SHAREHOLDER LETTER
Dear Shareholder:
This semiannual report for Franklin Strategic Series covers the six months ended
October 31, 2000.
A ROARING ECONOMY
The U.S. economy continued to grow vigorously during the period under review.
Concerned that this rapid growth could lead to future inflation, the Federal
Reserve Board (the Fed) raised short-term interest rates in May. Energy prices
soared throughout the period, adversely affecting U.S. corporate profits, while
the euro's free-fall hampered sales of American exports and cut into earnings of
U.S. multinationals as they converted their European profits into dollars. A
third-quarter slowing in the growth of annualized gross domestic product (GDP),
and the Fed's decision to hold short-term rates steady at their June and August
meetings, suggested that the economy might be slowing to a more sustainable
pace.
A ROLLERCOASTER MARKET
Illustrating the precept that Main Street and Wall Street are not always one and
the same, U.S. equity markets experienced severe volatility from May through
October. For example, the blue chips of the Dow Jones(R) Industrial Average
(DJIA(TM)),
CONTENTS
<TABLE>
<S> <C>
Shareholder Letter .............. 1
Fund Reports
Franklin Aggressive
Growth Fund ................... 4
Franklin California
Growth Fund ................... 10
Franklin Large Cap
Growth Fund ................... 16
Franklin Small Cap
Growth Fund I ................. 22
Franklin Small Cap
Growth Fund II ................ 28
Financial Highlights &
Statements of Investments ....... 34
Financial Statements ............ 76
Notes to
Financial Statements ............ 85
</TABLE>
FUND CATEGORY
[Pyramid Graph]
<PAGE>
which opened the period at 10733.91 and closed it at 10971.14, dropped 404
points during the week ended October 13 but proceeded to gain 398 points by
October 27. The tech-heavy Nasdaq Composite Index (Nasdaq(R)), which opened the
period at 3860.66 and closed it at 3369.63, was even more turbulent. After
losing 460 points in May, the index rallied throughout most of the summer, only
to plummet 303 points in October. However, it turned in near-record positive
performance on October 19 when it gained 7.79%. The Standard and Poor's 500(R)
(S&P 500(R)) Composite Index, a broader market measure that fell 1.03% during
the period, was only slightly less volatile.(1)
SURVIVING THE SEESAW
While fluctuation such as this can be unsettling, it is important to remember
that securities markets always have been -- and always will be -- subject to
volatility. No one can predict exactly how they will perform. However, over the
long term, stocks and bonds have provided impressive results. For that reason,
we urge you to exercise patience, consult with your investment representative,
and focus on your long-term objectives rather than on short-term market cycles.
(1) The Dow Jones Industrial Average is a price-weighted index based on the
average market price of 30 blue chip stocks. The Nasdaq Composite Index
measures all Nasdaq domestic and non-U.S.-based common stocks listed on The
Nasdaq Stock Market(R). The index is market-value weighted and includes
over 4,800 companies (as of 10/31/00). The S&P 500 Composite Index consists
of 500 domestic stocks, comprising four broad sectors: industrials,
utilities, financials and transportation. The S&P 500 serves as the
standard for measuring large-cap U.S. stock market performance. Since some
industries are characterized by companies of relatively small stock
capitalization, the index is not composed of the 500 largest, publicly
traded U.S. companies.
2
<PAGE>
One way to help minimize the impact of market volatility on your portfolio is to
diversify your investments. Each of the Funds included in this report offers
individual investors a level of diversification that would be almost impossible
for them to achieve on their own. Although each Fund has a distinct investment
goal, all of Franklin Templeton's management teams are dedicated to providing
shareholders with a careful selection of securities, diversification and
constant professional supervision. For specific information about each Fund,
please refer to the Fund reports following this letter.
As always, we appreciate your support, welcome your comments and questions, and
look forward to continuing to serve your investment needs.
Sincerely,
/s/ Rupert H. Johnson, Jr.
--------------------------------
Rupert H. Johnson, Jr.
President
Franklin Strategic Series
3
<PAGE>
FRANKLIN AGGRESSIVE GROWTH FUND
Your Fund's Goal: Franklin Aggressive Growth Fund seeks capital appreciation by
investing primarily in the equity securities of companies demonstrating
accelerating growth, increasing profitability, or above-average growth or growth
potential, when compared to the overall economy.
This semiannual report of Franklin Aggressive Growth Fund covers the six months
ended October 31, 2000 -- a challenging time for growth investors. Due largely
to weakness in technology sectors of the market, value stocks generally
outperformed growth stocks, especially late in the period. Rising energy prices
helped keep a lid on economic growth in much of the world, the euro continued to
slide in value against the U.S. dollar, and slowing demand for U.S. technology
products led to negative earnings announcements from several industry leaders.
Internet software and services companies performed especially poorly as
explosive demand from dot-com firms slowed. Within this environment, Franklin
Aggressive Growth Fund - Class A posted a -1.78% six-month cumulative total
return, as shown in the
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 38.
4
<PAGE>
Performance Summary on page 8. The Fund's benchmarks, the Standard & Poor's 500
Composite Index and the Russell 3000(R) Growth Index, returned -1.03% and -7.99%
during the same period.
During the reporting period, we focused on companies possessing sustainable
competitive advantages and the potential to benefit from global growth trends.
Attempting to take advantage of weakness in technology stocks, we added to
existing positions in the sector and initiated several new ones. Concentrating
on semiconductor companies that sell to the communications market, which is
growing more rapidly than the personal computer market, we initiated positions
in Analog Devices and Integrated Device Technology, two firms we believe are
poised for strong growth. Outside the technology area, we initiated positions in
Silicon Valley Bancshares, a leading provider of innovative banking services to
emerging-growth and middle-market companies, and Southern Energy, a leading
global, independent power producer.
PORTFOLIO BREAKDOWN
Franklin Aggressive Growth Fund
Based on Total Net Assets
10/31/00
<TABLE>
<S> <C>
Electronic Technology 40.8%
Technology Services 29.0%
Health Technology 8.5%
Communications 5.2%
Commercial Services 2.6%
Transportation 2.4%
Finance 1.7%
Consumer Services 1.6%
Utilities 1.1%
Retail Trade 0.9%
Process Industries 0.1%
Short-Term Investments & Other Net Assets 6.1%
</TABLE>
5
<PAGE>
TOP 10 HOLDINGS
Franklin Aggressive Growth Fund
10/31/00
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
SECTOR NET ASSETS
----------------------------------------
<S> <C>
Concord EFS Inc. 2.7%
Commercial Services
Affiliated Computer
Services Inc., A 2.6%
Technology Services
Polycom Inc. 2.6%
Electronic Technology
Siebel Systems Inc. 2.4%
Technology Services
Expeditors International
of Washington Inc. 2.4%
Transportation
Intersil Holding Corp. 2.2%
Electronic Technology
Sun Microsystems Inc. 2.2%
Electronic Technology
i2 Technologies Inc. 2.2%
Technology Services
XO Communications Corp. 2.2%
Communications
Predictive Systems Inc. 2.1%
Technology Services
</TABLE>
On the sell side, we disposed of several holdings that were, in our opinion,
either excessively valued or experiencing deteriorating fundamentals. During the
reporting period, we sold Nokia, Gap and Brio Technology. Each of these
companies experienced a slowdown in growth that clouded our long-term outlook
for the companies. Although we sold JDS Uniphase, we retained our shares of SDL,
which, at the end of the period, was in negotiations to be purchased by JDS.
Looking forward, we remain optimistic about long-term prospects for growth
stocks and for Franklin Aggressive Growth Fund. At period's end, investors
seemed to have shifted their worries about inflation and increasing interest
rates to concern over an overall global economic slowdown. While such a slowdown
could result in reduced demand for U.S. technology, we believe that in the long
run the technology revolution is real. More and more corporations are viewing
technology expenditures as a necessary competitive tool, and in our opinion,
this should fuel ongoing spending. Although we expect equity markets to remain
volatile in the near term, we believe that many companies, particularly those in
the technology sectors, possess the potential for solid growth in the future. We
shall endeavor to take advantage of any market volatility to purchase stocks of
well-positioned growth companies at attractive valuations.
