FRANKLIN MIDCAP GROWTH FUND
IMPORTANT SHAREHOLDER INFORMATION
These materials are for a special shareholders' meeting scheduled for July 19,
2000 at 1:00 p.m. Pacific time. They discuss the proposals to be voted on at the
meeting, and contain your proxy statement and proxy card. A proxy card is, in
essence, a ballot. When you vote your proxy, it tells us how you wish to vote on
important issues relating to your Fund. If you complete and sign the proxy,
we'll vote it exactly as you tell us. If you simply sign the proxy, we'll vote
it in accordance with the Board of Trustees' recommendations on page 3 of the
proxy statement.
WE URGE YOU TO SPEND A FEW MINUTES REVIEWING THE PROPOSALS IN THE PROXY
STATEMENT. THEN, FILL OUT THE PROXY CARD AND RETURN IT TO US SO THAT WE KNOW HOW
YOU WOULD LIKE TO VOTE. WHEN SHAREHOLDERS RETURN THEIR PROXIES PROMPTLY, THE
FUND MAY BE ABLE TO SAVE MONEY BY NOT HAVING TO CONDUCT ADDITIONAL MAILINGS.
WE WELCOME YOUR COMMENTS. IF YOU HAVE ANY QUESTIONS, CALL FUND INFORMATION AT
1-800/DIAL BEN(R) (1-800/342-5236).
TELEPHONE AND INTERNET VOTING
FOR YOUR CONVENIENCE, YOU MAY BE ABLE TO VOTE BY TELEPHONE OR THROUGH THE
INTERNET, 24 HOURS A DAY. IF YOUR ACCOUNT IS ELIGIBLE, A CONTROL NUMBER AND
SEPARATE INSTRUCTIONS ARE ENCLOSED.
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Dear Shareholders:
Enclosed is a Notice of Meeting for a Special Shareholders' Meeting of Franklin
MidCap Growth Fund ("MidCap Growth Fund"). The Meeting is scheduled for July 19,
2000 at 1:00 p.m. Pacific time at the offices of the Fund at 777 Mariners Island
Boulevard, San Mateo, California 94404. The accompanying materials describe an
important proposal which may affect the future of your Fund. We ask you to give
this your prompt attention and vote via the enclosed proxy card.
PLEASE TAKE A MOMENT TO FILL OUT, SIGN AND
RETURN THE ENCLOSED PROXY CARD
This meeting is very important to the Fund's future. The Trustees of your Fund
unanimously recommend that you consider and approve a Plan of Reorganization
that would result in your shares of MidCap Growth Fund being exchanged for those
of a fund called Franklin California Growth Fund ("California Growth Fund"). If
the shareholders of MidCap Growth Fund approve the proposal, you will receive
shares of California Growth Fund equal in value to your investment in MidCap
Growth Fund. You will no longer be a shareholder of MidCap Growth Fund, and you
will instead be a shareholder of California Growth Fund. The MidCap Fund will no
longer exist after the reorganization is completed.
The proposed transaction is intended to be tax-free, which means that you will
not have a taxable gain or loss on the exchange of your shares.
The Trustees recommend this transaction because the projected growth in assets
of MidCap Growth Fund was not sufficient to provide competitive performance and
high quality service to shareholders over the long term. MidCap Growth Fund and
California Growth Fund are both managed by Franklin Advisers, Inc. ("Advisers").
California Growth Fund has investment goals and investment policies that are
similar to those of MidCap Growth Fund, and is a larger fund that may be better
able to obtain cost savings for shareholders.
Please take the time to review this document and vote now. THE TRUSTEES OF THE
FUND UNANIMOUSLY RECOMMEND THAT YOU VOTE IN FAVOR OF THIS PROPOSAL.
o To ensure that your vote is counted, indicate your position on the enclosed
proxy card.
o Sign and return your card promptly.
o You may also vote by telephone or over the Internet.
o If you determine at a later date that you wish to attend this meeting, you
may revoke your proxy and vote in person.
Thank you for your attention to this matter.
Sincerely,
Rupert H. Johnson, Jr.
President
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FRANKLIN MIDCAP GROWTH FUND
777 MARINERS ISLAND BOULEVARD
SAN MATEO, CALIFORNIA 94404-7777
NOTICE OF SPECIAL SHAREHOLDERS' MEETING
TO BE HELD ON JULY 19, 2000
To the Shareholders of Franklin MidCap Growth Fund:
NOTICE IS HEREBY GIVEN that a Special Shareholders' Meeting of Franklin MidCap
Growth Fund ("MidCap Growth Fund") will be held at the offices of MidCap Growth
Fund, 777 Mariners Island Boulevard, San Mateo, California 94404-7777 on July
19, 2000, at 1:00 p.m. Pacific time. The Meeting is being
called for the following purpose:
1. To approve or disapprove a Plan of Reorganization of Franklin Strategic
Series (the "Trust") on behalf of two of its series, MidCap Growth Fund and
California Growth Fund that provides for the acquisition of substantially all of
the assets of MidCap Growth Fund in exchange for Class A shares of California
Growth Fund, the distribution of such shares to the shareholders of MidCap
Growth Fund, and the liquidation and dissolution of MidCap Growth Fund.
In addition, shareholders will be asked to grant the proxyholders the authority
to vote upon any other business which may legally come before the Meeting or any
adjournment thereof.
The Plan of Reorganization in the attached Prospectus/Proxy Statement describes
this transaction more completely. A copy of the Plan of Reorganization is
attached as Exhibit A to the Prospectus/ Proxy Statement.
Shareholders of record as of the close of business on May 12, 2000, are entitled
to notice of, and to vote at, the Meeting or any adjournment thereof.
By Order of the Board of Trustees,
Deborah R. Gatzek
Secretary
San Mateo
May 30, 2000
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THE BOARD OF TRUSTEES URGES YOU TO COMPLETE, DATE, SIGN, AND RETURN THE
ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE. IT IS
IMPORTANT THAT YOU RETURN YOUR SIGNED PROXY CARD PROMPTLY SO THAT A QUORUM MAY
BE ENSURED.
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PROSPECTUS AND PROXY STATEMENT
When reading this Prospectus/Proxy Statement, you will see certain terms
beginning with capital letters. This means the term is explained in our glossary
section.
TABLE OF CONTENTS
PAGE
COVER PAGE COVER
SUMMARY................................................................ 2
What proposal am I voting on?........................................ 2
How will the shareholder voting be handled?.......................... 3
COMPARISONS OF SOME IMPORTANT FEATURES................................. 3
How do the investment goals and policies of the Funds compare?....... 3
What are the risks of an investment in the Funds?.................... 4
Who manages the Funds?............................................... 4
What are the fees and expenses of each Fund and what might they be
after the Transaction?................................................. 5
Where can I find more financial information about the Funds?......... 6
What are other key features of the Funds?............................ 7
REASONS FOR THE TRANSACTION............................................ 9
INFORMATION ABOUT THE TRANSACTION...................................... 9
How will the Transaction be carried out?............................. 9
Who will pay the expenses of the Transaction?........................ 10
What are the tax consequences of the Transaction?.................... 10
What should I know about the shares of California Growth Fund? ...... 11
What are the capitalizations of the Funds and what might
the capitalization be after the Transaction?........................... 11
COMPARISON OF INVESTMENT GOALS AND POLICIES............................ 11
Are there any significant differences between the investment
goals and strategies of the Funds?..................................... 11
How do the fundamental investment restrictions of the Funds differ?.. 13
What are the risk factors associated with investments in the Funds?.. 13
TABLE OF CONTENTS (CONTINUED)
PAGE
VOTING INFORMATION..................................................... 16
How many votes are necessary to approve the Plan?.................... 16
How do I ensure my vote is accurately recorded?...................... 17
Can I revoke my proxy?............................................... 17
What other matters will be voted upon at the Meeting?................ 17
Who is entitled to vote?............................................. 17
What other solicitations will be made?............................... 17
Are there dissenters' rights?........................................ 17
INFORMATION ABOUT CALIFORNIA GROWTH FUND............................... 18
INFORMATION ABOUT MIDCAP GROWTH FUND................................... 18
PRINCIPAL HOLDERS OF SHARES............................................ 19
GLOSSARY - USEFUL TERMS AND DEFINITIONS................................ 19
EXHIBITS TO PROSPECTUS AND PROXY STATEMENT............................. 21
EXHIBIT A - PLAN OF REORGANIZATION...................................A-1
EXHIBIT B - PROSPECTUS OF FRANKLIN CALIFORNIA GROWTH FUND - CLASS A, B & C
DATED SEPTEMBER 1, 1999, AS AMENDED MAY 1, 2000 (ENCLOSED)
EXHIBIT C - ANNUAL REPORT TO SHAREHOLDERS OF FRANKLIN CALIFORNIA GROWTH
FUND AND FRANKLIN MIDCAP GROWTH FUND DATED APRIL 30, 1999
(ENCLOSED)
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PROSPECTUS AND PROXY STATEMENT
DATED MAY 20, 2000
ACQUISITION OF THE ASSETS OF
FRANKLIN MIDCAP GROWTH FUND
BY AND IN EXCHANGE FOR CLASS A SHARES OF
FRANKLIN CALIFORNIA GROWTH FUND
This Prospectus/Proxy Statement solicits proxies to be voted at a Special
Shareholders' Meeting (the "Meeting") of Franklin MidCap Growth Fund ("MidCap
Growth Fund"), a series of Franklin Strategic Series ("Trust") to approve or
disapprove a Plan of Reorganization (the "Plan"). If shareholders of MidCap
Growth Fund vote to approve the Plan, the net assets of MidCap Growth Fund will
be acquired by and in exchange for shares of Franklin California Growth Fund
("California Growth Fund"), also a series of the Trust.
The Meeting will be held at the principal offices of MidCap Growth Fund, which
are located at 777 Mariners Island Boulevard, San Mateo, California 94404-7777
on July 19, 2000 at 1:00 Pacific time. The Board of Trustees of the Trust, on
behalf of MidCap Growth Fund is soliciting these proxies. This Prospectus/Proxy
Statement will first be sent to shareholders on or about May 30, 2000.
If MidCap Growth Fund shareholders vote to approve the Plan, you will receive
Class A shares of California Growth Fund equal in value to your investment in
shares of MidCap Growth Fund. MidCap Growth Fund will then be liquidated and
dissolved.
The investment goals of California Growth Fund and MidCap Growth Fund
(individually, a "Fund" and collectively, the "Funds") are similar, but not
identical. MidCap Growth Fund's principal investment goal is long-term capital
appreciation. California Growth Fund's investment goal is capital appreciation,
which may mean California Growth Fund will seek to achieve capital appreciation
without reference to any time horizon. More significant differences between the
Funds are that (1) California Growth Fund is a non-diversified fund, which means
it may invest a greater portion of its assets in the securities of one issuer
and, therefore, a smaller number of individual issuers, than a diversified fund
such as MidCap Growth Fund, and (2) California Growth Fund focuses its
investments on issuers in California, while MidCap Growth Fund may seek
opportunities in all states.
This Prospectus/Proxy Statement gives the information about the proposed
reorganization and Class A shares of California Growth Fund that you should know
before investing. You should retain it for future reference. Additional
information about California Growth Fund and the proposed reorganization has
been filed with the SEC and can be found in the following documents:
o The Prospectus of California Growth Fund - Class A, B & C dated September 1,
1999, as amended May 1, 2000 (the "California Growth Fund Prospectus"), is
attached to and considered a part of this Prospectus/Proxy Statement.
o The Annual Report to Shareholders of the Trust dated April 30, 1999, which
contains financial and performance information for California Growth Fund and
MidCap Growth Fund, is attached to and considered a part of this
Prospectus/Proxy Statement.
o A Statement of Additional Information dated September 1, 1999, as amended
January 1, 2000, and as supplemented February 1, 2000 and February 16, 2000,
relating to this Prospectus/Proxy Statement has been filed with the SEC and
is incorporated by reference into this Prospectus/Proxy Statement.
You may request a free copy of the SAI relating to this Prospectus/Proxy
Statement or any of the documents referred to above without charge by calling
1-800/DIAL-BEN(R) or by writing to either Fund at P.O. Box 997151, Sacramento,
CA 95899-9983.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER U.S. GOVERNMENT AGENCY. MUTUAL FUND
SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
SUMMARY
This is only a summary of certain information contained in this Prospectus/Proxy
Statement. You should read the more complete information in the rest of this
Prospectus/Proxy Statement, including the Plan (attached as Exhibit A), the
California Growth Fund Prospectus (enclosed as Exhibit B) and the Annual Report
to Shareholders of the Trust (enclosed as Exhibit C).
WHAT PROPOSAL AM I VOTING ON?
At a meeting held on February 14, 2000, the Board of Trustees of the Trust on
behalf of MidCap Growth Fund approved the Plan and determined to recommend that
shareholders of MidCap Growth Fund vote to approve the Plan. If shareholders of
MidCap Growth Fund vote to approve the Plan, it will result in the transfer of
the net assets of MidCap Growth Fund to California Growth Fund, in exchange for
an equal value of shares of California Growth Fund. The shares of California
Growth Fund will then be distributed to MidCap Growth Fund shareholders and
MidCap Growth Fund will be liquidated and dissolved. (The proposed transaction
is referred to in this Prospectus/Proxy Statement as the "Transaction.") As a
result of the Transaction, you will cease to be a shareholder of MidCap Growth
Fund and will become a shareholder of California Growth Fund. This exchange will
occur on the closing date of the Transaction, which is the specific date on
which the Transaction takes place.
This means that your shares of MidCap Growth Fund will be exchanged for an equal
value of shares of California Growth Fund. You will receive Class A shares of
California Growth Fund equal in value to your investment in shares of MidCap
Growth Fund.
California Growth Fund is a mutual fund in Franklin Templeton Investments. It is
managed by Advisers. It has an investment goal and policies that are similar,
but not identical, to those of MidCap Growth Fund. For the reasons set forth in
the "Reasons for the Transaction" section, the Board of Trustees of the Trust on
behalf of MidCap Growth Fund has determined that the Transaction is in the best
interests of the shareholders of MidCap Growth Fund. The Board of Trustees of
the Trust also concluded that no dilution in value would result to the
shareholders of MidCap Growth Fund or California Growth Fund, as a result of the
Transaction.
THE BOARD OF TRUSTEES RECOMMENDS THAT YOU
VOTE TO APPROVE THE AGREEMENT AND PLAN.
HOW WILL THE SHAREHOLDER VOTING BE HANDLED?
Shareholders who own shares of MidCap Growth Fund at the close of business on
May 12, 2000 will be entitled to vote at the Meeting, and will be entitled to
one vote for each full share and a fractional vote for each fractional share
that they hold. To approve the Transaction, a majority of the shares of MidCap
Growth Fund outstanding and entitled to vote must be voted in favor of the Plan.
Please vote by proxy as soon as you receive this Prospectus/Proxy Statement. You
may place your vote by completing and signing the enclosed proxy card or voting
by telephone or over the Internet. If you vote by any of these three methods,
your votes will be officially cast at the Meeting by the persons appointed as
proxies.
You can revoke your proxy or change your voting instructions at any time until
the vote is taken at the Meeting. For more details about shareholder voting, see
the "Voting Information" section of this Prospectus/Proxy Statement.
COMPARISONS OF SOME IMPORTANT FEATURES
HOW DO THE INVESTMENT GOALS AND POLICIES OF THE FUNDS COMPARE?
The principal differences in investment strategies and the policies of the Funds
are the extent to which their portfolios are diversified, the extent to which
their investments are focused on companies with operations in California, and
the size of the companies in which the Funds invest.
The principal investment goal of the Funds is very similar. MidCap Growth Funds'
primary investment goal is long-term capital appreciation. California Growth
Fund's primary investment goal is capital appreciation. Thus, California Growth
Fund's emphasis on capital appreciation is unrelated to a particular time
horizon.
MidCap Growth Fund, unlike California Growth Fund, is a diversified fund. As a
diversified fund, MidCap Growth Fund is required to spread its investments among
more issues.
Under normal market conditions, California Growth Fund invests at least 65% of
its total assets in the securities of companies headquartered or conducting a
majority of their operations in the State of California. California Growth Fund
may invest up to 35% of its total assets in securities of issuers headquartered
or conducting a majority of their operations outside of the State of California,
including outside the U.S. MidCap Growth Fund has no specific focus on investing
in companies located in a geographic region and it may also invest a portion of
its assets outside the U.S.
Under normal market conditions, MidCap Growth Fund invests primarily in the
equity securities of companies of medium market capitalization growth companies
(i.e., those companies that have a market capitalization range between $1
billion and $8 billion). California Growth Fund may invest a significant portion
of its assets in smaller capitalization companies, those with market
capitalizations under $1.5 billion.
For more information about the investment goals and policies of the Funds,
please see the section "Comparison of Investment Goals and Policies."
WHAT ARE THE RISKS OF AN INVESTMENT IN THE FUNDS?
Investments in California Growth Fund and MidCap Growth Fund involve risks
common to most mutual funds. There is no guarantee against losses resulting from
an investment in either Fund, nor that either Fund will achieve its investment
goals. Both Funds are subject to the risks posed by investing in stocks.
California Growth Fund is a non-diversified fund, which means it may invest a
greater portion of its assets in the securities of one issuer and, therefore, a
smaller number of individual issuers than a diversified fund. Therefore,
California Growth Fund may be more sensitive to economic, business, political or
other changes affecting similar issuers or securities.
Also, California Growth Fund invests a greater portion of its assets in
securities of companies headquartered or conducting a majority of their
operations in the State of California, so that the performance of California
Growth Fund will likely be dependent on economic, political and other conditions
within California.
California Growth Fund seeks to invest in small and medium capitalization
companies, while MidCap Growth Fund seeks to invest primarily in medium
capitalization companies. Thus, California Growth Fund may place greater
emphasis upon investments in small cap companies which may be relatively new or
unseasoned companies. California Growth Fund's investments in the securities of
new or unseasoned companies may present greater risks than the securities of
larger capitalization companies, which may be more established companies, in
which MidCap Growth Fund may invest.
For more information about the risks of the Funds, see the section "What are the
risk factors associated with investments in the Funds?" under the heading
"Comparison of Investment Goals and Policies."
WHO MANAGES THE FUNDS?
The management of the business and affairs of each Fund is the responsibility of
the Board of Trustees of the Trust, as California Growth Fund and MidCap Growth
Fund are both series of the Trust. Both Funds are open-end, registered
management investment companies, commonly referred to as "mutual funds." The
Trust was organized as a Delaware business trust on January 25, 1991 and is
registered with the SEC.
Advisers manages the assets and makes the investment decisions for both Funds.
Advisers is a wholly-owned subsidiary of Resources. Resources is a publicly
owned company engaged in various aspects of the financial services industry
through its subsidiaries. Together, Advisers and their affiliates serve as
investment manager or administrator to 52 registered investment companies, with
approximately 157 U.S.-based funds or series. They have over $225 billion in
combined assets under management for more than 5 million U.S.-based mutual fund
shareholder and other accounts. The principal shareholders of Resources are
Charles B. Johnson and Rupert H. Johnson, Jr.
The team responsible for the day-to-day management of California Growth Fund's
portfolio is:
CONRAD B. HERRMANN CFA, SENIOR VICE PRESIDENT OF ADVISERS. Mr. Herrmann has
been a manager of the California Growth Fund since 1993. He joined the
Franklin Templeton Group in 1989.
CANYON A. CHAN CFA, VICE PRESIDENT OF ADVISERS. Mr. Chan has been a manager
of the California Growth Fund since 1999. He joined the Franklin Templeton
Group in 1991.
California Growth Fund has a management agreement with Advisers under which
Advisers is to receive a management fee equal to an annual rate of 0.625 of 1%
of the value of its average daily net assets up to and including $100 million;
0.50 of 1% of the value of its average daily net assets over $100 million up to
and including $250 million; 0.45 of 1% of the value of its average daily net
assets over $250 million up to and including $10 billion; 0.44 of 1% of the
value of its average daily net assets over $10 billion up to and including $12.5
billion; 0.42 of 1% of the value of its average daily net assets over $12.5
billion up to and including $15 billion; and 0.40 of 1% of the value of its
average daily net assets in excess of $15 billion. Each class of California
Growth Fund pays its proportionate share of the management fee.
MidCap Growth Fund has a management agreement with Advisers under which Advisers
receives a management fee equal to an annual rate of 0.65 of 1% of the value of
its average daily net assets.
WHAT ARE THE FEES AND EXPENSES OF EACH FUND AND WHAT MIGHT THEY BE AFTER THE
TRANSACTION?
FEE TABLE FOR
MIDCAP GROWTH FUND AND CALIFORNIA GROWTH FUND
ACTUAL+ PROJECTED++
CALIFORNIA
MIDCAP CALIFORNIA GROWTH FUND -
GROWTH FUND GROWTH FUND - CLASS A
- CLASS A CLASS A AFTER TRANSACTION
----------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES*
Maximum Sales Charge 5.75% 5.75% 5.75%
(as a percentage of Offering
Price)
Paid at time of purchase1 5.75% 5.75% 5.75%
Paid at time of redemption2 None None None
Exchange Fee (per transaction)3 $5.00 None None
ANNUAL FUND OPERATING EXPENSES
(as percentage of average net
assets)
Management Fees 0.65% 0.48% 0.44%
Distribution and service (12b-1) 0.26% 0.25% 0.25%
Fees
Other Expenses 0.33% 0.27% 0.20%
==============================================
Total Annual Fund Operating 1.24% 1.00% 0.89%
Expenses
==============================================
+Information provided for MidCap Growth Fund and California Growth Fund shares
is provided for the fiscal year ended April 30, 1999.
++Projected expenses based on current and anticipated California Growth Fund
expenses.
*If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
1. There is no front-end sales charge if you invest $1 million or more in Class
A shares of the California Growth Fund or shares of MidCap Growth Fund. Please
see "Your Account - Choosing a Share Class" in the Prospectus of California
Growth Fund ("California Growth Fund Prospectus").
2. A Contingent Deferred Sales Charge ("CDSC") of 1% may apply to Class A
purchases of $1 million or more with respect to each of the Funds if you sell
the shares within one year. See "Your Account - Contingent Deferred Sales
Charge" in the California Growth Fund Prospectus for details.
3. There is a $5 fee charged by MidCap Growth Fund for each exchange by a Market
Timer. California Growth Fund does not accept funds from Market Timers. We
process all other exchanges without a fee.
EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown. These
are the projected expenses for each $10,000 that you invest in a Fund.
CLASS A 1 YEAR* 3 YEARS 5 YEARS 10 YEARS
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MidCap Growth Fund........................ $694 $946 $1,217 $1,989
California Growth Fund.................... $671 $875 $1,096 $1,729
Projected California Growth Fund
(after Transaction)....................... $661 $843 $1,040 $1,608
*Assumes a CDSC will not apply.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. Each
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of each class and are not directly charged to
your account.
WHERE CAN I FIND MORE FINANCIAL INFORMATION ABOUT THE FUNDS?
For the California Growth Fund, per share income information for the past five
fiscal years (and the most recent six month semiannual period) for Class A is
shown on the following page under the heading "Financial Highlights." Also the
current Annual Report to Shareholders of the Trust, which is attached, contains
more financial information about California Growth Fund and MidCap Growth Fund
as well as discussions of California Growth Fund's and MidCap Growth Fund's
performance during the fiscal year ended April 30, 1999 and the six month period
ended October 31, 1999.
FINANCIAL HIGHLIGHTS
CALIFORNIA GROWTH FUND - CLASS A
SIX MONTHS
ENDED
OCTOBER
31, 1999 YEAR ENDED APRIL 30,
-----------------------------------------
(UNAUDITED)1 1999 1998 1997 1996 1995
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PER SHARE DATA ($)
Net asset value, 25.82 24.97 19.35 18.26 14.03 12.05
beginning of year
-----------------------------------------------------
Net investment income .01 .10 .14 .13 .20 .16
Net realized and 8.25 1.42 6.48 1.51 6.03 3.04
unrealized gains
-----------------------------------------------------
Total from investment 8.26 1.52 6.62 1.64 6.23 3.20
operations
-----------------------------------------------------
Distributions from net (.06) (.14) (.14) (.12) (.23) (.12)
investment income
Distributions in (.02) - - - - -
excess of net
investment income
Distributions from net - (.53) (.86) (.43) (1.77) (1.10)
realized gains
-----------------------------------------------------
Total distributions (.08) (.67) (1.00) (.55) (2.00) (1.22)
-----------------------------------------------------
Net asset value, end of 34.00 25.82 24.97 19.35 18.26 14.03
year
=====================================================
Total return (%)2 32.10 6.39 34.98 8.94 47.42 29.09
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year 1,063,395 780,598 721,254 282,898 81,175 13,844
($ x 1,000)
Ratios to average net
assets: (%)
Expenses .963 1.00 .99 1.08 .71 .25
Expenses excluding .963 1.00 .99 1.08 1.09 1.27
waiver and payments by
affiliate
Net investment income .043 .41 .67 .84 1.42 1.63
Portfolio turnover rate 38.20 52.76 48.52 44.81 61.82 79.52
(%)
1. Based on average shares outstanding.
2. Total return does not include sales charges, and is not annualized.
3. Annualized.
WHAT ARE OTHER KEY FEATURES OF THE FUNDS?
THE FUNDS USE THE SAME SERVICE PROVIDERS FOR THE FOLLOWING SERVICES:
TRANSFER AGENCY AND CUSTODY SERVICES. Investor Services, a wholly owned
subsidiary of Resources, is the shareholder servicing agent and acts as the
transfer agent and dividend-paying agent for the Funds.
Bank of New York, Mutual Funds Division, 90 Washington Street, New York, NY
10286, acts as the custodian of the securities and other assets of both Funds.
ADMINISTRATIVE SERVICES. FT Services, a wholly-owned subsidiary of Resources,
provides certain administrative facilities and services to California Growth
Fund and MidCap Growth Fund under the same terms and conditions.
DISTRIBUTION SERVICES. Distributors acts as the principal underwriter in the
continuous public offering of the Funds' shares under the same terms and
conditions for both Funds.
DISTRIBUTION AND SERVICE (12B-1) FEES. Both Funds have distribution or "Rule
12b-1" plans Under each plan, the Fund may pay Distributors or others for the
expenses of activities that are primarily intended to sell shares of the class.
These expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
Fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements. The distribution and service (12b-1) fees charged to each class
are based only on the fees attributable to that particular class.
MidCap Growth Fund under its Class A plan may pay up to 0.35% per year of Class
A's average daily net assets while payments by California Growth Fund under its
plan are limited to 0.25% per year of Class A's average daily net assets.
For more information regarding California Growth Fund's Rule 12b-1 plans, please
see "The Underwriter - Distribution and Service (12b-1) fees" in the current SAI
for both funds dated September 1, 1999, as amended January 1, 2000 and as
supplemented February 1, 2000 and February 16, 2000 ("Combined SAI").
PURCHASES AND REDEMPTIONS. The maximum front-end sales charge imposed on
purchases of Class A shares of California Growth Fund and of shares of MidCap
Growth Fund is 5.75% with reduced charges for purchases of $50,000 or more and
no front-end sales charges for purchases of $1 million or more. Each Fund
generally requires a minimum initial investment of $1,000 and subsequent
investments of at least $50.
You may sell (redeem) your shares at any time. Shares of each Fund also may be
exchanged for shares of other Franklin Templeton Funds, subject to certain
limitations, as provided in the prospectus of the respective Franklin Templeton
Fund. Because an exchange is technically a sale and a purchase of shares, an
exchange is a taxable transaction.
Shares of each Fund may be redeemed at their respective Net Asset Value per
share. However, redemptions of Class A shares which were purchased in amounts of
$1,000,000 or more generally are subject to a 1% CDSC on shares you sell within
12 months of purchase. California Growth Fund shares acquired by MidCap Growth
Fund shareholders as a result of this Transaction are subject to a CDSC to the
same extent that MidCap Growth Fund shares were subject to a CDSC.
Additional information and specific instructions explaining how to buy, sell,
and exchange shares of California Growth Fund are outlined in the California
Growth Fund Prospectus under the heading "Your Account." The accompanying
California Growth Fund Prospectus also lists phone numbers for you to call if
you have any questions about your account under the heading "Questions." These
instructions and phone numbers are the same for both Funds.
DIVIDENDS AND DISTRIBUTIONS. Each Fund intends to pay a dividend at least
annually representing substantially all of its net investment income and any net
realized capital gains. The amount of these distributions will vary and there is
no guarantee the Funds will pay dividends.
For more information about the tax implications of investments in the California
Growth Fund, see the attached California Growth Fund Prospectus under the
heading "Distributions and Taxes."
REASONS FOR THE TRANSACTION
The Board of Trustees on behalf of MidCap Growth Fund has recommended the
Transaction in order to combine MidCap Growth Fund with a larger fund that has
similar goals and investment policies. A larger fund may be expected to have a
lower expense ratio because certain costs may be spread over a larger asset
base. However, variable expenses that are based on the value of assets or the
number of shareholder accounts, such as custody and transfer agency fees, would
be largely unaffected by the Transaction.
The Plan was presented to the Board of Trustees of MidCap Growth Fund at a
meeting held on February 14, 2000. At the meeting, the Board of Trustees
reviewed the potential benefits and costs to shareholders of MidCap Growth Fund;
the expense ratios of California Growth Fund and MidCap Growth Fund; the
comparative investment performance of California Growth Fund and MidCap Growth
Fund; the compatibility of the investment goals, policies, restrictions and
investments of MidCap Growth Fund with those of California Growth Fund; and the
tax consequences of the Transaction. During the course of its deliberations, the
Board of Trustees noted that the expenses of the Transaction will be shared
one-quarter by MidCap Growth Fund, one-quarter by California Growth Fund, and
one-half by Advisers.
The Board of Trustees, including a majority of the trustees who are not
interested persons of either Fund, concluded that the Transaction is in the best
interests of the shareholders of MidCap Growth Fund and that no dilution of
value would result to the shareholders of MidCap Growth Fund from the
Transaction, approved the Plan and recommended that shareholders of MidCap
Growth Fund vote to approve the Transaction.
FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS
THAT YOU VOTE FOR THE PLAN.
If shareholders of MidCap Growth Fund do not approve the Plan, the Board of
Trustees will consider other possible courses of action for MidCap Growth Fund,
including liquidation and dissolution.
INFORMATION ABOUT THE TRANSACTION
This is only a summary of the Plan. You should read the actual Plan. It is
attached as Exhibit A.
HOW WILL THE TRANSACTION BE CARRIED OUT?
If the shareholders of MidCap Growth Fund approve the Plan, the Transaction will
take place after various conditions are satisfied by the Trust on behalf of
MidCap Growth Fund and California Growth Fund, including the preparation of
certain documents. The Trust will determine a specific date for the actual
Transaction to take place. This is called the closing date. If the shareholders
of MidCap Growth Fund do not approve the Plan, the Transaction will not take
place.
If shareholders of MidCap Growth Fund approve the Plan at the Meeting, shares of
MidCap Growth Fund will no longer be offered for sale to existing shareholders,
except for the reinvestment of dividend and capital gain distributions or
through established automatic investment plans. Until the close of business on
the day of the Meeting, you may continue to add to your existing account subject
to your applicable minimum additional investment amount or buy additional shares
through the reinvestment of dividend and capital gain distributions.
If the shareholders of MidCap Growth Fund approve the Plan, MidCap Growth Fund
will deliver to California Growth Fund substantially all of its assets on the
closing date. In exchange, Shareholders of MidCap Growth Fund will receive Class
A shares of California Growth Fund that have a value equal to the dollar value
of the assets delivered to MidCap Growth Fund. The stock transfer books of
MidCap Growth Fund will be permanently closed as of 1:00 p.m. Pacific time on
the closing date. MidCap Growth Fund will only accept requests for redemptions
received in proper form before 1:00 p.m. Pacific time on the closing date.
Requests received after that time will be considered requests to redeem shares
of California Growth Fund.
To the extent permitted by law, the Funds may agree to amend the Plan without
shareholder approval. They may also agree to terminate and abandon the
Transaction at any time before or, to the extent permitted by law, after the
approval of shareholders of MidCap Growth Fund.
WHO WILL PAY THE EXPENSES OF THE TRANSACTION?
The expenses resulting from the Transaction will be paid one-quarter by MidCap
Growth Fund, one-quarter by California Growth Fund, and one-half by Advisers,
the investment manager for both Funds.
WHAT ARE THE TAX CONSEQUENCES OF THE TRANSACTION?
The Transaction is intended to qualify as a tax-free reorganization for federal
income tax purposes under Section 368(a)(1) of the Internal Revenue Code of
1986, as amended. Based on certain assumptions and representations received from
the Trust, on behalf of the Funds, it is the opinion of Stradley, Ronon, Stevens
& Young, LLP, counsel to the Funds, that shareholders of MidCap Growth Fund will
not recognize any gain or loss for federal income tax purposes as a result of
the exchange of their shares of MidCap Growth Fund for shares of California
Growth Fund and that neither California Growth Fund nor its shareholders will
recognize any gain or loss upon receipt of the assets of MidCap Growth Fund.
You will continue to be responsible for tracking the purchase cost and holding
period of your shares and should consult your tax advisor regarding the effect,
if any, of the Transaction in light of your individual circumstances. You should
also consult your tax advisor as to state and local tax consequences, if any, of
the Transaction, because this discussion only relates to the federal income tax
consequences.
WHAT SHOULD I KNOW ABOUT THE SHARES OF CALIFORNIA GROWTH FUND?
Class A shares of California Growth Fund will be distributed to shareholders of
the MidCap Growth Fund's shares and will have the same legal characteristics as
the shares of MidCap Growth Fund with respect to such matters as voting rights,
assessibility, conversion rights, and transferability. Former shareholders of
MidCap Growth Fund whose shares are represented by outstanding share
certificates will not be allowed to redeem shares of California Growth Fund
until MidCap Growth Fund certificates have been returned.
WHAT ARE THE CAPITALIZATIONS OF THE FUNDS AND WHAT MIGHT THE CAPITALIZATION BE
AFTER THE TRANSACTION?
The following table sets forth, as of April 30, 2000, the capitalization of
Class A shares of MidCap Growth Fund (the only class of MidCap Growth Fund
outstanding) and the Class A shares of California Growth Fund. The table also
shows the projected capitalization of California Growth Fund Class A shares as
adjusted to give effect to the proposed Transaction. The capitalization of
California Growth Fund and its classes is likely to be different when the
Transaction is consummated.
CALIFORNIA
GROWTH FUND
-PROJECTED
MIDCAP GROWTH CALIFORNIA AFTER
FUND GROWTH FUND TRANSACTION
(UNAUDITED) (UNAUDITED) (UNAUDITED)
----------------------------------------------
Net assets (all classes) $72 $2,518 $2,590
(millions)
Total shares outstanding (all 2,759,482 50,322,6921 51,767,3161
classes)
Class A net assets (millions) $72 $2,026 $2,098
Class A shares outstanding 2,759,482 40,392,821 41,837,445
Class A net asset value per $26.25 $50.15 $50.15
share
1. California Growth Fund offers two additional classes of shares, Class B and
Class C.
COMPARISON OF INVESTMENT GOALS AND POLICIES
This section describes the key differences between the investment policies of
MidCap Growth Fund and California Growth Fund, and certain noteworthy
differences between the investment goals and policies of the two Funds. For a
complete description of California Growth Fund's investment policies and risks,
you should read the California Growth Fund Prospectus, which is attached to this
Prospectus/Proxy Statement as Exhibit B.
ARE THERE ANY SIGNIFICANT DIFFERENCES BETWEEN THE INVESTMENT GOALS AND
STRATEGIES OF THE FUNDS?
There are several important differences between the Funds.
Unlike California Growth Fund, MidCap Growth Fund is a "diversified" fund under
the 1940 Act. As a diversified fund, 75% of MidCap Growth Fund's total assets
may not be invested in more than 5% of a single issuer's securities or be used
to purchase 10% or more of the outstanding voting securities of a single issuer.
MidCap Growth Fund is not prohibited from investing the remaining 25% of its
assets in the securities of a single issuer.
Although California Growth Fund may invest a greater portion of its assets in
the securities of one issuer than a diversified fund, it does intend to meet the
diversification requirements of the Internal Revenue Code.
As a non-diversified fund, California Growth Fund may invest a greater portion
of its assets in the securities of one issuer and, therefore, a smaller number
of individual issuers than a diversified fund. Economic, business, political or
other changes can affect all securities of a similar type. Because it is a
non-diversified fund, California Growth Fund may be more sensitive to these
changes.
Under normal market conditions, the California Growth Fund invests at least 65%
of its assets in equity and debt securities of companies headquartered or
conducting a majority of their operations in the state of California. The MidCap
Growth Fund does not focus its investments in companies in any single state or
region.
While the MidCap Growth Fund expects to invest a significant portion of its
assets in medium-sized companies with a market capitalization of $1 billion and
$8 billion, the California Growth Fund expects to invest a significant portion
of its assets in small capitalization companies - those whose market
capitalization is below $1.5 billion - in addition to medium capitalization
companies.
Although the principal investment goal of MidCap Growth Fund is long-term
capital appreciation, and that of California Growth Fund is capital
appreciation, there is minimal practical difference between the two. The
Funds' investment goals are fundamental.
There are other differences between the Funds that are of lesser significance.
For example, California Growth Fund may, although it does not have any current
intent to do so, invest a greater portion of its assets in debt securities than
does MidCap Growth Fund. While neither of the Funds has any limitation on the
percentage of its total assets invested in foreign securities, the MidCap Growth
Fund intends to limit its investments in foreign securities to no more than 5%
of its total assets.
California Growth Fund may not loan more than 10% of the value of its total
assets, whereas MidCap Growth Fund may not loan more than 20% of the value of
its total assets.
The California Growth Fund may invest in securities of companies operating in
the real estate industry, including real estate investment trusts (REITs). The
California Growth Fund currently intends to limit these investments to no more
than 10% of total assets. MidCap Growth Fund may also invest in REITs, but has
no specific limit to any investment it may make in REITs.
Both Funds may lend their portfolio securities to qualified banks or broker
dealers. Such loans may not exceed 20%, in the case of MidCap Growth Fund, and
10%, in the case of California Growth Fund, of the value of each fund's total
assets measured at the time of the most recent loan.
As a fundamental policy, California Growth Fund may not invest more than 10% of
its total assets in securities with a limited trading market. Illiquid
securities are generally securities that cannot be sold within seven days in the
normal course of business at approximately the amount at which the fund has
valued them. MidCap Growth Fund has no restriction on the percentage of assets
which may be invested in illiquid securities.
HOW DO THE FUNDAMENTAL INVESTMENT RESTRICTIONS OF THE FUNDS DIFFER?
Policies or restrictions that are deemed fundamental may not be changed without
the approval of the lesser of (i) a majority of the outstanding shares of the
fund, or (ii) 67% or more of the shares represented at a meeting of shareholders
at which the holders of more than 50% of the outstanding shares are represented
("Majority Vote").
As described below, the Funds have adopted similar restrictions as fundamental
policies, which may not be changed without the approval of a Majority Vote.
California Growth Fund is not prohibited from purchasing shares of money market
funds managed by Advisers or its affiliates to the extent permitted by exemption
granted under the 1940 Act. MidCap Growth Fund may not purchase securities of
other investment companies, except in connection with a merger, consolidation,
acquisition or reorganization; provided that all or substantially all of the
assets of the MidCap Growth Fund may be invested in another registered company
having the same objective and policies as MidCap Growth Fund.
MidCap Growth Fund may participate in an interfund lending program with other
Franklin Templeton Funds to the extent permitted under the 1940 Act. California
Growth Fund does not yet have this authority.
California Growth Fund may not invest more than 10% of the value of its total
assets in securities with legal or contractual restrictions on resale (although
the Fund may invest in such securities to the extent permitted under the federal
securities laws) or which are not readily marketable, or which have a record of
less than three years continuous operation, including the operations of any
predecessor companies, if more than 5% of California Growth Fund's total assets
would be invested in such companies. MidCap Growth Fund has a non-fundamental
policy of not investing more than 10% of its net assets in illiquid securities,
but it has no limitations on its investment in securities of companies which
have a record of less than three years continuous operation.
California Growth Fund may not invest in excess of 5% of its total assets in
options unrelated to its transaction in futures. While California Growth Fund
has no stated policy in this regard, MidCap Growth Fund has a non-fundamental
policy that it may not invest in excess of 5% of its net assets, valued at the
lower of cost or market, in warrants. In addition, no more than 2% of MidCap
Growth Fund's net assets may be invested in warrants not listed on either the
New York Stock Exchange or American Stock Exchange.
WHAT ARE THE RISK FACTORS ASSOCIATED WITH INVESTMENTS IN THE FUNDS?
Like all investments, an investment in both Funds involves risk. There is no
assurance that the Funds will meet their investment goals. The achievement of
the Funds' goals depends upon market conditions, generally, and on the
investment managers' analytical and portfolio management skills. The risks of
the Funds are basically the same as those of other investments in real estate
securities.
STOCK RISK.
While stocks have historically outperformed other asset classes over the long
term, they tend to go up and down more dramatically over the shorter term. These
price movements may result from factors affecting individual companies,
industries or securities markets as a whole.
Medium and Smaller Companies Risk. California Growth Fund invests a substantial
portion of its assets in equity securities of medium and smaller companies and,
therefore, it is subject to additional risks associated with those securities.
Historically, medium-size and smaller company securities have been more volatile
in price than larger company securities, especially over the short term. Among
the reasons for the greater price volatility are the less certain growth
prospects of medium-size and smaller companies, the lower degree of liquidity in
the markets for such securities, and the greater sensitivity of these companies
to changing economic conditions.
In addition, these companies may lack depth of management, they may be unable to
generate funds necessary for growth or development, or they may be developing or
marketing new products or services for which markets are not yet established and
may never become established. While medium-size and smaller companies may offer
greater opportunities for capital growth than larger, more established
companies, they also involve greater risks and should be considered speculative.
FOREIGN SECURITIES RISK.
Securities of companies and governments located outside the U.S. may involve
risks that can increase the potential for losses in a Fund. Investments in
Depository Receipts also involve some or all of the following risks. These
risks, including currency risks, may be greater for California Growth Fund than
MidCap Growth Fund because California Growth Fund has no limit on what
percentage of its assets may be invested in foreign securities whereas MidCap
Growth Fund intends to limit its investments in foreign securities to no more
than 5% of its assets.
Country Risk. General securities market movements in any country where a Fund
has investments are likely to affect the value of the securities the Fund owns
that trade in that country. These movements will affect a Fund's share price and
fund performance.
The political, economic and social structures of some countries a Fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of the imposition of
exchange controls, currency devaluations, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks.
Investments in developing or emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, business and social frameworks to support securities
markets. Foreign securities markets, including emerging markets, may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. While short-term
volatility in these markets can be disconcerting, declines in excess of 50% are
not unusual.
Company Risk. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and companies
generally have less government supervision and regulation than in the U.S. A
Fund may have greater difficulty voting proxies, exercising shareholder rights,
pursuing legal remedies and obtaining judgments with respect to foreign
investments in foreign courts than with respect to U.S. companies in U.S.
courts.
CURRENCY RISK.
To the extent either Fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates will affect the value of the Fund's
foreign investments and the Fund's share price. Generally, when the U.S. dollar
rises in value against a foreign currency, an investment in that country loses
value because that currency is worth fewer U.S. dollars. Devaluation of currency
by a country's government or banking authority also has a significant impact on
the value of any securities denominated in that currency.
Euro. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, to replace the national currency for participating
member countries.
Because the change to a single currency has been relatively recent, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers that a Fund may hold in its portfolio, and their
impact on Fund performance. To the extent either Fund holds non-U.S. dollar
(euro or other) denominated securities, it will still be exposed to currency
risk due to fluctuations in those currencies versus the U.S. dollar.
CONVERTIBLE SECURITIES RISK.
To the extent either Fund invests in convertible securities, it is subject to
the risks associated with them. A convertible security has risk characteristics
of both equity and debt securities. Its value may rise and fall with the market
value of the underlying stock or, like a debt security, vary with changes in
interest rates and the credit quality of the issuer. A convertible security
tends to perform more like a stock when the underlying stock price is high
(because it is assumed it will be converted) and more like a debt security when
the underlying stock price is low (because it is assumed it will not be
converted). Because its value can be influenced by many different factors, a
convertible security is not as sensitive to interest rate changes as a similar
non-convertible debt security, and generally has less potential for gain or loss
than the underlying stock.
DERIVATIVE SECURITIES RISK.
Options, futures, options on futures, and forward currency contracts are
considered derivative investments since their value depends on the value of the
underlying asset to be purchased or sold. A Fund's investment in derivatives may
involve a small investment relative to the amount of risk assumed. To the extent
either Fund enters into any of these transactions, their success will depend on
the manager's ability to predict market movements.
ILLIQUID SECURITIES RISK.
As a fundamental policy, the California Growth Fund may invest up to 10% of its
total assets in securities with legal or contractual restrictions, although it
may not invest in illiquid securities issued by real estate investment trusts.
MidCap Growth Fund has no policy with respect to illiquid investments.
Investments by a Fund in illiquid securities involve the possibility that the
securities cannot be readily sold or can only be resold at a price significantly
lower than their value, which may have a negative effect on the value of the
Fund's shares.
INTEREST RATE RISK.
When interest rates rise, debt security prices fall. The opposite is also true:
debt security prices go up when interest rates fall. In general, securities with
longer maturities are more sensitive to these price changes. To the extent
California Growth Fund invests more of its assets in debt securities than MidCap
Growth Fund, California Growth Fund is exposed to a greater interest rate risk.
CREDIT RISK.
This is the possibility than an issuer will be unable to make interest payments
or repay principal. Changes in an issuer's financial strength or in a security's
credit rating may affect its value and, thus, impact the value of a Fund's
shares. As with the interest rate risk, to the extent that California Growth
Fund invests more of its assets in debt securities than MidCap Growth Fund,
California Growth Fund is exposed to greater credit risk.
NON-DIVERSIFICATION RISK.
A potential difference in the risks associated with investments in each of the
Funds arises from the fact that California Growth Fund, unlike MidCap Growth
Fund, is non-diversified. To the extent California Growth Fund's investments are
not diversified, California Growth Fund may be more sensitive to economic,
political, business, or regulatory developments affecting a single issuer or
industry. This, in turn, may result in greater fluctuation in the value of
California Growth Fund's shares.
VOTING INFORMATION
HOW MANY VOTES ARE NECESSARY TO APPROVE THE PLAN?
The affirmative vote of a majority of the total number of shares of MidCap
Growth Fund outstanding and entitled to vote is necessary to approve the Plan.
Each shareholder will be entitled to one vote for each full share, and a
fractional vote for each fractional share of MidCap Growth Fund held at the
close of business on May 12, 2000 (the "Record Date"). If sufficient votes to
approve the Plan are not received by the date of the Meeting, the Meeting may be
adjourned to permit further solicitations of proxies.
Under relevant state law and the Trust's governing documents, abstentions and
broker non-votes will be included for purposes of determining whether a quorum
is present at the Meeting, but will be treated as votes not cast and, therefore,
will not be counted for purposes of determining whether the matters to be voted
upon at the Meeting have been approved, and will have the same effect as a vote
against the Plan.
HOW DO I ENSURE MY VOTE IS ACCURATELY RECORDED?
You can vote in any one of four ways:
o By mail, with the enclosed proxy card.
o In person at the Meeting.
o By telephone or through the Internet; a control number is provided on your
proxy card and separate instructions are enclosed.
A proxy card is, in essence, a ballot. IF YOU SIMPLY SIGN AND DATE THE PROXY BUT
GIVE NO VOTING INSTRUCTIONS, YOUR SHARES WILL BE VOTED IN FAVOR OF THE PLAN AND
IN ACCORDANCE WITH THE VIEWS OF MANAGEMENT UPON ANY UNEXPECTED MATTERS THAT COME
BEFORE THE MEETING OR ADJOURNMENT OF THE MEETING.
CAN I REVOKE MY PROXY?
You may revoke your proxy at any time before it is voted by sending a written
notice to MidCap Growth Fund expressly revoking your proxy, by signing and
forwarding to MidCap Growth Fund a later-dated proxy, or by attending the
Meeting and voting in person.
WHAT OTHER MATTERS WILL BE VOTED UPON AT THE MEETING?
The Board of Trustees of the Trust on behalf of MidCap Growth Fund does not
intend to bring any matters before the Meeting other than those described in
this proxy. It is not aware of any other matters to be brought before the
Meeting by others. If any other matter legally comes before the Meeting, proxies
for which discretion has been granted will be voted in accordance with the views
of management.
WHO IS ENTITLED TO VOTE?
Shareholders of record of MidCap Growth Fund on the Record Date will be entitled
to vote at the Meeting. On the Record Date, there were 2,749,449.888 outstanding
shares of MidCap Growth Fund - Class A, the only class of MidCap Growth Fund
issued and outstanding.
WHAT OTHER SOLICITATIONS WILL BE MADE?
MidCap Growth Fund will request broker-dealer firms, custodians, nominees, and
fiduciaries to forward proxy material to the beneficial owners of the shares of
record. MidCap Growth Fund may reimburse broker-dealer firms, custodians,
nominees, and fiduciaries for their reasonable expenses incurred in connection
with such proxy solicitation. In addition to solicitations by mail, officers and
employees of the Trust, without extra pay, may conduct additional solicitations
by telephone, personal interviews, and other means. The Trust, on behalf of
MidCap Growth Fund, has engaged Shareholder Communications Corporation to
solicit proxies from brokers, banks, other institutional holders, and individual
shareholders for a fee, including out-of-pocket expenses, of $5,000. The costs
of any such additional solicitation and of any adjourned session will be shared
one-quarter by MidCap Growth Fund, one-quarter by California Growth Fund, and
one-half by Advisers.
ARE THERE DISSENTERS' RIGHTS?
Shareholders of MidCap Growth Fund will not be entitled to any "dissenters'
rights" since the proposed Transaction involves two open-end investment
companies registered under the 1940 Act (commonly called mutual funds). Although
no dissenters' rights may be available, you have the right to redeem your shares
at Net Asset Value until the closing date. After the closing date, you may
redeem your California Growth Fund shares or exchange them for shares of certain
other funds in the Franklin Templeton Funds, subject to the terms in the
prospectus of the respective fund.
INFORMATION ABOUT CALIFORNIA GROWTH FUND
Information about California Growth Fund is included in the California Growth
Fund Prospectus, which is attached to and considered a part of this
Prospectus/Proxy Statement. Additional information about California Growth Fund
is included in the Combined SAI which is attached hereto and considered a part
of this Prospectus/Proxy Statement. You may request a free copy of the
Semiannual Report to Shareholders for the six month period ended October 31,
1999 by calling 1-800/DIAL-BEN(R) or by writing to the California Growth Fund at
P.O. Box 997151, Sacramento, CA 95899-9983. The California Growth Fund's Annual
Report to Shareholders for the fiscal year ended April 30, 1999, is attached to
and considered a part of this Prospectus/Proxy Statement.
The California Growth Fund files proxy materials, reports and other information
with the SEC in accordance with the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act. These materials can be inspected and
copied at: the SEC's Public Reference Room at 450 Fifth Street NW, Washington,
DC 20549, and at the Regional Offices of the SEC located in New York City at 7
World Trade Center, Suite 1300, New York, NY 10048 and in Chicago at 500 West
Madison Street, Suite 1400, Chicago, IL 60661. Also, copies of such material can
be obtained from the SEC's Public Reference Section, Washington, DC 20549-6009,
at prescribed rates, or from the SEC's Internet address at http://www.sec.gov.
INFORMATION ABOUT MIDCAP GROWTH FUND
Information about MidCap Growth Fund is included in its prospectus, the Combined
SAI, the Trust's Annual Report to Shareholders dated April 30, 1999 and the
Semiannual Report dated October 31, 1999. These documents have been filed with
the SEC and the Trust's Annual Report is attached as an exhibit to this
Prospectus/Proxy Statement. You may request free copies of the MidCap Growth
Fund's prospectus and the Trust's Semiannual Report dated October 31, 1999 by
calling 1-800/DIAL BEN(R) or by writing to MidCap Growth Fund at P.O. Box
997151, Sacramento, CA 95899-9983. Reports and other information filed by the
MidCap Growth Fund can be inspected and copied at: the SEC's Public Reference
Room at 450 Fifth Street NW, Washington, DC 20549, and at the Regional Offices
of the SEC located in New York City at 7 World Trade Center, Suite 1300, New
York, NY 10048 and in Chicago at 500 West Madison Street, Suite 1400, Chicago,
IL 60661. Also, copies of such material can be obtained from the SEC's Public
Reference Section, Washington, DC 20549-6009, at prescribed rates, or from the
SEC's Internet address at http://www.sec.gov.
PRINCIPAL HOLDERS OF SHARES
As of the Record Date, the principal shareholder of the Franklin MidCap Growth
Fund, beneficial or of record, was:
NAME AND ADDRESS PERCENTAGE (%)
Franklin Resources, Inc.
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Floor
Burlingame, CA 94010 23
Note: Charles B. Johnson and Rupert H. Johnson, Jr., who are officers and
trustees of the Trust, may be considered beneficial holders of the fund
shares held by Franklin Resources, Inc. (Resources). As principal
shareholders of Resources, they may be able to control the voting of
Resources' shares of the fund.
From time to time, the number of fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. No other
person owned (beneficially or of record) 5% or more of the outstanding shares of
California Growth Fund.
As of April 26, 2000, the officers and trustees of the Trust, as a group, owned
less than 1% of the outstanding voting shares of MidCap Growth Fund and/or Class
A of California Growth Fund.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., 777 Mariners Island Blvd., San Mateo, CA
94404, the investment manager for both Funds
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your Class A shares within 12 months of purchase
DISTRIBUTORS - Franklin Templeton Distributors, Inc., 777 Mariners Island
Blvd., San Mateo, CA 94404, the principal underwriter for the Funds
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds, except Franklin Templeton
Variable Insurance Products Trust and Templeton Capital Accumulator Fund, Inc.
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON INVESTMENTS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Funds' administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., 777 Mariners
Island Blvd., San Mateo, CA 94404, the shareholder servicing and transfer agent
to the Funds
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Services, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the Fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the Fund by the
number of shares outstanding.
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge, if applicable. For
each Fund, the maximum front-end sales charge is 5.75% for Class A shares of
California Growth Fund and for shares of MidCap Growth Fund. We calculate the
offering price to two decimal places using standard rounding criteria.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Funds. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
S&P - Standard & Poor's(R) Ratings Group
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Funds and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
EXHIBITS TO PROSPECTUS
AND PROXY STATEMENT
EXHIBIT
A Plan of Reorganization by Franklin Strategic Series on behalf of
Franklin California Growth Fund and Franklin MidCap Growth Fund
B Prospectus of Franklin California Growth Fund - Class A, B & C dated
September 1, 1999, as amended May 1, 2000 (enclosed)
C Annual Report to Shareholders of Franklin Strategic Series dated
April 30, 1999 (enclosed)
EXHIBIT A
PLAN OF REORGANIZATION
THIS PLAN OF REORGANIZATION (the "Plan"), is made by Franklin Strategic Series,
a business trust created under the laws of the State of Delaware in 1991 (the
"Trust") as of this 26th day of May, 2000, on behalf of two of its series,
Franklin MidCap Growth Fund ("MidCap Growth Fund") and Franklin California
Growth Fund ("California Growth Fund") (collectively, the "Funds") with its
principal place of business at 777 Mariners Island Boulevard, San Mateo,
California 94404.
PLAN OF REORGANIZATION
The reorganization (hereinafter referred to as the "Plan of Reorganization")
will consist of (i) the acquisition by California Growth Fund, of substantially
all of the property, assets and goodwill of MidCap Growth Fund in exchange
solely for shares of beneficial interest, par value $0.01 per share, of
California Growth Fund - Class A ("California Growth Fund Shares"); and (ii) the
subsequent dissolution of MidCap Growth Fund as soon as practicable after the
closing (as defined in Section 3, hereinafter called the "Closing"), all upon
and subject to the terms and conditions of this Plan hereinafter set forth.
AGREEMENT
In order to consummate the Plan of Reorganization and in consideration of the
promises and of the covenants and agreements hereinafter set forth, and
intending to be legally bound, the parties hereto covenant and agree as follows:
1. SALE AND TRANSFER OF ASSETS, LIQUIDATION AND DISSOLUTION OF MIDCAP
GROWTH FUND.
(a) Subject to the terms and conditions of this Plan, the Trust on behalf of
MidCap Growth Fund agrees that it will convey, transfer and deliver to
California Growth Fund at the Closing all of MidCap Growth Fund's then existing
assets, free and clear of all liens, encumbrances, and claims whatsoever (other
than shareholders' rights of redemption), except for cash, bank deposits, or
cash equivalent securities in an estimated amount necessary to: (i) pay the
costs and expenses of carrying out this Plan (including, but not limited to,
fees of counsel and accountants, and expenses of its liquidation and dissolution
contemplated hereunder), which costs and expenses shall be established on MidCap
Growth Fund's books as liability reserves; (ii) discharge its unpaid liabilities
on its books at the closing date (as defined in Section 3, hereinafter called
the "Closing Date"), including, but not limited to, its income dividends and
capital gains distributions, if any, payable for the period prior to, and
through, the Closing Date; and (iii) pay such contingent liabilities as the
Board of Trustees shall reasonably deem to exist against MidCap Growth Fund, if
any, at the Closing Date, for which contingent and other appropriate liability
reserves shall be established on MidCap Growth Fund's books (hereinafter "Net
Assets"). MidCap Growth Fund shall also retain any and all rights that it may
have over and against any person that may have accrued up to and including the
close of business on the Closing Date.
