52,600 4,858,925
Intertrust Technologies Corp. ................ 36,500 1,989,250
InterVu Inc. ................................. 200,000 10,975,000
Interwoven Inc ............................... 31,800 2,492,325
Intuit Inc. .................................. 1,366,200 39,790,575
ISS Group Inc. ............................... 200,400 7,640,250
ITXC Corp. ................................... 172,900 7,823,725
Jacada Ltd. (Israel) ......................... 228,800 3,317,600
Keane Inc. ................................... 525,300 12,344,550
Keynote Systems Inc. ......................... 101,600 4,610,100
Legato Systems Inc. .......................... 1,227,000 65,951,250
Liberate Technologies Inc. ................... 356,000 24,252,500
Media Metrix Inc. ............................ 293,200 13,743,750
f Micromuse Inc. ............................... 820,200 87,658,875
MicroStrategy Inc. ........................... 221,000 21,354,125
Mission Critical Software Inc. ............... 223,600 13,164,450
N2H2 Inc. .................................... 478,000 4,242,250
National Information Consortium Inc. ......... 272,300 8,917,825
National Instruments Corp. ................... 1,200 36,075
Navidec Inc. ................................. 400,000 4,075,000
Navisite Inc. ................................ 89,800 4,220,600
Netiq Corp. .................................. 297,200 13,578,325
NetScout Systems Inc. ........................ 175,000 3,587,500
Predictive Systems Inc. ...................... 40,300 1,753,050
Proxicom Inc. ................................ 200,800 15,411,400
Quest Software Inc. .......................... 20,300 1,497,125
Quokka Sports Inc. ........................... 607,500 4,973,906
Radware Ltd. ................................. 68,800 3,538,900
Sapient Corp. ................................ 658,700 84,231,263
Serena Software Inc. ......................... 376,800 7,065,000
Software.com Inc. ............................ 167,100 11,247,919
SS&C Technologies Inc. ....................... 47,100 211,950
Starmedia Network Inc. ....................... 426,400 12,259,000
Sykes Enterprises Inc. ....................... 234,900 7,252,538
Tenfold Corp. ................................ 61,000 1,433,500
Transaction Systems Architects Inc., A ....... 308,900 9,498,675
Tumbleweed Communications Corp. .............. 454,700 11,367,500
U.S. Interactive Inc. ........................ 342,300 12,280,013
Vantive Corp. ................................ 699,900 8,136,338
Verio Inc. ................................... 1,873,200 69,893,775
</TABLE>
75
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STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
a TECHNOLOGY SERVICES (CONT.)
VERITAS Software Corp. .................................. 1,103,400 $ 119,029,275
f Verity Inc. ............................................. 786,100 54,142,638
Viador Inc. ............................................. 261,400 4,672,525
Vignette Corp. .......................................... 248,200 39,215,600
Vitria Technology Inc. .................................. 53,100 3,501,281
Whittman-Hart Inc. ...................................... 1,041,500 40,032,656
Wind River Systems Inc. ................................. 1,966,500 40,067,438
Women.com Networks Inc. ................................. 558,900 10,060,200
Xoom.com Inc. ........................................... 209,800 13,112,500
--------------
1,901,394,321
--------------
a TELECOMMUNICATIONS 4.0%
ICG Communications Inc. ................................. 1,599,100 26,185,263
Millicom International Cellular SA (Luxembourg) ......... 878,500 29,649,375
f Pacific Gateway Exchange Inc. ........................... 1,015,700 23,107,175
Pinnacle Holdings Inc. .................................. 1,547,400 37,137,600
f Primus Telecommunications Group Inc. .................... 1,813,100 40,114,838
Rhythms NetConnections Inc. ............................. 50,900 1,485,644
f Rural Cellular Corp., A ................................. 646,700 38,923,256
Western Wireless Corp., A ............................... 1,619,200 85,615,200
--------------
282,218,351
--------------
TRANSPORTATION 2.9%
Air Express International Corp. ......................... 911,000 24,255,375
a Alaska Air Group Inc. ................................... 175,000 6,956,250
a,f Atlantic Coast Airlines Holdings Inc. ................... 1,400,000 32,550,000
C.H. Robinson Worldwide Inc. ............................ 1,046,200 35,374,638
f Expeditors International of Washington Inc. ............. 2,562,200 95,762,225
a Mesa Air Group Inc. ..................................... 1,467,200 8,253,000
a Mesaba Holdings Inc. .................................... 140,000 1,610,000
--------------
204,761,488
--------------
a UTILITIES 3.5%
Airgate PCS Inc. ........................................ 45,500 2,275,000
AT&T Canada Inc., B (Canada) ............................ 227,600 7,340,100
Clearnet Communications Inc., A (Canada) ................ 521,500 11,473,000
DSL.net Inc. ............................................ 653,600 6,290,900
Illuminet Holdings Inc. ................................. 21,900 1,018,350
Intermedia Communications Inc. .......................... 680,000 17,680,000
ITC Deltacom Inc. ....................................... 328,700 7,888,800
Plug Power Inc. ......................................... 112,800 1,692,000
Time Warner Telecom Inc. ................................ 194,400 4,896,450
Triton PCS Holdings Inc., A ............................. 31,500 1,110,375
VoiceStream Wireless Corp. .............................. 1,869,200 184,583,472
--------------
246,248,447
--------------
TOTAL COMMON STOCKS AND RIGHTS (COST $4,380,899,181) .... 6,272,999,225
--------------
</TABLE>
76
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS .3%
FINANCE .2%
Bank United Corp., 8.00%, cvt. pfd ..................... 300,000 $15,225,000
-----------
HEALTH TECHNOLOGY .1%
Cephalon Inc., 7.25%, cvt. pfd., 144A .................. 200,000 10,200,000
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $25,000,000) .. 25,425,000
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
---------------
<S> <C> <C>
a CONVERTIBLE BONDS .7%
CONSUMER SERVICES
AMF Bowling Inc., cvt., zero cpn., A, 144A, 5/12/18 ................................ $ 6,190,000 627,666
-------------
ELECTRONIC TECHNOLOGY .1%
Western Digital Corp., cvt. sub. deb., zero cpn., 144A, 2/18/18 .................... 23,800,000 3,138,625
Western Digital Corp., cvt., zero cpn., 2/18/18 .................................... 6,500,000 857,188
-------------
3,995,813
-------------
HEALTH TECHNOLOGY .4%
Inhale Therapeutic Systems Inc., cvt., 144A, 6.75%, 10/13/06 ....................... 25,000,000 25,671,875
-------------
TECHNOLOGY SERVICES .2%
Citrix Systems Inc., cvt. sub. deb., 144A, zero cpn., 3/22/19 ...................... 30,000,000 15,643,200
-------------
TOTAL CONVERTIBLE BONDS (COST $48,122,525) ......................................... 45,938,554
-------------
SHORT TERM INVESTMENTS 4.2%
GOVERNMENT BONDS 4.2%
FHLB, 1/19/00 ...................................................................... 55,000,000 54,378,445
FHLB, 2/02/00 ...................................................................... 50,000,000 49,287,650
FHLMC, 1/27/00 ..................................................................... 60,000,000 59,253,240
FHLMC, 2/03/00 ..................................................................... 70,000,000 68,992,000
FNMA, 1/21/00 ...................................................................... 15,000,000 14,826,180
FNMA, 2/07/00 ...................................................................... 50,000,000 49,249,350
-------------
TOTAL SHORT TERM INVESTMENTS (COST $295,957,796) ................................... 295,986,865
-------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT (COST $4,749,979,502) ................ 6,640,349,644
-------------
</TABLE>
77
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN SMALL CAP GROWTH FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
c REPURCHASE AGREEMENT 9.9%
Joint Repurchase Agreement, 5.199%, 11/01/99,
(Maturity Value $688,773,422) (Cost $688,475,138) ................................... $ 688,475,138 $ 688,475,138
Banc of America Securities LLC (Maturity Value $59,838,047)
Barclays Capital Inc. (Maturity Value $59,838,047)
Bear Stearns & Co. Inc. (Maturity Value $59,838,047)
Chase Securities Inc. (Maturity Value $59,838,047)
CIBC World Markets Corp. (Maturity Value $59,838,047)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $90,392,952)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $59,838,047)
Goldman, Sachs & Co. (Maturity Value $59,838,047)
Paine Webber Inc. (Maturity Value $59,838,047)
Paribas Corp. (Maturity Value $59,838,047)
Warburg Dillon Read LLC (Maturity Value $59,838,047)
Collateralized by U.S. Treasury Bills and Notes
TOTAL INVESTMENTS (COST $5,438,454,640) 105.0% ...................................... 7,328,824,782
OTHER ASSETS, LESS LIABILITIES (5.0%) ............................................... (351,897,265)
---------------
NET ASSETS 100.0% ................................................................... $ 6,976,927,517
===============
</TABLE>
(a) Non-income producing
(c) Investment is through participation in a joint account with other funds
managed by the investment advisor. At October 31, 1999, all repurchase
agreements had been entered into on October 29, 1999.
(e) See Note 6 regarding restricted securities.
(f) See Note 7 regarding holding of 5% voting securities.
78 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE GROWTH BLUE CHIP CALIFORNIA GROWTH LARGE CAP GROWTH
FUND FUND FUND FUND
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost - Unaffiliated issuers ....................... $ 40,202,007 $ 66,967,767 $ 786,330,642 $ 22,549,311
Cost - Non-controlled affiliated issuers .......... -- -- 7,344,207 --
Value - Unaffiliated issuers ...................... 47,883,144 77,118,651 1,268,513,259 25,056,984
Value - Non-controlled affiliated issuers ......... -- -- 4,300,000 --
===========================================================================
Receivables:
Investment securities sold ........................ 328,114 1,283,676 22,085,632 259,671
Capital shares sold ............................... 801,135 476,827 5,977,340 185,307
Dividends and interest ............................ -- 41,834 549,576 7,230
Affiliates ........................................ 16,581 64,748 -- 4,129
Offering costs ..................................... 60,109 -- -- 65,016
---------------------------------------------------------------------------
Total assets ..................................... 49,089,083 78,985,736 1,301,425,807 25,578,337
---------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ................... 2,485,355 3,968,781 8,727,588 768,054
Capital shares redeemed ........................... 111,321 115,222 2,614,684 --
Affiliates ........................................ 13,766 77,236 1,143,388 11,162
Shareholders ...................................... 5,909 18,452 150,406 825
Offering costs .................................... 96,174 -- -- 104,026
Other liabilities .................................. 10,705 26,649 146,681 3,428
---------------------------------------------------------------------------
Total liabilities ................................ 2,723,230 4,206,340 12,782,747 887,495
---------------------------------------------------------------------------
Net assets, at value ........................... $ 46,365,853 $ 74,779,396 $ 1,288,643,060 $ 24,690,842
===========================================================================
Net assets consist of:
Undistributed net investment income (loss) ......... $ (22,228) $ 51,196 $ -- $ (11,511)
Accumulated distributions in excess of
net investment income .............................. -- -- (576,397) --
Net unrealized appreciation ........................ 7,681,137 10,150,918 479,138,410 2,507,673
Accumulated net realized gain (loss) ............... 2,235,952 2,180,218 (4,763,420) (254,327)
Capital shares ..................................... 36,470,992 62,397,064 814,844,467 22,449,007
---------------------------------------------------------------------------
Net assets, at value ........................... $ 46,365,853 $ 74,779,396 $ 1,288,643,060 $ 24,690,842
===========================================================================
</TABLE>
See notes to financial statements. 79
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE GROWTH BLUE CHIP CALIFORNIA GROWTH LARGE CAP GROWTH
FUND FUND FUND FUND
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A:
Net assets, at value ........................... $ 11,363,200 $ 74,779,396 $1,063,394,645 $ 6,039,932
==============================================================================
Shares outstanding ............................. 693,359 4,828,850 31,280,822 537,759
==============================================================================
Net asset value per share* ..................... $ 16.39 $ 15.49 $ 34.00 $ 11.23
==============================================================================
Maximum offering price per share
(net asset value per share divided by 94.25%) .. $ 17.39 $ 16.44 $ 36.07 $ 11.92
==============================================================================
CLASS B:
Net assets, at value ........................... $ 1,493,578 -- $ 10,468,797 $ 975,984
==============================================================================
Shares outstanding ............................. 91,153 -- 309,901 87,169
==============================================================================
Net asset value and maximum
offering price per share* ...................... $ 16.39 -- $ 33.78 $ 11.20
==============================================================================
CLASS C:
Net assets, at value ........................... $ 3,999,127 -- $ 214,779,618 $ 6,749,997
==============================================================================
Shares outstanding ............................. 244,141 -- 6,372,067 603,094
==============================================================================
Net asset value per share* ..................... $ 16.38 -- $ 33.71 $ 11.19
==============================================================================
Maximum offering price per share
(net asset value per share divided by 99.00%) .. $ 16.55 -- $ 34.05 $ 11.30
==============================================================================
ADVISOR CLASS:
Net assets, at value ........................... $ 29,509,948 -- -- $ 10,924,929
==============================================================================
Shares outstanding ............................. 1,797,836 -- -- 971,915
==============================================================================
Net asset value and maximum
offering price per share ....................... $ 16.41 -- -- $ 11.24
==============================================================================
</TABLE>
* Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements. 80
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
MIDCAP GROWTH SMALL CAP GROWTH
FUND FUND
----------------------------------------
<S> <C> <C>
Assets:
Investments in securities:
Cost - Unaffiliated issuers ................................................... $ 29,632,120 $3,497,708,119
Cost - Non-controlled affiliated issuers ...................................... -- 1,252,271,383
========================================
Value - Unaffiliated issuers .................................................. 40,431,305 5,357,621,756
Value - Non-controlled affiliated issuers ..................................... -- 1,282,727,888
Repurchase agreement, at value and cost ........................................ -- 688,475,138
Receivables:
Investment securities sold .................................................... 127,396 2,740,695
Capital shares sold ........................................................... 238,228 29,107,481
Dividends and interest ........................................................ 6,483 541,057
----------------------------------------
Total assets ................................................................. 40,803,412 7,361,214,015
----------------------------------------
Liabilities:
Payables:
Investment securities purchased ............................................... 169,025 32,714,664
Capital shares redeemed ....................................................... 40,805 24,206,146
Affiliates .................................................................... 39,763 5,807,188
Shareholders .................................................................. 3,361 282,410
Funds advanced by custodian .................................................... -- 276,000
Payable upon return of securities loaned (Note 8) .............................. -- 320,296,429
Other liabilities .............................................................. 15,814 703,661
----------------------------------------
Total liabilities ............................................................ 268,768 384,286,498
----------------------------------------
Net assets, at value ........................................................ $ 40,534,644 $6,976,927,517
========================================
Net assets consist of:
Undistributed net investment income ............................................ $ -- $ 7,685,728
Accumulated distributions in excess of net investment income ................... (35,359) --
Net unrealized appreciation .................................................... 10,799,185 1,890,370,142
Accumulated net realized gain (loss) ........................................... (1,449,128) 60,864,770
Capital shares ................................................................. 31,219,946 5,018,006,877
----------------------------------------
Net assets, at value ........................................................ $ 40,534,644 $6,976,927,517
========================================
</TABLE>
See notes to financial statements. 81
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
MIDCAP GROWTH SMALL CAP GROWTH
FUND FUND
------------------------------------
<S> <C> <C>
CLASS A:
Net assets, at value ................................................................ $40,534,644 $5,754,812,581
====================================
Shares outstanding .................................................................. 2,218,348 185,024,287
====================================
Net asset value per share* .......................................................... $18.27 $31.10
====================================
Maximum offering price per share (net asset value per share divided by 94.25%) ...... $19.38 $33.00
====================================
CLASS C:
Net assets, at value ................................................................ -- $993,786,320
====================================
Shares outstanding .................................................................. -- 32,509,593
====================================
Net asset value per share* .......................................................... -- $30.57
====================================
Maximum offering price per share (net asset value per share divided by 99.00%) ...... -- $30.88
====================================
ADVISOR CLASS:
Net assets, at value ................................................................ -- $228,328,616
====================================
Shares outstanding .................................................................. -- 7,306,822
====================================
Net asset value and maximum offering price per share ................................ -- $31.25
====================================
</TABLE>
* Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
82 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE BLUE CHIP CALIFORNIA LARGE CAP
GROWTH FUND FUND GROWTH FUND GROWTH FUND
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:
Dividends* ................................................ $ 51,916 $ 360,327 $ 4,735,536 $ 54,779
Interest .................................................. 6,120 23,531 604,606 5,811
--------------------------------------------------------------------
Total investment income ................................. 58,036 383,858 5,340,142 60,590
--------------------------------------------------------------------
Expenses:
Management fees (Note 3) .................................. 35,234 237,660 2,418,205 30,308
Administrative fees (Note 3) .............................. 15,330 -- -- 12,778
Distribution fees (Note 3)
Class A .................................................. 5,667 100,880 1,105,318 3,495
Class B .................................................. 1,893 -- 27,996 2,444
Class C .................................................. 4,211 -- 895,640 8,843
Transfer agent fees (Note 3) .............................. 6,391 72,254 1,041,213 2,800
Custodian fees ............................................ 131 1,978 4,486 49
Reports to shareholders ................................... 764 7,435 190,398 714
Registration and filing fees .............................. 3,131 17,315 67,991 3,451
Professional fees ......................................... 426 1,010 15,052 367
Trustees' fees and expenses ............................... 218 472 10,501 143
Amortization of offering costs (Note 1) ................... 36,065 -- -- 39,010
Other ..................................................... 71 3,899 14,176 53
--------------------------------------------------------------------
Total expenses .......................................... 109,532 442,903 5,790,976 104,455
Expenses waived/paid by affiliate (Note 3) .............. (29,268) (39,451) -- (32,354)
--------------------------------------------------------------------
Net expenses ........................................... 80,264 403,452 5,790,976 72,101
--------------------------------------------------------------------
Net investment loss ..................................... (22,228) (19,594) (450,834) (11,511)
--------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments in unaffiliated issuers ...................... 2,235,952 1,099,576 56,141,199 (254,327)
Foreign currency transactions ............................ -- 5,246 -- --
--------------------------------------------------------------------
Net realized gain (loss) ............................... 2,235,952 1,104,822 56,141,199 (254,327)
Net unrealized appreciation (depreciation) on:
Investments .............................................. 7,681,137 3,871,861 249,865,743 2,507,673
Translation of assets and liabilities denominated in
foreign currencies ...................................... -- (3,914) -- --
--------------------------------------------------------------------
Net unrealized appreciation ............................ 7,681,137 3,867,947 249,865,743 2,507,673
--------------------------------------------------------------------
Net realized and unrealized gain ........................... 9,917,089 4,972,769 306,006,942 2,253,346
--------------------------------------------------------------------
Net increase in net assets resulting from operations ....... $ 9,894,861 $ 4,953,175 $ 305,556,108 $ 2,241,835
====================================================================
</TABLE>
* Net of foreign taxes and fees of $8,578 and $115 for the Franklin Blue Chip
Fund and the Franklin Large Cap Growth Fund, respectively.
See notes to financial statements. 83
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF OPERATIONS (CONT.)
FOR THE SIX MONTHS ENDED OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
MIDCAP SMALL CAP
GROWTH FUND GROWTH FUND
----------------------------------------
<S> <C> <C>
Investment income:
Dividends:
Unaffiliated issuers* ............................................................ $ 160,881 $ 12,232,337
Non-controlled affiliated issuers ................................................ -- 1,063,462
Interest .......................................................................... 19,971 14,669,033
----------------------------------------
Total investment income ......................................................... 180,852 27,964,832
----------------------------------------
Expenses:
Management fees (Note 3) .......................................................... 111,942 12,865,714
Distribution fees (Note 3)
Class A .......................................................................... 43,454 5,901,602
Class C .......................................................................... -- 4,208,818
Transfer agent fees (Note 3) ...................................................... 43,195 4,822,490
Custodian fees .................................................................... 162 34,690
Reports to shareholders ........................................................... 10,184 696,046
Registration and filing fees ...................................................... 11,474 361,457
Professional fees ................................................................. 974 106,814
Trustees' fees and expenses ....................................................... 414 57,743
Other ............................................................................. 463 51,998
----------------------------------------
Total expenses .................................................................. 222,262 29,107,372
----------------------------------------
Net investment loss ............................................................ (41,410) (1,142,540)
----------------------------------------
Realized and unrealized gains (losses): Net realized gain (loss) from:
Investments in unaffiliated issuers .............................................. 128,277 180,975,454
Investments in non-controlled affiliated issuers (Note 7) ........................ -- (7,501,369)
Foreign currency transactions .................................................... -- (224,199)
----------------------------------------
Net realized gain ................................................................. 128,277 173,249,886
Net unrealized appreciation on investments .................................... 4,737,333 1,236,479,949
----------------------------------------
Net realized and unrealized gain ................................................... 4,865,610 1,409,729,835
----------------------------------------
Net increase in net assets resulting from operations ............................... $ 4,824,200 $ 1,408,587,295
========================================
</TABLE>
* Net of foreign taxes and fees of $49,308 for the Franklin Small Cap Growth
Fund.
84 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS FOR THE SIX MONTHS ENDED OCTOBER 31, 1999
(UNAUDITED) AND THE YEAR ENDED APRIL 30, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
AGGRESSIVE GROWTH FUND* BLUE CHIP FUND
----------------------------------------------------------
PERIOD SIX MONTHS YEAR
ENDED ENDED ENDED
OCTOBER 31, 1999 OCTOBER 31, 1999 APRIL 30, 1999
----------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) .......................................... $ (22,228) $ (19,594) $ 150,036
Net realized gain from investments and foreign
currency transactions .................................................. 2,235,952 1,104,822 1,499,458
Net unrealized appreciation on investments and
translation of assets and liabilities denominated
in foreign currencies ................................................... 7,681,137 3,867,947 3,974,888
----------------------------------------------------------
Net increase in net assets resulting
from operations ..................................................... 9,894,861 4,953,175 5,624,382
Distributions to shareholders from net investment income ............... -- -- (126,476)
Capital share transactions: (Note 2)
Class A ............................................................. 9,068,900 14,945,756 32,546,439
Class B ............................................................. 1,177,037 -- --
Class C ............................................................. 3,325,976 -- --
Advisor Class ....................................................... 22,899,079 -- --
----------------------------------------------------------
Total capital share transactions ....................................... 36,470,992 14,945,756 32,546,439
Net increase in net assets ........................................... 46,365,853 19,898,931 38,044,345
Net assets:
Beginning of period .................................................... -- 54,880,465 16,836,120
----------------------------------------------------------
End of period .......................................................... $ 46,365,853 $ 74,779,396 $ 54,880,465
==========================================================
Undistributed net investment income (loss) included in net assets:
End of period ......................................................... $ (22,228) $ 51,196 $ 70,790
==========================================================
</TABLE>
* For the period June 23, 1999 (effective date) to October 31, 1999.
See notes to financial statements. 85
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE SIX MONTHS ENDED OCTOBER 31, 1999 (UNAUDITED)
AND THE YEAR ENDED APRIL 30, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
CALIFORNIA GROWTH FUND LARGE CAP GROWTH FUND
----------------------------------------------------------
SIX MONTHS YEAR PERIOD
ENDED ENDED ENDED
OCTOBER 31, 1999 APRIL 30, 1999 OCTOBER 31, 1999*
----------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ...................................... $ (450,834) $ 2,495,653 $ (11,511)
Net realized gain (loss) from investments and
foreign currency transactions ...................................... 56,141,199 (60,726,763) (254,327)
Net unrealized appreciation on investments and translation of
assets and liabilities denominated in foreign currencies ........... 249,865,743 115,471,275 2,507,673
----------------------------------------------------------
Net increase in net assets resulting from operations ........... 305,556,108 57,240,165 2,241,835
Distributions to shareholders from:
Net investment income:
Class A ......................................................... (1,829,561) (4,374,577) --
Class B ......................................................... (7,547) -- --
Class C ......................................................... (82,969) (606) --
In excess of net investment income:
Class A ......................................................... (549,224) -- --
Class B ......................................................... (2,265) -- --
Class C ......................................................... (24,907) -- --
Net realized gains:
Class A ......................................................... -- (15,717,424) --
Class C ......................................................... -- (3,127,611) --
----------------------------------------------------------
Total distributions to shareholders ................................ (2,496,473) (23,220,218) --
Capital share transactions: (Note 2)
Class A ......................................................... 31,987,797 32,435,619 5,556,150
Class B ......................................................... 5,984,785 2,564,716 889,660
Class C ......................................................... 5,046,199 29,589,278 6,292,341
Advisor Class ................................................... -- -- 9,710,856
----------------------------------------------------------
Total capital share transactions ................................... 43,018,781 64,589,613 22,449,007
Net increase in net assets ..................................... 346,078,416 98,609,560 24,690,842
Net assets:
Beginning of period ................................................ 942,564,644 843,955,084 --
----------------------------------------------------------
End of period ...................................................... $ 1,288,643,060 $ 942,564,644 $ 24,690,842
==========================================================
Undistributed net investment income (loss or accumulated
distributions in excess of net investment income)
included in net assets:
End of period ..................................................... $ (576,397) $ 2,370,910 $ (11,511)
==========================================================
</TABLE>
* For the period June 7, 1999 (effective date) to October 31, 1999.
86 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE SIX MONTHS ENDED OCTOBER 31, 1999 (UNAUDITED)
AND THE YEAR ENDED APRIL 30, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
MIDCAP GROWTH FUND SMALL CAP GROWTH FUND
-------------------------------------------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
OCTOBER 31, 1999 APRIL 30, 1999 OCTOBER 31, 1999 APRIL 30, 1999
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ......................... $ (41,410) $ 92,018 $ (1,142,540) $ 8,864,522
Net realized gain (loss) from investments and
foreign currency transactions ......................... 128,277 (1,550,328) 173,249,886 (109,863,505)
Net unrealized appreciation on investments and
translation of assets and liabilities denominated
in foreign currencies .................................. 4,737,333 72,048 1,236,479,949 7,888,123
-------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ....................................... 4,824,200 (1,386,262) 1,408,587,295 (93,110,860)
Distributions to shareholders from:
Net investment income:
Class A ............................................... (49,650) -- -- (24,920,845)
Advisor Class ......................................... -- -- -- (1,373,343)
In excess of net investment income ................... (35,359) -- -- --
Net realized gains:
Class A ............................................... -- (347,614) -- (31,374,289)
Class C ............................................... -- -- -- (6,067,928)
Advisor Class ......................................... -- -- -- (1,280,976)
-------------------------------------------------------------------------
Total distributions to shareholders ................... (85,009) (347,614) -- (65,017,381)
Capital share transactions: (Note 2)
Class A ............................................... 1,894,520 5,771,147 342,578,944 418,158,255
Class C ............................................... -- -- 28,539,833 64,646,406
Advisor Class ......................................... -- -- 13,166,953 51,015,284
-------------------------------------------------------------------------
Total capital share transactions ...................... 1,894,520 5,771,147 384,285,730 533,819,945
Net increase in net assets ............................. 6,633,711 4,037,271 1,792,873,025 375,691,704
Net assets:
Beginning of period ................................... 33,900,933 29,863,662 5,184,054,492 4,808,362,788
-------------------------------------------------------------------------
End of period ......................................... $ 40,534,644 $ 33,900,933 $ 6,976,927,517 $ 5,184,054,492
=========================================================================
Undistributed net investment income (accumulated
distributions in excess of net investment income)
included in net assets:
End of period ........................................ $ (35,359) $ 91,060 $ 7,685,728 $ 8,828,268
=========================================================================
</TABLE>
See notes to financial statements. 87
<PAGE>
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 twelve separate
series. All funds included in this report (the Funds) are diversified except the
Franklin California Growth Fund. The Funds' investment objective is capital
growth.
The following summarizes the Funds' significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Trustees.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. 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 substantially all of its taxable income.
d. 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 (loss), other
than class specific expenses, are allocated daily to each class of shares based
upon the relative proportion of net assets of each class.
88
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
e. OFFERING COSTS:
Offering costs are amortized on a straight-line basis over twelve months.
f. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the Funds are indicated below.
Effective January 1, 1999, Class I and Class II were renamed Class A and Class
C, respectively, and the Franklin California Growth Fund began offering a new
class of shares, Class B. Each class of shares differs by its initial sales
load, distribution fees, voting rights on matters affecting a single class and
its exchange privilege.