6
<PAGE>
Thank you for your participation in Franklin Aggressive Growth Fund. We
appreciate your support, welcome your comments, and look forward to serving your
future investment needs.
/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, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. Our strategies and the Fund's portfolio composition will change
depending on market and economic conditions. Although historical performance is
no guarantee of future results, these insights may help you understand our
investment and management philosophy.
7
<PAGE>
FRANKLIN AGGRESSIVE GROWTH FUND
PERFORMANCE SUMMARY AS OF 10/31/00
Six-month total return represents the change in value of an investment for the
period indicated and does not include sales charges. 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 operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
CLASS A: Subject to the 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.
<TABLE>
<S> <C> <C>
CLASS A
Six-Month Total Return -1.78%
Net Asset Value (NAV) $24.77 (10/31/00) $25.22 (4/30/00)
Change in NAV -$0.45
CLASS B
Six-Month Total Return -2.10%
Net Asset Value (NAV) $24.65 (10/31/00) $25.18 (4/30/00)
Change in NAV -$0.53
CLASS C
Six-Month Total Return -2.07%
Net Asset Value (NAV) $24.60 (10/31/00) $25.12 (4/30/00)
Change in NAV -$0.52
ADVISOR CLASS
Six-Month Total Return -1.62%
Net Asset Value (NAV) $24.90 (10/31/00) $25.31 (4/30/00)
Change in NAV -$0.41
</TABLE>
Past performance does not guarantee future results.
8
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR (6/23/99)
-------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +105.74% +188.03%
Average Annual Total Return(2) +93.96% +119.37%
Value of $10,000 Investment(3) $19,396 $27,147
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 1-YEAR (6/23/99)
-------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +105.15% +186.60%
Average Annual Total Return(2) +101.15% +126.41%
Value of $10,000 Investment(3) $20,115 $28,260
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR (6/23/99)
-------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +104.54% +185.95%
Average Annual Total Return(2) +101.52% +126.12%
Value of $10,000 Investment(3) $20,152 $28,213
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS 1-YEAR (6/23/99)
-------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +106.85% +189.59%
Average Annual Total Return(2) +106.85% +130.81%
Value of $10,000 Investment(3) $20,685 $28,959
</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 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 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.
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
Past performance does not guarantee 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 also may invest in foreign securities.
This semiannual report of Franklin California Growth Fund covers the six months
ended October 31, 2000. On August 4, 2000, Franklin MidCap Growth Fund was
merged into Franklin California Growth Fund. Because there was a great deal of
overlap with both portfolios, consistency of many holdings was maintained.
During the reporting period, U.S. corporate earnings fell, energy prices rose,
and the blistering pace at which the U.S. economy had been growing began to
slacken. In late October, many investors were wondering if the economy would
slow too much, leading to a recession, or if the Fed had successfully engineered
a "soft landing," which would lead to slower growth and less of an inflation
threat.
For most of the six months under review, U.S. stock markets experienced
substantial volatility. Blue chip stocks comprising the Dow Jones Industrial
Average finished the period with a gain of 2.92% but technology stocks, as
represented by the
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 43.
10
<PAGE>
Nasdaq Composite Index, fell 12.33%. Within this environment, Franklin
California Growth Fund - Class A posted a +6.00% six-month cumulative total
return as shown in the Performance Summary beginning on page 14. The Standard &
Poor's 500 (S&P 500) Index, the Franklin California 250 Growth Index(R) (CAL250)
and the Bloomberg California Index posted returns of -1.03%, 3.09% and 3.56%,
respectively, for the same period.(1), (2), (3)
Throughout the reporting period, we maintained our positions in companies we
believed possessed the potential for solid growth. Many of them were in the high
technology and health care sectors, and on October 31, 2000, technology stocks
represented 64.1% of the Fund's total net assets. Believing that in years to
come, many corporations may find it necessary to spend a great deal on
technology to gain a competitive advantage in the marketplace, we initiated new
positions in leading Internet infrastructure software companies Adobe Systems,
Check Point Software, Interwoven and Informatica. We also purchased shares in
more traditional enterprise software companies Quest Software and Rational
Software, and increased our weighting in web-application provider BEA Systems.
Concerned about the higher valuations of some leading technology companies, we
maintained positions in those with rising operating margins, accelerating
revenues and earnings, and
(1) Source: Standard & Poor's Micropal. The S&P 500 Index consists of 500
domestic stocks, comprising four broad sectors: industrials, utilities,
financials and transportation. The S&P 500 serves as the standard for
measuring large-cap U.S. stock market performance. Since some industries
are characterized by companies of relatively small stock capitalization,
the index is not composed of the 500 largest, U.S. publicly traded
companies.
(2) Source: CDA/Wiesenberger(R). 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(R). The Bloomberg California Index is price weighted and
measures the performance of over 700 California-based companies. Indexes
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
10/31/00
<TABLE>
<S> <C>
Electronic Technology 28.3%
Technology Services 22.6%
Health Technology 13.2%
Finance 7.0%
Real Estate 4.1%
Retail Trade 3.5%
Consumer Services 3.1%
Commercial Services 2.7%
Producer Manufacturing 1.5%
Health Services 1.4%
Utilities 1.3%
Consumer Non-Durables 0.9%
Industrial Service 0.9%
Transportation 0.9%
Energy Minerals 0.8%
Other Sectors 0.7%
Short-Term Investments & Other Net Assets 7.1%
</TABLE>
11
<PAGE>
TOP 10 HOLDINGS
Franklin California Growth Fund
10/31/00
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
SECTOR NET ASSETS
-----------------------------------------------
<S> <C>
VERITAS Software Corp. 3.2%
Technology Services
Siebel Systems Inc. 3.1%
Technology Services
Applied Micro Circuits Corp. 2.6%
Electronic Technology
Genentech Inc. 2.1%
Health Technology
JDS Uniphase Corp. 2.1%
Electronic Technology
Cisco Systems Inc. 2.0%
Electronic Technology
Safeway Inc. 1.9%
Retail Trade
Robert Half International Inc. 1.8%
Commercial Services
Sun Microsystems Inc. 1.7%
Electronic Technology
Silicon Valley Bancshares 1.6%
Finance
</TABLE>
market share gains through product positioning. Examples of such companies
include top holdings Applied Micro Circuits, Siebel Systems, VERITAS Software
and Cisco Systems. We also maintained, or added to, our holdings in companies we
believed were either using technology to their advantage or were benefiting from
strong growth in the technology and health care sectors. These companies, which
appeared attractive on more traditional valuation measures, included firms such
as Robert Half, Providian, Wells Fargo, Charles Schwab, Silicon Valley
Bancshares, Alexandria Real Estate, Spieker Properties and Molecular Devices.
Some of our best-performing stocks during the reporting period included
telecommunications equipment companies addressing bandwidth bottlenecks (such as
Extreme Networks, Juniper Networks and Redback Networks) and storage and
security companies (such as Network Appliance, Check Point Software and VERITAS
Software). A number of Internet infrastructure software firms also performed
well (such as Ariba, Commerce One, Interwoven, Mercury Interactive, Siebel
Systems and BEA Systems).
During the six months under review, we were extremely optimistic about the
health care sector, particularly biotechnology. Almost one in three of all U.S.
publicly traded biotechnology companies are located in California. According to
our internal analysts' research, 100 new biotech products are expected to come
to market over the next several years. Many are already in the later stages of
clinical trials. New holdings purchased during the period include COR
Therapeutics, Illumina, Invitrogen, Pain Therapeutics and Versicor. We also
purchased stocks in generics pharmaceutical company Watson Pharmaceuticals, and
on October 31, health technology represented 13.2% of the Fund's total net
assets, 7.56% of which was in biotechnology.