(b) Subject to the terms and conditions of this Plan, the Trust on behalf of
California Growth Fund, shall at the Closing deliver to MidCap Growth Fund the
number of California Growth Fund Shares, determined by dividing the net asset
value per share of the Class A shares of MidCap Growth Fund (the "MidCap Growth
Fund Shares") by the net asset value per share of California Growth Fund Shares,
and multiplying the result thereof by the number of outstanding MidCap Growth
Fund Shares, as of 1:00 p.m. Pacific time on the Closing Date. All such values
shall be determined in the manner and as of the time set forth in Section 2
hereof.
(c) Immediately following the Closing, the Trust shall dissolve MidCap Growth
Fund and distribute pro rata to the shareholders of record of the MidCap Growth
Fund Shares as of the close of business on the Closing Date, California Growth
Fund Shares received by MidCap Growth Fund pursuant to this Section 1. Such
liquidation and distribution shall be accomplished by the establishment of
accounts on the share records of MidCap Growth Fund of the type and in the
amounts due such shareholders based on their respective holdings as of the close
of business on the Closing Date. Fractional California Growth Fund Shares shall
be carried to the third decimal place. As promptly as practicable after the
Closing, each holder of any outstanding certificate or certificates representing
shares of beneficial interest of MidCap Growth Fund shall be entitled to
surrender the same to the transfer agent for California Growth Fund in exchange
for the number of California Growth Fund Shares into which the MidCap Growth
Fund Shares theretofore represented by the certificate or certificates so
surrendered shall have been converted. Certificates for California Growth Fund
Shares shall not be issued, unless specifically requested by the shareholders.
Until so surrendered, each outstanding certificate which, prior to the Closing,
represented shares of beneficial interest of MidCap Growth Fund shall be deemed
for all California Growth Fund's purposes to evidence ownership of the number of
California Growth Fund Shares into which the MidCap Growth Fund Shares (which
prior to the Closing were represented thereby) have been converted.
2. VALUATION.
(a) The value of MidCap Growth Fund's Net Assets to be acquired by California
Growth Fund, hereunder shall be computed as of 1:00 p.m. Pacific time on the
Closing Date using the valuation procedures set forth in MidCap Growth Fund's
currently effective prospectus.
(b) The net asset value of a share of beneficial interest of MidCap Growth Fund
Shares shall be determined to the fourth decimal place as of 1:00 p.m. Pacific
time on the Closing Date using the valuation procedures set forth in MidCap
Growth Fund's currently effective prospectus.
(c) The net asset value of a share of beneficial interest of California Growth
Fund Shares shall be determined to the nearest full cent as of 1:00 p.m. Pacific
time on the Closing Date using the valuation procedures set forth in California
Growth Fund's currently effective prospectus.
3. CLOSING AND CLOSING DATE.
The Closing Date shall be August 3, 2000, or such later date as determined by
the Trust's officers. The Closing shall take place at the principal office of
the Trust at 2:00 p.m., Pacific time, on the Closing Date. The Trust on behalf
of the MidCap Growth Fund shall have provided for delivery as of the Closing of
those Net Assets of MidCap Growth Fund to be transferred to the account of
California Growth Fund at the Trust's Custodian, Bank of New York, Mutual Funds
Division, 90 Washington Street, New York, New York 10286. Also, the Trust on
behalf of the MidCap Growth Fund shall have prepared and have available at the
Closing a list of names and addresses of the shareholders of record of its
MidCap Growth Fund Shares and the number of shares of beneficial interest of
MidCap Growth Fund Shares owned by each such shareholder, indicating thereon
which such shares are represented by outstanding certificates and which by
book-entry accounts, all as of 1:00 p.m. Pacific time on the Closing Date,
certified by its transfer agent or by its President to the best of its or his
knowledge and belief. The Trust on behalf of California Growth Fund shall issue
and deliver a certificate or certificates evidencing the shares of beneficial
interest of California Growth Fund to be delivered to the account of MidCap
Growth Fund at said transfer agent registered in such manner as the officers of
the Trust on behalf of MidCap Growth Fund shall deem appropriate, or shall have
prepared satisfactory evidence that such California Growth Fund Shares have been
registered in an account on the books of California Growth Fund in such manner
as the officers of the Trust on behalf of MidCap Growth Fund shall deem
appropriate.
4. REPRESENTATIONS AND WARRANTIES BY THE TRUST ON BEHALF OF CALIFORNIA GROWTH
FUND.
The Trust makes the following representations and warranties about California
Growth Fund:
(a) California Growth Fund is a series of the Trust, a business trust created
under the laws of the State of Delaware on January 25, 1991, and is validly
existing under the laws of that State. The Trust is duly registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end,
management investment company and all of the Trust's California Growth Fund
Shares sold were sold pursuant to an effective registration statement filed
under the Securities Act of 1933, as amended (the "1933 Act"), except for those
shares sold pursuant to the private offering exemption for the purpose of
raising the required initial capital.
(b) The Trust is authorized to issue an unlimited number of shares of beneficial
interest of California Growth Fund Shares, par value $0.01 per share, each
outstanding share of which is fully paid, non-assessable, freely transferable
and has full voting rights. California Growth Fund is further divided into three
classes of shares of which California Growth Fund Shares is one, and an
unlimited number of shares of beneficial interest, par value $0.01 per share,
have been allocated and designated to the California Growth Fund Shares.
(c) The financial statements appearing in the Trust's Annual Report to
Shareholders for the fiscal year ended April 30, 1999, audited by
PricewaterhouseCoopers, LLP, and the Semiannual Report to Shareholders for the
six month period ended October 31, 1999, fairly present the financial position
of California Growth Fund as of such dates and the results of its operations for
the periods indicated in conformity with generally accepted accounting
principles applied on a consistent basis.
(d) The books and records of California Growth Fund accurately summarize the
accounting data represented and contain no material omissions with respect to
the business and operations of California Growth Fund.
(e) The Trust has the necessary power and authority to conduct its business as
such business is now being conducted.
(f) The Trust on behalf of California Growth Fund is not a party to or obligated
under any provision of its Agreement and Declaration of Trust or Amended and
Restated By-laws ("By-laws"), or any contract or any other commitment or
obligation, and is not subject to any order or decree that would be violated by
its execution of or performance under this Plan.
(g) The Trust has elected to treat California Growth Fund as a regulated
investment company ("RIC") for federal income tax purposes under Part I of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
California Growth Fund has qualified as a RIC for each taxable year since its
inception, and will qualify as a RIC as of the Closing Date.
5. REPRESENTATIONS AND WARRANTIES BY THE TRUST ON BEHALF OF MIDCAP GROWTH FUND.
The Trust makes the following representations and warranties about MidCap Growth
Fund:
(a) MidCap Growth Fund is a series of the Trust, a business trust created under
the laws of the State of Delaware on January 25, 1991, and is validly existing
under the laws of that state. The Trust is duly registered under the 1940 Act as
an open-end, management investment company and all of the Trust's MidCap Growth
Fund's shares sold were sold pursuant to an effective registration statement
filed under the 1933 Act, except for those shares sold pursuant to the private
offering exemption for the purpose of raising the required initial capital.
(b) The Trust is authorized to issue an unlimited number of shares of beneficial
interest of MidCap Growth Fund, par value $0.01 per share, each outstanding
share of which is fully paid, non-assessable, freely transferable, and has full
voting rights. One class of shares of MidCap Growth Fund has been designated as
the MidCap Growth Fund - Class A Shares, and an unlimited number of shares of
beneficial interest of the Trust, par value $0.01 per share, have been allocated
to the MidCap Growth Fund Shares.
(c) The financial statements appearing in the Trust's Annual Report to
Shareholders for the fiscal year ended April 30, 1999, audited by
PricewaterhouseCoopers, LLP, and the Semiannual Report to Shareholders for the
six month period ended October 31, 1999, fairly present the financial position
of MidCap Growth Fund as of such date and the results of its operations for the
period indicated in conformity with generally accepted accounting principles
applied on a consistent basis.
(d) The Trust has the necessary power and authority to conduct MidCap Growth
Fund's business as such business is now being conducted.
(e) The Trust on behalf of MidCap Growth Fund is not a party to or obligated
under any provision of the Trust's Agreement and Declaration of Trust or
By-laws, or any contract or any other commitment or obligation, and is not
subject to any order or decree, that would be violated by the Trust's execution
of or performance under this Plan.
(f) The Trust has elected to treat MidCap Growth Fund as a RIC for federal
income tax purposes under Part I of Subchapter M of the Code, and MidCap Growth
Fund has qualified as a RIC for each taxable year since its inception and will
qualify as a RIC as of the Closing Date.
6. REPRESENTATIONS AND WARRANTIES BY THE TRUST ON BEHALF OF THE FUNDS.
The Trust makes the following representations and warranties about both MidCap
Growth Fund and California Growth Fund:
(a) The Trust will create a statement of assets and liabilities for each of the
Funds which will be prepared as of 1:00 p.m. Pacific time on the Closing Date
for the purpose of determining the number of California Growth Fund Shares to be
issued pursuant to Section 1 of this Plan, will accurately reflect its Net
Assets in the case of MidCap Growth Fund and its net assets in the case of
California Growth Fund, and outstanding shares of beneficial interest, as of
such date, in conformity with generally accepted accounting principles applied
on a consistent basis.
(b) At the Closing, the Funds will have good and marketable title to all of the
securities and other assets shown on the statement of assets and liabilities
referred to in "(a)" above, free and clear of all liens or encumbrances of any
nature whatsoever, except such imperfections of title or encumbrances as do not
materially detract from the value or use of the assets subject thereto, or
materially affect title thereto.
(c) Except as disclosed in the Trust's currently effective prospectuses relating
to the Funds, there is no material suit, judicial action, or legal or
administrative proceeding pending or threatened against either of the Funds.
(d) There are no known actual or proposed deficiency assessments with respect to
any taxes payable by either of the Funds.
(e) The execution, delivery, and performance of this Plan have been duly
authorized by all necessary action of the Trust's Board of Trustees, and this
Plan constitutes a valid and binding obligation enforceable in accordance with
its terms.
(f) It anticipates that consummation of this Plan will not cause either of the
Funds to fail to conform to the requirements of Subchapter M of the Code for
federal income taxation as a RIC at the end of its fiscal year.
(g) The Trust has the necessary power and authority to conduct the business of
the Funds, as such business is now being conducted.
7. INTENTIONS OF THE TRUST ON BEHALF OF THE FUNDS.
(a) The Trust intends to operate each Fund's respective business, as presently
conducted between the date hereof and the Closing.
(b) The Trust intends that the MidCap Growth Fund will not acquire California
Growth Fund Shares for the purpose of making distributions thereof to anyone
other than MidCap Growth Fund's shareholders.
(c) The Trust on behalf of MidCap Growth Fund intends, if this Plan is
consummated, to liquidate and dissolve MidCap Growth Fund.
(d) The Trust intends that, by the Closing, all of the Funds' Federal and other
tax returns and reports required by law to be filed on or before such date shall
have been filed, and all Federal and other taxes shown as due on said returns
shall have either been paid or adequate liability reserves shall have been
provided for the payment of such taxes.
(e) At the Closing, the Trust on behalf of MidCap Growth Fund intends to have
available a copy of the shareholder ledger accounts, certified by the Trust's
transfer agent or its President to the best of its or his knowledge and belief,
for all the shareholders of record of Mid-Cap Growth Fund Shares as of 1:00 p.m.
Pacific time on the Closing Date who are to become shareholders of California
Growth Fund as a result of the transfer of assets that is the subject of this
Plan.
(f) The Trust intends to mail to each shareholder of record of MidCap Growth
Fund entitled to vote at the meeting of its shareholders at which action on this
Plan is to be considered, in sufficient time to comply with requirements as to
notice thereof, a combined Prospectus and Proxy Statement that complies in all
material respects with the applicable provisions of Section 14(a) of the
Securities Exchange Act of 1934, as amended, and Section 20(a) of the 1940 Act,
and the rules and regulations, respectively, thereunder.
(g) The Trust intends to file with the U.S. Securities and Exchange Commission a
registration statement on Form N-14 under the 1933 Act relating to California
Growth Fund Shares issuable hereunder ("Registration Statement"), and will use
its best efforts to provide that the Registration Statement becomes effective as
promptly as practicable. At the time it becomes effective, the Registration
Statement will (i) comply in all material respects with the applicable
provisions of the 1933 Act, and the rules and regulations promulgated
thereunder; and (ii) not contain any untrue statement of material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading. At the time the Registration Statement
becomes effective, at the time of MidCap Growth Fund's shareholders' meeting,
and at the Closing Date, the prospectus and statement of additional information
included in the Registration Statement will not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
8. CONDITIONS PRECEDENT TO BE FULFILLED BY THE TRUST ON BEHALF OF THE FUNDS.
The consummation of this Plan hereunder shall be subject to the following
respective conditions:
(a) That: (i) all the representations and warranties contained herein shall be
true and correct as of the Closing with the same effect as though made as of and
at such date; (ii) the performance of all obligations required by this Plan to
be performed by the Trust on behalf of the Funds shall occur prior to the
Closing; and (iii) the Trust shall execute a certificate signed by the President
and by the Secretary or equivalent officer to the foregoing effect.
(b) That this Plan shall have been adopted and approved by the appropriate
action of the Board of Trustees of the Trust on behalf of each of the Funds.
(c) That the U.S. Securities and Exchange Commission shall not have issued an
unfavorable management report under Section 25(b) of the 1940 Act or instituted
or threatened to institute any proceeding seeking to enjoin consummation of the
Plan under Section 25(c) of the 1940 Act. And, further, no other legal,
administrative or other proceeding shall have been instituted or threatened that
would materially affect the financial condition of Mid-Cap Growth Fund or
California Growth Fund or would prohibit the transactions contemplated hereby.
(d) That this Plan and the Plan of Reorganization contemplated hereby shall have
been adopted and approved by the appropriate action of the shareholders of
MidCap Growth Fund at an annual or special meeting or any adjournment thereof.
(e) That a distribution or distributions shall have been declared for MidCap
Growth Fund prior to the Closing Date that, together with all previous
distributions, shall have the effect of distributing to its shareholders (i) all
of its net investment income and all of its net realized capital gains, if any,
for the period from the close of its last fiscal year to 1:00 p.m. Pacific time
on the Closing Date; and (ii) any undistributed net investment income and net
realized capital gains from any period to the extent not otherwise declared for
distribution.
(f) That there shall be delivered to the Trust on behalf of MidCap Growth Fund
an opinion from Messrs. Stradley, Ronon, Stevens & Young, LLP, counsel to the
Trust, to the effect that, provided the acquisition contemplated hereby is
carried out in accordance with this Plan and based upon certificates of the
officers of the Trust with regard to matters of fact:
(1) The acquisition by California Growth Fund of substantially all the
assets of MidCap Growth Fund as provided for herein in exchange for California
Growth Fund Shares will qualify as a reorganization within the meaning of
Section 368(a)(1)(C) of the Code, and MidCap Growth Fund and California Growth
Fund will each be a party to the respective reorganization within the meaning of
Section 368(b) of the Code;
(2) No gain or loss will be recognized by MidCap Growth Fund upon the
transfer of substantially all of its assets to California Growth Fund in
exchange solely for voting shares of California Growth Fund (Code Sections
361(a) and 357(a)). No opinion, however, will be expressed as to whether any
accrued market discount will be required to be recognized as ordinary income
pursuant to Section 1276 of the Code;
(3) No gain or loss will be recognized by California Growth Fund upon the
receipt of substantially all of the assets of MidCap Growth Fund in exchange
solely for voting shares of California Growth Fund (Code Section 1032(a));
(4) The basis of the assets of MidCap Growth Fund received by California
Growth Fund will be the same as the basis of such assets to MidCap Growth Fund
immediately prior to the exchange (Code Section 362(b));
(5) The holding period of the assets of MidCap Growth Fund received by
California Growth Fund will include the period during which such assets were
held by MidCap Growth Fund (Code Section 1223(2));
(6) No gain or loss will be recognized to the shareholders of MidCap
Growth Fund Shares upon the exchange of their shares in MidCap Growth Fund for
voting shares of California Growth Fund (Code Section 354(a));
(7) The basis of California Growth Fund Shares received by MidCap Growth
Fund Shares' shareholders shall be the same as the basis of the MidCap Growth
Fund Shares exchanged therefor (Code Section 358(a)(1));
(8) The holding period of California Growth Fund Shares received by
shareholders of MidCap Growth Fund Shares (including fractional shares to which
they may be entitled) will include the holding period of the MidCap Growth Fund
Shares surrendered in exchange therefor, provided that the MidCap Growth Fund
Shares were held as a capital asset on the date of the exchange (Code Section
1223(1)); and
(9) California Growth Fund will succeed to and take into account as of the
date of the proposed transfer the items of MidCap Growth Fund described in
Section 381(c) of the Code (as defined in Section 1.381(b)-1(b) of the Income
Tax Regulations), subject to the conditions and limitations specified in
Sections 381(b) and (c), 382, 383 and 384 of the Code and the Income Tax
Regulations thereunder.
(g) That there shall be delivered to the Trust on behalf of California Growth
Fund an opinion in form and substance satisfactory to it from Messrs. Stradley,
Ronon, Stevens & Young, LLP, counsel to the Trust with respect to MidCap Growth
Fund, to the effect that, subject in all respects to the effects of bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance, and other laws
now or hereafter affecting generally the enforcement of creditors' rights:
(1) MidCap Growth Fund is a series of the Trust, a business trust
organized under the laws of the State of Delaware on January 25, 1991, and the
Trust is a validly existing business trust and in good standing under the laws
of that state;
(2) The Trust is authorized to issue an unlimited number of shares of
beneficial interest of MidCap Growth Fund, par value $0.01 per share. One class
of shares of MidCap Growth Fund has been designated as the MidCap Growth Fund -
Class A Shares, and an unlimited number of shares of beneficial interest of the
Trust have been allocated to the MidCap Growth Fund Shares. Assuming that the
initial shares of beneficial interest of MidCap Growth Fund were issued in
accordance with the 1940 Act and the Agreement and Declaration of Trust and
By-laws of MidCap Growth Fund, and that all other outstanding shares of MidCap
Growth Fund were sold, issued and paid for in accordance with the terms of
MidCap Growth Fund's prospectus in effect at the time of such sales, each such
outstanding share is fully paid, non-assessable, freely transferable and has
full voting rights;
(3) MidCap Growth Fund is a diversified series of the Trust, an open-end
investment company of the management type registered as such under the 1940 Act;
(4) Except as disclosed in MidCap Growth Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or legal or
administrative proceeding pending or threatened against MidCap Growth Fund, the
unfavorable outcome of which would materially and adversely affect MidCap Growth
Fund;
(5) All actions required to be taken by the Trust on behalf of MidCap
Growth Fund to authorize this Plan and to effect the Plan of Reorganization
contemplated hereby have been duly authorized by all necessary action on the
part of MidCap Growth Fund; and
(6) Neither the execution, delivery, nor performance of this Plan by the
Trust on behalf of MidCap Growth Fund violates any provision of its Agreement
and Declaration of Trust or By-laws, or the provisions of any agreement or other
instrument known to such counsel to which the Trust is a party or by which the
Trust is otherwise bound; this Plan is the legal, valid and binding obligation
of the Trust on behalf of MidCap Growth Fund and is enforceable against the
Trust on behalf of MidCap Growth Fund in accordance with its terms.
In giving the opinions set forth above, this counsel may state that it is
relying on certificates of the officers of the Trust with regard to matters of
fact, and certain certifications and written statements of governmental
officials with respect to the good standing of the Trust.
(h) That there shall be delivered to the Trust on behalf of MidCap Growth Fund
an opinion in form and substance satisfactory to it from Messrs. Stradley,
Ronon, Stevens & Young, LLP, counsel to the Trust with respect to California
Growth Fund, to the effect that, subject in all respects to the effects of
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and
other laws now or hereafter affecting generally the enforcement of creditors'
rights:
(1) California Growth Fund is a series of the Trust, a business trust
organized under the laws of the State of Delaware on January 25, 1991, and is a
validly existing business trust and in good standing under the laws of that
state;
(2) The Trust is authorized to issue an unlimited number of shares of
beneficial interest of California Growth Fund, par value $0.01 per share.
California Growth Fund is further divided into three classes of shares of which
California Growth Fund Shares is one, and an unlimited number of shares of
beneficial interest, par value $0.01 per share, have been allocated and
designated to the California Growth Fund Shares. Assuming that the initial
shares of beneficial interest of California Growth Fund were issued in
accordance with the 1940 Act, and the Agreement and Declaration of Trust and
By-laws of the Trust, and that all other outstanding shares of California Growth
Fund were sold, issued and paid for in accordance with the terms of California
Growth Fund's prospectus in effect at the time of such sales, each such
outstanding share of California Growth Fund is fully paid, non-assessable,
freely transferable and has full voting rights;
(3) California Growth Fund is a nondiversified series of the Trust, an
open-end investment company of the management type registered as such under the
1940 Act;
(4) Except as disclosed in California Growth Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or legal or
administrative proceeding pending or threatened against California Growth Fund,
the unfavorable outcome of which would materially and adversely affect
California Growth Fund;
(5) California Growth Fund Shares to be issued pursuant to the terms of
this Plan have been duly authorized and, when issued and delivered as provided
in this Plan, will have been validly issued and fully paid and will be
non-assessable by the Trust on behalf of California Growth Fund;
(6) All actions required to be taken by the Trust on behalf of California
Growth Fund to authorize this Plan and to effect the Plan of Reorganization
contemplated hereby have been duly authorized by all necessary action on the
part of the Trust;
(7) Neither the execution, delivery, nor performance of this Plan by the
Trust on behalf of California Growth Fund violates any provision of its
Agreement and Declaration of Trust or By-laws, or the provisions of any
agreement or other instrument known to such counsel to which the Trust is a
party or by which the Trust is otherwise bound; this Plan is the legal, valid
and binding obligation of the Trust on behalf of California Growth Fund and is
enforceable against the Trust on behalf of California Growth Fund in accordance
with its terms; and
(8) The registration statement of the Trust, of which the prospectus,
dated September 1, 1999, as amended May 1, 2000, of California Growth Fund is a
part (the "Prospectus"), is, at the time of the signing of this Plan, effective
under the 1933 Act, and, to the best knowledge of such counsel, no stop order
suspending the effectiveness of such registration statement has been issued, and
no proceedings for such purpose have been instituted or are pending before or
threatened by the U.S. Securities and Exchange Commission under the 1933 Act,
and nothing has come to counsel's attention that causes it to believe that, at
the time the Prospectus became effective, or at the time of the signing of this
Plan, or at the Closing, such Prospectus (except for the financial statements
and other financial and statistical data included therein, as to which counsel
need not express an opinion), contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; and such counsel knows of no
legal or government proceedings required to be described in the Prospectus, or
of any contract or document of a character required to be described in the
Prospectus that is not described as required.
In giving the opinions set forth above, this counsel may state that it is
relying on certificates of the officers of the Trust with regard to matters of
fact, and certain certifications and written statements of governmental
officials with respect to the good standing of the Trust.
(i) That the Trust's Registration Statement with respect to the California
Growth Fund Shares to be delivered to MidCap Growth Fund Shares' shareholders in
accordance with this Plan shall have become effective, and no stop order
suspending the effectiveness of the Registration Statement or any amendment or
supplement thereto, shall have been issued prior to the Closing Date or shall be
in effect at Closing, and no proceedings for the issuance of such an order shall
be pending or threatened on that date.
(j) That the California Growth Fund Shares to be delivered hereunder shall be
eligible for sale by the Trust with each state commission or agency with which
such eligibility is required in order to permit California Growth Fund Shares
lawfully to be delivered to each holder of MidCap Growth Fund Shares.
(k) That, at the Closing, there shall be transferred to California Growth Fund,
aggregate Net Assets of MidCap Growth Fund comprising at least 90% in fair
market value of the total net assets and 70% of the fair market value of the
total gross assets recorded on the books of MidCap Growth Fund on the Closing
Date.
9. BROKERAGE FEES AND EXPENSES.
(a) The Trust represents and warrants that there are no broker or finders' fees
payable by it in connection with the transactions provided for herein.
(b) The expenses of entering into and carrying out the provisions of this Plan
shall be borne one-quarter by California Growth Fund, one-quarter by MidCap
Growth Fund, and one-half by Franklin Advisers, Inc.
10. TERMINATION; POSTPONEMENT; WAIVER; ORDER.
(a) Anything contained in this Plan to the contrary notwithstanding, this Plan
may be terminated and the Plan of Reorganization abandoned at any time (whether
before or after approval thereof by the shareholders of MidCap Growth Fund)
prior to the Closing, or the Closing may be postponed by the Trust on behalf of
either party by resolution of the Board of Trustees, if circumstances develop
that, in the opinion of the Board, make proceeding with the Plan inadvisable.
(b) If the transactions contemplated by this Plan have not been consummated by
December 31, 2000, the Plan shall automatically terminate on that date, unless a
later date is established.
(c) In the event of termination of this Plan pursuant to the provisions hereof,
the same shall become void and have no further effect, and neither the Trust,
MidCap Growth Fund nor California Growth Fund nor the Trust's trustees,
officers, or agents or the shareholders of MidCap Growth Fund or California
Growth Fund shall have any liability in respect of this Plan.
(d) At any time prior to the Closing, any of the terms or conditions of this
Plan may be waived by the Board of Trustees on behalf of either of MidCap Growth
Fund or California Growth Fund if, in the judgment of such Board of Trustees,
such action or waiver will not have a material adverse effect on the benefits
intended under this Plan to the shareholders of either MidCap Growth Fund or
California Growth Fund, on behalf of whom such action is taken.
(e) The respective representations and warranties contained in Sections 4 to 6
hereof shall expire with and be terminated by the Plan of Reorganization, and
neither the Trust nor any of its officers, trustees, agents or shareholders nor
the Funds nor any of their shareholders shall have any liability with respect to
such representations or warranties after the Closing. This provision shall not
protect any officer, trustee, agent or shareholder of either of the Funds or the
Trust against any liability to the entity for which that officer, trustee, agent
or shareholder so acts or to either of the Funds' shareholders to which that
officer, trustee, agent or shareholder would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties in the conduct of such office.
(f) If any order or orders of the U.S. Securities and Exchange Commission with
respect to this Plan shall be issued prior to the Closing and shall impose any
terms or conditions that are determined by action of the Board of Trustees of
the Trust on behalf of MidCap Growth Fund or California Growth Fund to be
acceptable, such terms and conditions shall be binding as if a part of this Plan
without further vote or approval of the shareholders of MidCap Growth Fund,
unless such terms and conditions shall result in a change in the method of
computing the number of California Growth Fund Shares to be issued to MidCap
Growth Fund in which event, unless such terms and conditions shall have been
included in the proxy solicitation material furnished to the shareholders of
MidCap Growth Fund prior to the meeting at which the transactions contemplated
by this Plan shall have been approved, this Plan shall not be consummated and
shall terminate unless the Trust shall promptly call a special meeting of the
shareholders of MidCap Growth Fund at which such conditions so imposed shall be
submitted for approval.
11. ENTIRE AGREEMENT AND AMENDMENTS.
This Plan embodies the entire agreement between the parties and there are no
agreements, understandings, restrictions, or warranties relating to the
transactions contemplated by this Plan other than those set forth herein or
herein provided for. This Plan may be amended only by the Trust on behalf of the
Funds. Neither this Plan nor any interest herein may be assigned without the
prior written consent of the Trust on behalf of the Funds.
12. COUNTERPARTS.
This Plan may be executed in any number of counterparts, each of which shall be
deemed to be an original, but all such counterparts together shall constitute
but one instrument.
13. NOTICES.
Any notice, report, or demand required or permitted by any provision of this
Plan shall be in writing and shall be deemed to have been given if delivered or
mailed, first class postage prepaid, addressed to the Trust at 777 Mariners
Island Boulevard, San Mateo, California 94404, Attention: Secretary.
14. GOVERNING LAW.
This Plan shall be governed by and carried out in accordance with the laws of
the State of Delaware.
IN WITNESS WHEREOF, Franklin Strategic Series on behalf of the Funds has caused
this Plan to be executed on their behalf by its duly authorized officers, all as
of the date and year first-above written.
FRANKLIN STRATEGIC SERIES,
ON BEHALF OF
FRANKLIN CALIFORNIA GROWTH FUND
Attest:
/S/ DEBORAH R. GATZEK By: /S/ DAVID P. GOSS
Deborah R. Gatzek David P. Goss
Secretary Vice President
FRANKLIN STRATEGIC SERIES,
ON BEHALF OF
FRANKLIN MIDCAP GROWTH FUND
Attest:
/S/ DEBORAH R. GATZEK By: /S/ DAVID P. GOSS
Deborah R. Gatzek David P. Goss
Secretary Vice President
196 PROXY 05/00
FRANKLIN STRATEGIC SERIES
INVESTMENT STRATEGY GROWTH
Franklin Aggressive Growth Fund - Class A, B & C
Franklin California Growth Fund - Class A, B & C
Franklin Large Cap Growth Fund - Class A, B & C
Franklin Small Cap Growth Fund I (formerly, Small Cap Growth Fund) - Class A
& C
Franklin Small Cap Growth Fund II - Class A, B & C
SEPTEMBER 1, 1999 AS AMENDED MAY 1, 2000
[Insert Franklin Templeton Ben Head]
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
The Funds
[Begin callout]
INFORMATION ABOUT
EACH FUND YOU SHOULD
KNOW BEFORE INVESTING
[END CALLOUT]
[insert page #] Franklin Aggressive Growth Fund
[insert page #] Franklin California Growth Fund
[insert page #] Franklin Large Cap Growth Fund
[insert page #] Franklin Small Cap Growth Fund I
[insert page #] Franklin Small Cap Growth Fund II
[insert page #] Distributions and Taxes
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Choosing a Share Class
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
FRANKLIN AGGRESSIVE GROWTH FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is capital appreciation.
PRINCIPAL INVESTMENTS The fund normally invests primarily in equity
securities of companies demonstrating accelerating growth, increasing
profitability, or above-average growth or growth potential as compared with
the overall economy.
[Begin call out]
The fund invests primarily in aggressive growth companies' equity securities.
[End callout]
Equity securities generally entitle the holder to participate in a company's
general operating results. They include common stocks, convertible securities
and warrants.
The fund invests in small, medium, and large capitalization companies with
strong growth potential across a wide range of sectors. In choosing equity
investments, the fund's manager will focus on sectors that have exceptional
growth potential and fast growing, innovative companies within these sectors.
In addition, solid management and sound financial records are factors the
manager also considers.
Although the manager will search for investments across a large number of
sectors, it expects to have significant positions in particular sectors.
These sectors may include, for example, technology (including computers and
telecommunications), health care (including biotechnology), consumer
products, and consumer services (including media, broadcasting and
entertainment).
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal, because it may not invest or may invest
substantially less in aggressive growth companies' equity securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
The prices of aggressive growth stocks are based largely on projections of
the issuer's future earnings and revenues. If a company's earnings or
revenues fall short of expectations, its stock price may fall dramatically.
The fund's manager uses an aggressive growth strategy in choosing the fund's
investments. As a result, an investment in the fund involves a greater degree
of risk and its share price may be more volatile than an investment in a
conservative equity fund or a growth fund investing entirely in proven growth
stocks. Aggressive growth stocks may be more expensive relative to their
earnings or assets compared to value or other stocks.
SMALLER AND MIDSIZE COMPANIES Historically, smaller and midsize company
securities have been more volatile in price than larger company securities,
especially over the short term. Among the reasons for the greater price
volatility are the less certain growth prospects of smaller and midsize
companies, the lower degree of liquidity in the markets for such securities,
and the greater sensitivity of smaller and midsize companies to changing
economic conditions.
In addition, smaller and midsize companies may lack depth of management, they
may be unable to generate funds necessary for growth or development, or they
may be developing or marketing new products or services for which markets are
not yet established and may never become established.
Smaller and midsize companies involve greater risks than larger, more
established companies and should be considered speculative.
TECHNOLOGY COMPANIES The technology sector has historically been volatile
due to the rapid pace of product change and development within the sector.
The stock prices of companies operating within this sector may be subject to
abrupt or erratic movements.
HEALTH CARE COMPANIES The activities of health care companies may be funded
or subsidized by federal and state governments. If government funding and
subsidies are reduced or discontinued, the profitability of these companies
could be adversely affected. Health care companies may also be affected by
government policies on health care reimbursements, regulatory approval for
new drugs and medical instruments, and similar matters. They are also subject
to legislative risk, i.e., the risk of a reform of the health care system
through legislation.
TELECOMMUNICATIONS, MEDIA, AND BROADCASTING COMPANIES The activities of
telecommunications, media, and broadcasting companies operate under
international, federal, and state regulations. These companies may be
adversely affected by changes in government regulations. In addition, these
sectors have been undergoing deregulation to enable increased competition,
which could affect the companies in these sectors that the fund holds.
CONSUMER PRODUCTS, SERVICES, AND ENTERTAINMENT COMPANIES These companies have
historically been sensitive to the economy in general, through changes in
consumer spending patterns. These companies may be adversely affected by
changes in consumer opinion or demand for a given product or service.
PORTFOLIO TURNOVER Because of the fund's aggressive growth strategy, the
fund's portfolio turnover rate may be higher than that of other mutual funds.
High portfolio turnover may involve additional expenses to the fund,
including transaction costs for purchases and sales of securities. These
transactions may result in realization of taxable capital gains, including
short-term capital gains, which are generally taxed at ordinary income tax
rates.
MARKET A security's value may be reduced by market activity or the results
of supply and demand. This is a basic risk associated with all securities.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to rise.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
Because the fund is new, it has no performance history.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B CLASS C
-----------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge None 1 4.00% 2 0.99% 3
(load)
Exchange fee 4 $5.00 $5.00 $5.00
Please see "Choosing a Share Class" on page 46 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)5
CLASS A CLASS B CLASS C
-----------------------------------------------------------------
Management fees 6 0.50% 0.50% 0.50%
Distribution and service (12b-1) 0.35% 1.00% 1.00%
fees
Other expenses 0.84% 0.84% 0.84%
----------------------------
Total annual fund operating 1.69% 2.34% 2.34%
expenses 6 ============================
1. Except for investments of $1 million or more (see page 46) and purchases
by certain retirement plans without an initial sales charge.
2. Declines to zero after six years.
3. This is equivalent to a charge of 1% based on net asset value.
4. This fee is only for market timers (see page 59).
5. The management fees and distribution and service (12b-1) fees shown are
based on the fund's maximum contractual amount. Other expenses are estimated
for the current fiscal year.
6. The manager and administrator have agreed in advance to limit their
respective fees and to assume as their own expense certain expenses otherwise
payable by the fund. With this reduction, management and administration fees
are estimated to be 0.26% and total annual fund operating expenses are
estimated to be 1.25% for Class A, 1.90% for Class B, and 1.90% for Class C
for the current fiscal year. The manager and administrator may end this
arrangement at any time upon notice to the fund's Board of Trustees.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS
--------------------------------------------------
If you sell your shares at
the end of the period:
CLASS A $737 1 $1,077
CLASS B $637 $1,030
CLASS C $433 $ 823
If you do not sell your
shares:
CLASS B $237 $ 730
CLASS C $335 $ 823
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94403, is the fund's investment manager. Together, Advisers and its
affiliates manage over $229 billion in assets.
The team responsible for the fund's management is:
CONRAD B. HERRMANN CFA, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Herrmann has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1989.
MICHAEL MCCARTHY, VICE PRESIDENT OF ADVISERS
Mr. McCarthy has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1992.
JOHN P. SCANDALIOS, PORTFOLIO MANAGER OF ADVISERS
Mr. Scandalios has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1996. Previously, he was with Chase Manhattan
Bank.
The fund pays Advisers a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of:
o 0.50% of the value of net assets up to and including $500 million;
o 0.40% of the value of net assets over $500 million up to and including $1
billion;
o 0.35% of the value of net assets over $1 billion up to and including $1.5
billion;
o 0.30% of the value of net assets over $1.5 billion up to and including $6.5
billion;
o 0.275% of the value of net assets over $6.5 billion up to and including
$11.5 billion;
o 0.25% of the value of net assets over $11.5 billion up to and including
$16.5 billion;
o 0.24% of the value of net assets over $16.5 billion up to and including $19
billion;
o 0.23% of the value of net assets over $19 billion up to and including $21.5
billion; and
o 0.22% of the value of net assets in excess of $21.5 billion.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance since its inception.
OCTOBER 31, 1999
CLASS A (UNAUDITED) 1,2
PER SHARE DATA ($)
Net asset value, beginning of period 10.00
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 (%)3 63.90
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period($ x 1,000) 11,363
Ratios to average net assets: (%)
Expenses 1.23 4
Expenses excluding waiver and
payments by affiliate 1.61 4
Net investment loss (.44)4
Portfolio turnover rate (%) 91.19
OCTOBER 31, 1999
CLASS B (UNAUDITED) 1,2
PER SHARE DATA ($)
Net asset value, beginning of period 10.00
Net investment loss (.05)
Net realized and unrealized gains 6.44
Total from investment operations 6.39
----
Net asset value, end of period 16.39
=====
Total return (%)3 63.90
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($ x 1,000) 1,494
Ratios to average net assets: (%)
Expenses 1.80 4
Expenses excluding waiver and
payments by affiliate 2.18 4
Net investment loss (1.05)4
Portfolio turnover rate (%) 91.19
OCTOBER 31, 1999
CLASS C (UNAUDITED)1,2
PER SHARE DATA ($)
Net asset value, beginning of period 10.00
Net investment loss (.05)
Net realized and unrealized gains 6.43
Total from investment operations 6.38
----
Net asset value, end of period 16.38
=====
Total return (%)3 63.80
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($ x 1,000) 3,999
Ratios to average net assets: (%)
Expenses 1.83 4
Expenses excluding waiver and
payments by affiliate 2.21 4
Net investment loss (1.11)4
Portfolio turnover rate (%) 91.19
1. Based on average shares outstanding.
2. For the period June 23, 1999 (effective date) to October 31, 1999.
3. Total return does not include sales charges, and is not annualized.
4. Annualized.
FRANKLIN CALIFORNIA GROWTH FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is capital appreciation.
PRINCIPAL INVESTMENTS The fund normally invests primarily in equity
securities of California companies.
[Begin callout]
The fund invests primarily in California companies' equity securities.
[End callout]
For purposes of the fund's investments, California companies are companies
headquartered or conducting a majority of their operations in the state of
California. The fund invests in small to mid-size companies as well as in
relatively well-known, larger capitalization companies in mature industries
that the manager believes have the potential for capital appreciation.
Equity securities generally entitle the holder to participate in a company's
general operating results. They include common stocks, preferred stocks,
convertible securities and warrants.
The manager expects to invest a portion of the fund's assets in securities of
companies in the technology sector, including computer companies. Typically,
the fund will invest in technology companies that market their products or
services globally rather than only domestically or regionally.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal, because it may not invest or may invest
substantially less in California companies' equity securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
CALIFORNIA Since the fund invests heavily in California companies' equity
securities, events and conditions in California are likely to affect the
fund's investments and its performance. These events may include changes in
economic and political conditions. These and other conditions within
California are unpredictable and can change at any time.
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
The prices of growth stocks are based largely on projections of the issuer's
future earnings and revenues. If a company's earnings or revenues fall short
of expectations, its stock price may fall dramatically. Growth stocks may be
more expensive relative to their earnings or assets compared to value or
other stocks. Because the fund invests in growth stocks, its share price may
be more volatile than other types of investments.
SMALLER AND MIDSIZE COMPANIES Historically, smaller and midsize company
securities have been more volatile in price than large company securities,
especially over the short term. Among the reasons for the greater price
volatility are the less certain growth prospects of smaller and midsize
companies, the lower degree of liquidity in the markets for such securities,
and the greater sensitivity of smaller and midsize companies to changing
economic conditions.
In addition, smaller and midsize companies may lack depth of management, they
may be unable to generate funds necessary for growth or development, or they
may be developing or marketing new products or services for which markets are
not yet established and may never become established.
Smaller and midsize companies involve greater risks than larger, more
established companies and should be considered speculative.
MARKET A security's value may be reduced by market activity or the results of
supply and demand. This is a basic risk associated with all securities. When
there are more sellers than buyers, prices tend to fall. Likewise, when there
are more buyers than sellers, prices tend to rise.
DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in the securities of one issuer than a diversified
fund. The fund may be more sensitive to economic, business, political or
other changes affecting similar issuers or securities, which may result in
greater fluctuation in the value of the fund's shares, and may involve more
risk than an investment in a fund that does not focus on securities of a
single state. The fund, however, intends to meet certain tax diversification
requirements.
TECHNOLOGY COMPANIES The technology sector has historically been volatile due
to the rapid pace of product change and development within the sector. The
stock prices of companies operating within this sector may be subject to
abrupt or erratic movements.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past eight calendar
years. The table shows how the fund's average annual total returns compare to
those of two broad-based securities market indices. Of course, past
performance cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS1
5.50% 17.57% 16.53% 47.63% 30.43% 15.71% 10.72% 95.17%
92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST QUARTER:
Q4 '99 56.36%
WORST QUARTER:
Q3 '98 -15.27%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR 5 YEARS (10/30/91)
----------------------------------------------------------------------
Franklin California Growth Fund - 83.97%* 35.33% 26.35%
Class A 2
S&P 500 Index 3 21.04% 28.56% 20.24%
Franklin California 250 Index 4 75.20% 36.83% 25.66%
SINCE
INCEPTION
1 YEAR (01/01/99)
----------------------------------------------------------------------
Franklin California Growth Fund - 89.59%* 89.59%
Class B 2
S&P 500 Index 3 21.04% 21.04%
Franklin California 250 Index 4 75.20% 75.20%
SINCE
INCEPTION
1 YEAR (9/3/96)
----------------------------------------------------------------------
Franklin California Growth Fund - 90.91%* 36.30%
Class C 2
S&P 500 Index 3 21.04% 29.63%
Franklin California 250 Index 4 75.20% 39.99%
*Recently many individual stocks and sectors such as technology have
significantly exceeded historical norms; investors should generally not
expect such outsized returns to continue.
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 2000, the fund's year-to-date return was 19.07% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
4. The unmanaged Franklin California 250 Growth Index consists of the 250
largest California based companies on an equal weighted basis chosen to
approximate the business segment weightings of the California economy. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B 1 CLASS C
--------------------------------------------------------------------
Maximum sales charge (load)
as a percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge None 2 4.00% 3 0.99% 4
(load)
Exchange fee None None None
Please see "Choosing a Share Class" on page 46 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B1 CLASS C
--------------------------------------------------------------------
Management fees 0.48% 0.48% 0.48%
Distribution and service (12b-1) 0.25% 1.00% 1.00%
fees
Other expenses 0.27% 0.27% 0.27%
-------------------------------
Total annual fund operating expenses 1.00% 1.75% 1.75%
===============================
1. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended April 30, 1999. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
2. Except for investments of $1 million or more (see page 46) and purchases
by certain retirement plans without an initial sales charge.
3. Declines to zero after six years.
4. This is equivalent to a charge of 1% based on net asset value.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------------------------------
If you sell your shares at
the end of the period:
CLASS A $671 1 $875 $1,096 $1,729
CLASS B $578 $851 $1,149 $1,864 2
CLASS C $374 3 $646 $1,039 $2,142
If you do not sell your
shares:
CLASS B $178 $551 $949 $1,864 2
CLASS C $226 $646 $1,039 $2,142
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $229 billion in assets.
The team responsible for the fund's management is:
CANYON A. CHAN CFA, VICE PRESIDENT OF ADVISERS
Mr. Chan has been a manager of the fund since 1999. He joined the Franklin
Templeton Group in 1991.
CONRAD B. HERRMANN CFA, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Herrmann has been a manager of the fund since 1993. He joined the
Franklin Templeton Group in 1989.
The fund pays Advisers a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended April 30, 1999, the fund paid
0.48% of its average daily net assets to the manager for its services.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
OCTOBER 31,
CLASS A 1999 YEAR ENDED APRIL 30,
----------------------------------------------------------------------------------------------------
(UNAUDITED) 1 1999 2 1998 1997 1996 1995
--------------- ---------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA ($)
Net asset value, beginning of
year 25.82 24.97 19.35 18.26 14.03 12.05
--------------- ---------- ---------- ---------- --------- --------
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
--------------- ---------- ---------- ---------- --------- --------
Distributions from net
investment income (.06) (.14) (.14) (.12) (.23) (.12)
Distributions in excess of
net investment income
(.02) - - - - -
Distributions from 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 year
34.00 25.82 24.97 19.35 18.26 14.03
=============== ========== ========== ========== ========= ========
Total return (%)4 32.10 6.39 34.98 8.94 47.42 29.09
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 1,063,395 780,598 721,254 282,898 81,175 13,844
Ratios to average net assets:
(%)
Expenses .96 5 1.00 .99 1.08 .71 .25
Expenses excluding waiver and
payments by affiliate
.96 5 1.00 .99 1.08 1.09 1.27
Net investment income
.04 5 .41 .67 .84 1.42 1.63
Portfolio turnover rate (%) 38.20 52.76 48.52 44.81 61.82 79.52
</TABLE>
CLASS B
PER SHARE DATA ($)
Net asset value, beginning
of year 25.75 24.31
------------ -----------
Net investment (loss) (.10) (.01)
Net realized and unrealized
gains 8.20 1.45
------------ -----------
Total from investment
operations 8.10 1.44
------------ -----------
Distribution from net
investment income (.06) -
In excess of net investment
income (.01) -
============ ===========
Total Distributions (.07) -
============ ===========
Net asset value, end of
period 33.78 25.75
============ ===========
Total return (%)4 31.58 5.88
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 10,469 2,657
Ratios to average net
assets: (%)
Expenses 1.71 5 1.75 5
Net investment loss (.68) 5 (.33)5
Portfolio turnover rate (%) 38.20 52.76
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
OCTOBER 31,
CLASS C 1999 YEAR ENDED APRIL 30,
------------------------------------------------------------------------------------------------------
(UNAUDITED) 1 1999 1998 19973
------------------------------------------------- ----------------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
PER SHARE DATA ($)
Net asset value, beginning of year 25.63 24.81 19.27 18.05
----------------- ------------ ----------- ---------
Net investment income (loss) (.10) (.07) - .05
Net realized and unrealized gains 8.20 1.42 6.43 1.65
----------------- ------------ ----------- ---------
Total from investment operations 8.10 1.35 6.43 1.70
----------------- ------------ ----------- ---------
Distributions from net
investment income (.02) 6 - (.03) (.05)
Distributions from net realized gains - (.53) (.86) (.43)
----------------- ------------ ----------- ---------
Total distributions (.02) (.53) (.89) (.48)
----------------- ------------ ----------- ---------
Net asset value, end of year 33.71 25.63 24.81 19.27
================= ============ =========== =========
Total return (%)4 31.62 5.67 34.02 9.32
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 214,780 159,310 122,701 24,556
Ratios to average net assets: (%)
Expenses 1.71 5 1.75 1.74 1.86 5
Net investment income (loss) (.72) 5 (.33) (.10) (.05) 5
Portfolio turnover rate (%) 38.20 52.76 48.52 44.81
</TABLE>
1. Based on average shares outstanding.
2. For the period January 1, 1999 (effective date) to April 30, 1999 for
Class B.
3. For the period September 3, 1996 (effective date) to April 30, 1997 for
Class C.
4. Total return does not include sales charges, and is not annualized.
5. Annualized.
6. Includes distributions in excess of net investment income in the amount of
$.004.
FRANKLIN LARGE CAP GROWTH FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's principal investment goal is long-term capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 80% of its total assets in equity securities of large cap growth
companies located in the U.S.
For purposes of the fund's investments, large cap growth companies include
well-established companies with a market capitalization of $8.5 billion or
more that are expected to have revenue growth in excess of the economy as a
whole either through above-average industry expansion or market share gains.
These companies generally dominate, or are gaining market share, in their
respective industries and have a reputation for quality management, as well
as superior products and services.
Equity securities generally entitle the holder to participate in a company's
general operating results. They include common stocks, convertible securities
and warrants.
[Begin callout]
The fund invests primarily in large cap growth companies' equity securities.
[End callout]
In choosing equity investments, the fund's manager will focus on companies
that have exhibited above average growth, strong financial records and large
market capitalization. In addition, management expertise, industry
leadership, growth in market share and sustainable competitive advantage are
factors the manager also considers. Although the manager will search for
investments across a large number of industries, it expects to have
significant positions (but not in excess of 25% of its total assets in a
given sector) in the technology (including computers, telecommunications and
electronics), health care and financial services industries.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal, because it may not invest or may invest
substantially less in large cap growth companies' equity securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
TECHNOLOGY COMPANIES The technology sector has historically been volatile due
to the rapid pace of product change and development within the sector. The
stock prices of companies operating within this sector may be subject to
abrupt or erratic movements. In addition, the activities of
telecommunications companies fall under international, federal and state
regulations. These companies may be adversely affected by changes in
government regulations.
HEALTH CARE COMPANIES The activities of health care companies may be funded
or subsidized by federal and state governments. If government funding and
subsidies are reduced or discontinued, the profitability of these companies
could be adversely affected. Health care companies may also be affected by
government policies on health care reimbursements, regulatory approval for
new drugs and medical instruments, and similar matters. They are also subject
to legislative risk, i.e., the risk of a reform of the health care system
through legislation.
FINANCIAL SERVICES COMPANIES Financial services companies are subject to
extensive government regulation which tends to limit both the amount and
types of loans and other financial commitments such companies can make, and
the interest rates and fees they can charge. These limitations can have a
significant impact on the profitability of a financial services company since
profitability is impacted by the company's ability to make financial
commitments such as loans.
The financial services industry is currently undergoing a number of changes
such as continuing consolidations, development of new products and structures
and changes to its regulatory framework. These changes are likely to have a
significant impact on the financial services industry.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of bull and bear] PERFORMANCE
Because the fund is new, it has no performance history.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B CLASS C
---------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge None 1 4.00% 2 0.99% 3
(load)
Exchange fee4 $5.00 $5.00 $5.00
Please see "Choosing a Share Class" on page 46 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)5
CLASS A CLASS B CLASS C
---------------------------------------------------------------
Management fees 6 0.50% 0.50% 0.50%
Distribution and service (12b-1) 0.35% 1.00% 1.00%
fees 6
Other expenses 0.84% 0.84% 0.84%
---------------------------
Total annual fund operating 1.69% 2.34% 2.34%
expenses6
===========================
1. Except for investments of $1 million or more (see page 46) and purchases
by certain retirement plans without an initial sales charge.
2. Declines to zero after six years.
3. This is equivalent to a charge of 1% based on net asset value.
4. This fee is only for market timers (see page 59).
5. The management fees and distribution and service (12b-1) fees shown are
based on the fund's maximum contractual amount. Other expenses are estimated
for the current fiscal year.
6. The manager and administrator have agreed in advance to limit their
respective fees and to assume as their own expense certain expenses otherwise
payable by the fund. With this reduction, management and administration fees
are estimated to be 0.26% and total annual fund operating expenses are
estimated to be 1.25% for Class A, 1.90% for Class B, and 1.90% for Class C
for the current fiscal year. The manager and administrator may end this
arrangement at any time upon notice to the fund's Board of Trustees.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS
--------------------------------------------------
If you sell your shares at
the end of the period:
CLASS A $737 1 $1,077
CLASS B $637 $1,030
CLASS C $433 $823
If you do not sell your
shares:
CLASS B $237 $730
CLASS C $335 $823
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94403, is the fund's investment manager. Together, Advisers and its
affiliates manage over $229 billion in assets.
The team responsible for the fund's management is:
THERESA SPATH CFA, PORTFOLIO MANAGER OF ADVISERS
Ms. Spath has been a manager of the fund since its inception. She joined the
Franklin Templeton Group in 1994.
JASON R. NUNN, PORTFOLIO MANAGER OF ADVISERS
Mr. Nunn has been a manager of the fund since its inception. He joined the
Franklin Templeton Group in 1997. Previously, he worked in corporate finance
with Alex. Brown & Sons.
EDWARD B. JAMIESON, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Jamieson has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1987.
The fund pays Advisers a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of:
o 0.50% of the value of net assets up to and including $500 million;
o 0.40% of the value of net assets over $500 million and not over $1 billion;
o 0.35% of the value of net assets over $1 billion and not over $1.5 billion;
o 0.30% of the value of net assets over $1.5 billion and not over $6.5
billion;
o 0.275% of the value of net assets over $6.5 billion and not over $11.5
billion;
o 0.25% of the value of net assets over $11.5 billion and not over $16.5
billion;
o 0.24% of the value of net assets over $16.5 billion and not over $19
billion;
o 0.23% of the value of net assets over $19 billion and not over $21.5
billion; and
o 0.22% of the value of net assets in excess of $21.5 billion.
FINANCIAL HIGHLIGHTS [Insert graphic of a dollar bill]
This table presents the fund's financial performance since its inception.
OCTOBER 31, 1999
CLASS A (UNAUDITED) 1,2
-----------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of period 10.00
------------------
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 (%) 3 12.30
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($ x 1,000) 6,040
Ratios to average net assets: (%)
Expenses 1.21 4
Expenses excluding waiver and
payments by affiliate 1.71 4
Net investment loss (.31) 4
Portfolio turnover rate (%) 52.60
OCTOBER 31, 1999
CLASS B (UNAUDITED) 1,2
PER SHARE DATA ($)
Net asset value, beginning of period 10.00
------------------
Net investment loss (.04)
Net realized and unrealized gains 1.24
------------------
Total from investment operations 1.20
==================
Net asset value, end of period 11.20
==================
Total return (%) 3 12.00
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($ x 1,000) 976
Ratios to average net assets: (%)
Expenses 1.85 4
Expenses excluding waiver and
payments by affiliate 2.35 4
Net investment loss (.94) 4
Portfolio turnover rate (%) 52.60
OCTOBER 31, 1999
CLASS C (UNAUDITED) 1,2
PER SHARE DATA ($)
Net asset value, beginning of period 10.00
------------------
Net investment loss (.04)
Net realized and unrealized gains 1.23
------------------
Total from investment operations 1.19
==================
Net asset value, end of period 11.19
==================
Total return (%) 3 11.90
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($ x 1,000) 6,750
Ratios to average net assets: (%)
Expenses 1.86 4
Expenses excluding waiver and
payments by affiliate 2.36 4
Net investment loss (.97) 4
Portfolio turnover rate (%) 52.60
1. Based on average shares outstanding.
2. For the period June 7, 1999 (effective date) to October 31, 1999.
3. Total return does not include sales charges, and is not annualized.
4. Annualized.
FRANKLIN SMALL CAP GROWTH FUND I
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the equity securities of U.S. small
capitalization (small cap) companies. For this fund, small cap companies are
those companies with market cap values not exceeding: (i) $1.5 billion; or
(ii) the highest market cap value in the Russell 2000 Index; whichever is
greater, at the time of purchase. That index consists of 2,000 small
companies that have publicly traded securities. Market capitalization is
defined as share price multiplied by the number of common stock shares
outstanding. The fund generally expects that its portfolio median market cap
will significantly exceed the Index's median market cap. The manager may
continue to hold an investment for further capital growth opportunities even
if the company is no longer small cap. In selecting growth companies, the
fund may invest substantially in technology sectors such as electronics,
computer software and hardware, telecommunications, internet-related
services, and health-care technology.
In addition to its main investments, the fund may invest in equity securities
of larger companies. When suitable opportunities are available, the fund may
also invest in initial public offerings of securities, and may invest a very
small portion of its assets in private or illiquid securities, such as late
stage venture capital financings. An equity security represents a
proportionate share of the ownership of a company; its value is based on the
success of the company's business, any income paid to stockholders, the value
of its assets, and general market conditions. Common and preferred stocks,
and securities convertible into common stock, are examples of equity
securities.
[Begin callout]
The fund invests primarily in common stocks of small cap U.S. companies.
[End callout]
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a growth strategy. As a "bottom-up" investor focusing primarily on
individual securities, the manager chooses companies that it believes are
positioned for rapid growth in revenues, earnings, or assets. The manager
relies on a team of analysts to provide in-depth industry expertise and uses
both qualitative and quantitative analysis to evaluate companies for distinct
and sustainable competitive advantages. Advantages, such as a particular
marketing or product niche, proven technology, and industry leadership are
all factors the manager believes point to strong long-term growth potential.
The manager diversifies the fund's assets across many industries, but from
time to time may invest substantially in certain sectors.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including
cash or cash equivalents. Under these circumstances, the fund may temporarily
be unable to pursue its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
GROWTH STYLE INVESTING Growth stock prices reflect projections of future
earnings or revenues, and can, therefore, fall dramatically if the company
fails to meet those projections. Growth stocks may also be more expensive
relative to their earnings or assets compared to value or other stocks.