<TABLE>
<CAPTION>
CLASS A, CLASS B, CLASS C,
CLASS A CLASS A, CLASS C, & ADVISOR CLASS CLASS A, CLASS B, & CLASS C & ADVISOR CLASS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Franklin Blue Chip Fund Franklin Small Cap Growth Fund Franklin California Growth Fund Franklin Aggressive Growth Fund
Franklin MidCap Growth Fund Franklin Large Cap Growth Fund
</TABLE>
At October 31, 1999, there were an unlimited number of shares authorized ($.01
par value). Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
AGGRESSIVE GROWTH FUND(1) BLUE CHIP FUND
---------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Six months ended October 31, 1999
Shares sold 1,091,554 $14,373,895 2,226,362 $ 32,764,731
Shares redeemed (398,195) (5,304,995) (1,206,623) (17,818,975)
---------------------------------------------------------------
Net increase 693,359 $ 9,068,900 1,019,739 $ 14,945,756
===============================================================
Year ended April 30, 1999
Shares sold 3,618,266 $ 47,414,962
Shares issued in reinvestment of distributions 8,472 105,717
Shares redeemed (1,168,867) (14,974,240)
----------------------------
Net increase 2,457,871 $ 32,546,439
============================
</TABLE>
89
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
FRANKLIN
AGGRESSIVE GROWTH FUND(1)
----------------------------
SHARES AMOUNT
----------------------------
<S> <C> <C>
CLASS B SHARES:
Six months ended October 31, 1999
Shares sold ............................. 91,933 $ 1,187,909
Shares redeemed ......................... (780) (10,872)
----------------------------
Net increase ............................ 91,153 $ 1,177,037
============================
CLASS C SHARES:
Six months ended October 31, 1999
Shares sold ............................. 256,136 $ 3,500,171
Shares redeemed ......................... (11,995) (174,195)
----------------------------
Net increase ............................ 244,141 $ 3,325,976
============================
ADVISOR CLASS SHARES:
Six months ended October 31, 1999
Shares sold ............................. 1,842,176 $ 23,495,048
Shares redeemed ......................... (44,340) (595,969)
----------------------------
Net increase ............................ 1,797,836 $ 22,899,079
============================
</TABLE>
(1) For the period June 23, 1999 (effective date) to October 31, 1999.
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
CALIFORNIA GROWTH FUND LARGE CAP GROWTH FUND(3)
---------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Six months ended October 31, 1999
Shares sold ........................................... 13,482,603 $ 391,298,280 578,286 $ 5,982,734
Shares issued in reinvestment of distributions ........ 87,475 2,237,912 -- --
Shares redeemed ....................................... (12,525,101) (361,548,395) (40,527) (426,584)
---------------------------------------------------------------------
Net increase .......................................... 1,044,977 $ 31,987,797 537,759 $ 5,556,150
=====================================================================
Year ended April 30, 1999
Shares sold ........................................... 16,494,382 $ 386,947,861
Shares issued in reinvestment of distributions ........ 825,009 18,676,674
Shares redeemed ....................................... (15,966,155) (373,188,916)
------------------------------
Net increase .......................................... 1,353,236 $ 32,435,619
==============================
</TABLE>
90
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
CALIFORNIA GROWTH FUND LARGE CAP GROWTH FUND(3)
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS B SHARES:
Six months ended October 31, 1999
Shares sold ........................................... 213,786 6,192,530 96,129 $ 982,307
Shares issued in reinvestment of distributions ........ 366 9,348 -- --
Shares redeemed ....................................... (7,430) (217,093) (8,960) (92,647)
-------------------------------------------------------------------
Net increase .......................................... 206,722 5,984,785 87,169 $ 889,660
===================================================================
Year ended April 30, 1999(2)
Shares sold ........................................... 103,431 $ 2,570,873
Shares redeemed ....................................... (252) (6,157)
----------------------------
Net increase .......................................... 103,179 $ 2,564,716
============================
CLASS C SHARES:
Six months ended October 31, 1999
Shares sold ........................................... 851,443 24,743,368 626,980 $ 6,549,554
Shares issued in reinvestment of distributions ........ 3,833 97,634 -- --
Shares redeemed ....................................... (698,569) (19,794,803) (23,886) (257,213)
-------------------------------------------------------------------
Net increase .......................................... 156,707 5,046,199 603,094 $ 6,292,341
===================================================================
Year ended April 30, 1999
Shares sold ........................................... 3,010,549 $ 70,453,473
Shares issued in reinvestment of distributions ........ 128,580 2,895,577
Shares redeemed ....................................... (1,868,591) (43,759,772)
----------------------------
Net increase .......................................... 1,270,538 $ 29,589,278
============================
ADVISOR CLASS SHARES:
Six months ended October 31, 1999
Shares sold .................................................................................... 1,156,947 $ 11,708,712
Shares redeemed ................................................................................ (185,032) (1,997,856)
----------------------------
Net increase ................................................................................... 971,915 $ 9,710,856
============================
</TABLE>
(2) For the Franklin California Growth Fund, for the period January 1, 1999
(effective date) to April 30, 1999.
(3) For the period June 7, 1999 (effective date) to October 31, 1999.
91
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
Franklin Franklin
MidCap Growth Fund Small Cap Growth Fund
------------------------------------------------------------------------
Shares Amount Shares Amount
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Six months ended October 31, 1999
Shares sold ................................... 1,074,320 $ 17,628,424 117,500,149 $ 3,124,284,322
Shares issued in reinvestment of distributions 3,549 57,049 -- --
Shares redeemed ............................... (958,395) (15,790,953) (104,947,661) (2,781,705,378)
------------------------------------------------------------------------
Net increase .................................. 119,474 $ 1,894,520 12,552,488 $ 342,578,944
========================================================================
Year ended April 30, 1999
Shares sold ................................... 1,510,866 $ 22,694,848 161,810,259 $ 3,545,958,486
Shares issued in reinvestment of distributions 16,973 236,773 2,486,084 51,561,607
Shares redeemed ............................... (1,140,923) (17,160,474) (144,463,351) (3,179,361,838)
------------------------------------------------------------------------
Net increase .................................. 386,916 $ 5,771,147 19,832,992 $ 418,158,255
========================================================================
CLASS C SHARES:
Six months ended October 31, 1999
Shares sold ............................................................. 3,910,340 $ 102,422,809
Shares redeemed ......................................................... (2,846,395) (73,882,976)
--------------------------------
Net increase ............................................................ 1,063,945 $ 28,539,833
================================
Year ended April 30, 1999
Shares sold ............................................................. 13,842,560 $ 300,359,397
Shares issued in reinvestment of distributions .......................... 260,342 5,339,598
Shares redeemed ......................................................... (11,256,132) (241,052,589)
--------------------------------
Net increase ............................................................ 2,846,770 $ 64,646,406
================================
ADVISOR CLASS SHARES:
Six months ended October 31, 1999
Shares sold ............................................................. 2,399,428 $ 63,201,685
Shares redeemed ......................................................... (1,886,896) (50,034,732)
--------------------------------
Net increase ............................................................ 512,532 $ 13,166,953
================================
Year ended April 30, 1999
Shares sold ............................................................. 6,726,880 $ 148,222,012
Shares issued in reinvestment of distributions .......................... 95,743 1,989,524
Shares redeemed ......................................................... (4,591,816) (99,196,252)
--------------------------------
Net increase ............................................................ 2,230,807 $ 51,015,284
================================
</TABLE>
92
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), Franklin/ Templeton Distributors, Inc.
(Distributors), Franklin Templeton Services, Inc. (FT Services), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Funds'
investment manager, principal underwriter, administrative manager and transfer
agent, respectively.
Certain funds in the Trust may invest in the Franklin Institutional Fiduciary
Trust Money Market Portfolio (the Sweep Money Fund) which is managed by
Advisers.
The Funds earned dividend income from the investment in the Sweep Money Fund as
follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE BLUE CALIFORNIA LARGE CAP MIDCAP SMALL CAP
GROWTH FUND CHIP FUND GROWTH FUND GROWTH FUND GROWTH FUND GROWTH FUND
<S> <C> <C> <C> <C> <C> <C>
Dividend income $51,184 $71,616 $1,375,631 $27,760 $67,381 $1,822,138
</TABLE>
The Franklin California Growth Fund and the Franklin Small Cap Growth Fund pay
an investment management fee to Advisers based on the average net assets of the
funds as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
-------------------------------------
<S> <C>
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million, up to and including $10 billion
</TABLE>
Fees are further reduced on net assets over $10 billion.
The Franklin Aggressive Growth Fund and the Franklin Large Cap Growth Fund pay
an investment management fee to Advisers based on the average net assets of the
funds as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
----------------------------------------
<S> <C>
.500% First $500 million
.400% Over $500 million, up to and including $1 billion
.350% Over $1 billion, up to and including $1.5 billion
</TABLE>
Fees are further reduced on net assets over $1.5 billion.
The Franklin Blue Chip Fund pays an investment management fee to Advisers based
on the average net assets of the fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
------------------------------------------------------------------
<S> <C>
.750% First $500 million
.625% Over $500 million, up to and including $1 billion
.500% Over $1 billion
</TABLE>
93
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES (cont.)
The Franklin MidCap Growth Fund pays an investment management fee to Advisers of
.65% per year of the average daily net assets of the fund.
Management fees were reduced on assets invested in the Sweep Money Fund.
The Franklin Aggressive Growth Fund and the Franklin Large Cap Growth Fund pay
an administrative fee to FT Services of .20% per year of the average daily net
assets of the funds.
Under an agreement with Advisers, FT Services provides administrative services
to the funds, except the Franklin Aggressive Growth Fund and the Franklin Large
Cap Growth 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 administrative and management fees for the
Franklin Aggressive Growth Fund, Franklin Blue Chip Fund and the Franklin Large
Cap Growth Fund, as noted in the Statements of Operations.
The Funds reimburse Distributors for costs incurred in marketing the Funds'
shares as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE BLUE CALIFORNIA LARGE CAP MIDCAP SMALL CAP
GROWTH FUND CHIP FUND GROWTH FUND GROWTH FUND GROWTH FUND GROWTH FUND
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A .................. .35% .35% .25% .35% .35% .25%
Class B .................. 1.00% -- 1.00% 1.00% -- --
Class C .................. 1.00% -- 1.00% 1.00% -- 1.00%
</TABLE>
Distributors received (paid) net commissions on sales of the Funds' shares, and
received contingent deferred sales charges for the period as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE BLUE CALIFORNIA LARGE CAP MIDCAP SMALL CAP
GROWTH FUND CHIP FUND GROWTH FUND GROWTH FUND GROWTH FUND GROWTH FUND
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net commissions
received (paid)........ $(36,234) $18,165 $(397,512) $(47,526) $13,766 $(1,668,742)
Contingent deferred
sales charges.......... $ 369 $ 68 $ 40,205 $ 349 $ -- $ 164,816
</TABLE>
The Funds paid transfer agent fees of $5,988,343, of which $3,867,005 was paid
to Investor Services.
At October 31, 1999, Advisers and/or investment companies managed by Advisers
owned 62.87%, 49.08%, and 28.20% of the net assets of the Franklin Aggressive
Growth Fund, the Franklin Large Cap Growth Fund, and the Franklin MidCap Growth
Fund, respectively.
4. INCOME TAXES
At April 30, 1999, the Franklin California Growth Fund, the Franklin MidCap
Growth Fund and the Franklin Small Cap Growth Fund had tax basis capital losses
of $55,141,885, $1,535,255, and $111,986,137, respectively, which may be carried
over to offset future capital gains. Such losses expire in 2007.
94
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
4. INCOME TAXES (cont.)
At April 30, 1999, the Franklin California Growth Fund had deferred capital
losses occurring subsequent to October 31, 1998 of $5,826,227. For tax purposes,
such losses will be reflected in the year ending April 30, 2000.
At April 30, 1999, the Franklin Blue Chip Fund and Franklin Small Cap Fund had
deferred currency losses occurring subsequent to October 31, 1998 of $1,663 and
$13,830, respectively. For tax purposes, such losses will be reflected in the
year ending April 30, 2000.
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions and offering costs.
Net realized capital gains differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.
At October 31, 1999, the net unrealized appreciation based on the cost of
investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE BLUE CALIFORNIA LARGE CAP MIDCAP SMALL CAP
GROWTH FUND CHIP FUND GROWTH FUND GROWTH FUND GROWTH FUND GROWTH FUND
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investments at cost ....... $ 40,202,007 $ 67,227,720 $ 794,081,941 $ 22,640,197 $ 29,706,641 $ 5,438,815,978
=====================================================================================================
Unrealized appreciation ... $ 8,498,530 $ 12,450,043 $ 519,493,412 $ 2,842,901 $ 11,867,786 $ 2,607,310,817
Unrealized depreciation ... (817,393) (2,559,112) (40,762,094) (426,114) (1,143,122) (717,302,013)
-----------------------------------------------------------------------------------------------------
Net unrealized appreciation $ 7,681,137 $ 9,890,931 $ 478,731,318 $ 2,416,787 $ 10,724,664 $ 1,890,008,804
=====================================================================================================
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended October 31, 1999 were as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE BLUE CALIFORNIA LARGE CAP MIDCAP SMALL CAP
GROWTH FUND CHIP FUND GROWTH FUND GROWTH FUND GROWTH FUND GROWTH FUND
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Purchases ........ $ 47,375,345 $ 31,858,639 $ 423,676,625 $ 27,454,810 $ 11,724,852 $1,148,372,667
Sales ............ $ 16,295,621 $ 17,882,845 $ 382,440,949 $ 7,346,676 $ 10,920,251 $ 903,489,312
</TABLE>
6. 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, 1999 were as follows:
<TABLE>
<CAPTION>
ACQUISITION
SHARES ISSUER DATE COST VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FRANKLIN AGGRESSIVE GROWTH FUND
31,328 eMachines Inc. (.4% of net assets) .................... 8/16/99 $ 199,998 $ 199,998
FRANKLIN CALIFORNIA GROWTH FUND
783,208 eMachines Inc. (.4% of net assets) .................... 8/16/99 $5,000,000 $5,000,000
FRANKLIN SMALL CAP GROWTH FUND
1,378,446 eMachines Inc. (.1% of net assets) .................... 8/16/99 $8,799,999 $8,799,999
</TABLE>
95
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
7. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" as investments
in portfolio companies in which the funds own 5% or more of the outstanding
voting securities. Investments in "affiliated companies" including dividends,
interest income, and net realized capital gains (losses), at October 31, 1999
were as shown below.
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES
HELD AT GROSS GROSS HELD AT
NAME OF ISSUER BEGINNING OF PERIOD ADDITIONS REDUCTIONS END OF PERIOD
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FRANKLIN CALIFORNIA GROWTH FUND:
Remedy Temp Inc., A ............. 400,000 -- -- 400,000
TOTAL NON-CONTROLLED
AFFILIATED ISSUERS ...........
FRANKLIN SMALL CAP GROWTH FUND:
Activison Inc. .................. 1,294,400 -- -- 1,294,400
Applied Graphics
Technologies Inc. .............. 1,319,000 -- 119,000 1,200,000
Atlantic Coast Airlines
Holdings Inc. .................. 1,400,000 -- -- 1,400,000
Atwood Oceanics Inc. ............ 1,216,600 -- -- 1,216,600
AVT Corp. ....................... 837,400 -- -- 837,400
Barrett Resources Corp. ......... 1,790,900 -- 130,000 1,660,900
Catalytica Inc. ................. 1,965,733 -- -- 1,965,733
Catapult Communications Corp. ... 627,000 53,900 24,100 656,800
Coherent Inc. ................... 1,763,400 -- -- 1,763,400
Com21 Inc. ...................... 1,294,000 -- 736,400 557,600
Core Laboratories
NV (Netherlands) ............... 1,632,400 -- -- 1,632,400
Cumulus Media Inc., A ........... 785,000 396,700 181,700 1,000,000
Expeditors International of
Washington Inc.** .............. 2,562,200 -- -- 2,562,200
FLIR Systems Inc. ............... 1,028,600 -- -- 1,028,600
Gibraltar Steel Corp. ........... 1,012,800 -- -- 1,012,800
HNC Software Inc. ............... 1,348,200 388,000 -- 1,736,200
H.T.E. Inc. ..................... 1,227,100 -- 618,000 609,100
Innkeepers USA Trust ............ 2,102,800 -- -- 2,102,800
Integrated Systems Inc. ......... 1,857,200 -- 155,000 1,702,200
Itron Inc. ...................... 1,159,800 -- -- 1,159,800
Javelin Systems Inc. ............ 499,100 94,000 -- 593,100
Komag Inc. ...................... 4,207,100 -- -- 4,207,100
Ladish Co. Inc. ................. 971,600 -- 154,900 816,700
MeriStar Hotels & Resorts Inc. .. 1,330,000 -- -- 1,330,000
Mesa Air Group Inc. ............. 1,467,200 -- -- 1,467,200
Mettler-Toledo International Inc. 1,886,600 591,300 -- 2,477,900
Micromuse Inc. .................. 960,000 -- 139,800 820,200
MicroStrategy Inc., A ........... 426,100 -- 205,100 221,000
Natural MicroSystems Corp. ...... 646,600 -- 282,400 364,200
Newfield Exploration Co. ........ 2,338,600 -- 200,000 2,138,600
</TABLE>
<TABLE>
<CAPTION>
VALUE AT DIVIDEND NET REALIZED
NAME OF ISSUER END OF PERIOD INCOME GAIN/LOSS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FRANKLIN CALIFORNIA GROWTH FUND:
Remedy Temp Inc., A ............. 4,300,000 -- --
-----------------------------------------------------
TOTAL NON-CONTROLLED
AFFILIATED ISSUERS ........... $ 4,300,000 $ -- $ --
=====================================================
FRANKLIN SMALL CAP GROWTH FUND:
Activison Inc. .................. 18,283,400 -- --
Applied Graphics
Technologies Inc. .............. 8,550,000 -- (6,089,524)
Atlantic Coast Airlines
Holdings Inc. .................. 32,550,000 -- --
Atwood Oceanics Inc. ............ 35,357,438 -- --
AVT Corp. ....................... 28,052,900 -- --
Barrett Resources Corp. ......... 55,743,956 -- 1,777,418
Catalytica Inc. ................. 24,694,521 -- --
Catapult Communications Corp. ... 10,426,700 -- 388,049
Coherent Inc. ................... 36,259,913 -- --
Com21 Inc. ...................... * -- (2,729,399)
Core Laboratories
NV (Netherlands) ............... 29,995,350 -- --
Cumulus Media Inc., A ........... 35,875,000 -- 1,174,510
Expeditors International of
Washington Inc.** .............. 95,762,225 128,110 --
FLIR Systems Inc. ............... 14,593,263 -- --
Gibraltar Steel Corp. ........... 24,750,300 50,640 --
HNC Software Inc. ............... 69,339,488 -- --
H.T.E. Inc. ..................... * -- (3,175,484)
Innkeepers USA Trust ............ 18,136,650 874,462 --
Integrated Systems Inc. ......... 28,618,238 -- (1,056,045)
Itron Inc. ...................... 5,436,563 -- --
Javelin Systems Inc. ............ 4,893,075 -- --
Komag Inc. ...................... 6,968,009 -- --
Ladish Co. Inc. ................. 5,716,900 -- (1,149,740)
MeriStar Hotels & Resorts Inc. .. * -- --
Mesa Air Group Inc. ............. * -- --
Mettler-Toledo International Inc. 73,872,394 -- --
Micromuse Inc. .................. 87,658,875 -- 5,728,543
MicroStrategy Inc., A ........... * -- 539,171
Natural MicroSystems Corp. ...... * -- (902,309)
Newfield Exploration Co. ........ 62,955,038 -- 865,890
</TABLE>
96
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
7. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (cont.)
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES
HELD AT GROSS GROSS HELD AT
NAME OF ISSUER BEGINNING OF PERIOD ADDITIONS REDUCTIONS END OF PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FRANKLIN SMALL CAP GROWTH FUND: (CONT.)
Newport Corp. ......................... 512,500 -- -- 512,500
Nuevo Energy Co. ...................... 1,075,500 -- -- 1,075,500
Pacific Gateway Exchange Inc. ......... 1,015,700 -- -- 1,015,700
Pennaco Energy Inc. ................... -- 1,400,000 -- 1,400,000
Perceptron Inc. ....................... 793,500 -- -- 793,500
Pharmaceutical Product
Development Inc. ..................... 1,300,000 -- -- 1,300,000
Prime Hospitality Corp ................ 3,020,500 -- -- 3,020,500
Primus Telecommunications
Group Inc. ........................... 1,406,100 726,100 319,100 1,813,100
RSA Security Inc (formally known as
Security Dynamics) ................... 2,445,000 -- 225,000 2,220,000
Rural Cellular Corp., A ............... 690,800 -- 44,100 646,700
Serologicals Corp. .................... 2,022,700 -- -- 2,022,700
Silicon Valley Bancshares ............. 1,293,600 -- -- 1,293,600
SOS Staffing Services Inc. ............ 872,400 -- -- 872,400
Spectra-Physics Lasers Inc. ........... 1,016,300 -- -- 1,016,300
Tom Brown Inc. ........................ 2,095,800 -- 151,000 1,944,800
Tropical Sportswear International Corp. 400,500 -- 400,500 0
U.S. Liquids Inc. ..................... 1,500,800 -- 497,400 1,003,400
Varco International Inc. .............. 5,162,500 -- -- 5,162,500
Verity Inc ............................ -- 786,100 -- 786,100
TOTAL NON-CONTROLLED
AFFILIATED ISSUERS ...................
</TABLE>
<TABLE>
<CAPTION>
VALUE AT DIVIDEND NET REALIZED
NAME OF ISSUER END OF PERIOD INCOME GAIN/LOSS
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FRANKLIN SMALL CAP GROWTH FUND: (CONT.)
Newport Corp. ......................... $ 9,993,750 $ 10,250 $ --
Nuevo Energy Co. ...................... 15,258,656 -- --
Pacific Gateway Exchange Inc. ......... 23,107,175 -- --
Pennaco Energy Inc. ................... 15,487,500 -- --
Perceptron Inc. ....................... 2,802,047 -- --
Pharmaceutical Product
Development Inc. ..................... 13,081,250 -- --
Prime Hospitality Corp ................ 23,597,656 -- --
Primus Telecommunications
Group Inc. ........................... 40,114,838 -- 3,193,359
RSA Security Inc (formally known as
Security Dynamics) ................... 78,810,000 -- (53,903)
Rural Cellular Corp., A ............... 38,923,256 -- 1,047,873
Serologicals Corp. .................... 7,837,963 -- --
Silicon Valley Bancshares ............. 42,203,700 -- --
SOS Staffing Services Inc. ............ 4,416,525 -- --
Spectra-Physics Lasers Inc. ........... 10,480,594 -- --
Tom Brown Inc. ........................ 26,741,000 -- (1,404,891)
Tropical Sportswear International Corp. -- * 1,735,669
U.S. Liquids Inc. ..................... 6,710,238 -- (7,390,556)
Varco International Inc. .............. 54,528,906 -- --
Verity Inc ............................ 54,142,638 -- --
-----------------------------------------------------------
TOTAL NON-CONTROLLED
AFFILIATED ISSUERS ................... $1,282,727,888 $ 1,063,462 $ (7,501,369)
===========================================================
</TABLE>
* As of October 31, 1999, no longer an affiliate.
** Reflects a 2:1 stock split during the current period. Balance as of 4/30/99
was 1,281,100.
8. LENDING OF PORTFOLIO SECURITIES
The Franklin Small Cap Growth Fund loans securities to certain brokers for which
it receives cash collateral against the loaned securities in an amount equal to
at least 102% of the market value of the loaned securities. Net interest income
from the investment of the cash collateral received was $2,239,422 for the
period ended October 31,1999. The value of the loaned securities for the Small
Cap Growth Fund was $344,706,085. The Fund has received sufficient cash
collateral to meet this commitment.
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Shareholder Letter 1
Fund Reports
Franklin Biotechnology
Discovery Fund 4
Franklin Global
Health Care Fund 8
Franklin Global
Utilities Fund 14
Franklin Natural
Resources Fund 22
Financial Highlights &
Statement of Investments 28
Financial Statements 46
Notes to
Financial Statements 51
</TABLE>
SHAREHOLDER LETTER
Dear Shareholder:
This semiannual report for the Franklin Strategic Series covers the six months
ended October 31, 1999.
FULL SPEED AHEAD.
During the second and third quarters of 1999, the U.S. economy performed like a
well-trained thoroughbred. Gross domestic product (GDP) grew significantly,
unemployment hovered around lows last seen in 1970, and inflation remained
surprisingly benign.(1) Unfortunately, most U.S. stocks and bonds did not
perform as well as the nation's economy.
UP, AND DOWN, AND UP AGAIN.
At the beginning of the six months under review, the Dow Jones(R) Industrial
Average (the Dow) stood at 10788. By August 25, after much backing and filling,
it posted a record high of 11326. But that was just the beginning of the story.
During the week ended October 15, it fell 630 points (5.9%), its biggest
percentage drop in a decade. Then, shrugging off worries about inflation and
rising interest rates, it proceeded to gain 710 points, and on October 29 closed
at 10,729. The Standard & Poor's(R) 500 Composite Index, which represents more
stocks than the Dow, opened the reporting period at 1335 and ended it at 1362,
see-sawing as violently as the Dow along the way.(2)
1. Second quarter 1999 GDP grew at an annualized rate of 1.9%, while third
quarter GDP grew at an annualized rate of 5.5%. Source: Bloomberg.
<PAGE>
STANDARD & POOR'S 500(C) COMPOSITE INDEX (S&P 500(C))
AND DOW JONES INDUSTRIAL AVERAGE (DJIA)
DAILY PRICES
4/30/99 - 10/31/99
This chart shows the volatility of the Standard & Poor's 500 Composite Index
(S&P 500) and Dow Jones Industrial Average (DJIA), based on their daily prices
from 4/30/99 to 10/31/99.