12
<PAGE>
Although the U.S. economy seems to be slowing, and stock market volatility will
likely continue, we remain optimistic about prospects for California's economy
and Franklin California Growth Fund. We expect solid growth for many companies,
particularly in the biotechnology and energy generation sectors. California is
an economic powerhouse with approximately 1,400 publicly traded companies,
providing us with a wide array of investment opportunities in our own
"backyard." Using our unique investment management approach, vast resources and
professional research analysts, we shall continue to search for leading
companies, which in our opinion have gained competitive advantages and have the
potential to provide strong returns for the Fund's shareholders over the long
term.
We thank you for your participation in Franklin California Growth Fund and
welcome any comments or suggestions you may have. We look forward to serving
your investment needs in the years to come.
/s/ Conrad B. Herrmann
--------------------------
Conrad B. Herrmann
Portfolio Manager
Franklin California Growth Fund
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any industry, security or the Fund.
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.
13
<PAGE>
FRANKLIN CALIFORNIA GROWTH FUND
PERFORMANCE SUMMARY AS OF 10/31/00
Six-month total return represents the change in value of an investment for the
period indicated and does not include sales charges. 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 operating expenses for
each class. 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. Prior to
8/3/98, 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.
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.
<TABLE>
<S> <C> <C>
CLASS A
Six-Month Total Return +6.00%
Net Asset Value (NAV) $53.16 (10/31/00) $50.15 (4/30/00)
Change in NAV +$3.01
CLASS B
Six-Month Total Return +5.58%
Net Asset Value (NAV) $52.42 (10/31/00) $49.64 (4/30/00)
Change in NAV +$2.78
CLASS C
Six-Month Total Return +5.57%
Net Asset Value (NAV) $52.31 (10/31/00) $49.55 (4/30/00)
Change in NAV +$2.76
</TABLE>
Past performance does not guarantee future results.
14
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR (10/30/91)
-------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +92.50% +313.75% +783.10%
Average Annual Total Return(2) +81.40% +31.29% +26.81%
Value of $10,000 Investment(3) $18,140 $39,001 $83,224
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 1-YEAR (1/1/99)
-------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +90.99% +136.94%
Average Annual Total Return(2) +86.99% +62.22%
Value of $10,000 Investment(3) $18,699 $23,294
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (9/3/96)
-------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +91.07% +149.65% +246.18%
Average Annual Total Return(2) +88.19% +35.20% +35.31%
Value of $10,000 Investment(3) $18,819 $24,712 $34,277
</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.
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.
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
Past performance does not guarantee future results.
15
<PAGE>
FRANKLIN LARGE CAP GROWTH FUND
Your Fund's Goal: Franklin Large Cap Growth Fund seeks long-term capital
appreciation by investing primarily in companies with market capitalizations of
$8.5 billion or more.
This semiannual report for Franklin Large Cap Growth Fund covers the six months
ended October 31, 2000 -- a time of severe volatility for equity markets in
general and growth stocks in particular. During the period, many investors were
concerned about rising oil prices, currency fluctuation, corporate profitability
and high growth stock valuations.
Within this environment, Franklin Large Cap Growth Fund - Class A posted a
+6.53% cumulative total return as shown in the Performance Summary on page 20.
This performance compared very favorably to the Fund's benchmark, the Standard &
Poor's 500 (S&P 500) Index, which dropped 1.03% during the same period.
Performance was also strong versus other widely watched benchmarks, including
the Russell 1000 Growth Index and the S&P Barra Growth Stock Index, which fell
7.90% and 7.91%.(1)
(1) Source: Standard & Poor's Micropal. The S&P 500 Composite Index consists of
500 domestic stocks, comprising four broad sectors: industrials, utilities,
financials and transportation. The S&P 500 serves as the standard for
measuring large-cap U.S. stock market performance. Since some industries
are characterized by companies of relatively small stock capitalization,
the index is not comprised of the 500 largest, U.S. publicly traded
companies. The Russell 1000 Growth Index measures the performance of those
Russell 1000 companies with higher price-to-book ratios and higher
forecasted growth values. The Standard & Poor's Barra Growth Index is a
capitalization-weighted index of all the stocks in the Standard & Poor's
500 that have high price-to-book ratios.
The indexes are unmanaged and include reinvested dividends. One cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio.
The dollar value, number of shares or principal value, and complete legal
titles of all portfolio holdings are listed in the Fund's Statement of
Investments (SOI). The SOI begins on page 53.
16
<PAGE>
We attribute the Fund's strong performance to our philosophy of investing in
companies we believe combine high growth potential with sustainable competitive
advantages. On October 31, electronic technology and technology services stocks
comprised 46.1% of our portfolio. Our investments in the fast-growing optical
sector, including CIENA, Corning, Juniper Networks and SDL, contributed
significantly to the Fund's returns, as did storage sector holdings EMC, Network
Appliance and Brocade Communications Systems, which benefited from the Internet
infrastructure build-out.
The Fund's performance was also bolstered by our selective exposure to health
technology, most notably in the biotechnology and medical device sectors. PE
Biosystems and Genentech performed particularly well, reflecting the industry's
improved profit outlook. Additionally, the Food and Drug Administration's
approval of Baxter International's second manufacturing facility for Factor VIII
recombinant protein enhanced the already positive outlook for this medical
technology company.
Throughout the period, we selectively increased our exposure to the
energy/industrial services sector, including additions to our position in
Dynegy, a leading U.S. wholesale energy provider seeking to control 10% of the
U.S. electricity market. Dynegy has benefited from the blackouts and brownouts
across the U.S. in 2000, as well as price caps and price spikes in the U.S.
electric market, and we believe they will continue to benefit from future
volatility.
PORTFOLIO BREAKDOWN
Franklin Large Cap Growth Fund
Based on Total Net Assets
10/31/00
<TABLE>
<S> <C>
Electronic Technology 37.0%
Health Technology 13.8%
Technology Services 9.1%
Finance 8.0%
Industrial Services 6.2%
Utilities 4.1%
Communications 3.0%
Consumer Non-Durables 2.9%
Process Industries 2.7%
Retail Trade 2.0%
Consumer Services 1.7%
Producer Manufacturing 1.2%
Energy Minerals 1.1%
Short-Term Investments & Other Net Assets 7.2%
</TABLE>
17
<PAGE>
TOP 10 HOLDINGS
Franklin Large Cap Growth Fund
10/31/00
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
SECTOR NET ASSETS
----------------------------------------
<S> <C>
CIENA Corp. 3.0%
Electronic Technology
Juniper Networks Inc. 3.0%
Electronic Technology
Cisco Systems Inc. 2.7%
Electronic Technology
Sun Microsystems Inc. 2.7%
Electronic Technology
General Electric Co. 2.7%
Process Industries
EMC Corp. 2.6%
Electronic Technology
Dynegy Inc. 2.6%
Industrial Services
Pfizer Inc. 2.4%
Health Technology
American International
Group Inc. 2.4%
Finance
Enron Corp. 2.4%
Utilities
</TABLE>
Anticipating some slowing in the U.S. economy's rapid growth rate, we initiated
modest positions in more traditionally defensive stocks. These included
Anheuser-Busch, the number one American beer manufacturer, and Southern Energy,
an international power producer benefiting from U.S. power market deregulation.
Looking forward, we are optimistic about the long-term potential for the Fund's
holdings of industry leaders in the highest growth sectors. Growth for the
companies in which we invest remains robust, fueled in large part by the ongoing
communications build-out and investment in e-commerce initiatives. Although the
unprecedented volatility that has come to characterize the equity markets may be
unsettling on a day-to-day basis, we believe it provides terrific investment
opportunities. We view the current volatility in the broader equity markets, and
technology stocks in particular, as a chance to add to positions in the highest
quality, fastest growing, most profitable and exciting companies in the world.
18
<PAGE>
Thank you for your participation in Franklin Large Cap Growth Fund. We welcome
your comments and suggestions, and look forward to serving your investment needs
in the years ahead.
/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, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. Our strategies and the Fund's portfolio composition will change
depending on market and economic conditions. Although historical performance is
no guarantee of future results, these insights may help you understand our
investment and management philosophy.
19
<PAGE>
FRANKLIN LARGE CAP GROWTH FUND
CLASS A: Subject to the 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.