Because the fund's manager uses an aggressive growth strategy, an investment
in the fund involves greater risk and more volatility than an investment in a
growth fund investing entirely in proven growth stocks.
TECHNOLOGY COMPANIES Technology and biotechnology industry stocks can be
subject to abrupt or erratic price movements. They have historically been
volatile in price, especially over the short term, due to the rapid pace of
product change and development affecting such companies. Prices often change
collectively without regard to the merits of individual companies.
SMALLER COMPANIES While smaller companies may offer opportunities for capital
growth, they also have significant risk. Historically, small cap company
securities have been more volatile in price than large company securities,
especially over the short term. Smaller or relatively new companies can be
particularly sensitive to changing economic conditions, including increases
in interest rates, because of their reliance on credit, and their growth
prospects are less certain.
For example, smaller companies may lack depth of management or may have
limited financial resources for growth or development. They may have limited
product lines or market share. Smaller companies may be in new industries, or
their new products or services may not find an established market or may
become quickly obsolete. Smaller companies' securities may be less liquid
which may adversely affect their price. Investments in these companies may be
considered speculative.
Initial public offerings (IPOs) of securities issued by unseasoned companies
with little or no operating history are risky and their prices are highly
volatile, but they can result in very large gains in their initial trading.
Attractive IPOs are often oversubscribed and may not be available to the
fund, or only in very limited quantities. Thus, when the fund's size is
smaller, any gains from IPOs will have an exaggerated impact on the fund's
reported performance than when the fund is larger.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past seven calendar
years. The table shows how the fund's average annual total returns compare to
those of two broad-based securities market indices. Of course, past
performance cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS1
21.77% 9.22% 42.20% 27.07% 15.78% -0.02% 97.08%*
93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST QUARTER:
Q4 '99 59.78%
WORST QUARTER:
Q3 '98 -23.56%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR 5 YEARS (2/14/92)
----------------------------------------------------------------------
Franklin Small Cap Growth Fund 85.73%* 31.19% 24.83%
I - Class A 2
S&P 500 Index 3 21.04% 28.56% 20.23%
Russell 2500 Index 4 24.14% 19.43% 15.26%
SINCE
INCEPTION
1 YEAR (10/2/95)
----------------------------------------------------------------------
Franklin Small Cap Growth 92.63%* 27.70%
Fund I - Class C 2
S&P 500 Index 3 21.04% 26.39%
Russell 2500 Index 4 24.14% 16.23%
*Recently many individual stocks and sectors such as technology have
significantly exceeded historical norms; investors should generally not
expect such outsized returns to continue.
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 2000, the fund's year-to-date return was 13.71% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
4. Source: Standard & Poor's Micropal. The Russell 2500 Index is an unmanaged
group of 2,500 stocks of smaller capitalization companies. It includes
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS C
----------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 1.99%
Load imposed on purchases 5.75% 1.00%
Maximum deferred sales charge None 1 0.99% 2
(load)
Exchange fee None None
Please see "Choosing a Share Class" on page 46 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS C
----------------------------------------------------------
Management fees 0.46% 0.46%
Distribution and service (12b-1) 0.25% 1.00%
fees
Other expenses 0.23% 0.23%
======================
Total annual fund operating 0.94% 1.69%
expenses
======================
1. Except for investments of $1 million or more (see page 46) and purchases
by certain retirement plans without an initial sales charge.
2. This is equivalent to a charge of 1% based on net asset value.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------------------------------
If you sell your shares at
the end of the period:
CLASS A $665 1 $857 $1,065 $1,663
CLASS C $368 $627 $1,009 $2,078
If you do not sell your
shares:
CLASS C $270 $627 $1,009 $2,078
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $229 billion in assets.
The team responsible for the fund's management is:
EDWARD B. JAMIESON, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Jamieson has been a manager of the fund since 1992. He joined the
Franklin Templeton Group in 1987.
MICHAEL MCCARTHY, VICE PRESIDENT OF ADVISERS
Mr. McCarthy has been a manager of the fund since 1993. He joined the
Franklin Templeton Group in 1992.
AIDAN O'CONNELL, PORTFOLIO MANAGER OF ADVISERS
Mr. O'Connell has been a manager of the fund since 1998. Previously, he was a
research associate and a corporate finance associate at Hambrecht & Quist.
The fund pays Advisers a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended April 30, 1999, the fund paid
0.46% of its average daily net assets to the manager for its services.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
OCTOBER 31,
CLASS A 1999 1 YEAR ENDED APRIL 30,
---------------------------------------------------------------------------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA ($)
Net asset value, beginning of year 24.65 25.93 18.96 19.75 14.90 12.75
-------------- ----------- ------------ ----------- --------- ---------
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
-------------- ----------- ------------ ----------- --------- ---------
Distributions from net investment
income - (.14) (.09) (.06) (.01) (.02)
Distributions from net realized
gains - (.18) (.93) (.80) (1.38) (1.00)
-------------- ----------- ------------ ----------- --------- ---------
Total distributions - (.32) (1.02) (.86) (1.39) (1.02)
============== =========== ============ =========== ========= =========
Net asset value, end of year 31.10 24.65 25.93 18.96 19.75 14.90
============== =========== ============ =========== ========= =========
Total return (%) 3 26.17 (3.44) 43.09 .14 44.06 27.05
RATIOS/SUPPLEMENTAL DATA
Net assets, end
of year ($ x 1,000) 5,754,813 4,251,284 3,957,972 1,071,352 444,912 63,010
Ratios to
average net assets: (%)
Expenses .91 4 .94 .89 .92 .97 .69
Expenses excluding waiver and
payments by affiliate .91 4 .94 .89 .92 1.00 1.16
Net investment income .06 4 .30 .32 .10 .09 .25
Portfolio turnover rate (%) 17.18 46.73 42.97 55.27 87.92 104.84
Six Months
Ended
October 31,
Class C 1999 Year ended April 30,
-------------------------------------------------------------------------------------------------
(unaudited) 1999 1998 1997 1996 2
Per share data ($)
Net asset value,
beginning of year 24.32 25.59 18.78 19.66 17.94
------------- ------------ ----------- ------------ ---------
Net investment loss (.09) (.09) (.02) (.05) (.03)
Net realized and unrealized
gains (losses) 6.34 (1.00) 7.76 (.03) 2.71
------------- ------------ ----------- ------------ ---------
Total from investment operations
6.25 (1.09) 7.74 (.08) 2.68
------------- ------------ ----------- ------------ ---------
Distributions from net realized
gains - (.18) (.93) (.80) (.96)
============= ============ =========== ============ =========
Net asset value, end of year 30.57 24.32 25.59 18.78 19.66
============= ============ =========== ============ =========
Total return (%) 3 25.70 (4.08) 42.06 (.65) 15.98
Ratios/supplemental data
Net assets, end
of year ($ x 1,000) 993,786 764,715 731,707 146,164 24,102
Ratios to
average net assets: (%)
Expenses 1.66 4 1.69 1.64 1.69 1.76 4
Net investment loss (.69) 4 (.44) (.42) (.70) (.69) 4
Portfolio turnover rate (%) 17.18 46.73 42.97 55.27 87.92
</TABLE>
1. Based on average shares outstanding.
2. For the period October 1, 1995 (effective date) to April 30, 1996 for
Class C.
3. Total return does not include sales charges, and is not annualized.
4. Annualized.
FRANKLIN SMALL CAP GROWTH FUND II
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the equity securities of U.S. small
capitalization (small cap) companies. For this fund, small cap companies are
those companies with market cap values not exceeding: (i) $1.5 billion; or
(ii) the highest market cap value in the Russell 2000 Index; whichever is
greater, at the time of purchase. That index consists of 2,000 small
companies that have publicly traded securities. Market capitalization is
defined as share price multiplied by the number of common stock shares
outstanding. The manager may continue to hold an investment for further
capital growth opportunities even if the company is no longer small cap. In
selecting growth companies, the fund may invest substantially in technology
sectors such as electronics, computer software and hardware,
telecommunications, internet-related services, and health-care technology.
In addition to its main investments, the fund may invest in equity securities
of larger companies. When suitable opportunities are available, the fund may
also invest in initial public offerings of securities, and may invest a very
small portion of its assets in private or illiquid securities, such as late
stage venture capital financings. An equity security represents a
proportionate share of the ownership of a company; its value is based on the
success of the company's business, any income paid to stockholders, the value
of its assets, and general market conditions. Common and preferred stocks,
and securities convertible into common stock, are examples of equity
securities.
[Begin callout]
The fund invests primarily in common stocks of small cap U.S. companies.
[End callout]
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a growth strategy. As a "bottom-up" investor focusing primarily on
individual securities, the manager chooses companies that it believes are
positioned for rapid growth in revenues, earnings, or assets. The manager
relies on a team of analysts to provide in-depth industry expertise and uses
both qualitative and quantitative analysis to evaluate companies for distinct
and sustainable competitive advantages. Advantages, such as a particular
marketing or product niche, proven technology, and industry leadership are
all factors the manager believes point to strong long-term growth potential.
The manager diversifies the fund's assets across many industries, but from
time to time may invest substantially in certain sectors.
TEMPORARY INVESTMENTS When the manager believes market or economic
conditions are unfavorable for investors, is unable to locate suitable
investment opportunities, or seeks to maintain liquidity, it may invest all
or substantially all of the fund's assets in short-term investments,
including cash or cash equivalents. Under these circumstances, the fund may
temporarily be unable to pursue its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
STOCKS While stocks have historically outperformed other asset classes over
the long term, their value tends to go up and down more dramatically over the
short term. These price movements may result from factors affecting
individual companies, industries, or securities markets.
GROWTH STYLE STOCK INVESTING Growth stock prices reflect projections of
future earnings or revenues, and can, therefore, fall dramatically if the
company fails to meet those projections. Growth stocks may also be more
expensive relative to their earnings or assets compared to value or other
stocks. Because the fund's manager uses an aggressive growth strategy, an
investment in the fund involves greater risk and more volatility than an
investment in a growth fund investing entirely in proven growth stocks.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
SMALLER COMPANIES While smaller companies may offer opportunities for
capital growth, they also have significant risk. Historically, smaller
company securities have been more volatile in price and have fluctuated
independently from larger company securities, especially over the
short-term. Smaller or relatively new companies can be particularly
sensitive to changing economic conditions, including increases in interest
rates, because of their reliance on credit, and their growth prospects are
less certain.
For example, smaller companies may lack depth of management or may have
limited financial resources for growth or development. They may have limited
product lines or market share. Smaller companies may be in new industries, or
their new products or services may not find an established market or may
become quickly obsolete. Smaller companies' securities may be less liquid
which may adversely affect their price. Investments in these companies may be
considered speculative.
Initial public offerings (IPOs) of securities issued by unseasoned companies
with little or no operating history are risky and their prices are highly
volatile, but they can result in very large gains in their initial trading.
Attractive IPOs are often oversubscribed and may not be available to the
fund, or only in very limited quantities. Thus, when the fund's size is
smaller, any gains from IPOs will have an exaggerated impact on the fund's
reported performance than when the fund is larger.
TECHNOLOGY COMPANIES Technology and biotechnology industry stocks can be
subject to abrupt or erratic price movements. They have historically been
volatile in price, especially over the short term, due to the rapid pace of
product change and development affecting such companies. Prices often change
collectively without regard to the merits of individual companies.
More detailed information about the fund, its policies and risks can be found
in the SAI.
[Insert graphic of bull and bear] PERFORMANCE
Because the fund is new, it has no performance history.
[Insert graphic of a percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B CLASS C
--------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge None 1 4.00% 2 0.99% 3
(load)
Exchange fee 4 $5.00 $5.00 $5.00
Please see "Choosing a Share Class" on page 46 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)5
CLASS A CLASS B CLASS C
--------------------------------------------------------------------
Management fees 6 0.55% 0.55% 0.55%
Distribution and service
(12b-1) fees 0.35% 1.00% 1.00%
Other expenses 0.60% 0.60% 0.60%
-------------------------------
Total annual fund operating 1.50% 2.15% 2.15%
expenses 6 -------------------------------
1. Except for investments of $1 million or more (see page 46)and purchases by
certain retirement plans without an initial sales charge.
2. Declines to zero after six years.
3. This is equivalent to a charge of 1% based on net asset value.
4. This fee is only for market timers (see page 59).
5. The management fees and distribution and service (12b-1) fees shown are
based on the fund's maximum contractual amount. Other expenses are estimated.
6. The manager and administrator have agreed in advance to limit their
respective fees and to assume as their own expense certain expenses otherwise
payable by the fund so that total annual fund operating expenses do not
exceed 1.40% for Class A, 2.05% for Class B and 2.05% for Class C for the
current fiscal year. After April 30, 2001, the manager and administrator may
end this arrangement at any time upon notice to the fund's Board of Trustees.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS
--------------------------------------------------
If you sell your shares at
the end of the period:
CLASS A $719 1 $1,022
CLASS B $618 $ 973
CLASS C $415 $ 766
If you do not sell your
shares:
CLASS B $218 $ 673
CLASS C $316 $ 766
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404 is the fund's investment manager. Together, Advisers and its
affiliates manage over $229 billion in assets.
The team responsible for the fund's management:
EDWARD B. JAMIESON, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Jamieson has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1987.
MICHAEL MCCARTHY, VICE PRESIDENT OF ADVISERS
Mr. McCarthy has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1992.
AIDAN O'CONNELL, PORTFOLIO MANAGER OF ADVISERS
Mr. O'Connell has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1998. Previously, he was a research associate
and a corporate finance associate at Hambrecht & Quist.
The fund pays Advisers a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of:
o 0.550% of the value of net assets up to and including $500 million;
o 0.450 of the value of net assets over $500 million up to and including
$1 billion;
o 0.400 of the value of net assets over $1 billion up to and including
$1.5 billion;
o 0.350 of the value of net assets over $1.5 billion up to and including
$6.5 billion;
o 0.325 of the value of net assets over $6.5 billion up to and including
$11.5 billion;
o 0.300 of the value of net assets over $11.5 billion up to and including
$16.5 billion;
o 0.290 of the value of net assets over $16.5 billion up to and including
$19 billion;
o 0.280 of the value of net assets over $19 billion up to and including
$21.5 billion;
o 0.270 of the value of net assets in excess of $21.5 billion.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund intends to pay a dividend at
least annually representing substantially all of its net investment income
and any net realized capital gains. The amount of this distribution will
vary and there is no guarantee any fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for each fund's distributions will vary. Please keep in mind
that if you invest in a fund shortly before the record date of a
distribution, any distribution will lower the value of the fund's shares by
the amount of the distribution and you will receive some of your investment
back in the form of a taxable distribution. If you would like information on
upcoming record dates for a fund's distributions, please call 1-800/DIAL BEN(R).
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional fund shares or receive them in cash. Any
capital gains a fund distributes are taxable to you as long-term capital
gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, a fund must withhold 31% of your taxable distributions and redemption
proceeds if you do not provide your correct social security or taxpayer
identification number and certify that you are not subject to backup
withholding, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale.
Distributions of ordinary income and capital gains, and gains from the sale
or exchange of your fund shares generally will be subject to state and local
taxes. Non-U.S. investors may be subject to U.S. withholding and estate tax.
You should consult your tax advisor about the federal, state, local or
foreign tax consequences of your investment in a fund.
YOUR ACCOUNT
[Insert graphic of pencil marking an X] CHOOSING A SHARE CLASS
The Aggressive Growth Fund, California Fund, Large Cap Fund and Small Cap
Fund II each offer Class A, B and C shares. The Small Cap Fund I offers Class
A and C shares. Each class has its own sales charge and expense structure,
allowing you to choose the class that best meets your situation. Your
investment representative can help you decide.
CLASS A CLASS B CLASS C
----------------------------------------------------------------------
o Initial sales charge o No initial sales o Initial sales
of 5.75% or less charge charge of 1%
o Deferred sales o Deferred sales o Deferred sales
charge of 1% on charge of 4% on charge of 1% on
purchases of $1 shares you sell shares you sell
million or more sold within the first within 18 months
within 12 months year, declining to
1% within six years
and eliminated
after that
o Lower annual o Higher annual o Higher annual
expenses than Class expenses than Class expenses than Class
B or C due to lower A (same as Class C) A (same as Class B)
distribution fees due to higher due to higher
distribution fees. distribution fees.
Automatic No conversion to
conversion to Class Class A shares, so
A shares after annual expenses do
eight years, not decrease.
reducing future
annual expenses.
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING OF YOUR NET INVESTMENT
PRICE
----------------------------------------------------------------------
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 2.00 2.04
million
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as
a lump sum or through our cumulative quantity discount or letter of intent
programs (see page 49), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC
is the same for each class (please see page 48).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the Aggressive Growth Fund
and Large Cap Fund to pay distribution fees of up to 0.35% per year to those
who sell and distribute Class A shares and provide other services to
shareholders. For the California Fund, Small Cap Fund I and Small Cap Fund
II, Class A has a distribution plan, sometimes known as a Rule 12b-1 plan,
that allows the funds to pay distribution fees of up to 0.25% per year to
those who sell and distribute Class A shares and provide other services to
shareholders. Because these fees are paid out of Class A's assets on an
on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS B
IF YOU SELL YOUR SHARES
WITHIN THIS MANY YEARS THIS % IS DEDUCTED FROM
AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
With Class B shares, there is no initial sales charge. However, there is a
CDSC if you sell your shares within six years, as described in the table
above. The way we calculate the CDSC is the same for each class (please see
page 48). After 8 years, your Class B shares automatically convert to Class A
shares, lowering your annual expenses from that time on.
MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares
at one time is $249,999. We place any investment of $250,000 or more in Class
A shares, since a reduced initial sales charge is available and Class A's
annual expenses are lower.
RETIREMENT PLANS Class B shares are available to certain retirement plans,
including IRAs (of any type), Franklin Templeton Trust Company 403(b) plans,
and Franklin Templeton Trust Company qualified plans with participant or
earmarked accounts.
DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution and other fees of up to 1% per year for the sale of Class B
shares and for services provided to shareholders. Because these fees are paid
out of Class B's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
SALES CHARGES - CLASS C
THE SALES
WHEN YOU INVEST THIS CHARGE MAKES UP WHICH EQUALS THIS % OF
AMOUNT THIS % OF THE YOUR NET INVESTMENT
OFFERING PRICE
-------------------------------------------------------------------
Under $1 million 1.00 1.01
WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE
IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C
shares you sell within 18 months of purchase. The way we calculate the CDSC
is the same for each class (please see below).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution and other fees of up to 0.75% per year for the sale of Class C
shares and for services provided to shareholders. Because these fees are paid
out of Class C's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A, B & C
The CDSC for each class is based on the current value of the shares being
sold or their net asset value when purchased, whichever is less. There is no
CDSC on shares you acquire by reinvesting your dividends or capital gains
distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page 54 for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below,
please let us know at the time you make your investment to help ensure you
receive the lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in
the Franklin Templeton Funds to take advantage of the lower sales charges for
large purchases of Class A shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance
Products Trust and Templeton Capital Accumulator Fund, Inc.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same sales
charge as if all shares had been purchased at one time. We will reserve a
portion of your shares to cover any additional sales charge that may apply
if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR
ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you
may reinvest some or all of the proceeds within 365 days without an initial
sales charge. The proceeds must be reinvested within the same share class,
except proceeds from the sale of Class B shares will be reinvested in Class A
shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit
your account with the amount of the CDSC paid but a new CDSC will apply. For
Class B shares reinvested in Class A, a new CDSC will not apply, although
your account will not be credited with the amount of any CDSC paid when you
sold your Class B shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial sales
charge or CDSC by various individuals, institutions and retirement plans or
by investors who reinvest certain distributions and proceeds within 365
days. Certain investors also may buy Class C shares without an initial sales
charge. The CDSC for each class may be waived for certain redemptions and
distributions. If you would like information about available sales charge
waivers, call your investment representative or call Shareholder Services at
1-800/632-2301. For information about retirement plans, you may call
Retirement Services at 1-800/527-2020. A list of available sales charge
waivers also may be found in the Statement of Additional Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to
invest as a group. For sales charge purposes, the group's investments are
added together. There are certain other requirements and the group must have
a purpose other than buying fund shares at a discount.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
MINIMUM INVESTMENTS
----------------------------------------------------------------
INITIAL ADDITIONAL
----------------------------------------------------------------
Regular accounts $1,000 $50
----------------------------------------------------------------
Automatic investment plans $50 ($25 $50 ($25
for an for an
Education Education
IRA) IRA)
----------------------------------------------------------------
UGMA/UTMA accounts $100 $50
----------------------------------------------------------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers,
Education IRAs or Roth IRAs)
----------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or
Roth IRAs $250 $50
----------------------------------------------------------------
Broker-dealer sponsored wrap account
programs $250 $50
----------------------------------------------------------------
Full-time employees, officers,
trustees and directors of Franklin
Templeton entities, and their
immediate family members $100 $50
----------------------------------------------------------------
PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND ELIGIBLE FOR SALE IN YOUR
STATE OR JURISDICTION.
Class A shares of the Small Cap Fund I are available only to the following
investors:
o Current shareholders who owned Class A shares of Small Cap Fund I as of
the close of business on April 30, 2000.
o Retirement plans: Current and new investors in retirement plans.
o Wrap programs: Current and new investors in wrap programs.
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. Make sure you indicate the share class
you have chosen. If you do not indicate a class, we will place your purchase
in Class A shares. To save time, you can sign up now for services you may
want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES OPENING AN ACCOUNT ADDING TO AN ACCOUNT
[Insert graphic of Contact your Contact your
hands shaking] investment investment
representative representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
----------------------------------------------------------------------
[Insert graphic of Make your check Make your check
envelope] payable to the fund. payable to the fund.
Include your account
BY MAIL Mail the check and number on the check.
your signed
application to Fill out the deposit
Investor Services. slip from your account
statement. If you do
not have a slip,
include a note with
your name, the fund
name, and your account
number.
Mail the check and
deposit slip or note
to Investor Services.
----------------------------------------------------------------------
[Insert graphic of Call to receive a Call to receive a wire
three lightning bolts] wire control number control number and
and wire instructions. wire instructions.
BY WIRE
Wire the funds and To make a same day
1-800/632-2301 mail your signed wire investment,
(or 1-650/312-2000 application to please call us by 1:00
collect) Investor Services. p.m. Pacific time and
Please include the make sure your wire
wire control number arrives by 3:00 p.m.
or your new account
number on the
application.
To make a same day
wire investment,
please call us by
1:00 p.m. Pacific
time and make sure
your wire arrives by
3:00 p.m.
----------------------------------------------------------------------
[Insert graphic of Call Shareholder Call Shareholder
two arrows pointing Services at the Services at the number
in opposite number below, or send below or our automated
directions] signed written TeleFACTS system, or
instructions. The send signed written
BY EXCHANGE TeleFACTS system instructions.
cannot be used to
TeleFACTS(R) open a new account. (Please see page 54
1-800/247-1753 for information on
(around-the-clock (Please see page 54 exchanges.)
access) for information on
exchanges.)
----------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest
in a fund by automatically transferring money from your checking or savings
account each month to buy shares. To sign up, complete the appropriate
section of your account application and mail it to Investor Services. If you
are opening a new account, please include the minimum initial investment of
$50 with your application.
AUTOMATIC PAYROLL DEDUCTION You may invest in a fund automatically by
transferring money from your paycheck to a fund by electronic funds transfer.
If you are interested, indicate on your application that you would like to
receive an Automatic Payroll Deduction Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from a fund
in an existing account in the same share class* of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
*Class B and C shareholders may reinvest their distributions in Class A
shares of any Franklin Templeton money fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to
sell or exchange your shares and make certain other changes to your account
by phone.
For accounts with more than one registered owner, telephone privileges also
allow the funds to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*, generally without paying any additional sales
charges. If you exchange shares held for less than six months, however, you
may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%. If you exchange shares from a
money fund, a sales charge may apply no matter how long you have held the
shares.
EXCHANGES INTO CLASS A SHARES OF SMALL CAP FUND I FROM OTHER FRANKLIN
TEMPLETON FUNDS WILL BE ACCEPTED ONLY TO ADD TO AN EXISTING ACCOUNT AND NOT
TO ESTABLISH A NEW ACCOUNT, OTHER THAN A RETIREMENT PLAN ACCOUNT OR INVESTORS
IN WRAP PROGRAMS.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton Fund, the time your shares are held in that fund will
count towards the eight year period for automatic conversion to Class A
shares.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page 59).
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into Class A without any sales charge. Advisor Class shareholders of
another Franklin Templeton Fund also may exchange into Class A without any
sales charge. Advisor Class shareholders who exchange their shares for Class
A shares and later decide they would like to exchange into another fund that
offers Advisor Class may do so.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application. Please keep in
mind that if a systematic withdrawal plan exhausts the Small Cap Fund I -
Class A Shares in your account, your account will be closed and you will not
be able to buy additional Small Cap Fund I Class A Shares or to reopen your
account.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time. Please keep in mind that a contingent
deferred sales charge (CDSC) may apply. Please also keep in mind that if you
sell all the Class A Shares in your Small Cap Fund I account, your Small Cap
Fund I account will be closed and you will not be able to buy additional
Small Cap Fund I Class A Shares or to reopen your Small Cap Fund I account.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the fund we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can
obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in
a Franklin Templeton Trust Company retirement plan. For participants under
age 591/2, tax penalties may apply. Call Retirement Services at
1-800/527-2020 for details.
SELLING SHARES
TO SELL SOME OR ALL OF YOUR SHARES
----------------------------------------------------------------------
[Insert graphic of hands Contact your investment
shaking] representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
----------------------------------------------------------------------
[Insert graphic of envelope] Send written instructions and
BY MAIL endorsed share certificates (if you
hold share certificates) to Investor
Services. Corporate, partnership or
trust accounts may need to send
additional documents.
Specify the fund, the account number
and the dollar value or number of
shares you wish to sell. If you own
both Class A and B shares, also
specify the class of shares,
otherwise we will sell your Class A
shares first. Be sure to include all
necessary signatures and any
additional documents, as well as
signature guarantees if required.
A check will be mailed to the
name(s) and address on the account,
or otherwise according to your
written instructions.
----------------------------------------------------------------------
[Insert graphic of phone] As long as your transaction is for
$100,000 or less, you do not hold
BY PHONE share certificates and you have not
changed your address by phone within
1-800/632-2301 the last 15 days, you can sell your
shares by phone.
A check will be mailed to the
name(s) and address on the account.
Written instructions, with a
signature guarantee, are required to
send the check to another address or
to make it payable to another person.
----------------------------------------------------------------------
[Insert graphic of three You can call or write to have
lightning bolts] redemption proceeds sent to a bank
account. See the policies above for
BY ELECTRONIC FUNDS TRANSFER selling shares by mail or phone.
(ACH)
Before requesting to have redemption
proceeds sent to a bank account,
please make sure we have your bank
account information on file. If we
do not have this information, you
will need to send written
instructions with your bank's name
and address, a voided check or
savings account deposit slip, and a
signature guarantee if the ownership
of the bank and fund accounts is
different.
If we receive your request in proper
form by 1:00 p.m. Pacific time,
proceeds sent by ACH generally will
be available within two to three
business days.
----------------------------------------------------------------------
[Insert graphic of two arrows Obtain a current prospectus for the
pointing in opposite fund you are considering.
directions]
Call Shareholder Services at the
BY EXCHANGE number below or our automated
TeleFACTS system, or send signed
TeleFACTS(R) written instructions. See the
1-800/247-1753 policies above for selling shares by
(around-the-clock mail or phone.
access)
If you hold share certificates, you
will need to return them to the fund
before your exchange can be
processed.
----------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE Each fund calculates its net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. Pacific time). Each class's NAV is calculated by
dividing its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
Each fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee and UGMA/UTMA accounts) because you sell some of your shares, we
may mail you a notice asking you to bring the account back up to its
applicable minimum investment amount. If you choose not to do so within 30
days, we may close your account and mail the proceeds to the address of
record. You will not be charged a CDSC if your account is closed for this
reason.
STATEMENTS AND REPORTS You will receive quarterly account statements that
show all your account transactions during the quarter. You also will receive
written notification after each transaction affecting your account (except
for distributions and transactions made through automatic investment or
withdrawal programs, which will be reported on your quarterly statement).
You also will receive the fund's financial reports every six months. To
reduce fund expenses, we try to identify related shareholders in a household
and send only one copy of the financial reports. If you need additional
copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and
statements and other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two
or more owners are registered as "joint tenants with rights of survivorship"
(shown as "Jt Ten" on your account statement). To make any ownership changes
to a joint account, all owners must agree in writing, regardless of the law
in your state.
MARKET TIMERS The Aggressive Growth Fund, Large Cap Fund and Small Cap Fund
II may restrict or refuse exchanges by market timers. If accepted, each
exchange by a market timer will be charged $5 by Franklin/Templeton Investor
Services, Inc., the fund's transfer agent. The California Fund and Small Cap
Fund I do not allow investments by market timers. You will be considered a
market timer if you have (i) requested an exchange out of the fund within two
weeks of an earlier exchange request, or (ii) exchanged shares out of the
fund more than twice in a calendar quarter, or (iii) exchanged shares equal
to at least $5 million, or more than 1% of the fund's net assets, or (iv)
otherwise seem to follow a timing pattern. Shares under common ownership or
control are combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies
and reserve certain rights, including:
o The funds may refuse any order to buy shares, including any purchase
under the exchange privilege.
o At any time, the funds may change their investment minimums or waive or
lower their minimums for certain purchases.
o The funds may modify or discontinue the exchange privilege on 60 days'
notice.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, each fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check, wire or electronic funds transfer
would be harmful to existing shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the funds promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and
service (12b-1) fees and its other resources.
CLASS A CLASS B CLASS C
----------------------------------------------------------------------
COMMISSION (%) - 4.00 2.00
Investment under $50,000 5.00 - -
$50,000 but under $100,000 3.75 - -
$100,000 but under $250,000 2.80 - -
$250,000 but under $500,000 2.00 - -
$500,000 but under $1 million 1.60 - -
$1 million or more up to 1.00 1 - -
12B-1 FEE TO DEALER 0.25 2 0.25 3 1.00 4
A dealer commission of up to 1% may be paid on Class A NAV purchases by
certain retirement plans1 and on Class C NAV purchases. A dealer commission
of up to 0.25% may be paid on Class A NAV purchases by certain trust
companies and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive
fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. The Aggressive Growth Fund and Large Cap Fund may each pay up to 0.35% to
Distributors or others, out of which 0.10% generally will be retained by
Distributors for its distribution expenses.
3. Dealers may be eligible to receive up to 0.25% from the date of purchase.
After 8 years, Class B shares convert to Class A shares and dealers may then
receive the 12b-1 fee applicable to Class A.
4. Dealers may be eligible to receive up to 0.25% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the
13th month.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the funds or your account, you can write to
us at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one
of the following numbers. For your protection and to help ensure we provide
you with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
-----------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Advisor Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional 1-800/321-8563 6:00 a.m. to 5:00 p.m.
Services
TDD (hearing 1-800/851-0637 5:30 a.m. to 5:00 p.m.
impaired)
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings
and the auditor's report.
STATEMENTS OF ADDITIONAL INFORMATION (SAIS)
Contains more information about each fund, its investments and policies. It
is incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You also can obtain information about each fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR
Database on the SEC's Internet site at http://www.sec.gov. You can obtain
copies of this information, after paying a duplicating fee, by writing to the
SEC's Public Reference Section, Washington, D.C. 20549-0102 or by electronic
request at the following E-mail address: [email protected].
Investment Company Act file #811-6243 FSS1 P 05/00
SHAREHOLDER LETTER
Dear Shareholder:
This annual report for the Franklin Strategic Series covers the fiscal year
ended April 30, 1999.
A YEAR TO REMEMBER.
Looking back, the 12 months under review turned out to be an eventful year for
many investors. Despite economic and financial turmoil overseas, U.S. employment
rose, our economy grew at a remarkable pace, and inflation remained practically
non-existent. On April 30, 1998, the Dow Jones(R) Industrial Average (the Dow)
closed at 9063.37.(1) It climbed throughout most of the summer, but due to
investor concerns about economic crises in Asia and Russia, it fell to 8051.68
on August 28 and suffered an additional 512.61 point drop on August 31.
Concerned about the possible impact of global economic turmoil on the U.S.
economy, the Federal Reserve Board cut short-term interest rates three times in
the fall. This fueled an October rally, which set the Dow on the road to record
highs. Led by blue chip, technology and internet-related stocks, on March 29,
1999, it broke through the 10000 level for the first time in its history. And
that was just the beginning -- on April 30, 1999, the Dow closed at a record
high of 10789.04. The S&P 500(R) Composite Index, which represents many more
stocks, also performed well, closing at 1111.75 on April 30, 1998, and at
1335.18 on April 30, 1999.
(1.) Source: Standard & Poor's(R) Micropal. Dow Jones Industrial Average total
return calculated by Wilshire Associates, Inc.
CONTENTS
<TABLE>
<S> <C>
Shareholder Letter .................................................... 1
Fund Reports
Franklin Blue Chip Fund ............................................. 4
Franklin California
Growth Fund ......................................................... 10
Franklin MidCap
Growth Fund ......................................................... 18
Franklin Small Cap
Growth Fund ......................................................... 24
Financial Highlights &
Statement of Investments .............................................. 32
Financial Statements .................................................. 58
Notes to
Financial Statements .................................................. 63
Independent
Auditors' Report ...................................................... 71
Tax Information ....................................................... 72
</TABLE>
FUND CATEGORY
[PYRAMID GRAPHIC]
-PAGE-
THINGS ARE NOT ALWAYS WHAT THEY SEEM.
A cursory look at the figures noted above might cause one to conclude that the
reporting period was a good year for all stocks. Nothing could be further from
the truth. The Dow represents only 19.5% of the value of all publicly traded
stocks,(2) and in 1998, the S&P 500 gained 28.72%, but only 100 stocks accounted
for 85% of its return.(3) In fact, in that same year, about 42% of its stocks
lost ground.
WHAT ABOUT NEXT YEAR?
As we look forward to the rest of 1999, it is important to realize that the
prolonged bull market we have been experiencing for the past four years is
extremely unusual, and that past performance is not predictive of future
results. Revived economic activity in Europe, Asia and Latin America could
increase demand for many goods and services. A tighter supply of these goods and
services might result in increased inflation and cause investors to become more
cautious. However, it is also important to remember that over the long term,
stocks and bonds have historically delivered impressive results. For this
reason, we encourage you to discuss your financial goals with your investment
representative, stay focused on the long term, and diversify your investments.
As you know, mutual funds offer a level of diversification almost impossible for
individual investors to achieve on their own.
(2.) Source: Wilshire Associates, Inc.
(3.) Source: Morgan Stanley Dean Witter & Co.
2
-PAGE-
Whatever direction the market takes, you can rest assured that Franklin
Templeton's portfolio managers are dedicated to providing our shareholders with
careful selection and constant professional supervision. As always, we
appreciate your support, welcome your comments and look forward to serving your
investment needs.
Sincerely,
/s/ Rupert H. Johnson, Jr.
-----------------------------
Rupert H. Johnson, Jr.
President
Franklin Strategic Series
3
-PAGE-
FRANKLIN BLUE CHIP FUND
Your Fund's Goal: Franklin Blue Chip Fund seeks long-term capital appreciation
by investing primarily in high quality, blue chip companies with market
capitalization of $1 billion or more, that the managers believe are leaders in
their industries and are positioned for stable, long-term growth potential.
The fiscal year ended April 30, 1999, provided both good and bad news for
investors. The good news was relatively low interest rates and benign inflation,
while the bad news was widespread financial and political instability abroad.
Large-cap growth stocks generally appreciated in value as investors showed a
strong desire for stable earnings growth, while mid- and small-cap stocks did
not perform nearly as well. Within this environment, Franklin Blue Chip Fund
delivered a +16.18% one-year cumulative total return, as shown in the
Performance Summary on page 8, while the fund's benchmarks, the Morgan Stanley
Capital International(R) (MSCI) World Index and the Standard & Poor's (S&P(R))
500(R) Index, provided a return of 16.37% and 21.82% respectively.(1)
(1.) Source: Standard & Poor's(R) Micropal. The unmanaged MSCI World Index
tracks The performance of approximately 1,450 securities in 22 countries, and is
designed to measure world stock market performance. The unmanaged S&P 500 Index
includes 500 domestic securities.
Indices include reinvested dividends. One cannot invest directly in an index,
nor is an index representative of the fund's portfolio.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 33 of
this report.
4
-PAGE-
In selecting investments for the fund, we search for companies which demonstrate
market dominance, management excellence, and strong growth in revenues,
earnings, or earnings before interest, taxes, depreciation and amortization. Our
rigorous analysis helps us find high-quality companies, and our long-term
orientation usually leads to low portfolio turnover.
During the reporting period, we substantially re-allocated the fund's portfolio
to reflect the wealth of opportunities in the U.S. market, and our domestic
holdings rose from 60.5% of total net assets on April 30, 1998 to 87.9% on April
30, 1999. This change was reflected in the performance of the fund, which
delivered a return of +6.58% for the three months ended April 30, 1999, while
the S&P 500 Index delivered a return of 4.67% for the same period.(2)
The fund's portfolio was well diversified by industry, with the greatest
concentrations in high-growth industry groups such as electronic technology,
health technology, finance, and consumer durables. Prices of health and
electronic technology stocks generally rose, and our positions in Abbott Labs,
Intel and Cisco Systems strengthened the fund's performance. We added Pfizer,
Schering Plough and Bristol-Meyers Squibb (pharmaceuticals), as well as EMC
(peripherals) and Automatic Data Processing to the portfolio because we believed
they offer potential for sustainable long-term earnings growth.
(2.) Source: Standard & Poor's Micropal.
PORTFOLIO BREAKDOWN
FRANKLIN BLUE CHIP FUND
BASED ON TOTAL NET ASSETS
4/30/99
<TABLE>
<S> <C>
Finance 14.0%
Consumer Non-Durables 12.0%
Health Technology 11.4%
Electronic Technology 10.2%
Technology Services 7.7%
Telecommunications 7.6%
Producer Manufacturing 5.7%
Energy Minerals 5.0%
Process Industries 4.6%
Retail 4.5%
Other Industries 8.8%
Cash & Equivalents 8.5%
</TABLE>
5
-PAGE-
TOP 10 HOLDINGS
Franklin Blue Chip Fund
Based on Total Net Assets
4/30/99
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
------------------------------------------
<S> <C>
Microsoft Corp.
Technology Services, U.S. 2.9%
General Electric Co.
Producer Manufacturing, U.S. 2.9%
Intel Corp.
Electronic Technology, U.S. 2.2%
Royal Dutch Petroleum Co.,
N.Y.shs.
Energy Minerals, Netherlands 2.1%
Wal-Mart Stores Inc.
Retail Trade, U.S. 2.0%
Coca-Cola Co.
Consumer Non-Durables, U.S. 1.8%
Countrywide Credit
Industries Inc.
Finance, U.S. 1.7%
Avery Dennison Corp.
Producer Manufacturing, U.S. 1.7%
Marsh & McLennan Cos. Inc.
Finance, U.S. 1.7%
American International
Group Inc.
Finance, U.S. 1.7%
</TABLE>
Our holdings in the financial industry group delivered mixed results, with
strong performance from Charles Schwab Corp. and American International Group
Inc. helping offset flat performance from Merrill Lynch & Co., Inc. During the
reporting period, we added to our holdings in this sector by initiating
positions in Chase Manhattan Corp. and insurers Marsh & McLennan Cos. Inc. and
AFLAC Inc.
However, not all the news was good. The fund's performance was adversely
affected by its underweighting in telecommunications stocks, which appreciated
significantly during the year in review and were more heavily represented in the
index.
This discussion reflects our views, opinions and portfolio holdings as of April
30, 1999. However, market and economic conditions are changing constantly, which
can be expected to affect our strategies and the fund's portfolio composition.
Although historical performance is no guarantee of future results, these
insights may give you a better understanding of our investment and management
philosophy.
Looking forward, we believe prospects remain bright for companies with
high-quality assets, solid management, and sound competitive strategies, with
the potential to generate strong
6
-PAGE-
growth well into the future. We thank you for your participation in Franklin
Blue Chip Fund and look forward to serving your investment needs in the years to
come.
Sincerely,
/s/ Sally E. Haff
-----------------
Sally E. Haff
Portfolio Manager
Franklin Blue Chip Fund
SALLY EDWARDS HAFF, CFA
Sally Edwards Haff is a senior vice president of Franklin Advisers, Inc. She
is the portfolio manager of Franklin Blue Chip Fund and Franklin Utilities
Fund.
Ms. Haff joined Franklin in 1986 as a management trainee. Prior to her current
responsibilities, she managed Franklin Global Utilities Fund, Franklin
Convertible Securities Fund and Franklin Valuemark Global Utilities. She was
also an industry analyst specializing in re- search analysis of utility,
networking equipment, tobacco, food, consumer goods and emerging growth
industries.
Ms. Haff is a Chartered Financial Analyst (CFA) and holds a bachelor of arts
degree in economics from the University of California at Santa Barbara. She is
a member of the Security Analysts of San Francisco, the International Society
of Financial Analysts and the Association for Investment Management and
Research (AIMR).
7
-PAGE-
FRANKLIN BLUE CHIP FUND
Class A (formerly Class I): Subject to the current,maximum 5.75% initial sales
charge. Prior to August 3, 1998,fund shares were offered at a lower initial
sales charge; thus actual total returns may differ.
PERFORMANCE SUMMARY AS OF 4/30/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities, as well as the
level of the fund's operating expenses. Past distributions are not indicative of
future results. All total returns include reinvested distributions at net asset
value.
PRICE AND DISTRIBUTION INFORMATION (5/1/98-4/30/99)
<TABLE>
<CAPTION>
Class A Change 4/30/99 4/30/98
--------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$1.95 $14.41 $12.46
Distributions
----------------------------------
Dividend Income $0.0571
</TABLE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR (6/3/96)
-----------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +16.18% +47.60%
Average Annual Total Return(2) +9.50% +12.03%
Value of $10,000 Investment(3) $10,950 $13,912
4/30/98 4/30/99
-------- -------
One-Year Total Return(4) +16.41% +16.18%
</TABLE>
(1.) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
(2.) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current,
applicable, maximum sales charge.
(3.) These figures represent the value of a hypothetical $10,000 investment
in the fund over the periods indicated and include the current, applicable,
maximum sales charge.
(4.) One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results.
8
-PAGE-
FRANKLIN BLUE CHIP FUND
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged index differs from the fund in composition, does not pay
management fees or expenses and includes reinvested dividends. One cannot invest
directly in an index. Total return represents the change in value of an
investment over the periods shown. It includes the current, applicable, maximum
sales charge, fund expenses, account fees, and reinvested distributions.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
4/30/99
Class A
---------------------------------
<S> <C>
1-Year +9.50%
Since Inception (6/3/96) +12.03%
</TABLE>
TOTAL RETURN INDEX COMPARISON
Franklin Blue Chip Fund
$10,000 Investment (6/3/96 - 4/30/99)
[LINE GRAPH]
The following chart shows in graph format the cumulative total return of a
$10,000 investment in the Fund - Class A, June 3, 1996 (inception) as of April
30, 1999.
<TABLE>
<CAPTION>
DATE FRANKLIN BLUE MSCI S&P 500 MS WORLD S&P 500
CHIP FUND WORLD INDEX GT$
INDEX
<S> <C> <C> <C> <C> <C>
6/3/96 $9,425 $10,000 $10,000
6/30/96 $9,548 $10,052 $10,038 0.52% 0.38%
7/31/96 $9,274 $9,698 $9,594 -3.52% -4.42%
8/31/96 $9,359 $9,812 $9,797 1.17% 2.11%
9/30/96 $9,651 $10,197 $10,348 3.93% 5.63%
10/31/96 $9,651 $10,271 $10,634 0.72% 2.76%
11/30/96 $10,028 $10,848 $11,438 5.62% 7.56%
12/31/96 $9,955 $10,676 $11,211 -1.58% -1.98%
1/31/97 $10,126 $10,807 $11,912 1.22% 6.25%
2/28/97 $10,182 $10,933 $12,005 1.17% 0.78%
3/31/97 $10,021 $10,719 $11,512 -1.96% -4.11%
4/30/97 $10,287 $11,072 $12,199 3.29% 5.97%
5/31/97 $10,969 $11,757 $12,942 6.19% 6.09%
6/30/97 $11,358 $12,345 $13,522 5.00% 4.48%
7/31/97 $11,823 $12,915 $14,598 4.62% 7.96%
8/31/97 $10,884 $12,054 $13,780 -6.67% -5.60%
9/30/97 $11,358 $12,711 $14,536 5.45% 5.48%
10/31/97 $10,438 $12,043 $14,050 -5.25% -3.34%
11/30/97 $10,543 $12,259 $14,701 1.79% 4.63%
12/31/97 $10,696 $12,410 $14,953 1.23% 1.72%
1/31/98 $10,802 $12,757 $15,119 2.80% 1.11%
2/28/98 $11,446 $13,622 $16,210 6.78% 7.21%
3/31/98 $11,763 $14,200 $17,039 4.24% 5.12%
4/30/98 $11,974 $14,340 $17,212 0.99% 1.01%
5/31/98 $11,696 $14,162 $16,916 -1.24% -1.72%
6/30/98 $11,955 $14,501 $17,602 2.39% 4.06%
7/31/98 $11,946 $14,479 $17,414 -0.15% -1.07%
8/31/98 $10,235 $12,550 $14,896 -13.32% -14.46%
9/30/98 $10,658 $12,775 $15,851 1.79% 6.41%
10/31/98 $11,648 $13,932 $17,139 9.06% 8.13%
11/30/98 $12,272 $14,763 $18,178 5.96% 6.06%
12/31/98 $12,647 $15,486 $19,225 4.90% 5.76%
1/31/99 $13,053 $15,827 $20,029 2.20% 4.18%
2/28/99 $12,917 $15,408 $19,406 -2.65% -3.11%
3/31/99 $13,487 $16,052 $20,182 4.18% 4.00%
4/30/99 $13,912 $16,687 $20,963 3.96% 3.87%
</TABLE>
(*)Source: Standard & Poor's(R) Micropal. We are replacing the MSCI World
Index with the S&P 500 Index as the fund's benchmark. We believe its composition
provides a more appropriate comparison to the fund's current portfolio because
the fund now has a more domestic focus. The S&P 500 Index measures the
performance of 500 domestic stocks. The MSCI World Index, which may be excluded
from next year's report, includes approximately 1,450 companies representing the
stock markets of 22 countries, including the U.S., Australia, and several
countries in Europe and Asia. The indices include reinvested dividends. One
cannot invest directly in an index, nor is an index representative of the fund's
portfolio.
Past performance is not predictive of future results.
9
-PAGE-
FRANKLIN CALIFORNIA GROWTH FUND
Your Fund's Goal: Franklin California Growth Fund seeks capital
appreciation through a policy of investing at least 65% of its assets
in the securities of companies either headquartered or conducting a
majority of their operations in the state of California. The fund may
also invest in foreign securities.
Dear Shareholder:
This annual report of Franklin California Growth Fund covers the year
ended April 30, 1999, a challenging period for the fund. During this
time, a number of California companies suffered a loss of business due
to financial woes in Asia and Latin America, but global economic
conditions improved toward the end of the period, and the U.S. equity
market reached record-breaking levels. However, gains were concentrated
in large-capitalization (cap) equities, while smaller companies' stocks
generally declined, and some commodity-related sectors remained weak.
Within this environment, Franklin California Growth Fund Class A
delivered a +6.39% one-year cumulative total return, as shown in the
Performance Summary on page 15. For the same period, the fund's
benchmarks, the Standard and Poor's(R) 500 (S&P 500(R)) Composite
Index, the Franklin California Growth 250 (CA 250) Index(R)(1) and the
Bloomberg California Index(2),
(1). The Franklin CA 250 Index consists of equal weightings of
California's top 250 companies, based on market capitalization, and is
rebalanced quarterly.
(2). We are introducing the Bloomberg California Index as an additional
benchmark for the fund because we believe its composition provides an
appropriate comparison to the fund's current and past portfolio. It is
a price-weighted index, and measures the performance of over 700
California-based companies.
You will find a complete listing of the fund's portfolio holdings,
including dollar value 10 and number of shares or principal amount,
beginning on page 39 of this report.
10
-PAGE-
returned 21.82%,(3) 12.64%(4) and 4.90%,(5) respectively. While the fund's
return was lower than we would have liked, its performance greatly improved
during the latter part of the reporting period, and for the six months prior to
the end of the reporting period, it delivered a +22.70% cumulative total return.
The S&P 500, the Franklin CA 250 and the Bloomberg California Index returned
22.32%, 29.02% and 26.86%, respectively, for the same six months. It is also
important to view your investment with a long-term perspective. As you can see
in the Performance Summary, the fund delivered cumulative total returns of
+56.43% and +197.84%, respectively, for the three- and five-year periods ended
April 30, 1999.
On April 30, 1999, the fund held 91.7% of total net assets in equities, 0.8% in
convertible bonds and 7.5% in cash & equivalents. The portfolio included some
large-cap growth stocks, which advanced during the reporting period's
momentum-driven market, but more than 58% of assets represented shares of
companies with less than $10 billion in market capitalization, many of which
fell during the period.
The portfolio had large technology weightings, and the value of many of our
electronic technology shares appreciated significantly during the reporting
period. For example, the fund's top two positions on April 30, 1999, Cisco
Systems Inc. and Sun Microsystems Inc., rose in value 133% and 190%,
respectively. Stocks of on-line brokerage service companies also performed well,
as the price of the fund's fourth largest holding, Charles Schwab Corp., rose
370%, and our E(*)Trade Group Inc. shares appreciated an astounding 826%. Taking
advantage of this increase, we sold some of our E(*)Trade Group shares for a
substantial profit. Despite the fact that Internet-related stocks were highly
volatile, they have
(3.) Source: Standard & Poor's Micropal.
(4.) Source: CDA/Wiesenberger.
(5.) Source: Bloomberg.
Indices are unmanaged and include reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the fund's portfolio.
PORTFOLIO BREAKDOWN
Franklin California Growth Fund
Based on Total Net Assets
4/30/99
<TABLE>
<S> <C>
Electronic Technology 27.1%
Technology Services 13.0%
Finance 11.2%
Health Technology 7.4%
Real Estate 5.5%
Retail Trade 4.7%
Consumer Services 3.4%
Telecommunications 3.1%
Other Sectors 17.1%
Cash & Equivalents 7.5%
</TABLE>
11
-PAGE-
TOP 10 HOLDINGS
Franklin California Growth Fund
4/30/99
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
INDUSTRY NET ASSETS
--------------------------------------
<S> <C>
Cisco Systems Inc.
Electronic Technology 3.6%
Sun Microsystems Inc.
Electronic Technology 2.9%
Providian Financial Corp.
Finance 2.7%
Charles Schwab Corp.
Finance 2.6%
Uniphase Corp.
Electronic Technology 1.9%
Hewlett-Packard Co.
Electronic Technology 1.9%
Safeway Inc.
Retail Trade 1.9%
Clorox Co.
Consumer Non-Durables 1.8%
Avery Dennison Corp.
Producer Manufacturing 1.8%
AirTouch Communications Inc.
Telecommunications 1.7%
</TABLE>
generally demonstrated phenomenal growth, and we initiated
positions in some of them, including At Home Corp., eBay Inc.,
and Yahoo! Inc.
Health technology was another sector on which we focused. Our positions in some
of the largest U.S. biotechnology companies, including Genentech Inc., Chiron
Corp. and Amgen Inc., gained value during the reporting period, and we purchased
shares of some smaller-cap companies such as Affymetrix Inc., a gene discovery
and analysis firm, and Gilead Sciences Inc., a developer of new human
therapeutics based on nucleotides (the building blocks of genes). At the end of
the reporting period, California was home to approximately one-third of all U.S.
biotechnology companies, and in our opinion, many of these companies have
extraordinary growth potential.
Although the fund's exposure to energy minerals and real estate was relatively
small, these sectors had a negative impact on its performance. The price of oil
dropped substantially during the reporting period, hurting the value of our
shares of Nuevo Energy Co. and Unocal Corp., and real estate investment trusts
in general experienced their lowest absolute and relative valuation levels since
Congress first made them an investment class in 1960.
Looking forward, we believe California companies are poised to benefit from both
domestic and foreign growth. We have recently witnessed an apparent broadening
of investment in U.S. markets, indicating a potential recovery for the small cap
sector; many Asian and Latin American economies appear to be recovering from the
period's turmoil; and over 100 interest rate reductions during the year by more
than 40 central banks around the world bodes well for the global economy.
California is already an economic powerhouse, representing almost 13% of U.S.
gross domestic product, and generating over $1 trillion in goods and services
during 1997 (more than all other western states combined).(6)
(6). Source: "California, An Economic Profile." California Trade and Commerce
Agency, Office of Economic Research, October 1998.
12
-PAGE-
Among the nearly 1,400 publicly traded companies in Franklin Templeton's own
"backyard," we find no shortage of attractive opportunities on the investment
horizon. Using our focused management approach and our staff of more than 30
fundamental research analysts, we shall continue to search for companies
offering exceptional long-term investment opportunities.
It is important to remember that there are certain risks involved with investing
in a non-diversified fund concentrating in securities associated with a single
state, such as increased susceptibility to adverse economic or regulatory
developments. The fund also invests a portion of its assets in small or
relatively new or unseasoned companies, which involves the additional risks
related to relatively small revenues, limited product lines and small market
share. These and other risks are described in the prospectus.
This discussion reflects our views and opinions as of April 30, 1999, the end of
the reporting period. However, market and economic conditions are changing
constantly, which can be expected to affect our strategies and the fund's
portfolio composition. Although past performance is not predictive of future
results, these insights may help you better understand our investment and
management philosophy.
Thank you for your participation in Franklin California Growth Fund. We welcome
any comment or suggestions you may have, and look forward to serving your
investment needs in the years to come.
Sincerely,
/s/ Conrad B. Herrmann
----------------------
Conrad B. Herrmann
Portfolio Manager
Franklin California Growth Fund
13
-PAGE-
FRANKLIN CALIFORNIA
GROWTH FUND
Class A (formerly Class I):
Subject to the current,maximum 5.75% initial sales
charge.Prior to August 3,1998,fund shares were offered at a lower initial
sales charge; thus actual total returns may differ. Past expense reductions by
the fund's manager increased the fund's total returns. Without this
reduction,the fund's total returns would have been lower.
Class B:
Subject to no initial sales charge, but subject to a contingent deferred sales
charge (CDSC) declining from 4% to 0% over six years. These shares have higher
annual fees and expenses than Class A shares.
Class C (formerly Class II):
Subject to 1% initial sales charge and 1% CDSC
for shares redeemed within 18 months of investment. These shares have higher
annual fees and expenses than Class A shares.
PERFORMANCE SUMMARY AS OF 4/30/99
Distributions will vary based on income earned by the fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
the fund's operating expenses. Past distributions are not indicative of future
trends. All total returns include reinvested distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (5/1/98-4/30/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 4/30/99 4/30/98
----------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.85 $25.82 $24.97
DISTRIBUTIONS
--------------------------
Dividend Income $0.1462
Long-Term Capital Gain $0.2388
Short-Term Capital Gain $0.2869
TOTAL $0.6719
</TABLE>
<TABLE>
<CAPTION>
CLASS B CHANGE 4/30/99 1/1/99
-----------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$1.44 $25.75 $24.31
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 4/30/99 4/30/98
-----------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.82 $25.63 $24.81
DISTRIBUTIONS
--------------------------
Long-Term Capital Gain $0.2388
Short-Term Capital Gain $0.2869
TOTAL $0.5257
</TABLE>
Franklin California Growth Fund paid distributions derived from long-term
capital gains of 23.88 cents ($0.2388) per share in December 1998. The fund
hereby designates such distributions as capital gain dividends per Internal
Revenue Code Section 852 (b)(3).
Past performance is not predictive of future results.
14
-PAGE-
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 3-YEAR 5-YEAR (10/30/91)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +6.39% +56.43% +197.84% +290.23%
Average Annual Total Return(2) +0.29% +13.82% +22.92% +18.96%
Value of $10,000 Investment(3) $10,029 $14,747 $28,061 $36,775
</TABLE>
<TABLE>
<CAPTION>
4/30/95 4/30/96 4/30/97 4/30/98 4/30/99
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) +29.09% +47.42% +8.94% +34.98% +6.39%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B (1/1/99)
---------------------------------------------------------------------------
<S> <C>
Cumulative Total Return(1) +5.88%
Aggregate Total Return(2) +1.88%
Value of $10,000 Investment(3) $10,188
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR (9/3/96)
----------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +5.67% +54.64%
Average Annual Total Return(2) +3.63% +17.41%
Value of $10,000 Investment(3) $10,363 $15,312
</TABLE>
<TABLE>
<CAPTION>
4/30/98 4/30/99
------------------------------------------------------------------------
<S> <C> <C>
One-Year Total Return(4) +34.02% +5.67%
</TABLE>
(1). Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
(2). Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current,
applicable, maximum sales charge(s) for that class. Since Class B shares have
existed for less than one year, aggregate total return for that class represents
total return since inception, including the maximum sales charge.