Daily Prices
6-months ended
10/31/99
<TABLE>
<CAPTION>
DATE S&P 500 DJIA
---- ------- ----
<S> <C> <C>
04/30/99 1335.18 10789.04
05/03/99 1354.63 11014.69
05/04/99 1332.00 10886.11
05/05/99 1347.31 10955.41
05/06/99 1332.05 10946.82
05/07/99 1345.00 11031.59
05/10/99 1340.30 11007.25
05/11/99 1355.61 11026.15
05/12/99 1364.00 11000.37
05/13/99 1367.56 11107.19
05/14/99 1337.80 10913.32
05/17/99 1339.49 10853.47
05/18/99 1333.32 10836.95
05/19/99 1344.23 10887.39
05/20/99 1338.83 10866.74
05/21/99 1330.29 10829.28
05/24/99 1306.65 10654.67
05/25/99 1284.40 10531.09
05/26/99 1304.76 10702.16
05/27/99 1281.41 10466.93
05/28/99 1301.84 10559.74
06/01/99 1294.26 10596.26
06/02/99 1294.81 10577.89
06/03/99 1299.54 10663.69
06/04/99 1327.75 10799.84
06/07/99 1334.52 10909.38
06/08/99 1317.33 10765.64
06/09/99 1318.64 10690.29
06/10/99 1302.82 10621.27
06/11/99 1293.64 10490.51
06/14/99 1294.00 10563.33
06/15/99 1301.16 10594.99
06/16/99 1330.41 10784.95
06/17/99 1339.90 10841.63
06/18/99 1342.84 10855.56
06/21/99 1349.00 10815.98
06/22/99 1335.88 10721.63
06/23/99 1333.06 10666.86
06/24/99 1315.78 10534.83
06/25/99 1315.31 10552.56
06/28/99 1331.35 10655.15
06/29/99 1351.45 10815.35
06/30/99 1372.71 10970.80
07/01/99 1380.96 11066.42
07/02/99 1391.22 11139.24
07/06/99 1388.12 11135.12
07/07/99 1395.86 11187.36
07/08/99 1394.42 11126.89
07/09/99 1403.28 11193.70
07/12/99 1399.10 11200.98
07/13/99 1393.56 11175.02
07/14/99 1398.17 11148.10
07/15/99 1409.62 11186.41
07/16/99 1418.78 11209.84
07/19/99 1407.65 11187.68
07/20/99 1377.10 10996.13
07/21/99 1379.29 11002.78
07/22/99 1360.97 10969.22
07/23/99 1356.94 10910.96
07/26/99 1347.76 10863.16
07/27/99 1362.84 10979.04
07/28/99 1365.40 10972.07
07/29/99 1341.03 10791.29
07/30/99 1328.72 10655.15
08/02/99 1328.05 10645.96
08/03/99 1322.18 10677.31
08/04/99 1305.33 10674.77
08/05/99 1313.71 10793.82
08/06/99 1300.29 10714.03
08/09/99 1297.80 10707.70
08/10/99 1281.43 10655.15
08/11/99 1301.93 10787.80
08/12/99 1298.16 10789.39
08/13/99 1327.68 10973.65
08/16/99 1330.77 11046.79
08/17/99 1344.16 11117.08
08/18/99 1332.84 10991.38
08/19/99 1323.59 10963.84
08/20/99 1336.61 11100.61
08/23/99 1360.22 11299.76
08/24/99 1363.50 11283.30
08/25/99 1381.79 11326.04
08/26/99 1362.01 11198.45
08/27/99 1348.27 11090.17
08/30/99 1324.02 10914.13
08/31/99 1320.41 10829.28
09/01/99 1331.07 10937.88
09/02/99 1319.11 10843.21
09/03/99 1357.24 11078.45
09/07/99 1350.45 11034.13
09/08/99 1344.15 11036.34
09/09/99 1347.66 11079.40
09/10/99 1351.66 11028.43
09/13/99 1344.13 11030.33
09/14/99 1336.29 10910.33
09/15/99 1317.97 10801.42
09/16/99 1318.48 10737.46
09/17/99 1335.42 10803.63
09/20/99 1335.53 10823.90
09/21/99 1307.58 10598.47
09/22/99 1310.51 10524.07
09/23/99 1280.41 10318.59
09/24/99 1277.36 10279.33
09/27/99 1283.31 10303.39
09/28/99 1282.20 10275.53
09/29/99 1268.37 10213.48
09/30/99 1282.71 10336.95
10/01/99 1282.81 10273.00
10/04/99 1304.60 10401.23
10/05/99 1301.35 10400.59
10/06/99 1325.40 10588.34
10/07/99 1317.64 10537.05
10/08/99 1336.02 10649.76
10/11/99 1335.21 10648.18
10/12/99 1313.04 10417.06
10/13/99 1285.55 10232.16
10/14/99 1283.42 10286.61
10/15/99 1247.41 10019.71
10/18/99 1254.13 10116.28
10/19/99 1261.32 10204.93
10/20/99 1289.43 10392.36
10/21/99 1283.61 10297.69
10/22/99 1301.65 10470.25
10/25/99 1293.63 10349.93
10/26/99 1281.91 10302.13
10/27/99 1296.71 10394.89
10/28/99 1342.44 10622.53
10/29/99 1362.93 10729.86
</TABLE>
Source: Standard & Poor's Micropal and Dow Jones and Company. The S&P 500 is a
market-value weighted index of 500 stocks chosen for market size, liquidity, and
industry group presentation, with each stock's weight in the index proportionate
to its market value. The DJIA is a price-weighted index based on the average
market price of 30 blue chip stocks. Indexes are unmanaged.
The graph is intended to show the stock market's volatility, as reflected in the
S&P 500 and DJIA, and does not illustrate the past or future performance of any
fund in the Franklin Strategic Series.
RIDING THE ROLLER COASTER.
While such turbulence can be unsettling for investors, it is important to
remember that volatility is a natural condition of securities markets. Over the
long term, stocks and bonds have provided impressive results, and while catching
the wave may be an appropriate pastime for surfers, it is not generally a good
strategy for investors. For that reason, we urge you to consult with your
investment representative and focus on your long-term goals rather than
short-term market cycles.
2. Source: Standard & Poor's(R) Micropal. Dow Jones Industrial Average total
return calculated by Wilshire Associates, Inc.
2
<PAGE>
We also encourage you to consider using an investment technique called dollar
cost averaging. By investing a fixed dollar amount at regular intervals, you buy
more shares when prices are low and fewer shares when prices are high, which can
reduce your average cost per share. A note of caution: no investment technique
can assure a profit or completely protect against loss, and before using this
strategy, you should consider your ability to continue purchases through periods
of changing economic conditions.(3)
Another good way to deal with market volatility is to diversify your
investments. As you know, mutual funds offer a level of diversification almost
impossible for individual investors to achieve on their own. In the following
pages, you will find discussions of the four funds that compose the Franklin
Strategic Series. While each of the funds has different objectives, their
management teams all pursue long-term investment goals and follow the
fundamental principles of careful selection and constant professional
supervision.
As we enter the new millennium, we would like to take this opportunity to thank
you for your support in the past. We welcome your comments and questions and
look forward to serving you in the years to come.
Sincerely,
/s/ Rupert H. Johnson, Jr.
Rupert H. Johnson, Jr.
President
Franklin Strategic Series
3. For more information on dollar cost averaging, contact your investment
representative, or call Franklin Templeton, toll free, at 1-800/DIAL BEN
(1-800/342-5236).
3
<PAGE>
[PYRAMID CHART GRAPHIC]
FRANKLIN BIOTECHNOLOGY
DISCOVERY FUND
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Biotechnology Discovery Fund seeks capital
appreciation by investing primarily in equity securities of biotechnology
companies and discovery research firms located in the U.S. and other countries.
- --------------------------------------------------------------------------------
Dear Shareholder:
During the six-month period ended October 31, 1999, biotechnology stocks
performed well due to improving sector fundamentals, ongoing consolidation and
renewed investor interest in small-cap companies. This strong performance was
especially encouraging because the sector historically yields weaker returns
from May through August. Within this environment, Franklin Biotechnology Fund -
Class A shares provided a +35.10% six-month cumulative total return as shown in
the Performance Summary on page 7. The AMEX Biotechnology Index and the NASDAQ
Biotechnology Index posted returns of 37.47% and 31.87%, respectively, for the
same period.(1)
On October 31, 1999, the fund was invested in all aspects of the biotechnology
sector, including large established firms like Amgen Inc. and Genentech Inc.,
and small, innovative companies like Collateral Therapeutics Inc. and United
Therapeutics Corp. Our holdings of small-capitalization (small-cap) stocks were
one of the primary contributors to the fund's strong performance. Whereas large
capitalization (large-cap) biotech stocks were responsible for the sector's
strong returns in early 1999, small- and mid-cap stocks powered its run during
the reporting period, with the fund's small-cap positions doing especially well.
For example, our holdings of small-cap companies IDEC Pharmaceuticals Corp.,
Medimmune Inc. and COR Therapeutics Inc. rose 129%, 103% and 77% respectively,
from May 1, 1999 to October 31, 1999.
1. Indexes are unmanaged and include reinvested dividends. One cannot invest
directly in an index.
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 29 of
this report.
4
<PAGE>
Industry consolidation also contributed to the fund's strong performance, as
large pharmaceutical companies continued to purchase smaller biotechnology
companies. Our portfolio included a number of acquisition targets, including
Centocor Inc., whose stock price increased 36.3% leading to its acquisition by
Johnson & Johnson, and Sugen Inc., whose shares jumped 76.1% leading to its
acquisition by Pharmacia & Upjohn Inc. We believe consolidation will continue to
be a major theme within the industry, and feel the fund is well-positioned
because its portfolio includes a number of biotechnology companies that we
consider to be likely acquisition candidates.
Looking forward, we are optimistic about the long-term outlook for biotechnology
stocks and Franklin Biotechnology Discovery Fund. We expect more biotech
companies may become profitable over the next year, adding to the approximately
18 that already are, and we look forward to strong earnings from newly
profitable companies such as COR Therapeutics, as well as from our large-cap
holdings like Biogen.
PORTFOLIO BREAKDOWN
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
BASED ON TOTAL NET ASSETS
10/31/99
[PIE CHART]
<TABLE>
<S> <C>
Therapeutics 47.0%
Discovery Biotechnology 17.3%
Delivery Systems 9.0%
Biomedical Devices 7.8%
Biomedical 4.8%
Biomedical Services 1.9%
Cash & Equivalents 12.2%
</TABLE>
5
<PAGE>
TOP 10 HOLDINGS
Franklin Biotechnology Discovery Fund
10/31/99
<TABLE>
<CAPTION>
% OF TOTAL
COMPANY NET ASSETS
- ------- ----------
<S> <C>
Biogen Inc. 4.8%
Immunex Corp. 4.0%
Inhale Therapeutics
Systems Inc. 3.7%
Genentech Inc. 3.6%
Chiron Corp. 3.5%
Medimmune Inc. 3.3%
Molecular Devices Corp. 3.1%
Vertex Pharmaceuticals Inc. 2.8%
Genzyme Corp. 2.6%
Abgenix, Inc. 2.6%
</TABLE>
In 1993, total biotechnology product sales were $4.4 billion; in 1998, sales
reached more than $10 billion, and sales for 2003 are estimated to exceed $20
billion. Yet, on October 31, 1999, the total market valuation of the
approximately 350 publicly traded biotech companies was less than the market
value of Merck & Co. Inc., a leading U.S. pharmaceutical company. New product
introductions for the treatment of such ailments as diabetes, cancer and
cardiovascular disease should fuel the sector's growth, and, in our opinion, the
potential long-term return could be significant for investors if even a small
fraction of new drugs make it to market.
Sincerely,
/s/ Kurt von Emster
Kurt von Emster
Portfolio Manager
Franklin Biotechnology Discovery Fund
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1999, the end of the reporting period. Our strategies and the fund's
portfolio composition will change depending on market and economic conditions.
Although historical performance is no guarantee of future results, these
insights may help you understand our investment and management philosophy.
6
<PAGE>
PERFORMANCE SUMMARY AS OF 10/31/99
Distributions will vary based on income earned by the fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
the fund's operating expenses. Past distributions are not indicative of future
trends. All total returns include reinvested distributions at net asset value.
PRICE INFORMATION
<TABLE>
<CAPTION>
CLASS A CHANGE 10/31/99 4/30/99
- --------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$8.67 $31.60 $22.93
</TABLE>
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
CLASS A (FORMERLY CLASS I):
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge; thus, actual
total returns may differ.
Past expense reductions by the fund's manager increased the fund's total return.
Without this reduction, the fund's total return would have been lower.
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 6-MONTH 1-YEAR (9/15/97)
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +35.10% +40.28% +28.92%
Average Annual Total Return(2) +27.32% +32.20% +9.59%
Value of $10,000 Investment(3) $12,732 $13,320 $12,148
</TABLE>
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 current, applicable,
maximum sales charge. Six-month returns have not been annualized.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the current, applicable, maximum
sales charge.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results.
7
<PAGE>
[PYRAMID GRAPHIC]
FRANKLIN GLOBAL HEALTH CARE FUND
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Global Health Care Fund seeks capital appreciation by
investing primarily in the equity securities of health care companies, including
small capitalization companies, located throughout the world.
- --------------------------------------------------------------------------------
Dear Shareholder:
This semiannual report of Franklin Global Health Care Fund covers the six months
ended October 31, 1999. During the reporting period, U.S. stock markets
experienced severe turbulence, as strong economic growth and threats of
inflation led the Federal Reserve Board (the Fed) to raise interest rates in
June and again in August 1999. As a result, health care stocks underwent a
difficult period -- despite solid earnings and what we view as excellent
long-term fundamentals. Within this environment, Franklin Global Health Care
Fund - Class A provided a +2.88% six-month cumulative total return, as shown in
the Performance Summary on page 12, outperforming both the Standard and
Poor's(R) 500 Composite Index and the Standard and Poor's Healthcare Index,
which posted returns of 2.75% and 2.61%, respectively.(1)
1. Source: Standard & Poor's Micropal.
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 34 of
this report.
8
<PAGE>
One of the main factors contributing to the fund's outperforming its benchmark
indexes was its holdings of small capitalization (cap) stocks. For example, the
price of our small cap holding CIMA Labs Inc. rose significantly when it
developed a drug delivery technology that allows patients to take pills without
water, and it introduced other products in conjunction with Novartis AG and
AstraZeneca PLC. Another small-cap holding, Noven Pharmaceuticals Inc., nearly
doubled in value during the period as the company, which produces a patch that
delivers drugs through the skin, announced strong sales and additional partners.
The biotechnology sector also contributed significantly to the fund's
performance as market sentiment swung away from pharmaceutical stocks. Amgen
Inc., a blue-chip biotechnology firm, appreciated about 40% during the period.
One of the fund's largest holdings at the end of the reporting period, Amgen's
stock appreciated in value as two of its primary products, Epogen and Neupogen,
experienced strong sales and products in development advanced to late-stage
clinical trials. Vertex Pharmaceuticals Inc., another biotechnology holding, won
approval for its HIV drug, Agenerase, fueling a significant rise in the price of
the company's stock.
The pharmaceutical sector performed poorly, especially during summer, due to
concerns regarding possible enactment of a federally-funded prescription drug
benefit for senior citizens. However, by the end of the summer, concluding that
this proposal would take a back seat to the Patients' Bill of Rights, we began
purchasing pharmaceutical stocks. We bolstered our positions in U.S. drug
manufacturers Warner-Lambert Co., Merck & Co. Inc., and Schering-Plough Corp.,
and in the European drug company, AstraZeneca PLC. And we initiated positions in
Johnson & Johnson, Eli Lilly & Co., both located in the U.S., and United
Kingdom-based Glaxo Wellcome PLC.
GEOGRAPHIC DISTRIBUTION
Franklin Global Health Care Fund
Based on Total Net Assets
10/31/99
[PIE CHART]
<TABLE>
<S> <C>
United States .............................. 82.9%
United Kingdom ............................. 6.1%
Switzerland ................................ 1.5%
Cash & Equivalents ......................... 9.5%
</TABLE>
9
<PAGE>
PORTFOLIO BREAKDOWN
Franklin Global Health Care Fund
Based on Total Net Assets
10/31/99
[BAR GRAPH]
<TABLE>
<S> <C>
Major Pharmaceuticals ...................... 38.7%
Medical Specialties ........................ 21.0%
Biotechnology .............................. 8.5%
Services to the Health Industry ............ 4.6%
Other Pharmaceuticals ...................... 4.1%
Managed Health Care ........................ 3.6%
Medical Electronics ........................ 3.6%
Medical/Nursing Services ................... 2.5%
Other Sectors .............................. 3.9%
Cash & Equivalents ......................... 9.5%
</TABLE>
During the reporting period, we participated in a handful of initial public
offerings, including the re-offering of Genentech Inc. shares to the public. We
purchased a relatively large allocation in July and benefited from the stock's
subsequent rise the following month. Genentech remains a core biotechnology
holding for the fund, and we are optimistic about prospects for the company's
anti-cancer therapies. We also purchased shares of drkoop.com Inc. and
Careinsite Inc., two Internet initial public offerings. These stocks rose to
what we felt were lofty valuation levels, and we reduced our holdings in these
companies. Although these companies are leaders in their respective niches and
are run by excellent management teams, we are waiting for more attractive
valuations before re-establishing larger positions. We appreciate the potential
of the Internet to revolutionize business practices of health care companies but
believe that current investment opportunities in that area carry significant
risk.
Looking forward, we are optimistic about the long-term prospects for Franklin
Global Health Care Fund. We believe that health care expenditures will be driven
by an aging population and technological advances, which should result in a
wider range of treatable conditions and an increase in life expectancy. In
addition, demand for health care services and products is not necessarily
affected by swings in the business cycle. We expect to find excellent value in
out-of-favor pockets of health care and shall strive to provide the fund's
shareholders with exceptional opportunities for investing in today's newest and
fastest growing health care companies.
10
<PAGE>
There are, of course, special risks involved with investing in a non-diversified
fund concentrating its investments in a single industry around the globe. These
risks, which include currency fluctuations and increased susceptibility to
adverse economic, political, social and regulatory developments, are further
discussed in the fund's prospectus.
We appreciate your participation in Franklin Global Health Care Fund and look
forward to serving your investment needs in the years to come.
Sincerely,
/s/ Kurt von Emster
Kurt von Emster
Portfolio Manager
Franklin Global Health Care Fund
TOP 10 HOLDINGS
Franklin Global Health Care Fund
10/31/99
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- -----------------------------------------
<S> <C>
Baxter International Inc.
Medical Specialties, U.S. 5.4%
Schering-Plough Corp.
Major Pharmaceuticals, U.S. 4.4%
Roberts Pharmaceutical Corp.
Other Pharmaceuticals, U.S. 4.1%
Warner-Lambert Co.
Major Pharmaceuticals, U.S. 4.1%
American Home Products Corp.
Major Pharmaceuticals, U.S. 4.0%
Pharmacia & Upjohn Inc.
Major Pharmaceuticals, U.S. 3.8%
Inhale Therapeutic
Systems Inc.
Medical Specialties, U.S. 3.5%
AstraZeneca PLC, ADR
Major Pharmaceuticals,
United Kingdom 3.5%
Merck & Co. Inc.
Major Pharmaceuticals, U.S. 3.5%
CIMA Labs Inc.
Medical Specialties, U.S. 3.3%
</TABLE>
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1999, the end of the reporting period. Our strategies and the fund's
portfolio composition will change depending on market and economic conditions.
Although historical performance is no guarantee of future results, these
insights may help you understand our investment and management philosophy.
11
<PAGE>
FRANKLIN GLOBAL HEALTH CARE FUND
CLASS A (formerly Class I):
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge; thus, actual
total returns may differ. Past expense reductions by the fund's manager
increased the fund's total returns. Without this reduction, total returns would
have been lower.
CLASS B:
Subject to no initial sales charge, but subject to a contingent deferred sales
charge (CDSC) declining from 4% to 0% over six years. These shares have higher
annual fees and expenses than Class A shares.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18
months of investment. These shares have higher annual fees and expenses than
Class A shares.
PERFORMANCE SUMMARY AS OF 10/31/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities, as well as the
level of each class's operating expenses. Past distributions are not indicative
of future trends. All total returns include reinvested distributions at net
asset value.
PRICE INFORMATION
<TABLE>
<CAPTION>
CLASS A CHANGE 10/31/99 4/30/99
- -------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.40 $14.28 $13.88
</TABLE>
<TABLE>
<CAPTION>
CLASS B CHANGE 10/31/99 4/30/99
- -------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.35 $14.19 $13.84
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 10/31/99 4/30/99
- -------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.34 $14.05 $13.71
</TABLE>
Past performance is not predictive of future results.
12
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 6-MONTH 1-YEAR 5-YEAR (2/14/92)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +2.88% -5.54% +49.32% +88.41%
Average Annual Total Return(2) -3.05% -10.95% +7.08% +7.73%
Value of $10,000 Investment(3) $9,695 $8,905 $14,078 $17,758
</TABLE>
<TABLE>
<CAPTION>
10/31/95 10/31/96 10/31/97 10/31/98 10/31/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) +30.17% +26.06% +23.73% -22.14% -5.54%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 6-MONTH (1/1/99)
- --------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +2.53% -16.38%
Aggregate Total Return(2) -1.47% -19.73%
Value of $10,000 Investment(3) $9,853 $8,027
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 6-MONTH 1-YEAR 3-YEAR (9/3/96)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +2.48% -6.13% -10.91% -11.57%
Average Annual Total Return(2) +0.45% -7.99% -4.09% -4.13%
Value of $10,000 Investment(3) $10,045 $9,201 $8,822 $8,752
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class. Six-month return has not been
annualized. Since Class B shares have existed for less than one year, aggregate
total return for that class represents total return since inception, including
the maximum sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
4. One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results.
13
<PAGE>
[PYRAMID CHART GRAPHIC]
FRANKLIN GLOBAL UTILITIES FUND
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Dear Shareholder:
This discussion, which covers the six months ended October 31, 1999, will be the
last report you receive under the name Franklin Global Utilities Fund. As of
November 15, the fund's new name will be Franklin Global Communications Fund.
The change is a result of a shift in the character of global markets as well as
management's belief that communications stocks offer superior growth prospects
and reasonable valuations relative to other utility sectors.
During the period under review, global utility stocks generally performed well,
and Franklin Global Utilities Fund - Class A produced a +15.29% six-month
cumulative total return as shown in the Performance Summary on page 20. The
Financial Times/ Standard & Poor's(R) All World Utilities Index (FT/S&P World
Utilities Index), the fund's benchmark index, rose 9.41%, and the Standard &
Poor's 500(R) Composite Stock Index posted a 2.74% return over the same period.1
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 39 of
this report.
14
<PAGE>
The fund's positive performance during the six months under review is
attributable largely to the rising prices of many telecommunications stocks.
Growing demand for wireless, long distance, data and Internet services caused
revenue and earnings estimates of some of our largest holdings to increase
rapidly during the period, and the price of Sprint Corp. (PCS Group), Nextel
Communications Inc. and VoiceStream Wireless Corp. each rose significantly.
Needless to say, they were among the fund's top performers for the period.
However, not all stocks performed as well. Electric and gas utility stocks
turned in mixed results for the period with electric stocks falling and gas
utilities holding more or less steady since April 30, 1999.
On October 31, the fund's portfolio included stocks from 18 countries. Our
largest exposure was to the United States (56.4% of total net assets), followed
by Continental Europe (14.1%), the United Kingdom, including the Irish Republic
(7.9%), and Asia (4.6%).
UNITED STATES
Although the strong long-term fundamentals of U.S. electric and gas companies
remained in place during the six months under review, the period proved to be a
challenging one for investors in these stocks. Telecommunications stocks,
however, presented a different story.
GEOGRAPHIC DISTRIBUTION
Franklin Global Utilities Fund
Based on Total Net Assets
10/31/99
[PIE CHART GRAPHIC]
<TABLE>
<S> <C>
United States 56.4%
Continental Europe 14.1%
United Kingdom (including the
Irish Republic) 7.9%
Asia 4.6%
Latin America 0.3%
Other Countries 8.2%
Cash & Equivalents 8.5%
</TABLE>
1. Source: Standard and Poor's Micropal. Indexes are unmanaged and do not
include reinvested dividends. One cannot invest directly in an index, nor is an
index representative of the fund's portfolio.
15
<PAGE>
Driven by increasing traffic, continued deregulation and strong growth in
wireless services, fund holdings such as Bell Atlantic Corp., Vodaphone AirTouch
PLC, Nextel Communications Inc., Primus Telecommunications Group Inc., and
VoiceStream Wireless Corp. performed well during the reporting period. Sprint
Corp. (PCS Group), one of the fund's larger holdings, has achieved record
subscriber growth since we purchased its stock in December 1998, and we believe
that its state-of-the-art digital network, well-known brand name and strong
balance sheet position it to take advantage of wireless communications growth.
EUROPE
European telecommunications companies also performed well during the period
under review as established providers and new entrants moved quickly to improve
Europe's underdeveloped telecommunications infrastructure. Telecom Italia SpA,
one of our holdings at the close of the reporting period, is a former monopoly
that is streamlining its existing operations and succeeding in new areas such as
wireless communications. Our portfolio also included newly competitive entrants,
such as Equant NV, N.Y. shs., Global TeleSystems Group Inc. and COLT Telecom
Group PLC, which are capitalizing on Europe's growing need for bandwidth
communications. Europe is one of the fastest growing areas in the global
utilities sector, and we are optimistic about future opportunities in the
region.
16
<PAGE>
ASIA
Despite the rebound of many Asian economies during the reporting period, our
exposure to the region remained relatively modest, representing 4.6% of total
net assets on October 31. However, we believe that the region will soon deliver
improved returns to equity investors. Nippon Telegraph & Telephone Corp. of
Japan, one of the fund's significant holdings, is the largest phone company in
the world based on sales and, in our opinion, is poised to benefit from the
deregulation of the Japanese telecommunications industry.
LATIN AMERICA
Our Latin American exposure continued to be very small during the period
(approximately 0.3% of total net assets on October 31, 1999). The region's
financial markets have been subject to severe volatility, and we believe that,
despite some encouraging developments, Latin America faces economic and
political challenges. In our opinion, the region's battle for economic stability
has not yet been settled, and one cannot overlook the possibility that financial
instability will return. Although we did not add to our Latin American holdings
during the reporting period, we are optimistic about Latin America's long-term
prospects, and we intend to invest cautiously in stocks whose valuations provide
ample potential to compensate for the region's risks.
TOP 10 HOLDINGS
FRANKLIN GLOBAL UTILITIES FUND
10/31/99
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
COUNTRY NET ASSETS
- ------------------------------------------
<S> <C>
Global Crossing Ltd.
Bermuda 3.6%
MCI WorldCom Inc.
U.S. 2.9%
Sprint Corp. (PCS Group)
U.S. 2.8%
GTE Corp.
U.S. 2.6%
SBC Communications Inc.
U.S. 2.5%
Equant NV, N.Y. shares
Netherlands 2.4%
Telecom Italia SpA
Italy 2.4%
Global TeleSystems Group Inc.
U.S. 2.4%
Vodafone AirTouch PLC, ADR
United Kingdom 2.4%
Edison International
U.S. 2.3%
</TABLE>
17
<PAGE>
LOOKING FORWARD.
We believe telecommunications will play an integral part in the world's economic
development and are optimistic regarding the potential of global
telecommunications stocks to deliver strong shareholder returns over the long
term. The strong demand for wireless phone service experienced in Europe over
the past several years is spreading to other parts of the world and will
continue to drive the need for network construction, new handsets and additional
functionality. New Internet applications will necessitate improvements in
telecom infrastructure that will allow content to reach end users. And companies
serving developing nations will have an enormous opportunity to provide basic
phone service for those countries.
In 1994, the FT/S&P World Utilities Index was roughly 50% electric utilities and
50% telecommunications stocks. At the end of the period, the index had
approximately a 30% weighting in electric utilities and 70% in
telecommunications issues. Because we are convinced that these trends will
continue, we will increase the fund's investments in global telecommunications
stocks. On October 31, these stocks comprised just over 60% of the fund's total
net assets. By our next annual report (4/30/00), investors should expect the
fund to have between 75% and 100% of its total net assets invested in
communications stocks and related industries.
18
<PAGE>
Of course, there are special risks involved with investing globally in a
non-diversified fund. These risks, which include currency fluctuations and
increased susceptibility to adverse economic, political, social and regulatory
developments, are further discussed in the fund's prospectus.
We thank you for your participation in Franklin Global Utilities Fund and look
forward to your future participation in Franklin Global Communications Fund.
Please feel free to contact us with your questions or comments.
Sincerely,
/s/ Ian Link
Ian Link
Portfolio Manager
Franklin Global Utilities Fund
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1999, the end of the reporting period. Our strategies and the fund's
portfolio composition will change depending on market and economic conditions.
Although historical performance is no guarantee of future results, these
insights may help you understand our investment and management philosophy.
19
<PAGE>
FRANKLIN GLOBAL UTILITIES FUND
CLASS A (FORMERLY CLASS I):
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge; thus, actual
total returns may differ. Effective May 1, 1994, the fund implemented a Rule
12b-1 plan, which affects subsequent performance. Past expense reductions by the
fund's manager increased the fund's total return. Without this reduction, the
fund's total returns would have been lower.
CLASS B:
Subject to no initial sales charge, but subject to a contingent deferred sales
charge (CDSC) declining from 4% to 0% over six years. These shares have higher
annual fees and expenses than Class A shares.
CLASS C (FORMERLY CLASS II):
Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18
months of investment. These shares have higher annual fees and expenses than
Class A shares.
PERFORMANCE SUMMARY AS OF 10/31/99
Distributions will vary based on income earned by the fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
each class's operating expenses. Past distributions are not indicative of future
trends. All total returns include reinvested distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION
<TABLE>
<CAPTION>
CLASS A CHANGE 10/31/99 4/30/99
- -----------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$2.30 $19.27 $16.97
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS (5/1/99 - 10/31/99)
---------------------------------
<S> <C>
Dividend Income $0.2640
</TABLE>
<TABLE>
<CAPTION>
CLASS B CHANGE 10/31/99 4/30/99
- -----------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$2.23 $19.15 $16.92
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS (5/1/99 - 10/31/99)
---------------------------------
<S> <C>
Dividend Income $0.2579
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 10/31/99 4/30/99
- -----------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$2.26 $19.10 $16.84
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS (5/1/99 - 10/31/99)
---------------------------------
<S> <C>
Dividend Income $0.2216
</TABLE>
Past performance is not predictive of future results.