PERFORMANCE SUMMARY AS OF 10/31/00
Six-month total return represents the change in value of an investment for the
period indicated and does not include sales charges. 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 operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
<TABLE>
<S> <C> <C>
CLASS A
Six-Month Total Return +6.53%
Net Asset Value (NAV) $15.82 (10/31/00) $14.85 (4/30/00)
Change in NAV +$0.97
CLASS B
Six-Month Total Return +6.16%
Net Asset Value (NAV) $15.68 (10/31/00) $14.77 (4/30/00)
Change in NAV +$0.91
CLASS C
Six-Month Total Return +6.16%
Net Asset Value (NAV) $15.68 (10/31/00) $14.77 (4/30/00)
Change in NAV +$0.91
ADVISOR CLASS
Six-Month Total Return +6.72%
Net Asset Value (NAV) $15.88 (10/31/00) $14.88 (4/30/00)
Change in NAV +$1.00
</TABLE>
20 Past performance does not guarantee future results.
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR (6/7/99)
---------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +65.79% +70.10%
Average Annual Total Return(2) +56.20% +43.18%
Value of $10,000 Investment(3) $ 15,620 $ 16,032
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 1-YEAR (6/7/99)
---------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +64.65% +68.60%
Average Annual Total Return(2) +60.65% +46.08%
Value of $10,000 Investment(3) $ 16,065 $ 16,460
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR (6/7/99)
---------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +64.81% +68.60%
Average Annual Total Return(2) +62.22% +46.98%
Value of $10,000 Investment(3) $ 16,222 $ 16,594
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS 1-YEAR (6/7/99)
---------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +66.35% +70.84%
Average Annual Total Return(2) +66.35% +50.27%
Value of $10,000 Investment(3) $ 16,635 $ 17,084
</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 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 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.
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
Past performance does not guarantee future results. 21
<PAGE>
FRANKLIN SMALL CAP GROWTH FUND I
Your Fund's Goal: Franklin Small Cap Growth Fund I seeks long-term capital
growth by investing in equity securities of small-capitalization companies with
market capitalizations similar to the Russell 2500(TM) Growth Index at the time
of purchase.(1)
This semiannual report of Franklin Small Cap Growth Fund I covers the six months
ended October 31, 2000 -- a challenging period for small-cap growth stock
investors. After months of momentum-driven investing in "new economy" stocks,
many investors became concerned about rising oil prices, the possibility of
inflation and indications of a slowing global economy. They also began to take
notice of, and flee from, companies with little or no earnings whose stocks were
trading at extremely elevated stock valuations.
Although technology continued to drive productivity increases in most sectors,
investor pessimism, combined with the Federal
(1) Source: Standard & Poor's Micropal. The Russell 2500 Growth Index measures
the performance of those Russell 2500 companies with higher price-to-book ratios
and higher forecasted growth values. The Russell 2500, from which the Russell
2500 Growth Index is constituted, is composed of the 500 smallest-capitalization
securities in the Russell 1000 Index and all stocks in the Russell 2000 Index.
The largest company in the Russell 2500 Index has a market capitalization of
approximately $1.3 billion.
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 59.
22
<PAGE>
Reserve Board's (the Fed's) interest-rate hikes, triggered waves of selling
across major indexes. The best growth stocks from 1999 and first quarter 2000 --
technology hardware, Internet and communications equipment shares prevalent
among the small-company stock universe -- became the worst-performing sectors
during the six-month period.
Stocks of smaller, growth-oriented companies were particularly hard hit during
this time. By contrast, value-oriented sectors such as airlines, beverages,
banks and real estate investment trusts (REITs) were some of the best
performers. Even though value stocks seemed to perform better than growth stocks
during the period, stocks of companies in both "old" and "new economy" sectors
traded significantly below their highs set in early 2000. The stocks of
fast-growing companies whose growth projections were revised lower showed the
largest declines.
Within this environment, Franklin Small Cap Growth Fund I - Class A provided a
+2.81% six-month cumulative total return as shown in the Performance Summary on
page 26. The Fund outperformed its benchmark, the Russell 2500 Growth Index,
which returned -6.08% during the same period.(2)
TOP 10 EQUITY HOLDINGS
Franklin Small Cap Growth Fund I
10/31/00
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
SECTOR NET ASSETS
-----------------------------------------------
<S> <C>
i2 Technologies, Inc. 3.7%
Technology Services
PMC-Sierra, Inc. (Canada) 3.6%
Electronic Technology
BEA Systems, Inc. 3.5%
Technology Services
JDS Uniphase Corp. 2.6%
Electronic Technology
VERITAS Software Corp. 2.4%
Technology Services
Micromuse Inc. 1.7%
Technology Services
VoiceStream Wireless Corp. 1.6%
Communications
Inhale Therapeutic Systems 1.3%
Health Technology
Check Point Software
Technologies Ltd. (Israel) 1.2%
Technology Services
Waters Corp. 1.2%
Electronic Technology
</TABLE>
2. The index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the Fund's portfolio.
23
<PAGE>
PORTFOLIO BREAKDOWN
Franklin Small Cap Growth Fund I
Based on Total Net Assets
10/31/00
<TABLE>
<S> <C>
Technology Services 27.9%
Electronic Technology 26.1%
Health Technology 5.9%
Finance 5.9%
Communications 3.6%
Industrial Services 3.2%
Consumer Services 2.4%
Real Estate 2.4%
Commercial Services 2.3%
Energy Minerals 2.2%
Transportation 2.0%
Producer Manufacturing 2.0%
Retail Trade 1.7%
Other Sectors 2.3%
Short-Term Investments
& Other Net Assets 10.1%
</TABLE>
The Fund's outperformance of its benchmark was due to strong gains in our
financial services, energy and consumer stocks whose recent gains offset
weakness in our technology hardware and software holdings. However, we did not
benefit from owning biotechnology stocks, one of the strongest performers by
industry group during the reporting period, because very few of these companies
met our market capitalization and growth criteria.
Looking forward, the market environment may remain quite challenging for
small-cap growth investing, especially for a fund such as Franklin Small Cap
Growth Fund I, which typically invests heavily in rapidly-growing technology
companies. The specter of inflation, falling domestic productivity, decelerating
economic growth in Europe, waning U.S. consumer confidence levels and heavy
sector rotation could potentially depress share prices. However, we believe that
even if the prevailing skittishness over recent stock gyrations persists, or if
the economy does in fact slow further, investors will continue to reward rapidly
growing, high-quality, small-cap companies such as those found in the Fund's
portfolio.
24
<PAGE>
Thank you for investing with us. We appreciate your support, and look forward to
serving you in the future. Please feel free to contact us with any questions or
comments you may have.
/S/ Edward B. Jamieson
Edward B. Jamieson
Portfolio Manager
Franklin Small Cap Growth Fund I
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. Our strategies and the Fund's portfolio composition will change
depending on market and economic conditions. Although historical performance is
no guarantee of future results, these insights may help you understand our
investment and management philosophy.
25
<PAGE>
FRANKLIN SMALL CAP GROWTH FUND I
CLASS A: Subject to the current, maximum 5.75% initial sales charge. Prior to
8/3/98, Fund shares were offered at a lower initial sales charge; thus actual
total returns may differ.*
CLASS C: 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
returns.