(3). These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
(4). One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or
loss when you sell your shares.
Past performance is not predictive of future results.
15
-PAGE-
FRANKLIN CALIFORNIA
GROWTH FUND
AVERAGE ANNUAL TOTAL RETURN
4/30/99
<TABLE>
<CAPTION>
CLASS A
----------------------------------
<S> <C>
1-Year +0.29%
3-Year +13.82%
5-Year +22.92%
Since Inception -10/30/91) +18.96%
</TABLE>
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged indices differ from the fund in composition, do not pay management
fees or expenses and include reinvested dividends. One cannot invest directly in
an index. Total return represents the change in value of an investment over the
periods shown. It includes the current, applicable, maximum sales charge-s),
fund expenses, account fees, and reinvested distributions.
TOTAL RETURN INDEX COMPARISON
Franklin California Growth Fund - Class A
$10,000 Investment -10/30/91 - 4/30/99)
The following line graph compares the performance of Franklin California Growth
Fund, Class A with the Franklin CA 250 Growth Index* and the S&P 500-R)
Composite Index** since the inception of the fund.
* Source: CDA/Wiesenberger
** Source: Standard and Poor's Micropal.
<TABLE>
<CAPTION>
FRANKLIN
CALIFORNIA
GROWTH FUND - S&P 500 STOCK FRANKLIN CA 250
DATE CLASS A INDEX GROWTH INDEX S&P 500% Cal 250%
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/30/91 $ 9,424 $10,000 $10,000
10/31/91 $ 9,509 $10,004 $10,015 0.04% 0.15%
11/30/91 $ 8,744 $ 9,601 $ 9,199 -4.03% -8.15%
12/31/91 $ 9,714 $10,699 $10,301 11.44% 11.98%
1/31/92 $10,409 $10,500 $11,101 -1.86% 7.77%
2/28/92 $10,542 $10,636 $11,271 1.29% 1.53%
3/31/92 $ 9,829 $10,428 $10,527 -1.95% -6.60%
4/30/92 $ 9,319 $10,735 $10,093 2.94% -4.12%
5/31/92 $ 9,419 $10,787 $10,155 0.49% 0.61%
6/30/92 $ 8,835 $10,627 $ 9,578 -1.49% -5.68%
7/31/92 $ 9,093 $11,061 $ 9,898 4.09% 3.34%
8/31/92 $ 8,691 $10,835 $ 9,465 -2.05% -4.38%
9/30/92 $ 8,797 $10,961 $ 9,554 1.17% 0.94%
10/31/92 $ 9,218 $10,999 $10,083 0.34% 5.54%
11/30/92 $10,041 $11,373 $11,016 3.40% 9.26%
12/31/92 $10,249 $11,512 $11,302 1.23% 2.59%
1/31/93 $10,576 $11,609 $11,719 0.84% 3.69%
2/28/93 $10,143 $11,767 $11,237 1.36% -4.11%
3/31/93 $10,258 $12,015 $11,348 2.11% 0.99%
4/30/93 $ 9,835 $11,725 $10,922 -2.42% -3.76%
5/31/93 $10,547 $12,038 $11,744 2.67% 7.53%
6/30/93 $10,524 $12,072 $11,710 0.29% -0.29%
7/31/93 $10,282 $12,024 $11,742 -0.40% 0.27%
8/31/93 $10,970 $12,480 $12,318 3.79% 4.91%
9/30/93 $11,425 $12,384 $12,605 -0.77% 2.33%
10/31/93 $11,580 $12,640 $12,788 2.07% 1.45%
11/30/93 $11,551 $12,520 $12,628 -0.95% -1.25%
12/31/93 $12,050 $12,672 $13,010 1.21% 3.02%
1/31/94 $12,583 $13,102 $13,452 3.40% 3.40%
2/28/94 $12,747 $12,747 $13,340 -2.71% -0.83%
3/31/94 $12,460 $12,192 $12,574 -4.36% -5.74%
4/30/94 $12,347 $12,348 $12,523 1.28% -0.41%
5/31/94 $12,419 $12,550 $12,475 1.64% -0.38%
6/30/94 $12,057 $12,243 $11,921 -2.45% -4.44%
7/31/94 $12,490 $12,644 $12,316 3.28% 3.31%
8/31/94 $13,314 $13,163 $13,477 4.10% 9.43%
9/30/94 $13,412 $12,841 $13,421 -2.44% -0.42%
10/31/94 $13,867 $13,130 $13,688 2.25% 1.99%
11/30/94 $13,911 $12,652 $13,287 -3.64% -2.93%
12/31/94 $14,042 $12,840 $13,473 1.48% 1.40%
1/31/95 $14,030 $13,172 $13,800 2.59% 2.43%
2/28/95 $15,007 $13,686 $14,497 3.90% 5.05%
3/31/95 $15,575 $14,090 $15,109 2.95% 4.22%
4/30/95 $15,939 $14,504 $15,598 2.94% 3.24%
5/31/95 $16,575 $15,084 $16,062 4.00% 2.97%
6/30/95 $17,690 $15,434 $17,226 2.32% 7.25%
7/31/95 $19,197 $15,946 $18,671 3.32% 8.39%
8/31/95 $19,632 $15,986 $19,064 0.25% 2.10%
9/30/95 $20,115 $16,661 $19,452 4.22% 2.04%
10/31/95 $20,150 $16,601 $19,019 -0.36% -2.23%
11/30/95 $20,786 $17,330 $19,778 4.39% 3.99%
12/31/95 $20,730 $17,664 $19,538 1.93% -1.21%
1/31/96 $20,974 $18,265 $19,712 3.40% 0.89%
2/29/96 $21,682 $18,435 $20,434 0.93% 3.66%
3/31/96 $21,862 $18,612 $20,135 0.96% -1.46%
4/30/96 $23,509 $18,885 $22,161 1.47% 10.06%
5/31/96 $24,037 $19,372 $22,848 2.58% 3.10%
6/30/96 $23,315 $19,446 $21,296 0.38% -6.79%
7/31/96 $21,933 $18,587 $19,563 -4.42% -8.14%
8/31/96 $23,302 $18,979 $21,128 2.11% 8.00%
9/30/96 $24,799 $20,047 $22,763 5.63% 7.74%
10/31/96 $25,109 $20,600 $22,745 2.76% -0.08%
11/30/96 $26,929 $22,158 $24,278 7.56% 6.74%
12/31/96 $27,039 $21,719 $24,569 -1.98% 1.20%
1/31/97 $27,475 $23,077 $25,891 6.25% 5.38%
2/28/97 $26,708 $23,257 $24,780 0.78% -4.29%
3/31/97 $25,160 $22,301 $23,494 -4.11% -5.19%
4/30/97 $25,597 $23,632 $23,574 5.97% 0.34%
5/31/97 $28,058 $25,071 $26,215 6.09% 11.20%
6/30/97 $28,115 $26,195 $27,145 4.48% 3.55%
7/31/97 $30,558 $28,280 $29,974 7.96% 10.42%
8/31/97 $30,372 $26,696 $30,666 -5.60% 2.31%
9/30/97 $32,522 $28,159 $32,604 5.48% 6.32%
10/31/97 $31,461 $27,218 $30,475 -3.34% -6.53%
11/30/97 $31,792 $28,479 $30,177 4.63% -0.98%
12/31/97 $31,285 $28,968 $28,813 1.72% -4.52%
1/31/98 $30,829 $29,290 $30,769 1.11% 6.79%
2/28/98 $33,264 $31,402 $33,467 7.21% 8.77%
3/31/98 $33,956 $33,010 $34,036 5.12% 1.70%
4/30/98 $34,565 $33,343 $35,071 1.01% 3.04%
5/31/98 $32,738 $32,769 $32,707 -1.72% -6.74%
6/30/98 $33,507 $34,100 $33,535 4.06% 2.53%
7/31/98 $31,913 $33,735 $32,136 -1.07% -4.17%
8/31/98 $26,631 $28,857 $25,648 -14.46% -20.19%
9/30/98 $28,392 $30,707 $28,359 6.41% 10.57%
10/30/98 $29,972 $33,203 $30,616 8.13% 7.96%
11/30/98 $32,162 $35,215 $33,467 6.06% 9.31%
12/31/98 $34,638 $37,244 $36,884 5.76% 10.21%
1/31/99 $36,861 $38,800 $39,742 4.18% 7.75%
2/28/99 $33,954 $37,594 $36,483 -3.11% -8.20%
3/31/99 $35,963 $39,097 $37,851 4.00% 3.75%
4/30/99 $36,775 $40,611 $39,498 3.87% 4.35%
</TABLE>
TOTAL RETURN INDEX COMPARISON
Franklin California Growth Fund - Class A
$10,000 Investment -1/1/95 - 4/30/99)-***)
The following line graph compares the performance of Franklin California
Growth Fund, Class A with the Franklin CA 250 Growth Index*, the S&P 500-R)
Composite Index,** and the Bloomberg California Index**** since the beginning of
the Bloomberg California Index on 12/30/94.
*Source: CDA/Wiesenberger
**Source: Standard and Poor's Micropal.
****Source: Bloomberg. Reinvested dividends are reflected in the Bloomberg
California Index from October 1995 onward. Prior to that the index
represents simple price appreciation excluding dividends.
<TABLE>
<CAPTION>
FRANKLIN
CALIFORNIA
GROWTH FUND - S&P 500 STOCK FRANKLIN CA 250 BLOOMBERG CA S&P 500%
DATE CLASS A INDEX GROWTH INDEX INDEX
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1/1/95 $ 9,428 $10,000 $10,000 $10,000
1/31/95 $ 9,420 $10,259 $10,243 $10,016 2.59%
2/28/95 $10,076 $10,659 $10,760 $10,524 3.90%
3/31/95 $10,458 $10,974 $11,214 $10,861 2.95%
4/30/95 $10,702 $11,296 $11,577 $11,069 2.94%
5/31/95 $11,129 $11,748 $11,921 $11,337 4.00%
6/30/95 $11,878 $12,021 $12,786 $12,157 2.32%
7/31/95 $12,889 $12,420 $13,858 $13,188 3.32%
8/31/95 $13,182 $12,451 $14,149 $13,446 0.25%
9/30/95 $13,506 $12,976 $14,437 $13,876 4.22%
10/31/95 $13,529 $12,929 $14,115 $13,582 -0.36%
11/30/95 $13,956 $13,497 $14,679 $14,066 4.39%
12/31/95 $13,919 $13,757 $14,501 $13,883 1.93%
1/31/96 $14,083 $14,225 $14,630 $13,960 3.40%
2/29/96 $14,558 $14,358 $15,166 $14,576 0.93%
3/31/96 $14,679 $14,495 $14,944 $14,477 0.96%
4/30/96 $15,785 $14,708 $16,448 $15,522 1.47%
5/31/96 $16,139 $15,088 $16,957 $16,179 2.58%
6/30/96 $15,654 $15,145 $15,806 $15,025 0.38%
7/31/96 $14,727 $14,476 $14,520 $13,560 -4.42%
8/31/96 $15,646 $14,781 $15,681 $14,409 2.11%
9/30/96 $16,651 $15,613 $16,896 $15,359 5.63%
10/31/96 $16,859 $16,044 $16,882 $15,155 2.76%
11/30/96 $18,081 $17,257 $18,021 $15,867 7.56%
12/31/96 $18,155 $16,916 $18,238 $15,989 -1.98%
1/31/97 $18,448 $17,973 $19,219 $16,721 6.25%
2/28/97 $17,933 $18,113 $18,393 $16,146 0.78%
3/31/97 $16,894 $17,369 $17,438 $15,226 -4.11%
4/30/97 $17,187 $18,406 $17,497 $15,000 5.97%
5/31/97 $18,839 $19,526 $19,457 $16,847 6.09%
6/30/97 $18,878 $20,401 $20,148 $17,645 4.48%
7/31/97 $20,518 $22,025 $22,248 $19,047 7.96%
8/31/97 $20,393 $20,792 $22,761 $19,405 -5.60%
9/30/97 $21,908 $21,931 $24,201 $20,969 5.48%
10/31/97 $21,124 $21,199 $22,621 $19,748 -3.34%
11/30/97 $21,346 $22,180 $22,400 $19,466 4.63%
12/31/97 $21,006 $22,562 $21,388 $19,075 1.72%
1/31/98 $20,699 $22,812 $22,840 $18,905 1.11%
2/28/98 $22,335 $24,457 $24,843 $20,438 7.21%
3/31/98 $22,799 $25,709 $25,264 $20,963 5.12%
4/30/98 $23,208 $25,969 $26,033 $21,666 1.01%
5/31/98 $21,982 $25,522 $24,279 $20,567 -1.72%
6/30/98 $22,498 $26,558 $24,893 $20,765 4.06%
7/31/98 $21,427 $26,274 $23,856 $19,442 -1.07%
8/31/98 $17,881 $22,475 $19,039 $15,602 -14.46%
9/30/98 $19,063 $23,915 $21,052 $17,025 6.41%
10/30/98 $20,124 $25,860 $22,729 $17,912 8.13%
11/30/98 $21,595 $27,427 $24,845 $19,694 6.06%
12/31/98 $23,257 $29,007 $27,381 $21,150 5.76%
1/31/99 $24,749 $30,219 $29,504 $22,304 4.18%
2/28/99 $22,798 $29,279 $27,085 $20,830 -3.11%
3/31/99 $24,147 $30,451 $28,101 $21,436 4.00%
4/30/99 $24,692 $31,629 $29,324 $22,725 3.87%
</TABLE>
Past performance is not predictive of future results.
16
-PAGE-
TOTAL RETURN INDEX COMPARISON
Franklin California Growth Fund - Class C
$10,000 Investment (9/3/96 - 4/30/99)
The following line graph compares the performance of Franklin California Growth
Fund, Class C with the Franklin CA 250 Growth Index*, the S&P 500(R) Composite
Index,** and the Bloomberg California Index.****
*Source: CDA/Wiesenberger
**Source: Standard and Poor's Micropal.
****Source: Bloomberg. Reinvested dividends are reflected in the Bloomberg
California Index from October 1995 onward. Prior to that the index represents
simple price appreciation excluding dividends.
<TABLE>
<CAPTION>
Date Franklin California S&P 500 Stock Franklin CA Bloomberg CA S&P 500%
Growth Fund - Index 250 Growth Index
Class C Index
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
9/3/96 $9,901 $10,000 $10,000 $10,000
9/30/96 $10,520 $10,563 $10,774 $10,659 5.63%
10/31/96 $10,641 $10,855 $10,766 $10,517 2.76%
11/30/96 $11,407 $11,675 $11,492 $11,012 7.56%
12/31/96 $11,446 $11,444 $11,631 $11,096 -1.98%
1/31/97 $11,619 $12,159 $12,256 $11,605 6.25%
2/28/97 $11,289 $12,254 $11,729 $11,205 0.78%
3/31/97 $10,627 $11,750 $11,120 $10,567 -4.11%
4/30/97 $10,806 $12,452 $11,158 $10,410 5.97%
5/31/97 $11,833 $13,210 $12,408 $11,692 6.09%
6/30/97 $11,854 $13,802 $12,849 $12,246 4.48%
7/31/97 $12,876 $14,901 $14,188 $13,218 7.96%
8/31/97 $12,787 $14,066 $14,515 $13,467 -5.60%
9/30/97 $13,730 $14,837 $15,433 $14,552 5.48%
10/31/97 $13,230 $14,342 $14,426 $13,705 -3.34%
11/30/97 $13,359 $15,006 $14,285 $13,509 4.63%
12/31/97 $13,140 $15,264 $13,639 $13,238 1.72%
1/31/98 $12,947 $15,433 $14,565 $13,120 1.11%
2/28/98 $13,963 $16,546 $15,843 $14,184 7.21%
3/31/98 $14,237 $17,393 $16,111 $14,548 5.12%
4/30/98 $14,488 $17,569 $16,602 $15,036 1.01%
5/31/98 $13,718 $17,266 $15,483 $14,274 -1.72%
6/30/98 $14,027 $17,967 $15,875 $14,411 4.06%
7/31/98 $13,350 $17,775 $15,213 $13,493 -1.07%
8/31/98 $11,138 $15,205 $12,141 $10,828 -14.46%
9/30/98 $11,867 $16,180 $13,425 $11,815 6.41%
10/30/98 $12,521 $17,495 $14,494 $12,431 8.13%
11/30/98 $13,420 $18,555 $15,844 $13,668 6.06%
12/31/98 $14,450 $19,624 $17,461 $14,678 5.76%
1/31/99 $15,370 $20,444 $18,815 $15,479 4.18%
2/28/99 $14,152 $19,808 $17,273 $14,456 -3.11%
3/31/99 $14,976 $20,601 $17,920 $14,877 4.00%
4/30/99 $15,312 $21,398 $18,700 $15,771 3.87%
</TABLE>
(*) Source: CDA/Wiesenberger.
(**) Source: Standard and Poor's Micropal.
(***) The Bloomberg California Index was not established until December 30,
1994, and therefore, the fund's Class A returns have been shown for the period
since then, in addition to the period since the fund's inception.
(****)Source: Bloomberg. Reinvested dividends are reflected in the Bloomberg
California Index from October 1995 onward. Prior to that the index represents
simple price appreciation excluding dividends.
AVERAGE ANNUAL TOTAL RETURN
4/30/99
<TABLE>
<CAPTION>
CLASS C
--------------------------------
<S> <C>
1-Year +3.63%
Since Inception (9/3/96) +17.41%
</TABLE>
Past performance is not predictive of future results.
17
-PAGE-
FRANKLIN MIDCAP GROWTH FUND
Your Fund's Goal: Franklin MidCap Growth Fund seeks long-term capital
growth by investing primarily in equity securities of
medium-capitalization companies - those with a market capitalization
between $200 million and $5 billion.
During the 12-month period ended April 30, 1999, the U.S. equity market
experienced significant volatility. During the summer, concerns about
Russia's economic meltdown, a potential slowdown of the U.S. economy,
and the possibility of currency crises in Latin America contributed to
market declines. The Federal Reserve's three interest rate reductions
in the fall sparked a market rally, as investors gained confidence in
the U.S. economy's ability to avoid a recession, but small and midcap
stocks underperformed relative to larger, more liquid stocks.
Within this environment, Franklin MidCap Growth Fund Class A delivered
a 12-month cumulative total return of -6.36%, as shown in the
performance summary on page 22. The fund's benchmark S&P MidCap
400(R) Index provided a one-year 6.43% cumulative total return,
significantly underperforming the S&P 500(R), as investors' desire
for liquidity continued to
You will find a complete listing of the fund's portfolio holdings,
including dollar value 18 and number of shares or principal amount, beginning on
page 45 of this report.
18
-PAGE-
draw them to the large-cap sector.(1) However, the latter part of the reporting
period saw the fund's performance improve substantially, and it delivered a
+19.04% cumulative total return for the six months ended April 30, 1999.(2)
The fund underperformed its benchmark largely because investors bid up the price
of many technology and Internet-related stocks to unprecedented levels. As an
example, America Online, which was not owned by the fund as it is significantly
larger than the fund's upper-end market cap range, saw its stock price increase
nearly seven-fold in 1998, and on December 31, 1998, it represented
approximately 7.6% of the S&P MidCap 400 Index. This stock alone accounted for
over one-third of the S&P MidCap 400 Index's 1998 total return.(3)
The fund was also hindered by its exposure to several out-of-favor industry
segments. These included energy stocks, whose value fell after oil prices
dropped in mid-1998; healthcare stocks, which were negatively affected by
concerns over managed care pricing; and technology service stocks, which
experienced declines largely due to concerns of less widespread spending on
information technology as companies were focused on Y2K issues.
During the second half of the reporting period, we substantially rebalanced the
portfolio to reflect more closely the sector weightings of our benchmark. One of
the most affected sectors
PORTFOLIO BREAKDOWN
Franklin MidCap Growth Fund
Based on Total Net Assets
4/30/99
<TABLE>
<S> <C>
Finance 16.3%
Consumer Services 11.1%
Electronic Technology 9.7%
Retail Trade 6.2%
Consumer Non-Durables 4.9%
Technology Services 4.7%
Utilities 4.7%
Process Industries 4.4%
Industrial Services 3.7%
Real Estate 3.3%
Other 22.7%
Cash & Equivalents 8.3%
</TABLE>
(1). The S&P MidCap 400 is a market value weighted index consisting of 400
domestic stocks chosen for market size, liquidity, and industry group
representation. The S&P 500 is a market value weighted index consisting of 500
domestic stocks, mainly those of large capitalization companies. For the period
ended April 30, 1999, the S&P 500 provided a cumulative total return of 21.82%.
Indices include reinvested dividends. One cannot invest directly in an index,
nor is the index representative of the fund's portfolio.
(2). For the same period, the S&P MidCap 400 Index earned a 19.71% six-month
cumulative total return.
(3). Source: Standard & Poor's Micropal.
19
-PAGE-
TOP 10 HOLDINGS
Franklin MidCap Growth Fund
4/30/99
<TABLE>
<CAPTION>
Company, % of Total
Industry Net Assets
------------------------------------------
<S> <C>
Expeditors International
of Washington Inc.
Transportation 2.9%
Estee Lauder Cos.,A
Consumer Non-Durables 2.4%
Altera Corp.
Electronic Technology 2.3%
Tiffany & Co.
Retail Trade 2.2%
Countrywide Credit
Industries Inc.
Finance 2.1%
Ecolab Inc.
Consumer Services 2.0%
Chancellor Media Corp.
Consumer Services 1.9%
Providian Financial Corp.
Finance 1.9%
Tellabs Inc.
Electronic Technology 1.9%
Gentex Corp.
Producer Manufacturing 1.8%
</TABLE>
was finance, rising from 9.1% of total net assets at the beginning of the period
to 16.3% on April 30, 1999. We also began the process of concentrating the
portfolio into fewer, more selective names, and positive results began to show,
with the fund's performance improving significantly in early 1999. Gains in the
technology and telecommunications segments contributed to the improved
performance, while strong performers in other sectors included Providian
Financial Corp., a specialty finance company; Tiffany & Co., a jewelry retailer;
and Expeditors International of Washington Inc., a freight forwarding and
logistics company.
Looking forward, we are optimistic about long-term prospects for the fund and
the midcap group as a whole. We intend to focus on leaders with earnings
visibility within growing segments, and believe our rebalancing of the fund to
more closely align with the benchmark will prove successful.
Of course, there are special risks associated with investing in a fund seeking
long-term capital growth from small-to-medium size companies, which have less
certain growth prospects than large-cap companies, as well as greater
sensitivity to changing economic conditions. These and other risks are further
discussed in the fund's prospectus.
This discussion reflects our views, opinions and portfolio holdings as of April
30, 1999, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historical performance
is no guarantee of future results, these insights may help give you a better
understanding of our investment and management philosophy.
20
-PAGE-
We thank you for your participation in Franklin MidCap Growth Fund and look
forward to serving you in the future. Please feel free to contact us with your
questions or comments.
Sincerely,
/s/ Catherine Roberts Bowman
----------------------------
Catherine Bowman
Portfolio Manager
Franklin MidCap Growth Fund
CATHERINE BOWMAN
Catherine Bowman is a vice president and portfolio manager for Franklin
Advisers, Inc. She manages Franklin MidCap Growth Fund and specializes in
research analysis of the consumer products, consumer service and education
industries.
Ms. Bowman joined Franklin in 1990 as a securities analyst. Prior
to that, Ms. Bowman was a financial analyst at Prudential Bache
Capital Funding.
Ms. Bowman received a bachelor of arts degree from Princeton
University and an MBA from the J.L. Kellogg Graduate School of
Management at Northwestern University.
21
-PAGE-
FRANKLIN MIDCAP
GROWTH FUND
CLASS A (formerly Class I): Subject to the current,maximum 5.75% initial sales
charge. Prior to August 3,1998,fund shares were offered at a lower initial sales
charge; thus actual total returns may differ. Effective June 1, 1996, the fund
implemented a Rule 12b-1 plan, which affects subsequent performance.
(1). Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
(2). Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current,
applicable, maximum sales charge.
(3). These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the current, applicable, maximum
sales charge.
(4). One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
(5). On January 2, 1996, the fund changed its investment objective, strategy,
and investment adviser.
On June 1, 1996, the fund became available to retail investors. Prior to that
date, it was only offered to institutional investors (without a sales charge or
12b-1 fees).
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
PERFORMANCE SUMMARY AS OF 4/30/99
Distributions will vary based on income earned by the fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
the fund's operating expenses. Past distributions are not indicative of future
trends. All total returns include reinvested distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (5/1/98-4/30/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 4/30/99 4/30/98
-----------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE -$1.29 $16.15 $17.44
DISTRIBUTIONS
-------------------------------------
LONG-TERM CAPITAL GAIN $0.1472
SHORT-TERM CAPITAL GAIN $0.0097
TOTAL $0.1569
</TABLE>
Franklin MidCap Growth Fund paid distributions derived from long-term capital
gains of 14.72 cents ($0.1472) per share in December, 1998. The fund hereby
designates such distributions as capital gain dividends per Internal Revenue
Code Section 852 (b)(3).
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 3-YEAR 5-YEAR (8/17/93)(5)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) -6.36% +34.93% +101.08% +104.35%
Average Annual Total Return(2) -11.72% +8.34% +13.65% +12.18%
Value of $10,000 Investment(3) $8,828 $12,716 $18,957 $19,260
</TABLE>
<TABLE>
<CAPTION>
4/30/95 4/30/96 4/30/97 4/30/98 4/30/99
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) +10.06% +35.40% +6.47% +35.33% -6.36%
</TABLE>
Past performance is not predictive of future results.
22
-PAGE-
TOTAL RETURN INDEX COMPARISON FOR
HYPOTHETICAL $10,000 INVESTMENT
The unmanaged index differs from the fund in composition, does not pay
management fees or expenses and includes reinvested dividends. One cannot invest
directly in an index. Total return represents the change in value of an
investment over the periods shown. It includes the current, applicable, maximum
sales charge, fund expenses, account fees, and reinvested distributions.
FRANKLIN MIDCAP
GROWTH FUND
AVERAGE ANNUAL TOTAL RETURN
4/30/99
<TABLE>
<CAPTION>
Class A
---------------------------------
<S> <C>
1-Year -11.72%
5-Year +13.65%
Since Inception (8/17/93) +12.18%
</TABLE>
TOTAL RETURN INDEX COMPARISON
Franklin MidCap Growth Fund - Class A
$10,000 Investment (8/17/93 - 4/30/99)
[LINE GRAPH]
The following chart shows in graph format the cumulative total return of a
$10,000 investment in the Fund - Class A, August 17, 1993 (inception) as of
April 30, 1999.
<TABLE>
<CAPTION>
DATE FRANKLIN MIDCAP S&P MIDCAP S&P MidCap
GROWTH FUND- CLASS A 400 INDEX %
-----------------------------------------------------------------------------
<S> <C> <C> <C>
8/17/93 $9,425 $10,000
8/31/93 $9,425 $10,187 1.87%
9/30/93 $9,783 $10,295 1.06%
10/31/93 $9,698 $10,329 0.33%
11/30/93 $9,416 $10,101 -2.21%
12/31/93 $9,883 $10,569 4.64%
1/31/94 $10,102 $10,816 2.33%
2/28/94 $9,893 $10,662 -1.42%
3/31/94 $9,454 $10,168 -4.63%
4/30/94 $9,578 $10,244 0.74%
5/31/94 $9,445 $10,146 -0.95%
6/30/94 $9,110 $9,797 -3.44%
7/31/94 $9,381 $10,129 3.39%
8/31/94 $9,943 $10,660 5.24%
9/30/94 $9,691 $10,461 -1.87%
10/31/94 $9,846 $10,575 1.09%
11/30/94 $9,459 $10,098 -4.51%
12/31/94 $9,596 $10,191 0.92%
1/31/95 $9,655 $10,298 1.05%
2/28/95 $10,123 $10,837 5.24%
3/31/95 $10,327 $11,026 1.74%
4/30/95 $10,542 $11,248 2.01%
5/31/95 $10,815 $11,519 2.41%
6/30/95 $11,393 $11,988 4.07%
7/31/95 $12,072 $12,613 5.22%
8/31/95 $12,338 $12,847 1.85%
9/30/95 $12,623 $13,158 2.42%
10/31/95 $12,486 $12,819 -2.57%
11/30/95 $12,879 $13,380 4.37%
12/31/95 $12,770 $13,346 -0.25%
1/31/96 $12,981 $13,540 1.45%
2/29/96 $13,192 $14,000 3.40%
3/31/96 $13,302 $14,168 1.20%
4/30/96 $14,274 $14,600 3.05%
5/31/96 $14,565 $14,797 1.35%
6/30/96 $14,113 $14,575 -1.50%
7/31/96 $13,087 $13,590 -6.76%
8/31/96 $14,113 $14,374 5.77%
9/30/96 $15,058 $15,001 4.36%
10/31/96 $14,857 $15,044 0.29%
11/30/96 $16,034 $15,891 5.63%
12/31/96 $15,767 $15,909 0.11%
1/31/97 $16,404 $16,505 3.75%
2/28/97 $15,733 $16,370 -0.82%
3/31/97 $14,868 $15,673 -4.26%
4/30/97 $15,198 $16,079 2.59%
5/31/97 $16,574 $17,484 8.74%
6/30/97 $16,961 $17,975 2.81%
7/31/97 $18,190 $19,755 9.90%
8/31/97 $18,212 $19,731 -0.12%
9/30/97 $19,748 $20,866 5.75%
10/31/97 $18,838 $19,958 -4.35%
11/30/97 $18,599 $20,253 1.48%
12/31/97 $18,122 $21,039 3.88%
1/31/98 $17,591 $20,639 -1.90%
2/28/98 $19,253 $22,348 8.28%
3/31/98 $19,899 $23,356 4.51%
4/30/98 $20,130 $23,784 1.83%
5/31/98 $19,276 $22,713 -4.50%
6/30/98 $19,715 $22,856 0.63%
7/31/98 $18,618 $21,970 -3.88%
8/31/98 $14,832 $17,881 -18.61%
9/30/98 $15,144 $19,551 9.34%
10/31/98 $15,836 $21,299 8.94%
11/30/98 $16,540 $22,362 4.99%
12/31/98 $17,789 $25,063 12.08%
1/31/99 $17,917 $24,088 -3.89%
2/28/99 $17,100 $22,826 -5.24%
3/31/99 $17,894 $23,463 2.79%
4/30/99 $19,260 $25,314 7.89%
</TABLE>
(*)Source: Standard and Poor's(R) Micropal.
Past performance is not predictive of future results.
23
-PAGE-
FRANKLIN SMALL CAP GROWTH FUND
PORTFOLIO BREAKDOWN
Franklin Small Cap Growth Fund
Based on Total Net Assets
4/30/99
<TABLE>
<S> <C>
Electronic Technology 21.1%
Technology Services 16.9%
Finance 12.0%
Consumer Services 5.2%
Telecommunications 5.2%
Industrial Services 5.0%
Energy Minerals 4.0%
Transportation 3.7%
Producer Manufacturing 3.3%
Health Services 2.5%
Other 11.6%
Cash & Equivalents 9.5%
</TABLE>
Your Fund's Goal: Franklin Small Cap Growth Fund seeks long-term capital growth
by investing in equity securities of small-capitalization companies -- those
with a market capitalization of less than $1.5 billion at the time of
investment.
During the 12 months under review, Internet stocks experienced remarkable growth
as corporations scrambled to develop Internet capabilities. These corporations
were spurred into action by the success of early entrants like bookseller
Amazon.com and retail on-line broker E*Trade. As firms that help large
companies establish themselves on the Internet experienced tremendous revenue
growth, many investors staked their claims, hoping to own the next big winner in
this relatively new industry. But, apart from the Internet-related phenomenon,
most small-cap stocks actually declined in value, reflecting many investors'
concerns that the economic slowdown overseas would negatively impact the U.S.
economy. However, this didn't occur, and, by the end of the reporting period,
many economically sensitive stocks, including small caps, began to recover,
although they remained below prior-year levels. Within this environment,
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 51 of
this report.
24
-PAGE-
Franklin Small Cap Growth Fund - Class A provided a -3.44% one-year cumulative
total return for the period ended April 30, 1999, as shown in the Performance
Summary on page 29. The Russell 2500 Index, the fund's benchmark, returned
-5.86% for the same period. We have always maintained a long-term perspective
when managing the fund and encourage shareholders to do the same with their
investments. As you can also see in the Performance Summary, since inception on
February 14, 1992, Franklin Small Cap Growth Fund - Class A has returned
+237.59%.
The Internet phenomenon provides vivid examples of the types of corporate
characteristics we look for -- companies with strong management, well-positioned
to benefit from rapid sector growth, and with a competitive advantage such as a
unique marketing niche or proprietary intellectual property. While we were
excited about Internet-related stocks, we were concerned about their valuations
and believed that many stocks in the sector reflected unrealistically high
expectations for future prospects. With that in mind, we remained invested
mostly in franchises involved with corporate clients we thought could and would
pay large sums to stay competitive in a rapidly changing business landscape. For
example, we own shares of the consulting firm Sapient Corp., which specializes
in helping corporations establish their electronic commerce capabilities. We
also have a position in Exodus, a web site management company for large
corporations that outsource this function rather than attempt to develop it
internally.
25
-PAGE-
Top 10 Holdings
Franklin Small Cap Growth Fund
4/30/99
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
INDUSTRY NET ASSETS
------------------------------------
<S> <C>
Uniphase Corp.,
Electronic Technology 2.01%
Gemstar International,
Electronic Technology 1.80%
PMC Sierra Inc.,
Electronic Technology 1.69%
Expeditors International,
Transportation 1.50%
Western Wireless Corp.,
Telecommunications 1.48%
i2 Technologies,
Technology Services 1.29%
Verio Inc.,
Technology Services 1.28%
Synopsys Inc.,
Electronic Technology 1.28%
E*Trade Group,
Finance 1.27%
Waters Corp.,
Electronic Technology 1.26%
</TABLE>
Although the fund's return for the year under review was less than we would have
liked to see, we believe the potential for small capitalization companies is
just beginning to be tapped. With our location near Silicon Valley and our team
of experienced technology analysts, we believe we are uniquely positioned to
take advantage of investment opportunities in this sector. However, stocks of
these companies often exhibit the higher volatility generally associated with
technology and small-cap investing, and, despite our relative overweighting in
technology, we intend to remain broadly diversified to take advantage of
potential growth in other sectors. These include apparel, advertising,
broadcasting, hotels, education, energy and energy services, banks and insurance
companies, health care, and transportation. In our opinion, this broad
diversification may help reduce volatility in the fund's holdings relative to a
more sector-concentrated portfolio.
Of course, there are special risks involved with investing in a fund seeking
long-term growth from small or relatively new or unseasoned companies, and from
foreign securities. These risks, which include relatively small revenues,
limited product lines and small market share, as well as the currency
fluctuations and political uncertainty associated with foreign investing are
further discussed in the fund's prospectus.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1999, the end of the reporting period. However, market
and economic conditions are changing constantly, which can be expected to affect
our strategies and
26
-PAGE-
the fund's portfolio composition. Although historical performance is no
guarantee of future results, these insights may help you understand our
investment and management philosophy.
We thank you for participation in Franklin Small Cap Growth Fund and look
forward to serving you in the future. Please feel free to contact us with your
questions or comments.
Sincerely,
/s/ Edward B. Jamieson
----------------------
Edward B. Jamieson
Portfolio Manager
Franklin Small Cap Growth Fund
27
-PAGE-
FRANKLIN SMALL CAP
GROWTH FUND
CLASS A (formerly Class I):
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective May 1, 1994,the fund implemented a Rule
12b-1 plan, which affects subsequent performance. Past expense reductions by the
fund's manager increased the fund's total return to shareholders. Without this
waiver, the fund's total returns would have been lower.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% contingent deferred sales charge for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class A shares.
ADVISOR CLASS:
No initial sales charge or Rule 12b-1 fees and are available to a limited class
of investors. Past expense reductions by the fund's manager increased the fund's
total return to shareholders. Without this waiver, the fund's total returns
would have been lower.
PERFORMANCE SUMMARY AS OF 4/30/99
Distributions will vary based on income earned by the fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
the fund's operating expenses. Past distributions are not indicative of future
trends. All total returns include reinvested distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (5/1/98-4/30/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 4/30/99 4/30/98
--------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$1.28 $24.65 $25.93
DISTRIBUTIONS
-------------------------------------
Dividend Income $0.1445
Long-Term Capital Gain $0.1605
Short-Term Capital Gain $0.0214
TOTAL $0.3264
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 4/30/99 4/30/98
--------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$1.27 $24.32 $25.59
DISTRIBUTIONS
-------------------------------------
Long-Term Capital Gain $0.1605
Short-Term Capital Gain $0.0214
TOTAL $0.1819
ADVISOR CLASS CHANGE 4/30/99 4/30/98
--------------------------------------------------------------------------
Net Asset Value -$1.28 $24.73 $26.01
DISTRIBUTIONS
-------------------------------------
Dividend Income $0.1950
Long-Term Capital Gain $0.1605
Short-Term Capital Gain $0.0214
TOTAL $0.3769
</TABLE>
Franklin Small Cap Growth Fund paid distributions derived from long-term capital
gains of 16.05 cents ($0.1605) per share in December 1998. The fund hereby
designates such distributions as capital gain dividends per Internal Revenue
Code Section 852(b)(3).
Past performance is not predictive of future results.
28
-PAGE-
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR (2/14/92)
-------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) -3.44% +153.24% +237.59%
Average Annual Total Return(2) -8.99% +19.00% +17.42%
Value of $10,000 Investment(3) $9,101 $23,864 $31,818
</TABLE>
<TABLE>
<CAPTION>
4/30/95 4/30/96 4/30/97 4/30/98 4/30/99
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) +27.05% +44.06% +0.14% +43.16% -3.44%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (10/2/95)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) -4.08% +35.32% +59.16%
Average Annual Total Return(2) -5.99% +10.24% +13.55%
Value of $10,000 Investment(3) $9,401 $13,396 $15,756
</TABLE>
<TABLE>
<CAPTION>
4/30/97 4/30/98 4/30/99
---------------------------------------------------------------------------
<S> <C> <C> <C>
One-Year Total Return(4) -0.65% +42.06% -4.08%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS(5) 1-YEAR 5-YEAR (2/14/92)
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) -3.12% +155.16% +240.15%
Average Annual Total Return(2) -3.12% +20.60% +18.51%
Value of $10,000 Investment(3) $9,688 $25,516 $34,015
</TABLE>
<TABLE>
<CAPTION>
4/30/95 4/30/96 4/30/97 4/30/98 4/30/99
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) +27.05 +44.06% +0.20% +43.68% -3.12%
</TABLE>
(1.) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
(2.) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current,
applicable, maximum sales charge(s) for that class.
(3.) These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
(4.) One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
(5.) On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
Class A performance, excluding the effect of the Class A sales charge, but
including the effect of Rule 12b-1 fees and other Class A expenses; and (b) for
periods after January 1, 1997, figures reflect actual Advisor Class performance,
including the deduction of all fees and expenses applicable only to that class.
Since January 2, 1997 (commencement of sales), the cumulative and average annual
total returns of Advisor Class shares were +28.88% and +11.54%, respectively.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results.
29
-PAGE-
FRANKLIN SMALL CAP
GROWTH FUND
AVERAGE ANNUAL TOTAL RETURN
4/30/99
<TABLE>
<CAPTION>
CLASS A
--------------------------------
<S> <C>
1-Year -8.99%
5-Year +19.00%
Since Inception (2/14/92) +17.42%
</TABLE>
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged indices differ from the fund in composition, do not pay management
fees or expenses and include reinvested dividends. One cannot invest directly in
an index. Total return represents the change in value of an investment over the
periods shown. It includes the current, applicable, maximum sales charges, fund
expenses, account fees, and reinvested distributions.
TOTAL RETURN INDEX COMPARISON
Franklin Small Cap Growth Fund - Class A
$10,000 Investment (2/14/92 - 4/30/99)
The following line graph compares the performance of Franklin Small Cap Growth
Fund's Class A shares to the Standard & Poor's 500 Composite Index and the
Russell 2500 Index, based on a $10,000 investment from 2/14/92 to 4/30/99.
<TABLE>
<CAPTION>
Date Franklin Small Cap S&P 500 Russell
--- Growth Fund - Index 2500 Index
------------------ ------- ----------
Class A
-------
<S> <C> <C> <C>
02/14/1992 $9,425 $10,000 $10,000
02/29/1992 $9,566 $10,067 $10,137
03/31/1992 $9,293 $9,871 $9,813
04/30/1992 $9,029 $10,161 $9,617
05/31/1992 $8,992 $10,211 $9,705
06/30/1992 $8,772 $10,059 $9,367
07/31/1992 $8,923 $10,470 $9,717
08/31/1992 $8,791 $10,255 $9,462
09/30/1992 $8,810 $10,375 $9,623
10/31/1992 $9,255 $10,411 $9,911
11/30/1992 $10,014 $10,765 $10,564
12/31/1992 $10,472 $10,897 $10,933
01/31/1993 $10,757 $10,988 $11,196
02/28/1993 $9,806 $11,138 $11,039
03/31/1993 $10,272 $11,373 $11,452
04/30/1993 $9,721 $11,098 $11,125
05/31/1993 $10,634 $11,394 $11,572
06/30/1993 $10,591 $11,427 $11,692
07/31/1993 $10,591 $11,381 $11,767
08/31/1993 $11,487 $11,813 $12,288
09/30/1993 $11,916 $11,722 $12,519
10/31/1993 $12,136 $11,964 $12,669
11/30/1993 $12,193 $11,851 $12,263
12/31/1993 $12,752 $11,994 $12,742
01/31/1994 $13,254 $12,402 $13,145
02/28/1994 $13,392 $12,066 $13,097
03/31/1994 $12,732 $11,540 $12,461
04/30/1994 $12,565 $11,687 $12,533
05/31/1994 $12,338 $11,879 $12,404
06/30/1994 $11,908 $11,588 $12,020
07/31/1994 $12,353 $11,968 $12,345
08/31/1994 $13,316 $12,459 $13,012
09/30/1994 $13,482 $12,155 $12,880
10/31/1994 $14,124 $12,428 $12,901
11/30/1994 $13,803 $11,976 $12,341
12/31/1994 $13,928 $12,153 $12,608
01/31/1995 $13,671 $12,468 $12,583
02/28/1995 $14,913 $12,954 $13,215
03/31/1995 $15,674 $13,336 $13,539
04/30/1995 $15,963 $13,728 $13,780
05/31/1995 $16,328 $14,278 $14,071
06/30/1995 $17,650 $14,609 $14,746
07/31/1995 $19,135 $15,094 $15,616
08/31/1995 $19,597 $15,132 $15,866
09/30/1995 $19,740 $15,770 $16,163
10/31/1995 $18,970 $15,713 $15,657
11/30/1995 $19,586 $16,403 $16,326
12/31/1995 $19,806 $16,720 $16,605
01/31/1996 $19,631 $17,288 $16,723
02/29/1996 $20,714 $17,449 $17,226
03/31/1996 $21,215 $17,617 $17,577
04/30/1996 $22,996 $17,875 $18,390
05/31/1996 $24,079 $18,337 $18,888
06/30/1996 $22,961 $18,406 $18,308
07/31/1996 $20,900 $17,593 $16,968
08/31/1996 $22,880 $17,964 $17,944
09/30/1996 $24,126 $18,975 $18,720
10/31/1996 $23,683 $19,499 $18,597
11/30/1996 $24,789 $20,973 $19,495
12/31/1996 $25,167 $20,558 $19,762
01/31/1997 $25,677 $21,843 $20,308
02/28/1997 $24,596 $22,013 $20,005
03/31/1997 $22,871 $21,108 $19,099
04/30/1997 $23,017 $22,369 $19,341
05/31/1997 $26,260 $23,731 $21,123
06/30/1997 $27,147 $24,794 $21,987
07/31/1997 $28,786 $26,768 $23,275
08/31/1997 $29,017 $25,269 $23,599
09/30/1997 $31,714 $26,653 $25,142
10/31/1997 $30,232 $25,763 $24,013
11/30/1997 $29,491 $26,956 $24,121
12/31/1997 $29,139 $27,420 $24,577
01/31/1998 $28,923 $27,724 $24,201
02/28/1998 $31,223 $29,723 $25,958
03/31/1998 $32,393 $31,245 $27,098
04/30/1998 $32,952 $31,560 $27,201
05/31/1998 $30,753 $31,017 $25,938
06/30/1998 $30,906 $32,277 $25,970
07/31/1998 $27,919 $31,931 $24,185
08/31/1998 $21,654 $27,314 $19,624
09/30/1998 $23,624 $29,065 $21,017
10/31/1998 $25,111 $31,428 $22,167
11/30/1998 $27,068 $33,332 $23,264
12/31/1998 $29,133 $35,252 $24,674
01/31/1999 $30,747 $36,726 $24,632
02/28/1999 $28,023 $35,584 $23,014
03/31/1999 $29,662 $37,007 $23,506
04/30/1999 $31,818 $38,439 $25,610
</TABLE>
Past performance is not predictive of future results.
30
-PAGE-
TOTAL RETURN INDEX COMPARISON
Franklin Small Cap Growth Fund - Class C
$10,000 Investment (10/2/95 - 4/30/99)
<TABLE>
<CAPTION>
Date Franklin Small Cap S&P 500 Russell
--- Growth Fund - Index 2500 Index
-------------------- ------- ----------
Class C
-------
<S> <C> <C> <C>
10/02/1995 $9,899 $10,000 $10,000
10/31/1995 $9,636 $9,964 $9,687
11/30/1995 $9,938 $10,401 $10,101
12/31/1995 $10,050 $10,602 $10,273
01/31/1996 $9,961 $10,963 $10,346
02/29/1996 $10,500 $11,065 $10,658
03/31/1996 $10,749 $11,171 $10,875
04/30/1996 $11,643 $11,335 $11,378
05/31/1996 $12,188 $11,627 $11,686
06/30/1996 $11,614 $11,672 $11,327
07/31/1996 $10,565 $11,156 $10,498
08/31/1996 $11,554 $11,391 $11,102
09/30/1996 $12,182 $12,032 $11,582
10/31/1996 $11,945 $12,365 $11,506
11/30/1996 $12,490 $13,299 $12,062
12/31/1996 $12,670 $13,036 $12,227
01/31/1997 $12,923 $13,851 $12,564
02/28/1997 $12,369 $13,959 $12,377
03/31/1997 $11,494 $13,385 $11,816
04/30/1997 $11,562 $14,184 $11,967
05/31/1997 $13,182 $15,048 $13,069
06/30/1997 $13,613 $15,722 $13,603
07/31/1997 $14,432 $16,974 $14,400
08/31/1997 $14,537 $16,023 $14,600
09/30/1997 $15,880 $16,901 $15,555
10/31/1997 $15,128 $16,337 $14,857
11/30/1997 $14,752 $17,093 $14,924
12/31/1997 $14,558 $17,387 $15,206
01/31/1998 $14,449 $17,580 $14,973
02/28/1998 $15,585 $18,848 $16,060
03/31/1998 $16,163 $19,813 $16,765
04/30/1998 $16,426 $20,013 $16,829
05/31/1998 $15,322 $19,668 $16,048
06/30/1998 $15,386 $20,467 $16,067
07/31/1998 $13,890 $20,248 $14,964
08/31/1998 $10,769 $17,320 $12,141
09/30/1998 $11,745 $18,430 $13,003
10/31/1998 $12,477 $19,929 $13,715
11/30/1998 $13,434 $21,136 $14,394
12/31/1998 $14,460 $22,354 $15,266
01/31/1999 $15,244 $23,288 $15,240
02/28/1999 $13,890 $22,564 $14,239
03/31/1999 $14,700 $23,467 $14,543
04/30/1999 $15,756 $24,375 $15,845
</TABLE>
TOTAL RETURN INDEX COMPARISON
Franklin Small Cap Growth Fund - Advisor Class(***)
$10,000 Investment (2/14/92 - 4/30/99)
The following line graph compares the performance of Franklin Small Cap Growth
Fund to that of the Standard & Poor's 500 Composite Index and the Russell 2500
Index, based on a $10,000 investment from 2/14/92 to 4/30/99.
<TABLE>
<CAPTION>
Date Franklin Small Cap S&P 500 Russell
--- Growth Fund - Advisor Index 2500 Index
-------------------- ------- ----------
Class
-------
<S> <C> <C> <C>
02/14/1992 $10,000 $10,000 $10,000
02/29/1992 $10,150 $10,067 $10,137
03/31/1992 $9,860 $9,871 $9,813
04/30/1992 $9,580 $10,161 $9,617
05/31/1992 $9,540 $10,211 $9,705
06/30/1992 $9,307 $10,059 $9,367
07/31/1992 $9,468 $10,470 $9,717
08/31/1992 $9,327 $10,255 $9,462
09/30/1992 $9,347 $10,375 $9,623
10/31/1992 $9,820 $10,411 $9,911
11/30/1992 $10,625 $10,765 $10,564
12/31/1992 $11,111 $10,897 $10,933
01/31/1993 $11,414 $10,988 $11,196
02/28/1993 $10,404 $11,138 $11,039
03/31/1993 $10,899 $11,373 $11,452
04/30/1993 $10,314 $11,098 $11,125
05/31/1993 $11,282 $11,394 $11,572
06/30/1993 $11,237 $11,427 $11,692
07/31/1993 $11,237 $11,381 $11,767
08/31/1993 $12,188 $11,813 $12,288
09/30/1993 $12,643 $11,722 $12,519
10/31/1993 $12,876 $11,964 $12,669
11/30/1993 $12,937 $11,851 $12,263
12/31/1993 $13,530 $11,994 $12,742
01/31/1994 $14,063 $12,402 $13,145
02/28/1994 $14,209 $12,066 $13,097
03/31/1994 $13,509 $11,540 $12,461
04/30/1994 $13,331 $11,687 $12,533
05/31/1994 $13,090 $11,879 $12,404
06/30/1994 $12,635 $11,588 $12,020
07/31/1994 $13,107 $11,968 $12,345
08/31/1994 $14,129 $12,459 $13,012
09/30/1994 $14,305 $12,155 $12,880
10/31/1994 $14,986 $12,428 $12,901
11/30/1994 $14,645 $11,976 $12,341
12/31/1994 $14,777 $12,153 $12,608
01/31/1995 $14,505 $12,468 $12,583
02/28/1995 $15,823 $12,954 $13,215
03/31/1995 $16,630 $13,336 $13,539
04/30/1995 $16,937 $13,728 $13,780
05/31/1995 $17,324 $14,278 $14,071
06/30/1995 $18,726 $14,609 $14,746
07/31/1995 $20,302 $15,094 $15,616
08/31/1995 $20,793 $15,132 $15,866
09/30/1995 $20,944 $15,770 $16,163
10/31/1995 $20,127 $15,713 $15,657
11/30/1995 $20,781 $16,403 $16,326
12/31/1995 $21,014 $16,720 $16,605
01/31/1996 $20,829 $17,288 $16,723
02/29/1996 $21,978 $17,449 $17,226
03/31/1996 $22,509 $17,617 $17,577
04/30/1996 $24,399 $17,875 $18,390
05/31/1996 $25,548 $18,337 $18,888
06/30/1996 $24,362 $18,406 $18,308
07/31/1996 $22,175 $17,593 $16,968
08/31/1996 $24,275 $17,964 $17,944
09/30/1996 $25,597 $18,975 $18,720
10/31/1996 $25,128 $19,499 $18,597
11/30/1996 $26,301 $20,973 $19,495
12/31/1996 $26,702 $20,558 $19,762
01/31/1997 $27,243 $21,843 $20,308
02/28/1997 $26,109 $22,013 $20,005
03/31/1997 $24,279 $21,108 $19,099
04/30/1997 $24,447 $22,369 $19,341
05/31/1997 $27,900 $23,731 $21,123
06/30/1997 $28,841 $24,794 $21,987
07/31/1997 $30,594 $26,768 $23,275
08/31/1997 $30,839 $25,269 $23,599
09/30/1997 $33,713 $26,653 $25,142
10/31/1997 $32,140 $25,763 $24,013
11/30/1997 $31,367 $26,956 $24,121
12/31/1997 $30,992 $27,420 $24,577
01/31/1998 $30,790 $27,724 $24,201
02/28/1998 $33,234 $29,723 $25,958
03/31/1998 $34,476 $31,245 $27,098
04/30/1998 $35,111 $31,560 $27,201
05/31/1998 $32,775 $31,017 $25,938
06/30/1998 $32,950 $32,277 $25,970
07/31/1998 $29,777 $31,931 $24,185
08/31/1998 $23,092 $27,314 $19,624
09/30/1998 $25,199 $29,065 $21,017
10/31/1998 $26,806 $31,428 $22,167
11/30/1998 $28,885 $33,332 $23,264
12/31/1998 $31,100 $35,252 $24,674
01/31/1999 $32,833 $36,726 $24,632
02/28/1999 $29,932 $35,584 $23,014
03/31/1999 $31,719 $37,007 $23,506
04/30/1999 $34,015 $38,439 $25,610
</TABLE>
(*)Source: Standard and Poor's(R) Micropal.
(**)Source: Standard and Poor's Micropal (Russell 2500).
(***)On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
Class A performance, excluding the effect of the Class A sales charge, but
including the effect of Rule 12b-1 fees and other Class A expenses; and (b) for
periods after January 1, 1997, figures reflect actual Advisor Class performance,
including the deduction of all fees and expenses applicable to Advisor Class
shares.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
4/30/99
CLASS C
---------------------------------------
<S> <C>
1-Year -5.99%
3-Year +10.24%
Since Inception (10/2/95) +13.55%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
4/30/99
ADVISOR CLASS(***)
-------------------------------------
<S> <C>
1-Year -3.12%
5-Year +20.60%
Since Inception (2/14/92) +18.51%
</TABLE>
Past performance is not predictive of future results.
31
-PAGE-
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN BLUE CHIP FUND
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------
1999 1998 1997(1)
------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year . . . . . . . . $12.46 $10.85 $10.00
------------------------------
Income from investment operations:
Net investment income . . . . . . . . . . . . . . .04 .09 .09
Net realized and unrealized gains . . . . . . . . 1.97 1.67 .82
------------------------------
Total from investment operations . . . . . . . . . 2.01 1.76 .91
------------------------------
Less distributions from:
Net investment income . . . . . . . . . . . . . . (.06) (.06) (.06)
Net realized gains . . . . . . . . . . . . . . . . -- (.09) --
------------------------------
Total distributions . . . . . . . . . . . . . . . . (.06) (.15) (.06)
------------------------------
Net asset value,end of year . . . . . . . . . . . . $14.41 $12.46 $10.85
==============================
Total return(*) . . . . . . . . . . . . . . . . . . 16.18% 16.41% 9.14%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) . . . . . . . . . . $54,880 $16,836 $5,600
Ratios to average net assets:
Expenses . . . . . . . . . . . . . . . . . . . . . 1.25% 1.25% 1.25%(2)
Expenses excluding waiver and payments by affiliate 1.51% 1.95% 2.22%(2)
Net investment income . . . . . . . . . . . . . . . .55% 1.04% 1.07%(2)
Portfolio turnover rate . . . . . . . . . . . . . . 35.74% 57.67% 11.14%
</TABLE>
(*)Total return does not reflect sales commissions or the contingent deferred
sales charge,and is not annualized for periods less than one year.
(1)For the period June 3,1996 (effective date) to April 30,1997.
(2)Annualized
32
See notes to financial statements.
-PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999
<TABLE>
<CAPTION>
FRANKLIN BLUE CHIP FUND COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 91.5%
CONSUMER DURABLES 1.3%
Sony Corp. . . . . . . . . . . . . . . . . . . . Japan 7,700 $ 719,264
-----------
CONSUMER NON-DURABLES 12.0%
Bestfoods . . . . . . . . . . . . . . . . . . . United States 17,100 858,206
Coca-Cola Co. . . . . . . . . . . . . . . . . . United States 14,300 972,400
Gillette Co. . . . . . . . . . . . . . . . . . . United States 15,700 819,344
L'OREAL . . . . . . . . . . . . . . . . . . . . France 665 426,345
Nestle SA . . . . . . . . . . . . . . . . . . . Switzerland 450 834,384
Nike Inc., B . . . . . . . . . . . . . . . . . United States 6,600 410,438
PepsiCo Inc. . . . . . . . . . . . . . . . . . . United States 16,500 609,469
Philip Morris Cos. Inc. . . . . . . . . . . . . United States 18,600 652,163
Procter & Gamble Co. . . . . . . . . . . . . . United States 5,900 553,494
Wm. Wrigley Jr. Co. . . . . . . . . . . . . . . United States 4,900 434,569
----------
6,570,812
----------
CONSUMER SERVICES 2.2%
Ecolab Inc. . . . . . . . . . . . . . . . . . . United States 6,000 251,625
McDonald's Corp. . . . . . . . . . . . . . . . . United States 10,500 444,938
The Walt Disney Co. . . . . . . . . . . . . . . United States 15,300 485,775
----------
1,182,338
----------
ELECTRONIC TECHNOLOGY 10.2%
(a)Applied Materials Inc. . . . . . . . . . . . . United States 10,400 557,700
(a)Cisco Systems Inc. . . . . . . . . . . . . . . United States 7,875 898,242
(a)Dell Computer Corp. . . . . . . . . . . . . . United States 7,000 288,313
Hewlett-Packard Co. . . . . . . . . . . . . . . United States 9,500 749,313
Intel Corp. . . . . . . . . . . . . . . . . . . United States 20,100 1,229,861
Lucent Technologies Inc. . . . . . . . . . . . United States 9,844 591,871
Molex Inc. . . . . . . . . . . . . . . . . . . United States 28,000 903,000
Motorola Inc. . . . . . . . . . . . . . . . . . United States 4,900 392,613
----------
5,610,913
----------
ENERGY MINERALS 5.0%
BP Amoco PLC,ADR . . . . . . . . . . . . . . . . United Kingdom 5,813 657,959
Exxon Corp. . . . . . . . . . . . . . . . . . . United States 11,000 913,688
Royal Dutch Petroleum Co., N.Y.shs. . . . . . . Netherlands 20,000 1,173,750
----------
2,745,397
----------
FINANCE 14.0%
AFLAC Inc. . . . . . . . . . . . . . . . . . . . United States 13,700 743,225
American International Group Inc. . . . . . . . United States 7,812 917,422
Capital One Financial Corp. . . . . . . . . . . United States 3,200 555,800
Charles Schwab Corp. . . . . . . . . . . . . . . United States 6,000 658,500
Chase Manhattan Corp. . . . . . . . . . . . . United States 7,900 653,725
Citigroup Inc. . . . . . . . . . . . . . . . . United States 10,150 763,788
Countrywide Credit Industries Inc. . . . . . . United States 21,000 951,563
Fannie Mae . . . . . . . . . . . . . . . . . . United States 12,900 915,094
</TABLE>
33
-PAGE-
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1999 (cont.)
<TABLE>
<CAPTION>
FRANKLIN BLUE CHIP FUND COUNTRY SHARES VALUE
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FINANCE (CONT.)
Marsh & McLennan Cos. Inc. ...................... United States 12,000 $ 918,750
Merrill Lynch & Co. Inc. ........................ United States 7,100 595,956
-----------
7,673,823
-----------
HEALTH TECHNOLOGY 11.4%
Abbott Laboratories ............................ United States 14,100 682,969
Bristol-Myers Squibb Co. ........................ United States 11,100 705,544
Eli Lilly & Co. ................................. United States 9,100 669,988
Johnson & Johnson ............................... United States 6,100 594,750
Medtronic Inc. .................................. United States 10,100 726,569
Merck & Co. Inc. ................................ United States 7,800 547,950
Novartis AG ..................................... Switzerland 370 542,667
Pfizer Inc. ..................................... United States 4,900 563,806
Roche Holding AG ................................ Switzerland 40 471,330
Schering-Plough Corp. ........................... United States 15,500 748,844
-----------
6,254,417
-----------
INDUSTRIAL SERVICES 2.9%
(a)AES Corp. ..................................... United States 13,800 690,000
Schlumberger Ltd. ............................... United States 14,100 900,638
-----------
1,590,638
-----------
NON-ENERGY MINERALS 1.0%
De Beers Consolidated Mines AG, ADR ............. South Africa 22,600 553,700
-----------
PROCESS INDUSTRIES 4.6%
Avery Dennison Corp. ............................ United States 13,900 948,675
Monsanto Co. .................................... United States 9,000 407,250
Praxair Inc. .................................... United States 10,400 538,200
Sigma-Aldrich Corp. ............................. United States 20,100 653,250
-----------
2,547,375
-----------
PRODUCER MANUFACTURING 5.7%
General Electric Co. ............................ United States 15,100 1,593,050
Minnesota Mining & Manufacturing Co. ............ United States 10,000 890,000
Tyco International Ltd. ......................... United States 3,000 243,750
Xerox Corp. ..................................... United States 7,200 423,000
-----------
3,149,800
-----------
RETAIL TRADE 4.5%
(a)Safeway Inc. .................................. United States 17,000 916,938
Wal-Mart Stores Inc. ............................ United States 23,800 1,094,800
(a)Williams-Sonoma Inc. .......................... United States 15,000 435,000
-----------
2,446,738
-----------
TECHNOLOGY SERVICES 7.7%
(a)America Online Inc. ........................... United States 2,500 356,875
Automatic Data Processing Inc. .................. United States 12,500 556,250
(a)EMC Corp. ..................................... United States 3,700 403,069
</TABLE>
34
-PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN BLUE CHIP FUND COUNTRY SHARES VALUE
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
TECHNOLOGY SERVICES (CONT.)
First Data Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 10,400 $ 441,350
(a)Microsoft Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 19,700 1,601,856
(a)Oracle Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 18,750 507,422
SAP AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany 1,200 385,307
-----------
4,252,129
-----------
TELECOMMUNICATIONS 7.6%
(a)AirTouch Communications Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . United States 5,000 466,875
AT&T Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 16,700 843,350
BellSouth Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 11,000 492,250
GTE Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 10,000 669,375
(a)MCI WorldCom Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 9,000 739,688
SBC Communications Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 12,000 672,000
Telefonica SA, ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain 1,960 273,236
-----------
4,156,774
-----------
UTILITIES 1.4%
Enron Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 6,000 451,500
Williams Cos. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 7,000 330,750
-----------
782,250
-----------
TOTAL LONG TERM INVESTMENTS ($43,957,346) . . . . . . . . . . . . . . . . . . . . 50,236,368
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
------
<S> <C> <C> <C>
(c)REPURCHASE AGREEMENT 12.2%
Joint Repurchase Agreement, 4.862%,5/03/99, (Maturity Value $6,720,802)
(COST $6,718,080) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States $6,718,080 6,718,080
Barclays Capital Inc.(Maturity Value $694,057)
Bear, Stearns & Co. Inc. (Maturity Value $378,584)
Chase Securities Inc. (Maturity Value $694,057)
CIBC Oppenheimer Corp. (Maturity Value $694,057)
Deutsche Bank Securities Inc. (Maturity Value $95,705)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $694,057)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $694,057)
Lehman Brothers Inc. (Maturity Value $694,057)
Paine Webber Inc. (Maturity Value $694,057)
Paribas Corp. (Maturity Value $694,057)
UBS Securities LLC (Maturity Value $694,057)
Collateralized by U.S.Treasury Bills & Notes
-----------
TOTAL INVESTMENTS (Cost $50,675,426) 103.7% . . . . . . . . . . . . . . . . . . . 56,954,448
OTHER ASSETS, LESS LIABILITIES (3.7%) . . . . . . . . . . . . . . . . . . . . . . (2,073,983)
-----------
NET ASSETS 100.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $54,880,465
===========
</TABLE>
(a)Non-income producing.
(c)See Note 1(c) regarding joint repurchase agreement.
See notes to financial statements.
35
-PAGE-
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN CALIFORNIA GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------
YEAR ENDED APRIL 30,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $24.97 $19.35 $18.26 $14.03 $12.05
---------------------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .10 .14 .13 .20 .16
Net realized and unrealized gains ................. 1.42 6.48 1.51 6.03 3.04
---------------------------------------------------------------------------
Total from investment operations ................... 1.52 6.62 1.64 6.23 3.20
---------------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (.14) (.14) (.12) (.23) (.12)
Net realized gains ................................ (.53) (.86) (.43) (1.77) (1.10)
---------------------------------------------------------------------------
Total distributions ................................ (.67) (1.00) (.55) (2.00) (1.22)
---------------------------------------------------------------------------
Net asset value, end of year ....................... $25.82 $24.97 $19.35 $18.26 $14.03
===========================================================================
Total return(*) .................................... 6.39% 34.98% 8.94% 47.42% 29.09%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $780,598 $721,254 $282,898 $81,175 $13,844
Ratios to average net assets:
Expenses .......................................... 1.00% .99% 1.08% .71% .25%
Expenses excluding waiver and payments by affiliate 1.00% .99% 1.08% 1.09% 1.27%
Net investment income ............................. .41% .67% .84% 1.42% 1.63%
Portfolio turnover rate ............................ 52.76% 48.52% 44.81% 61.82% 79.52%
</TABLE>
(*)Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
36
-PAGE-
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN CALIFORNIA GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
CLASS B
YEAR ENDED
APRIL 30,1999(3)
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........................... $24.31
----------------
Income from investment operations:
Net investment loss ........................................... (.01)
Net realized and unrealized gains ............................. 1.45
----------------
Total from investment operations ............................... 1.44
Net asset value, end of period ................................. $25.75
================
Total return(*) ................................................ 5.88%
RATIOS/SUPPLEMENTAL DATA
Net assets,end of period (000's) ............................... $2,657
Ratios to average net assets:
Expenses ...................................................... 1.75%(2)
Net investment loss ........................................... (.33%)(2)
Portfolio turnover rate ........................................ 52.76%
</TABLE>
(*) Total return does not reflect contingent deferred sales charge,and is not
annualized for periods less than one year.
(2) Annualized
(3) For the period January 1,1999 (effective date) to April 30,1999.
37
-PAGE-
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN CALIFORNIA GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
--------------------------------------
YEAR ENDED APRIL 30,
--------------------------------------
1999 1998 1997(4)
--------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................. $24.81 $19.27 $18.05
--------------------------------------
Income from investment operations:
Net investment income (loss) .................................. (.07) -- .05
Net realized and unrealized gains ............................. 1.42 6.43 1.65
--------------------------------------
Total from investment operations ............................... 1.35 6.43 1.70
--------------------------------------
Less distributions from:
Net investment income ......................................... -- (.03) (.05)
Net realized gains ............................................ (.53) (.86) (.43)
--------------------------------------
Total distributions ............................................ (.53) (.89) (.48)
--------------------------------------
Net asset value, end of year ................................... $25.63 $24.81 $19.27
======================================
Total return(*) ................................................ 5.67% 34.02% 9.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................ $159,310 $122,701 $24,556
Ratios to average net assets:
Expenses ...................................................... 1.75% 1.74% 1.86%(2)
Net investment income (loss) .................................. (.33%) (.10%) .05%(2)
Portfolio turnover rate ........................................ 52.76% 48.52% 44.81%
</TABLE>
(*) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(2) Annualized
(4) For the period September 3,1996 (effective date) to April 30, 1997.
See notes to financial statements.
38
-PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA GROWTH FUND SHARES VALUE
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 91.2%
(a)COMMERCIAL SERVICES 1.7%
NetGravity Inc. ......................................................... 30,000 $ 1,213,125
Probusiness Services Inc. ............................................... 130,000 4,663,750
(d)RemedyTemp Inc.,A ..................................................... 400,000 4,675,000
Robert Half International Inc. .......................................... 225,000 5,371,875
-----------
15,923,750
-----------
CONSUMER DURABLES 1.9%
(a)Electronic Arts Inc. .................................................. 150,000 7,621,875
K2 Inc. ................................................................. 148,400 1,511,825
Mattel Inc. ............................................................. 325,000 8,409,375
-----------
17,543,075
-----------
CONSUMER NON-DURABLES 2.5%
Clorox Co. .............................................................. 150,000 17,306,250
(a)Del Monte Foods Co. ................................................... 501,500 6,707,563
-----------
24,013,813
-----------
CONSUMER SERVICES 3.4%
(a)Foodmaker Inc. ........................................................ 200,000 4,825,000
(a)Fox Entertainment Group Inc.,A ........................................ 100,000 2,562,500
The McClatchy Co.,A ..................................................... 175,000 6,278,125
The Walt Disney Co. ..................................................... 150,000 4,762,500
United Television Inc. .................................................. 60,000 6,030,000
(a)Univision Communications Inc.,A ....................................... 135,000 7,813,125
-----------
32,271,250
-----------
ELECTRONIC TECHNOLOGY 26.6%
(a)Altera Corp. .......................................................... 100,000 7,225,000
(a)Applied Materials Inc. ................................................ 175,000 9,384,375
(a)Applied Micro Circuits Corp. .......................................... 175,000 9,329,688
(a)Catapult Communications Corp. ......................................... 175,000 2,723,438
(a)Cisco Systems Inc. .................................................... 300,000 34,218,750
(a)Coherent Inc. ......................................................... 175,000 2,603,125
(a)Cypress Semiconductor Corp. ........................................... 550,000 5,637,500
(a)Flextronics International Ltd. ........................................ 100,000 4,668,744
Hewlett-Packard Co. ..................................................... 225,000 17,746,875
Intel Corp. ............................................................. 250,000 15,296,875
(a)Javelin Systems Inc. .................................................. 300,000 3,525,000
(a)KLA-Tencor Corp. ...................................................... 150,000 7,443,750
(a)Lam Research Corp. .................................................... 200,000 6,300,000
Linear Technology Corp. ................................................. 250,000 14,218,750
(a)Maxim Integrated Products Inc. ........................................ 175,000 9,800,000
(a)Proxim Inc. ........................................................... 108,900 4,192,650
(a)Sanmina Corp. ......................................................... 100,000 6,637,500
(a)Seagate Technology Inc. ............................................... 200,000 5,575,000
(a)Solectron Corp. ....................................................... 250,000 12,125,000
(a)Spectra-Physics Lasers Inc. ........................................... 200,000 1,825,000
(a)Sun Microsystems Inc. ................................................. 450,000 26,915,625
</TABLE>
39
-PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA GROWTH FUND SHARES VALUE
-------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
ELECTRONIC TECHNOLOGY (CONT.)
(a)Synopsys Inc. ............................................ 200,000 $ 9,425,000
(a)Tekelec .................................................. 305,000 2,754,547
(a)Uniphase Corp. ........................................... 150,000 18,206,250
(a)Xilinx Inc. .............................................. 300,000 13,687,500
------------
251,465,942
------------
ENERGY MINERALS 2.9%
Atlantic Richfield Co. ..................................... 90,000 7,554,375
Chevron Corp. .............................................. 90,000 8,977,500
(a)Nuevo Energy Co. ......................................... 200,000 3,175,000
Unocal Corp. ............................................... 175,000 7,273,438
------------
26,980,313
------------
FINANCE 11.2%
Charles Schwab Corp. ....................................... 225,000 24,693,750
Countrywide Credit Industries Inc. ......................... 250,000 11,328,125
(a)E*TRADE Group Inc. ....................................... 100,000 11,550,000
(a)Freedom Securities Corp. ................................. 90,000 1,636,875
(a)Golden State Bancorp Inc. ................................ 400,000 9,825,000
Mercury General Corp. ...................................... 100,000 3,612,500
The PMI Group Inc. ......................................... 50,000 2,790,625
Providian Financial Corp. .................................. 200,000 25,812,500
(a)Silicon Valley Bancshares ................................ 350,000 6,146,875
Washington Mutual Inc. ..................................... 193,750 7,967,969
------------
105,364,219
------------
(a)HEALTH SERVICES .2%
Total Renal Care Holdings Inc. ............................. 150,000 2,081,250
------------
HEALTH TECHNOLOGY 7.4%
(a)Affymetrix Inc. .......................................... 100,000 4,087,500
Allergan Inc. .............................................. 100,000 8,987,500
(a)Amgen Inc. ............................................... 70,000 4,300,625
(a)Cerus Corp. .............................................. 60,000 982,500
(a)Chiron Corp. ............................................. 255,500 5,141,938
(a)Dura Pharmaceuticals Inc. ................................ 100,000 1,200,000
(a)Genentech Inc. ........................................... 125,000 10,578,125
(a)Gilead Sciences Inc. ..................................... 75,000 3,454,688
(a)Inhale Therapeutic Systems Inc. .......................... 350,000 10,062,500
Mentor Corp. ............................................... 44,500 645,250
(a)Molecular Devices Corp. .................................. 300,000 7,200,000
(a)Nanogen Inc. ............................................. 190,000 1,496,250
(a)ResMed Inc. .............................................. 100,000 2,643,750
(a)Watson Pharmaceuticals Inc. .............................. 225,000 9,112,500
------------
69,893,126
------------
(a)INDUSTRIAL SERVICES 2.7%
Catalytica Inc. ............................................ 250,000 3,421,875
EMCON ...................................................... 268,700 1,494,644
</TABLE>
40
-PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA GROWTH FUND SHARES VALUE
---------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a)INDUSTRIAL SERVICES (CONT.)
Granite Construction Inc. .......................................... 250,000 $ 7,140,625
Tetra Tech Inc. .................................................... 375,000 9,070,313
Varco International Inc. ........................................... 350,000 3,959,375
-----------
25,086,832
-----------
PROCESS INDUSTRIES .2%
Optical Coating Laboratory Inc. .................................... 30,000 1,848,750
-----------
PRODUCER MANUFACTURING 2.6%
Avery Dennison Corp. ............................................... 250,000 17,062,500
Reliance Steel & Aluminum Co. ...................................... 115,000 4,190,313
(a)Simpson Manufacturing Co. Inc .................................... 75,000 3,468,750
-----------
24,721,563
-----------
REAL ESTATE 5.0%
Alexandria Real Estate Equities Inc. ............................... 150,000 4,228,125
AMB Property Corp. ................................................. 175,000 3,850,000
Arden Realty Inc. .................................................. 450,000 11,250,000
Burnham Pacific Properties Inc. .................................... 450,000 5,175,000
(a)Catellus Development Corp. ....................................... 325,000 4,996,875
Irvine Apartment Communities Inc. .................................. 175,000 5,862,500
Spieker Properties Inc. ............................................ 300,000 11,775,000
-----------
47,137,500
-----------
(a)RETAIL TRADE 4.7%
Cost Plus Inc. ..................................................... 250,000 8,812,500
Costco Cos. Inc. ................................................... 150,000 12,140,625
Safeway Inc. ....................................................... 325,000 17,529,688
Williams-Sonoma Inc. ............................................... 200,000 5,800,000
-----------
44,282,813
-----------
(a)TECHNOLOGY SERVICES 12.7%
At Home Corp. ...................................................... 10,000 1,439,375
BroadVision Inc. ................................................... 100,000 5,806,250
Clarify Inc. ....................................................... 75,000 1,762,500
Computer Sciences Corp. ............................................ 200,000 11,912,500
EarthLink Network Inc. ............................................. 40,000 2,757,500
eBay Inc. .......................................................... 60,000 12,487,500
Excite Inc. ........................................................ 15,000 2,190,000
Exodus Communications Inc. ......................................... 15,000 1,351,875
Geocities .......................................................... 10,000 1,165,000
HNC Software Inc. .................................................. 175,000 3,762,500
i2 Technologies Inc. ............................................... 200,000 6,775,000
Infoseek Corp. ..................................................... 15,000 765,938
International Network Services ..................................... 300,000 11,400,000
Intuit Inc. ........................................................ 125,000 10,765,625
Legato Systems Inc. ................................................ 100,000 4,043,750
(b)Marimba Inc. ..................................................... 3,000 182,250
Micromuse Inc. ..................................................... 200,000 6,887,500
</TABLE>
41
-PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA GROWTH FUND SHARES VALUE
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a)TECHNOLOGY SERVICES (CONT.)
Mpath Interactive Inc. ................................................... 6,800 $ 267,750
Oracle Corp. ............................................................. 225,000 6,089,063
Siebel Systems Inc. ...................................................... 200,000 7,687,500
VeriSign Inc. ............................................................ 15,000 1,725,000
VERITAS Software Corp. ................................................... 175,000 12,425,000
Wind River Systems Inc. .................................................. 300,000 4,500,000
Yahoo! Inc. .............................................................. 10,000 1,746,875
------------
119,896,251
------------
(a)TELECOMMUNICATIONS 3.1%
AirTouch Communications Inc. ............................................. 175,000 16,340,625
Covad Communications Group Inc. .......................................... 50,000 4,800,000
Pacific Gateway Exchange Inc. ............................................ 200,000 8,000,000
------------
29,140,625
------------
TRANSPORTATION 1.0%
Expeditors International of Washington Inc. .............................. 150,000 9,093,750
------------
UTILITIES 1.4%
American States Water Co. ................................................ 168,900 4,296,394
(a)California Water Service Group ......................................... 180,000 4,128,750
Edison International ..................................................... 200,000 4,900,000
------------
13,325,144
------------
TOTAL COMMON STOCKS (COST $628,732,448) .................................. 860,069,966
------------
CONVERTIBLE PREFERRED STOCKS .5%
Glenborough Realty Trust, 7.75%, cvt. pfd., A (COST $6,000,000) .......... 240,000 4,335,000
------------
PRINCIPAL
AMOUNT
------
CONVERTIBLE BONDS .8%
(a)ELECTRONIC TECHNOLOGY .5%
Aspect Telecommunications Corp., cvt. sub. deb., 144A, zero cpn., 8/10/18.. $ 10,500,000 2,073,750
Aspect Telecommunications Corp., cvt. sub. deb., zero cpn., 8/10/18 ....... 14,000,000 2,765,000
------------
4,838,750
------------
TECHNOLOGY SERVICES .3%
Activision Inc., cvt. sub. note, 144A, 6.75%, 1/01/05 ..................... 3,000,000 2,640,000
------------
TOTAL CONVERTIBLE BONDS (COST $7,878,601) ................................. 7,478,750
------------
TOTAL LONG TERM INVESTMENTS (COST $642,611,049) ........................... 871,883,716
------------
</TABLE>
42
-PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA GROWTH FUND AMOUNT VALUE
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(c)REPURCHASE AGREEMENT 7.0%
Joint Repurchase Agreement,4.862%, 5/03/99,(Maturity Value
$66,279,880) (COST $66,253,037) ............................................ $66,253,037 $ 66,253,037
Barclays Capital Inc.(Maturity Value $6,844,705)
Bear, Stearns & Co. Inc.(Maturity Value $3,733,475)
Chase Securities Inc.(Maturity Value $6,844,704)
CIBC Oppenheimer Corp.(Maturity Value $6,844,705)
Deutsche Bank Securities Inc.(Maturity Value $944,065)
Donaldson, Lufkin & Jenrette Securities Corp.(Maturity Value $6,844,704)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $6,844,705)
Lehman Brothers Inc.(Maturity Value $6,844,704)
Paine Webber Inc.(Maturity Value $6,844,705)
Paribas Corp.(Maturity Value $6,844,704)
UBS Securities LLC (Maturity Value $6,844,704)
Collateralized By U.S.Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $708,864,086) 99.5% .................................. 938,136,753
OTHER ASSETS, LESS LIABILITIES .5% ........................................... 4,427,891
------------
NET ASSETS 100.0% ............................................................ $942,564,644
============
</TABLE>
(a) Non-income producing.
(b) Sufficient collateral has been segregated for securities traded on a when-
issued or delayed delivery basis.
(c) See Note 1(c) regarding joint repurchase agreement.
(d) See Note 6 regarding holdings of 5% voting securities.
See notes to financial statements.
43
-PAGE-
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN MIDCAP GROWTH FUND
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......................................... $17.44 $13.34 $14.24 $10.81 $10.05
-------------------------------------------------
Income from investment operations:
Net investment income (loss) ............................................... .04 -- (.02) .18 .21
Net realized and unrealized gains (losses) ................................. (1.17) 4.66 .93 3.59 .77
-------------------------------------------------
Total from investment operations ............................................ (1.13) 4.66 .91 3.77 .98
-------------------------------------------------
Less distributions from:
Net investment income ...................................................... -- -- (.05) (.21) (.20)
Net realized gains ......................................................... (.16) (.56) (1.76) (.13) (.02)
-------------------------------------------------
Total distributions ......................................................... (.16) (.56) (1.81) (.34) (.22)
-------------------------------------------------
Net asset value, end of year ................................................ $16.15 $17.44 $13.34 $14.24 $10.81
=================================================
Total return(*) ............................................................. (6.36%) 35.53% 6.31% 35.40% 10.06%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................................. $33,901 $29,864 $12,853 $7,575 $5,591
Ratios to average net assets:
Expenses ................................................................... 1.24% 1.17% 1.07% .16% --
Expenses excluding waiver and payments by affiliate ........................ 1.24% 1.17% 1.07% .96% .98%
Net investment income (loss) ............................................... .30% (.03%) (.22%) 1.42% 2.12%
Portfolio turnover rate ..................................................... 59.97% 50.16% 76.35% 102.65% 163.54%
</TABLE>
(*)Total return does not reflect sales commissions or the contingent deferred
sales charge,and is not annualized for periods less than one year.
See notes to financial statements.
44
-PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999
<TABLE>
<CAPTION>
FRANKLIN MIDCAP GROWTH FUND SHARES VALUE
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 91.7%
(a)COMMERCIAL SERVICES 3.4%
Convergys Corp. ..................................................................... 12,000 $ 223,500
Robert Half International Inc. ...................................................... 20,000 477,500
U.S.Foodservice ..................................................................... 11,000 462,688
----------
1,163,688
----------
(a)CONSUMER DURABLES 1.0%
Electronic Arts Inc. ................................................................ 6,500 330,281
----------
CONSUMER NON-DURABLES 4.9%
Estee Lauder Cos., A ................................................................ 8,300 831,038
Hershey Foods Corp. ................................................................. 10,000 526,250
(a)Tommy Hilfiger Corp. .............................................................. 4,500 314,438
----------
1,671,726
----------
CONSUMER SERVICES 11.1%
(a)Apollo Group Inc., A .............................................................. 18,000 445,500
(a)Chancellor Media Corp. ............................................................ 11,800 647,525
(a)DeVry Inc. ........................................................................ 21,200 559,150
Ecolab Inc. ......................................................................... 16,000 671,000
(a)Education Management Corp. ........................................................ 15,800 315,013
The McClatchy Co., A ................................................................ 9,800 351,575
MeriStar Hospitality Corp. .......................................................... 17,000 391,000
(a)Starbucks Corp. ................................................................... 10,000 369,375
----------
3,750,138
----------
ELECTRONIC TECHNOLOGY 9.7%
(a)Altera Corp. ...................................................................... 11,000 794,750
Linear Technology Corp. ............................................................. 10,000 568,750
(a)Mettler-Toledo International Inc. ................................................. 21,000 548,625
(a)Seagate Technology Inc. ........................................................... 11,500 320,563
(a)Synopsys Inc. ..................................................................... 9,000 424,125
(a)Tellabs Inc. ...................................................................... 5,800 634,557
----------
3,291,370
----------
(a)ENERGY MINERALS 1.0%
Barrett Resources Corp. ............................................................. 11,500 349,313
----------
FINANCE 16.3%
Countrywide Credit Industries Inc. .................................................. 15,500 702,344
Federated Investors Inc. ............................................................ 32,000 514,000
Financial Security Assurance Holdings Ltd. .......................................... 7,600 434,150
HCC Insurance Holdings Inc. ......................................................... 22,000 464,750
National Commerce Bancorp ........................................................... 19,800 495,000
North Fork Bancorporation Inc. ...................................................... 15,300 344,250
The PMI Group Inc. .................................................................. 7,200 401,850
Protective Life Corp. ............................................................... 14,000 548,625
Providian Financial Corp. ........................................................... 5,000 645,313
</TABLE>
45
-PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN MIDCAP GROWTH FUND SHARES VALUE
------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
FINANCE (CONT.)
Reinsurance Group of America .............................................. 11,250 $ 480,938
Zions Bancorp ............................................................. 7,200 480,150
----------
5,511,370
----------
HEALTH SERVICES 2.8%
(a)Cardinal Health Inc. .................................................... 6,000 358,875
Omnicare Inc. ............................................................. 25,000 601,563
----------
960,438
----------
(a)HEALTH TECHNOLOGY 4.1%
Centocor Inc. ............................................................. 5,800 257,375
Chiron Corp. .............................................................. 11,000 221,375
Genzyme Corp. ............................................................. 5,700 215,175
Quintiles Transnational Corp. ............................................. 10,000 405,625
Watson Pharmaceuticals Inc. ............................................... 7,500 303,750
----------
1,403,300
----------
INDUSTRIAL SERVICES 3.7%
(a)AES Corp. ............................................................... 9,200 460,000
Republic Services Inc., A ................................................. 21,500 442,094
Transocean Offshore Inc. .................................................. 11,800 350,313
----------
1,252,407
----------
PROCESS INDUSTRIES 4.4%
AptarGroup Inc. ........................................................... 11,400 319,200
Bowater Inc. .............................................................. 8,400 450,450
(a)Owens-Illinois Inc. ..................................................... 10,100 292,900
Sigma-Aldrich Corp. ....................................................... 13,300 432,250
----------
1,494,800
----------
(a)PRODUCER MANUFACTURING 3.5%
Gentex Corp. .............................................................. 20,200 607,263
Weatherford International Inc. ............................................ 16,600 562,325
----------
1,169,588
----------
REAL ESTATE 3.3%
Equity Office Properties Trust ............................................ 12,400 341,775
Equity Residential Properties Trust ....................................... 8,000 370,000
Security Capital Group Inc., B ............................................ 27,000 408,375
----------
1,120,150
----------
RETAIL TRADE 6.2%
Family Dollar Stores Inc. ................................................. 24,000 579,000
(a)Office Depot Inc. ....................................................... 19,500 429,000
(a)Safeway Inc. ............................................................ 6,000 323,625
Tiffany & Co. ............................................................. 9,000 756,000
----------
2,087,625
----------
</TABLE>
46
-PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN MIDCAP GROWTH FUND SHARES VALUE
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a)TECHNOLOGY SERVICES 4.7%
Affiliated Computer Services Inc., A ................................................. 8,500 $ 325,125
Computer Sciences Corp. .............................................................. 6,000 357,375
Sapient Corp. ........................................................................ 7,000 439,250
Siebel Systems Inc. .................................................................. 12,000 461,250
-----------
1,583,000
-----------
TELECOMMUNICATIONS 2.6%
Cincinnati Bell Inc. ................................................................. 16,000 362,000
(a)Western Wireless Corp., A .......................................................... 12,500 513,274
-----------
875,274
-----------
TRANSPORTATION 4.3%
C.H. Robinson Worldwide Inc. ......................................................... 15,600 467,025
Expeditors International of Washington Inc. .......................................... 16,500 1,000,313
-----------
1,467,338
-----------
UTILITIES 4.7%
CMS Energy Corp. ..................................................................... 8,500 374,000
Baltimore Gas and Electric Co. ....................................................... 10,700 300,938
El Paso Energy Corp. ................................................................. 9,500 349,125
Montana Power Co. .................................................................... 7,700 574,131
-----------
1,598,194
-----------
TOTAL LONG TERM INVESTMENTS (COST $25,018,148) ....................................... 31,080,000
-----------
PRINCIPAL
AMOUNT
---------
(c)REPURCHASE AGREEMENT 8.3%
Joint Repurchase Agreement,4.862%,5/03/99,(Maturity Value
$2,825,900) (COST $2,824,755) ...................................................... $2,824,755 2,824,755
Barclays Capital Inc.(Maturity Value $291,831)
Bear,Stearns & Co.Inc.(Maturity Value $159,180)
Chase Securities Inc. (Maturity Value $291,831)
CIBC Oppenheimer Corp.(Maturity Value $291,831)
Deutsche Bank Securities Inc.(Maturity Value $40,241)
Donaldson,Lufkin & Jenrette Securities Corp.(Maturity Value $291,831)
Dresdner Kleinwort Benson,North America LLC (Maturity Value $291,831)
Lehman Brothers Inc.(Maturity Value $291,831)
Paine Webber Inc.(Maturity Value $291,831)
Paribas Corp.(Maturity Value $291,831)
UBS Securities LLC (Maturity Value $291,831)
Collateralized by U.S.Treasury Bills & Notes
-----------
TOTAL INVESTMENTS (COST $27,842,903) 100.0% .......................................... 33,904,755
-----------
OTHER ASSETS, LESS LIABILITIES ....................................................... (3,822)
-----------
NET ASSETS 100.0% .................................................................... $33,900,933
===========
</TABLE>
(a) Non-income producing.
(c) See Note 1(c) regarding joint repurchase agreement.
See notes to financial statements.
47
-PAGE-
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
FRANKLIN SMALL CAP GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------
YEAR ENDED APRIL 30,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value,beginning of year ............................ $25.93 $18.96 $19.75 $14.90 $12.75
---------------------------------------------------------------
Income from investment operations:
Net investment income ....................................... .06 .07 .03 .01 .03
Net realized and unrealized gains (losses) .................. (1.02) 7.92 .04 6.23 3.14
---------------------------------------------------------------
Total from investment operations ............................. (.96) 7.99 .07 6.24 3.17
---------------------------------------------------------------
Less distributions from:
Net investment income ....................................... (.14) (.09) (.06) (.01) (.02)
Net realized gains .......................................... (.18) (.93) (.80) (1.38) (1.00)
---------------------------------------------------------------
Total distributions .......................................... (.32) (1.02) (.86) (1.39) (1.02)
---------------------------------------------------------------
Net asset value,end of year .................................. $24.65 $25.93 $18.96 $19.75 $14.90
===============================================================
Total return(*) .............................................. (3.44%) 43.09% .14% 44.06% 27.05%
RATIOS/SUPPLEMENTAL DATA
Net assets,end of year (000's) ............................... $4,251,284 $3,957,972 $1,071,352 $444,912 $63,010
Ratios to average net assets:
Expenses .................................................... .94% .89% .92% .97% .69%
Expenses excluding waiver and payments by affiliate ......... .94% .89% .92% 1.00% 1.16%
Net investment income ....................................... .30% .32% .10% .09% .25%
Portfolio turnover rate ...................................... 46.73% 42.97% 55.27% 87.92% 104.84%
</TABLE>
(*) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
48
-PAGE-
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
------------------------------------------------------
YEAR ENDED APRIL 30,
------------------------------------------------------
1999 1998 1997 1996(5)
------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value,beginning of year ............................ $25.59 $18.78 $19.66 $17.94
------------------------------------------------------
Income from investment operations:
Net investment loss ......................................... (.09) (.02) (.05) (.03)
Net realized and unrealized gains (losses) .................. (1.00) 7.76 (.03) 2.71
------------------------------------------------------
Total from investment operations ............................. (1.09) 7.74 (.08) 2.68
------------------------------------------------------
Less distributions from net realized gains ................... (.18) (.93) (.80) (.96)
------------------------------------------------------
Net asset value,end of year .................................. $24.32 $25.59 $18.78 $19.66
======================================================
Total return(*) .............................................. (4.08%) 42.06% (.65%) 15.98%
RATIOS/SUPPLEMENTAL DATA
Net assets,end of year (000's) ............................... $764,715 $731,707 $146,164 $24,102
Ratios to average net assets:
Expenses .................................................... 1.69% 1.64% 1.69% 1.76%(2)
Net investment loss ......................................... (.44%) (.42%) (.70%) (.69%)(2)
Portfolio turnover rate ...................................... 46.73% 42.97% 55.27% 87.92%
</TABLE>
(*) Total return does not reflect sales commissions or the contingent deferred
sales charge,and is not annualized for periods less than one year.
(2) Annualized
(5) For the period October 1,1995 (effective date) to April 30,1996.
49
-PAGE-
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN SMALL CAP GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
ADVISOR CLASS
---------------------------------------------
YEAR ENDED APRIL 30,
---------------------------------------------
1999 1998 1997(6)
---------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value,beginning of year ..................................... $ 26.01 $ 18.97 $ 20.48
---------------------------------------------
Income from investment operations:
Net investment income ................................................ .10 .09 .01
Net realized and unrealized gains (losses) ........................... (1.00) 8.01 (1.52)
---------------------------------------------
Total from investment operations ...................................... (.90) 8.10 (1.51)
---------------------------------------------
Less distributions from:
Net investment income ................................................ (.20) (.13) --
Net realized gains ................................................... (.18) (.93) --
---------------------------------------------
Total distributions ................................................... (.38) (1.06) --
---------------------------------------------
Net asset value,end of year ........................................... $ 24.73 $ 26.01 $ 18.97
=============================================
Total return(*) ....................................................... (3.12%) 43.68% (7.37%)
RATIOS/SUPPLEMENTAL DATA
Net assets,end of year (000's) ........................................ $168,055 $118,683 $18,777
Ratios to average net assets:
Expenses ............................................................. .69% .64% .69%(2)
Net investment income ................................................ .56% .58% .30%(2)
Portfolio turnover rate ............................................... 46.73% 42.97% 55.27%
</TABLE>
(*) Total return is not annualized for periods less than one year.
(2 )Annualized
(6) For the period January 2,1997 (effective date) to April 30,1997.
See notes to financial statements.
50
-PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS 90.1%
COMMERCIAL SERVICES 2.2%
(a)24/7 Media Inc. ................................................. 415,400 $ 18,485,300
(a)AnswerThink Consulting Group Inc. ............................... 75,000 1,664,063
(a,d)Applied Graphics Technologies Inc. ............................. 1,319,000 13,354,875
(a)The Corporate Executive Board Co. ............................... 93,500 2,629,688
(a)Lamar Advertising Co., A ........................................ 402,800 13,544,150
(a)NetGravity Inc. ................................................. 79,200 3,202,650
Norrell Corp. ..................................................... 931,100 13,966,500
(a)NOVA Corp. ...................................................... 888,800 23,108,800
(a)RemedyTemp Inc., A .............................................. 319,300 3,731,819
(a,d)SOS Staffing Services Inc. ..................................... 872,400 6,106,800
(a)Sylvan Learning Systems Inc. .................................... 687,900 17,283,488
------------
117,078,133
------------
(a)CONSUMER DURABLES .5%
(d)Activision Inc. ................................................. 1,294,400 13,510,300
Electronic Arts Inc. .............................................. 200,000 10,162,500
------------
23,672,800
------------
CONSUMER NON-DURABLES 2.2%
Alberto-Culver Co., A ............................................. 585,200 13,240,150
(a)Gerber Childrenswear Inc. ....................................... 360,000 2,790,000
(a)Sola International Inc. ......................................... 509,800 7,583,275
(a)Tommy Hilfiger Corp. ............................................ 898,900 62,810,638
(a,d)Tropical Sportswear International Corp. ........................ 400,500 8,785,969
Wolverine World Wide Inc. ......................................... 1,575,500 18,906,000
------------
114,116,032
------------
CONSUMER SERVICES 5.2%
(a)BEA Systems Inc. ................................................ 1,873,200 28,332,150
(a,d)Cumulus Media Inc., A .......................................... 785,000 12,707,188
(a)DeVry Inc. ...................................................... 1,064,800 28,084,100
(a)Foodmaker Inc. .................................................. 411,400 9,925,025
(a)Harrah's Entertainment Inc. ..................................... 1,170,600 25,753,200
(a)Jones Intercable Inc. ........................................... 12,500 565,625
(a)Jones Intercable Inc., A ........................................ 174,600 8,097,075
MeriStar Hospitality Corp. ........................................ 2,330,000 53,590,000
(a,d)MeriStar Hotels & Resorts Inc. ................................. 1,330,000 4,821,250
(a,d)Prime Hospitality Corp. ........................................ 3,020,500 36,812,344
(a)SFX Entertainment Inc. .......................................... 587,000 36,247,250
(a)Sotheby's Holdings Inc., A ...................................... 375,000 15,984,375
(a)Vail Resorts Inc. ............................................... 370,500 7,178,438
------------
268,098,020
------------
ELECTRONIC TECHNOLOGY 21.1%
(a)Advanced Energy Industries Inc. ................................. 916,600 25,378,363
(a)Aspect Telecommunications Corp. ................................. 1,065,000 8,486,772
(a,d)AVT Corp. ...................................................... 837,400 22,766,813
(a)Catapult Communications Corp. ................................... 627,000 9,757,688
(a,d)Coherent Inc. .................................................. 1,763,400 26,230,575
</TABLE>
51
-PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
ELECTRONIC TECHNOLOGY (CONT.)
(a,d)Com21 Inc. ........................................................... 1,294,000 $ 40,275,750
(a)Conexant Systems Inc. ................................................. 218,300 8,895,725
(a)Cymer Inc. ............................................................ 50,000 912,500
EG&G Inc. ............................................................... 400,000 12,500,000
(a)Electro Scientific Industries Inc. .................................... 275,000 10,484,375
(a)Etec Systems Inc. ..................................................... 654,000 20,192,250
(a)Excel Switching Corp. ................................................. 733,300 15,215,975
(a)First Virtual Corp. ................................................... 400,000 2,700,000
(a)Flextronics International Ltd. ........................................ 850,000 39,684,375
(a,d)FLIR Systems Inc. .................................................... 1,028,600 14,143,250
(a)Gemstar International Group Ltd. ...................................... 883,300 93,077,738
(a,d)H.T.E. Inc ........................................................... 1,227,100 3,604,606
(a)Harmonic Lightwaves Inc. .............................................. 600,100 27,379,563
(a)hi/fn Inc. ............................................................ 52,500 2,835,000
(a,d)Itron Inc. ........................................................... 1,159,800 9,568,350
(a)Jabil Circuit Inc. .................................................... 943,400 43,927,063
(a,d)Javelin Systems Inc. ................................................. 499,100 5,864,425
(a,d)Komag Inc. ........................................................... 4,207,100 15,776,625
(a,d)Ladish Co.Inc ........................................................ 971,600 6,497,575
(a)Level One Communications Inc. ......................................... 675,000 34,678,125
(a)Mettler-Toledo International Inc. ..................................... 1,886,600 49,287,425
(a)Micrel Inc. ........................................................... 82,400 4,851,300
(a,d)Natural Microsystems Corp. ........................................... 646,600 3,313,825
(d)Newport Corp. ......................................................... 512,500 6,406,250
(a)Novellus Systems Inc. ................................................. 306,100 14,463,225
(a,d)Perceptron Inc. ...................................................... 793,500 4,314,656
(a)Photronics Inc. ....................................................... 587,500 14,063,281
(a)PLX Technology Inc. ................................................... 89,200 1,728,250
(a)PMC-Sierra Inc. ....................................................... 915,300 87,754,388
(a)Power Integrations Inc. ............................................... 500,000 19,625,000
(a)Proxim Inc. ........................................................... 101,600 3,911,600
(a)Sanmina Corp. ......................................................... 423,200 28,089,900
(a,d)Security Dynamics .................................................... 2,445,000 53,178,750
(a)SIPEX Corp. ........................................................... 450,000 6,300,000
(a,d)Spectra-Physics Lasers Inc. .......................................... 1,016,300 9,273,738
(a)Synopsys Inc. ......................................................... 1,405,000 66,210,625
(a)Tekelec ............................................................... 2,608,500 23,558,146
(a)Terayon Communication Systems Inc. .................................... 186,800 7,542,050
(a)TranSwitch Corp. ...................................................... 205,400 9,037,600
(a)TriStar Aerospace Co. ................................................. 490,700 5,213,688
(a)Uniphase Corp. ........................................................ 858,600 104,212,575
(a)Waters Corp. .......................................................... 619,800 65,156,475
(a)Western Digital Corp. ................................................. 824,300 6,542,881
--------------
1,094,869,109
--------------
ENERGY MINERALS 4.0%
(a,d)Barrett Resources Corp. .............................................. 1,790,900 54,398,588
(a)Denbury Resources Inc. ................................................ 1,003,800 4,768,050
</TABLE>
52
-PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
ENERGY MINERALS (CONT.)
(a,d)Newfield Exploration Co. ............................................... 2,338,600 $ 62,849,875
(a,d)Nuevo Energy Co. ....................................................... 1,075,500 17,073,563
Range Resources Corp. ..................................................... 1,990,000 10,198,750
Snyder Oil Corp. .......................................................... 828,000 15,059,250
(a)Titan Exploration Inc. .................................................. 1,645,700 9,257,063
(a,d)Tom Brown Inc. ......................................................... 2,095,800 31,306,013
------------
204,911,152
------------
FINANCE 12.0%
(a)Affiliated Managers Group Inc. .......................................... 903,400 26,255,063
Allied Capital Corp. ...................................................... 667,000 12,006,000
(a)Amerin Corp. ............................................................ 1,085,500 25,441,406
Bank United Corp. ......................................................... 1,000,000 40,375,000
(a)E*TRADE Group Inc. ...................................................... 571,400 65,996,700
E.W.Blanch Holdings Inc. .................................................. 140,000 8,242,500
Espirito Santo Financial Group SA,ADR (Luxembourg) ........................ 801,500 12,924,187
EVEREN Capital Corp. ...................................................... 660,600 19,405,125
Federated Investors Inc. .................................................. 2,255,600 36,230,575
Financial Security Assurance Holdings Ltd. ................................ 1,069,300 61,083,763
Freedom Securities Corp. .................................................. 396,800 7,216,800
(a)Golden State Bancorp Inc. ............................................... 2,000,000 49,125,000
(a)Hambrecht & Quist Group ................................................. 400,000 14,100,000
HCC Insurance Holdings Inc. ............................................... 696,500 14,713,563
(a)HealthCare Financial Partners Inc. ...................................... 663,900 22,406,625
Heller Financial Inc. ..................................................... 461,100 12,507,338
(a)Knight/Trimark Group Inc., A ............................................ 318,500 48,790,219
Life USA Holding Inc. ..................................................... 292,800 2,928,000
(a)Mutual Risk Management Ltd. ............................................. 349,100 13,571,263
Reinsurance Group of America .............................................. 894,900 38,256,975
(a)Risk Capital Holdings Inc. .............................................. 751,900 10,902,550
Scor (France) ............................................................. 245,226 12,245,474
(a,d)Silicon Valley Bancshares .............................................. 1,293,600 22,718,850
(a)TeleBanc Financial Corp. ................................................ 257,600 26,693,800
Westamerica Bancorp ....................................................... 472,700 15,776,363
------------
619,913,139
------------
(a)HEALTH SERVICES 2.5%
American Dental Partners Inc. ............................................. 266,200 2,562,175
Beverly Enterprises Inc. .................................................. 2,131,800 13,856,700
Eclipsys Corp. ............................................................ 21,551 474,122
Integrated Health Services Inc. ........................................... 900,000 4,331,250
New American Healthcare Corp. ............................................. 382,800 574,200
PAREXEL International Corp. ............................................... 1,000,000 24,062,500
Pediatrix Medical Group Inc. .............................................. 558,600 10,578,488
(d)Pharmaceutical Product Development Inc. ................................. 1,300,000 37,862,500
Renal Care Group Inc. ..................................................... 1,303,800 27,216,825
</TABLE>
53
-PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999(CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
(a)HEALTH SERVICES (CONT.)
Sabratek Corp. ..................................................... 195,000 $ 3,180,938
Total Renal Care Holdings Inc. ..................................... 237,366 3,293,453
------------
127,993,151
------------
HEALTH TECHNOLOGY 1.2%
(a)Heska Corp. ...................................................... 605,300 2,345,538
(a)Incyte Pharmaceuticals Inc. ...................................... 41,200 744,175
(a)Inhale Therapeutic Systems Inc. .................................. 811,000 23,316,250
Mentor Corp. ....................................................... 295,300 4,281,850
(a)OrthoLogic Corp. ................................................. 1,202,600 3,607,800
(a,d)Serologicals Corp. .............................................. 2,022,700 15,170,250
(a)SkyePharma PLC, ADR (United Kingdom) ............................. 229,190 2,320,549
(a)SkyePharma PLC, rts., 3/31/00 (United Kingdom) ................... 785,500 0
(a)Zonagen Inc. ..................................................... 438,800 10,037,550
------------
61,823,962
------------
(a)INDUSTRIAL SERVICES 5.0%
(d)Atwood Oceanics Inc. ............................................. 1,216,600 42,428,925
Casella Waste Systems Inc., A ...................................... 319,600 7,990,000
(d)Catalytica Inc. .................................................. 1,965,733 26,905,970
(d)Core Laboratories NV (Netherlands) ............................... 1,632,400 29,383,200
KTI Inc. ........................................................... 72,500 725,000
Marine Drilling Cos. Inc ........................................... 1,062,400 18,260,000
Safety-Kleen Corp. ................................................. 1,138,200 18,068,925
Tuboscope Inc. ..................................................... 2,000,000 27,250,000
(d)US Liquids Inc. .................................................. 1,500,800 30,391,200
(d)Varco International Inc. ......................................... 5,162,500 58,400,781
------------
259,804,001
------------
NON-ENERGY MINERALS .5%
Carpenter Technology Corp. ......................................... 800,000 25,050,000
------------
PROCESS INDUSTRIES .8%
ChemFirst Inc. ..................................................... 764,900 18,261,988
(a)CUNO Inc. ........................................................ 420,000 7,691,250
Optical Coating Laboratory Inc. .................................... 272,900 16,817,463
------------
42,770,701
------------
PRODUCER MANUFACTURING 3.3%
(a)Cable Design Technologies ........................................ 300,000 4,462,500
(a)Gentex Corp. ..................................................... 1,986,100 59,707,131
(d)Gibraltar Steel Corp. ............................................ 1,012,800 23,737,500
JLG Industries Inc. ................................................ 1,262,700 20,282,119
(a)Polycom Inc. ..................................................... 93,700 2,289,794
Reliance Steel & Aluminum Co. ...................................... 830,000 30,243,125
Roper Industries Inc. .............................................. 1,033,800 29,463,300
------------
170,185,469
------------
</TABLE>
54
-PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
REAL ESTATE 2.5%
Arden Realty Inc. ..................................................... 1,330,400 $ 33,260,000
Camden Property Trust ................................................. 1,200,000 32,400,000
Colonial Properties Trust ............................................. 273,400 7,484,325
FelCor Lodging Trust Inc. ............................................. 687,300 16,452,244
Glenborough Realty Trust Inc. ......................................... 865,500 14,875,781
(d)Innkeepers USA Trust ................................................ 2,102,800 21,685,125
SL Green Realty Corp. ................................................. 394,100 7,832,738
------------
133,990,213
------------
(a)RETAIL TRADE 1.3%
Beyond.com Corp. ...................................................... 1,106,100 32,560,819
Claire's Stores Inc. .................................................. 612,800 20,299,000
Guitar Center Inc. .................................................... 916,800 14,325,000
------------
67,184,819
------------
(a)TECHNOLOGY SERVICES 16.9%
Affiliated Computer Services Inc., A .................................. 1,662,300 63,582,975
(b)AppliedTheory Corp. ................................................. 14,100 289,050
Aspen Technologies Inc. ............................................... 60,600 518,888
Brightpoint Inc. ...................................................... 550,000 3,385,965
Brio Technology Inc. .................................................. 369,000 5,166,000
BroadVision Inc. ...................................................... 444,700 25,820,394
Check Point Software Technologies Ltd. (Israel) ....................... 291,500 10,275,375
Citrix Systems Inc. ................................................... 600,000 25,500,000
Complete Business Solutions Inc. ...................................... 390,900 8,746,388
Concord Communications Inc. ........................................... 450,000 20,137,500
Deltek Systems Inc. ................................................... 448,100 3,864,862
Documentum Inc. ....................................................... 750,000 11,718,750
Doubleclick Inc. ...................................................... 394,400 55,142,050
EarthLink Network Inc. ................................................ 500,000 34,468,750
Entrust Technologies Inc. ............................................. 1,307,200 32,189,800
Exodus Communications Inc. ............................................ 149,400 13,464,675
Harbinger Corp. ....................................................... 124,600 1,362,812
(d)HNC Software Inc. ................................................... 1,348,200 28,986,283
i2 Technologies Inc. .................................................. 1,979,000 67,038,625
Information Advantage Inc. ............................................ 362,100 1,719,975
(d)Integrated Systems Inc. ............................................. 1,857,200 25,304,350
International Network Services ........................................ 1,355,550 51,510,900
InterVU Inc. .......................................................... 115,000 6,210,000
Intuit Inc. ........................................................... 505,400 43,527,575
ISS Group Inc. ........................................................ 100,200 5,316,863
Legato Systems Inc. ................................................... 613,500 24,808,406
(b)Marimba Inc. ........................................................ 16,400 996,300
(d)Micromuse Inc. ...................................................... 960,000 33,060,000
(d)MicroStrategy Inc. .................................................. 426,100 7,350,225
Mpath Interactive Inc. ................................................ 35,000 1,378,125
Proxicom Inc. ......................................................... 145,500 3,264,656
Sapient Corp. ......................................................... 623,900 39,149,725
</TABLE>
55
-PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN SMALL CAP GROWTH FUND RIGHTS VALUE
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND RIGHTS (CONT.)
(a)TECHNOLOGY SERVICES (CONT.)
Serena Software Inc. ................................................ 501,800 $ 5,143,450
SS&C Technologies Inc. .............................................. 171,000 2,458,125
Transaction Systems Architects Inc. ................................. 658,900 21,373,069
Vantive Corp. ....................................................... 970,400 7,763,200
Verio Inc. .......................................................... 936,600 66,498,600
VERITAS Software Corp. .............................................. 551,700 39,170,700
Vignette Corp. ...................................................... 154,200 14,649,000
Visio Corp. ......................................................... 204,400 5,518,800
Whittman-Hart Inc. .................................................. 1,041,500 29,422,375
Wind River Systems Inc. ............................................. 1,966,500 29,497,500
--------------
876,751,061
--------------
(a)TELECOMMUNICATIONS 5.2%
ICG Communications Inc. ............................................. 1,599,100 35,280,144
MetroNet Communications Corp., B (Canada) ........................... 113,800 6,315,900
Millicom International Cellular SA (Luxembourg) ..................... 1,465,200 50,549,400
(d)Pacific Gateway Exchange Inc. ..................................... 1,015,700 40,628,000
Pinnacle Holdings Inc. .............................................. 1,075,900 22,055,950
Primus Telecommunications Group Inc. ................................ 1,406,100 23,464,294
Rhythms NetConnections Inc. ......................................... 50,900 4,199,250
(d)Rural Cellular Corp., A ........................................... 690,800 12,261,700
Western Wireless Corp., A ........................................... 1,869,200 76,754,025
--------------
271,508,663
--------------
TRANSPORTATION 3.7%
Air Express International Corp. ..................................... 911,000 19,928,125
(a)Alaska Air Group Inc. ............................................. 175,000 7,710,938
(a,d)Atlantic Coast Airlines Inc. ..................................... 1,400,000 43,225,000
C.H. Robinson Worldwide Inc. ........................................ 1,046,200 31,320,613
(d)Expeditors International of Washington Inc. ....................... 1,281,100 77,666,688
(a,d)Mesa Air Group Inc. .............................................. 1,467,200 9,903,600
(a)Mesaba Holdings Inc. .............................................. 189,500 2,759,594
--------------
192,514,558
--------------
TOTAL COMMON STOCKS AND RIGHTS (COST $4,013,248,760) ................ 4,672,234,983
--------------
PRINCIPAL
AMOUNT
(a)CONVERTIBLE BONDS .4%
AMF Bowling Inc., cvt., zero cpn., A, 5/12/18 ....................... $ 12,900,000 1,451,250
Citrix Systems Inc., cvt., zero cpn., A, 3/22/19 .................... 30,000,000 11,475,000
Western Digital Corp., cvt. sub. deb., zero cpn., 144A, 2/18/18 ..... 23,800,000 5,146,750
--------------
TOTAL CONVERTIBLE BONDS (COST $23,169,030) .......................... 18,073,000
--------------
TOTAL LONG TERM INVESTMENTS (COST $4,036,417,790) ................... 4,690,307,983
--------------
</TABLE>
56
-PAGE-
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS,APRIL 30,1999(CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN SMALL CAP GROWTH FUND AMOUNT VALUE
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(c)REPURCHASE AGREEMENT 11.5%
Joint Repurchase Agreement, 4.862%, 5/03/99, (Maturity Value $597,901,606)
(COST $597,659,458) ................................................................. $597,659,458 $ 597,659,458
Barclays Capital Inc. (Maturity Value $61,745,299)
Bear,Stearns & Co. Inc. (Maturity Value $33,679,797)
Chase Securities Inc. (Maturity Value $61,745,299)
CIBC Oppenheimer Corp. (Maturity Value $61,745,299)
Deutsche Bank Securities Inc. (Maturity Value $8,514,118)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $61,745,299)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $61,745,299)
Lehman Brothers Inc. (Maturity Value $61,745,299)
Paine Webber Inc. (Maturity Value $61,745,299)
Paribas Corp. (Maturity Value $61,745,299)
UBS Securities LLC (Maturity Value $61,745,299)
Collateralized by U.S. Treasury Bills & Notes
---------------
TOTAL INVESTMENTS (COST $4,634,077,248) 102.0% ........................................ 5,287,967,441
OTHER ASSETS, LESS LIABILITIES (2.0%) ................................................. (103,912,949)
---------------
NET ASSETS 100.0% ..................................................................... $5,184,054,492
===============
</TABLE>
(a) Non-income producing.
(b) Sufficient collateral has been segregated for securities traded on a when-
issued or delayed delivery basis.
(c) See Note 1(c) regarding joint repurchase agreement.
(d) See Note 6 regarding holdings of 5% voting securities.
See notes to financial statements.