20
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 6-MONTH 1-YEAR 5-YEAR (7/2/92)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +15.29% +34.16% +131.23% +209.57%
Average Annual Total Return(2) +8.63% +26.45% +16.86% +15.73%
Value of $10,000 Investment(3) $10,863 $12,645 $21,794 $29,177
</TABLE>
<TABLE>
<CAPTION>
10/31/95 10/31/96 10/31/97 10/31/98 10/31/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) +12.29% +18.16% +18.98% +9.18% +34.16%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 6-MONTH (1/1/99)
- --------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +14.88% +22.71%
Aggregate Total Return(2) +10.88% +18.71%
Value of $10,000 Investment(3) $11,088 $11,871
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 6-MONTH 1-YEAR 3-YEAR (5/1/95)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +14.88% +33.20% +70.57% +122.75%
Average Annual Total Return(2) +12.75% +30.91% +19.08% +19.20%
Value of $10,000 Investment(3) $11,275 $13,091 $16,886 $22,058
</TABLE>
<TABLE>
<CAPTION>
10/31/96 10/31/97 10/31/98 10/31/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One-Year Total Return(4) +17.48% +18.15% +8.39% +33.20%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class. Six-month return has not been
annualized. Since Class B shares have existed for less one year, aggregate total
return for that class represents total return since inception, including the
maximum sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
4. One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results.
21
<PAGE>
[PYRAMID CHART GRAPHIC]
FRANKLIN NATURAL RESOURCES FUND
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Natural Resources Fund seeks high total return 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.
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to bring you this semiannual report of Franklin Natural Resources
Fund, which covers the six months ended October 31, 1999. During this period,
signs of economic recovery have continued in Asia, helping to bolster investors'
enthusiasm about the continued rebound in commodity prices. However, equity
prices of commodity-sensitive companies fell in late summer, leading to a
disparity between improving fundamentals, increasing cash flow and rising
earnings and the companies' declining stock prices. Within this environment, the
fund's Class A shares posted a -0.95% six-month cumulative total return, as
shown in the Performance Summary on page 26.
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 44 of
this report.
22
<PAGE>
We maintained our relatively overweight position in the energy sector during the
six months under review, focusing on natural gas equities since these stocks
exhibited the most favorable fundamentals and offered an attractive risk/reward
ratio. The fund benefited from its relatively large weighting in this sector,
especially its holdings in Barrett Resources Corp. and Newfield Exploration Co.
Barrett Resources is primarily a coal-bed methane gas producer in Wyoming, with
about 90% of its reserves in natural gas. Newfield Exploration is primarily a
Gulf of Mexico exploration and production company with about 70% of its
production and reserves in natural gas.
During the reporting period, we made a strategic investment into a global steel
producer, Ispat International NV, A, N.Y. shs., which is one of the largest
steel producers in the world, with sales in over 60 countries. The company has a
dominant market share in several key products, including wire rod, direct
reduced iron and steel slab.
PORTFOLIO BREAKDOWN*
Franklin Natural Resources Fund
Based on Total Net Assets
10/31/99
[PIE CHART]
<TABLE>
<S> <C>
Energy Minerals ............................ 40.1%
Industrial Services ........................ 25.3%
Non-Energy Minerals ........................ 17.8%
Process Industries ......................... 12.4%
Utilities .................................. 4.1%
Producer Manufacturing ..................... 3.0%
</TABLE>
* Cash and equivalents represented -2.7% of the fund's total net assets.
23
<PAGE>
GEOGRAPHIC DISTRIBUTION*
Franklin Natural Resources Fund
Based on Total Net Assets
10/31/99
[LINE GRAPH]
<TABLE>
<S> <C>
United States .............................. 85.9%
Canada ..................................... 7.2%
Europe ..................................... 3.9%
Asia ....................................... 3.0%
Africa ..................................... 2.7%
</TABLE>
* Cash and equivalents represented -2.7% of the fund's total net assets.
Due to a favorable pricing environment and the supply constraints of many pulp
and paper companies, we found compelling investment opportunities in this
sector, and we increased our weighting in several pulp, paper and newsprint
stocks. At the beginning of the period, this sector represented just under 7% of
total net assets, but by October 31, it had risen to 12%.
Looking forward, we are optimistic about natural resources stocks and the
long-term prospects for Franklin Natural Resources Fund. In our opinion, a
continued rebound in the Asian economies will positively impact demand for
natural resource products, allowing the fund to outperform the market. We feel
that moderate inflation combined with global gross domestic product growth
provides an optimal base for the fund's holdings. We anticipate that greater
demand may help to balance supply and could lead to moderately higher growth and
improved profitability for commodity-related companies.
24
<PAGE>
It is important to remember, however, that investing in the fund involves the
special risks of a non-diversified, sector fund, as well as the currency
volatility and social, political, economic or regulatory uncertainty associated
with foreign, and especially developing market, investing.
We thank you for your participation in Franklin Natural Resources Fund and look
forward to serving your investment needs in the future. Please feel free to
contact us with your comments or questions.
Sincerely,
/s/ Michael R. Ward
Michael R. Ward
Portfolio Manager
Franklin Natural Resources Fund
TOP 10 HOLDINGS
Franklin Natural Resources Fund
10/31/99
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- -------------------------------------------
<S> <C>
Conoco Inc., A & B
Energy Minerals, U.S. 4.1%
Barrett Resources Corp.
Energy Minerals, U.S. 3.6%
Newfield Exploration Co.
Energy Minerals, U.S. 3.6%
Weatherford International Inc.
Industrial Services, U.S. 3.1%
Diamond Offshore Drilling Inc.
Industrial Services, U.S. 2.7%
Ipsat International NV, A,
N.Y. shs.,
Non-Energy Minerals,
Netherlands 2.7%
De Beers Consolidated
Mines AG, ADR
Non-Energy Minerals,
South Africa 2.7%
Transocean Offshore Inc.
Industrial Services, U.S. 2.6%
Abitibi-Consolidated Inc.
Process Industries, Canada 2.6%
Cal Dive International Inc.
Industrial Services, U.S. 2.6%
</TABLE>
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1999, the end of the reporting period. Our strategies and the fund's
portfolio composition will change depending on market and economic conditions.
Although historical performance is no guarantee of future results, these
insights may help you understand our investment and management philosophy.
25
<PAGE>
FRANKLIN NATURAL RESOURCES FUND
CLASS A (FORMERLY CLASS I):
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge; thus, actual
total returns may differ.
ADVISOR CLASS:
No initial sales charge or Rule 12b-1 fees and are available to a limited class
of investors.
PERFORMANCE SUMMARY AS OF 10/31/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities, as well as the
level of each class's operating expenses. Past distributions are not indicative
of future trends. All total returns include reinvested distributions at net
asset value.
PRICE AND DISTRIBUTION INFORMATION
<TABLE>
<CAPTION>
CLASS A CHANGE 10/31/99 4/30/99
- ----------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.20 $13.05 $13.25
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS (5/1/99 - 10/31/99)
- -----------------------------------------------------------
<S> <C>
Dividend Income $0.0767
</TABLE>
<TABLE>
<CAPTION>
ADVISOR CLASS CHANGE 10/31/99 4/30/99
- -----------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.18 $13.45 $13.63
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS (5/1/99 - 10/31/99)
- -----------------------------------------------------------
<S> <C>
Dividend Income $0.0885
</TABLE>
Past performance is not predictive of future results.
26
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 6-MONTH 1-YEAR 3-YEAR (6/5/95)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) -0.95% +15.43% +2.13% +48.21%
Average Annual Total Return(2) -6.65% +8.76% -1.26% +7.88%
Value of $10,000 Investment(3) $9,335 $10,876 $9,625 $13,969
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS(4) 6-MONTH 1-YEAR 3-YEAR (6/5/95)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) -0.69% +19.38% +7.38% +55.83%
Average Annual Total Return(2) -0.69% +19.38% +2.40% +10.59%
Value of $10,000 Investment(3) $9,931 $11,938 $10,738 $15,583
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class. Six-month return has not been
annualized.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
4. On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
Class A performance, excluding the effect of the Class A sales charge, but
including the effect of Rule 12b-1 fees and other Class A expenses; and (b) for
periods after January 1, 1997, figures reflect actual Advisor Class performance,
including the deduction of all fees and expenses applicable to that class. Since
January 2, 1997 (commencement of sales), the cumulative and average annual total
returns of Advisor Class shares were +0.78% and +0.27%, respectively.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results.
27
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31, 1999 YEAR ENDED APRIL 30,
(UNAUDITED)(3) 1999 1998(1)
---------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 23.41 $ 26.89 $ 25.00
Income from investment operations:
Net investment loss ............................... (.12) (.10) (.05)
Net realized and unrealized gains (losses) ........ 8.31 (2.96) 1.99
--------------------------------------------------------
Total from investment operations ................... 8.19 (3.06) 1.94
--------------------------------------------------------
Less distributions from net realized gains ......... -- (.42) (.05)
--------------------------------------------------------
Net asset value, end of period ..................... $ 31.60 $ 23.41 $ 26.89
========================================================
Total return* ...................................... 35.10% (11.46%) 7.78%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $ 101,258 $ 69,450 $ 73,546
Ratios to average net assets:
Expenses .......................................... 1.46%(2) 1.52% 1.50%(2)
Expenses excluding waiver and payments by affiliate 1.46%(2) 1.52% 1.61%(2)
Net investment loss ............................... (.86%)(2) (.40%) (.44%)(2)
Portfolio turnover rate ............................ 76.97% 97.62% 75.50%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(1) For the period September 15, 1997 (effective date) to April 30, 1998.
(2) Annualized
(3) Based on average shares outstanding.
28 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND RIGHTS VALUE
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS 87.8%
(a) BIOTECHNOLOGY 62.4%
Abgenix Inc. ...................................... 60,000 $ 2,662,500
Affymetrix Inc. ................................... 25,000 2,203,125
Amgen Inc. ........................................ 32,800 2,615,800
Biogen Inc. ....................................... 65,000 4,818,125
Celera Genomics ................................... 30,000 1,173,750
Chiron Corp. ...................................... 125,000 3,570,313
COR Therapeutics Inc. ............................. 130,000 2,624,375
CuraGen Corp. ..................................... 75,000 1,359,375
Emisphere Technologies Inc. ....................... 100,000 1,250,000
Genentech Inc. .................................... 25,000 3,643,750
Genzyme Corp. ..................................... 70,000 2,677,500
Gilead Sciences Inc. .............................. 20,000 1,263,750
ICOS Corp. ........................................ 50,000 1,434,375
IDEC Pharmaceuticals Corp. ........................ 20,000 2,323,750
ImClone Systems Inc. .............................. 50,000 1,393,750
Immunex Corp. ..................................... 65,000 4,095,000
Isis Pharmaceuticals Inc. ......................... 127,400 1,473,063
LifeCell Corp. .................................... 227,500 966,875
Medarex Inc. ...................................... 110,000 756,250
Medimmune Inc. .................................... 30,000 3,360,000
QLT PhotoTherapeutics Inc. ........................ 40,000 1,695,000
Sangstat Medical Corp. ............................ 50,000 1,081,250
Supergen Inc. ..................................... 52,500 1,476,563
Synsorb Biotech Inc. (Canada) ..................... 158,700 221,179
Texas Biotechnology Corp. ......................... 350,000 1,509,375
Titan Pharmaceuticals Inc. ........................ 55,000 464,063
Transgene SA, ADR (France) ........................ 100,000 853,125
Triangle Pharmaceuticals Inc. ..................... 100,000 1,625,000
Trimeris Inc. ..................................... 60,000 1,080,000
U.S. Bioscience Inc. .............................. 100,000 1,612,500
Vertex Pharmaceuticals Inc. ....................... 100,000 2,862,500
Vical Inc. ........................................ 67,500 961,875
ViroPharma Inc. ................................... 100,000 2,087,500
-----------
63,195,356
-----------
(a) DIVERSIFIED COMMERCIAL SERVICES 1.9%
Chemdex Corp. ..................................... 50,000 1,906,250
-----------
(a) MEDICAL SPECIALTIES 11.1%
Anesta Corp. ...................................... 110,000 1,223,750
Aradigm Corp. ..................................... 75,000 618,750
Inhale Therapeutic Systems Inc. ................... 135,000 3,720,938
Invitrogen Corp. .................................. 60,000 1,500,000
Molecular Devices Corp. ........................... 85,000 3,145,000
Serologicals Corp. ................................ 232,800 902,100
Techne Corp. ...................................... 2,500 98,438
Zonagen Inc. ...................................... 12,500 38,281
-----------
11,247,257
-----------
</TABLE>
29
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED)(CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND RIGHTS VALUE
- --------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
(a)OTHER PHARMACEUTICALS 9.9%
Aronex Pharmaceuticals Inc. ....................... 25,000 $ 73,438
Aviron ............................................ 60,000 1,458,750
Biomarin Pharmaceutical Inc. ...................... 70,000 1,076,250
Collateral Therapeutics Inc. ...................... 63,000 889,875
Medicis Pharmaceutical Corp., A ................... 80,000 2,440,000
Sepracor Inc. ..................................... 25,000 2,079,688
SkyePharma PLC, rts., 3/31/00 (United Kingdom) .... 182,300 18
United Therapeutics Corp. ......................... 65,000 1,958,125
------------
9,976,144
-----------
PRECISION INSTRUMENTS 2.5%
PE Corp. PE Biosystems Group ...................... 15,000 973,125
(a)Waters Corp. ...................................... 30,000 1,593,750
------------
2,566,875
------------
TOTAL LONG TERM INVESTMENTS (COST $72,923,228) .... 88,891,882
------------
SHORT TERM INVESTMENTS 10.7%
(b)Franklin Institutional Fiduciary Trust Money Market
Portfolio (COST $10,877,146) .................... 10,877,146 10,877,146
------------
TOTAL INVESTMENTS (COST $83,800,374) 98.5% .......... 99,769,028
OTHER ASSETS, LESS LIABILITIES 1.5% ................. 1,489,051
------------
NET ASSETS 100.0% ................................... $101,258,079
============
</TABLE>
(a) Non-income producing.
(b) The Franklin Institutional Fiduciary Trust Money Market Portfolio is
managed by Franklin Advisers, Inc. 29
30 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
FRANKLIN GLOBAL HEALTH CARE FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 1999 -----------------------------------------------------------
(UNAUDITED)(2) 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 13.88 $ 19.28 $ 16.11 $ 19.34 $ 11.45 $ 10.43
------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) ................. (.06) (.16) (.14) (.06) .11 .08
Net realized and unrealized gains (losses) ... .46 (5.23) 4.58 (2.75) 8.96 1.56
------------------------------------------------------------------------------
Total from investment operations .............. .40 (5.39) 4.44 (2.81) 9.07 1.64
------------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ -- -- (.09) (.04) (.13) (.06)
Net realized gains ........................... -- (.01) (1.18) (.38) (1.05) (.56)
------------------------------------------------------------------------------
Total distributions ........................... -- (.01) (1.27) (.42) (1.18) (.62)
------------------------------------------------------------------------------
Net asset value, end of period ................ $ 14.28 $ 13.88 $ 19.28 $ 16.11 $ 19.34 $ 11.45
==============================================================================
Total return* ................................. 2.88% (27.95%) 28.22% (14.71%) 82.78% 16.33%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $ 65,149 $ 74,252 $176,545 $150,653 $108,914 $ 12,906
Ratios to average net assets:
Expenses ..................................... 1.70%(1) 1.34% 1.15% 1.14% .73% .25%
Expenses excluding waiver and payments
by affiliate ................................ 1.70%(1) 1.34% 1.15% 1.14% 1.16% 1.37%
Net investment income (loss) ................. (.78%)(1) (.72%) (.67%) (.39%) .50% .80%
Portfolio turnover rate ....................... 47.36% 66.54% 66.84% 73.17% 54.78% 93.79%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(1) Annualized
(2) Based on average shares outstanding.
31
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN GLOBAL HEALTH CARE FUND (CONT.)
<TABLE>
<CAPTION>
CLASS B
------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 1999 YEAR ENDED
(UNAUDITED)(3) APRIL 30, 1999(1)
------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 13.84 $ 16.97
--------------------------------
Income from investment operations:
Net investment loss .......................... (.11) (.03)
Net realized and unrealized gains (losses) ... .46 (3.10)
--------------------------------
Total from investment operations .............. .35 (3.13)
--------------------------------
Net asset value, end of period ................ $ 14.19 $ 13.84
================================
Total return* ................................. 2.53% (18.44%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $ 530 $ 208
Ratios to average net assets:
Expenses ..................................... 2.46%(2) 1.84%(2)
Net investment loss .......................... (1.58%)(2) (1.22%)(2)
Portfolio turnover rate ....................... 47.36% 66.54%
</TABLE>
* Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(1) For the period January 1, 1999 (effective date) to April 30, 1999.
(2) Annualized
(3) Based on average shares outstanding.
32
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN GLOBAL HEALTH CARE FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 1999 ----------------------------------------------
(UNAUDITED)(3) 1999 1998 1997(1)
------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ...... $ 13.71 $ 19.17 $ 16.07 $ 17.37
-------------------------------------------------------------------
Income from investment operations:
Net investment loss ...................... (.11) (.29) (.20) (.07)
Net realized and unrealized gains (losses) .45 (5.16) 4.48 (.85)
-------------------------------------------------------------------
Total from investment operations .......... .34 (5.45) 4.28 (.92)
-------------------------------------------------------------------
Less distributions from net realized gains -- (.01) (1.18) (.38)
-------------------------------------------------------------------
Net asset value, end of period ............ $ 14.05 $ 13.71 $ 19.17 $ 16.07
===================================================================
Total return* ............................. 2.48% (28.42%) 27.22% (5.47%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ......... $ 12,559 $ 13,747 $ 25,321 $ 10,099
Ratios to average net assets:
Expenses ................................. 2.46%(2) 2.07% 1.90% 1.92%(2)
Net investment loss ...................... (1.54%)(2) (1.45%) (1.44%) (1.29%)(2)
Portfolio turnover rate ................... 47.36% 66.54% 66.84% 73.17%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(1) For the period September 3, 1996 (effective date) to April 30, 1997.
(2) Annualized
(3) Based on average shares outstanding.
See notes to financial statements. 33
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN GLOBAL HEALTH CARE FUND COUNTRY RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND RIGHTS 90.5%
(a)BIOTECHNOLOGY 8.5%
Amgen Inc. ................................... United States 15,000 $ 1,196,250
Genentech Inc. ............................... United States 10,900 1,588,675
Ligand Pharmaceuticals Inc., B ............... United States 75,000 614,063
Noven Pharmaceuticals Inc. ................... United States 113,800 1,116,663
Vertex Pharmaceuticals Inc. .................. United States 75,000 2,146,875
-----------
6,662,526
-----------
(a)GENERIC DRUGS 2.0%
Watson Pharmaceuticals Inc. .................. United States 50,000 1,587,500
-----------
(a)HOSPITAL/NURSING MANAGEMENT .9%
Beverly Enterprises Inc. ..................... United States 105,000 413,438
Novamed Eyecare Inc. ......................... United States 40,000 262,500
-----------
675,938
-----------
MAJOR PHARMACEUTICALS 38.7%
American Home Products Corp. ................. United States 60,000 3,135,000
AstraZeneca PLC, ADR ......................... United Kingdom 60,000 2,745,000
Bristol-Myers Squibb Co. ..................... United States 25,000 1,920,313
Eli Lilly & Co. .............................. United States 35,000 2,410,625
Glaxo Wellcome PLC, ADR ...................... United Kingdom 34,200 2,047,725
Johnson & Johnson ............................ United States 20,000 2,095,000
Merck & Co. Inc. ............................. United States 34,000 2,705,125
Pfizer Inc. .................................. United States 60,000 2,370,000
Pharmacia & Upjohn Inc. ...................... United States 55,000 2,966,563
Roche Holding AG ............................. Switzerland 100 1,201,024
Schering-Plough Corp. ........................ United States 70,000 3,465,000
Warner-Lambert Co. ........................... United States 40,000 3,192,500
-----------
30,253,875
-----------
MANAGED HEALTH CARE 3.6%
(a)Foundation Health Systems, A ................. United States 50,000 331,250
United Healthcare Corp. ...................... United States 15,000 775,313
(a)Wellpoint Health Networks Inc. ............... United States 30,000 1,740,000
-----------
2,846,563
-----------
MEDICAL ELECTRONICS 3.6%
Medtronic Inc. ............................... United States 50,000 1,731,250
(a)Novoste Corp. ................................ United States 15,000 257,813
(a)OrthoLogic Corp. ............................. United States 284,000 816,500
-----------
2,805,563
-----------
(a)MEDICAL/NURSING SERVICES 2.5%
Renal Care Group Inc. ........................ United States 105,000 1,955,621
-----------
MEDICAL SPECIALTIES 21.0%
Bausch & Lomb Inc. ........................... United States 40,000 2,160,000
Baxter International Inc. .................... United States 65,000 4,216,909
(a)CIMA Labs Inc. ............................... United States 386,800 2,562,550
</TABLE>
34
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED)(CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN GLOBAL HEALTH CARE FUND COUNTRY RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
MEDICAL SPECIALTIES (CONT.)
(a)Inhale Therapeutic Systems Inc. .............. United States 100,000 $ 2,756,250
(a)Molecular Devices Corp. ...................... United States 50,000 1,850,000
(a)Ocular Sciences Inc. ......................... United States 92,700 1,703,363
(a)Serologicals Corp. ........................... United States 273,650 1,060,394
(a)Zonagen Inc. ................................. United States 50,000 153,125
-----------
16,462,591
-----------
(a)OTHER CONSUMER SERVICES 1.0%
drkoop.com Inc. .............................. United States 61,100 763,750
-----------
(a)OTHER PHARMACEUTICALS 4.1%
Roberts Pharmaceutical Corp. ................. United States 100,000 3,225,000
SkyePharma PLC, rts., 3/31/00 ................ United Kingdom 344,500 --
-----------
3,225,000
-----------
(a)SERVICES TO THE HEALTH INDUSTRY 4.6%
Careinsite Inc. .............................. United States 15,000 656,250
Cybear Inc. .................................. United States 89,700 605,475
Express Scripts Inc., A ...................... United States 13,700 673,013
MedQuist Inc. ................................ United States 26,000 832,000
Pharmaceutical Product Development Inc. ...... United States 80,000 805,000
-----------
3,571,738
-----------
TOTAL LONG TERM INVESTMENTS (COST $74,542,468) 70,810,665
-----------
SHORT TERM INVESTMENTS 8.5%
(b)Franklin Institutional Fiduciary Trust Money
Market Portfolio (Cost $6,607,999) ......... United States 6,607,999 6,607,999
-----------
TOTAL INVESTMENTS (COST $81,150,467) 99.0% ... 77,418,664
OTHER ASSETS, LESS LIABILITIES 1.0% .......... 819,418
-----------
NET ASSETS 100.0% ............................ $78,238,082
===========
</TABLE>
(a) Non-income producing.
(b) The Franklin Institutional Fiduciary Trust Money Market Portfolio is
managed by Franklin Advisers, Inc.
See notes to financial statements. 35
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
FRANKLIN GLOBAL UTILITIES FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 1999 ---------------------------------------------------------
(UNAUDITED)(2) 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 16.97 $ 17.36 $ 14.46 $ 14.28 $ 12.23 $ 12.60
----------------------------------------------------------------------------
Income from investment operations:
Net investment income ........................ .12 .27 .33 .42 .37 .42
Net realized and unrealized gains (losses) ... 2.47 .31 4.69 1.35 2.39 (.07)
----------------------------------------------------------------------------
Total from investment operations .............. 2.59 .58 5.02 1.77 2.76 .35
----------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (.27) (.19) (.37) (.38) (.39) (.36)
Net realized gains ........................... -- (.78) (1.75) (1.21) (.32) (.36)
----------------------------------------------------------------------------
Total distributions ........................... (.27) (.97) (2.12) (1.59) (.71) (.72)
----------------------------------------------------------------------------
Net asset value, end of period ................ $ 19.29 $ 16.97 $ 17.36 $ 14.46 $ 14.28 $ 12.23
============================================================================
Total return* ................................. 15.29% 4.02% 37.02% 12.94% 23.27% 3.17%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $220,620 $199,824 $226,594 $174,023 $167,225 $119,250
Ratios to average net assets:
Expenses ..................................... 1.04%(1) 1.05% 1.03% 1.00% 1.04% 1.12%
Net investment income ........................ 1.32%(1) 1.55% 2.02% 2.82% 2.85% 3.47%
Portfolio turnover rate ....................... 40.26% 68.50% 45.51% 47.55% 50.51% 16.65%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(1) Annualized
(2) Based on average shares outstanding.
36
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN GLOBAL UTILITIES FUND (CONT.)
<TABLE>
<CAPTION>
CLASS B
--------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 1999 YEAR ENDED
(UNAUDITED)(3) APRIL 30, 1999(1)
--------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........ $ 16.92 $ 15.84
---------------------------------
Income from investment operations:
Net investment income ...................... .05 .02
Net realized and unrealized gains .......... 2.46 1.06
---------------------------------
Total from investment operations ............ 2.51 1.08
---------------------------------
Less distributions from net investment income (.26) --
---------------------------------
Net asset value, end of period .............. $ 19.17 $ 16.92
=================================
Total return* ............................... 14.88% 6.82%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ........... $ 414 $ 79
Ratios to average net assets:
Expenses ................................... 1.78%(2) 1.80%(2)
Net investment income ...................... .50%(2) .83%(2)
Portfolio turnover rate ..................... 40.26% 68.50%
</TABLE>
* Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(1) For the period January 1, 1999 (effective date) to April 30, 1999.
(2) Annualized
(3) Based on average shares outstanding.
37
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN GLOBAL UTILITIES FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 1999 -----------------------------------------------------
(UNAUDITED)(2) 1999 1998 1997 1996
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 16.85 $ 17.25 $ 14.37 $ 14.24 $ 12.23
-------------------------------------------------------------------------
Income from investment operations:
Net investment income ........................ .05 .14 .24 .32 .37
Net realized and unrealized gains ............ 2.44 .32 4.66 1.33 2.32
-------------------------------------------------------------------------
Total from investment operations .............. 2.49 .46 4.90 1.65 2.69
-------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (.22) (.08) (.27) (.31) (.36)
Net realized gains ........................... -- (.78) (1.75) (1.21) (.32)
-------------------------------------------------------------------------
Total distributions ........................... (.22) (.86) (2.02) (1.52) (.68)
-------------------------------------------------------------------------
Net asset value, end of period ................ $ 19.12 $ 16.85 $ 17.25 $ 14.37 $ 14.24
=========================================================================
Total return* ................................. 14.88% 3.19% 36.21% 12.04% 22.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $ 19,118 $ 16,807 $ 16,324 $ 8,467 $ 2,727
Ratios to average net assets:
Expenses ..................................... 1.78%(1) 1.80% 1.78% 1.77% 1.81%
Net investment income ........................ .57%(1) .81% 1.29% 1.98% 2.10%
Portfolio turnover rate ....................... 40.26% 68.50% 45.51% 47.55% 50.51%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(1) Annualized
(2) Based on average shares outstanding.