PERFORMANCE SUMMARY AS OF 10/31/00
Six-month total return represents the change in value of an investment for the
period indicated and does not include sales charges. 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 operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
<TABLE>
<S> <C> <C>
CLASS A
Six-Month Total Return +2.81%
Net Asset Value (NAV) $46.76 (10/31/00) $45.48 (4/30/00)
Change in NAV +$1.28
CLASS C
Six-Month Total Return +2.42%
Net Asset Value (NAV) $45.66 (10/31/00) $44.58 (4/30/00)
Change in NAV +$1.08
ADVISOR CLASS
Six-Month Total Return +2.95%
Net Asset Value (NAV) $47.09 (10/31/00) $45.74 (4/30/00)
Change in NAV +$1.35
</TABLE>
26 Past performance does not guarantee future results.
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR (2/14/92)
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +83.49% +234.03% +599.61%
Average Annual Total Return(2) +72.93% +25.79% +24.44%
Value of $10,000 Investment(3) $17,293 $31,490 $65,939
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 5-YEAR (10/2/95)
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +82.12% +226.34% +226.34%
Average Annual Total Return(2) +79.29% +26.43% +26.43%
Value of $10,000 Investment(3) $17,929 $32,305 $32,305
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS(4) 1-YEAR 5-YEAR (2/14/92)
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +84.04% +241.75% +615.78%
Average Annual Total Return(2) +84.04% +27.86% +25.63%
Value of $10,000 Investment(3) $18,404 $34,175 $71,578
</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. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not
have sales charges or Rule 12b-1 plans. Performance quotations for this class
reflect the following methods of calculation: (a) For periods prior to 1/2/97, a
restated figure is used based upon the Fund's Class A performance, excluding the
effect of Class A's maximum initial sales charge and including the effect of the
Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, an actual Advisor
Class figure is used reflecting a deduction of all charges and fees applicable
to that class. Since 1/2/97 (commencement of sales), the cumulative and average
annual total returns of Advisor Class shares were +168.06% and +30.09%.
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.
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
Past performance does not guarantee future results. 27
<PAGE>
FRANKLIN SMALL CAP GROWTH FUND II
Your Fund's Goal: Franklin Small Cap Growth Fund II seeks long-term capital
growth by investing in equity securities of small-capitalization companies with
market capitalizations similar to the Russell 2500 Growth Index at the time of
purchase.(1)
We are pleased to bring you this first semiannual report for Franklin Small Cap
Growth Fund II, covering the six-month period ended October 31, 2000 -- a
challenging period for small-cap growth stock investors. After months of
momentum-driven investing in "new economy" stocks, many investors became
concerned about rising oil prices, the possibility of inflation and indications
of a slowing global economy. They also began to take notice of, and flee from,
companies with little or no earnings whose stocks were trading at extremely
elevated stock valuations.
Although technology continued to drive productivity increases in most sectors,
investor pessimism, combined with the Federal
1. Source: Standard & Poor's Micropal. The Russell 2500 Growth Index measures
the performance of those Russell 2500 companies with higher price-to-book ratios
and higher forecasted growth values. The Russell 2500, from which the Russell
2500 Growth Index is constituted, is composed of the 500 smallest-capitalization
securities in the Russell 1000 Index and all stocks in the Russell 2000 Index.
The largest company in the Russell 2500 Index has a market capitalization of
approximately $1.3 billion.
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 73.
28
<PAGE>
Reserve Board's (the Fed's) interest-rate hikes, triggered waves of selling
across major indexes. The best growth stocks from 1999 and first quarter 2000 --
technology hardware, Internet and communications equipment shares prevalent
among the small-company stock universe -- became the worst-performing sectors
during the six-month period.
Stocks of smaller, growth-oriented companies were particularly hard hit during
this time. By contrast, value-oriented sectors such as airlines, beverages,
banks and real estate investment trusts (REITs) were some of the best
performers. Even though value stocks seemed to perform better than growth stocks
during the period, stocks of companies in both "old" and "new economy" sectors
traded significantly below their highs set in early 2000. The stocks of
fast-growing companies whose growth projections were revised lower showed the
largest declines.
Within this environment, Franklin Small Cap Growth Fund II - Class A provided a
+16.80% six-month cumulative total return as shown in the Performance Summary on
page 32. The Fund outperformed its benchmark, the Russell 2500 Growth Index,
which returned -6.08% during the same period.(2)
The Fund's outperformance compared to its benchmark index was due to strong
gains in our financial services and health care-related stock holdings.
Financial services stocks produced the best results as many investors came to
believe the Fed would stop raising interest rates as the economy slowed to a
more
TOP 10 EQUITY HOLDINGS
Franklin Small Cap Growth Fund II
10/31/00
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
SECTOR NET ASSETS
-------------------------------------------------
<S> <C>
Cobalt Networks Inc. 3.5%
Electronic Technology
Alpha Industries Inc. 3.1%
Electronic Technology
Avocent Corp. 3.0%
Electronic Technology
Hain Celestial Group Inc. 2.5%
Consumer Non-Durables
Leap Wireless
International Inc. 2.4%
Communications
Ditech Communications Corp. 2.2%
Electronic Technology
Sierra Wireless Inc. 2.1%
Electronic Technology
Mettler-Toledo International 2.1%
Producer Manufacturing
Timberland Co. 1.8%
Consumer Non-Durables
Coors Tek Inc. 1.8%
Process Industries
</TABLE>
(2) The index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the Fund's portfolio.
29
<PAGE>
PORTFOLIO BREAKDOWN
Franklin Small Cap Growth Fund II
Based on Total Net Assets
10/31/00
<TABLE>
<S> <C>
Electronic Technology 31.3%
Health Technology 10.6%
Technology Services 9.5%
Producer Manufacturing 6.9%
Finance 5.5%
Consumer Services 4.5%
Consumer Non-Durables 4.3%
Process Industries 3.0%
Communications 2.5%
Energy Minerals 2.2%
Commercial Services 1.7%
Health Services 1.5%
Non-Energy Minerals 1.2%
Real Estate 1.2%
Transportation 1.1%
Industrial Services 0.9%
Short-Term Investments
& Other Net Assets 12.1%
</TABLE>
sustainable pace. The Fund also benefited when two of its semiconductor holdings
were acquired at premiums by larger competitors. But even though merger and
acquisition activity can be a boon to portfolio holdings that become acquisition
targets, such fortuitous acquisitions cannot be depended upon in the future.
Believing that the volatile technology sector was not a reliable source of
investment returns for the Fund during the reporting period, we generally looked
outside technology for small-cap ideas with growth potential. With this strategy
in mind, we increased the portfolio's exposure to consumer products and stocks
related to the health care industry, with a particular emphasis on drug
suppliers and medical technology firms. New technology purchases included stocks
of software, electronic component and hardware companies.
Although the fourth quarter of 2000 has begun with renewed investor concern
regarding the technology sector's corrections, we are optimistic about the
long-term prospects for small-cap companies. Because economic growth is often
fueled by new technologies, we expect to continue to invest in technology stocks
despite recent corrections in the Nasdaq. But we shall also invest in
non-technology stocks, because we believe they may mitigate the near-term
volatility of our technology holdings.
30
<PAGE>
We thank you for your participation in the Fund, and look forward to serving you
in the future. Please feel free to contact us with any questions or comments you
may have.
/S/ Edward B. Jamieson
Edward B. Jamieson
Portfolio Manager
Franklin Small Cap Growth Fund II
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. 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.
31
<PAGE>
PERFORMANCE SUMMARY AS OF 10/31/00
Six-month cumulative total return represents the change in value of an
investment for the period indicated and does not include sales charges.
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 operating expenses for each class. 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.*
*The Fund's manager has agreed in advance to waive a portion of its management
fees and to make certain payments to reduce expenses. If the manager had not
taken this action, the Fund's total return would have been lower. The fee waiver
may be discontinued at any time, upon notice to the Fund's Board of Trustees.
<TABLE>
<CAPTION>
CLASS A
<S> <C> <C> <C>
Six-Month Total Return +16.80%
Net Asset Value (NAV) $11.68 (10/31/00) $10.00(5/1/00)
Change in NAV +$1.68
</TABLE>
<TABLE>
<CAPTION>
CLASS B
<S> <C> <C>
Six-Month Total Return +16.40%
Net Asset Value (NAV) $11.64 (10/31/00) $10.00 (5/1/00)
Change in NAV +$1.64
</TABLE>
<TABLE>
<CAPTION>
CLASS C
<S> <C> <C>
Six-Month Total Return +16.50%
Net Asset Value (NAV) $11.65 (10/31/00) $10.00 (5/1/00)
Change in NAV +$1.65
</TABLE>
<TABLE>
<CAPTION>
ADVISOR CLASS
<S> <C> <C>
Six-Month Total Return +17.10%
Net Asset Value (NAV) $11.71 (10/31/00) $10.00 (5/1/00)
Change in NAV +$1.71
</TABLE>
Past performance does not guarantee future results.