57
-PAGE-
FRANKLIN STRATEGIC SERIES
Financial Statements
STATEMENTS OF ASSETS AND LIABILITIES
APRIL 30,1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
FRANKLIN CALIFORNIA FRANKLIN MIDCAP SMALL CAP
BLUE CHIP FUND GROWTH FUND GROWTH FUND GROWTH FUND
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost - Unaffiliated issuers ....................... $43,957,346 $635,266,842 $25,018,148 $2,828,627,473
Cost - Non-controlled affiliated issuers .......... -- 7,344,207 -- 1,207,790,317
=========================================================================
Value - Unaffiliated issuers ...................... 50,236,368 867,208,716 31,080,000 3,620,295,883
Value - Non-controlled affiliated issuers ......... -- 4,675,000 -- 1,070,012,100
Repurchase agreements, at value and cost ........... 6,718,080 66,253,037 2,824,755 597,659,458
Receivables:
Investment securities sold ........................ 1,075,957 16,021,865 -- 9,039,659
Capital shares sold ............................... 316,948 1,463,068 107,597 36,010,668
Dividends and interest ............................ 38,434 261,825 21,899 802,876
-------------------------------------------------------------------------
Total assets .................................. 58,385,787 955,883,511 34,034,251 5,333,820,644
-------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ................... 3,275,081 7,889,941 -- 14,883,739
Capital shares redeemed ........................... 30,105 2,799,040 48,761 18,990,777
Affiliates ........................................ 62,946 1,426,018 45,130 7,070,552
Shareholders ...................................... 91,900 1,165,595 34,260 2,911,828
Payable upon return of securities loaned (Note 7) .. -- -- -- 105,416,707
Other liabilities .................................. 45,290 38,273 5,167 492,549
-------------------------------------------------------------------------
Total liabilities ............................. 3,505,322 13,318,867 133,318 149,766,152
-------------------------------------------------------------------------
Net assets, at value ......................... $54,880,465 $942,564,644 $33,900,933 $5,184,054,492
=========================================================================
Net assets consist of:
Undistributed net investment income ................ $ 70,790 $ 2,370,910 $ 91,060 $ 8,828,268
Net unrealized appreciation ........................ 6,282,971 229,272,667 6,061,852 653,890,193
Accumulated net realized gain (loss) ............... 1,075,396 (60,904,619) (1,577,405) (112,385,116)
Capital shares ..................................... 47,451,308 771,825,686 29,325,426 4,633,721,147
-------------------------------------------------------------------------
Net assets, at value ................................ $54,880,465 $942,564,644 $33,900,933 $5,184,054,492
=========================================================================
</TABLE>
See notes to financial statements.
58
-PAGE-
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
APRIL 30,1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
FRANKLIN CALIFORNIA FRANKLIN MIDCAP SMALL CAP
BLUE CHIP FUND GROWTH FUND GROWTH FUND GROWTH FUND
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A:
Net assets, at value ............................ $54,880,465 $780,597,663 $33,900,933 $4,251,284,028
==========================================================================
Shares outstanding .............................. 3,809,111 30,235,845 2,098,874 172,471,799
==========================================================================
Net asset value per share(*) .................... $14.41 $25.82 $16.15 $4.65
==========================================================================
Maximum offering price per share
(net asset value per share / 94.25%) ........... $15.29 $27.40 $17.14 $26.15
==========================================================================
CLASS B:
Net assets, at value ............................ -- $ 2,656,978 -- --
==========================================================================
Shares outstanding .............................. -- 103,179 -- --
==========================================================================
Net asset value and maximum offering price
per share(*) .................................. -- $25.75 -- --
==========================================================================
CLASS C:
Net assets, at value ............................ -- $159,310,003 -- $ 764,715,028
==========================================================================
Shares outstanding .............................. -- 6,215,360 -- 31,445,648
==========================================================================
Net asset value per share(*) .................... -- $25.63 -- $24.32
==========================================================================
Maximum offering price per share
(net asset value per share / 99.00%) ........... -- $25.89 -- $24.57
==========================================================================
ADVISOR CLASS:
Net assets, at value ............................ -- -- -- $ 168,055,436
==========================================================================
Shares outstanding .............................. -- -- -- 6,794,290
==========================================================================
Net asset value and maximum offering price
per share ..................................... -- -- -- $24.73
==========================================================================
</TABLE>
(*)Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
59
-PAGE-
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
FRANKLIN CALIFORNIA MIDCAP SMALL CAP
BLUE CHIP FUND GROWTH FUND GROWTH FUND GROWTH FUND
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:
Dividends:
Unaffiliated issuers(*) .................................... $ 276,198 $ 8,133,002 $ 274,569 $ 21,631,143
Non-controlled affiliated issuers (Note 6) ................. -- -- -- 4,948,935
Interest .................................................... 214,910 3,904,360 198,932 29,500,709
----------------------------------------------------------------
Total investment income ................................ 491,108 12,037,362 473,501 56,080,787
----------------------------------------------------------------
Expenses:
Management fees (Note 3) .................................... 205,441 4,066,764 199,753 20,630,510
Distribution fees (Note 3)
Class A .................................................... 82,646 1,783,516 78,777 9,197,204
Class B .................................................... -- 3,974 -- --
Class C .................................................... -- 1,357,061 -- 6,943,308
Transfer agent fees (Note 3) ................................ 80,316 1,736,957 65,427 7,621,758
Custodian fees .............................................. 881 8,734 280 61,706
Reports to shareholders ..................................... 15,111 342,008 13,728 1,314,529
Registration and filing fees ................................ 21,593 188,893 20,539 1,155,720
Professional fees ........................................... 1,684 27,128 1,866 156,470
Trustees' fees and expenses ................................. 358 11,711 446 61,599
Other ....................................................... 4,431 14,963 667 73,461
----------------------------------------------------------------
Total expenses ......................................... 412,461 9,541,709 381,483 47,216,265
Expenses waived/paid by affiliate (Note 3) ............. (71,389) -- -- --
----------------------------------------------------------------
Net expenses .......................................... 341,072 9,541,709 381,483 47,216,265
----------------------------------------------------------------
Net investment income ................................ 150,036 2,495,653 92,018 8,864,522
----------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain loss) from:
Investments in unaffiliated issuers ........................ 1,503,611 (60,704,565) (1,550,328) 4,475,296
Investments in non-controlled affiliated issuers (Note 6) .. -- (22,198) -- (114,318,769)
Foreign currency transactions .............................. (4,153) -- -- (20,032)
----------------------------------------------------------------
Net realized gain (loss) ............................... 1,499,458 (60,726,763) (1,550,328) (109,863,505)
Net unrealized appreciation on:
Investments ................................................ 3,966,983 115,471,275 72,048 7,888,123
Translation of assets and liabilities denominated in
foreign currencies ....................................... 7,905 -- -- --
----------------------------------------------------------------
Net unrealized appreciation ............................ 3,974,888 115,471,275 72,048 7,888,123
----------------------------------------------------------------
Net realized and unrealized gain (loss) ..................... 5,474,346 54,744,512 (1,478,280) (101,975,382)
----------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations ................................................. $5,624,382 $ 57,240,165 $(1,386,262) $ (93,110,860)
================================================================
</TABLE>
(*)Net of foreign taxes and fees of $13,767,$424, and $78,512 for the Franklin
Blue Chip Fund, Franklin MidCap Growth Fund, and Franklin Small Cap Growth
Fund, respectively.
See notes to financial statements.
60
-PAGE-
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
BLUE CHIP FUND CALIFORNIA GROWTH FUND
1999 1998 1999 1998
----------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............................................. $ 150,036 $ 109,740 $ 2,495,653 $ 3,338,627
Net realized gain (loss) from investments and
foreign currency transactions .................................... 1,499,458 (371,433) (60,726,763) 42,533,146
Net unrealized appreciation on investments and
translation of assets and liabilities denominated
in foreign currencies ............................................ 3,974,888 2,021,063 115,471,275 104,216,403
---------------------------------------------------------
Net increase in net assets resulting from
operations ................................................... 5,624,382 1,759,370 57,240,165 150,088,176
Distributions to shareholders from:
Net investment income:
Class A .......................................................... (126,476) (61,919) (4,374,577) (2,778,436)
Class C .......................................................... -- -- (606) (56,235)
Net realized gains:
Class A .......................................................... -- (81,033) (15,717,424) (20,449,548)
Class C .......................................................... -- -- (3,127,611) (2,848,861)
---------------------------------------------------------
Total distributions to shareholders ................................ (126,476) (142,952) (23,220,218) (26,133,080)
Capital share transactions: (Note 2)
Class A ........................................................... 32,546,439 9,619,758 32,435,619 328,134,373
Class B ........................................................... -- -- 2,564,716 --
Class C ........................................................... -- -- 29,589,278 84,411,109
---------------------------------------------------------
Total capital share transactions ................................... 32,546,439 9,619,758 64,589,613 412,545,482
Net increase in net assets .................................... 38,044,345 11,236,176 98,609,560 536,500,578
Net assets:
Beginning of year .................................................. 16,836,120 5,599,944 843,955,084 307,454,506
---------------------------------------------------------
End of year ........................................................ $54,880,465 $16,836,120 $942,564,644 $843,955,084
=========================================================
Undistributed net investment income included in net assets:
End of year ....................................................... $ 70,790 $ 51,383 $ 2,370,910 $ 1,171,577
=========================================================
</TABLE>
See notes to financial statements.
61
-PAGE-
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED APRIL 30,1999 AND 1998
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
MIDCAP GROWTH FUND SMALL CAP GROWTH FUND
-------------------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) .......................... $ 92,018 $ (6,092) $ 8,864,522 $ 6,367,212
Net realized gain (loss) from investments and
foreign currency transactions ........................ (1,550,328) 899,279 (109,863,505) 168,905,582
Net unrealized appreciation on investments and
translation of assets and liabilities denominated
in foreign currencies ................................ 72,048 4,795,383 7,888,123 660,877,005
-------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations .................................. (1,386,262) 5,688,570 (93,110,860) 836,149,799
Distributions to shareholders from:
Net investment income:
Class A .............................................. -- -- (24,920,845) (10,251,644)
Advisor Class ........................................ -- -- (1,373,343) (376,164)
Net realized gains:
Class A .............................................. (347,614) (759,611) (31,374,289) (103,290,267)
Class C .............................................. -- -- (6,067,928) (19,206,121)
Advisor Class ........................................ -- -- (1,280,976) (2,705,237)
-------------------------------------------------------------------
Total distributions to shareholders .................... (347,614) (759,611) (65,017,381) (135,829,433)
Capital share transactions:(Note 2)
Class A ............................................... 5,771,147 12,082,084 418,158,255 2,294,635,207
Class C ............................................... -- -- 64,646,406 492,492,347
Advisor Class ......................................... -- -- 51,015,284 84,621,122
-------------------------------------------------------------------
Total capital share transactions ....................... 5,771,147 12,082,084 533,819,945 2,871,748,676
Net increase in net assets ........................ 4,037,271 17,011,043 375,691,704 3,572,069,042
Net assets
Beginning of year ...................................... 29,863,662 12,852,619 4,808,362,788 1,236,293,746
-------------------------------------------------------------------
End of year ............................................ $33,900,933 $29,863,662 $5,184,054,492 $4,808,362,788
==================================================================
Undistributed net investment income included in net
assets:
End of year ........................................... $ 91,060 $ -- $ 8,828,268 $
==================================================================
</TABLE>
See notes to financial statements.
62
-PAGE-
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (the Trust) is registered under the Investment Company
Act of 1940 as an open-ended investment company, consisting of ten separate
series (the Funds). All Funds included in this report are diversified except the
Franklin California Growth Fund. The Funds' investment objective is capital
growth.
The following summarizes the Funds' significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Trustees.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. JOINT REPURCHASE AGREEMENT:
The Funds may enter into a joint repurchase agreement whereby their uninvested
cash balance is deposited into a joint cash account to be used to invest in one
or more repurchase agreements. The value and face amount of the joint repurchase
agreement are allocated to the Funds based on their pro-rata interest. A
repurchase agreement is accounted for as a loan by the Funds to the seller,
collateralized by securities which are delivered to the Funds' custodian. The
market value, including accrued interest, of the initial collateralization is
required to be at least 102% of the dollar amount invested by the Funds, with
the value of the underlying securities marked to market daily to maintain
coverage of at least 100%. At April 30, 1999, all outstanding repurchase
agreements had been entered into on that date.
d. INCOME TAXES:
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
e. SECURITY TRANSACTIONS,INVESTMENT INCOME,EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount is
amortized on an income tax basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
63
-PAGE-
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
e. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: (CONT.)
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. Other expenses are
charged to each Fund on a specific identification basis.
Distributions received by the Trust from securities may be a return of capital
(ROC). Such distributions reduce the cost basis of the securities, and any
distributions in excess of the cost basis are recognized as capital gains.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
f. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the Funds are indicated below.
Effective January 1, 1999, Class I and Class II were renamed Class A and Class
C, respectively, and the Franklin California Growth Fund began offering a new
class of shares, Class B. The shares differ by their initial sales load,
distribution fees, voting rights on matters affecting a single class and the
exchange privilege of each class.
<TABLE>
<CAPTION>
CLASS A CLASS A, CLASS C, & ADVISOR CLASS CLASS A, CLASS B, & CLASS C
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Franklin Blue Chip Fund Franklin Small Cap Growth Fund Franklin California Growth Fund
Franklin MidCap Growth Fund
</TABLE>
At April 30, 1999, there were an unlimited number of shares authorized ($.01 par
value). Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
BLUE CHIP FUND CALIFORNIA GROWTH FUND
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Year ended April 30,1999
Shares sold .............................................. 3,618,266 $47,414,962 16,494,382 $ 386,947,861
Shares issued in reinvestment of distributions ........... 8,472 105,717 825,009 18,676,674
Shares redeemed .......................................... (1,168,867) (14,974,240) (15,966,155) (373,188,916)
-------------------------------------------------------------------
Net increase ............................................. 2,457,871 $32,546,439 1,353,236 $ 32,435,619
===================================================================
Year ended April 30,1998
Shares sold .............................................. 1,118,441 $12,925,246 20,145,76 $ 465,817,703
Shares issued in reinvestment of distributions ........... 12,437 135,809 978,677 21,399,872
Shares redeemed .......................................... (295,806) (3,441,297) (6,859,634) (159,083,202)
-------------------------------------------------------------------
Net increase ............................................. 835,072 $ 9,619,758 14,264,811 $ 328,134,373
===================================================================
</TABLE>
64
-PAGE-
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
FRANKLIN
CALIFORNIA GROWTH FUND
-----------------------------
SHARES AMOUNT
-----------------------------
<S> <C> <C>
CLASS B SHARES:
Year ended April 30,1999(1)
Shares sold .......................................... 103,431 $ 2,570,873
Shares redeemed ...................................... (252) (6,157)
-----------------------------
Net increase ......................................... 103,179 $ 2,564,716
=============================
CLASS C SHARES:
Year ended April 30,1999
Shares sold .......................................... 3,010,549 $ 70,453,473
Shares issued in reinvestment of distributions ....... 128,580 2,895,577
Shares redeemed ...................................... (1,868,591) (43,759,772)
-----------------------------
Net increase ......................................... 1,270,538 $ 29,589,278
=============================
Year ended April 30,1998
Shares sold .......................................... 4,008,172 $ 92,395,912
Shares issued in reinvestment of distributions ....... 122,953 2,681,530
Shares redeemed ...................................... (460,393) (10,666,333)
-----------------------------
Net increase ......................................... 3,670,732 $ 84,411,109
=============================
</TABLE>
(1) For the Franklin California Growth Fund, for the period January 1, 1999
(effective date) to April 30, 1999.
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
MIDCAP GROWTH FUND SMALL CAP GROWTH FUND
-----------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Year ended April 30,1999
Shares sold ........................................ 1,510,866 $ 22,694,848 161,810,259 $ 3,545,958,486
Shares issued in reinvestment of distributions ..... 16,973 236,773 2,486,084 51,561,607
Shares redeemed .................................... (1,140,923) (17,160,474) (144,463,351) (3,179,361,838)
-----------------------------------------------------------------------
Net increase ....................................... 386,916 $ 5,771,147 19,832,992 $ 418,158,255
=======================================================================
Year ended April 30,1998
Shares sold ........................................ 1,253,115 $ 20,195,538 136,826,460 $ 3,281,727,105
Shares issued in reinvestment of distributions ..... 47,614 724,287 4,660,368 102,667,738
Shares redeemed .................................... (551,956) (8,837,741) (45,358,271) (1,089,759,636)
-----------------------------------------------------------------------
Net increase ....................................... 748,773 $ 12,082,084 96,128,557 $ 2,294,635,207
=======================================================================
</TABLE>
65
-PAGE-
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
FRANKLIN
SMALL CAP GROWTH FUND
---------------------------------
SHARES AMOUNT
---------------------------------
<S> <C> <C>
CLASS C SHARES:
Year ended April 30,1999
Shares sold .................................................................. 13,842,560 $ 300,359,397
Shares issued in reinvestment of distributions ............................... 260,342 5,339,598
Shares redeemed .............................................................. (11,256,132) (241,052,589)
---------------------------------
Net increase ................................................................. 2,846,770 $ 64,646,406
=================================
Year ended April 30,1998
Shares sold .................................................................. 22,584,756 $ 535,761,867
Shares issued in reinvestment of distributions ............................... 771,371 16,815,889
Shares redeemed .............................................................. (2,541,642) (60,085,409)
---------------------------------
Net increase ................................................................. 20,814,485 $ 492,492,347
=================================
ADVISOR CLASS SHARES:
Year ended April 30,1999
Shares sold .................................................................. 6,726,880 $ 148,222,012
Shares issued in reinvestment of distributions ............................... 95,743 1,989,524
Shares redeemed .............................................................. (4,591,816) (99,196,252)
---------------------------------
Net increase ................................................................. 2,230,807 $ 51,015,284
=================================
Year ended April 30,1998
Shares sold .................................................................. 3,919,786 $ 93,330,082
Shares issued in reinvestment of distributions ............................... 90,328 1,991,723
Shares redeemed .............................................................. (436,261) (10,700,683)
---------------------------------
Net increase ................................................................. 3,573,853 $ 84,621,122
=================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), Franklin/Templeton Distributors, Inc.
(Distributors), Franklin Templeton Services, Inc. (FT Services), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Funds'
investment manager, principal underwriter, administrative manager and transfer
agent, respectively.
All Funds, except the Franklin Blue Chip Fund and the Franklin MidCap Growth
Fund, pay an investment management fee to Advisers based on the average net
assets of the Funds as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
----------------------------------------------------------------
<S> <C>
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million, up to and including $10 billion
</TABLE>
Fees are further reduced on net assets over $10 billion.
66
-PAGE-
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES (CONT.)
The Franklin Blue Chip Fund pays an investment management fee to Advisers based
on the average net assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
--------------------------------------------------------------
<S> <C>
.750% First $500 million
.625% Over $500 million, up to and including $1 billion
.500% Over $1 billion
</TABLE>
The Franklin MidCap Growth Fund pays an investment management fee to Advisers of
.65% per year of the average daily net assets of the Fund.
Under an agreement with Advisers, FT Services provides administrative services
to the Funds. The fee is paid by Advisers based on the average daily net assets,
and is not an additional expense of the Funds.
Advisers agreed in advance to waive management fees for the Franklin Blue Chip
Fund, as noted in the Statements of Operations.
The Franklin Blue Chip Fund and Franklin MidCap Growth Fund reimburse
Distributors up to .35% per year of the Funds' average daily net assets, the
Franklin California Growth Fund reimburses Distributors up to .25%, 1.00%, and
1.00% per year of the average daily net assets of Class A, Class B, and Class C,
respectively, and the Franklin Small Cap Growth Fund reimburses Distributors up
to .25% and 1.00% per year of the average daily net assets of Class A and Class
C, respectively, for costs incurred in marketing the Fund's shares.
Distributors received (paid) net commissions on sales of the Funds' shares, and
received contingent deferred sales charges for the year as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BLUE CALIFORNIA MIDCAP SMALL CAP
CHIP FUND GROWTH FUND GROWTH FUND GROWTH FUND
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Net commissions received (paid) ......... $49,226 $(812,703) $(11,740) $(7,281,303)
Contingent deferred sales charges ....... $ 8 $ 125,886 $ 12,053 $ 828,220
</TABLE>
The Funds paid transfer agent fees of $9,504,458, of which $7,369,946 was paid
to Investor Services.
At April 30, 1999, Franklin Resources Inc. owned 29.86% of the Franklin MidCap
Growth Fund.
4. INCOME TAXES
At April 30, 1999, the Franklin California Growth Fund, the Franklin MidCap
Growth Fund and the Franklin Small Cap Growth Fund had tax basis capital losses
of $55,141,885, $1,535,255, and $111,986,137, respectively, which may be carried
over to offset future capital gains. Such losses expire in 2007.
At April 30, 1999, the Franklin California Growth Fund has deferred capital
losses occurring subsequent to October 31, 1998 of $5,826,227. For tax purposes,
such losses will be reflected in the year ending April 30, 2000.
At April 30, 1999, the Franklin Blue Chip Fund and Franklin Small Cap Fund have
deferred currency losses occurring subsequent to October 31, 1998 of $1,663 and
$13,830, respectively. For tax purposes, such losses will be reflected in the
year ending April 30, 2000.
67
-PAGE-
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (continued)
4. INCOME TAXES (CONT.)
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions.
Net realized capital gains differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.
At April 30, 1999, the net unrealized appreciation based on the cost of
investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BLUE CALIFORNIA MIDCAP SMALL CAP
CHIP FUND GROWTH FUND GROWTH FUND GROWTH FUND
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments at cost ......................... $50,675,426 $709,094,989 $27,884,115 $4,634,444,957
======================================================================
Unrealized appreciation ..................... $ 6,789,185 $275,666,254 $ 7,096,382 $1,267,795,604
Unrealized depreciation ..................... (510,163) (46,624,490) (1,075,742) (614,273,120)
----------------------------------------------------------------------
Net unrealized appreciation ................. $ 6,279,022 $229,041,764 $ 6,020,640 $ 653,522,484
======================================================================
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended April 30, 1999 were as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BLUE CALIFORNIA MIDCAP SMALL CAP
CHIP FUND GROWTH FUND GROWTH FUND GROWTH FUND
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases ................... $37,692,452 $452,553,570 $22,946,222 $2,399,924,941
Sales ....................... $ 8,670,005 $415,286,907 $16,186,663 $1,931,615,242
</TABLE>
6. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" as investments
in portfolio companies in which the Funds own 5% or more of the outstanding
voting securities. Investments in "affiliated companies" including dividends,
interest income, and net realized capital gains (losses) at April 30, 1999 were
as shown below.
<TABLE>
<CAPTION>
NUMBER OF
SHARES HELD NUMBER OF
AT BEGINNING GROSS GROSS SHARES HELD AT
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS END OF YEAR
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FRANKLIN CALIFORNIA GROWTH FUND:
RemedyTemp Inc. ............................................. 350,000 75,000 25,000 400,000
TOTAL NON-CONTROLLED AFFILIATED ISSUERS ...............
FRANKLIN SMALL CAP GROWTH FUND:
Activison Inc. .............................................. 1,344,400 -- 50,000 1,294,400
Advanced Energy Industries Inc. ............................. 1,374,300 244,700 702,400 916,600
Advanced Health Corp. ....................................... 970,000 -- 970,000 --
Applied Graphics Technologies Inc. .......................... 960,100 408,900 50,000 1,319,000
Arch Communications Group Inc. .............................. 2,000,000 -- 2,000,000 --
Atlantic Coast Airlines Inc. ................................ 700,000 700,000 -- 1,400,000
</TABLE>
<TABLE>
<CAPTION>
REALIZED
VALUE AT DIVIDEND CAPITAL
NAME OF ISSUER END OF YEAR INCOME GAIN (LOSS)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FRANKLIN CALIFORNIA GROWTH FUND:
RemedyTemp Inc. ............................................. $ 4,675,000 $ -- $ (22,198)
-----------------------------------------------
TOTAL NON-CONTROLLED AFFILIATED ISSUERS ............... $ 4,675,000 $ -- $ (22,198)
===============================================
FRANKLIN SMALL CAP GROWTH FUND:
Activison Inc. .............................................. 13,510,300 -- (127,493)
Advanced Energy Industries Inc. ............................. (*) -- 1,640,468
Advanced Health Corp. ....................................... (*) -- (15,930,752)
Applied Graphics Technologies Inc. .......................... 13,354,875 -- (1,778,994)
Arch Communications Group Inc. .............................. (*) -- (13,990,655)
Atlantic Coast Airlines Inc. ................................ 43,225,000 -- --
</TABLE>
68
-PAGE-
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (continued)
6. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (CONT.)
<TABLE>
<CAPTION>
NUMBER OF
SHARES HELD NUMBER OF
AT BEGINNING GROSS GROSS SHARES HELD AT
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS END OF YEAR
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Atwood Oceanics Inc. ........................................... 1,216,600 -- -- 1,216,600
AVT Corp. ...................................................... -- 837,400 -- 837,400
Barrett Resources Corp. ........................................ 1,683,900 107,000 -- 1,790,900
Catalytica Inc. ................................................ 2,058,633 140,600 233,500 1,965,733
Clarify Inc. ................................................... 1,297,200 -- 1,297,200 --
Coherent Inc. .................................................. 1,763,400 -- -- 1,763,400
Com21 Inc. ..................................................... -- 1,294,000 -- 1,294,000
Consolidated Cigar Holdings Inc. ............................... 988,300 -- 988,300 --
Core Laboratories NV (Netherlands) ............................. 1,700,900 -- 68,500 1,632,400
Cumulus Media Inc., A .......................................... -- 1,225,000 440,000 785,000
Etec Systems Inc. .............................................. 983,000 387,500 716,500 654,000
Executive Risk Inc. ............................................ 426,400 305,300 731,700 --
Expeditors International of Washington Inc. .................... 1,016,100 265,000 -- 1,281,100
FLIR Systems Inc. .............................................. 184,800 843,800 -- 1,028,600
Gibraltar Steel Corp. .......................................... 1,012,800 -- -- 1,012,800
Harmonic Inc. .................................................. 961,500 -- 361,400 600,100
HBO & Co.( formerly known as Access Health Inc.) ............... 975,750 439,088 1,414,838 --
HNC Software Inc. .............................................. 1,079,900 468,300 200,000 1,348,200
H.T.E. Inc ..................................................... 665,400 665,400 103,700 1,227,100
Inhale Therapeutic Systems ..................................... 811,000 -- -- 811,000
Innkeepers USA Trust ........................................... 2,102,800 -- -- 2,102,800
Integrated Systems Inc. ........................................ 2,091,300 -- 234,100 1,857,200
Itron Inc. ..................................................... 1,157,700 100,000 97,900 1,159,800
Javelin Systems ................................................ -- 499,100 -- 499,100
K2 Inc. ........................................................ 960,500 -- 960,500 --
Komag Inc. ..................................................... 3,811,600 395,500 -- 4,207,100
Ladish Co.Inc .................................................. 802,300 180,000 10,700 971,600
Meristar Hospitality Corp.(formerly known
as CapStar Hotel Co.) ......................................... 1,330,000 1,000,000 -- 2,330,000
Meristar Hotels & Resorts Inc. ................................. -- 1,330,000 -- 1,330,000
Mesa Air Group Inc. ............................................ 1,646,100 -- 178,900 1,467,200
Micromuse Inc. ................................................. 754,500 355,500 150,000 960,000
MicroStrategy Inc., ............................................ -- 641,800 215,700 426,100
Mylan Laboratories (formerly known as Penederm Inc.) ........... 531,200 -- 531,200 --
Natural Microsystems Corp. ..................................... 646,600 -- -- 646,600
Newfield Exploration Co. ....................................... 938,600 1,400,000 -- 2,338,600
Newport Corp. .................................................. -- 512,500 -- 512,500
Nuevo Energy Co. ............................................... -- 1,075,500 -- 1,075,500
Omtool Ltd. .................................................... 938,600 -- 938,600 --
Pacific Gateway Exchange Inc. .................................. -- 1,015,700 -- 1,015,700
Pediatrix Medical Group Inc. ................................... 1,101,500 -- 542,900 558,600
</TABLE>
<TABLE>
<CAPTION>
REALIZED
VALUE AT DIVIDEND CAPITAL
NAME OF ISSUER END OF YEAR INCOME GAIN (LOSS)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Atwood Oceanics Inc. ........................................... $42,428,925 $ -- $ --
AVT Corp. ...................................................... 22,766,813 -- --
Barrett Resources Corp. ........................................ 54,398,588 -- --
Catalytica Inc. ................................................ 26,905,970 -- 1,571,186
Clarify Inc. ................................................... (*) -- (6,580,256)
Coherent Inc. .................................................. 26,230,575 -- --
Com21 Inc. ..................................................... 40,275,750 -- --
Consolidated Cigar Holdings Inc. ............................... (*) -- (7,777,795)
Core Laboratories NV (Netherlands) ............................. 29,383,200 -- 1,070,110
Cumulus Media Inc., A .......................................... 12,707,188 -- 196,040
Etec Systems Inc. .............................................. (*) -- (83,761)
Executive Risk Inc. ............................................ (*) 49,118 12,678,112
Expeditors International of Washington Inc. .................... 77,666,688 178,948 --
FLIR Systems Inc. .............................................. 14,143,250 -- --
Gibraltar Steel Corp. .......................................... 23,737,500 50,640 --
Harmonic Inc. .................................................. (*) -- (553,641)
HBO & Co.( formerly known as Access Health Inc.) ............... (*) -- --
HNC Software Inc. .............................................. 28,986,283 -- (2,410,976)
H.T.E. Inc ..................................................... 3,604,606 -- (595,481)
Inhale Therapeutic Systems ..................................... (*) -- --
Innkeepers USA Trust ........................................... 21,685,125 1,969,482 --
Integrated Systems Inc. ........................................ 25,304,350 -- (911,278)
Itron Inc. ..................................................... 9,568,350 -- (1,402,294)
Javelin Systems ................................................ 5,864,425 -- --
K2 Inc. ........................................................ (*) 208,780 (14,681,264)
Komag Inc. ..................................................... 15,776,625 -- --
Ladish Co.Inc .................................................. 6,497,575 -- (72,518)
Meristar Hospitality Corp.(formerly known
as CapStar Hotel Co.) ......................................... (*) 2,280,467 --
Meristar Hotels & Resorts Inc. ................................. 4,821,250 -- --
Mesa Air Group Inc. ............................................ 9,903,600 -- 512,114
Micromuse Inc. ................................................. 33,060,000 -- 3,204,134
MicroStrategy Inc., ............................................ 7,350,225 -- (813,855)
Mylan Laboratories (formerly known as Penederm Inc.) ........... (*) -- 5,828,241
Natural Microsystems Corp. ..................................... 3,313,825 -- --
Newfield Exploration Co. ....................................... 62,849,875 -- --
Newport Corp. .................................................. 6,406,250 15,500 --
Nuevo Energy Co. ............................................... 17,073,563 -- --
Omtool Ltd. .................................................... (*) -- (7,843,456)
Pacific Gateway Exchange Inc. .................................. 40,628,000 -- --
Pediatrix Medical Group Inc. ................................... (*) -- (9,318,754)
</TABLE>
69
-PAGE-
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (continued)
6. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (CONT.)
<TABLE>
<CAPTION>
NUMBER OF
SHARES HELD NUMBER OF
AT BEGINNING GROSS GROSS SHARES HELD AT
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS END OF YEAR
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Perceptron Inc. ....................................... 793,500 -- -- 793,500
Pharmaceutical Product Development Inc. ............... 1,000,000 300,000 -- 1,300,000
Prime Hospitality Corp ................................ 1,720,500 1,300,000 -- 3,020,500
Primus Telecommunications Group Inc. .................. 1,003,000 403,100 -- 1,406,100
Rainbow Technologies Inc. ............................. 532,000 369,500 901,500 --
Range Resources Corp (formerly known as
Lomak Petroleum Inc.) ................................ 1,890,000 100,000 -- 1,990,000
RemedyTemp Inc., A .................................... 319,300 -- -- 319,300
RockShox Inc. ......................................... 965,800 -- 965,800 --
Rural Cellular Corp., A ............................... 700,800 -- 10,000 690,800
Security Dynamics ..................................... 650,000 1,795,000 -- 2,445,000
Serologicals Corp. .................................... 1,381,800 690,900 50,000 2,022,700
SFX Entertainment Inc.(formerly known as
Marquee Group Inc.) .................................. 1,327,500 -- 740,500 587,000
Silicon Valley Bancshares ............................. 490,600 803,000 -- 1,293,600
Skyepharma PLC (formerly known as DepoTech Corp.) ..... 995,700 229,190 995,700 229,190
SOS Staffing Services Inc. ............................ 872,400 -- -- 872,400
Spectra-Physics Lasers Inc. ........................... 1,016,300 -- -- 1,016,300
Spectralink Corp. ..................................... 1,050,000 -- 1,050,000 --
Tom Brown Inc. ........................................ 2,095,800 -- -- 2,095,800
Transcrypt International Inc. ......................... 1,212,700 -- 1,212,700 --
Tropical Sportswear International Corp. ............... 413,200 -- 12,700 400,500
U.S. Liquids Inc. ..................................... 726,200 774,600 -- 1,500,800
Vans Inc. ............................................. 1,045,500 -- 1,045,500 --
Varco International Inc. .............................. 3,462,500 1,700,000 -- 5,162,500
West Marine Inc. ...................................... 1,474,800 -- 1,474,800 --
Western Wireless Corp., A ............................. 1,719,200 250,000 100,000 1,869,200
Wind River Systems Inc. ............................... 834,000 1,648,100 515,600 1,966,500
XcelleNet Inc. ........................................ 780,100 -- 780,100 --
TOTAL NON-CONTROLLED AFFILIATED ISSUERS .........
</TABLE>
<TABLE>
<CAPTION>
REALIZED
VALUE AT DIVIDEND CAPITAL
NAME OF ISSUER END OF YEAR INCOME GAIN (LOSS)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Perceptron Inc. ....................................... $ 4,314,656 $ -- $ --
Pharmaceutical Product Development Inc. ............... 37,862,500 -- --
Prime Hospitality Corp ................................ 36,812,344 -- --
Primus Telecommunications Group Inc. .................. (*) -- --
Rainbow Technologies Inc. ............................. (*) -- (3,194,746)
Range Resources Corp (formerly known as
Lomak Petroleum Inc.) ................................ (*) 196,000 --
RemedyTemp Inc., A .................................... (*) -- --
RockShox Inc. ......................................... (*) -- (10,369,136)
Rural Cellular Corp., A ............................... 12,261,700 -- 50,083
Security Dynamics ..................................... 53,178,750 -- --
Serologicals Corp. .................................... 15,170,250 -- 833,960
SFX Entertainment Inc.(formerly known as
Marquee Group Inc.) .................................. (*) -- (22,925)
Silicon Valley Bancshares ............................. 22,718,850 -- --
Skyepharma PLC (formerly known as
DepoTech Corp.) ...................................... (*) -- (2,632,950)
SOS Staffing Services Inc. ............................ 6,106,800 -- --
Spectra-Physics Lasers Inc. ........................... 9,273,738 -- --
Spectralink Corp. ..................................... (*) -- (5,373,299)
Tom Brown Inc. ........................................ 31,306,013 -- --
Transcrypt International Inc. ......................... (*) -- (22,597,463)
Tropical Sportswear International Corp. ............... 8,785,969 -- 126,991
U.S.Liquids Inc. ...................................... 30,391,200 -- --
Vans Inc. ............................................. (*) -- (8,033,324)
Varco International Inc. .............................. 58,400,781 -- --
West Marine Inc. ...................................... (*) -- (17,460,272)
Western Wireless Corp., A ............................. (*) -- 2,300,984
Wind River Systems Inc. ............................... (*) -- 4,532,964
XcelleNet Inc. ........................................ (*) -- 5,693,184
------------------------------------------------
TOTAL NON-CONTROLLED AFFILIATED ISSUERS ......... $1,070,012,100 $4,948,935 $(114,318,769)
================================================
</TABLE>
(*)As of April 30,1999,no longer an affiliate.
7. LENDING OF PORTFOLIO SECURITIES
The Franklin Small Cap Growth Fund loans securities to certain brokers for which
it receives cash collateral against the loaned securities in an amount equal to
at least 102% of the market value of the loaned securities. Net interest income
from the investment of the cash collateral received was $4,936,194 for the
period ended April 30,1999. The value of the loaned securities for the Small Cap
Growth Fund was $103,803,765 at April 30, 1999.
70
-PAGE-
FRANKLIN STRATEGIC SERIES
Independent Auditors' Report
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF
FRANKLIN STRATEGIC SERIES
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Blue Chip Fund, Franklin
California Growth Fund, Franklin MidCap Growth Fund, and Franklin Small Cap
Growth Fund (four of the portfolios constituting the Franklin Strategic Series,
hereafter referred to as the "Funds") at April 30, 1999, the results of each of
their operations for the year then ended, the changes in each of their net
assets for each of the two years in the period then ended and the financial
highlights for each of the periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements")are the
responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at April 30, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
June 4, 1999
71
-PAGE-
FRANKLIN STRATEGIC SERIES
Tax Information
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Trust hereby
designates the following amounts as capital gain dividends for the fiscal year
ended April 30, 1999:
<TABLE>
<CAPTION>
CAPITAL GAINS
20% RATE GAIN
-------------
<S> <C>
Franklin Blue Chip Fund ................. $1,070,472
</TABLE>
Under Section 854(b)(2) of the Internal Revenue Code, the Trust hereby
designates the following percentage amounts of the ordinary income dividends as
income qualifying for the dividends received deduction for the fiscal year end
April 30, 1999:
<TABLE>
<CAPTION>
<S> <C>
Franklin Blue Chip Fund .............................................. 100.00%
Franklin California Growth Fund ...................................... 31.71%
Franklin MidCap Growth Fund .......................................... 100.00%
Franklin Small Cap Growth Fund ....................................... 37.50%
</TABLE>
EVERY SHAREHOLDER'S VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR
PROXY TODAY
Please detach at perforation before mailing.
PROXY PROXY
SPECIAL SHAREHOLDERS' MEETING OF
FRANKLIN MIDCAP GROWTH FUND
JULY 19, 2000
The undersigned hereby revokes all previous proxies for his or her shares and
appoints Rupert H. Johnson, Jr., Harmon E. Burns, Deborah R. Gatzek, Barbara J.
Green, and David P. Goss, and each of them, proxies of the undersigned with full
power of substitution to vote all shares of Franklin MidCap Growth Fund (the
"MidCap Growth Fund") that the undersigned is entitled to vote at MidCap Growth
Fund's Special Shareholders' Meeting to be held at 777 Mariners Island
Boulevard, San Mateo, CA 94404 at 1:00 p.m. Pacific time on July 19, 2000,
including any adjournment thereof, upon such business as may properly be brought
before the Meeting.
IMPORTANT: PLEASE SEND IN YOUR PROXY TODAY.
YOU ARE URGED TO DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY. THIS WILL SAVE
THE EXPENSE OF FOLLOW-UP LETTERS TO SHAREHOLDERS WHO HAVE NOT RESPONDED.
VOTE VIA THE INTERNET: WWW.FRANKLINTEMPLETON.COM
VOTE VIA THE TELEPHONE: 1-800/597-7836
CONTROL NUMBER:
Note: Please sign exactly as your name appears on the proxy.
If signing for estates, trusts or corporations, title or
capacity should be stated. If shares are held jointly, each
holder must sign.
______________________________________________
Signature
______________________________________________
Signature
______________________________________________
Date 10818 FMC
PLEASE SIGN AND PROMPTLY RETURN IN THE ACCOMPANYING ENVELOPE. NO POSTAGE
REQUIRED IF MAILED IN THE U.S.
(Please see reverse side)
EVERY SHAREHOLDER'S VOTE IS IMPORTANT
Please detach at perforation before mailing.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE TRUST ON
BEHALF OF MIDCAP GROWTH FUND. IT WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION
IS MADE, THIS PROXY SHALL BE VOTED IN FAVOR OF PROPOSAL 1, REGARDING THE
REORGANIZATION OF THE MIDCAP GROWTH FUND PURSUANT TO THE PLAN OF REORGANIZATION
WITH CALIFORNIA GROWTH FUND. IF ANY OTHER MATTERS ABOUT WHICH THE PROXYHOLDERS
WERE NOT AWARE PRIOR TO THE TIME OF THE SOLICITATION PROPERLY COME BEFORE THE
MEETING, AUTHORIZATION IS GIVEN THE PROXYHOLDERS TO VOTE IN ACCORDANCE WITH THE
VIEWS OF MANAGEMENT ON SUCH MATTERS. MANAGEMENT IS NOT AWARE OF ANY SUCH
MATTERS.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR PROPOSAL 1.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1. To approve a plan of Reorganization between FOR AGAINST ABSTAIN
Franklin MidCap Growth Fund ("MidCap Growth
Fund") and California Growth ("California [ ] [ ] [ ]
Growth Fund"), that provides for the
acquisition of substantially all of the assets
of MidCap Growth Fund in exchange for Class A
shares of California Growth Fund, the distribution
of such shares to the shareholders of MidCap
Growth Fund, and the dissolution of MidCap Growth
Fund (the "Reorganization")
2. To grant the proxyholders the authority to vote GRANT WITHHOLD ABSTAIN
upon any other business that may properly come
before the Meeting or any adjournments thereof. [ ] [ ] [ ]
</TABLE>
IMPORTANT: PLEASE SIGN, DATE AND MAIL IN YOUR PROXY...TODAY
YOUR PROXY VOTE IS IMPORTANT!
AND NOW YOU CAN VOTE YOUR
PROXY ON THE PHONE OR ON
THE INTERNET.
[INSERT BEN HEAD]
IT SAVES MONEY! Telephone and Internet voting
saves postage costs.
Savings which can help to minimize fund expenses.
IT SAVES TIME! Telephone and Internet voting is
instantaneous - 24 hours a day.
IT'S EASY! Just follow these simple steps:
1. Read your proxy statement and have it at
hand.
2. Call toll-free 1-800/597-7836 or go to our
Web site:
WWW.FRANKLINTEMPLETON.COM
3. Click on the Proxy Voting link.
4. Enter your 14 digit CONTROL NUMBER from
your Proxy Card.
5. Follow the recorded or on-screen
directions.
6. Do NOT mail your Proxy Card when you vote
by phone or internet.
FRK 10818
STATEMENT OF ADDITIONAL INFORMATION
FOR
FRANKLIN CALIFORNIA GROWTH FUND
DATED MAY 20, 2000
Acquisition of
the Assets of
FRANKLIN MIDCAP GROWTH FUND,
a series of Franklin Strategic Series
By and in exchange for shares of the
FRANKLIN CALIFORNIA GROWTH FUND,
also a series of Franklin Strategic Series
This Statement of Additional Information (SAI) relates specifically to
the proposed delivery of substantially all of the assets of Franklin MidCap
Growth Fund for Class A shares of Franklin California Growth Fund.
This SAI consists of this Cover Page and the following documents. Each
of these documents is attached to and is legally considered to be a part of this
SAI:
1. Statement of Additional Information of Franklin
California Growth Fund and Franklin MidCap Growth Fund
dated September 1, 1999, as amended January 1, 2000, and
as supplemented February 1, 2000 and February 16, 2000.
2. Annual Report of Franklin California Growth Fund and
Franklin MidCap Growth Fund for the fiscal year ended
April 30, 1999.
3. Semiannual Report of Franklin California Growth Fund and
Franklin MidCap Growth Fund for the six months ended
October 31, 1999.
This SAI is not a Prospectus; you should read this SAI in conjunction
with the Prospectus/Proxy Statement dated May 20, 2000, relating to the
above-referenced transaction. You can request a copy of the Prospectus/Proxy
Statement by calling 1-800/DIAL BEN or by writing to Franklin California Growth
Fund, P.O. Box 997151, Sacramento, CA 95899-9983.
o FSS1 SA-3
SUPPLEMENT DATED FEBRUARY 1, 2000
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN STRATEGIC SERIES
(FSS1 - FRANKLIN AGGRESSIVE GROWTH, BLUE CHIP, CALIFORNIA GROWTH,
LARGE CAP GROWTH, MIDCAP GROWTH AND SMALL CAP GROWTH FUNDS)
DATED SEPTEMBER 1, 1999, AS AMENDED JANUARY 1, 2000
The Statement of Additional Information is amended as follows:
I. As of February 1, 2000, the Blue Chip Fund offers three classes of shares:
Class A, Class B and Class C.
II. The following is added at the end of the second paragraph on page 1:
The unaudited financial statements in the funds' Semiannual Report to
Shareholders, for the six-month period ended October 31, 1999, also are
incorporated by reference.
III. In the section "Organization, Voting Rights and Principal Holders", the
following changes are made:
(a) The sixth paragraph is replaced with the following:
The Blue Chip and California Funds currently offer three classes of shares,
Class A, Class B and Class C. The Blue Chip Fund began offering Class B and C
shares on February 1, 2000. The funds may offer additional classes of shares in
the future. The full title of each class is:
o Franklin Blue Chip Fund - Class A o Franklin Blue Chip Fund - Class B o
Franklin Blue Chip Fund - Class C o Franklin California Growth Fund - Class A o
Franklin California Growth Fund - Class B o Franklin California Growth Fund -
Class C
(b) The eighth paragraph is replaced with the following:
The MidCap Fund offers only one share class. Because the MidCap Fund's sales
charge structure and Rule 12b-1 plan are similar to those of Class A shares,
shares of the fund are considered Class A shares for redemption, exchange and
other purposes. The fund may offer additional classes of shares in the future.
(c) The following is added to the section:
As of January 3, 2000, the principal shareholders of the funds, beneficial or
of record, were:
SHARE PERCENTAGE
NAME AND ADDRESS CLASS (%)
-------------------------------------------------------------------------------
MIDCAP FUND
Franklin Resources, Inc.1
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Floor
Burlingame, CA 94010 Class A 26
SMALL CAP FUND
First Union National Bank Ttee
FBO Willis Coroon Corporation
A/C 1040108756
1525 West WT Harris Blvd
NC-1151 Advisor
Charlotte, NC 28288 Class 8
The Northern Trust Company Trst
For the Nalco Chemical Co Ret Trst
50 S. LaSalle St. Advisor
Chicago, IL 60675 Class 5
Old Second National Bank
of Aurora
C/O Trust Operations Division
37 South River St. Advisor
Aurora, IL 60506-4173 Class 6
Trust Company of Illinois
45 S. Park Blvd., Ste. 315 Advisor
Glen Ellyn, IL 60137-6282 Class 7
SHARE PERCENTAGE
NAME AND ADDRESS CLASS (%)
-------------------------------------------------------------------------------
AGGRESSIVE GROWTH FUND
Franklin Resources, Inc.1
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Floor
Burlingame, CA 94010 Class B 6
FT Fund Allocator
Conservative Target Fund
C/O Fund Accounting Dept.
Kimberley Monasterio
1810 Gateway, 3rd Flr. Advisor
San Mateo, CA 94404-2470 Class 8
FT Fund Allocator
Moderate Target Fund
C/O Fund Accounting Dept.
Kimberley Monasterio
1810 Gateway, 3rd Flr. Advisor
San Mateo, CA 94404-2470 Class 25
FT Fund Allocator
Growth Target Fund
C/O Fund Accounting Dept.
Kimberley Monasterio
1810 Gateway, 3rd Flr. Advisor
San Mateo, CA 94404-2470 Class 47
SHARE PERCENTAGE
NAME AND ADDRESS CLASS (%)
-------------------------------------------------------------------------------
LARGE CAP FUND
Franklin Resources, Inc.1
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Floor
Burlingame, CA 94010 Class A 7
FTTC Ttee For Valuselect
Pinnacle
Attn: Trading
P.O. Box 2438
Rancho Cordova, CA 95741-2438 Class A 7
Franklin Resources, Inc.1
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Floor
Burlingame, CA 94010 Class B 16
Painewebber for the Benefit of
Painewebber CDN FBO
Barbara C. Gillespie, Dec'd
P.O. Box 3321
Weehawken, NJ 07087-8154 Class B 18
NFSC FEBO OBP-424994
Anthony Doria Ttee
Anthony Doria Family Trust
U/A 7/11/94
1805 Tanager Drive
Costa Mesa, CA 92626 Class B 5
SHARE PERCENTAGE
NAME AND ADDRESS CLASS (%)
-------------------------------------------------------------------------------
Franklin Resources, Inc.1
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Floor Advisor
Burlingame, CA 94010 Class 8
FT Fund Allocator
Conservative Target Fund
C/O Fund Accounting Dept.
Kimberley Monasterio
1810 Gateway, 3rd Flr. Advisor
San Mateo, CA 94404-2470 Class 10
FT Fund Allocator Moderate
Target Fund
C/O Fund Accounting Dept.
Kimberley Monasterio
1810 Gateway, 3rd Flr. Advisor
San Mateo, CA 94404-2470 Class 27
FT Fund Allocator Growth
Target Fund
C/O Fund Accounting Dept.
Kimberley Monasterio
1810 Gateway, 3rd Flr. Advisor
San Mateo, CA 94404-2470 Class 53
1. Franklin Resources, Inc. is a Delaware Corporation.
Note: Charles B. Johnson and Rupert H. Johnson, Jr., who are officers and/or
trustees of the trust, may be considered beneficial holders of the fund
shares held by Franklin Resources, Inc. (Resources). As principal
shareholders of Resources, they may be able to control the voting of
Resources' shares of the MidCap, Aggressive Growth and Large Cap Funds.
As of January 3, 2000, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each fund and
class.
IV. In the section "The Class B and C plans", found on page 34 under
"Distribution and service (12b-1) fees", the first paragraph is replaced with
the following:
Under the Class B and C plans, the funds pay Distributors up to 0.75% per year
of the class's average daily net assets, payable monthly for the Aggressive
Growth, Blue Chip, Large Cap and Small Cap Funds and the Class B plan of the
California Fund and quarterly for the Class C plan of the California Fund, to
pay Distributors or others for providing distribution and related services and
bearing certain expenses. All distribution expenses over this amount will be
borne by those who have incurred them. The funds also may pay a servicing fee
of up to 0.25% per year of the class's average daily net assets, payable
monthly for the Aggressive Growth, Blue Chip, Large Cap and Small Cap Funds and
the Class B plan of the California Fund and quarterly for the Class C plan of
the California Fund. This fee may be used to pay securities dealers or others
for, among other things, helping to establish and maintain customer accounts
and records, helping with requests to buy and sell shares, receiving and
answering correspondence, monitoring dividend payments from the funds on behalf
of customers, and similar servicing and account maintenance activities.
V. The following information is added to the applicable sections under
"Performance", which begins on page 36:
AVERAGE ANNUAL TOTAL RETURN
The average annual total returns for the indicated periods ended October 31,
1999, were:
SINCE
INCEPTION 1 YEAR 5 YEARS INCEPTION
DATE (%) (%) (%)
-------------------------------------------------------------------------------
CLASS A
Blue Chip Fund 06/03/96 21.00 - 12.49
California Fund 10/30/91 52.76 26.98 21.84
MidCap Fund 08/17/93 27.20 15.89 13.42
Small Cap Fund 02/14/92 50.64 21.79 19.75
SINCE
INCEPTION 1 YEAR INCEPTION
DATE (%) (%)
-------------------------------------------------------------------------------
CLASS C
California Fund 09/03/96 58.31 24.84
Small Cap Fund 10/02/95 56.12 18.21
CUMULATIVE TOTAL RETURN
The cumulative total returns for the indicated periods ended October 31, 1999,
were:
SINCE
INCEPTION 1 YEAR 5 YEARS INCEPTION
DATE (%) (%) (%)
-------------------------------------------------------------------------------
CLASS A
Aggressive Growth Fund 06/23/99 - - 54.48
Blue Chip Fund 06/03/96 21.00 - 49.54
California Fund 10/30/91 52.76 230.18 385.79
Large Cap Fund 06/07/99 - - 5.84
MidCap Fund 08/17/93 27.20 109.08 118.42
Small Cap Fund 02/14/92 50.64 167.92 301.44
SINCE
INCEPTION INCEPTION
DATE (%)
-------------------------------------------------------------------------------
CLASS B
Aggressive Growth Fund 06/23/99 59.90
California Fund 01/01/99 35.32
Large Cap Fund 06/07/99 8.00
SINCE
INCEPTION 1 YEAR INCEPTION
DATE (%) (%)
-------------------------------------------------------------------------------
CLASS C
Aggressive Growth Fund 06/23/99 - 61.19
California Fund 09/03/96 58.31 101.53
Large Cap Fund 06/07/99 - 9.80
Small Cap Fund 10/02/95 56.12 98.05
Please keep this supplement for future reference.
o FSS1 SA-4
o FSS1 SAA-1
SUPPLEMENT DATED FEBRUARY 16, 2000
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN STRATEGIC SERIES
(FSS1 SAI - FRANKLIN AGGRESSIVE GROWTH, BLUE CHIP, CALIFORNIA GROWTH, LARGE
CAP GROWTH, MIDCAP GROWTH AND SMALL CAP GROWTH FUNDS - CLASS A, B & C)
DATED SEPTEMBER 1, 1999, AS AMENDED JANUARY 1, 2000
(FSS1 SAIA - FRANKLIN AGGRESSIVE GROWTH, BLUE CHIP, CALIFORNIA GROWTH, LARGE
CAP GROWTH, MIDCAP GROWTH AND SMALL CAP GROWTH FUNDS - ADVISOR CLASS)
DATED SEPTEMBER 1, 1999
The Board of Trustees has approved: (1) changing the name of the Franklin
Small Cap Growth Fund to the Franklin Small Cap Growth Fund I, effective
May 1, 2000; and (2) closing Class A shares of the Franklin Small Cap Growth
Fund to most new investors. Class C shares, however, will continue to be
available to all eligible investors. After the close of business on April
30, 2000, Class A shares of the Small Cap Fund will ONLY be available to the
following investors:
o CURRENT SHAREHOLDERS: All shareholders of record of the Small Cap Fund
as of the close of business on April 30, 2000, may buy shares in
accounts existing on that date, subject to their applicable minimum
additional investment amount; or buy additional shares through the
reinvestment of dividend or capital gain distributions.
o RETIREMENT PLANS: Current and new investors in retirement plans.
o WRAP PROGRAMS: Current and new investors in wrap programs.
In addition, the following investor services for Class A shareholders will be
affected:
o SELLING SHARES: While you can sell your shares at any time, please keep
in mind that if you sell all the shares in your account, your account
will be closed and you will not be able to buy additional fund shares or
to reopen your account.
o SYSTEMATIC WITHDRAWAL PLANS: While these plans will continue without
interruption, please keep in mind that if a systematic withdrawal plan
exhausts the shares in your account, your account will be closed and you
will not be able to buy additional fund shares or to reopen your
account.
o EXCHANGE PRIVILEGE: After the close of business on April 30, 2000,
exchanges into Class A shares of the fund from other Franklin Templeton
Funds will be accepted only for investors who qualify to invest in Class
A shares of the fund after April 30, 2000, as described above.
The board reserves the right to modify these services and restrictions at any
time. If you have questions, please call Franklin Templeton Investor
Services at 1-800/632-2301.
Please keep this supplement for future reference.
FRANKLIN
STRATEGIC SERIES
FRANKLIN AGGRESSIVE GROWTH FUND - CLASS A, B & C
FRANKLIN BLUE CHIP FUND - CLASS A
FRANKLIN CALIFORNIA GROWTH FUND - CLASS A, B & C
FRANKLIN LARGE CAP GROWTH FUND - CLASS A, B & C
FRANKLIN MIDCAP GROWTH FUND - CLASS A
FRANKLIN SMALL CAP GROWTH FUND - CLASS A & C
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 1, 1999, AS AMENDED JANUARY 1, 2000
[Insert Franklin Templeton Ben Head]
P.O. BOX 997151 SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
------------------------------------------------------------------------------
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the funds' prospectus.
The funds' prospectus, dated September 1, 1999, which we may amend from time
to time, contains the basic information you should know before investing in
the fund. You should read this SAI together with the funds' prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended April 30, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies ........................ 2
Risks ....................................... 16
Officers and Trustees ....................... 19
Management and Other Services ............... 21
Portfolio Transactions ...................... 23
Distributions and Taxes ..................... 24
Organization, Voting Rights
and Principal Holders ...................... 26
Buying and Selling Shares ................... 27
Pricing Shares .............................. 33
The Underwriter ............................. 34
Performance ................................. 36
Miscellaneous Information ................... 40
Description of Ratings ...................... 40
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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FSS1 SAI 01/00
GOALS AND STRATEGIES
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FRANKLIN AGGRESSIVE GROWTH FUND The fund's investment goal is capital
appreciation. This goal is fundamental, which means it may not be changed
without shareholder approval.
The fund normally invests primarily in equity securities of companies
demonstrating accelerating growth, increasing profitability, or above-average
growth or growth potential compared with the overall economy.
FRANKLIN BLUE CHIP FUND The fund's principal investment goal is long-term
capital appreciation. This goal is fundamental, which means it may not be
changed without shareholder approval.
The fund may also seek current income incidental to long-term capital
appreciation, although this is not a fundamental policy of the fund.
Under normal market conditions, the fund will invest at least 80%, and
intends to try to invest up to 100%, of its total assets in equity securities
of blue chip companies.