38 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN GLOBAL UTILITIES FUND COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 90.8%
(a)BROADCASTING .1%
XM Satellite Radio Holdings Inc. ......... United States 16,200 $ 313,875
----------
CELLULAR TELEPHONE 11.5%
(a)Airgate PCS Inc. ......................... United States 2,000 100,000
(a)Nextel Communications Inc. ............... United States 30,000 2,585,625
NTT Mobile Communications Network Inc. ... Japan 110 2,919,701
(a)Partner Communications Co. Ltd., ADR ..... Israel 325,300 5,123,475
(a)Sprint Corp. (PCS Group) ................. United States 80,000 6,635,000
(a)Stet Hellas Telecommunications SA, ADR ... Greece 110,900 2,384,350
(a)Triton PCS Holdings Inc., A .............. United States 1,100 38,775
Vodafone AirTouch PLC, ADR ............... United Kingdom 118,400 5,675,800
(a)VoiceStream Wireless Corp. ............... United States 21,300 2,103,375
----------
27,566,101
----------
(a)COMPUTER COMMUNICATIONS 1.0%
Alteon Websystems Inc. ................... United States 900 64,575
Cisco Systems Inc. ....................... United States 22,000 1,628,000
Foundry Networks Inc. .................... United States 3,800 720,100
JNI Corp. ................................ United States 1,600 85,500
----------
2,498,175
----------
(a)EDP SERVICES 2.4%
Equant NV, N.Y. shs ...................... Netherlands 60,000 5,820,000
----------
ELECTRIC UTILITIES 13.7%
Avista Corp. ............................. United States 100,000 1,800,000
CMS Energy Corp. ......................... United States 40,000 1,475,000
(a)Cogeneration Corp. of America ............ United States 117,400 2,817,600
Duke Energy Corp. ........................ United States 40,000 2,260,000
Edison International ..................... United States 190,000 5,628,750
FPL Group Inc. ........................... United States 20,000 1,006,250
Illinova Corp. ........................... United States 50,000 1,590,625
Montana Power Co. ........................ United States 23,000 654,063
New Century Energies Inc. ................ United States 25,000 814,063
Northwestern Corp. ....................... United States 151,600 3,458,375
PECO Energy Co. .......................... United States 74,800 2,856,425
Pinnacle West Capital Corp. .............. United States 60,000 2,212,500
Southern Co. ............................. United States 70,000 1,859,375
TECO Energy Inc. ......................... United States 100,000 2,206,250
Unicom Corp. ............................. United States 57,000 2,183,813
----------
32,823,089
----------
(a)ELECTRONIC COMPONENTS .8%
Epcos AG, ADR ............................ Germany 48,000 1,956,000
----------
(a)ELECTRONIC TECHNOLOGY .2%
Chartered Semiconductor Manufacturing, ADR Singapore 16,000 531,000
----------
(a)INTERNET SERVICES .7%
Akamai Technologies Inc. ................. United States 4,800 696,900
Digex Inc. ............................... United States 3,600 103,050
</TABLE>
39
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN GLOBAL UTILITIES FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
(a)INTERNET SERVICES (CONT.)
Egain Communications Corp. .............................. United States 2,600 $ 75,725
Internap Network Services Corp. ......................... United States 1,900 175,513
ITXC Corp. .............................................. United States 6,200 280,550
Keynote Systems Inc. .................................... United States 3,600 163,350
Radware Ltd. ............................................ United States 2,400 123,450
----------
1,618,538
----------
MAJOR U.S. TELECOMMUNICATIONS 13.8%
AT&T Corp. .............................................. United States 91,750 4,289,313
Bell Atlantic Corp. ..................................... United States 65,000 4,220,938
BellSouth Corp. ......................................... United States 48,000 2,160,000
GTE Corp. ............................................... United States 84,000 6,300,000
(a)MCI WorldCom Inc. ....................................... United States 80,000 6,865,000
SBC Communications Inc. ................................. United States 115,800 5,898,563
U.S. West Inc. .......................................... United States 57,000 3,480,563
----------
33,214,377
----------
NATURAL GAS DISTRIBUTION 2.1%
MDU Resources Group Inc. ................................ United States 100,000 2,337,500
Washington Gas Light Co. ................................ United States 102,700 2,792,156
----------
5,129,656
----------
NON-U.S. UTILITIES 5.6%
Endesa SA ............................................... Spain 180,000 3,600,265
PowerGen PLC ............................................ United Kingdom 304,626 2,671,763
Scottish & Southern Energy PLC .......................... United Kingdom 450,000 4,242,148
Scottish Power PLC ...................................... United Kingdom 200,000 1,850,940
Tokyo Electric Power Co. ................................ Japan 48,000 1,071,675
----------
13,436,791
----------
OIL/GAS TRANSMISSION 2.3%
Coastal Corp. ........................................... United States 62,000 2,611,750
Enron Corp. ............................................. United States 70,000 2,795,625
----------
5,407,375
----------
OTHER TELECOMMUNICATIONS 32.6%
(a)Allegiance Telecom Inc. ................................. United States 35,400 2,442,600
Cincinnati Bell Inc. .................................... United States 110,000 2,289,375
(a)Citizens Utilities Co., B ............................... United States 136,000 1,572,500
(a)Clearnet Communications Inc., A ......................... Canada 124,800 2,745,600
(a)COLT Telecom Group PLC .................................. United Kingdom 65,000 1,943,323
(a)DSL.net Inc. ............................................ United States 21,100 203,088
(a)EIRCOM PLC .............................................. Irish Republic 604,000 2,513,942
(a)Global Crossing Ltd. .................................... Bermuda 250,000 8,656,246
(a)Global TeleSystems Group Inc. ........................... United States 240,000 5,745,000
(a)GST Telecommunications Inc. ............................. Canada 190,000 1,282,500
Hellenic Telecommunications Organization SA ............. Greece 145,138 3,075,497
(a)ICG Communications Inc. ................................. United States 92,000 1,506,500
(a)ICO Global Communications Holdings Ltd. ................. United States 100 363
(a)Illuminet Holdings Inc. ................................. United States 800 37,200
</TABLE>
40
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN GLOBAL UTILITIES FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
OTHER TELECOMMUNICATIONS (CONT.)
(a)Intermedia Communications Inc. ............................ United States 100,000 $ 2,600,000
Korea Telecom Corp. ....................................... South Korea 40,130 2,699,867
(a)McLeodUSA Inc. ............................................ United States 45,000 2,008,125
(a)Nextlink Communications Inc., A ........................... United States 20,000 1,196,250
Nippon Telegraph & Telephone Corp. ........................ Japan 110 1,686,470
(a)Pacific Gateway Exchange Inc. ............................. United States 30,000 682,500
Portugal Telecom SA ....................................... Portugal 65,000 2,896,692
(a)Primus Telecommunications Group Inc. ...................... United States 170,100 3,763,463
(a)Qwest Communications International Inc. ................... United States 115,000 4,140,000
Swisscom AG ............................................... Switzerland 10,100 3,078,985
Telebras SA, ADR .......................................... Brazil 9,500 739,813
(a)Telecel-Comunicacoes Pessoais SA .......................... Portugal 1,084 140,594
Telecom Italia SpA ........................................ Italy 1,172,000 5,771,123
(a)Telecomunicacoes Brasileiras SA, ADR ...................... Brazil 9,500 445
Telefonica SA, ADR ........................................ Spain 84,615 4,225,462
(a)Telstra Corp Ltd. ......................................... Australia 639,000 2,048,234
(a)Versatel Telecom International NV ......................... Netherlands 81,000 1,004,593
Videsh Sanchar Nigam Ltd., GDR, 144A ...................... India 140,000 2,233,000
(a)Williams Communications Group Inc. ........................ United States 106,200 3,385,125
-------------
78,314,475
-------------
TELECOMMUNICATIONS EQUIPMENT 2.4%
(a)Aether Systems Inc. ....................................... United States 3,100 215,644
(a)Ciena Corp. ............................................... United States 35,000 1,233,750
Lucent Technologies Inc. .................................. United States 33,165 2,130,851
(a)MCK Communications Inc. ................................... United States 2,200 49,500
(a)Sycamor Networks Inc. ..................................... United States 4,300 924,500
(a)Tellabs Inc. .............................................. United States 20,000 1,265,000
-------------
5,819,245
-------------
(a)UNREGULATED POWER GENERATION 1.6%
AES Corp. ................................................. United States 45,000 2,539,688
Calpine Corp. ............................................. United States 21,400 1,233,175
-------------
3,772,863
-------------
TOTAL COMMON STOCKS (COST $166,215,144) ................... 218,221,560
-------------
CONVERTIBLE PREFERRED STOCKS .7%
CMS Energy Corp., 7.75%, cvt. pfd. (COST $1,750,000) ...... United States 35,000 1,715,000
-------------
TOTAL LONG TERM INVESTMENTS (COST $167,965,144) ........... 219,936,560
-------------
SHORT TERM INVESTMENTS 9.9%
(b)Franklin Institutional Fiduciary Trust Money
Market Portfolio (COST $23,658,426) ..................... United States 23,658,426 23,658,426
-------------
TOTAL INVESTMENTS (COST $191,623,570) 101.4% .............. 243,594,986
OTHER ASSETS, LESS LIABILITIES (1.4%) ..................... (3,443,550)
-------------
NET ASSETS 100.0% ......................................... $ 240,151,436
-------------
</TABLE>
(a) Non-income producing.
(b) The Franklin Institutional Fiduciary Trust Money Market Portfolio is managed
by Franklin Advisers, Inc.
See notes to financial statements. 41
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
FRANKLIN NATURAL RESOURCES FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 1999 ------------------------------------------------------
(UNAUDITED)(3) 1999 1998 1997 1996(1)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............... $ 13.25 $ 15.46 $ 14.07 $ 13.14 $ 10.00
-------------------------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .01 .12 .10 .09 .08
Net realized and unrealized gains (losses) ........ (.13) (2.21) 2.26 1.25 3.22
-------------------------------------------------------------------------------
Total from investment operations ................... (.12) (2.09) 2.36 1.34 3.30
-------------------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (.08) (.12) (.09) (.09) (.06)
Net realized gains ................................ -- -- (.88) (.32) (.10)
-------------------------------------------------------------------------------
Total distributions ................................ (.08) (.12) (.97) (.41) (.16)
-------------------------------------------------------------------------------
Net asset value, end of period ..................... $ 13.05 $ 13.25 $ 15.46 $ 14.07 $ 13.14
===============================================================================
Total return* ...................................... (.95%) (13.42%) 17.57% 10.23% 33.36%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $ 39,093 $ 44,014 $ 62,274 $ 45,386 $ 9,909
Ratios to average net assets:
Expenses .......................................... .99%(2) .97% .96% .98% .99%(2)
Expenses excluding waiver and payments by affiliate 1.46%(2) 1.47% 1.31% 1.31% 1.77%(2)
Net investment income ............................. .16%(2) .97% .67% .72% 1.16%(2)
Portfolio turnover rate ............................ 33.62% 74.03% 72.93% 46.31% 59.04%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(1) For the period June 5, 1995 (effective date) to April 30, 1996.
(2) Annualized
(3) Based on average shares outstanding.
42
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN NATURAL RESOURCES FUND (CONT.)
<TABLE>
<CAPTION>
ADVISOR CLASS
-------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 1999 -----------------------------------------------
(UNAUDITED)(3) 1999 1998 1997(1)
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............... $ 13.63 $ 15.48 $ 14.07 $ 14.66
-------------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .03 .19 .23 --
Net realized and unrealized gains (losses) ........ (.12) (1.85) 2.20 (.59)
-------------------------------------------------------------------
Total from investment operations ................... (.09) (1.66) 2.43 (.59)
-------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (.09) (.19) (.14) --
Net realized gains ................................ -- -- (.88) --
-------------------------------------------------------------------
Total distributions ................................ (.09) (.19) (1.02) --
-------------------------------------------------------------------
Net asset value, end of period ..................... $ 13.45 $ 13.63 $ 15.48 $ 14.07
===================================================================
Total return* ...................................... (.69%) (10.48%) 18.11% (4.02%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $ 367 $ 319 $ 892 $ 1,123
Ratios to average net assets:
Expenses .......................................... .65%(2) .65% .64% .64%(2)
Expenses excluding waiver and payments by affiliate 1.12%(2) 1.15% .99% .86%(2)
Net investment income ............................. .44%(2) 1.29% 1.02% 1.03%(2)
Portfolio turnover rate ............................ 33.62% 74.03% 72.93% 46.31%
</TABLE>
* Total return is not annualized for periods less than one year.
(1) For the period January 2, 1997 (effective date) to April 30, 1997.
(2) Annualized
(3) Based on average shares outstanding.
See notes to financial statements. 43
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN NATURAL RESOURCES FUND COUNTRY WARRANTS VALUE
-------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS 102.7%
ENERGY MINERALS 40.1%
Apache Corp. ..................................................... United States 24,200 $ 943,800
Atlantic Richfield Co. ........................................... United States 10,400 969,150
(a)Barrett Resources Corp. .......................................... United States 42,900 1,439,831
(a)Basin Exploration Inc. ........................................... United States 40,900 672,294
(a)Chesapeake Energy Corp. .......................................... United States 170,000 616,250
Conoco Inc., A ................................................... United States 18,600 510,338
Conoco Inc., B ................................................... United States 40,498 1,098,508
Devon Energy Corp. ............................................... United States 9,750 379,031
EOG Resources Inc. ............................................... United States 46,900 976,106
(a)Gulf Canada Resources Ltd. ....................................... Canada 116,800 459,900
(a)Houston Exploration Co. .......................................... United States 23,000 449,938
Mobil Corp. ...................................................... United States 4,400 424,600
(a)Newfield Exploration Co. ......................................... United States 47,700 1,404,169
(a)Nuevo Energy Co. ................................................. United States 44,000 624,250
(a)Pennaco Energy Inc. .............................................. United States 68,000 752,250
(a)Santa Fe Snyder Corp. ............................................ United States 62,100 535,613
Texaco Inc. ...................................................... United States 13,700 840,838
Tosco Corp. ...................................................... United States 31,100 787,219
Ultramar Diamond Shamrock Corp. .................................. United States 27,300 668,850
Unocal Corp. ..................................................... United States 16,200 558,900
Valero Energy Corp. .............................................. United States 38,800 712,950
------------
15,824,785
------------
INDUSTRIAL SERVICES 25.3%
(a)AES Corp. ........................................................ United States 10,660 601,624
(a)Atwood Oceanics Inc. ............................................. United States 15,900 462,094
Baker Hughes Inc. ................................................ United States 11,000 307,313
(a)BJ Services Co. .................................................. United States 16,300 559,294
(a)Cal Dive International Inc. ...................................... United States 30,200 1,015,475
(a)Casella Waste Systems Inc., A .................................... United States 24,700 331,906
Diamond Offshore Drilling Inc. ................................... United States 34,000 1,079,500
ENSCO International Inc. ......................................... United States 23,000 445,625
(a)Grey Wolf Inc. ................................................... United States 120,000 315,000
Halliburton Co. .................................................. United States 5,900 222,356
(a)Marine Drilling Cos. Inc. ........................................ United States 20,000 323,750
(a)Nabors Industries Inc. ........................................... United States 14,000 317,625
(a)Petroleum Geo-Services, ADR ...................................... Norway 3,100 45,338
(a)Safety-Kleen Corp. ............................................... United States 23,700 271,069
(a)TETRA Technologies Inc. .......................................... United States 35,000 290,938
Transocean Offshore Inc. ......................................... United States 38,300 1,041,281
(a)Tuboscope Inc. ................................................... United States 45,600 507,300
(a)Varco International Inc. ......................................... United States 61,200 646,425
(a)Weatherford International Inc. ................................... United States 35,775 1,211,878
------------
9,995,791
------------
NON-ENERGY MINERALS 17.8%
Aluminum Co. of America .......................................... United States 10,800 656,100
Barrick Gold Corp. ............................................... Canada 18,100 331,449
</TABLE>
44
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN NATURAL RESOURCES FUND COUNTRY WARRANTS VALUE
-------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
NON-ENERGY MINERALS (CONT.)
De Beers Consolidated Mines AG, ADR .............................. South Africa 38,900 $ 1,052,731
Franco-Nevada Mining Corp. Ltd. .................................. Canada 36,000 668,162
(a)Freeport-McMoRan Copper & Gold Inc., A ........................... United States 11,700 165,263
Georgia-Pacific Group ............................................ United States 18,000 714,375
Ispat International NV, A, N.Y. shs. ............................. Netherlands 103,500 1,073,813
Newmont Mining Corp. ............................................. United States 7,335 160,912
Pohang Iron & Steel Co. Ltd., ADR ................................ South Korea 20,500 684,188
Rayonier Inc. .................................................... United States 15,000 615,000
Rio Tinto PLC .................................................... United Kingdom 25,600 437,294
(a)Stillwater Mining Co. ............................................ United States 22,200 446,775
------------
7,006,062
------------
PROCESS INDUSTRIES 12.4%
Abitibi-Consolidated Inc. ........................................ Canada 85,000 1,025,313
(a)Asia Pulp & Paper Co. Ltd., ADR .................................. Indonesia 69,300 480,769
(a)Asia Pulp & Paper Co. Ltd., wts., 7/27/00 ........................ Indonesia 11,160 9,765
Bowater Inc. ..................................................... United States 18,400 966,000
E. I. du Pont de Nemours and Co. ................................. United States 6,128 394,860
Ecolab Inc. ...................................................... United States 5,400 182,588
Hercules Inc. .................................................... United States 8,200 197,313
Monsanto Co. ..................................................... United States 5,500 211,750
Potash Corp. of Saskatchewan Inc. ................................ Canada 8,285 366,093
Praxair Inc. ..................................................... United States 2,400 112,200
(a)Smurfit-Stone Container Corp. .................................... United States 44,700 966,638
------------
4,913,289
------------
PRODUCER MANUFACTURING 3.0%
Avery Dennison Corp. ............................................. United States 8,200 512,500
Gibraltar Steel Corp. ............................................ United States 18,500 452,094
Reliance Steel & Aluminum Co. .................................... United States 9,750 204,750
------------
1,169,344
------------
UTILITIES 4.1%
Enron Corp. ...................................................... United States 23,200 926,550
Williams Cos. Inc. ............................................... United States 18,500 693,750
------------
1,620,300
------------
TOTAL LONG TERM INVESTMENTS (COST $40,422,814) ................... 40,529,571
------------
SHORT TERM INVESTMENTS 1.5%
(b)Franklin Institutional Fiduciary Trust Money Market Portfolio
(COST $605,285) .................................................. United States 605,285 605,285
------------
TOTAL INVESTMENTS (COST $41,028,099) 104.2% ...................... 41,134,856
OTHER ASSETS, LESS LIABILITIES (4.2%) ............................ (1,675,340)
------------
NET ASSETS 100.0% ................................................ $ 39,459,516
============
</TABLE>
(a) Non-income producing.
(b) The Franklin Institutional Fiduciary Trust Money Market Portfolio is
managed by Franklin Advisers, Inc.
See notes to financial statements. 45
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BIOTECHNOLOGY GLOBAL HEALTH GLOBAL UTILITIES NATURAL RESOURCES
DISCOVERY FUND CARE FUND FUND FUND
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost ..................................... $ 83,800,374 $ 81,150,467 $ 191,623,570 $ 41,028,099
==============================================================================
Value .................................... 99,769,028 77,418,664 243,594,986 41,134,856
Receivables:
Investment securities sold ............... 1,457,751 1,596,946 1,947,795 300,257
Capital shares sold ...................... 415,114 51,010 1,301,265 77,813
Dividends and interest ................... -- 20,225 494,865 22,834
Deposits with brokers (Note 1) ............. 1,682,261 -- -- --
------------------------------------------------------------------------------
Total assets ......................... 103,324,154 79,086,845 247,338,911 41,535,760
------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased .......... 1,779,688 243,750 5,880,916 313,727
Capital shares redeemed .................. 123,416 359,963 982,003 1,683,266
Affiliates ............................... 131,594 163,031 212,095 54,959
Shareholders ............................. 9,967 40,676 50,093 3,657
Other liabilities .......................... 21,410 41,343 62,368 20,635
------------------------------------------------------------------------------
Total liabilities .................... 2,066,075 848,763 7,187,475 2,076,244
------------------------------------------------------------------------------
Net assets, at value ............... $ 101,258,079 $ 78,238,082 $ 240,151,436 $ 39,459,516
==============================================================================
Net assets consist of:
Undistributed net investment income ........ $ -- $ -- $ 1,058,912 $ 35,113
Accumulated net operating loss ............. (362,617) (380,143) -- --
Net unrealized appreciation (depreciation) . 15,968,661 (3,731,803) 51,971,601 106,772
Accumulated net realized gain (loss) ....... 337,181 (16,842,413) 36,224,087 (5,604,128)
Capital shares ............................. 85,314,854 99,192,441 150,896,836 44,921,759
------------------------------------------------------------------------------
Net assets, at value ................. $ 101,258,079 $ 78,238,082 $ 240,151,436 $ 39,459,516
==============================================================================
</TABLE>
46 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BIOTECHNOLOGY GLOBAL HEALTH GLOBAL UTILITIES NATURAL RESOURCES
DISCOVERY FUND CARE FUND FUND FUND
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A:
Net assets, at value ....................... $ 101,258,079 $ 65,149,014 $220,619,584 $ 39,092,929
================================================================================
Shares outstanding ......................... 3,204,025 4,562,328 11,435,768 2,995,361
================================================================================
Net asset value per share* ................. $ 31.60 $ 14.28 $ 19.29 $ 13.05
================================================================================
Maximum offering price per share
(net asset value per share / 94.25%) .... $ 33.53 $ 15.15 $ 20.47 $ 13.85
================================================================================
CLASS B:
Net assets, at value ....................... -- $ 529,893 $ 413,788 --
================================================================================
Shares outstanding ......................... -- 37,352 21,584 --
================================================================================
Net asset value and maximum offering
price per share* ........................... -- $ 14.19 $ 19.17 --
================================================================================
CLASS C:
Net assets, at value ....................... -- $ 12,559,175 $ 19,118,064 --
================================================================================
Shares outstanding ......................... -- 893,736 999,729 --
================================================================================
Net asset value per share* ................. -- $ 14.05 $ 19.12 --
================================================================================
Maximum offering price per share
(net asset value per share / 99.00%) ....... -- $ 14.19 $ 19.31 --
================================================================================
ADVISOR CLASS:
Net assets, at value ....................... -- -- -- $ 366,587
================================================================================
Shares outstanding ......................... -- -- -- 27,265
================================================================================
Net asset value and maximum offering
price per share ............................ -- -- -- $ 13.45
================================================================================
</TABLE>
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements. 47
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BIOTECHNOLOGY GLOBAL HEALTH GLOBAL UTILITIES NATURAL RESOURCES
DISCOVERY FUND CARE FUND FUND FUND
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:*
Dividends .................................... $ 169,370 $ 318,979 $ 2,537,422 $ 241,669
Interest ..................................... 84,085 65,503 69,727 15,614
-----------------------------------------------------------------------------
Total investment income ............... 253,455 384,482 2,607,149 257,283
-----------------------------------------------------------------------------
Expenses:
Management fees (Note 3) ..................... 254,349 258,586 592,143 137,367
Administrative fees (Note 3) ................. 63,217 -- -- --
Distribution fees (Note 3)
Class A .................................... 128,992 88,542 256,057 74,980
Class B .................................... -- 1,740 986 --
Class C .................................... -- 66,177 85,685 --
Transfer agent fees (Note 3) ................. 128,757 281,424 186,335 81,948
Custodian fees ............................... 928 3,575 18,253 780
Reports to shareholders ...................... 17,157 40,282 36,407 12,096
Registration and filing fees ................. 20,000 17,959 24,967 14,852
Professional fees ............................ 1,829 2,906 4,019 713
Trustees' fees and expenses .................. 503 1,130 1,686 518
Other ......................................... 340 2,304 7,317 2,611
-----------------------------------------------------------------------------
Total expenses ........................ 616,072 764,625 1,213,855 325,865
Expenses waived/paid by affiliate
(Note 3) ............................ -- -- -- (103,474)
-----------------------------------------------------------------------------
Net expenses ........................ 616,072 764,625 1,213,855 222,391
-----------------------------------------------------------------------------
Net investment income (loss) ...... (362,617) (380,143) 1,393,294 34,892
-----------------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................ 4,597,267 (2,192,844) 17,458,319 1,093,274
Foreign currency transactions .............. -- 22,535 (8,495) 9,431
-----------------------------------------------------------------------------
Net realized gain (loss) ............ 4,597,267 (2,170,309) 17,449,824 1,102,705
Net unrealized appreciation (depreciation) on:
Investments ................................ 19,280,288 5,279,289 13,127,930 (1,705,470)
Translation of assets and liabilities
denominated in foreign currencies ........ 7 -- 707 (22)
-----------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) .................... 19,280,295 5,279,289 13,128,637 (1,705,492)
-----------------------------------------------------------------------------
Net realized and unrealized gain (loss) ........ 23,877,562 3,108,980 30,578,461 (602,787)
-----------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations .............................. $ 23,514,945 $ 2,728,837 $ 31,971,755 $ (567,895)
=============================================================================
</TABLE>
*Net of foreign taxes and fees of $4,828, $113,485, and $5,593 for the Franklin
Global Health Care Fund, Franklin Global Utilities Fund, and Franklin Natural
Resources Fund, respectively.
48 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS FOR THE SIX MONTHS ENDED OCTOBER 31, 1999
(UNAUDITED) AND THE YEAR ENDED APRIL 30, 1999
<TABLE>
<CAPTION>
FRANKLIN BIOTECHNOLOGY FRANKLIN
DISCOVERY FUND GLOBAL HEALTH CARE FUND
-------------------------------------------------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
OCTOBER 31, 1999 APRIL 30, 1999 OCTOBER 31, 1999 APRIL 30, 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment loss ...................... $ (362,617) $ (285,652) $ (380,143) $ (1,149,843)
Net realized gain (loss) from investments
and foreign currency transactions ....... 4,597,267 (2,905,988) (2,170,309) (14,678,519)
Net unrealized appreciation (depreciation)
on investments and translation of
assets and liabilities denominated
in foreign currencies ................... 19,280,295 (5,962,288) 5,279,289 (32,520,914)
-------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ........... 23,514,945 (9,153,928) 2,728,837 (48,349,276)
Distributions to shareholders from
net realized gains:
Class A .................................. -- (1,272,491) -- (98,214)
Class C .................................. -- -- -- (16,744)
-------------------------------------------------------------------------------
Total distributions to shareholders ....... -- (1,272,491) -- (114,958)
Capital share transactions: (Note 2)
Class A .................................. 8,293,289 6,330,107 (11,452,534) (60,533,341)
Class B .................................. -- -- 315,988 222,435
Class C .................................. -- -- (1,561,015) (4,883,689)
-------------------------------------------------------------------------------
Total capital share transactions .......... 8,293,289 6,330,107 (12,697,561) (65,194,595)
Net increase (decrease) in net assets.. 31,808,234 (4,096,312) (9,968,724) (113,658,829)
Net assets:
Beginning of period ....................... 69,449,845 73,546,157 88,206,806 201,865,635
-------------------------------------------------------------------------------
End of period ............................. $ 101,258,079 $ 69,449,845 $ 78,238,082 $ 88,206,806
===============================================================================
Accumulated net operating loss included
in net assets:
End of period .............................. $ (362,617) $ (7,680) $ (380,143) $ --
===============================================================================
</TABLE>
See notes to financial statements. 49
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE SIX MONTHS ENDED OCTOBER 31, 1999 (UNAUDITED)
AND THE YEAR ENDED APRIL 30, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
GLOBAL UTILITIES FUND NATURAL RESOURCES FUND
--------------------------------------------------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
OCTOBER 31, 1999 APRIL 30, 1999 OCTOBER 31, 1999 APRIL 30, 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .................... $ 1,393,294 $ 3,289,731 $ 34,892 $ 398,867
Net realized gain (loss) from investments
and foreign currency transactions ....... 17,449,824 18,511,777 1,102,705 (6,100,355)
Net unrealized appreciation (depreciation)
on investments and translation of
assets and liabilities
denominated in foreign currencies ....... 13,128,637 (15,631,278) (1,705,492) (4,510,191)
--------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ............ 31,971,755 6,170,230 (567,895) (10,211,679)
Distributions to shareholders from:
Net investment income:
Class A .................................. (3,036,560) (2,419,109) (249,794) (424,272)
Class B .................................. (1,672) -- -- --
Class C .................................. (215,000) (75,113) -- --
Advisor Class ............................ -- -- (2,323) (10,798)
Net realized gains:
Class A .................................. -- (9,673,260) -- --
Class C .................................. -- (818,825) -- --
--------------------------------------------------------------------------------
Total distributions to shareholders ....... (3,253,232) (12,986,307) (252,117) (435,070)
Capital share transactions: (Note 2)
Class A .................................. (5,638,486) (20,312,303) (4,107,934) (7,774,548)
Class B .................................. 302,452 72,761 -- --
Class C .................................. 58,717 847,862 -- --
Advisor Class ............................ -- -- 54,305 (411,581)
--------------------------------------------------------------------------------
Total capital share transactions .......... (5,277,317) (19,391,680) (4,053,629) (8,186,129)
Net increase (decrease) in net assets.. 23,441,206 (26,207,757) (4,873,641) (18,832,878)
Net assets:
Beginning of period ....................... 216,710,230 242,917,987 44,333,157 63,166,035
--------------------------------------------------------------------------------
End of period ............................. $ 240,151,436 $ 216,710,230 $ 39,459,516 $ 44,333,157
================================================================================
Undistributed net investment income
included in net assets:
End of period ............................. $ 1,058,912 $ 2,918,850 $ 35,113 $ 252,338
================================================================================
</TABLE>
50 See notes to financial statements.
<PAGE>
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 twelve separate
series. All Funds included in this report (the Funds) are non-diversified. The
investment objectives of the Funds included in this report are:
CAPITAL GROWTH TOTAL RETURN
------------------------------------- ------------------------------
Franklin Biotechnology Discovery Fund Franklin Global Utilities Fund
Franklin Global Health Care Fund Franklin Natural Resources Fund
Effective November 15, 1999, the name of the Franklin Global Utilities Fund,
changed to Franklin Global Communications Fund. The fund's investment objectives
and other policies did not change as a result of the name change.