32
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A (5/1/00)
--------------------------------------------------------------------------------
<S> <C>
Cumulative Total Return(1) +24.60%
Aggregate Total Return(2) +17.44%
Value of $10,000 Investment(3) $11,744
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B (5/1/00)
--------------------------------------------------------------------------------
<S> <C>
Cumulative Total Return(1) +24.30%
Aggregate Total Return(2) +20.30%
Value of $10,000 Investment(3) $12,030
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C (5/1/00)
--------------------------------------------------------------------------------
<S> <C>
Cumulative Total Return(1) +24.30%
Aggregate Total Return(2) +22.08%
Value of $10,000 Investment(3) $12,208
</TABLE>
<TABLE>
<CAPTION>
ADVISOR CLASS
--------------------------------------------------------------------------------
<S> <C>
Cumulative Total Return(1) +24.90%
Aggregate Total Return(2) +24.90%
Value of $10,000 Investment(3) $12,490
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the period indicated and does not include sales charges.
2. Aggregate total return represents the average change in value of an
investment over the period indicated and includes the current, applicable,
maximum sales charge(s) for that class. Since the Fund has existed for less than
one year, average annual total return is not provided.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the period 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.
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
Past performance does not guarantee future results.
33
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
FRANKLIN AGGRESSIVE GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
-------
SIX MONTHS ENDED
OCTOBER 31, 2000 YEAR ENDED
(UNAUDITED) APRIL 30, 2000(d)
--------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................ $ 25.22 $ 10.00
--------------------------------------
Income from investment operations:
Net investment loss(a) ............................. (.11) (.15)
Net realized and unrealized gains (losses) ......... (.36) 15.86
--------------------------------------
Total from investment operations .................... (.47) 15.71
--------------------------------------
Less distributions from:
Net investment income .............................. -- (.02)
Net realized gains ................................. -- (.47)
--------------------------------------
Total distributions ................................. -- (.49)
--------------------------------------
Net asset value, end of period ...................... $ 24.75 $ 25.22
======================================
Total return(b) ..................................... (1.78)% 158.14%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................... $ 199,620 $ 171,976
Ratios to average net assets:
Expenses(c) ........................................ 1.25% 1.24%
Expenses excluding waiver and payments by
affiliate(c) ...................................... 1.31% 1.28%
Net investment loss(c) ............................. (.80)% (.68)%
Portfolio turnover rate ............................. 62.78% 148.67%
</TABLE>
(a) Based on average shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(c) Annualized
(d) For the period June 23, 1999 (effective date) to April 30, 2000.
34
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN AGGRESSIVE GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
CLASS B
-------
SIX MONTHS ENDED
OCTOBER 31, 2000 YEAR ENDED
(UNAUDITED) APRIL 30, 2000(d)
--------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ..................... $ 25.18 $ 10.00
--------------------------------------
Income from investment operations:
Net investment loss(a) .................................. (.19) (.30)
Net realized and unrealized gains (losses) .............. (.36) 15.95
--------------------------------------
Total from investment operations ......................... (.55) 15.65
--------------------------------------
Less distributions from net realized gains ............... -- (.47)(e)
--------------------------------------
Net asset value, end of period ........................... $ 24.63 $ 25.18
======================================
Total return(b) .......................................... (2.10)% 157.55%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ........................ $ 43,083 $ 33,613
Ratios to average net assets:
Expenses(c) ............................................. 1.91% 1.86%
Expenses excluding waiver and payments by affiliate(c)... 1.97% 1.90%
Net investment loss(c) .................................. (1.46)% (1.31)%
Portfolio turnover rate .................................. 62.78% 148.67%
</TABLE>
(a) Based on average shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Annualized
(d) For the period June 23, 1999 (effective date) to April 30, 2000.
(e) Includes distribution of net investment income in the amount of $.003.
35
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN AGGRESSIVE GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
-------
SIX MONTHS ENDED
OCTOBER 31, 2000 YEAR ENDED
(UNAUDITED) APRIL 30, 2000(d)
--------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ..................... $ 25.12 $ 10.00
Income from investment operations:
Net investment loss(a) .................................. (.19) (.30)
Net realized and unrealized gains (losses) .............. (.35) 15.89
--------------------------------------
Total from investment operations ......................... (.54) 15.59
--------------------------------------
Less distributions from net realized gains ............... -- (.47)
--------------------------------------
Net asset value, end of period ........................... $ 24.58 $ 25.12
======================================
Total return(b) .......................................... (2.07)% 156.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ........................ $ 94,402 $ 80,473
Ratios to average net assets:
Expenses(c) ............................................. 1.90% 1.88%
Expenses excluding waiver and payments by affiliate(c)... 1.96% 1.92%
Net investment loss(c) .................................. (1.44)% (1.34)%
Portfolio turnover rate .................................. 62.78% 148.67%
</TABLE>
(a) Based on average shares outstanding.
(b) Total return does not reflect sales commissions or the contingent
deferred sales charge, and is not annualized for periods less than one
year.
(c) Annualized
(d) For the period June 23, 1999 (effective date) to April 30, 2000.
36
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN AGGRESSIVE GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
ADVISOR CLASS
-------------
SIX MONTHS ENDED
OCTOBER 31, 2000 YEAR ENDED
(UNAUDITED) APRIL 30, 2000(d)
--------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................. $ 25.31 $ 10.00
--------------------------------------
Income from investment operations:
Net investment loss(a) ............................... (.06) (.05)
Net realized and unrealized gains (losses) ........... (.37) 15.86
--------------------------------------
Total from investment operations ...................... (.43) 15.81
--------------------------------------
Less distributions from:
Net investment income ................................ -- (.03)
Net realized gains ................................... -- (.47)
--------------------------------------
Total distributions ................................... -- (.50)
--------------------------------------
Net asset value, end of period ........................ $ 24.88 $ 25.31
======================================
Total return(b) ....................................... (1.62)% 159.18%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ..................... $ 51,679 $ 46,726
Ratios to average net assets:
Expenses(c) .......................................... .90% .90%
Expenses excluding waiver and payments by affiliate(c) .96% .94%
Net investment loss(c) ............................... (.44)% (.25)%
Portfolio turnover rate ............................... 62.78% 148.67%
</TABLE>
(a) Based on average shares outstanding.
(b) Total return is not annualized for periods less than one year.
(c) Annualized
(d) For the period June 23, 1999 (effective date) to April 30, 2000.
See notes to financial statements.
37
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN AGGRESSIVE GROWTH FUND SHARES VALUE
--------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 93.4%
(a)COMMERCIAL SERVICES 2.6%
Concord EFS Inc. ...................... 250,000 $ 10,328,125
------------
(a)COMMUNICATIONS 5.2%
Qwest Communications International Inc. 132,000 6,418,500
VoiceStream Wireless Corp. ............ 40,000 5,260,000
XO Communications Inc. ................ 250,000 8,433,594
------------
20,112,094
------------
(a)CONSUMER SERVICES 1.6%
Citadel Communications Corp. .......... 500,000 6,062,500
------------
ELECTRONIC TECHNOLOGY 40.8%
(a)Analog Devices Inc. .................. 84,000 5,460,000
(a)Applied Micro Circuits Corp. ......... 90,000 6,840,000
(a)ARC International PLC (United Kingdom) 146,000 715,499
(a)Broadcom Corp., A .................... 31,500 7,004,813
(a)Cisco Systems Inc. ................... 125,000 6,734,375
(a)Comverse Technology Inc. ............. 60,000 6,705,000
(a)Conexant Systems Inc. ................ 180,000 4,736,250
Corning Inc. .......................... 65,000 4,972,500
(a),(c) eMachines Inc. .................. 31,328 29,076
(a)EMC Corp. ............................ 73,500 6,546,093
(a)Integrated Device Technology Inc. .... 84,000 4,730,250
(a)Intersil Holding Corp. ............... 180,000 8,628,750
(a)Juniper Networks Inc. ................ 40,000 7,800,000
(a)Lam Research Corp. ................... 260,000 5,037,500
Micron Technology Inc. ................ 120,000 4,170,000
(a)Network Appliance Inc. ............... 50,000 5,950,000
Nortel Networks Corp. (Canada) ........ 110,000 5,005,000
(a)Palm Inc. ............................ 110,000 5,891,875
(a)PMC-Sierra Inc. (Canada) ............. 38,000 6,441,000
(a)Polycom Inc. ......................... 153,000 9,945,000
(a)QLogic Corp. ......................... 70,000 6,772,500
(a)Redback Networks Inc. ................ 47,250 5,029,172
(a)SDL Inc. ............................. 24,000 6,222,000
(a)Solectron Corp. ...................... 167,000 7,348,000
(a)Sun Microsystems Inc. ................ 77,500 8,592,813
(a)Western Multiplex Corp. .............. 275,000 3,884,375
(a)Xilinx Inc. .......................... 100,000 7,243,750
------------
158,435,591
------------
(a)FINANCE 1.7%
Silicon Valley Bancshares ............. 147,000 6,798,750
------------
(a)HEALTH TECHNOLOGY 8.5%
Abgenix Inc. .......................... 87,000 6,862,125
COR Therapeutics Inc. ................. 110,000 6,215,000
Cubist Pharmaceuticals Inc. ........... 103,500 4,447,266
Inhale Therapeutic Systems Inc. ....... 160,000 7,960,000
</TABLE>
38
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN AGGRESSIVE GROWTH FUND SHARES VALUE
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a)HEALTH TECHNOLOGY (CONT.)