The fund may invest up to 10% of total assets in the equity securities of
blue chip companies not publicly traded in the U.S. This may include
companies in either developed or emerging markets. Certain companies in
emerging markets meet all the criteria of a blue chip company.
FRANKLIN CALIFORNIA GROWTH FUND The fund's investment goal is capital
appreciation. This goal is fundamental, which means it may not be changed
without shareholder approval.
The fund normally invests at least 65% of its assets in the equity and debt
securities of companies headquartered or conducting a majority of their
operations in the state of California. The fund may invest up to 35% of its
assets in the securities of companies headquartered or conducting a majority of
their operations outside of the state of California. In this way, the fund
tries to benefit from its research into companies and industries within or
beyond its primary region.
The fund expects to invest a significant portion of its assets in small and
medium size companies with market capitalization of up to $8 billion at the
time of its investment.
The fund may invest in securities of companies operating in the real estate
industry, including real estate investment trusts (REITs). The fund currently
intends to limit these investments to no more than 10% of total assets.
The fund may invest up to 35% of its total assets in debt securities. The
fund may invest in debt securities that the manager believes present an
opportunity for capital appreciation as a result of improvement in the
creditworthiness of the issuer. The receipt of income from debt securities is
incidental to the fund's investment goal. The fund may invest in both rated
and unrated debt securities. The fund may buy securities that are rated B by
Moody's Investors Service (Moody's) or Standard & Poor's Corporation (S&P) or
better, or unrated securities of comparable quality. The fund will not invest
more than 5% of its assets in securities rated below investment grade.
FRANKLIN LARGE CAP GROWTH FUND The fund's principal investment goal is
long-term capital appreciation. This goal is fundamental, which means it may
not be changed without shareholder approval.
The fund may also seek current income incidental to long-term capital
appreciation, although this is not a fundamental policy of the fund.
Under normal market conditions, the fund will invest at least 80%, and
intends to invest up to 100%, of its total assets in a diversified portfolio
of equity securities of large cap growth companies.
FRANKLIN MIDCAP GROWTH FUND The fund's investment goal is long-term capital
appreciation. This goal is fundamental, which means it may not be changed
without shareholder approval.
The fund normally invests primarily in equity securities of mid-cap growth
companies. Mid-cap growth companies are companies that have a market
capitalization range between $1 and $8 billion that the manager believes are
positioned for rapid growth in revenues or earnings and assets,
characteristics that may provide for significant capital appreciation.
The fund may invest up to 35% of its total assets in equity securities that
are outside the medium market capitalization range but with similar potential
for capital appreciation, or in corporate debt securities. The fund may buy
debt securities rated B or better by Moody's or S&P, or unrated securities of
comparable quality. The fund will not invest more than 5% of its total assets
in securities rated below investment grade.
The fund intends to limit its investment in foreign securities to 5% of its
total assets. The fund may buy securities of issuers in developed or emerging
markets.
FRANKLIN SMALL CAP GROWTH FUND The fund's investment goal is long-term
capital growth. This goal is fundamental, which means it may not be changed
without shareholder approval.
The fund normally invests primarily in equity securities of small cap growth
companies. The fund may also invest up to 35% (measured at the time of
purchase) of its total assets in any combination of (a) equity securities of
larger capitalization companies that the manager believes have strong growth
potential, and (b) relatively well-known, larger companies in mature
industries that the manager believes have the potential for capital
appreciation, if the investment presents a favorable investment opportunity
consistent with the fund's investment goal.
The fund may from time to time make private investments in companies whose
securities are not publicly traded. These investments typically will take the
form of letter stock or convertible preferred stock. Because these securities
are not publicly traded, there is no secondary market for these securities.
The fund will treat these securities as illiquid.
Although the fund may invest up to 25% of its total assets in foreign
securities, including those of developing or emerging markets, the fund
currently intends to limit its investment in foreign securities to 10% of its
total assets.
The fund may invest up to 10% of its total assets in REITs. The fund will not
invest in securities issued without stock certificates or comparable stock
documents. The fund may not invest more than 10% of its net assets in
securities of issuers with less than three years continuous operation.
The fund may invest up to 5% of its total assets in corporate debt securities
that the manager believes have the potential for capital appreciation as a
result of improvement in the creditworthiness of the issuer. The receipt of
income from debt securities is incidental to the fund's investment goal. The
fund may buy both rated and unrated debt securities. The fund will invest in
securities rated B or better by Moody's or S&P or unrated securities of
comparable quality.
Below is more detailed information about some of the various types of
securities the funds may buy and the funds' investment policies and
restrictions.
EQUITY SECURITIES The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner
of an equity security may participate in a company's success through the
receipt of dividends, which are distributions of earnings by the company to
its owners. Equity security owners may also participate in a company's
success or lack of success through increases or decreases in the value of the
company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred stock.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well. Equity securities may also include convertible securities, warrants,
or rights. Warrants or rights give the holder the right to purchase a common
stock at a given time for a specified price.
CONVERTIBLE SECURITIES Although each fund may invest in convertible
securities without limit, the Aggressive Growth Fund, Blue Chip Fund, and
Large Cap Fund currently intend to limit these investments to no more than 5%
of net assets. The California Fund, MidCap Fund, and Small Cap Fund may also
invest in enhanced convertible securities.
A convertible security is generally a debt obligation or preferred stock that
may be converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security
provides a fixed-income stream and the opportunity, through its conversion
feature, to participate in the capital appreciation resulting from a market
price advance in its underlying common stock. As with a straight fixed-income
security, a convertible security tends to increase in market value when
interest rates decline and decrease in value when interest rates rise. Like a
common stock, the value of a convertible security also tends to increase as
the market value of the underlying stock rises, and it tends to decrease as
the market value of the underlying stock declines. Because both interest rate
and market movements can influence its value, a convertible security is not
as sensitive to interest rates as a similar fixed-income security, nor is it
as sensitive to changes in share price as its underlying stock.
When issued by an operating company, a convertible security tends to be
senior to common stock, but sub-ordinate to other types of fixed-income
securities issued by that company. When a convertible security issued by an
operating company is "converted," the operating company often issues new
stock to the holder of the convertible security, but if the parity price of
the convertible security is less than the call price, the operating company
may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While each fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the fund's financial
reporting, credit rating, and investment limitation purposes. A preferred
stock is subordinated to all debt obligations in the event of insolvency, and
an issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred stock
generally has no maturity date, so that its market value is dependent on the
issuer's business prospects for an indefinite period of time. In addition,
distributions from preferred stock are dividends, rather than interest
payments, and are usually treated as such for corporate tax purposes.
ENHANCED CONVERTIBLE SECURITIES. In addition to "plain vanilla" convertibles,
a number of different structures have been created to fit the characteristics
of specific investors and issuers. Examples of these enhanced characteristics
for investors include yield enhancement, increased equity exposure or
enhanced downside protection. From an issuer's perspective, enhanced
structures are designed to meet balance sheet criteria, interest/
dividend payment deductibility and reduced equity dilution. The following are
descriptions of common structures of enhanced convertible securities.
Mandatorily convertible securities (e.g., ACES, DECS, PRIDES, SAILS-each
issuer has a different acronym for their version of these securities) are
considered the most equity like of convertible securities. At maturity these
securities are mandatorily convertible into common stock offering investors
some form of yield enhancement in return for some of the upside potential in
the form of a conversion premium. Typical characteristics of mandatories
include: issued as preferred stock, convertible at premium, pay fixed
quarterly dividend (typically 500 to 600 basis points higher than common
stock dividend), and are non-callable for the life of the security (usually
three to five years). An important feature of mandatories is that the number
of shares received at maturity is determined by the difference between the
price of the common stock at maturity and the price of the common stock at
issuance.
Enhanced convertible preferred securities (e.g., QUIPS, TOPrS, and TECONS)
are, from an investor's viewpoint, essentially convertible preferred
securities, i.e. they are issued as preferred stock convertible into common
stock at a premium and pay quarterly dividends. Through this structure the
company establishes a wholly owned special purpose vehicle whose sole purpose
is to issue convertible preferred stock. The proceeds of the convertible
preferred stock offering pass through to the company. The company then issues
a convertible subordinated debenture to the special purpose vehicle. This
convertible subordinated debenture has identical terms to the convertible
preferred issued to investors. Benefits to the issuer include increased
equity credit from rating agencies and the deduction of coupon payments for
tax purposes.
Exchangeable securities are often used by a company divesting a holding in
another company. The primary difference between exchangeables and standard
convertible structures is that the issuing company is a different company to
that of the underlying shares.
Yield enhanced stock (YES, also known as PERCS) mandatorily converts into
common stock at maturity and offers investors a higher current dividend than
the underlying common stock. The difference between these structures and
other mandatories is that the participation in stock price appreciation is
capped.
Zero-coupon and deep-discount convertible bonds (OID and LYONs) include the
following characteristics: no or low coupon payments, imbedded put options
allowing the investor to put them on select dates prior to maturity, call
protection (usually three to five years), and lower than normal conversion
premiums at issuance. A benefit to the issuer is that while no cash interest
is actually paid, the accrued interest may be deducted for tax purposes.
Because of their put options, these bonds tend to be less sensitive to
changes in interest rates than either long maturity bonds or preferred
stocks. The put options also provide enhanced downside protection while
retaining the equity participation characteristics of traditional convertible
bonds.
An investment in an enhanced convertible security or any other security may
involve additional risks. A fund may have difficulty disposing of such
securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the fund's ability to dispose
of particular securities, when necessary, to meet the fund's liquidity needs
or in response to a specific economic event, such as the deterioration in the
credit worthiness of an issuer. Reduced liquidity in the secondary market for
certain securities may also make it more difficult for the fund to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio. The funds, however, intend to acquire liquid securities, though
there can be no assurances that this will be achieved.
DEBT SECURITIES represent a loan of money by the purchaser of the securities
to the issuer. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it
declares and pays any dividend to holders of its equity securities. Bonds,
notes, and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's net asset value.
The funds may buy both rated and unrated debt securities. Independent rating
organizations rate debt securities based upon their assessment of the
financial soundness of the issuer. Generally, a lower rating indicates higher
risk.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS Each fund may invest in foreign
securities. The Aggressive Growth, Blue Chip, and Large Cap funds intend to
limit their investments in foreign securities to no more than 10% of total
assets. The MidCap Fund intends to limit its investments in foreign
securities to no more than 5% if total assets. Although the Small Cap Fund
may invest up to 25% of total assets in foreign securities, it intends to
limit its investments to 10% of total assets.
The funds may buy foreign securities traded in the U.S. or directly in
foreign markets. The funds may buy American, European, and Global Depositary
Receipts. Depositary receipts are certificates typically issued by a bank or
trust company that give their holders the right to receive securities (a) of
a foreign issuer deposited in a U.S. bank or trust company (American
Depositary Receipts, ADRs); or (b) of a foreign or U.S. issuer deposited in a
foreign bank or trust company (Global Depositary Receipts, GDRs or European
Depositary Receipts, EDRs).
SMALL AND MID-CAP COMPANIES Market capitalization is defined as the total
market value of a company's outstanding stock. Small cap companies generally
have market capitalization of up to $1.5 billion at the time of the fund's
investment. Mid-cap companies generally have market capitalization of $1 to
$8 billion at the time of the fund's investment.
Small cap companies are often overlooked by investors or undervalued in
relation to their earnings power. Because small cap companies generally are
not as well known to the investing public and have less of an investor
following than larger companies, they may provide greater opportunities for
long-term capital growth as a result of inefficiencies in the marketplace.
These companies may be undervalued because they are part of an industry that
is out of favor with investors, although the individual companies may have
high rates of earnings growth and be financially sound.
Mid-cap companies may offer greater potential for capital appreciation than
larger companies, because mid-cap companies are often growing more rapidly
than larger companies, but tend to be more stable and established than small
cap or emerging companies.
REPURCHASE AGREEMENTS Each fund generally will have a portion of its assets
in cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, the fund may enter into repurchase agreements.
Under a repurchase agreement, the fund agrees to buy securities guaranteed as
to payment of principal and interest by the U.S. government or its agencies
from a qualified bank or broker-dealer and then to sell the securities back
to the bank or broker-dealer after a short period of time (generally, less
than seven days) at a higher price. The bank or broker-dealer must transfer
to the fund's custodian securities with an initial market value of at least
102% of the dollar amount invested by the fund in each repurchase agreement.
The manager will monitor the value of such securities daily to determine that
the value equals or exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency
of the bank or broker-dealer, including possible delays or restrictions upon
the fund's ability to sell the underlying securities. The fund will enter
into repurchase agreements only with parties who meet certain
creditworthiness standards, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction.
The Small Cap Fund may also enter into reverse repurchase agreements. Under a
reverse repurchase agreement, the fund agrees to sell a security in its
portfolio and then to repurchase the security at an agreed-upon price, date,
and interest payment. The fund will maintain cash or high-grade liquid debt
securities with a value equal to the value of the fund's obligation under the
agreement, including accrued interest, in a segregated account with the
fund's custodian bank. The securities subject to the reverse repurchase
agreement will be marked-to-market daily. Although reverse repurchase
agreements are borrowings under federal securities laws, the Small Cap Fund
does not treat them as borrowings for purposes of its investment restriction
#3 below, provided the segregated account is properly maintained.
LOANS OF PORTFOLIO SECURITIES To generate additional income, each fund may
lend certain of its portfolio securities to qualified banks and
broker-dealers. These loans may not exceed the following percentages of the
value of the fund's total assets, measured at the time of the most recent
loan: Aggressive Growth, Blue Chip, and Large Cap funds, 331/3%; California
Fund, 10%; and MidCap and Small Cap funds, 20%. For each loan, the borrower
must maintain with the fund's custodian collateral (consisting of any
combination of cash, securities issued by the U.S. government and its
agencies and instrumentalities, or irrevocable letters of credit) with a
value at least equal to 100% of the current market value of the loaned
securities. The fund retains all or a portion of the interest received on
investment of the cash collateral or receives a fee from the borrower. The
fund may terminate the loans at any time and obtain the return of the
securities loaned within five business days. The fund will continue to
receive any interest or dividends paid on the loaned securities and will
continue to have voting rights with respect to the securities. However, as
with other extensions of credit, there are risks of delay in recovery or even
loss of rights in collateral should the borrower fail.
SECURITIES INDUSTRY RELATED INVESTMENTS To the extent it is consistent with
their respective investment goals and certain limitations under the
Investment Company Act of 1940, as amended (1940 Act), the funds may invest
their assets in securities issued by companies engaged in securities related
businesses, including companies that are securities brokers, dealers,
underwriters or investment advisors. These companies are considered to be
part of the financial services industry. Generally, under the 1940 Act, a
fund may not acquire a security or any interest in a securities related
business to the extent such acquisition would result in the fund acquiring in
excess of 5% of a class of an issuer's outstanding equity securities or 10%
of the outstanding principal amount of an issuer's debt securities, or
investing more than 5% of the value of the fund's total assets in securities
of the issuer. In addition, any equity security of a securities-related
business must be a marginable security under Federal Reserve Board
regulations and any debt security of a securities-related business must be
investment grade as determined by the Board. The funds do not believe that
these limitations will impede the attainment of their investment goals.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS The Blue Chip Fund may buy
equity securities on a "when-issued" or "delayed delivery" basis. These
transactions are arrangements whereby the fund buys securities with payment
and delivery scheduled for a future time, generally within 15 to 60 days.
If the fund buys securities on a when-issued basis, it will do so for the
purpose of acquiring securities consistent with its investment objective and
polices and not for investment leverage. The fund may sell securities
purchased on a when-issued basis before the settlement date, however, if the
manager believes it is advisable to do so.
When the fund is the buyer in one of these transactions, it relies on the
seller to complete the transaction. If the seller fails to do so, the fund
may miss an advantageous price or yield for the underlying security. When the
fund is the buyer, it will keep cash or high-grade marketable securities in a
segregated account with its custodian bank until payment is made. The amount
held in the account will equal the amount the fund must pay for the
securities at delivery.
STANDBY COMMITMENT AGREEMENTS The Blue Chip Fund may buy equity securities
under a standby commitment agreement. If the fund enters into a standby
commitment agreement, it will be obligated, for a set period of time, to buy
a certain amount of a security that may be issued and sold to the fund at the
option of the issuer. The price of the security is set at the time of the
agreement. The fund will receive a commitment fee typically equal to 0.5% of
the purchase price of the security. The fund will receive this fee regardless
of whether the security is actually issued.
The fund may enter into a standby commitment agreement to invest in the
security underlying the commitment at a yield or price that Advisers believes
is advantageous to the fund. The fund will not enter into a standby
commitment if the remaining term of the commitment is more than 45 days. If
the fund enters into a standby commitment, it will keep cash or high-grade
marketable securities in a segregated account with its custodian bank in an
amount equal to the purchase price of the securities underlying the
commitment.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the fund's books on the date the
security can reasonably be expected to be issued. The value of the security
will then be reflected in the calculation of the fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. If the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
OPTIONS, FUTURES, AND OPTIONS ON FUTURES A stock option is a contract that
provides the holder the right to buy or sell shares of the stock at a fixed
price, within a specified period of time. An option on a stock index is a
contract that allows the buyer of the option the right to receive from the
seller cash, in an amount equal to the difference between the index's closing
price and the option's exercise price. A futures contract is an obligation to
buy or sell a specified security or currency at a set price on a specified
future date. A stock index futures contract is an agreement to take or make
delivery of an amount of cash based on the difference between the value of
the index at the beginning and end of the contract period. Options, futures,
and options on futures are considered "derivative securities."
Each fund may buy and sell options on securities and (except the Blue Chip
Fund) securities indices. The funds may only buy options if the premiums paid
for such options total 5% or less of net assets.
Each fund (except the California Fund and MidCap Fund) may buy and sell
futures contracts for securities and currencies. Each fund (except the Blue
Chip Fund) may also buy and sell securities index futures and options on
securities index futures. Each fund may invest in futures contracts only to
hedge against changes in the value of its securities or those it intends to
buy. The funds will not enter into a futures contract if the amounts paid for
open contracts, including required initial deposits, would exceed 5% of net
assets.
OPTIONS. The funds may buy or write (sell) put and call options on securities
listed on a national securities exchange and in the over-the-counter (OTC)
market. All options written by the funds will be covered. The funds (except
the Blue Chip Fund) may also buy or write put and call options on securities
indices. Options written by the Aggressive Growth, Blue Chip, Large Cap, and
MidCap funds will be for portfolio hedging purposes only.
A call option written by the fund is covered if the fund (a) owns the underlying
security that is subject to the call or (b) has an absolute and immediate right
to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian
bank) upon conversion or exchange of other securities held in its portfolio. A
call option is also covered if the fund holds a call on the same security and in
the same principal amount as the call written where the exercise price of the
call held is (a) equal to or less than the exercise price of the call written or
(b) greater than the exercise price of the call written if the difference is
held in cash or high-grade debt securities in a segregated account with the
fund's custodian bank.
A put option written by the fund is covered if the fund maintains cash or
high-grade debt securities with a value equal to the exercise price of the
written put in a segregated account with its custodian bank. A put is also
covered if the fund holds a put on the same security and in the same
principal amount as the put written where the exercise price of the put held
is equal to or greater than the exercise price of the put written.
The premium paid by the buyer of an option will reflect, among other things,
the relationship of the exercise price to the market price and volatility of
the underlying security, the remaining term of the option, supply and demand,
and interest rates.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the
case of a put option, since the writer may be assigned an exercise notice at
any time prior to the termination of the obligation. Whether or not an option
expires unexercised, the writer retains the amount of the premium. This
amount may, in the case of a covered call option, be offset by a decline in
the market value of the underlying security during the option period. If a
call option is exercised, the writer experiences a profit or loss from the
sale of the underlying security. If a put option is exercised, the writer
must fulfill the obligation to buy the underlying security at the exercise
price, which will usually exceed the market value of the underlying security
at that time.
If the writer of an option wants to terminate its obligation, the writer may
effect a "closing purchase transaction" by buying an option of the same
series as the option previously written. The effect of the purchase is that
the clearing corporation will cancel the writer's position. However, a writer
may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, the holder of an option may liquidate its
position by effecting a "closing sale transaction" by selling an option of
the same series as the option previously purchased. There is no guarantee
that either a closing purchase or a closing sale transaction may be made at
the time desired by the fund.
Effecting a closing transaction in the case of a written call option allows
the fund to write another call option on the underlying security with a
different exercise price, expiration date or both. In the case of a written
put option, a closing transaction allows the fund to write another covered
put option. Effecting a closing transaction also allows the cash or proceeds
from the sale of any securities subject to the option to be used for other
fund investments. If the fund wants to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or at the same time as the sale of the security.
The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to buy the option. Likewise, the fund will realize
a loss from a closing transaction if the price of the transaction is more
than the premium received from writing the option or is less than the premium
paid to buy the option. Increases in the market price of a call option will
generally reflect increases in the market price of the underlying security.
As a result, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by the fund.
The writing of covered put options involves certain risks. For example, if
the market price of the underlying security rises or otherwise is above the
exercise price, the put option will expire worthless and the fund's gain will
be limited to the premium received. If the market price of the underlying
security declines or otherwise is below the exercise price, the fund may
elect to close the position or take delivery of the security at the exercise
price. The fund's return will be the premium received from the put option
minus the amount by which the market price of the security is below the
exercise price.
A fund may buy call options on securities it intends to buy in order to limit
the risk of a substantial increase in the market price of the security before
the purchase is effected. A fund may also buy call options on securities held
in its portfolio and on which it has written call options. Prior to its
expiration, a call option may be sold in a closing sale transaction. Profit
or loss from the sale will depend on whether the amount received is more or
less than the premium paid for the call option plus any related transaction
costs.
A fund may buy put options on securities in an attempt to protect against a
decline in the market value of the underlying security below the exercise
price less the premium paid for the option. The ability to buy put options
allows the fund to protect the unrealized gain in an appreciated security in
its portfolio without actually selling the security. In addition, the fund
continues to receive interest or dividend income on the security. The fund
may sell a put option it has previously purchased prior to the sale of the
security underlying the option. The sale of the option will result in a net
gain or loss depending on whether the amount received on the sale is more or
less than the premium and other transaction costs paid for the put option.
Any gain or loss may be wholly or partially offset by a change in the value
of the underlying security that the fund owns or has the right to acquire.
A fund may write covered put and call options and buy put and call options
that trade in the OTC market to the same extent that it may engage in
exchange traded options. Like exchange traded options, OTC options give the
holder the right to buy, in the case of OTC call options, or sell, in the
case of OTC put options, an underlying security from or to the writer at a
stated exercise price. However, OTC options differ from exchange traded
options in certain material respects.
OTC options are arranged directly with dealers and not with a clearing
corporation. Thus, there is a risk of non-performance by the dealer. Because
there is no exchange, pricing is typically done based on information from
market makers. OTC options are available for a greater variety of securities
and in a wider range of expiration dates and exercise prices, however, than
exchange traded options, and the writer of an OTC option is paid the premium
in advance by the dealer.
Call and put options on stock indices are similar to options on securities
except, rather than the right to buy or sell stock at a specified price,
options on a stock index give the holder the right to receive, upon exercise
of the option, an amount of cash if the closing level of the underlying stock
index is greater than (or less than, in the case of a put) the exercise price
of the option, expressed in dollars multiplied by a specified number. Thus,
unlike stock options, all settlements are in cash, and gain or loss depends
on price movements in the stock market generally (or in a particular industry
or segment of the market) rather than price movements in individual stocks.
When a fund writes an option on a stock index, the fund will establish a
segregated account with its custodian bank containing cash or high quality
fixed-income securities in an amount at least equal to the market value of
the underlying stock index. The fund will maintain the account while the
option is open or will otherwise cover the transaction.
FINANCIAL FUTURES. The funds (except the Blue Chip Fund) may enter into
contracts for the purchase or sale of futures contracts based upon financial
indices (financial futures). Financial futures contracts are commodity
contracts that obligate the long or short holder to take or make delivery of
the cash value of a securities index during a specified future period at a
specified price. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver such cash value called for by the contract
on a specified date. A "purchase" of a futures contract means the acquisition
of a contractual obligation to take delivery of the cash value called for by
the contract at a specified date. The purpose of the acquisition or sale of a
futures contract is to attempt to protect the fund from fluctuations in price
of portfolio securities without actually buying or selling the underlying
security. Futures contracts have been designed by exchanges designated
"contracts markets" by the Commodity Futures Trading Commission (CFTC) and
must be executed through a futures commission merchant, or brokerage firm,
which is a member of the relevant contract market.
The funds will not engage in transactions in futures contracts or related
options for speculation, but only as a hedge against changes resulting from
market conditions in the values of its securities or securities that they
intend to buy and, to the extent consistent therewith, to accommodate cash
flows. The funds will not enter into any stock index or financial futures
contract or related option if, immediately thereafter, more than one third of
total assets would be represented by futures contracts or related options. In
addition, the funds may not buy or sell futures contracts or buy or sell
related options if, immediately thereafter, the sum of the amount of initial
deposits on existing financial futures and premiums paid on options on
financial futures contracts would exceed 5% of total assets (taken at current
value). To the extent a fund enters into a futures contract or related call
option, it will maintain with its custodian bank, to the extent required by
the rules of the Securities and Exchange Commission (SEC), assets in a
segregated account to cover its obligations with respect to such contract
which will consist of cash, cash equivalents or high quality debt securities
from its portfolio in an amount equal to the market value of such futures
contract or related option.
STOCK INDEX FUTURES. The funds (other than the Blue Chip Fund) may buy and
sell stock index futures contracts. A stock index futures contract obligates
the seller to deliver (and the buyer to take) an amount of cash equal to a
specific dollar amount times the difference between the value of a specific
stock index at the close of the last trading day of the contract and the
price at which the agreement is made. No physical delivery of the underlying
stocks in the index is made.
The funds may sell stock index futures contracts in anticipation of or during
a market decline to attempt to offset the decrease in market value of their
equity securities that might otherwise result. When a fund is not fully
invested in stocks and anticipates a significant market advance, it may buy
stock index futures in order to gain rapid market exposure that may in part
or entirely offset increases in the cost of common stocks that it intends to
buy.
OPTIONS ON STOCK INDEX FUTURES. The funds (other than the Blue Chip Fund) may
buy and sell call and put options on stock index futures to hedge against
risks of market price movements. The need to hedge against these risks will
depend on the extent of diversification of the fund's common stock portfolio
and the sensitivity of such investments to factors influencing the stock
market as a whole.
Call and put options on stock index futures are similar to options on
securities except that, rather than the right to buy or sell stock at a
specified price, options on stock index futures give the holder the right to
receive cash. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised on the last trading day before the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the
closing price of the futures contract on the expi-
ration date.
BOND INDEX FUTURES AND RELATED OPTIONS. The California Fund and Small Cap
Fund may buy and sell futures contracts based on an index of debt securities
and options on such futures contracts to the extent they currently exist and,
in the future, may be developed. These funds reserve the right to conduct
futures and options transactions based on an index that may be developed in
the future to correlate with price movements in certain categories of debt
securities. The funds' investment strategies in employing futures contracts
based on an index of debt securities will be similar to that used in other
financial futures transactions.
The California Fund and Small Cap Fund may also buy and write put and call
options on bond index futures and enter into closing transactions with
respect to such options.
FUTURES CONTRACTS FOR SECURITIES AND CURRENCIES. The funds (except the
California Fund and MidCap Fund) may buy and sell futures contracts for
securities, and currencies. These funds may also enter into closing purchase
and sale transactions with respect to these futures contracts. The funds will
engage in futures transactions only for bona fide hedging or other
appropriate risk management purposes. All futures contracts entered into by
the funds are traded on U.S. exchanges or boards of trade licensed and
regulated by the CFTC or on foreign exchanges.
When securities prices are falling, a fund may offset a decline in the value
of its current portfolio securities through the sale of futures contracts.
When prices are rising, a fund can attempt to secure better prices than might
be available when it intends to buy securities through the purchase of
futures contracts. Similarly, a fund can sell futures contracts on a
specified currency in an attempt to protect against a decline in the value of
that currency and its portfolio securities denominated in that currency. A
fund can buy futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in that currency that the fund has
purchased or expects to buy.
Positions taken in the futures markets are not normally held to maturity, but
are liquidated through offsetting transactions that may result in a profit or
a loss. While the funds' futures contracts on securities and currencies will
usually be liquidated in this manner, the funds may instead make or take
delivery of the underlying securities or currencies whenever it appears
economically advantageous to do so. A clearing corporation associated with
the exchange on which futures on securities or currencies are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
To the extent a fund enters into a futures contract, it will deposit in a
segregated account with its custodian bank cash or U.S. Treasury obligations
equal to a specified percentage of the value of the futures contract (the
initial margin), as required by the relevant contract market and futures
commission merchant. The futures contract will be marked-to-market daily.
Should the value of the futures contract decline relative to the fund's
position, the fund, if required by law, will pay the futures commission
merchant an amount equal to the change in value.
FUTURES CONTRACTS - GENERAL. Although financial futures contracts by their
terms call for the actual delivery or acquisition of securities, or the cash
value of the index, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of
the securities or cash. A contractual obligation is offset by buying (or
selling, as the case may be) on a commodities exchange an identical financial
futures contract calling for delivery in the same month. This transaction,
which is effected through a member of an exchange, cancels the obligation to
make or take delivery of the securities or cash. Since all transactions in
the futures market are made, offset or fulfilled through a clearinghouse
associated with the exchange on which the contracts are traded, the funds
will incur brokerage fees when they buy or sell financial futures contracts.
FUTURE DEVELOPMENTS. The funds may take advantage of opportunities in the
area of options, futures, and options on futures and any other derivative
investments that are not presently contemplated for use by the funds or that
are not currently available but which may be developed, to the extent such
opportunities are consistent with the funds' investment goals and legally
permissible for the funds.
FORWARD CURRENCY EXCHANGE TRANSACTIONS In connection with the Blue Chip
Fund's investment in foreign securities, it may hold currencies other than
the U.S. dollar and enter into forward currency exchange transactions to
facilitate settlements and to protect against changes in exchange rates. In a
forward currency transaction, the fund agrees to buy or sell a foreign
currency at a set exchange rate. Payment and delivery of the currency occurs
on a future date. There is no assurance that these strategies will be
successful. The fund's investment in foreign currencies and forward currency
exchange transactions will not exceed 10% of its net assets. The Blue Chip
Fund may also enter into futures contracts for currencies as discussed above.
The Blue Chip Fund may enter into forward currency exchange transactions in
order (i) to "lock-in" the U.S. dollar price of a security in its portfolio
denominated in
a foreign currency; (ii) to sell an amount of a foreign currency
approximating the value of some or all of its portfolio securities
denominated in that foreign currency when the manager believes the foreign
currency may decline substantially against the U.S. dollar; or (iii) to buy a
foreign currency for a fixed dollar amount when the manager believes the U.S.
dollar may substantially decline against that foreign currency.
The value of securities denominated in a foreign currency may change during
the time between when a forward transaction is entered into and the time it
settles. It is therefore generally not possible to match precisely the
forward transaction amount and the value of the securities in the fund's
portfolio denominated in the currency involved. Using a forward currency
transaction to protect the value of the fund's portfolio securities against a
decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange
that the fund can achieve at some future time. The precise projection of
short-term currency market movements is not possible and short-term hedging
provides a way to fix the dollar value of only a portion of the fund's
foreign securities.
To limit the potential risks of buying currency under forward currency
transactions, the Blue Chip Fund will keep cash, cash equivalents, or readily
marketable high-grade debt securities equal to the amount of the purchase in
a segregated account with its custodian bank to be used to pay for the
commitment. The fund will cover any commitments under these transactions to
sell currency by owning the underlying currency or an absolute right to
acquire the underlying currency. The segregated account will be
marked-to-market daily.
ILLIQUID SECURITIES Each fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Generally, an illiquid security is any
security that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the fund has valued it.
Each fund does not consider securities that it acquires outside of the U.S.
and that are publicly traded in the U.S. or on a foreign securities market to
be illiquid assets if: (a) the fund reasonably believes it can readily
dispose of the securities for cash in the U.S. or foreign market, or (b)
current market quotations are readily available. Each fund will not acquire
the securities of foreign issuers outside of the U.S. if, at the time of
acquisition, the fund has reason to believe that it could not resell the
securities in a public trading market.
The funds' board of trustees has authorized the funds to invest in restricted
securities. To the extent the manager determines there is a liquid
institutional or other market for these securities, the fund considers them
to be liquid securities. An example of these securities are restricted
securities that may be freely transferred among qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933, as amended,
and for which a liquid institutional market has developed. The funds' board
of trustees will review any determination by the manager to treat a
restricted security as a liquid security on an ongoing basis, including the
manager's assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security is
properly considered a liquid security, the manager and the funds' board of
trustees will take into account the following factors: (i) the frequency of
trades and quotes for the security; (ii) the number of dealers willing to buy
or sell the security and the number of other potential buyers; (iii) dealer
undertakings to make a market in the security; and (iv) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics
of transfer). To the extent a fund invests in restricted securities that are
deemed liquid, the general level of illiquidity in the fund may increase if
qualified institutional buyers become uninterested in buying these securities
or the market for these securities contracts.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the funds'
portfolios in a temporary defensive manner. Under such circumstances, the
funds may invest up to 100% of assets in short-term debt instruments. The
funds may also invest cash, including cash resulting from purchases and sales
of fund shares, temporarily in short-term debt instruments. Short-term debt
instruments include high-grade commercial paper, repurchase agreements, and
other money market equivalents. To the extent permitted by exemptions granted
under the 1940 Act and the fund's other investment policies and restrictions,
each fund may also invest in shares of one or more money market funds managed
by Franklin Advisers, Inc. or its affiliates.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of a fund's outstanding shares or (ii) 67% or
more of a fund's shares present at a shareholder meeting if more than 50% of
a fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less.
The Aggressive Growth Fund MAY NOT:
1. Borrow money, except that the fund may borrow money from banks or
affiliated investment companies to the extent permitted by the 1940 Act,
or any exemptions therefrom that may be granted by the SEC, or for
temporary or emergency purposes and then in an amount not exceeding
331/3% of the value of the fund's total assets (including the amount
borrowed).
2. Act as an underwriter except to the extent the fund may be deemed to be
an underwriter when disposing of securities it owns or when selling its
own shares.
3. Make loans to other persons except (a) through the lending of its
portfolio securities, (b) through the purchase of debt securities, loan
participations and/or engaging in direct corporate loans in accordance
with its investment goal and policies, and (c) to the extent the entry
into a repurchase agreement is deemed to be a loan. The fund may also
make loans to affiliated investment companies to the extent permitted by
the 1940 Act or any exemptions therefrom that may be granted by the SEC.
4. Purchase or sell real estate and commodities, except that the fund may
buy or sell securities of real estate investment trusts may purchase or
sell currencies, may enter into forward contracts and futures contracts
on securities, currencies, and other indices or any other financial
instruments, and may purchase and sell options on such futures contracts.
5. Issue securities senior to the fund's presently authorized shares of
beneficial interest, except that this restriction shall not be deemed to
prohibit the fund from (a) making any permitted borrowings, loans,
mortgages or pledges, (b) entering into options, futures contracts,
forward contracts, repurchase transactions or reverse repurchase
transactions, or (c) making short sales of securities to the extent
permitted by the 1940 Act, and any rule or order thereunder, or SEC staff
interpretations thereof.
6. Concentrate (invest more than 25% of its total assets) in securities of
issuers in a particular industry (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities or securities of other investment companies).
7. Buy the securities of any one issuer (other than the U.S. government or
any of its agencies or instrumentalities or securities of other
investment companies) if immediately after such investment (a) more than
5% of the value of the fund's total assets would be invested in such
issuer or (b) more than 10% of the outstanding voting securities of such
issuer would be owned by the fund, except that up to 25% of the value of
such fund's total assets may be invested without regard to such 5% and
10% limitations.
It is the present policy of the fund (which may be changed without
shareholder approval) that its borrowings under restriction #1 above may not
exceed 15% of the value of the fund's total assets (including the amount
borrowed).
The Blue Chip Fund MAY NOT:
1. Borrow money or mortgage or pledge any of its assets, except it may
borrow up to 15% of its total assets (including the amount borrowed) to
meet redemption requests that might otherwise require the untimely
disposition of portfolio securities or for other temporary or emergency
purposes and may pledge its assets in connection with these borrowings.
The fund may borrow from banks, other Franklin Templeton Funds or other
persons to the extent permitted by applicable law. The fund will not make
any additional investments while borrowings exceed 5% of its total assets.
2. Underwrite securities of other issuers, except insofar as the fund may be
technically deemed an underwriter under the federal securities laws in
connection with the disposition of portfolio securities. This does not
preclude the fund from obtaining short-term credit necessary for the
clearance of purchases and sales of its portfolio securities.
3. Invest directly in interests in real estate, oil, gas or other mineral
leases, exploration or development programs, including limited
partnership interests. This restriction does not preclude investments in
marketable securities of issuers engaged in these activities.
4. Loan money, except as is consistent with the fund's investment objective,
and except that the fund may (a) buy a portion of an issue of publicly
distributed bonds, debentures, notes and other evidences of indebtedness,
(b) enter into repurchase agreements, (c) lend its portfolio securities,
and (d) participate in an interfund lending program with other Franklin
Templeton Funds to the extent permitted by the 1940 Act and any rules or
orders thereunder.
5. Buy or sell commodities or commodity contracts, except that the fund may
enter into financial futures contracts, options thereon, and forward
contracts.
6. Invest more than 25% of the fund's assets (at the time of the most recent
investment) in any industry, except that all or substantially all of the
assets of the fund may be invested in another registered investment
company having the same investment objective and policies as the fund.
7. Issue securities senior to the fund's presently authorized shares of
beneficial interest, except that the fund may borrow as permitted by
these restrictions.
ADDITIONAL RESTRICTIONS. The Blue Chip Fund has adopted the following
additional restrictions. These restrictions are not fundamental and may be
changed without shareholder approval. Under these restrictions, the Blue Chip
Fund may not:
1. Invest in any company for the purpose of exercising control or
management, except that all or substantially all of the assets of the
fund may be invested in another registered investment company having the
same investment objective and policies as the fund.
2. Buy securities on margin or sell securities short, except that the fund
may make margin payments in connection with futures, options and currency
transactions.
3. Buy or retain securities of any company in which officers, trustees or
directors of the fund or the manager individually own more than one-half
of 1% of the securities of such company, and in the aggregate own more
than 5% of the securities of such company.
4. Buy securities of open-end or closed-end investment companies, except
that the fund may: (i) acquire securities of an open-end or closed-end
investment company in compliance with the 1940 Act; (ii) invest all or
substantially all of its assets in another registered investment company
having the same investment objective and policies as the fund; or (iii)
invest in shares of one or more money market funds managed by the manager
or its affiliates, to the extent permitted by exemptions granted under
the 1940 Act.
5. Invest more than 5% of its assets in securities of issuers with less than
three years continuous operation, including the operations of any
predecessor companies, except that all or substantially all of the assets
of the fund may be invested in another registered investment company
having the same investment objective and policies as the fund.
6. Hold or purchase the securities of any issuer if, as a result, in the
aggregate, more than 10% of the value of the fund's net assets would be
invested in (i) securities that are not readily marketable or (ii)
repurchase agreements maturing in more than seven days. The fund may,
however, invest all or substantially all of its assets in another
registered investment company having the same investment objective and
policies as the fund.
7. Invest directly in warrants (valued at the lower of cost or market) in
excess of 5% of the value of the fund's net assets. No more than 2% of
the value of the fund's net assets may be invested in warrants (valued at
the lower of cost or market) that are not listed on the NYSE or the
American Stock Exchange.
As a diversified fund, with respect to 75% of its total assets, the Blue Chip
Fund may not invest more than 5% in any one issuer nor may it own more than
10% of the outstanding voting securities of any one issuer, except that this
restriction does not apply to cash, cash items (including receivables),
government securities, and securities of other investment companies. All or
substantially all of the assets of the fund may be invested in another
registered investment company having the same investment objective and
policies as the fund.
The California Fund MAY NOT:
1. Make loans to other persons, except by the purchase of bonds, debentures
or similar obligations which are publicly distributed or of a character
usually acquired by institutional investors or through loans of the
fund's portfolio securities, or to the extent the entry into a repurchase
agreement may be deemed a loan.
2. Borrow money, except from banks in order to meet redemption requests that
might otherwise require the untimely disposition of portfolio securities
or for other temporary or emergency (but not investment) purposes, in an
amount up to 10% of the value of the fund's total assets (including the
amount borrowed) based on the lesser of cost or market, less liabilities
(not including the amount borrowed) at the time the borrowing is made.
While borrowings exceed 5% of the fund's total assets, the fund will not
make any additional investments.
3. Invest more than 25% of the fund's assets (at the time of the most recent
investment) in any single industry.
4. Underwrite securities of other issuers (does not preclude the fund from
obtaining such short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities) or invest more than 10%
of its assets in securities with legal or contractual restrictions on
resale (although the fund may invest in such securities to the extent
permitted under the federal securities laws) or which are not readily
marketable, or which have a record of less than three years continuous
operation, including the operations of any predecessor companies, if more
than 5% of the fund's total assets would be invested in such companies.
5. Invest in securities for the purpose of exercising management or control
of the issuer.
6. Maintain a margin account with a securities dealer or invest in
commodities and commodity contracts (except that the fund may engage in
financial futures, including stock index futures, and options on stock
index futures) or lease or acquire any interests, including interest
issued by limited partnerships (other than publicly traded equity
securities) in oil, gas, or other mineral exploration or development
programs, or invest in excess of 5% of its total assets in options
unrelated to the fund's transactions in futures, including puts, calls,
straddles, spreads, or any combination thereof.
7. Effect short sales, unless at the time the fund owns securities
equivalent in kind and amount to those sold (which will normally be for
deferring recognition of gains or losses for tax purposes).
8. Invest directly in real estate, real estate limited partnerships or
illiquid securities issued by real estate investment trusts; the fund
may, however, invest in marketable securities issued by real estate
investment trusts.
9. Invest in the securities of other investment companies, except where
there is no commission other than the customary brokerage commission or
sales charge, or except that securities of another investment company may
be acquired pursuant to a plan of reorganization, merger, consolidation
or acquisition, and except where the fund would not own, immediately
after the acquisition, securities of other investment companies which
exceed in the aggregate i) more than 3% of the issuer's outstanding
voting stock, ii) more than 5% of the fund's total assets and iii)
together with the securities of all other investment companies held by
the fund, exceed, in the aggregate, more than 10% of the fund's total
assets. To the extent permitted by exemptions granted under the 1940 Act,
the fund may invest in shares of one or more money market funds managed
by the manager or its affiliates.
10. Purchase from or sell to its officers and trustees, or any firm of which
any officer or trustee is a member, as principal, any securities, but may
deal with such persons or firms as brokers and pay a customary brokerage
commission; or purchase or retain securities of any issuer if, to the
knowledge of the Trust, one or more of the officers or trustees of the
Trust, or its investment adviser, own beneficially more than one-half of
1% of the securities of such issuer and all such officers and trustees
together own beneficially more than 5% of such securities.
In addition to these fundamental policies, it is the present policy of the
California Fund (which may be changed without the approval of the
shareholders) not to pledge, mortgage or hypothecate its assets as securities
for loans, nor to engage in joint or joint and several trading accounts in
securities, except that it may: (i) participate in joint repurchase
arrangements; (ii) invest in shares of one or more money market funds managed
by Advisers or its affiliates, to the extent permitted by exemptions granted
under the 1940 Act; or (iii) combine orders to buy or sell with orders from
other persons to obtain lower brokerage commissions.
The Large Cap Fund MAY NOT:
1. Borrow money, except that the fund may borrow money from banks or
affiliated investment companies to the extent permitted by the 1940 Act,
or any exemptions therefrom which may be granted by the SEC, or for
temporary or emergency purposes and then in an amount not exceeding 33%
of the value of the fund's total assets (including the amount borrowed).
2. Act as an underwriter except to the extent the fund may be deemed to be
an underwriter when disposing of securities it owns or when selling its
own shares.
3. Make loans to other persons except (a) through the lending of its
portfolio securities, (b) through the purchase of debt securities, loan
participations and/or engaging in direct corporate loans in accordance
with its investment goal and policies, and (c) to the extent the entry
into a repurchase agreement is deemed to be a loan. The fund may also
make loans to affiliated investment companies to the extent permitted by
the 1940 Act or any exemptions therefrom that may be granted by the SEC.
4. Purchase or sell real estate and commodities, except that the fund may
buy or sell securities of real estate investment trusts and may enter
into financial futures contracts, options thereon, and forward contracts.
5. Issue securities senior to the fund's presently authorized shares of
beneficial interest, except that this restriction shall not be deemed to
prohibit the fund from (a) making any permitted borrowings, loans,
mortgages or pledges, (b) entering into options, futures contracts,
forward contracts or repurchase transactions, or (c) making short sales
of securities to the extent permitted by the 1940 Act and any rule or
order thereunder, or SEC staff interpretations thereof.
6. Concentrate (invest more than 25% of its total assets) in securities of
issuers in a particular industry (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities or securities of other investment companies).
7. Buy the securities of any one issuer (other than the U.S. government or
any of its agencies or instrumentalities or securities of other
investment companies) if immediately after such investment (a) more than
5% of the value of the fund's total assets would be invested in such
issuer or (b) more than 10% of the outstanding voting securities of such
issuer would be owned by the fund, except that up to 25% of the value of
such fund's total assets may be invested without regard to such 5% and
10% limitations.
The MidCap Fund MAY NOT:
1. Borrow money or mortgage or pledge any of its assets, except it may
borrow up to 10% of its total assets (including the amount borrowed) to
meet redemption requests that might otherwise require the untimely
disposition of portfolio securities or for other temporary or emergency
purposes and may pledge its assets in connection with these borrowings.
The fund may borrow from banks, other Franklin Templeton Funds or other
persons to the extent permitted by applicable law. The fund will not
make any additional investments while borrowings exceed 5% of its total
assets.
2. Loan money, except as is consistent with the fund's investment
objective, and except that the fund may (a) buy a portion of an issue of
publicly distributed bonds, debentures, notes and other evidences of
indebtedness, (b) enter into repurchase agreements, (c) lend its
portfolio securities, and (d) participate in an interfund lending
program with other Franklin Templeton Funds to the extent permitted by
the 1940 Act and any rules or orders thereunder.
3. Invest in any company for purposes of exercising control or management,
except that all or substantially all of the assets of the fund may be
invested in another registered investment company having the same
investment objective and policies as the fund.
4. Buy any securities on margin or sell any securities short, except that
it may use such short-term credits as are necessary for the clearance of
transactions.
5. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition, or reorganization; provided
that all or substantially all of the assets of the fund may be invested
in another registered investment company having the same investment
objective and policies as the fund.
6. Invest more than 25% of the fund's assets (at the time of the most
recent investment) in any single industry except that, to the extent
this restriction is applicable, all or substantially all of the assets
of the fund may be invested in another registered investment company
having the same investment objective and policies as the fund.
7. Underwrite securities of other issuers, except insofar as the fund may
be technically deemed an underwriter under the federal securities laws
in connection with the disposition of portfolio securities. This does
not preclude the fund from obtaining short-term credit necessary for the
clearance of purchases and sales of its portfolio securities.
8. Buy or sell securities to the fund's officers and trustees, or any firm
of which any officer or trustee is a member, as principal, or retain
securities of any issuer if, to the knowledge of the fund, one or more
of the fund's officers, trustees, or investment adviser own beneficially
more than 1/2 of 1% of the securities of such issuer and all such
officers and trustees together own beneficially more than 5% of such
securities.
9. Acquire, lease or hold real estate, provided that this limitation shall
not prohibit the purchase of securities secured by real estate or
interests therein.
10. Buy or sell commodities or commodity contracts, except that the fund may
enter into financial futures contracts, including stock index futures,
and options on stock index futures, or interests in oil, gas, or other
mineral exploration or development programs, or invest in excess of 5%
of its total assets in options unrelated to the fund's transactions in
futures, including puts, calls, straddles, spreads, or any combination
thereof.
In addition to these fundamental policies, it is the present policy of the
fund (which may be changed without shareholder approval) not to invest in
real estate limited partnerships (investments in marketable securities issued
by real estate investment trusts are not subject to this restriction). The
MidCap Fund's restriction against investment in interests in oil, gas, or
other mineral leases, exploration or development does not include publicly
traded equity securities.
It is the present policy of the MidCap Fund, which may be changed without
shareholder approval, not to engage in joint or joint and several trading
accounts in securities, except that it may participate in joint repurchase
arrangements, or combine orders to buy or sell with orders from other persons
to obtain lower brokerage commissions. To the extent permitted by exemptions
granted under the 1940 Act, the MidCap Fund may invest in shares of one or
more money market funds managed by the manager or its affiliates. The MidCap
Fund may not invest in excess of 5% of its total assets, valued at the lower
of cost or market, in warrants, nor more than 2% of its total assets in
warrants not listed on either the NYSE or the American Stock Exchange.
The Small Cap Fund MAY NOT:
1. Purchase the securities of any one issuer (other than obligations of the
U.S., its agencies or instrumentalities) if immediately thereafter, and
as a result of the purchase, the fund would (a) have invested more than
5% of the value of its total assets in the securities of the issuer, or
(b) hold more than 10% of any voting class of the securities of any one
issuer;
2. Make loans to other persons, except by the purchase of bonds, debentures
or similar obligations which are publicly distributed or of a character
usually acquired by institutional investors or through loans of the
fund's portfolio securities, or to the extent the entry into a
repurchase agreement may be deemed a loan;
3. Borrow money (does not preclude the fund from obtaining such short-term
credit as may be necessary for the clearance of purchases and sales of
its portfolio securities), except in the form of reverse repurchase
agreements or from banks in order to meet redemption requests that might
otherwise require the untimely disposition of portfolio securities or
for other temporary or emergency (but not investment) purposes, in an
amount up to 10% of the value of the fund's total assets (including the
amount borrowed) based on the lesser of cost or market, less liabilities
(not including the amount borrowed) at the time the borrowing is made.
While borrowings exceed 5% of the fund's total assets, the fund will not
make any additional investments;
4. Invest more than 25% of the fund's assets (at the time of the most
recent investment) in any single industry;
5. Underwrite securities of other issuers or invest more than 10% of its
assets in securities with legal or contractual restrictions on resale
(although the fund may invest in such securities to the extent permitted
under the federal securities laws, for example, transactions between the
fund and Qualified Institutional Buyers subject to Rule 144A under the
Securities Act of 1933) or which are not readily marketable, or which
have a record of less than three years continuous operation, including
the operations of any predecessor companies, if more than 10% of the
fund's total assets would be invested in such companies;
6. Invest in securities for the purpose of exercising management or control
of the issuer;
7. Maintain a margin account with a securities dealer or invest in
commodities and commodity contracts (except that the fund may engage in
financial futures, including stock index futures, and options on stock
index futures) or lease or acquire any interests, including interests
issued by limited partnerships (other than publicly traded equity
securities) in oil, gas, or other mineral exploration or development
programs, or invest in excess of 5% of its total assets in options
unrelated to the fund's transactions in futures, including puts, calls,
straddles, spreads, or any combination thereof;
8. Effect short sales, unless at the time the fund owns securities
equivalent in kind and amount to those sold (which will normally be for
deferring recognition of gains or losses for tax purposes). The fund
does not currently intend to employ this investment technique;
9. Invest directly in real estate, real estate limited partnerships or
illiquid securities issued by real estate investment trusts (the fund
may, however, invest in marketable securities issued by real estate
investment trusts);
10. Invest in the securities of other investment companies, except where
there is no commission other than the customary brokerage commission or
sales charge, or except that securities of another investment company
may be acquired pursuant to a plan of reorganization, merger,
consolidation or acquisition, and except where the fund would not own,
immediately after the acquisition, securities of the investment
companies which exceed in the aggregate i) more than 3% of the issuer's
outstanding voting stock, ii) more than 5% of the fund's total assets,
and iii) together with the securities of all other investment companies
held by the fund, exceed, in the aggregate, more than 10% of the fund's
total assets. The fund may invest in shares of one or more money market
funds managed by the manager or its affiliates; and
11. Purchase from or sell to its officers and trustees, or any firm of which
any officer or trustee is a member, as principal, any securities, but
may deal with such persons or firms as brokers and pay a customary
brokerage commission; or purchase or retain securities of any issuer, if
to the knowledge of the Trust, one or more of the officers or trustees
of the Trust, or the manager, own beneficially more than one-half of 1%
of the securities of such issuer and all such officers and trustees
together own beneficially more than 5% of such securities.
In addition to these fundamental policies, it is the present policy of the
Small Cap Fund (which may be changed without the approval of the
shareholders) not to pledge, mortgage or hypothecate its assets as securities
for loans, nor to engage in joint or joint and several trading accounts in
securities, except that it may: (i) participate in joint repurchase
arrangements; (ii) invest in shares of one or more money market funds managed
by Advisers or its affiliates, to the extent permitted by exemptions granted
under the 1940 Act; or (iii) combine orders to buy or sell with orders from
other persons to obtain lower brokerage commissions.
If a bankruptcy or other extraordinary event occurs concerning a particular
security a fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when a fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security
no longer meets one or more of the fund's policies or restrictions. If a
percentage restriction or limitation is met at the time of investment, a
later increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities will not be considered a violation of the
restriction or limitation.
RISKS
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FOREIGN SECURITIES The value of foreign (and U.S.) securities is affected by
general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in a fund. These risks can be significantly greater for investments in
emerging markets. Investments in depositary receipts also involve some or all
of the risks described below.
The political, economic, and social structures of some countries in which the
funds invest may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, and punitive taxes.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing, and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs
on foreign securities markets are generally higher than in the U.S. The
settlement practices may be cumbersome and result in delays that may affect
portfolio liquidity. The funds may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies, and obtaining
judgments with respect to foreign investments in foreign courts than with
respect to domestic issuers in U.S. courts.
The funds' management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when a fund changes
investments from one country to another or when proceeds of the sale of
shares in U.S. dollars are used for the purchase of securities in foreign
countries. Also, some countries may adopt policies that would prevent a fund
from transferring cash out of the country or withhold portions of interest
and dividends at the source. There is the possibility of cessation of trading
on national exchanges, expropriation, nationalization, or confiscatory
taxation, withholding, and other foreign taxes on income or other amounts,
foreign exchange controls (which may include suspension of the ability to
transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments that
could affect investments in securities of issuers in foreign nations.
The funds may be affected either favorably or unfavorably by fluctuations in
the relative rates of exchange between the currencies of different nations,
by exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Further, certain currencies may not be internationally traded.
LOWER-RATED SECURITIES Although they may offer higher yields than do higher
rated securities, low rated and unrated debt securities generally involve
greater volatility of price and risk to principal and income, including the
possibility of default by, or bankruptcy of the issuers of the securities. In
addition, the markets in which low rated and unrated debt securities are
traded are more limited than those in which higher rated securities are
traded. The existence of limited markets for particular securities may
diminish a fund's ability to sell the securities at fair value either to meet
redemption requests or to respond to a specific economic event such as a
deterioration in the creditworthiness of the issuer. Reduced secondary market
liquidity for certain low rated or unrated debt securities may also make it
more difficult for a fund to obtain accurate market quotations for the
purposes of valuing the fund's portfolio. Market quotations are generally
available on many low rated or unrated securities only from a limited number
of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated debt securities may be more complex
than for issuers of higher rated securities. The ability of a fund to achieve
its investment goal may, to the extent of investment in low rated debt
securities, be more dependent upon such creditworthiness analysis than would
be the case if the fund were invested in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be
less sensitive to interest rate changes than higher rated investments, but
more sensitive to adverse economic downturns or individual corporate
developments. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in low rated debt
securities prices because the advent of a recession could lessen the ability
of a highly leveraged company to make principal and interest payments on its
debt securities. If the issuer of low rated debt securities defaults, a fund
may incur additional expenses to seek recovery.
BIOTECHNOLOGY COMPANIES The biotechnology industry is subject to extensive
government regulation. The industry will be affected by government regulatory
requirements, regulatory approval for new drugs and medical products, patent
considerations, product liability, and similar matters. For example, in the
past several years, the U.S. Congress has considered legislation concerning
healthcare reform and changes to the U.S. Food and Drug Administration's
(FDA) approval process. If such legislation is passed it may affect the
biotechnology industry. As these factors impact the biotechnology industry,
the value of your shares may fluctuate significantly over relatively short
periods of time.
Because the biotechnology industry is relatively new, investors may be quick
to react to developments that affect the industry. In the past, biotechnology
securities have exhibited considerable volatility in reaction to research and
other developments. In comparison to more developed industries, there may be
a thin trading market in biotechnology securities, and adverse developments
in the biotechnology industry may be more likely to result in decreases in
the value of biotechnology stocks.
Biotechnology companies are often small, start-up ventures whose products are
only in the research stage. Only a limited number of biotechnology companies
have reached the point of approval of products by the FDA and subsequent
commercial production and distribution of such products. Therefore, the
success of investments in the biotechnology industry is often based upon
speculation and expectations about future products, research progress, and
new product filings with regulatory authorities. Such investments are
speculative and may drop sharply in value in response to regulatory or
research setbacks.