The following summarizes the Funds' significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. SECURITIES SOLD SHORT:
The Franklin Biotechnology Discovery Fund is engaged in selling securities
short, which obligates the fund to replace a borrowed security with the same
security at current market value. The fund would incur a loss if the price of
the security 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.
51
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
c. SECURITIES SOLD SHORT: (CONT.)
The Franklin Biotechnology Discovery 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.
At October 31, 1999, the Franklin Biotechnology Discovery Fund has no open short
sales.
d. INCOME TAXES:
No provision has been made for income taxes because each fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
e. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Common expenses incurred by the Trust are allocated among the funds based on the
ratio of net assets of each fund to the combined net assets. Other expenses are
charged to each fund on a specific identification basis.
Realized and unrealized gains and losses and net investment income (loss), other
than class specific expenses, are allocated daily to each class of shares based
upon the relative proportion of net assets of each class.
f. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the Funds are indicated below.
Effective January 1, 1999, Class I and Class II were renamed Class A and Class
C, respectively, and the Franklin Global Health Care Fund and the Franklin
Global Utilities Fund began offering a new class of shares, Class B. Each class
of shares differ by its initial sales load, distribution fees, voting rights on
matters affecting a single class and the exchange privilege.
<TABLE>
<CAPTION>
CLASS A CLASS A & ADVISOR CLASS CLASS A, CLASS B & CLASS C
- ------------------------------------- ------------------------------- --------------------------------
<S> <C> <C>
Franklin Biotechnology Discovery Fund Franklin Natural Resources Fund Franklin Global Health Care Fund
Franklin Global Utilities Fund
</TABLE>
52
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
At October 31, 1999, there were an unlimited number of shares authorized ($.01
par value). Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
FRANKLIN BIOTECHNOLOGY FRANKLIN
DISCOVERY FUND GLOBAL HEALTH CARE FUND
-------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Six months ended October 31,1999
Shares sold ................... 717,889 $ 21,640,365 3,884,427 $ 56,189,094
Shares issued in reinvestment
of distributions .............. -- -- -- --
Shares redeemed ............... (480,265) (13,347,076) (4,671,270) (67,641,628)
------------------------------------------------------------------------
Net increase (decrease) ....... 237,624 $ 8,293,289 (786,843) $ (11,452,534)
========================================================================
Year ended April 30,1999
Shares sold ................... 1,483,341 $ 35,796,702 9,005,885 $ 143,541,952
Shares issued in reinvestment
of distributions .............. 41,475 975,481 5,766 90,654
Shares redeemed ............... (1,293,474) (30,442,076) (12,818,888) (204,165,947)
------------------------------------------------------------------------
Net increase (decrease) ....... 231,342 $ 6,330,107 (3,807,237) $ (60,533,341)
========================================================================
CLASS B SHARES:
Six months ended October 31,1999
Shares sold ................... 22,400 $ 317,191
Shares issued in reinvestment
of distributions .............. -- --
Shares redeemed ............... (84) (1,203)
----------------------------------
Net increase .................. 22,316 $ 315,988
==================================
Year ended April 30, 1999(1)
Shares sold ................... 15,040 $ 222,495
Shares redeemed ............... (4) (60)
----------------------------------
Net increase .................. 15,036 $ 222,435
==================================
CLASS C SHARES:
Six months ended October 31,1999
Shares sold ................... 134,618 $ 1,896,419
Shares issued in reinvestment
of distributions .............. -- --
Shares redeemed ............... (243,484) (3,457,434)
----------------------------------
Net increase (decrease) ....... (108,866) $ (1,561,015)
==================================
Year ended April 30, 1999
Shares sold ................... 375,736 $ 6,135,515
Shares issued in reinvestment
of distributions .............. 1,001 15,481
Shares redeemed ............... (695,236) (11,034,685)
----------------------------------
Net increase (decrease) ....... (318,499) $ (4,883,689)
==================================
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN
GLOBAL UTILITIES FUND
-----------------------------
SHARES AMOUNT
--------------------------------
<S> <C> <C>
CLASS A SHARES:
Six months ended October 31,1999
Shares sold ................... 1,444,631 $ 25,993,825
Shares issued in reinvestment
of distributions .............. 149,086 2,574,683
Shares redeemed ............... (1,932,416) (34,206,994)
--------------------------------
Net increase (decrease) ....... (338,699) $ (5,638,486)
================================
Year ended April 30,1999
Shares sold ................... 2,575,785 $ 41,641,164
Shares issued in reinvestment
of distributions .............. 688,144 10,403,432
Shares redeemed ............... (4,540,259) (72,356,899)
--------------------------------
Net increase (decrease) ....... (1,276,330) $ (20,312,303)
================================
CLASS B SHARES:
Six months ended October 31,1999
Shares sold ................... 17,758 $ 317,443
Shares issued in reinvestment
of distributions .............. 67 1,153
Shares redeemed ............... (909) (16,144)
--------------------------------
Net increase .................. 16,916 $ 302,452
================================
Year ended April 30, 19991
Shares sold ................... 4,668 $ 72,761
Shares redeemed ............... -- --
--------------------------------
Net increase .................. 4,668 $ 72,761
================================
CLASS C SHARES:
Six months ended October 31,1999
Shares sold ................... 119,357 $ 2,107,455
Shares issued in reinvestment
of distributions .............. 9,993 171,588
Shares redeemed ............... (127,322) (2,220,326)
--------------------------------
Net increase (decrease) ....... 2,028 $ 58,717
================================
Year ended April 30, 1999
Shares sold ................... 348,707 $ 5,558,866
Shares issued in reinvestment
of distributions .............. 51,063 765,827
Shares redeemed ............... (348,295) (5,476,831)
--------------------------------
Net increase (decrease) ....... 51,475 $ 847,862
================================
</TABLE>
(1) For the Franklin Global Health Care Fund and the Franklin Global Utilities
Fund, for the period January 1, 1999 (effective date) to April 30, 1999.
53
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
FRANKLIN
NATURAL RESOURCES FUND
----------------------------
SHARES AMOUNT
----------------------------
<S> <C> <C>
CLASS A SHARES:
Six months ended October 31,1999
Shares sold .................................. 1,719,431 $ 23,649,484
Shares issued in reinvestment of distributions 17,350 232,668
Shares redeemed .............................. (2,063,371) (27,990,086)
----------------------------
Net decrease ................................. (326,590) $ (4,107,934)
============================
Year ended April 30, 1999
Shares sold .................................. 3,435,836 $ 39,238,044
Shares issued in reinvestment of distributions 33,594 390,527
Shares redeemed .............................. (4,175,956) (47,403,119)
----------------------------
Net decrease ................................. (706,526) $ (7,774,548)
============================
ADVISOR CLASS SHARES:
Six months ended October 31,1999
Shares sold .................................. 10,486 $ 147,423
Shares issued in reinvestment of distributions 167 2,297
Shares redeemed .............................. (6,793) (95,415)
----------------------------
Net increase ................................. 3,860 $ 54,305
============================
Year ended April 30, 1999
Shares sold .................................. 117,744 $ 1,462,201
Shares issued in reinvestment of distributions 897 10,797
Shares redeemed .............................. (152,874) (1,884,579)
----------------------------
Net decrease ................................. (34,233) $ (411,581)
============================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), Franklin/Templeton Distributors, Inc.
(Distributors), Franklin Templeton Services, Inc. (FT Services), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Funds'
investment manager, principal underwriter, administrative manager and transfer
agent, respectively.
All Funds pay an investment management fee to Advisers based on the average net
assets of the Funds as follows:
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
54
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES (CONT.)
Fees are further reduced on net assets over $10 billion.
Management fees were reduced on assets invested in the Franklin Institutional
Fiduciary Trust Money Market Portfolio.
The Franklin 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 an agreement with Advisers, FT Services provides administrative services
to the Funds, except the Franklin Biotechnology Discovery Fund. The fee is paid
by Advisers based on the average daily net assets, and is not an additional
expense of the funds.
Advisers agreed in advance to waive management fees for the Franklin Natural
Resources Fund as noted in the Statements of Operations.
The Franklin Biotechnology Discovery Fund and the Franklin Natural Resources
Fund reimburse Distributors up to .35% per year of the funds' average daily net
assets of Class A; the Franklin Global Health Care Fund and the Franklin Global
Utilities Fund reimburse Distributors up to .25%, 1.00%, and 1.00% per year of
the funds' average daily net assets of Class A, Class B, and Class C,
respectively, for costs incurred in marketing the Funds' shares.
Distributors received (paid) net commissions on sales of the Funds' shares, and
received contingent deferred sales charges for the period as follows:
<TABLE>
<CAPTION>
FRANKLIN BIOTECHNOLOGY FRANKLIN GLOBAL FRANKLIN GLOBAL FRANKLIN NATURAL
DISCOVERY FUND HEALTH CARE FUND UTILITIES FUND RESOURCES FUND
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Commissions received (paid) ................ $ 71,478 $(13,031) $(10,656) $ 3,893
Contingent deferred sales charges .............. $ 378 $ 6,438 $ 4,422 $ 413
</TABLE>
The Funds paid transfer agent fees of $678,464, of which $547,079 was paid to
Investor Services.
4. INCOME TAXES
At April 30, 1999, the Franklin Biotechnology Discovery Fund, the Franklin
Global Health Care Fund and the Franklin Natural Resources Fund had tax basis
capital losses of $329,494, $3,510,661, and $3,235,849, respectively, which may
be carried over to offset future capital gains. Such losses expire in 2007.
55
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
4. INCOME TAXES (CONT.)
At April 30, 1999, the Franklin Biotechnology Discovery Fund, the Franklin
Global Health Care Fund and the Franklin Natural Resources Fund had deferred
capital losses occurring subsequent to October 31, 1998 of $2,029,546,
$10,664,364, and $3,461,955, respectively. For tax purposes, such losses will be
reflected in the year ending April 30, 2000.
At April 30, 1999, the Franklin Biotechnology Discovery Fund and the Franklin
Global Utilities Fund had deferred currency losses occurring subsequent to
October 31, 1998 of $7,680 and $334,090, respectively. For tax purposes, such
losses will be reflected in the year ending April 30, 2000.
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions and
passive foreign investment company shares.
Net realized capital gains (losses) differ for financial statement and tax
purposes primarily due to differing treatments of wash sales, foreign currency
transactions, and passive foreign investment company shares.
At October 31,1999, the net unrealized appreciation (depreciation) based on the
cost of investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
FRANKLIN BIOTECHNOLOGY FRANKLIN GLOBAL FRANKLIN GLOBAL FRANKLIN NATURAL
DISCOVERY FUND HEALTH CARE FUND UTILITIES FUND RESOURCES FUND
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments at cost ............................ $ 84,444,367 $ 81,253,945 $ 192,143,222 $ 41,037,333
==================================================================================
Unrealized appreciation ........................ $ 22,844,214 $ 6,973,750 $ 56,149,990 $ 5,304,772
Unrealized depreciation ........................ (7,519,553) (10,809,031) (4,698,226) (5,207,249)
----------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) ..... $ 15,324,661 $ (3,835,281) $ 51,451,764 $ 97,523
==================================================================================
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended October 31,1999 were as follows:
<TABLE>
<CAPTION>
FRANKLIN BIOTECHNOLOGY FRANKLIN GLOBAL FRANKLIN GLOBAL FRANKLIN NATURAL
DISCOVERY FUND HEALTH CARE FUND UTILITIES FUND RESOURCES FUND
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases ...................... $57,687,840 $37,444,409 $82,332,264 $14,342,229
Sales .......................... $57,071,614 $53,069,088 $99,066,319 $14,106,309
</TABLE>
56
<PAGE>
SHAREHOLDER LETTER
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Strategic Income Fund seeks a high level of current
income, with capital appreciation over the long term as a secondary objective.
The fund uses an active asset allocation process and invests in securities of
foreign governments, U.S. and foreign high yield, fixed-income securities,
asset-backed securities, preferred stock, common stock that pays dividends, and
income-producing securities convertible into common stock of such companies.
- --------------------------------------------------------------------------------
The semiannual report for Franklin Strategic Income Fund covers the period ended
October 31, 1999.
The six-month period under review was rather difficult for fixed-income
investments. Although domestic inflation remained relatively benign, concerns
about rising prices and two 0.25% increases in the federal funds target rate
pushed interest rates higher during the period. In fact, 10-year Treasury rates
jumped from 5.3% on April 30, 1999, to end the period at 6.0%. Moreover,
weakness in the equity markets toward the latter half of the reporting period
pressured returns in the more equity-sensitive sectors of the fixed-income
market such as high yield corporate bonds. In this environment, Franklin
Strategic Income Fund sought to take advantage of relative value opportunities
within the fixed-income universe given the fund's flexibility to invest across
six primary asset classes - high yield corporate bonds, foreign government
bonds, emerging market debt securities, U.S. government bonds, mortgage-backed
securities and convertible securities.
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 16 of
this report.
CONTENTS
Shareholder Letter .......... 1
Performance Summary ......... 10
Financial Highlights &
Statement of Investments .... 12
Financial Statements ........ 25
Notes to
Financial Statements ........ 28
[PYRAMID GRAPH]
<PAGE>
"The fund completed its merger with Franklin Investment Grade Income Fund in
August 1999 ..."
Over the past six months, the fund benefited from its exposure to the emerging
market fixed-income sector, as that sector turned in one of the stronger
relative returns during the period. The fund completed its merger with Franklin
Investment Grade Income Fund in August 1999, which added to our U.S. government
and investment-grade corporate holdings. We also increased our exposure to the
mortgage- and asset-backed fixed-income sectors, which turned in some of the
stronger relative results during the reporting period. Overall, however, the
impact of rising global interest rates negatively impacted the fund's
performance during the six-month period, resulting in a -3.18% cumulative total
return for the fund's Class A shares.(1)
Although the rise in interest rates contributed to the fund's softer performance
over this reporting period, we believe that our end-of-period portfolio
positioning, which favors those fixed-income sectors that are more
growth-oriented than interest- rate-sensitive, is appropriate given relative
valuation levels. We feel such sector positioning should lead to superior
returns for our shareholders over the longer term, which is consistent with the
fund's historical performance track record. We encourage you to read further for
more detailed sector discussions and our portfolio management strategies during
the period under review.
HIGH YIELD CORPORATE BONDS
Over the past six months, a combination of rising interest rates, weaker equity
markets, and unfavorable trading factors pressured high yield market prices. In
particular, asset outflows from dedicated high yield mutual funds along with a
moderate level of new-issue volume widened overall yield spreads concurrent with
a rise in nominal Treasury rates. The yield spread is the difference in yield
between Treasuries and lower-rated securities. Although default rates in the
high yield corporate bond market rose in 1999 from their recent lows, in general
the healthy domestic economy should continue to support the fundamental credit
outlook for many high yield issuers. Based upon this outlook, as well as the
historically wide yield spreads this sector offered, high yield corporate bonds
remained the fund's largest sector holding throughout the reporting period.
1. Cumulative total return measures the change in value of an investment,
assuming reinvestment of all distributions, and does not include sales charges.
2
<PAGE>
Merger and acquisition activity as well as other positive events continued to
drive performance for the fund's more heavily weighted cable, media,
broadcasting and wireless communications sectors. Radio station operator
Chancellor Media Corp. (now AMFM Inc.) agreed to merge with
investment-grade-rated Clear Channel Communications, while
investment-grade-rated Infinity Broadcasting announced the acquisition of
outdoor advertiser Outdoor Systems Inc., which drove performance for our bond
positions in both Chancellor Media and Outdoor Systems. We took advantage of
this and sold our position in Outdoor Systems for a profit during the reporting
period. Our holdings in Charter Communications Holdings LLC, one of the top five
cable television operators in the U.S., benefited from that company's announced
initial public stock offering, which was anticipated to price in early November
1999. The fund's position in Nextel Communications Inc., which we increased
during the period, was favorably impacted by strong operating results and the
announcement of a proposed equity offering to raise over $2 billion in capital.
3
<PAGE>
At the end of the reporting period, telecommunications remained the fund's
largest industry allocation, given the robust long-term growth outlook and
consolidation trends for companies operating in that arena. Over the past six
months, we initiated positions in PSINet Inc., a global facilities-based
provider of Internet access, and in Williams Communication Group Inc., a
wholesale telecommunications services provider. The expected growth in demand
for both of these companies' services should drive their operating results for
the next several years and simultaneously lead to improving credit profiles.
During the period, we also sold positions that appeared fully or overvalued in
an attempt to improve the sector's performance by redirecting those assets into
the most attractive high yield names. For example, in July we sold our remaining
position in Paging Network, the largest paging company in the U.S. Disappointing
operating results since then have pushed the bonds down by more than 50%.
PORTFOLIO BREAKDOWN
Based on Total Net Assets
<TABLE>
<CAPTION>
10/31/99 4/30/99
- ----------------------------------------------------------------
<S> <C> <C>
High Yield Corporate Bonds 29.6% 30.0%
Emerging Market Bonds 20.2% 23.4%
Mortgage Securities 11.4% 11.3%
U.S. Government Bonds 10.6% 7.9%
International Bonds 9.9% 11.7%
Convertible Securities 8.5% 8.6%
Investment Grade Corporate Bonds 3.8% 0.0%
Preferred Stock (Non-Convertible) 0.5% 0.5%
Cash & Other Assets 5.5% 6.6%
</TABLE>
4
<PAGE>
EMERGING MARKETS
Although emerging markets experienced high volatility over the past six months,
the sector provided one of the stronger relative total return performances
within the fixed-income asset class, largely as a result of healthy yields
offered in this market. We reduced the fund's weighting in this sector
moderately by period-end, but emerging markets still represented the fund's
second-largest sector weighting, which reflects both the improving fundamental
outlook for select developing countries held in the portfolio as well as the
generous yield spreads over Treasuries provided for investors in this market.
During the six months under review, Latin America remained our top region within
this sector's holdings. Mexico continued to be our largest position in this
sector, and the fundamental outlook for this country remains favorable, as
reflected in the trading levels for that country's sovereign debt. We initiated
a position in Colombia, which had declined largely on fears of the impact of its
currency depreciation. However, with rising yield levels Colombia's sovereign
bonds appeared relatively attractive given a more confident longer-term outlook
for that country's economy. In September, Ecuador defaulted on certain of its
debt obligations, with little impact on the fund. We held a small position in
that country, which we further reduced during the period as the outlook for
these bonds' future recovery values remained unclear.
INTERNATIONAL
Although rising global interest rates pressured pricing in the international
developed bond sector, a modestly weaker U.S. dollar during the second half of
the reporting period helped to support the fund's dollar-based returns in this
sector. However, we kept a fairly moderate exposure to this sector as its total
return potential, barring major currency moves, remains rather constrained
compared to other fixed-income sectors, given the low nominal yields being
offered in many developed international fixed-income markets. In terms of
currency exposure, our positions in this sector were generally unhedged, as the
dollar still appeared vulnerable to further near-term depreciation.
5
<PAGE>
Germany remained our largest European holding during the period, as it still
serves as that region's sovereign benchmark. Based upon relative valuation, our
exposure to Belgium was nearly cut in half, while our position in France was
substantially increased over the past six months. In the dollar-bloc countries
(Australia, New Zealand, Canada) the fund generally maintained its weightings,
with Australia continuing to represent its largest position.
CONVERTIBLE SECURITIES
After rebounding in the first half of 1999, the broad domestic equity markets
experienced a moderate correction during the second half of the reporting
period, only to rally again at the end of October 1999. Although the economy's
strength should continue to support earnings growth, rising nominal interest
rates and the fear of increasing inflation pressured pricing levels in this
sector. The fund remained underweighted in convertible securities relative to
other sectors as valuation levels in the domestic equity markets remained near
record highs. However, going forward we will continue to look for select
opportunities to invest in equities of undervalued companies with favorable
fundamental outlooks, particularly as valuations in this market become more
attractive.
6
<PAGE>
During the period, the fund initiated a position (through the Kerr-McGee
convertible preferred position) in Devon Energy, an oil and gas exploration and
production company. The recent rise in oil and gas commodity prices bodes well
for the company's future earnings prospects and positively impacted Devon's
share price. Our position in Sanmina Corp., a leading provider of electronic
manufacturing services, benefited from the growing demand for Sanmina's services
from telecom and networking companies, driving the stock price higher since the
beginning of the reporting period. Our position in Vodafone (through the
MediaOne Group Inc. convertible preferred stock) continues to benefit from the
healthy subscriber additions and favorable long-term global growth projections
for wireless services. We also continued to exit from companies with
deteriorating fundamentals. For example, we sold our position in Owens-Illinois
Inc. before that company reported soft second quarter 1999 results that pushed
down its common shares.
DIVIDEND DISTRIBUTIONS
5/1/99 - 10/31/99
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
-------------------------------------------------
MONTH CLASS A CLASS B CLASS C ADVISOR CLASS*
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
May 6.8 cents 6.43 cents 6.42 cents --
June 6.8 cents 6.47 cents 6.44 cents --
July 6.8 cents 6.47 cents 6.44 cents --
August 6.8 cents 6.47 cents 6.44 cents --
September 6.8 cents 6.49 cents 6.47 cents 7.00 cents
October 6.8 cents 6.49 cents 6.47 cents 7.01 cents
- ----------------------------------------------------------------
Total 40.8 cents 38.82 cents 38.68 cents 14.01 cents
</TABLE>
*September 1, 1999, the fund began offering Advisor Class shares to investors.
See the prospectus for details.
7
<PAGE>
U.S. GOVERNMENT SECURITIES
Although the fund's weighting in U.S. government securities modestly increased
toward the end of the reporting period, during the six months under review, we
generally held an underweighted exposure in this sector. We increased our
position in the callable government agency market, in an attempt to take
advantage of spread widening in that sector. Although recent increases in the
nominal rates offered in the U.S. government market increased this sector's
attractiveness, total return potential still remains relatively limited compared
to other fixed-income alternatives. Consequently, the fund's exposure remained
generally low at period end.
U.S. MORTGAGE- AND OTHER ASSET-BACKED SECURITIES
The fund continued to overweight its mortgage- and other asset-backed sector
relative to its U.S. government exposure given the historically wide yield
spreads over Treasuries offered in this market. Over the course of the reporting
period, these spread levels did begin to contract, which helped to support
pricing in this sector even in the face of rising domestic interest rates. At
the end of the period we remained modestly overweighted in this sector as the
fundamental outlook for the credit quality and prepayment rates in these markets
would suggest further potential tightening in spread levels.
LOOKING FORWARD
Although domestic economic growth may slow from the 5.5% annualized growth rate
set in the third quarter of 1999, the expectation for moderate growth going
forward into 2000 remains intact. Even though certain measures of domestic
pricing pressure have recently been on the rise, core inflationary rates still
appear relatively subdued. Moreover, on the international front, a strong
economic outlook should help stabilize the fiscal positions of many developing
countries. Given this generally favorable global economic outlook, at period end
we favored more growth-oriented sectors such as high yield corporate bonds and
emerging market securities, particularly considering the above-average yield
spreads these sectors offered. The fund's lower exposure to interest-rate
sensitive sectors continues to reflect the relatively low nominal yields offered
in these markets and these sectors' more limited intermediate-term total return
prospects. As always, we will continue to look for opportunities to enhance our
long-term returns while reducing overall volatility by actively managing sector
and security allocations.
8
<PAGE>
Sincerely,
/s/ Christopher J. Molumphy
Christopher J. Molumphy
Portfolio Manager
Franklin Strategic Income Fund
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1999, the end of the reporting period. Our strategies and the fund's
portfolio composition will change depending on market and economic conditions.
Although historical performance is no guarantee of future results, these
insights may help you understand our investment and management philosophy.
9
<PAGE>
CLASS A (formerly Class I):
Subject to the maximum 4.25% initial sales charge.*
CLASS B:
Subject to no initial sales charge, but subject to a contingent deferred sales
charge (CDSC) declining from 4% to 0% over six years. These shares have higher
annual fees and expenses than Class A shares.*
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18
months of investment. These shares have higher annual fees and expenses than
Class A shares.*
ADVISOR CLASS:
No initial sales charge or Rule 12b-1 fees and are available to a limited class
of investors.*
*The fund's manager has agreed in advance to waive a portion of its management
fees, which reduces expenses and increases distribution rate, yield and total
return to shareholders. If the manager had not taken this action, the fund's
distribution rate and total return would have been lower and yield for the
period would have been 7.61%, 7.55%, 7.47% and 8.22% for Classes A, B, C and
Advisor respectively. The fee waiver may be discontinued at any time, upon
notice to the fund's Board of Directors.
PERFORMANCE SUMMARY AS OF 10/31/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION
<TABLE>
<CAPTION>
CLASS A CHANGE 10/31/99 4/30/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.75 $10.09 $10.84
DISTRIBUTIONS (5/1/99 - 10/31/99)
- --------------------------------------------------------------------------------
Dividend Income $0.408
</TABLE>
<TABLE>
<CAPTION>
CLASS B CHANGE 10/31/99 4/30/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.75 $10.11 $10.86
DISTRIBUTIONS (5/1/99 - 10/31/99)
- --------------------------------------------------------------------------------
Dividend Income $0.3882
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 10/31/99 4/30/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.75 $10.09 $10.84
DISTRIBUTIONS (5/1/99 - 10/31/99)
- --------------------------------------------------------------------------------
Dividend Income $0.3868
</TABLE>
<TABLE>
<CAPTION>
ADVISOR CLASS CHANGE 10/31/99 8/12/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.02 $10.09 $10.11
DISTRIBUTIONS (9/1/99 - 10/31/99)
- --------------------------------------------------------------------------------
Dividend Income $0.1401
</TABLE>
Past performance is not predictive of future results.
10
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 6-MONTH 1-YEAR 5-YEAR (5/24/94)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) -3.18% +4.16% +57.84% +61.91%
Average Annual Total Return(2) -7.29% -0.23% +8.62% +8.40%
Value of $10,000 Investment(3) $9,271 $9,977 $15,117 $15,508
Distribution Rate(4) 7.74%
30-Day Standardized Yield(5) 7.75%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 6-MONTH (1/1/99)
- --------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) -3.36% -0.07%
Aggregate Total Return(2) -7.08% -3.83%
Value of $10,000 Investment(3) $9,292 $9,617
Distribution Rate(4) 7.70%
30-Day Standardized Yield(5) 7.69%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 6-MONTH 1-YEAR (5/1/98)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) -3.38% +3.72% +0.09%
Average Annual Total Return(2) -5.27% +1.69% -0.59%
Value of $10,000 Investment(3) $9,473 $10,169 $9,912
Distribution Rate(4) 7.62%
30-Day Standardized Yield(5) 7.61%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS(6) 6-MONTH 1-YEAR 5-YEAR (5/24/94)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) -3.14% +4.20% +57.91% +61.97%
Average Annual Total Return(2) -3.14% +4.20% +9.57% +9.27%
Value of $10,000 Investment(3) $9,686 $10,420 $15,791 $16,197
Distribution Rate(4) 8.34%
30-Day Standardized Yield(5) 8.37%
</TABLE>
Past performance is not predictive of future results.
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the applicable, maximum
sales charge(s) for that class. Six-month return has not been annualized. Since
Class B shares have existed for less than one year, the figures for that class
represent aggregate total return from inception, including the maximum sales
charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include sales charges.
4. Distribution rate is based on an annualization of the respective class's
October dividend and the maximum offering price (net asset value price for Class
B and Advisor Class) per share on October 31, 1999.
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, 1999.