MedImmune Inc. ............................................... 75,000 $ 4,903,125
United Therapeutics Corp. .................................... 52,000 2,782,000
-----------
33,169,516
-----------
(a)PROCESS INDUSTRIES .1%
Eden Biosciences Corp. ....................................... 11,100 420,413
-----------
(a)RETAIL TRADE .9%
Williams-Sonoma Inc. ......................................... 164,200 3,417,413
-----------
(a)TECHNOLOGY SERVICES 28.5%
Affiliated Computer Services Inc., A ......................... 180,000 10,023,750
Art Technology Group Inc. .................................... 125,000 7,843,750
BEA Systems Inc. ............................................. 105,000 7,533,750
Cadence Design Systems Inc. .................................. 230,000 5,908,125
Exodus Communications Inc. ................................... 193,500 6,494,343
i2 Technologies Inc. ......................................... 50,000 8,500,000
Inforte Corp. ................................................ 120,000 3,675,000
Oracle Corp. ................................................. 140,000 4,620,000
Predictive Systems Inc. ...................................... 600,000 8,325,000
Quest Software Inc. .......................................... 150,000 6,553,125
Retek Inc. ................................................... 130,518 5,147,304
Sapient Corp. ................................................ 210,000 7,468,125
Scient Corp. ................................................. 320,000 5,760,000
Siebel Systems Inc. .......................................... 90,000 9,444,374
VERITAS Software Corp. ....................................... 58,000 8,178,906
Viant Corp. .................................................. 185,000 1,098,438
Yahoo! Inc. .................................................. 70,000 4,103,750
-----------
110,677,740
-----------
TRANSPORTATION 2.4%
Expeditors International of Washington Inc. .................. 180,000 9,337,500
-----------
(a)UTILITIES 1.1%
Southern Energy Inc. ......................................... 156,000 4,251,000
-----------
TOTAL COMMON STOCKS (COST $321,773,573) ...................... 363,010,642
-----------
(a),(c)PREFERRED STOCKS .5%
Micro Photonix Integration Corp., pfd., C (COST $2,079,464) .. 329,274 2,079,464
-----------
TOTAL LONG TERM INVESTMENTS (COST $323,853,037) .............. 365,090,106
-----------
SHORT TERM INVESTMENTS 5.4%
(b)Franklin Institutional Fiduciary Trust Money Market Portfolio
(COST $20,856,677) .......................................... 20,856,677 20,856,677
-----------
TOTAL INVESTMENTS (COST $344,709,714) 99.3% .................. 385,946,783
OTHER ASSETS, LESS LIABILITIES .7% ........................... 2,837,465
NET ASSETS 100.0% ............................................ $388,784,248
============
</TABLE>
(a) Non-income producing
(b) See Note 3 regarding investment in the "Sweep Money Fund."
(c) See Note 6 regarding restricted securities.
See notes to financial statements.
39
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
FRANKLIN CALIFORNIA GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2000 YEAR ENDED APRIL 30,
(UNAUDITED) 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $50.15 $25.82 $24.97 $19.35 $18.26 $14.03
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................... .01 .05 .10 .14 .13 .20
Net realized and unrealized gains ............ 3.00 24.36 1.42 6.48 1.51 6.03
--------------------------------------------------------------------------------
Total from investment operations .............. 3.01 24.41 1.52 6.62 1.64 6.23
--------------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ -- (.08) (.14) (.14) (.12) (.23)
Net realized gains ........................... -- -- (.53) (.86) (.43) (1.77)
--------------------------------------------------------------------------------
Total distributions ........................... -- (.08) (.67) (1.00) (.55) (2.00)
--------------------------------------------------------------------------------
Net asset value, end of period ................ $53.16 $50.15 $25.82 $24.97 $19.35 $18.26
================================================================================
Total return(b) ............................... 6.00% 94.90% 6.39% 34.98% 8.94% 47.42%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $2,496,587 $2,025,864 $780,598 $721,254 $282,898 $81,175
Ratios to average net assets:
Expenses ..................................... .85%(c) .88% 1.00% .99% 1.08% .71%
Expenses excluding waiver and payments
by affiliate ............................... .85%(c) .88% 1.00% .99% 1.08% 1.09%
Net investment income ........................ .02%(c) .11% .41% .67% .84% 1.42%
Portfolio turnover rate ....................... 10.46% 61.04% 52.76% 48.52% 44.81% 61.82%
</TABLE>
(a) Based on average shares outstanding effective year ended April 30,
2000.
(b) Total return does not reflect sales commissions or the contingent
deferred sales charge, and is not annualized for periods less than one
year.
(c) Annualized
40
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN CALIFORNIA GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2000 ----------------------
(UNAUDITED) 2000 1999(d)
--------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........ $49.64 $25.75 $24.31
--------------------------------------------------------
Income from investment operations:
Net investment loss(a) ..................... (.20) (.28) (.01)
Net realized and unrealized gains .......... 2.98 24.24 1.45
--------------------------------------------------------
Total from investment operations ............ 2.78 23.96 1.44
--------------------------------------------------------
Less distributions from net investment income -- (.07) --
--------------------------------------------------------
Net asset value, end of period .............. $52.42 $49.64 $25.75
========================================================
Total return(b) ............................. 5.58% 93.35% 5.88%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ........... $137,293 $63,960 $2,657
Ratios to average net assets:
Expenses ................................... 1.60%(c) 1.63% 1.75%(c)
Net investment loss ........................ (.74)%(c) (.61)% (.33)%(c)
Portfolio turnover rate ..................... 10.46% 61.04% 52.76%
</TABLE>
(a) Based on average shares outstanding effective year ended April 30,
2000.
(b) Total return does not reflect the contingent deferred sales charge, and
is not annualized for periods less than one year.
(c) Annualized
(d) For the period January 1, 1999 (effective date) to April 30, 1999.
41
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (Continued)
FRANKLIN CALIFORNIA GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
--------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2000 -----------------------------------------------------
(UNAUDITED) 2000 1999 1998 1997(d)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............ $49.55 $25.63 $24.81 $19.27 $18.05
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a) ................ (.19) (.25) (.07) -- .05
Net realized and unrealized gains .............. 2.95 24.19 1.42 6.43 1.65
--------------------------------------------------------------------------------
Total from investment operations ................ 2.76 23.94 1.35 6.43 1.70
--------------------------------------------------------------------------------
Less distributions from:
Net investment income .......................... -- (.02) -- (.03) (.05)
Net realized gains ............................. -- -- (.53) (.86) (.43)
--------------------------------------------------------------------------------
Total distributions ............................. -- (.02) (.53) (.89) (.48)
--------------------------------------------------------------------------------
Net asset value, end of period .................. $52.31 $49.55 $25.63 $24.81 $19.27
================================================================================
Total return(b) ................................. 5.57% 93.46% 5.67% 34.02% 9.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............... $536,281 $428,192 $159,310 $122,701 $24,556
Ratios to average net assets:
Expenses ....................................... 1.60%(c) 1.63% 1.75% 1.74% 1.86%(c)
Net investment income (loss) ................... (.72)%(c) (.64)% (.33)% (.10)% .05%(c)
Portfolio turnover rate ......................... 10.46% 61.04% 52.76% 48.52% 44.81%
</TABLE>
(a) Based on average shares outstanding effective year ended April 30,
2000.