HEALTH CARE COMPANIES The activities of health care companies may be funded
or subsidized by federal and state governments. If government subsidies are
discontinued, the profitability of these companies could be adversely
affected. Stocks of these companies will be affected by government policies
on health care reimbursements, regulatory approval for new drugs and medical
instruments, and similar matters. Health care companies are also subject to
legislative risk, which is the risk of a reform of the health care system
through legislation. Health care companies may face lawsuits related to
product liability issues. Also, many products and services provided by health
care companies are subject to rapid obsolescence. The value of an investment
in a fund may fluctuate significantly over relatively short periods of time.
YEAR 2000 On April 27, 1999, the U.S. General Accounting Office issued a
report on the readiness of Medicare and the health care sector for Year
2000. Among other things, this report noted that the health care industry
may be ill-prepared to deal with the potential disruptions brought about by
software problems caused by the change to the Year 2000. While the funds'
manager cannot audit each company in which the fund invests, its personnel
have reviewed the statements of preparedness of the companies owned by the
fund and, based upon these statements, does not expect significant
disruptions in these companies' business plans. The funds' manager will
continue to monitor the Year 2000 issue within the health care industry and
continue actively to incorporate Year 2000 preparedness as a factor in its
analysis of the funds' holdings.
UNSEASONED COMPANIES To the extent that a fund may invest in smaller
capitalization companies or other companies, it may place greater emphasis
upon investments in relatively new or unseasoned companies that are in their
early stages of development, or in new and emerging industries where the
opportunity for rapid growth is expected to be above average. Securities of
unseasoned companies present greater risks than securities of larger, more
established companies. Any investments in these types of companies, however,
will be limited in the case of issuers that have less than three years
continuous operation, including the operations of any predecessor companies,
to no more than 5% of the California Fund's total assets and to no more than
10% of the Small Cap Fund's net assets.
CALIFORNIA COMPANIES Since the California Fund mainly invests in California
companies' securities, its performance is dependent on economic, political
and other conditions within California. However, the fund tries to reduce the
effect on its portfolio of fluctuations in economic conditions in California
by investing a significant portion of its assets in companies whose financial
prospects are dependent on the global economy.
Below is a discussion of certain conditions that may affect California
companies. It is not a complete analysis of every material fact that may
affect the economic or political conditions within California and is subject
to change. The information below is based on data available to the fund from
historically reliable sources, but the fund has not independently verified it.
California's economy has been the largest of all the states in the nation.
Like many other states, however, California was significantly affected by the
national recession of the early 1990s, especially in the southern portion of
the state. Most of its job losses during its recession resulted from military
cutbacks and the downturn in the construction industry. Downsizing in the
state's aerospace industry, excess office capacity, and slow growth in
California's export market also contributed to the state's recession.
Since mid-1993, California's economic recovery has been fueled by growth in
the export, entertainment, tourism and computer services sectors. The state's
diverse employment base has reached prerecession levels with manufacturing
accounting for 14.5% of employment (based on 1997 state figures), trade
23.2%, services 30.8%, and government 16.3%. Despite strong employment
growth, California's unemployment rate has remained above the national
average. Recent economic problems in Asia have adversely affected the state's
high tech manufacturing and related industries, resulting in slower growth
than in previous years. Further weakening of the economies of California's
international trade partners could have a negative impact on the state.
REAL ESTATE SECURITIES Investments in real estate securities are subject to
the risks associated with the real estate industry. Economic, regulatory, and
social factors that affect the value of real estate will affect the value of
real estate securities. These factors include overbuilding and increased
competition, increases in property taxes and operating expenses, changes in
zoning laws, casualty or condemnation losses, variations in rental income,
changes in neighborhood values, the appeal of properties to tenants, and
increases in interest rates. REITs are subject to risks related to the skill
of their management, changes in value of the properties the REITs own, the
quality of any credit extended by the REITs, and general economic and other
factors.
DERIVATIVE SECURITIES The funds' transactions in options, futures, and
options on futures involve certain risks. These risks include, among others,
the risk that the effectiveness of a transaction depends on the degree that
price movements in the underlying securities, index, or currency correlate
with price movements in the relevant portion of the fund's portfolio. The
fund bears the risk that the prices of its portfolio securities will not move
in the same amount as the option or future it has purchased, or that there
may be a negative correlation that would result in a loss on both the
underlying securities and the derivative security.
In addition, adverse market movements could cause the fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss
by the fund of margin deposits in the event of bankruptcy of a broker with
whom the fund has an open position.
Positions in exchange traded options and futures may be closed out only on an
exchange that provides a secondary market. There can be no assurance that a
liquid secondary market will exist for any particular option or futures
contract at any specific time. Thus, it may not be possible to close an
option or futures position. The inability to close options or futures
positions may have an adverse impact on the fund's ability to effectively
hedge its securities. Furthermore, if the fund is unable to close out a
position and if prices move adversely, the fund will have to continue to make
daily cash payments to maintain its required margin. If the fund does not
have sufficient cash to do this, it may have to sell portfolio securities at
a disadvantageous time. The funds will enter into an option or futures
position only if there appears to be a liquid secondary market for the
options or futures.
Similarly, there can be no assurance that a continuous liquid secondary
market will exist for any particular OTC option at any specific time.
Consequently, the fund may be able to realize the value of an OTC option it
has purchased only by exercising it or by entering into a closing sale
transaction with the dealer that issued it. When a fund writes an OTC option,
it generally can close out that option prior to its expiration only by
entering into a closing purchase transaction with the dealer to which the
fund originally wrote it.
FORWARD CURRENCY EXCHANGE TRANSACTIONS While the Blue Chip Fund may enter
into forward currency transactions to reduce currency exchange rate risks,
these transactions involve certain other risks. Forward currency exchange
transactions may limit the potential gain to the fund from a positive change
in the relationship between the U.S. dollar and foreign currencies or between
foreign currencies. Unanticipated changes in currency exchange rates may
result in poorer overall performance for the fund than if it had not entered
into these transactions. Furthermore, there may be imperfect correlation
between the fund's portfolio securities denominated in a particular currency
and forward currency transactions entered into by the fund. This may cause
the fund to sustain losses that will prevent it from achieving a complete
hedge or expose it to the risk of foreign exchange loss.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS The securities underlying these
transactions are subject to market fluctuation prior to delivery and
generally do not earn interest until their scheduled delivery date. There is
the risk that the value or yield of the security at the time of delivery may
be more or less than the price paid for the security or the yield available
when the transaction was entered into.
STANDBY COMMITMENT AGREEMENTS There can be no assurance that the securities
underlying a standby commitment agreement will be issued. If issued, the
value of the security may be more or less than its purchase price. Since the
issuance of the security is at the option of the issuer, the Blue Chip Fund
may bear the risk of a decline in value of the security and may not benefit
if the security appreciates in value during the commitment period.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) introduced a
new single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of
currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets. While the
implementation of the euro could have a negative effect on the funds, the
funds' manager and its affiliated services providers are taking steps they
believe are reasonably designed to address the euro issue.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the trust's day-to-day
operations. The board also monitors each fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food
processing) (until 1996).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers) (until 1998).
*Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment
Advisory Services, Inc. and Franklin/Templeton Investor Services, Inc.; and
officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 52 of the investment
companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or
trustee, as the case may be, of 50 of the investment companies in the
Franklin Templeton Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and
H.J. Heinz Company (processed foods and allied products) (1994-present);
director or trustee, as the case may be, of 24 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and
Trustee (1993-1997), National Child Research Center, Assistant to the
President of the United States and Secretary of the Cabinet (1990-1993),
General Counsel to the United States Treasury Department (1989-1990), and
Counselor to the Secretary and Assistant Secretary for Public Affairs and
Public Liaison-United States Treasury Department (1988-1989).
*Charles B. Johnson (66)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Investment Advisory Services, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and Franklin Templeton
Services, Inc.; officer and/or director or trustee, as the case may be, of
most of the other subsidiaries of Franklin Resources, Inc. and of 49 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President,
Franklin Advisory Services, LLC; Director, Franklin/ Templeton Investor
Services, Inc.; and officer and/or director or trustee, as the case may be,
of most of the other subsidiaries of Franklin Resources, Inc. and of 52 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); director or trustee, as the case may be,
of 27 of the investment companies in the Franklin Templeton Group of Funds;
and FORMERLY, Director, Fischer Imaging Corporation (medical imaging
systems), Digital Transmission Systems, Inc. (wireless communications) and
Quarterdeck Corporation (software firm), and General Partner, Peregrine
Associates, which was the General Partner of Peregrine Ventures (venture
capital firm).
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 48 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and
Director, Templeton Investment Counsel, Inc.; Executive Vice President and
Chief Financial Officer, Franklin Advisers, Inc.; Chief Financial Officer,
Franklin Advisory Services, LLC and Franklin Investment Advisory Services,
Inc.; President and Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee, as the case may be, of 52 of
the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND SECRETARY
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 53 of the investment
companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (43)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment
Counsel, Inc.; Vice President, Franklin Advisers, Inc.; officer and/or
director of some of the other subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee, as the case may be, of 33 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $1,575 for each of the Trust's
eight regularly scheduled meetings plus $1,050 per meeting attended. Board
members who serve on the audit committee of the trust and other funds in the
Franklin Templeton Group of Funds receive a flat fee of $2,000 per committee
meeting attended, a portion of which is allocated to the trust. Members of a
committee are not compensated for any committee meeting held on the day of a
board meeting. Noninterested board members also may serve as directors or
trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve
on other boards within the Franklin Templeton Group of Funds. The following
table provides the total fees paid to noninterested board members by the
trust and by the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP ON WHICH EACH
NAME TRUST 1 ($) OF FUNDS 2 ($) SERVES 3
--------------------------------------------------------------------------------
Frank H. Abbott, III 13,935 159,051 27
Harris J. Ashton 16,280 361,157 48
S. Joseph Fortunato 15,279 367,835 50
Edith E. Holiday 18,975 211,400 24
Frank W.T. LaHaye 16,035 163,753 27
Gordon Macklin 16,280 361,157 48
1. For the fiscal year ended April 30, 1999. During the period from April 30,
1998, through May 31, 1998, fees at the rate of $300 for each of the Trust's
eight meetings plus $300 per meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the board members are responsible. The Franklin Templeton Group of
Funds currently includes 54 registered investment companies, with
approximately 162 U.S. based funds or series.
Noninterested board members are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED Each fund's manager is Franklin Advisers, Inc.
(Advisers). The manager is a wholly owned subsidiary of Franklin Resources,
Inc. (Resources), a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson,
Jr. are the principal shareholders of Resources.
The manager provides investment research and portfolio management services,
and selects the securities for each fund to buy, hold or sell. The manager
also selects the brokers who execute the funds' portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the funds, the manager and
its officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of
the other funds it manages, or for its own account, that may differ from
action taken by the manager on behalf of each fund. Similarly, with respect
to each fund, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the fund or other funds it manages. Of course, any transactions for the
accounts of the manager and other access persons will be made in compliance
with the funds' code of ethics.
Under the funds' code of ethics, employees of the Franklin Templeton Group
who are access persons may engage in personal securities transactions subject
to the following general restrictions and procedures: (i) the trade must
receive advance clearance from a compliance officer and must be completed by
the close of the business day following the day clearance is granted; (ii)
copies of all brokerage confirmations and statements must be sent to a
compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) above, file
annual reports of their securities holdings each January and inform the
compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they
are recommending a security in which they have an ownership interest for
purchase or sale by a fund or other client.
MANAGEMENT FEES The Aggressive Growth Fund and Large Cap Fund pay the manager a
fee computed at the close of business on the last business day of each month
according to the terms of the management agreement. Each class of each fund's
shares pays its proportionate share of the fee. The MidCap Fund pays the manager
a fee equal to an annual rate of 0.65% of the fund's average daily net assets.
The Blue Chip Fund pays the manager a fee equal to an annual rate of:
o 0.75% of the fund's average daily net assets up to and including $500
million;
o 0.625% of the fund's average daily net assets over $500 million up to and
including $1 billion; and
o 0.50% of the fund's average daily net assets over $1 billion
The California Fund and Small Cap Fund pay the manager a fee equal to an
annual rate of:
o 0.625 of 1% of the average daily net assets of the fund up to and
including $100 million;
o 0.50 of 1% of the value of the average daily net assets over $100
million, up to and including $250 million;
o 0.45 of 1% of the value of average daily net assets over $250 million up
to and including $10 billion;
o 0.44 of 1% of the value of average daily net assets over $10 billion up
to and including $12.5 billion;
o 0.42 of 1% of the value of average daily net assets over $12.5 billion up
to and including $15 billion; and
o 0.40 of 1% of the value of average daily net assets over $15 billion
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of a
fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended April 30, the funds paid the following
management fees:
MANAGEMENT FEES PAID ($) 1
-----------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------
Blue Chip Fund 2 134,052 17,998 0
California Fund 4,066,764 2,866,217 953,389
MidCap Fund 199,753 135,485 68,022
Small Cap Fund 20,630,510 13,566,077 3,859,067
1. No information is provided for the Aggressive Growth Fund and Large Cap Fund
because the funds were not in operation during these periods.
2. For the fiscal years ended April 30, 1999, 1998 and 1997, management fees,
before any advance waiver, totaled $205,441, $91,184 and $25,008, respectively.
Under an agreement by the manager to limit its fees, the fund paid the
management fees shown.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the Blue Chip Fund, California Fund, MidCap Fund
and Small Cap Fund. FT Services has an agreement with the Aggressive Growth
Fund and the Large Cap Fund to provide certain administrative services and
facilities for each fund. FT Services is wholly owned by Resources and is an
affiliate of the funds' manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES For the Blue Chip Fund, California Fund, MidCap Fund and
Small Cap Fund the manager pays FT Services a monthly fee equal to an annual
rate of:
o 0.15% of each fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
The Aggressive Growth Fund and Large Cap Fund pay FT Services a monthly fee
equal to an annual rate of 0.20% of each fund's average daily net assets.
During the last three fiscal years ended April 30, the manager paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($) 1
-------------------------------------------------
1999 1998 1997 2
------------------------------------------------------------------------------
Blue Chip Fund 41,211 15,838 3,786
California Fund 1,124,899 808,799 184,878
MidCap Fund 46,110 31,322 10,579
Small Cap Fund 3,971,753 2,794,347 717,201
1. No information is provided for the Aggressive Growth Fund and Large Cap Fund
because the funds were not in operation during these periods.
2. For the period October 1996 through April 30, 1997.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/ Templeton Investor
Services, Inc. (Investor Services) is each fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please
send all correspondence to Investor Services to P.O. Box 997151, Sacramento,
CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. Each
fund also will reimburse Investor Services for certain out-of-pocket
expenses, which may include payments by Investor Services to entities,
including affiliated entities, that provide sub-shareholder services,
recordkeeping and/or transfer agency services to beneficial owners of the
fund. The amount of reimbursements for these services per benefit plan
participant fund account per year will not exceed the per account fee payable
by the fund to Investor Services in connection with maintaining shareholder
accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of each fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105,
is the funds' independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
------------------------------------------------------------------------------
The manager selects brokers and dealers to execute the funds' portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid is
negotiated between the manager and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of
the persons responsible for placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being paid by other institutional investors of comparable size. The manager
will ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in
the opinion of the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager include, among others, supplying
information about particular companies, markets, countries, or local,
regional, national or transnational economies, statistical data, quotations
and other securities pricing information, and other information that provides
lawful and appropriate assistance to the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the funds. They must, however, be of value to the manager in carrying
out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on
the research services the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services allows the manager to supplement its
own research and analysis activities and to receive the views and information
of individuals and research staffs of other securities firms. As long as it
is lawful and appropriate to do so, the manager and its affiliates may use
this research and data in their investment advisory capacities with other
clients. If the funds' officers are satisfied that the best execution is
obtained, the sale of fund shares, as well as shares of other funds in the
Franklin Templeton Group of Funds, also may be considered a factor in the
selection of broker-dealers to execute the funds' portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when the funds tender portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the
funds, any portfolio securities tendered by a fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next
management fee payable to the manager will be reduced by the amount of any
fees received by Distributors in cash, less any costs and expenses incurred
in connection with the tender.
If purchases or sales of securities of the funds and one or more other
investment companies or clients supervised by the manager are considered at
or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by the manager, taking into account the respective sizes of
the funds and the amount of securities to be purchased or sold. In some cases
this procedure could have a detrimental effect on the price or volume of the
security so far as the funds are concerned. In other cases it is possible
that the ability to participate in volume transactions may improve execution
and reduce transaction costs to the funds.
During the last three fiscal years ended April 30, the funds paid the
following brokerage commissions:
BROKERAGE COMMISSIONS PAID ($) 1
-----------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------
Blue Chip Fund 56,175 48,160 14,667
California Fund 17,062,207 594,357 222,569
MidCap Fund 53,633 31,590 23,231
Small Cap Fund 2,187,594 14,648,944 1,155,691
1. No information is provided for the Aggressive Growth Fund and Large Cap
Fund because the funds were not in operation during these periods.
The table below shows the brokerage commissions each fund paid of its
aggregate portfolio transactions to brokers who provided research services
for the fiscal year ended April 30, 1999:
COMMISSIONS PAID IN
CONNECTION WITH
RESEARCH SERVICES AGGREGATE PORTFOLIO
PROVIDED ($) 1 TRANSACTIONS ($) 1
--------------------------------------------------------------------------------
Blue Chip Fund 55,840 39,550,375
California Fund 596,602 326,418,465
MidCap Fund 56,150 25,148,825
Small Cap Fund 2,645,470 1,092,883,339
1. No information is provided for the Aggressive Growth Fund and Large Cap
Fund because the funds were not in operation during these periods.
As of April 30, 1999, the Blue Chip Fund owned securities issued by the
following broker dealers: Charles Schwab & Co., Inc. valued in the aggregate
at $659,000, Merrill Lynch & Co., Inc. valued in the aggregate at $596,000
and Salomon Smith Barney valued in the aggregate at $764,000. The Small Cap
Fund owned securities issued by Hambrecht & Quist Group valued in the
aggregate at $14,100. Except as noted, the funds did not own any securities
issued by their regular broker-dealers as of the end of the fiscal year.
Because the funds may, from time to time, invest in broker-dealers, it is
possible that the funds will own more than 5% of the voting securities of one
or more broker-dealers through whom each fund places portfolio brokerage
transactions. In such circumstances, the broker-dealer would be considered an
affiliated person of the funds. To the extent the funds place brokerage
transactions through such a broker-dealer at a time when the broker-dealer is
considered to be an affiliate of the funds, the funds will be required to
adhere to certain rules relating to the payment of commissions to an
affiliated broker-dealer. These rules require the funds to adhere to
procedures adopted by the board relating to ensuring that the commissions
paid to such broker-dealers do not exceed what would otherwise be the usual
and customary brokerage commissions for similar transactions.
DISTRIBUTIONS AND TAXES
------------------------------------------------------------------------------
The funds calculate dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in the distribution and service (Rule 12b-1) fees of
each class. Distributions are subject to approval by the board. The funds do
not pay "interest" or guarantee any fixed rate of return on an investment in
their shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The funds receive income generally in
the form of dividends and interest on their investments. This income, less
expenses incurred in the operation of a fund, constitutes a fund's net
investment income from which dividends may be paid to you. Any distributions
by a fund from such income will be taxable to you as ordinary income, whether
you take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The funds may derive capital gains and losses
in connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in a fund. Any net capital gains realized by a fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce a fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce a fund's
ordinary income distributions to you, and may cause some or all of a fund's
previously distributed income to be classified as a return of capital.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year. If you have not held fund shares for a full year, a fund may
designate and distribute to you, as ordinary income or capital gain, a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The Aggressive Growth
Fund and Large Cap Fund intend to elect and qualify during the current fiscal
year to be treated as regulated investment companies under Subchapter M of
the Internal Revenue Code. The Blue Chip Fund, California Fund, MidCap Fund
and Small Cap Fund have elected to be treated as regulated investment
companies under Subchapter M of the Internal Revenue Code, have qualified as
such for their most recent fiscal years, and intend to so qualify during the
current fiscal year. As regulated investment companies, the funds generally
pay no federal income tax on the income and gains they distribute to you. The
board reserves the right not to maintain the qualification of a fund as a
regulated investment company if it determines such course of action to be
beneficial to shareholders. In such case, a fund will be subject to federal,
and possibly state, corporate taxes on its taxable income and gains, and
distributions to you will be taxed as ordinary dividend income to the extent
of such fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires a fund to distribute to you by December 31 of
each year, at a minimum, the following amounts: 98% of its taxable ordinary
income earned during the calendar year; 98% of its capital gain net income
earned during the twelve month period ending October 31; and 100% of any
undistributed amounts from the prior year. Each fund intends to declare and
pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you redeem
your fund shares, or exchange your fund shares for shares of a different
Franklin Templeton Fund, the IRS will require that you report a gain or loss
on your redemption or exchange. If you hold your shares as a capital asset,
the gain or loss that you realize will be capital gain or loss and will be
long-term or short-term, generally depending on how long you hold your
shares. Any loss incurred on the redemption or exchange of shares held for
six months or less will be treated as a long-term capital loss to the extent
of any long-term capital gains distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you buy other shares in
such fund (through reinvestment of dividends or otherwise) within 30 days
before or after your share redemption. Any loss disallowed under these rules
will be added to your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in a fund, and
then reinvest the sales proceeds in such fund or in another Franklin
Templeton Fund within 90 days of buying the original shares, the sales charge
that would otherwise apply to your reinvestment may be reduced or eliminated.
The IRS will require you to report gain or loss on the redemption of your
original shares in a fund. In doing so, all or a portion of the sales charge
that you paid for your original shares in a fund will be excluded from your
tax basis in the shares sold (for the purpose of determining gain or loss
upon the sale of such shares). The portion of the sales charge excluded will
equal the amount that the sales charge is reduced on your reinvestment. Any
portion of the sales charge excluded from your tax basis in the shares sold
will be added to the tax basis of the shares you acquire from your
reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by a fund. Investments in Government National Mortgage
Association or Federal National Mortgage Association securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 100% of the dividends paid by the Blue Chip
Fund, 31.71% of the dividends paid by the California Fund, 100% of the
dividends paid by the MidCap Fund and 37.50% of the dividends paid by the
Small Cap Fund for the most recent fiscal year qualified for the
dividends-received deduction. The Aggressive Growth Fund anticipates that a
portion of the dividends it pays will qualify for the dividends-received
deduction. Under normal market conditions the Large Cap Fund anticipates that
a significant portion of the dividends it pays will qualify for the dividends
received deduction. In some circumstances, you will be allowed to deduct
these qualified dividends, thereby reducing the tax that you would otherwise
be required to pay on these dividends. The dividends-received deduction will
be available only with respect to dividends designated by such fund as
eligible for such treatment. All dividends (including the deducted portion)
must be included in your alternative minimum taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES The funds may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to a fund and/or defer a fund's ability to recognize losses, and, in
limited cases, subject a fund to U.S. federal income tax on income from
certain of its foreign securities. In turn, these rules may affect the
amount, timing or character of the income distributed to you by a fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
------------------------------------------------------------------------------
Each fund, except the California Fund, is a diversified series of Franklin
Strategic Series, an open-end management investment company, commonly called
a mutual fund. The California Fund is a nondiversified series of Franklin
Strategic Series. The trust was organized as a Delaware business trust on
January 25, 1991, and is registered with the SEC.
Before July 12, 1993, the California Fund was named the Franklin California
250 Growth Fund. On that date, the fund's investment objective and various
investment policies were changed. Consistent with these changes, the fund's
name was changed to the Franklin California Growth Fund.
The MidCap Fund changed its name from FISCO MidCap Growth Fund to Franklin
Institutional MidCap Growth Fund on September 1, 1994, and to its current
name on April 18, 1996.
Certain Franklin Templeton Funds offer multiple classes of shares. The
different classes have proportionate interests in the same portfolio of
investment securities. They differ, however, primarily in their sales charge
structures and Rule 12b-1 plans.
The Aggressive Growth Fund and Large Cap Fund currently offer four classes of
shares, Class A, Class B, Class C and Advisor Class. The funds may offer
additional classes of shares in the future. The full title of each class is:
o Franklin Aggressive Growth Fund - Class A
o Franklin Aggressive Growth Fund - Class B
o Franklin Aggressive Growth Fund - Class C
o Franklin Aggressive Growth Fund - Advisor Class
o Franklin Large Cap Growth Fund - Class A
o Franklin Large Cap Growth Fund - Class B
o Franklin Large Cap Growth Fund - Class C
o Franklin Large Cap Growth Fund - Advisor Class
The California Fund currently offers three classes of
shares, Class A, Class B and Class C. Before January 1, 1999, Class A shares
of the California Fund were designated Class I and Class C shares of the
California Fund were designated Class II. The California Fund began offering
Class B shares on January 1, 1999. The fund may offer additional classes of
shares in the future. The full title of each class is:
o Franklin California Growth Fund - Class A
o Franklin California Growth Fund - Class B
o Franklin California Growth Fund - Class C
The Small Cap Fund currently offers three classes of shares, Class A, Class C
and Advisor Class. Before January 1, 1999, Class A shares were designated
Class I and Class C shares were designated Class II. The fund may offer
additional classes of shares in the future. The full title of each class is:
o Franklin Small Cap Growth Fund - Class A
o Franklin Small Cap Growth Fund - Class C
o Franklin Small Cap Growth Fund - Advisor Class
The Blue Chip Fund and MidCap Fund each offer only one share class. Because
the funds' sales charge structure and Rule 12b-1 plan are similar to those of
Class A shares, shares of the funds are considered Class A shares for
redemption, exchange and other purposes. Before January 1, 1999, Class A
shares were designated Class I. The funds may offer additional classes of
shares in the future.
Shares of each class represent proportionate interests in each fund's assets.
On matters that affect each fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
separately on matters affecting only that class, or expressly required to be
voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes
and series of the trust for matters that affect the trust as a whole.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all
of the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are
required to help you communicate with other shareholders about the removal of
a board member. A special meeting also may be called by the board in its
discretion.
As of June 8, 1999, the principal shareholders of the fund, beneficial or of
record, were:
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
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MIDCAP FUND
Franklin Resources, Inc.1
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Flr.
Burlingame, CA 94010 Class A 18
SMALL CAP FUND
First Union National Bank Ttee
FBO Willis Corroon Corporation
A/C 1040108756
1525 West WT Harris Blvd.
NC-1151
Charlotte, NC 28288 Advisor Class 6
The Northern Trust Company Trst
for the Nalco Chemical Co Ret Trst
50 S. LaSalle St.
Chicago, IL 60675 Advisor Class 6
Old Second National Bank of Aurora
C/O Trust Operations Division
37 South River St.
Aurora, IL 60506-4173 Advisor Class 7
Trust Company of Illinois
45 S. Park Blvd., Ste. 315
Glen Ellyn, IL 60137-6282 Advisor Class 7
1. Franklin Resources, Inc. is a Delaware Corporation.
Note: Charles B. Johnson and Rupert H. Johnson, Jr., who are officers and/or
trustees of the trust, may be considered beneficial holders of the fund
shares held by Franklin Resources, Inc. (Resources). As principal
shareholders of Resources, they may be able to control the voting of
Resources' shares of the fund.
From time to time, the number of fund shares held in the "street name"
accounts of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
As of June 8, 1999, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each fund
and class. The board members may own shares in other funds in the Franklin
Templeton Group of Funds.
BUYING AND SELLING SHARES
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The funds continuously offer their shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer
orders and accounts with the fund. This reference is for convenience only and
does not indicate a legal conclusion of capacity. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of a fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the funds must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank. We may deduct any applicable banking
charges imposed by the bank from your account.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the fund we may impose a $10 charge against your account for each returned
item.
If you buy shares through the reinvestment of dividends, the shares will be
purchased at the net asset value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not
affect the amount or value of the shares acquired.
INITIAL SALES CHARGES The maximum initial sales charge is 5.75% for Class A
and 1% for Class C. There is no initial sales charge for Class B.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of
the lower sales charges for large purchases. The Franklin Templeton Funds
include the U.S. registered mutual funds in the Franklin Group of Funds(R) and
the Templeton Group of Funds except Franklin Templeton Variable Insurance
Products Trust, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge
by completing the letter of intent section of your account application. A
letter of intent is a commitment by you to invest a specified dollar amount
during a 13 month period. The amount you agree to invest determines the sales
charge you pay. By completing the letter of intent section of the
application, you acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the
sales charge applicable to the amount specified in your LOI. Sales charge
reductions based on purchases in more than one Franklin Templeton Fund will
be effective only after notification to Distributors that the investment
qualifies for a discount. Any Class A purchases you made within 90 days
before you filed your LOI also may qualify for a retroactive reduction in the
sales charge. If you file your LOI with the fund before a change in the
fund's sales charge, you may complete the LOI at the lower of the new sales
charge or the sales charge in effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days
before you filed your LOI will be counted towards the completion of the LOI,
but they will not be entitled to a retroactive reduction in the sales charge.
Any redemptions you make during the 13 month period, except in the case of
certain retirement plans, will be subtracted from the amount of the purchases
for purposes of determining whether the terms of the LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of
your total purchases, less redemptions, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases.
If the amount of your total purchases, less redemptions, is less than the
amount specified in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, the
reserved shares held for your account will be deposited to an account in your
name or delivered to you or as you direct. If within 20 days after written
request the difference in sales charge is not paid, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.
For LOIs filed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the LOI. These plans are not subject to the requirement to reserve 5%
of the total intended purchase or to the policy on upward adjustments in
sales charges described above, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class
A shares at a reduced sales charge that applies to the group as a whole. The
sales charge is based on the combined dollar value of the group members'
existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group generally does not include a 403(b) plan that only allows
salary deferral contributions, although any such plan that purchased the
fund's Class A shares at a reduced sales charge under the group purchase
privilege before February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be
purchased without an initial sales charge or contingent deferred sales charge
(CDSC) by investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders who chose to
reinvest their distributions in Class A shares of the fund before November
17, 1997, and to Advisor Class or Class Z shareholders of a Franklin
Templeton Fund who may reinvest their distributions in the fund's Class A
shares. This waiver category also applies to Class B and C shares.
o Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option
the Franklin Templeton Variable Insurance Products Trust or the Templeton
Variable Products Series Fund. You should contact your tax advisor for
information on any tax consequences that may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
o If you immediately placed your redemption proceeds in a Franklin Bank CD
or a Franklin Templeton money fund, you may reinvest them as described
above. The proceeds must be reinvested within 365 days from the date the
CD matures, including any rollover, or the date you redeem your money fund
shares.
o Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund
shares and the CDSC holding period will begin again. We will, however,
credit your fund account with additional shares based on the CDSC you
previously paid and the amount of the redemption proceeds that you
reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without
an initial sales charge or CDSC by various individuals and institutions due
to anticipated economies in sales efforts and expenses, including:
o Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
o Any state or local government or any instrumentality, department,
authority or agency thereof that has determined the fund is a legally
permissible investment and that can only buy fund shares without paying
sales charges. Please consult your legal and investment advisors to
determine if an investment in the fund is permissible and suitable for you
and the effect, if any, of payments by the fund on arbitrage rebate
calculations.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting
distributions from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
In addition, Class C shares may be purchased without an initial sales charge
by any investor who buys Class C shares through an omnibus account with
Merrill Lynch Pierce Fenner & Smith, Inc. A CDSC may apply, however, if the
shares are sold within 18 months of purchase.
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales
charge. Retirement plans that are not qualified retirement plans (employer
sponsored pension or profit-sharing plans that qualify under section 401 of
the Internal Revenue Code, including 401(k), money purchase pension, profit
sharing and defined benefit plans), SIMPLEs (savings incentive match plans
for employees) or SEPs (employer sponsored simplified employee pension plans
established under section 408(k) of the Internal Revenue Code) must also meet
the group purchase requirements described above to be able to buy Class A
shares without an initial sales charge. We may enter into a special
arrangement with a securities dealer, based on criteria established by the
fund, to add together certain small qualified retirement plan accounts for
the purpose of meeting these requirements.
For retirement plan accounts opened on or after May 1, 1997, a CDSC may apply
if the retirement plan is transferred out of the Franklin Templeton Funds or
terminated within 365 days of the retirement plan account's initial purchase
in the Franklin Templeton Funds.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, each fund's shares are available to these banks' trust accounts
without a sales charge. The banks may charge service fees to their customers
who participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining
a service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
Each fund's Class A shares may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class A
shares may be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
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Under $30,000 3.0
$30,000 but less than $50,000 2.5
$50,000 but less than $100,000 2.0
$100,000 but less than $200,000 1.5
$200,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge. A securities dealer who receives 90% or more of the sales charge may
be deemed an underwriter under the Securities Act of 1933, as amended.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the funds' prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares of $1 million or more: 1% on sales of $1 million to $2 million, plus
0.80% on sales over $2 million to $3 million, plus 0.50% on sales over $3
million to $50 million, plus 0.25% on sales over $50 million to $100 million,
plus 0.15% on sales over $100 million.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors or one of its affiliates may pay up to 1%, out of its own
resources, to securities dealers who initiate and are responsible for
purchases of Class A shares by certain retirement plans without an initial
sales charge. These payments may be made in the form of contingent advance
payments, which may be recovered from the securities dealer or set off
against other payments due to the dealer if shares are sold within 12 months
of the calendar month of purchase. Other conditions may apply. All terms and
conditions may be imposed by an agreement between Distributors, or one of its
affiliates, and the securities dealer.
In addition to the payments above, Distributors and/or its affiliates may
provide financial support to securities dealers that sell shares of the
Franklin Templeton Group of Funds. This support is based primarily on the
amount of sales of fund shares and/or total assets with the Franklin
Templeton Group of Funds. The amount of support may be affected by: total
sales; net sales; levels of redemptions; the proportion of a securities
dealer's sales and marketing efforts in the Franklin Templeton Group of
Funds; a securities dealer's support of, and participation in, Distributors'
marketing programs; a securities dealer's compensation programs for its
registered representatives; and the extent of a securities dealer's marketing
programs relating to the Franklin Templeton Group of Funds. Financial support
to securities dealers may be made by payments from Distributors' resources,
from Distributors' retention of underwriting concessions and, in the case of
funds that have Rule 12b-1 plans, from payments to Distributors under such
plans. In addition, certain securities dealers may receive brokerage
commissions generated by fund portfolio transactions in accordance with the
rules of the National Association of Securities Dealers, Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity
discount or letter of intent programs, a CDSC may apply on any shares you
sell within 12 months of purchase. For Class C shares, a CDSC may apply if
you sell your shares within 18 months of purchase. The CDSC is 1% of the
value of the shares sold or the net asset value at the time of purchase,
whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class A shares without an initial sales charge also may be
subject to a CDSC if the retirement plan is transferred out of the Franklin
Templeton Funds or terminated within 365 days of the account's initial
purchase in the Franklin Templeton Funds.
For Class B shares, there is a CDSC if you sell your shares within six years,
as described in the table below. The charge is based on the value of the
shares sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES WITHIN THIS % IS DEDUCTED FROM
THIS MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
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1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Sales of Class A shares purchased without an initial sales charge by
certain retirement plan accounts if (i) the account was opened before May
1, 1997, or (ii) the securities dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the securities dealer of
record has entered into a supplemental agreement with Distributors
o Redemptions of Class A shares by investors who purchased $1 million or
more without an initial sales charge if the securities dealer of record
waived its commission in connection with the purchase
o Redemptions by the funds when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February
1, 1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's net asset value depending on the frequency of
your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R) (not applicable to Class B)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy (for
Class B, this applies to all retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is each fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments, unless it is believed
that attractive investment opportunities consistent with the fund's
investment goals exist immediately. This money will then be withdrawn from
the short-term, interest-bearing money market instruments and invested in
portfolio securities in as orderly a manner as is possible when attractive
investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally
not available until the seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of fund shares to complete an exchange will
be effected at net asset value at the close of business on the day the
request for exchange is received in proper form.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at
least $50. For retirement plans subject to mandatory distribution
requirements, the $50 minimum will not apply. There are no service charges
for establishing or maintaining a systematic withdrawal plan.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. When you sell your
shares under a systematic withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan also
may be subject to a CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. The fund may discontinue a systematic
withdrawal plan by notifying you in writing and will automatically
discontinue a systematic withdrawal plan if all shares in your account are
withdrawn or if the fund receives notification of the shareholder's death or
incapacity.
REDEMPTIONS IN KIND Each fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the U.S. Securities
and Exchange Commission (SEC). In the case of redemption requests in excess
of these amounts, the board reserves the right to make payments in whole or
in part in securities or other assets of the fund, in case of an emergency,
or if the payment of such a redemption in cash would be detrimental to the
existing shareholders of the fund. In these circumstances, the securities
distributed would be valued at the price used to compute the fund's net
assets and you may incur brokerage fees in converting the securities to cash.
Redemptions in kind are taxable transactions. The fund does not intend to
redeem illiquid securities in kind. If this happens, however, you may not be
able to recover your investment in a timely manner.
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This
eliminates the costly problem of replacing lost, stolen or destroyed
certificates. If a certificate is lost, stolen or destroyed, you may have to
pay an insurance premium of up to 2% of the value of the certificate to
replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to the fund marked
"unable to forward" by the postal service, we will consider this a request by
you to change your dividend option to reinvest all distributions. The
proceeds will be reinvested in additional shares at net asset value until we
receive new instructions.
Distribution or redemption checks sent to you do not
earn interest or any other income during the time the checks remain uncashed.
Neither the funds nor their affiliates will be liable for any loss caused by
your failure to cash such checks. The funds are not responsible for tracking
down uncashed checks, unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the funds are not bound
to meet any redemption request in less than the seven day period prescribed
by law. Neither the funds nor their agents shall be liable to you or any
other person if, for any reason, a redemption request by wire is not
processed as described in the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the funds
on behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such owners. For each beneficial owner in the
omnibus account, the fund may reimburse Investor Services an amount not to
exceed the per account fee that the fund normally pays Investor Services.
These financial institutions also may charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. If you sell shares
through your securities dealer, it is your dealer's responsibility to
transmit the order to the fund in a timely fashion. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
notice of levy.
PRICING SHARES
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When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of
shares outstanding.
Each fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther
King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, each fund values those securities at the last quoted sale price of
the day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. Each fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, each fund values them according to the broadest and most
representative market as determined by the manager.
The fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
The fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
close of trading on the NYSE, if that is earlier. The value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined. If no sale is reported at that time, the foreign security is
valued within the range of the most recent quoted bid and ask prices.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and
the close of the exchange and will, therefore, not be reflected in the
computation of the NAV. If events materially affecting the values of these
foreign securities occur during this period, the securities will be valued in
accordance with procedures established by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the NAV. If events materially affecting the values of these
securities occur during this period, the securities will be valued at their
fair value as determined in good faith by the board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the board. With the approval of
the board, each fund may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of each fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. Each fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the funds' shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
April 30,:
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
--------------------------------------------------------------------------------
1999
Blue Chip Fund 360,101 49,226 8
California Fund 3,857,071 433,509 125,886
MidCap Fund 290,614 38,279 12,053
Small Cap Fund 15,233,910 1,589,079 828,220
1998
Blue Chip Fund 226,140 25,642 0
California Fund 7,612,566 762,027 10,657
MidCap Fund 259,668 29,262 0
Small Cap Fund 30,947,759 2,943,926 64,163
1997
Blue Chip Fund 76,980 8,755 0
California Fund 4,836,624 518,921 1,701
MidCap Fund 140,519 16,023 0
Small Cap Fund 11,056,311 1,097,126 33,425
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) fees Each class has a separate distribution
or "Rule 12b-1" plan. Under each plan, the fund shall pay or may reimburse
Distributors or others for the expenses of activities that are primarily
intended to sell shares of the class. These expenses may include, among
others, distribution or service fees paid to securities dealers or others who
have executed a servicing agreement with the fund, Distributors or its
affiliates; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
The distribution and service (12b-1) fees charged to each class are based
only on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by California Fund and Small Cap Fund under the
Class A plan may not exceed 0.25% per year of Class A's average daily net
assets, payable quarterly. All distribution expenses over this amount will be
borne by those who have incurred them.
Payments by the Aggressive Growth Fund, Blue Chip Fund, Large Cap Fund and
MidCap Fund under the Class A plan may not exceed 0.35% per year of Class A's
average daily net assets, payable quarterly. All distribution expenses over
this amount will be borne by those who have incurred them.
THE CLASS B AND C PLANS. Under the Class B and C plans, the funds pay
Distributors up to 0.75% per year of the class's average daily net assets,
payable monthly for the Aggressive Growth Fund, California Fund - Class B,
Large Cap Fund and Small Cap Fund and quarterly for the California Fund -
Class C, to pay Distributors or others for providing distribution and related
services and bearing certain expenses. All distribution expenses over this
amount will be borne by those who have incurred them. The fund also may pay a
servicing fee of up to 0.25% per year of the class's average daily net
assets, payable monthly for the Aggressive Growth Fund, California Fund -
Class B, Large Cap Fund and Small Cap Fund and quarterly for the California
Fund - Class C. This fee may be used to pay securities dealers or others for,
among other things, helping to establish and maintain customer accounts and
records, helping with requests to buy and sell shares, receiving and
answering correspondence, monitoring dividend payments from the funds on
behalf of customers, and similar servicing and account maintenance activities.
The expenses relating to each of the Class B and C plans also are used to pay
Distributors for advancing the commission costs to securities dealers with
respect to the initial sale of Class B and C shares. Further, the expenses
relating to the Class B plan may be used by Distributors to pay third party
financing entities that have provided financing to Distributors in connection
with advancing commission costs to securities dealers.
THE CLASS A, B AND C PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the fund, the manager or Distributors or other parties on behalf of
the fund, the manager or Distributors make payments that are deemed to be for
the financing of any activity primarily intended to result in the sale of
fund shares within the context of Rule 12b-1 under the Investment Company Act
of 1940, as amended, then such payments shall be deemed to have been made
pursuant to the plan. The terms and provisions of each plan relating to
required reports, term, and approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks will not be entitled to participate in the plans as a result of
applicable federal law prohibiting certain banks from engaging in the
distribution of mutual fund shares. These banking institutions, however, are
permitted to receive fees under the plans for administrative servicing or for
agency transactions. If you are a customer of a bank that is prohibited from
providing these services, you would be permitted to remain a shareholder of
the fund, and alternate means for continuing the servicing would be sought.
In this event, changes in the services provided might occur and you might no
longer be able to avail yourself of any automatic investment or other
services then being provided by the bank. It is not expected that you would
suffer any adverse financial consequences as a result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1.
The plans are renewable annually by a vote of the board, including a majority
vote of the board members who are not interested persons of the fund and who
have no direct or indirect financial interest in the operation of the plans,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such board members be done by the
noninterested members of the funds' board. The plans and any related
agreement may be terminated at any time, without penalty, by vote of a
majority of the noninterested board members on not more than 60 days' written
notice, by Distributors on not more than 60 days' written notice, by any act
that constitutes an assignment of the management agreement with the manager
or by vote of a majority of the outstanding shares of the class. The Class A
plans also may be terminated by any act that constitutes an assignment of the
underwriting agreement with Distributors. Distributors or any dealer or other
firm also may terminate their respective distribution or service agreement at
any time upon written notice.
The plans and any related agreements may not be amended to increase
materially the amount to be spent for distribution expenses without approval
by a majority of the outstanding shares of the class, and all material
amendments to the plans or any related agreements shall be approved by a vote
of the noninterested board members, cast in person at a meeting called for
the purpose of voting on any such amendment.
Distributors is required to report in writing to the board at least quarterly
on the amounts and purpose of any payment made under the plans and any
related agreements, as well as to furnish the board with such other
information as may reasonably be requested in order to enable the board to
make an informed determination of whether the plans should be continued.
For the fiscal year ended April 30, 1999, Distributors' eligible expenditures
for advertising, printing, payments
to underwriters and broker-dealers and other expenses pursuant to the plans
and the amounts the funds paid Distributors under the plans were:
DISTRIBUTORS' AMOUNT PAID
ELIGIBLE BY THE
EXPENSES ($) 1 FUND ($) 1
--------------------------------------------------------------------------------
Blue Chip Fund 110,997 82,281
California Fund
Class A 2,176,459 1,782,674
Class B 77,390 3,982
Class C 1,446,655 1,352,080
MidCap Fund 110,173 77,031
Small Cap Fund
Class A 10,974,973 9,218,844
Class C 8,380,334 6,923,739
1. No information is provided for the Aggressive Growth Fund and Large Cap
Fund because the funds were not in operation during these periods.
------------------------------------------------------------------------------
PERFORMANCE
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the funds be accompanied
by certain standardized performance information computed as required by the
SEC.
Average annual total return quotations used by the funds are based on the
standardized methods of computing performance mandated by the SEC.
Performance figures reflect Rule 12b-1 fees from the date of the plan's
implementation. An explanation of these and other methods used by the funds
to compute or express performance follows. Regardless of the method used,
past performance does not guarantee future results, and is an indication of
the return to shareholders only for the limited historical period used.
Because the Aggressive Growth Fund and Large Cap Fund are new, they have no
performance history and thus no performance quotations have been provided.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum initial sales charge is
deducted from the initial $1,000 purchase, and income dividends and capital
gain distributions are reinvested at net asset value. The quotation assumes
the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum initial sales charge currently in effect.
When considering the average annual total return quotations for Class A and C
shares, you should keep in mind that the maximum initial sales charge
reflected in each quotation is a one time fee charged on all direct
purchases, which will have its greatest impact during the early stages of
your investment. This charge will affect actual performance less the longer
you retain your investment in the fund. The average annual total returns for
the indicated periods ended April 30, 1999, were:
1 5 SINCE
INCEPTION YEAR YEARS INCEPTION
DATE (%) (%) (%)
-------------------------------------------------------------------------
CLASS A
Blue Chip Fund 06/03/96 9.50 - 12.03
California Fund 10/30/91 0.29 22.92 18.96
MidCap Fund 08/17/93 -11.72 13.65 12.18
Small Cap Fund 02/14/92 -8.99 19.00 17.42
1 SINCE
INCEPTION YEAR INCEPTION
DATE (%) (%)
-------------------------------------------------------------------------
CLASS C
California Fund 09/03/96 3.63 17.41
Small Cap Fund 10/02/95 -5.99 13.55
The following SEC formula was used to calculate these figures:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, income dividends and capital gain distributions are
reinvested at net asset value, the account was completely redeemed at the end
of each period and the deduction of all applicable charges and fees.
Cumulative total return, however, is based on the actual return for a
specified period rather than on the average return over the periods indicated
above. The cumulative total returns for the indicated periods ended April 30,
1999, were:
1 5 SINCE
INCEPTION YEAR YEARS INCEPTION
DATE (%) (%) (%)
----------------------------------------------------------------------------
CLASS A
Blue Chip Fund 06/03/96 9.50 - 39.12
California Fund 10/30/91 0.29 180.61 267.75
MidCap Fund 08/17/93 -11.72 89.57 92.60
Small Cap Fund 02/14/92 -8.99 138.64 218.18
1 SINCE
INCEPTION YEAR INCEPTION
DATE (%) (%)
----------------------------------------------------------------------------
CLASS C
California Fund 09/03/96 3.63 53.12
Small Cap Fund 10/02/95 -5.99 57.56
VOLATILITY Occasionally statistics may be used to show a fund's volatility or
risk. Measures of volatility or risk are generally used to compare a fund's
net asset value or performance to a market index. One measure of volatility
is beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities
in which the fund invests. A beta of more than 1.00 indicates volatility
greater than the market and a beta of less than 1.00 indicates volatility
less than the market. Another measure of volatility or risk is standard
deviation. Standard deviation is used to measure variability of net asset
value or total return around an average over a specified period of time. The
idea is that greater volatility means greater risk undertaken in achieving
performance.
OTHER PERFORMANCE QUOTATIONS The funds also may quote the performance of
shares without a sales charge. Sales literature and advertising may quote a
cumulative total return, average annual total return and other measures of
performance with the substitution of net asset value for the public offering
price.
Sales literature referring to the use of the fund as a potential investment
for IRAs, business retirement plans, and other tax-advantaged retirement
plans may quote a total return based upon compounding of dividends on which
it is presumed no federal income tax applies.
Each fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of the Franklin Templeton Group of
Funds.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials also may compare performance (as calculated
above) to performance as reported by other investments, indices, and
averages. These comparisons may include, but are not limited to, the
following examples:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally the leaders in their industry),
the Dow Jones Transportation Average (20 transportation stocks) and the
Dow Jones Utilities Average (15 utility stocks involved in the production
of electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - an
unmanaged capitalization-weighted index designed to measure performance of
the broad domestic economy through changes in the aggregate market value
of 500 stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks
listed on the NYSE.
o Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
o Financial publications: THE WALL STREET JOURNAL, and BUSINESS WEEK,
FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide
performance statistics over specified time periods.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.
ADDITIONAL COMPARISONS - AGGRESSIVE GROWTH FUND
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Russell 3000(R) Growth Index - measures the performance of those Russell
3000 Index companies with higher price-to-book ratios and higher
forecasted growth values. The stocks in this index are also members of
either the Russell 1000 Growth or the Russell 2000 Growth indexes.
o Standard & Poor's(R) MidCap 400 Index - consists of 400 domestic stocks
chosen for market size (median market capitalization of $676 million),
liquidity and industry group representation. It is a market-value weighted
index, with each stock affecting the index in proportion to its market
value. This index, calculated by S&P, is a total return index with
dividends reinvested.
ADDITIONAL COMPARISONS - BLUE CHIP FUND
o Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Morgan Stanley Capital International World Index - an arithmetic average
(weighted by market value) index based in US dollars of the performance of
approximately 1,500 securities listed on the stock exchanges of 22
countries including the US, Europe, Canada, Australia, New Zealand and the
Far East with gross dividends reinvested.
ADDITIONAL COMPARISONS - CALIFORNIA FUND
o Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o Valueline Index - an unmanaged index which follows the stock of
approximately 1,700 companies.
o Bateman Eichler Hill Richards Western Stock Index - A managed index
representing 215 stocks of companies within the Western United States.
Seventy-five percent of the stocks are Californian companies, the
remaining 25% represent companies in: Arizona, Hawaii, Nevada, Oregon and
Washington.
o Russell 3000 Index - composed of 3,000 large U.S. companies by market
capitalization, representing approximately 98% of the U.S. equity market.
o Russell 2000 Small Stock Index - consists of the smallest 2,000 companies
in the Russell 3000 Index, representing approximately 11% of the Russell
3000 total market capitalization.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Franklin California 250 Growth Index - consists of the 250 largest
California based companies on an equal weighted basis in order to
approximately diversify and correlate with the business segment weightings
of the actual economy (as provided by the Gross State Product). By doing
so, the Index will have an orientation towards small cap growth companies,
mainly high tech and services related firms. The Index is equally weighted
as opposed to market weighted, meaning each company represents 0.4% of the
total index.
o Bloomberg California Index - a price-weighted index designed to measure
the performance of California's economy. The index was developed with a
base value of 100 as of December 30, 1994.
Additional Comparisons - Large Cap Fund
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Russell 3000(R) Index measures the performance of the 3,000 largest US
companies based on total market capitalization.
o Russell 1000(R) Index measures the performance of the 1,000 largest
companies in the Russell 3000 Index.
o The Wilshire Top 2500 Index consists of the largest 2500 companies in the
Wilshire 5000.
ADDITIONAL COMPARISONS - MIDCAP FUND
o Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o The Wilshire 4500 Equity Index - a market value-weighted index of all
U.S. common equity securities with readily available price data (excluding
the S&P 500 securities which together with the 4500 comprise the Wilshire
5000). It is a total return index with dividends reinvested.
o The Wilshire Mid Cap 750 - overlaps both the top 750 and next 1750 of the
Wilshire 2500 universe (the top 2500 companies and 99% of the market
capitalization of the Wilshire 5000). Wilshire includes companies that
have market capitalizations ranging from $300 million to $1.3 billion. The
portfolio contains from 125 to 500 securities.
o The Russell 2000 Index - consists of the 2,000 smallest securities in the
Russell 3000 Index. Representing approximately 11% of the Russell 3000
total market capitalization, this is Russell's Small Cap Index.
o The Russell 2500 Index - consists of the bottom 500 securities in the
Russell Index, as ranked by total market capitalization, and all 2,000
securities in the Russell 2000 Index. This Index is a measure of small to
medium-small stock performance.
o The Russell 3000 Index - consists of 3,000 large U.S. companies, as
determined by market capitalization. This portfolio of securities
represents approximately 98% of the investable U.S. equity market.
o Valueline Index - an unmanaged index which follows the stock of
approximately 1700 companies.
o Standard & Poor's(R) 400 - consists of 400 domestic stocks chosen for
market size, liquidity and industry group representation. It is a
market-value weighted index, with each stock affecting the Index in
proportion to its market value. This index, calculated by S&P, is a total
return index with dividends reinvested.
o Total Return Performance - The example below may be used to illustrate
the fund's performance, when compared to the total return of the Wilshire
5000 Index, Standard and Poor's 500 Index and the Standard and Poor's
Midcap Index:
Annual Performance from 1989 through 1998
S&P S&P WILSHIRE
500 MIDCAP 5000
-------------------------------------------------------------------------
1989 31.69 35.52 29.18
1990 -3.10 -5.13 -6.18
1991 30.47 50.10 34.21
1992 7.62 11.91 8.98
1993 10.08 13.95 11.30
1994 1.32 -3.58 -0.06
1995 37.58 30.95 36.47
1996 22.96 19.20 21.21
1997 33.36 32.25 31.29
1998 28.58 19.11 23.43
ADDITIONAL COMPARISONS - SMALL CAP FUND
o Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o The Russell 2000 Index - consists of the 2,000 smallest securities in the
Russell 3000 Index. Representing approximately 11% of the Russell 3000
total market capitalization, this is Russell's Small Cap Index.
o The Russell 2500 Index - consists of the bottom 500 securities in the
Russell Index, as ranked by total market capitalization, and all 2,000
securities in the Russell 2000 Index. This Index is a measure of small to
medium-small stock performance.
o The Russell 3000 Index - consists of 3,000 large U.S. companies, as
determined by market capitalization. This portfolio of securities
represents approximately 98% of the investable U.S. equity market.
From time to time, advertisements or information for each fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or information also may compare each fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, if any, as well as
the value of its shares that are based upon the value of such portfolio
investments, can be expected to decrease. Conversely, when interest rates
decrease, the value of the fund's shares can be expected to increase. CDs are
frequently insured by an agency of the U.S. government. An investment in a
fund is not insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to any fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by a fund to calculate its figures. In
addition, there can be no assurance that a fund will continue their
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
------------------------------------------------------------------------------
The funds may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the funds cannot guarantee that these goals will be met.
The funds are members of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of
the oldest mutual fund organizations and now services more than 4 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined
forces with Templeton, a pioneer in international investing. The Mutual
Series team, known for its value-driven approach to domestic equity
investing, became part of the organization four years later. Together, the
Franklin Templeton Group has over $227 billion in assets under management for
more than 7 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 112 U.S. based open-end
investment companies to the public. Each fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the funds are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
You will receive the Small Cap Fund's financial reports every six months. If
you would like to receive an interim report of the fund's portfolio holdings,
please call 1-800/DIAL BEN(R).
DESCRIPTION OF RATINGS
------------------------------------------------------------------------------
PREFERRED STOCKS RATINGS
STANDARD & POOR'S CORPORATION (S&P)
AAA: This is the highest rating that may be assigned by S&P to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations.
AA: A preferred stock issue rated AA also qualifies as a high quality
fixed-income security. The capacity to pay preferred stock obligations is
very strong, although not as overwhelming as for issues rated AAA.
A: An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions.
BBB: An issue rated BBB is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to make payments for a
preferred stock in this category than for issues in the A category.
BB, B and CCC: Preferred stock rated BB, B, and CCC are regarded, on balance,
as predominately speculative with respect to the issuer's capacity to pay
preferred stock obligations. BB indicates the lowest degree of speculation
and CCC the highest degree of speculation. While these issues will likely
have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CC: The rating CC is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C: A preferred stock rated C is a non-paying issue.
D: A preferred stock rated D is a non-paying issue with the issuer in default
on debt instruments.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Plus (+) or Minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A: Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating also may reflect the
filing of a bankruptcy petition under circumstances where debt service
payments are continuing. The C1 rating is reserved for income bonds on which
no interest is being paid.
D: Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's commercial
paper ratings are opinions of the ability of issuers to repay punctually
their promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designations for both short-term
debt and commercial paper, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
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.
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
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
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
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
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
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
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.
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
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
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
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
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
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.
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
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
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
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.
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
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
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
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
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
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.
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
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
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
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
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
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
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
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
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
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.
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
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
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
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
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
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
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
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.
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
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
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
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.
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
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
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
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
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
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
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
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.
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
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
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
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.
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
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
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
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.
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
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
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
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
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
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.
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
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.)
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
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.)
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
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.)
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
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 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
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
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
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.)
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
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
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.
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
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
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
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.
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
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.
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
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.
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
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
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
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
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
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
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
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
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
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
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.