6. On September 1, 1999, 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 August 12, 1999, figures reflect
Class A performance, excluding the effect of the Class A sales charge, but
including the effect of Rule 12b-1 fees and other Class A expenses; and (b) for
periods after August 12, 1999, figures reflect actual Advisor Class performance,
including the deduction of all fees and expenses applicable only to that class.
Since August 12, 1999, the cumulative and average annual total returns of
Advisor Class shares were 1.20% and 5.58% respectively.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions,
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. High yield corporate securities entail greater risk
than higher-rated securities. You may have a gain or loss when you sell your
shares.
11
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 1999 --------------------------
(UNAUDITED)** 1999 1998
---------------- ----------- -----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............... $ 10.84 $ 11.24 $ 10.86
----------- ----------- -----------
Income from investment operations:
Net investment income ............................. .41 .86 .87
Net realized and unrealized gains (losses) ........ (.75) (.43) .50
----------- ----------- -----------
Total from investment operations ................... (.34) .43 1.37
----------- ----------- -----------
Less distributions from:
Net investment income ............................. (.41) (.83) (.90)
Net realized gains ................................ -- -- (.09)
----------- ----------- -----------
Total distributions ................................ (.41) (.83) (.99)
----------- ----------- -----------
Net asset value, end of period ..................... $ 10.09 $ 10.84 $ 11.24
=========== =========== ===========
Total return* ...................................... (3.18%) 4.23% 13.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $ 282,978 $ 247,574 $ 166,633
Ratios to average net assets:
Expenses .......................................... .76%(2) .58% .25%
Expenses excluding waiver and payments by
affiliate ........................................ .96%(2) .99% 1.05%
Net investment income ............................. 7.88%(2) 7.99% 7.65%
Portfolio turnover rate ............................ 23.48% 48.68% 47.47%
</TABLE>
<TABLE>
<CAPTION>
CLASS A
---------------------------------------
YEAR ENDED APRIL 30,
---------------------------------------
1997 1996 1995(1)
----------- ----------- -----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............... $ 10.77 $ 10.18 $ 10.00
----------- ----------- -----------
Income from investment operations:
Net investment income ............................. .93 .85 .70
Net realized and unrealized gains (losses) ........ .39 .67 .15
----------- ----------- -----------
Total from investment operations ................... 1.32 1.52 .85
----------- ----------- -----------
Less distributions from:
Net investment income ............................. (.96) (.82) (.67)
Net realized gains ................................ (.27) (.11) --
----------- ----------- -----------
Total distributions ................................ (1.23) (.93) (.67)
----------- ----------- -----------
Net asset value, end of period ..................... $ 10.86 $ 10.77 $ 10.18
=========== =========== ===========
Total return* ...................................... 12.64% 15.59% 8.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $ 34,864 $ 13,022 $ 6,736
Ratios to average net assets:
Expenses .......................................... .23% .25% .25%(2)
Expenses excluding waiver and payments by
affiliate ........................................ 1.05% 1.08% 1.38%(2)
Net investment income ............................. 8.60% 8.53% 7.93%(2)
Portfolio turnover rate ............................ 114.26% 73.95% 68.43%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
**Based on average shares outstanding.
(1)For the period May 24, 1994 (effective date) to April 30, 1995.
(2)Annualized
12
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 1999 YEAR ENDED
(UNAUDITED)** APRIL 30, 1999(1)
-----------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............... $ 10.86 $ 10.76
-----------------------------------------
Income from investment operations:
Net investment income ............................. .38 .29
Net realized and unrealized gains (losses) ........ (.74) .07
-----------------------------------------
Total from investment operations ................... (.36) .36
-----------------------------------------
Less distributions from net investment income ...... (.39) (.26)
-----------------------------------------
Net asset value, end of period ..................... $ 10.11 $ 10.86
=========================================
Total return* ...................................... (3.36%) 3.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $ 9,617 $ 4,281
Ratios to average net assets:
Expenses .......................................... 1.16%(2) .98%(2)
Expenses excluding waiver and payments by affiliate 1.34%(2) 1.39%(2)
Net investment income ............................. 7.46%(2) 7.59%(2)
Portfolio turnover rate ............................ 23.48% 48.68%
</TABLE>
*Total return does not reflect the contingent deferred sales charge, and is not
annualized for periods less than one year.
**Based on average shares outstanding.
(1)For the period January 1, 1999 (effective date) to April 30, 1999.
(2)Annualized
13
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS C
-----------------------------------
SIX MONTHS ENDED
OCTOBER 31, 1999 YEAR ENDED
(UNAUDITED)** APRIL 30, 1999
-----------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................... $ 10.84 $ 11.19
--------------------------------
Income from investment operations:
Net investment income ................................. .39 .76
Net realized and unrealized losses .................... (.75) (.40)
--------------------------------
Total from investment operations ....................... (.36) .36
--------------------------------
Less distributions from net investment income .......... (.39) (.71)
--------------------------------
Net asset value, end of period ......................... $ 10.09 $ 10.84
================================
Total return* .......................................... (3.38%) 3.59%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ...................... $ 40,350 $ 36,245
Ratios to average net assets:
Expenses .............................................. 1.16%(2) .98%
Expenses excluding waiver and payments by affiliate ... 1.36%(2) 1.39%
Net investment income ................................. 7.50%(2) 7.59%
Portfolio turnover rate ................................ 23.48% 48.68%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
**Based on average shares outstanding.
(2)Annualized
14
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
ADVISOR CLASS
----------------
SIX MONTHS ENDED
OCTOBER 31, 1999
(UNAUDITED)(1)
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE**
(for a share outstanding throughout the period)
Net asset value, beginning of period ..................................... $10.11
------
Income from investment operations:
Net investment income ................................................... .17
Net realized and unrealized losses ...................................... (.05)
------
Total from investment operations ......................................... (.12)
------
Less distributions from net investment income ............................ (.14)
------
Net asset value, end of period ........................................... $10.09
======
Total return* ............................................................ 1.20%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ........................................ $9,743
Ratios to average net assets:
Expenses ................................................................ .50%(2)
Expenses excluding waiver and payments by affiliate ..................... .62%(2)
Net investment income ................................................... 7.68%(2)
Portfolio turnover rate .................................................. 23.48%
</TABLE>
*Total return is not annualized for periods less than one year.
**Based on average shares outstanding.
(1)For the period August 12, 1999 (effective date) to October 31, 1999.
(2)Annualized
See notes to financial statements.
15
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES/
COUNTRY WARRANTS VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(a)COMMON STOCKS AND WARRANTS .1%
Harvard Industries Inc. ........................................................... United States 8,240 $ 57,680
Loral Orion Network System, wts., 1/15/07 ......................................... United States 300 2,143
R&B Falcon Corp., wts., 5/01/09 ................................................... United States 750 187,500
Republic of Venezuela, Oil Value Recovery, wts., 4/15/20 .......................... Venezuela 3,035 --
Weatherford International Inc. .................................................... United States 5,686 192,613
-----------
TOTAL COMMON STOCKS, WARRANTS AND RIGHTS (COST $507,006) .......................... 439,936
-----------
PREFERRED STOCKS .4%
Fresenius Medical Care AG, 9.00%, pfd ............................................. Germany 100 94,500
R&B Falcon Corp., 13.875%, pfd., PIK .............................................. United States 806 789,512
Sinclair Capital, 11.625%, pfd .................................................... United States 3,000 300,750
-----------
TOTAL PREFERRED STOCKS (COST $1,168,986) .......................................... 1,184,762
-----------
CONVERTIBLE PREFERRED STOCKS 5.3%
CONSUMER NON-DURABLES .4%
Ralston Purina Co., Interstate Bakeries, 7.00%, cvt. pfd., ........................ United States 35,000 1,454,688
-----------
CONSUMER SERVICES .6%
Host Marriott Corp., 6.75%, cvt. pfd .............................................. United States 60,000 2,025,000
-----------
ENERGY MINERALS .7%
Kerr-McGee Corp., 5.50%, cvt. pfd ................................................. United States 60,500 2,276,313
-----------
FINANCE .7%
Protective Life Capital Trust II, 6.50%, cvt. pfd ................................. United States 40,000 2,330,000
-----------
INDUSTRIAL SERVICES .5%
AES Trust III, 6.75%, cvt. pfd .................................................... United States 32,500 1,639,219
-----------
PROCESS INDUSTRIES .4%
Hercules Inc. Trust II, 6.50%, cvt. pfd, CRESTS Unit .............................. United States 2,000 1,500,000
-----------
TELECOMMUNICATIONS 1.4%
MediaOne Group Inc., 6.25%, cvt. pfd .............................................. United States 23,000 2,392,000
(d)MediaOne Group Inc., 7.00%, cvt. pfd ............................................ United States 55,600 2,540,225
-----------
4,932,225
-----------
UTILITIES .6%
Texas Utilities Co., 9.25%, cvt. pfd .............................................. United States 40,000 2,032,500
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $18,084,581) ............................. 18,189,945
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT*
-----------
<S> <C> <C> <C>
BONDS 33.4%
COMMERCIAL SERVICES .4%
AmeriServe Food Distribution Inc., senior note, 8.875%, 10/15/06 ....................... United States $ 500,000 327,500
AmeriServe Food Distribution Inc., senior sub. note, 10.125%, 7/15/07 .................. United States 900,000 436,500
Fleming Cos. Inc., senior sub. note, B, 10.50%, 12/01/04 ............................... United States 500,000 462,500
-----------
1,226,500
-----------
</TABLE>
16
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT* VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
CONSUMER DURABLES .7%
Dura Operating Corp., senior sub. note, Series B, 9.00%, 5/01/09 ....................... United States $ 1,000,000 $ 922,500
Pillowtex Corp., senior sub. note, B, 9.00%, 12/15/07 .................................. United States 2,000,000 610,000
Sealy Mattress Co., senior disc. note, B, zero cpn. to 12/15/02, 10.875% thereafter,
12/15/07 .............................................................................. United States 300,000 202,500
Sealy Mattress Co., senior sub. note, B, 9.875%, 12/15/07 .............................. United States 200,000 195,000
Windmere-Durable Holdings Inc., senior sub. note, 10.00%, 7/31/08 ...................... United States 500,000 483,750
-----------
2,413,750
-----------
CONSUMER NON-DURABLES .5%
Compania De Alimentos Fargo SA, senior note, 13.25%, 8/01/08 ........................... Argentina 500,000 396,250
Revlon Consumer Products Corp., senior note, 9.00%, 11/01/06 ........................... United States 500,000 402,500
Revlon Consumer Products Corp., senior sub. note, 8.625%, 2/01/08 ...................... United States 1,500,000 825,000
-----------
1,623,750
-----------
CONSUMER SERVICES 6.6%
AMF Bowling Worldwide Inc., senior disc. note, B, zero cpn. to 3/15/01, 12.25%
thereafter, 3/15/06 ................................................................... United States 1,118,000 564,590
AMFM Inc., 9.00%, 10/01/08 ............................................................. United States 2,000,000 2,055,000
AMFM Inc., senior note, 8.00%, 11/01/08 ................................................ United States 1,000,000 995,000
Charter Communications Holdings LLC, senior disc. note, 144A, zero cpn. to 4/01/04,
9.92% thereafter, 4/01/11 ............................................................. United States 4,250,000 2,528,750
CSC Holdings Inc., senior sub. deb., 9.875%, 4/01/23 ................................... United States 1,750,000 1,820,000
Diamond Holdings PLC, senior note, 9.125%, 2/01/08 ..................................... United Kingdom 1,000,000 990,000
Fox/Liberty Networks LLC, senior disc. note, zero cpn. to 8/15/02, 9.75% thereafter,
8/15/07 ............................................................................... United States 2,000,000 1,570,000
Harrah's Operating Co. Inc., senior sub. note, 7.875%, 12/15/05 ........................ United States 1,750,000 1,666,875
Prime Hospitality Corp., senior sub. note, B, 9.75%, 4/01/07 ........................... United States 2,000,000 1,870,000
Regal Cinemas Inc., senior sub. note, 9.50%, 6/01/08 ................................... United States 2,000,000 1,510,000
Sinclair Broadcast Group Inc., senior sub. note, 8.75%, 12/15/07 ....................... United States 1,700,000 1,564,000
Six Flags Entertainment Corp., senior note, 8.875%, 4/01/06 ............................ United States 1,250,000 1,200,000
Telewest Communications PLC, senior disc. deb., zero cpn. to 10/01/00, 11.00%
thereafter, 10/01/07 .................................................................. United Kingdom 2,000,000 1,827,500
Telewest Communications PLC, senior disc. note, 144A, zero cpn. to 4/15/04, 9.25%
thereafter, 4/15/09 ................................................................... United Kingdom 500,000 306,250
United Pan-Europe Communications NV, senior disc. note,144A, zero cpn. to 8/01/04,
12.50% thereafter, 8/01/09 ............................................................ Netherlands 4,250,000 2,252,500
-----------
22,720,465
-----------
ENERGY MINERALS 2.2%
Abraxas Petroleum Corp., senior note, D, 11.50%, 11/01/04 .............................. United States 880,000 558,800
Chesapeake Energy Corp., senior note, B, 9.625%, 5/01/05 ............................... United States 2,000,000 1,890,000
Clark R&M Inc., senior sub. note, 8.875%, 11/15/07 ..................................... United States 1,000,000 785,000
Conproca SA, S.F., senior secured note, 144A, 12.00%, 6/16/10 .......................... Mexico 1,800,000 1,728,000
P&L Coal Holdings Corp., senior sub. note, B, 9.625%, 5/15/08 .......................... United States 2,500,000 2,406,250
-----------
7,368,050
-----------
</TABLE>
17
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT* VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
FINANCE 1.2%
Sears Roebuck Acceptance Corp., MTN, 6.13%, 11/15/05 ................................... United States $ 775,000 $ 771,337
Sears Roebuck Acceptance, MTN, 6.15%, 11/15/05 ......................................... United States 725,000 716,710
Southtrust Bank of Birmingham, 5.58%, 2/06/06 .......................................... United States 2,500,000 2,474,160
-----------
3,962,207
-----------
HEALTH SERVICES 1.5%
Express Scripts Inc., senior note, 9.625%, 6/15/09 ..................................... United States 2,000,000 2,010,000
Fresenius Medical Care Capital Trust, 7.875%, 2/01/08 .................................. Germany 2,000,000 1,770,000
Magellan Health Services Inc., senior sub. note, 9.00%, 2/15/08 ........................ United States 1,000,000 855,000
Pharmerica Inc., senior sub. note, 8.375%, 4/01/08 ..................................... United States 350,000 228,375
(c)Vencor Operating Inc., senior sub. note, 9.875%, 5/01/05 ............................. United States 1,500,000 307,500
-----------
5,170,875
-----------
HEALTH TECHNOLOGY .6%
Bausch & Lomb, MTN, B, 6.56%, 8/12/26 .................................................. United States 2,000,000 1,967,458
-----------
INDUSTRIAL SERVICES 1.7%
Allied Waste North America Inc., senior note, B, 7.875%, 1/01/09 ....................... United States 2,500,000 2,118,750
R&B Falcon Corp., senior note, 12.25%, 3/15/06 ......................................... United States 1,000,000 1,060,000
Universal Compression Inc., senior disc. note, zero cpn. to 2/15/03, 9.875% thereafter,
2/15/08 ............................................................................... United States 1,250,000 775,000
WMX Technologies, 6.65%, 5/15/05 ....................................................... United States 2,000,000 1,969,462
-----------
5,923,212
-----------
NON-ENERGY MINERALS .2%
LTV Corp., senior note, 8.20%, 9/15/07 ................................................. United States 900,000 778,500
-----------
PROCESS INDUSTRIES 3.1%
Anchor Glass Container, senior note, 9.875%, 3/15/08 ................................... United States 700,000 630,000
Anchor Glass, first mortgage, 11.25%, 4/01/05 .......................................... United States 300,000 297,750
Consolidated Container Co. LLC, senior sub. note, 144A, 10.125%, 7/15/09 ............... United States 2,000,000 2,015,000
Four M Corp., senior note, B, 12.00%, 6/01/06 .......................................... United States 200,000 186,500
Graham Packaging Co., senior disc. note, B, zero cpn. to 1/15/03, 10.75% thereafter,
1/15/09 ............................................................................... United States 1,700,000 1,096,500
Graham Packaging Co., senior sub. note, B, 8.75%, 1/15/08 .............................. United States 200,000 187,000
Lyondell Chemical Co., senior secured note, 9.875%, 5/01/07 ............................ United States 2,500,000 2,481,250
Packaging Corp. Of America, senior sub. note, 144A, 9.625%, 4/01/09 .................... United States 2,250,000 2,250,000
Pindo Deli Finance Mauritius Ltd., senior note, 10.25%, 10/01/02 ....................... Indonesia 700,000 502,250
(c)Purina Mills Inc., senior sub. note, 9.00%, 3/15/10 .................................. United States 2,000,000 450,000
Repap New Brunswick, senior note, 9.00%, 6/01/04 ....................................... Canada 700,000 682,500
-----------
10,778,750
-----------
PRODUCER MANUFACTURING 1.8%
American Axle & Manufacturing Inc., senior sub. note, 9.75%, 3/01/09 ................... United States 1,500,000 1,485,000
Cambridge Industries Inc., senior sub. note, B, 10.25%, 7/15/07 ........................ United States 600,000 399,000
Nortek Inc., senior note, 8.875%, 8/01/08 .............................................. United States 500,000 471,250
Nortek Inc., senior note, B, 9.125%, 9/01/07 ........................................... United States 300,000 288,750
Talon Automotive Group Inc., senior sub. note, B, 9.625%, 5/01/08 ...................... United States 800,000 644,000
</TABLE>
18
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT* VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
PRODUCER MANUFACTURING (CONT.)
Terex Corp., senior sub. note, 8.875%, 4/01/08 .......................................... United States $ 500,000 $ 467,500
Terex Corp., senior sub. note, 8.875%, 4/01/08 .......................................... United States 1,000,000 935,000
Xerox Corp., 5.90%, 5/05/37 ............................................................. United States 1,500,000 1,504,470
-----------
6,194,970
-----------
RETAIL TRADE .4%
Penney J.C. & Co., 6.90%, 8/15/26 ....................................................... United States 1,500,000 1,470,783
-----------
TECHNOLOGY SERVICES .7%
PSINet Inc., senior note, 144A, 11.00%, 8/01/09 ......................................... United States 2,250,000 2,295,000
-----------
TELECOMMUNICATIONS 10.1%
Allegiance Telecom Inc., senior disc. note, B, zero cpn. to 2/15/03, 11.75%, thereafter,
2/15/08 ................................................................................ United States 2,000,000 1,350,000
Arch Communications Group Inc., senior disc. note, zero cpn. to 3/15/01, 10.875%,
thereafter, 3/15/08 .................................................................... United States 300,000 121,500
Bellsouth Telecommunications Inc., 5.85%, 11/15/45 ...................................... United States 2,000,000 1,995,098
Call-Net Enterprises Inc., senior note, 9.375%, 5/15/09 ................................. Canada 2,750,000 2,516,250
Clearnet Communications Inc., senior disc. note, zero cpn. to 5/01/04, 10.125%
thereafter, 5/01/09 .................................................................... Canada 3,250,000 1,958,125
Dobson/Sygnet Communications Co., senior note, 12.25%, 12/15/08 ......................... United States 2,000,000 2,150,000
IntelCom Group Inc., senior secured disc. note, zero cpn. to 5/01/01, 12.50% thereafter,
5/01/06 ............................................................................... United States 2,250,000 1,698,750
Intermedia Communications Inc., senior disc. note, B, zero cpn. to 7/15/02, 11.25%
thereafter, 7/15/07 .................................................................... United States 2,000,000 1,390,000
IXC Communications Inc., senior sub. note, 9.00%, 4/15/08 ............................... United States 1,000,000 1,000,000
Level 3 Communications Inc., senior disc. note, zero cpn to 12/01/03, 10.50% thereafter,
12/01/08 ............................................................................... United States 4,000,000 2,430,000
Loral Orion Network Systems, senior disc. note, zero cpn. to 1/15/02, 12.50% thereafter,
1/15/07 ................................................................................ United States 300,000 130,500
McLeodUSA Inc., senior note, 8.125%, 2/15/09 ............................................ United States 2,000,000 1,860,000
Metrocall Inc., senior sub. note, 9.75%, 11/01/07 ....................................... United States 1,000,000 577,500
Metrocall Inc., senior sub. note, 11.00%, 9/15/08 ....................................... United States 1,000,000 607,500
Microcell Telecommunications Inc., senior disc. note, B, zero cpn. to 12/01/01, 14.00%
thereafter, 6/01/06 .................................................................... Canada 450,000 373,500
Millicom International Cellular SA, senior disc. note, zero cpn. to 6/01/01, 13.50%
thereafter, 6/01/06 .................................................................... Luxembourg 300,000 219,000
Nextel Communications Inc., senior disc. note, zero cpn. to 10/31/02, 9.75% thereafter,
10/31/07 ............................................................................... United States 500,000 362,500
Nextel Communications Inc., senior disc. note, zero cpn. to 2/15/03, 9.95% thereafter,
2/15/08 ................................................................................ United States 3,500,000 2,502,500
NEXTLINK Communications Inc., 144A, zero cpn. to 6/01/04, 12.25% thereafter, 6/01/09 .... United States 2,000,000 1,170,000
NEXTLINK Communications Inc., senior disc. note, zero cpn. to 4/15/03, 9.45% thereafter,
4/15/08 ................................................................................ United States 650,000 390,000
NEXTLINK Communications Inc., senior note, 9.625%, 10/01/07 ............................. United States 250,000 241,875
NEXTLINK Communications Inc., senior note, 9.00%, 3/15/08 ............................... United States 750,000 706,875
</TABLE>
19
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT* VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
TELECOMMUNICATIONS (CONT.)
Omnipoint Corp., senior note, 144A, 11.50%, 9/15/09 .................................... United States $ 2,000,000 $ 2,090,000
RSL Communications PLC, senior disc. note, zero cpn. to 3/01/03, 10.125% thereafter,
3/01/08 ............................................................................... United Kingdom 1,000,000 565,000
RSL Communications PLC, senior note, 12.00%, 11/01/08 .................................. United Kingdom 750,000 738,750
Spectrasite Holdings Inc., senior disc. note, zero cpn. to 4/15/04, 11.25% thereafter,
4/15/09 ............................................................................... United States 3,750,000 1,968,750
Triton PCS Inc., sub. disc. note, zero cpn. to 5/01/03, 11.00% thereafter, 5/01/08 ..... United States 1,750,000 1,207,500
Williams Communications Group Inc., senior note, 10.875%, 10/01/09 ..................... United States 2,250,000 2,323,125
------------
34,644,598
------------
TRANSPORTATION .5%
American Commercial Lines LLC, senior note, 10.25%, 6/30/08 ............................ United States 1,000,000 927,500
Ultrapetrol (Bahamas) Ltd., first mortgage, 10.50%, 4/01/08 ............................ Bahamas 1,000,000 815,000
------------
1,742,500
------------
UTILITIES 1.2%
AES China Generating Co., senior note, 10.125%, 12/15/06 ............................... China 100,000 60,000
AES Corp., senior note, 9.50%, 6/01/09 ................................................. United States 2,500,000 2,500,000
CMS Energy Corp., senior note, 7.50%, 1/15/09 .......................................... United States 1,650,000 1,480,875
------------
4,040,875
------------
TOTAL BONDS (COST $126,734,324) ........................................................ 114,322,243
------------
CONVERTIBLE BONDS 3.2%
ELECTRONIC TECHNOLOGY .7%
Sanmina Corp., cvt., 144A, 4.25%, 5/01/04 .............................................. United States 2,000,000 2,457,500
------------
HEALTH SERVICES .6%
Omnicare Inc., cvt. sub. deb., 5.00%, 12/01/07 ......................................... United States 3,000,000 1,856,700
------------
INDUSTRIAL SERVICES .6%
Diamond Offshore Drilling, cvt. sub. note, 3.75%, 2/15/07 .............................. United States 2,000,000 2,050,000
------------
TECHNOLOGY SERVICES .7%
Affiliated Computer Services, cvt., sub. note, 4.00%, 3/15/05 .......................... United States 2,300,000 2,495,500
------------
TELECOMMUNICATIONS .6%
Global Telesystems Group Inc., cvt., 5.75%, 7/01/10 .................................... United States 1,950,000 2,045,063
------------
TOTAL CONVERTIBLE BONDS (COST $11,948,838) ............................................. 10,904,763
------------
OTHER MORTGAGES/OTHER ASSET BACKED SECURITIES 2.9%
Champion Home Equity Loan Trust, Series 1996-2, Class A4, 8.00%, 9/25/28 ............... United States 1,000,000 1,022,555
Delta Home Equity, Series 1998-2, class AGF, 6.37%, 7/15/28 ............................ United States 2,000,000 1,906,390
Green Tree Financial Corp., Series 1992-2, Class A6, 6.92%, 12/01/30 ................... United States 1,000,000 907,461
Green Tree Financial Corp., Series 1996-2, Class A4, 7.20%, 4/15/27 .................... United States 1,200,000 1,199,658
Merrill Lynch Mortgage Investors Inc., Series 1995-C3, Class A3, 6.99%, 12/26/25 ...... United States 500,000 496,868
Merrill Lynch Mortgage Investors Inc., Series 1998-C2, Class A2, 6.39, 2/15/30 ......... United States 2,000,000 1,910,990
Morgan Stanley Capital I, Series 1998-WFI, Class A2, 6.55%, 12/15/07 ................... United States 2,000,000 1,910,937
Residential Asset Securities Corp., Series 1999-KSI, Class AI8, 6.32%, 4/25/30 ......... United States 750,000 710,269
------------
TOTAL OTHER MORTGAGES/OTHER ASSET BACKED SECURITIES (COST $10,410,842) ................. 10,065,128
------------
</TABLE>
20
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT* VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government and Agency Securities/Mortgages 19.1%
U.S. GOVERNMENT AGENCIES/MORTGAGES 8.5%
FHLMC, 7.00%, 1/01/09 .................................................................. United States $ 12,464 $ 12,549
FHLMC, 6.50%, 4/01/11 .................................................................. United States 22,506 22,175
FHLMC, 7.00%, 9/01/11 .................................................................. United States 24,702 24,744
FHLMC, 7.00%, 4/01/24 .................................................................. United States 29,233 28,809
FHLMC, 7.50%, 4/01/24 .................................................................. United States 25,888 26,065
FHLMC, 8.50%, 12/01/24 ................................................................. United States 13,315 13,839
FHLMC, 9.00%, 12/01/24 ................................................................. United States 6,116 6,428
FHLMC, 7.00%, 11/01/25 ................................................................. United States 19,369 19,062
FHLMC, 8.00%, 11/01/25 ................................................................. United States 14,790 15,117
FHLMC, 6.50%, 12/01/25 ................................................................. United States 27,773 26,827
FHLMC, 7.50%, 1/01/26 .................................................................. United States 17,094 17,190
FHLMC, 8.00%, 1/01/26 .................................................................. United States 9,416 9,624
FHLMC, 6.50%, 3/01/26 .................................................................. United States 41,075 39,565
FHLMC, 7.00%, 9/01/26 .................................................................. United States 21,920 21,567
FHLMC, 7.50%, 1/01/27 .................................................................. United States 32,566 32,743
FHLMC, 7.00%, 4/01/28 .................................................................. United States 118,599 116,677
FHLMC, 7.00%, 4/01/28 .................................................................. United States 173,506 170,694
FHLMC, 7.00%, 5/01/28 .................................................................. United States 475,984 468,138
FHLMC, 6.50%, 6/01/29 .................................................................. United States 498,521 478,440
FNMA, 7.50%, 10/01/07 .................................................................. United States 18,970 19,214
FNMA, 6.50%, 2/01/09 ................................................................... United States 19,580 19,344
FNMA, 6.50%, 4/01/11 ................................................................... United States 16,429 16,183
FNMA, 6.00%, 4/01/13 ................................................................... United States 931,446 896,997
FNMA, 6.50%, 6/01/13 ................................................................... United States 811,025 797,072
FNMA, 5.50%, 3/01/14 ................................................................... United States 965,355 909,164
FNMA, 5.50%, 6/01/14 ................................................................... United States 502,342 473,102
FNMA, 5.50%, 6/01/14 ................................................................... United States 495,058 466,241
FNMA, 7.50%, 9/01/14 ................................................................... United States 497,404 503,906
FNMA, 6.50%, 1/01/24 ................................................................... United States 25,292 24,452
FNMA, 7.00%, 5/01/24 ................................................................... United States 10,899 10,757
FNMA, 8.00%, 1/01/25 ................................................................... United States 11,084 11,310
FNMA, 9.00%, 3/01/25 ................................................................... United States 3,389 3,558
FNMA, 9.00%, 5/01/25 ................................................................... United States 2,469 2,592
FNMA, 8.50%, 7/01/25 ................................................................... United States 11,431 11,894
FNMA, 8.00%, 12/01/25 .................................................................. United States 394,544 402,505
FNMA, 7.00%, 1/01/26 ................................................................... United States 32,305 31,829
FNMA, 7.00%, 3/01/26 ................................................................... United States 37,115 36,508
FNMA, 8.00%, 5/01/26 ................................................................... United States 10,837 11,056
FNMA, 8.00%, 6/01/26 ................................................................... United States 6,911 7,051
FNMA, 7.50%, 10/01/26 .................................................................. United States 6,289 6,311
FNMA, 8.00%, 1/01/27 ................................................................... United States 10,810 11,027
FNMA, 7.00%, 4/01/27 ................................................................... United States 557,785 548,523
FNMA, 6.50%, 3/01/28 ................................................................... United States 2,766,787 2,655,227
FNMA, 7.00%, 6/01/28 ................................................................... United States 1,215,736 1,194,776
FNMA, 6.00%, 9/01/28 ................................................................... United States 939,736 877,005
FNMA, 6.00%, 10/01/28 .................................................................. United States 906,799 846,267
</TABLE>
21
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT* VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[U.S. GOVERNMENT AND AGENCY SECURITIES/MORTGAGES (CONT.)]
U.S. GOVERNMENT AGENCIES/MORTGAGES (CONT.)
FNMA, 6.50%, 12/01/28 ............................................................... United States $ 925,556 $ 888,237
FNMA, 7.50%, 12/01/28 ............................................................... United States 49,771 49,928
FNMA, 6.00%, 1/01/29 ................................................................ United States 988,230 922,262
FNMA, 6.00%, 1/01/29 ................................................................ United States 970,083 905,326
FNMA, 7.00%, 5/01/29 ................................................................ United States 936,001 919,865
FNMA, 6.50%, 8/01/29 ................................................................ United States 499,036 478,679
FNMA, 6.50%, 8/01/29 ................................................................ United States 499,141 478,780
FNMA, 6.50%, 9/01/29 ................................................................ United States 1,000,099 959,303
FNMA, 7.50%, 9/01/29 ................................................................ United States 1,596,269 1,601,357
FNMA, 7.50%, 10/01/29 ............................................................... United States 1,000,000 1,003,187
GNMA I, 7.50%, 5/15/27 .............................................................. United States 753,142 755,902
GNMA I, 7.00%, 11/15/27 ............................................................. United States 923,695 906,952
GNMA I, 8.00%, 4/15/28 .............................................................. United States 469,314 480,309
GNMA, 7.00%, 7/15/08 ................................................................ United States 844,818 846,050
GNMA, SF, 7.50%, 9/15/23 ............................................................ United States 11,810 11,894
GNMA, SF, 6.50%, 3/15/24 ............................................................ United States 39,866 38,451
GNMA, SF, 8.00%, 6/15/24 ............................................................ United States 24,465 25,063
GNMA, SF, 8.50%, 8/15/24 ............................................................ United States 5,361 5,600
GNMA, SF, 9.00%, 1/15/25 ............................................................ United States 4,797 5,061
GNMA, SF, 8.00%, 2/15/25 ............................................................ United States 10,028 10,268
GNMA, SF, 9.50%, 6/15/25 ............................................................ United States 6,422 6,898
GNMA, SF, 7.50%, 1/15/26 ............................................................ United States 14,169 14,226
GNMA, SF, 7.50%, 1/15/26 ............................................................ United States 13,199 13,252
GNMA, SF, 7.50%, 2/15/26 ............................................................ United States 16,886 16,954
GNMA, SF, 9.00%, 3/15/26 ............................................................ United States 30,002 31,634
GNMA, SF, 8.00%, 6/15/26 ............................................................ United States 25,161 25,756
GNMA, SF, 8.00%, 7/15/26 ............................................................ United States 16,868 17,267
GNMA, SF, 8.00%, 7/15/26 ............................................................ United States 19,116 19,568
GNMA, SF, 8.50%, 7/15/26 ............................................................ United States 10,009 10,443
GNMA, SF, 8.00%, 9/15/26 ............................................................ United States 244,521 250,302
GNMA, SF, 8.00%, 9/15/26 ............................................................ United States 417,143 427,006
GNMA, SF, 8.00%, 12/15/26 ........................................................... United States 422,155 432,137
GNMA, SF, 7.50%, 9/15/27 ............................................................ United States 446,219 447,855
GNMA, SF, 8.00%, 9/15/27 ............................................................ United States 346,598 354,750
GNMA, SF, 7.00%, 5/15/28 ............................................................ United States 41,880 41,125
GNMA, SF, 6.50%, 12/15/28 ........................................................... United States 460,539 440,739
GNMA, SF, 6.50%, 1/15/29 ............................................................ United States 1,002,259 958,869
GNMA, SF, 6.50%, 2/15/29 ............................................................ United States 974,465 932,279
GNMA, SF, 6.50%, 2/15/29 ............................................................ United States 987,002 944,273
-----------
29,021,931
-----------
U.S. GOVERNMENT SECURITIES 5.5%
U.S. Treasury Bond, 8.875%, 2/15/19 ................................................. United States 2,000,000 2,515,000
U.S. Treasury Bond, 7.125%, 2/15/23 ................................................. United States 400,000 431,625
U.S. Treasury Note, 5.625%, 11/30/99 ................................................ United States 2,000,000 2,001,876
U.S. Treasury Note, 5.625%, 12/31/99 ................................................ United States 2,000,000 2,001,876
</TABLE>
22
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT* VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES/MORTGAGES (CONT.)
U.S. GOVERNMENT SECURITIES (CONT.)
U.S. Treasury Note, 5.50%, 3/31/00 ..................................... United States $ 2,000,000 2,002,500
U.S. Treasury Note, 6.00%, 8/15/00 ..................................... United States 2,000,000 2,007,500
U.S. Treasury Note, 5.125%, 8/31/00 .................................... United States 3,000,000 2,990,625
U.S. Treasury Note, 5.375%, 2/15/01 .................................... United States 2,000,000 1,991,876
U.S. Treasury Note, 5.75%, 11/30/02 .................................... United States 3,000,000 2,986,875
-----------
18,929,753
-----------
OTHER U.S. GOVERNMENT AND AGENCY SECURITIES 5.1%
FHLB, 5.477%, 1/28/09 .................................................. United States 6,000,000 5,422,404
Fannie Mae, 5.75%, 4/15/03 ............................................. United States 5,500,000 5,401,468
Fannie Mae, 5.75%, 6/15/05 ............................................. United States 6,000,000 5,801,940
Freddie Mac, 7.625%, 9/09/09 ........................................... United States 1,000,000 1,004,406
-----------
17,630,218
-----------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES/MORTGAGES (COST $67,211,871) 65,581,902
-----------
FOREIGN GOVERNMENT AND AGENCY SECURITIES 30.1%
Republic of Argentina, 9.25%, 2/23/01 .................................. Argentina 275,000 266,922
Republic of Argentina, 11.375%, 1/30/17 ................................ Argentina 2,000,000 1,920,000
Republic of Argentina, 9.75%, 9/19/27 .................................. Argentina 730,000 615,025
Republic of Argentina, Bonos Del Tesoro, 8.75%, 5/09/02 ................ Argentina 5,700,000 5,305,275
Republic of Argentina, L, FRN, 6.00%, 3/31/23 .......................... Argentina 2,000,000 1,316,250
Australian Government, 7.50%, 7/15/05 .................................. Australia 4,003,000 AUD 2,684,036
Kingdom of Belgium, 7.75%, 10/15/04 .................................... Belgium 1,793,000 EUR 2,121,512
Republic of Brazil, 8.875%, 11/05/01 ................................... Brazil 2,295,000 2,266,313
Republic of Brazil, 11.625%, 4/15/04 ................................... Brazil 1,500,000 1,434,375
Republic of Brazil, 9.375%, 4/07/08 .................................... Brazil 4,000,000 3,295,000
Republic of Brazil, 14.50%, 10/15/09 ................................... Brazil 2,925,000 3,025,181
Republic of Brazil - DCB, L, FRN, 6.187%, 4/15/12 ...................... Brazil 300,000 196,689
Republic of Bulgaria, FRN, 5.875%, 7/28/11 ............................. Bulgaria 6,220,000 4,758,300
Republic of Bulgaria, FRN, 6.50%, 7/28/11 .............................. Bulgaria 110,000 84,150
Republic of Bulgaria, Series A, FRN, 6.687%, 7/28/24 ................... Bulgaria 1,340,000 999,144
Government of Canada, 8.75%, 12/01/05 .................................. Canada 303,000 CAD 233,967
Government of Canada, 7.00%, 12/01/06 .................................. Canada 359,000 CAD 257,402
Republic of Colombia, 9.75%, 4/23/09 ................................... Colombia 3,300,000 3,019,500
Kingdom of Denmark, 7.00%, 12/15/04 .................................... Denmark 15,160,000 DKK 2,327,806
(c)Republic of Ecuador, 144A, 11.25%, 4/25/02 ........................... Ecuador 480,000 136,800
(c)Republic of Ecuador, Reg S, 11.25%, 4/25/02 .......................... Ecuador 1,495,000 426,075
French Treasury Note, 3.50%, 7/12/04 ................................... France 3,220,000 EUR 3,210,422
Federal Republic of Germany, 3.25%, 2/17/04 ............................ Germany 1,180,000 EUR 1,174,878
Federal Republic of Germany, 7.375%, 1/03/05 ........................... Germany 1,000,000 EUR 1,167,926
Federal Republic of Germany, 6.00%, 1/05/06 ............................ Germany 600,768 EUR 663,956
Federal Republic of Germany, 4.50%, 7/04/09 ............................ Germany 4,674,000 EUR 4,657,641
Buoni Poliennali Del Tes, 7.75%, 11/01/06 .............................. Italy 1,319,000 EUR 1,566,696
Italy Government, 6.75%, 2/01/07 ....................................... Italy 1,513,216 EUR 1,725,654
Government of Jamaica, Reg S, 9.625%, 7/02/02 .......................... Jamaica 1,750,000 1,645,000
Republic of Korea, 8.875%, 4/15/08 ..................................... Korea (South) 3,100,000 3,225,178
</TABLE>
23
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT* VALUE
------- ------- -----
<S> <C> <C> <C>
FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONT.)
United Mexican States, 9.75%, 2/06/01 ................................... Mexico $ 1,950,000 $ 2,015,813
United Mexican States, 9.75%, 4/06/05 ................................... Mexico 2,000,000 2,007,500
United Mexican States, 8.625%, 3/12/08 .................................. Mexico 7,470,000 6,963,908
United Mexican States, 11.375%, 9/15/16 ................................. Mexico 3,310,000 3,539,218
United Mexican States, 11.50%, 5/15/26 .................................. Mexico 3,850,000 4,304,300
Netherlands Government, 8.50%, 6/01/06 .................................. Netherlands 1,619,707 EUR 2,026,357
Government of New Zealand, 7.00%, 7/15/09 ............................... New Zealand 2,000,000 NZD 1,005,689
Republic Of Panama, 8.875%, 9/30/27 ..................................... Panama 1,500,000 1,215,000
Peru - Pdi., FRN, 4.50%, 3/07/17 ........................................ Peru 5,100,000 3,187,500
Russia Ministry of Finance, Reg S, 10.00%, 6/26/07 ...................... Russia 4,000,000 1,975,000
Bonos Y oblig Del Estado, 3.25%, 1/31/05 ................................ Spain 2,578,000 EUR 2,464,018
Swedish Government, 10.25%, 5/05/03 ..................................... Sweden 7,000,000 SEK 983,433
SEI Holdings IX Inc., 11.00%, 11/30/00 .................................. Trinidad And Tobago 125,000 125,000
Republic of Turkey, 12.375%, 6/15/09 .................................... Turkey 1,720,000 1,735,480
Republic of Turkey, 144A, 9.875%, 2/23/05 ............................... Turkey 850,000 788,375
Republic of Turkey, 144A, 10.00%, 9/19/07 ............................... Turkey 875,000 810,469
Republic of Turkey, Reg S, 10.00%, 9/19/07 .............................. Turkey 1,315,000 1,218,019
United Kingdom, 6.50%, 12/07/03 ......................................... United Kingdom 995,000 GBP 1,675,730
United Kingdom, 7.50%, 12/07/06 ......................................... United Kingdom 2,081,000 GBP 3,778,257
Republic of Venezuela - DCB, FRN, 6.313%, 12/18/07 ...................... Venezuela 809,524 651,667
Republic of Venezuela, 9.25%, 9/15/27 ................................... Venezuela 5,383,000 3,633,525
Republic of Venezuela, 144A, 9.125%, 6/18/07 ............................ Venezuela 100,000 74,500
Republic of Venezuela, FRN, 7.00%, 3/31/20 .............................. Venezuela 250,000 181,556
Republic of Venezuela, Reg S, 9.125%, 6/18/07 ........................... Venezuela 1,200,000 894,000
------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $105,365,574) ...... 102,981,387
------------
TOTAL LONG TERM INVESTMENTS (COST $341,432,022) ......................... 323,670,066
------------
SHORT TERM INVESTMENTS 5.5%
(b)Franklin Institutional Fiduciary Trust Money Market Portfolio
(Cost $18,962,203) .................................................... United States 18,962,203 18,962,203
------------
TOTAL INVESTMENTS (COST $360,394,225) 100.0% ............................ 342,632,269
OTHER ASSETS, LESS LIABILITIES .......................................... 55,698
------------
NET ASSETS 100.0% ....................................................... $342,687,967
============
</TABLE>
CURRENCY ABBREVIATIONS:
AUD - Australian Dollar
CAD - Canadian Dollar
DKK - Danish Krone
EUR - European Union Euro
GBP - British Pound
NZD - New Zealand Dollar
SEK - Swedish Krona
* The principal amount is stated in U.S. dollars unless otherwise indicated.
(a) Non-income producing
(b) The Franklin Institutional Fiduciary Trust Money Market Portfolio is managed
by Franklin Advisers, Inc.
(c) See Note 7 regarding defaulted securities.
(d) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery.
24 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<S> <C>
Assets:
Investments in securities at value (Cost $360,394,225) ................................................ $342,632,269
Receivables:
Investment securities sold ........................................................................... 3,208,388
Capital shares sold .................................................................................. 893,159
Dividends and interest ............................................................................... 5,903,731
Unrealized gain on forward exchange contracts (Note 6) ................................................ 13,781
------------
Total assets ..................................................................................... 352,651,328
------------
Liabilities:
Payables:
Investment securities purchased ...................................................................... 7,900,244
Capital shares redeemed .............................................................................. 1,507,138
Affiliates ........................................................................................... 218,402
Shareholders ......................................................................................... 108,383
Unrealized loss on forward exchange contracts (Note 6) ................................................ 11,522
Other liabilities ..................................................................................... 217,672
------------
Total liabilities ................................................................................ 9,963,361
------------
Net assets, at value ............................................................................ $342,687,967
============
Net assets consist of:
Undistributed net investment income ................................................................... $ 988,772
Net unrealized depreciation ........................................................................... (17,770,424)
Accumulated net realized loss ......................................................................... (7,793,785)
Capital shares ........................................................................................ 367,263,404
------------
Net assets, at value ............................................................................ $342,687,967
============
CLASS A:
Net asset value per share ($282,977,852 / 28,041,149 shares outstanding)* ............................. $ 10.09
============
Maximum offering price per share ($10.09 / 95.75%) .................................................... $ 10.54
============
CLASS B:
Net asset value and maximum offering price per share ($9,616,889 / 950,865 shares outstanding)* ....... $ 10.11
============
CLASS C:
Net asset value per share ($40,350,127 / 3,998,586 shares outstanding)* ............................... $ 10.09
============
Maximum offering price per share ($10.09 / 99.00%) .................................................... $ 10.19
============
ADVISOR CLASS:
Net asset value and maximum offering price per share ($9,743,099 / 965,237 shares outstanding) ........ $ 10.09
============
</TABLE>
* Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements. 25
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Financial Statements (continued)
Statement of Operations
for the six months ended October 31, 1999 (unaudited)
<TABLE>
<S> <C>
Investment income:
Dividends ............................................................................... $ 791,547
Interest ................................................................................ 12,499,740
Total investment income ............................................................ 13,291,287
------------
Expenses:
Management fees (Note 3) ................................................................ 793,027
Distribution fees (Note 3)
Class A ................................................................................ 327,188
Class B ................................................................................ 23,869
Class C ................................................................................ 125,042
Transfer agent fees (Note 3) ............................................................ 139,742
Custodian fees .......................................................................... 20,151
Reports to shareholders ................................................................. 24,435
Registration and filing fees ............................................................ 61,105
Professional fees ....................................................................... 4,551
Trustees' fees and expenses ............................................................. 2,551
Other ................................................................................... 28,554
------------
Total expenses ..................................................................... 1,550,215
Expenses waived/paid by affiliate (Note 3) ......................................... (300,572)
------------
Net expenses ...................................................................... 1,249,643
------------
Net investment income ............................................................ 12,041,644
------------
Realized and unrealized gains (losses):
Net realized loss from:
Investments ............................................................................ (5,202,276)
Foreign currency transactions .......................................................... (40,178)
------------
Net realized loss .................................................................. (5,242,454)
Net unrealized appreciation (depreciation) on:
Investments ............................................................................ (15,501,378)
Translation of assets and liabilities denominated in foreign currencies ................ 27,002
------------
Net unrealized depreciation ........................................................ (15,474,376)
------------
Net realized and unrealized loss ......................................................... (20,716,830)
------------
Net decrease in net assets resulting from operations ..................................... $ (8,675,186)
============
</TABLE>
26 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Financial Statements (continued)
Statements of Changes in Net Assets
for the six months ended October 31, 1999 (unaudited)
and the year ended April 30, 1999
<TABLE>
<CAPTION>
Six Months Ended Year Ended
October 31, 1999 April 30, 1999
---------------- --------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .................................................. $ 12,041,644 $ 18,857,067
Net realized loss from investments and foreign currency transactions ... (5,242,454) (2,094,444)
Net unrealized depreciation on investments and translation of assets and
liabilities denominated in foreign currencies .......................... (15,474,376) (3,978,010)
------------- -------------
Net increase (decrease) in net assets resulting from operations .... (8,675,186) 12,784,613
Distributions to shareholders from:
Net investment income:
Class A ............................................................... (10,078,269) (16,526,206)
Class B ............................................................... (256,794) (34,549)
Class C ............................................................... (1,411,704) (1,362,771)
Advisor Class ......................................................... (67,657) --
------------- -------------
Total distributions to shareholders ..................................... (11,814,424) (17,923,526)
Capital share transactions: (Note 2)
Class A ................................................................ 52,750,518 86,606,278
Class B ................................................................ 5,775,467 4,206,050
Class C ................................................................ 6,765,080 35,792,706
Advisor Class .......................................................... 9,786,993 --
------------- -------------
Total capital share transactions ........................................ 75,078,058 126,605,034
Net increase in net assets ......................................... 54,588,448 121,466,121
Net assets:
Beginning of period ..................................................... 288,099,519 166,633,398
------------- -------------
End of period ........................................................... $ 342,687,967 $ 288,099,519
============= =============
Undistributed net investment income included in net assets:
End of period ........................................................... $ 988,772 $ 761,552
============= =============
</TABLE>
See notes to financial statements. 27
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Income Fund (the Fund) is a separate, non-diversified series
of Franklin Strategic Series (the Trust), which is an open-end investment
company registered under the Investment Company Act of 1940. The Fund seeks to
obtain a high level of current income while seeking capital appreciation.
The following summarizes the Fund's significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. FORWARD EXCHANGE CONTRACTS:
The Fund may enter into forward exchange contracts to hedge against foreign
exchange risks. These contracts are valued daily and the Fund's equity therein
is included in the Statement of Assets and Liabilities. Realized and unrealized
gains and losses are included in the Statement of Operations.
d. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
f. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount is
amortized on an income tax basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
28
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
f. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: (CONT.)
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each fund to the combined net assets. Other expenses are
charged to each fund on a specific identification basis.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
g. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The Fund offers four classes of shares: Class A, Class B, Class C, and Advisor
Class. Effective January 1, 1999, Class I and Class II were renamed Class A and
Class C, respectively, and the Fund began offering a new class of shares, Class
B. Effective August 12, 1999, the Fund began offering a new class of shares,
Advisor Class. Each class of shares differs by its initial sales load,
distribution fees, voting rights on matters affecting a single class and its
exchange privilege.
At October 31, 1999, there were an unlimited number of shares authorized ($.01
par value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
October 31, 1999 April 30, 1999
---------------- --------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Class A Shares:
Shares sold 5,011,444 $ 51,470,970 14,954,299 $ 160,265,362
Shares issued in merger (Note 8) 3,713,540 37,543,893 -- --
Shares issued in reinvestment of distributions 598,878 6,169,811 955,604 10,163,162
Shares redeemed (4,127,491) (42,434,156) (7,896,393) (83,822,246)
---------- ------------- ---------- -------------
Net increase 5,196,371 $ 52,750,518 8,013,510 $ 86,606,278
========== ============= ========== =============
Class B Shares:1
Shares sold 576,427 $ 5,973,014 392,984 $ 4,193,206
Shares issued in reinvestment of distributions 16,796 172,652 2,081 21,959
Shares redeemed (36,571) (370,199) (852) (9,115)
---------- ------------- ---------- -------------
Net increase 556,652 $ 5,775,467 394,213 $ 4,206,050
========== ============= ========== =============
</TABLE>
29
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Notes to Financial Statements (unaudited) (continued)
2. SHARES OF BENEFICIAL INTEREST (cont.)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
October 31, 1999 April 30, 1999
---------------- --------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Class C Shares:
Shares sold 1,069,007 $ 11,023,778 3,660,567 $ 39,127,644
Shares issued in reinvestment of distributions 81,551 841,454 81,594 860,843
Shares redeemed (496,495) (5,100,152) (397,638) (4,195,781)
--------- ------------ --------- ------------
Net increase 654,063 $ 6,765,080 3,344,523 $ 35,792,706
========= ============ ========= ============
Advisor Class Shares:(2)
Shares sold 950,537 $ 9,639,041
Shares issued in merger (Note 8) 8,554 86,480
Shares issued in reinvestment of distributions 6,752 67,594
Shares redeemed (606) (6,122)
--------- ------------
Net increase 965,237 $ 9,786,993
========= ============
</TABLE>
(1)For the period January 1, 1999 (effective date) to April 30, 1999.
(2)For the period August 12, 1999 (effective date) to October 31, 1999.
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
the following entities:
<TABLE>
<CAPTION>
Entity Affiliation
- ------ -----------
<S> <C>
Franklin Templeton Services, Inc. (FT Services) Administration manager
Franklin Advisers, Inc. (Advisers) Investment manager
Templeton Investment Counsel, Inc. (TICI) Investment manager
Franklin/Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin/Templeton Investor Services, Inc. (Investor Services) Transfer agent
</TABLE>
The Fund pays an investment management fee to Advisers based on the average net
assets of the Fund as follows:
<TABLE>
<CAPTION>
Annualized
Fee Rate Daily Net Assets
-------- ----------------
<S> <C>
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% In excess of $250 million
</TABLE>
Management fees were reduced on assets invested in the Sweep Money Fund.
Advisers agreed in advance to waive management fees as noted in the Statement of
Operations.
30
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES (cont.)
Under a subadvisory agreement, Templeton Investment Counsel, Inc. (TICI)
provides subadvisory services to the Fund and receives from Advisers fees based
on the average daily net assets of the Fund.
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
The Fund reimburses Distributors up to .25%, .65%, and .65% per year of the
average net assets of Class A, Class B, and Class C, respectively, for costs
incurred in marketing the Fund's shares.
Distributors paid net commissions on sales of the Fund's shares, and received
contingent deferred sales charges for the period of $265,773 and $20,419,
respectively.
The Fund paid transfer agent fees of $139,742, of which $129,494 was paid to
Investors Services.
4. INCOME TAXES
At April 30, 1999, the Fund had tax basis capital losses of $771,147 which may
be carried over to offset future capital gains. Such losses expire in 2007.
At August 12, 1999, the Fund acquired tax basis capital losses of $625,746 from
the merged Franklin Investment Grade Income Fund, which may be carried over to
offset future capital gains (see Note 8). Such losses expire as follows:
<TABLE>
<CAPTION>
Capital loss carryovers expiring in:
<S> <C>
2003 ............................. $254,062
2004 ............................. 368,716
2007 ............................. 2,968
--------
$625,746
========
</TABLE>
At October 31, 1999, the net unrealized depreciation based on the cost of
investments for income tax purposes of $360,449,068 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation ...... $ 7,794,423
Unrealized depreciation ...... (25,611,222)
------------
Net unrealized depreciation .. $(17,816,799)
============
</TABLE>
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions, non-deductible
merger expenses, and defaulted bonds.
Net realized capital losses differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, and mortgage dollar roll transactions.
31
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Notes to Financial Statements (unaudited) (continued)
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended October 31, 1999 aggregated $98,923,219 and $68,397,547,
respectively.
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Fund has been a party to financial instruments with off-balance sheet risk,
primarily forward exchange contracts, in order to minimize the impact on the
Fund from adverse changes in the relationship between the U.S. dollar and
foreign currencies and interest rates. These instruments involve market risk in
excess of the amount recognized on the Statement of Assets and Liabilities. Some
of these risks have been minimized by offsetting contracts. Risks arise from the
possible inability of counterparties to meet the terms of their contracts,
future movement in currency values and interest rates and contract positions
that are not exact offsets. The contract amount indicates the extent of the
Fund's involvement in such contracts.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. At October 31,
1999, the Fund has outstanding forward exchange contracts for the sale and
purchase of currency as set out below. The contract is reported in the financial
statements at the Fund's net equity, as measured by the difference between the
forward exchange rates at the reporting date and the forward exchange rates at
the day of entry into the contract.
<TABLE>
<CAPTION>
IN UNREALIZED
CONTRACTS TO SELL (FOREIGN EXCHANGE CURRENCY) EXCHANGE FOR SETTLEMENT DATE GAIN (LOSS)
--------------------------------------------- ------------ --------------- -----------
<S> <C> <C> <C>
753,000 European Union Euro U.S. $805,936 11/12/99 $ 13,781
CONTRACTS TO BUY (FOREIGN EXCHANGE CURRENCY)
--------------------------------------------
753,000 European Union Euro U.S. $803,677 11/12/99 $(11,522)
--------
Net unrealized gain on offsetting forward foreign currency contracts $ 2,259
========
</TABLE>
7. CREDIT RISK AND DEFAULTED SECURITIES
The Fund has 52.4% of its portfolio invested in lower rated and comparable
quality unrated high yield securities, which tend to be more sensitive to
economic conditions than higher rated securities. The risk of loss due to
default by the issuer may be significantly greater for the holders of high
yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer. At October 31, 1999, the
Fund held defaulted securities with a value aggregating $1,320,375, representing
0.4% 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 estimates for losses on interest receivable.
The Fund has investments in excess of 10% of its total net assets in Foreign
Government and Agency Securities and Telecommunications. Such concentration may
subject the Fund more significantly to economic changes occurring within those
sectors.
32
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Notes to Financial Statements (unaudited) (continued)
8. MERGER
On August 12, 1999, the Fund acquired the net assets of the Franklin Investment
Grade Income Fund pursuant to a plan of reorganization approved by Franklin
Investment Grade Income Fund's shareholders. The merger was accomplished by a
tax-free exchange of 3,713,540 Class A shares and 8,554 Advisor Class shares of
the Fund (valued at $10.11) for the net assets of the Franklin Investment Grade
Income Fund which aggregated $37,630,373, including $570,513 of unrealized
depreciation. The merger was accounted for as a pooling-of-interests without
restatement for financial reporting purposes. The combined net assets of the
Fund immediately after the merger were $322,616,994.