(b) Total return does not reflect sales commissions or the contingent
deferred sales charge, and is not annualized for periods less than one
year.
(c) Annualized
(d) For the period September 3, 1996 (effective date) to April 30, 1997.
See notes to financial statements.
42
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA GROWTH FUND SHARES VALUE
--------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 90.5%
(a)COMMERCIAL SERVICES 2.7%
Concord EFS Inc. ....................... 31,300 $1,293,081
Learning Tree International Inc. ....... 70,000 3,167,500
(c)Learning Tree International Inc. ...... 530,000 23,982,500
Robert Half International Inc. ......... 1,840,000 56,120,000
----------
84,563,081
----------
COMMUNICATIONS .3%
(a)Broadwing Inc. ........................ 25,000 706,250
(a)Pinnacle Holdings Inc. ................ 7,700 121,275
Vodafone Group PLC, ADR (United Kingdom) 175,000 7,448,438
(a)VoiceStream Wireless Corp. ............ 12,500 1,643,750
(a)Western Wireless Corp., A ............. 12,500 593,750
----------
10,513,463
----------
CONSUMER DURABLES .4%
(a)Electronic Arts Inc. .................. 200,000 10,000,000
Mattel Inc. ............................ 100,000 1,293,750
----------
11,293,750
----------
CONSUMER NON-DURABLES .9%
Clorox Co. ............................. 650,000 29,006,250
----------
CONSUMER SERVICES 3.1%
(a)Apollo Group Inc., A .................. 18,000 704,250
(a)Clear Channel Communications Inc. ..... 8,460 508,129
(a)DeVry Inc. ............................ 21,200 783,075
(a)eBay Inc. ............................. 150,000 7,725,000
(a)Entravision Communications Corp. ...... 400,000 7,075,000
(a)Fox Entertainment Group Inc., A ....... 1,000,000 21,500,000
(a)Jack in the Box Inc. .................. 400,000 9,800,000
Knight-Ridder Inc. ..................... 9,300 467,325
McClatchy Co., A ....................... 184,800 7,022,400
United Television Inc. ................. 50,000 6,700,000
(a)Univision Communications Inc., A ...... 800,000 30,600,000
Walt Disney Co. ........................ 150,000 5,371,875
----------
98,257,054
----------
ELECTRONIC TECHNOLOGY 27.8%
(a)Agilent Technologies Inc. ............. 163,140 7,555,421
(a)Altera Corp. .......................... 600,000 24,562,500
(a)Applied Materials Inc. ................ 300,000 15,937,500
(a)Applied Micro Circuits Corp. .......... 1,100,000 83,600,000
(a)Broadcom Corp., A ..................... 125,000 27,796,875
(a)Centillium Communications Inc. ........ 200,000 7,596,875
(a)Cisco Systems Inc. .................... 1,200,000 64,650,000
(a)Cosine Communications Inc. ............ 100,000 3,306,250
(a)Cypress Semiconductor Corp. ........... 500,000 18,718,750
(a)Ditech Communications Corp. ........... 200,000 6,887,500
</TABLE>
43
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA GROWTH FUND SHARES VALUE
--------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
ELECTRONIC TECHNOLOGY (CONT.)
(a),(c)eMachines Inc. ....................... 783,208 $ 726,915
(a)Endwave Corp. ............................ 70,900 1,019,188
(a)Extreme Networks Inc. .................... 300,000 24,881,250
(a)Flextronics International Ltd. (Singapore) 730,000 27,740,000
(a)Foundry Networks Inc. .................... 150,000 9,965,625
(a)Gemstar-TV Guide International Inc. ...... 200,000 13,712,500
Hewlett-Packard Co. ....................... 200,000 9,287,500
Intel Corp. ............................... 400,000 18,000,000
(a)JDS Uniphase Corp. ....................... 800,000 65,150,000
(a)Juniper Networks Inc. .................... 175,000 34,125,000
(a)KLA-Tencor Corp. ......................... 275,000 9,298,438
(a)Lam Research Corp. ....................... 570,000 11,043,750
Linear Technology Corp. ................... 580,000 37,446,250
(a)Macrovision Corp. ........................ 300,000 21,862,500
(a)Maxim Integrated Products Inc. ........... 450,000 29,840,625
(a)Micrel Inc. .............................. 266,000 12,036,500
(a)Network Appliance Inc. ................... 200,000 23,800,000
(a)Novellus Systems Inc. .................... 245,000 10,029,688
(a)Pinnacle Systems Inc. .................... 900,000 11,362,500
(a)Plantronics Inc. ......................... 60,000 2,737,500
(a)PMC-Sierra Inc. (Canada) ................. 75,000 12,712,500
(a)Polycom Inc. ............................. 250,000 16,250,000
(a)Proxim Inc. .............................. 150,000 9,093,750
(a)Sanmina Corp. ............................ 300,000 34,293,750
(a)SDL Inc. ................................. 181,000 46,924,250
(a)Solectron Corp. .......................... 300,000 13,200,000
(a)Sun Microsystems Inc. .................... 500,000 55,437,500
(a)Sunrise Telecom Inc. ..................... 50,000 1,243,750
(a)UTStarcom Inc. ........................... 50,000 1,000,000
(a)Vitesse Semiconductor Corp. .............. 245,000 17,134,688
(a)Western Multiplex Corp. .................. 114,200 1,613,075
(a)Xilinx Inc. .............................. 550,000 39,840,625
-----------
883,421,288
-----------
ENERGY MINERALS .8%
(a)Barrett Resources Corp. .................. 11,500 418,313
Chevron Corp. ............................. 300,000 24,637,500
-----------
25,055,813
-----------
FINANCE 7.0%
Charles Schwab Corp. ...................... 800,000 28,100,000
Countrywide Credit Industries Inc. ........ 350,000 13,103,125
Federated Investors Inc., B ............... 28,500 830,063
Golden State Bancorp Inc. ................. 600,000 15,675,000
iStar Financial Inc. ...................... 230,000 4,600,000
National Commerce Bancorp ................. 14,000 297,500
The PMI Group Inc. ........................ 500,000 36,937,500
</TABLE>
44
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA GROWTH FUND SHARES VALUE
--------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
FINANCE (CONT.)
Providian Financial Corp. ...... 350,000 $36,400,000
(a)Silicon Valley Bancshares ..... 1,102,500 50,990,625
Wells Fargo & Co. .............. 725,000 33,576,563
-----------
220,510,376
-----------
(a)HEALTH SERVICES 1.4%
Tenet Healthcare Corp. ......... 1,100,000 43,243,750
-----------
HEALTH TECHNOLOGY 12.3%
(a)Abgenix Inc. .................. 550,000 43,381,250
(a)Aclara Biosciences Inc. ....... 150,000 2,681,250
(a)Affymetrix Inc. ............... 413,700 22,908,638
Allergan Inc. .................. 200,000 16,812,500
(a)Amgen Inc. .................... 450,000 26,071,875
(a)Cerus Corp. ................... 75,000 4,190,625
(a)Chiron Corp. .................. 311,000 13,470,188
(a)Coherent Inc. ................. 250,000 8,703,125
(a)Collateral Therapeutics Inc. .. 200,000 5,056,250
(a)COR Therapeutics Inc. ......... 300,000 16,950,000
(a)Exelixis Inc. ................. 125,200 2,762,225
(a)Genentech Inc. ................ 800,000 66,000,000
(a)Genzyme Corp. ................. 5,700 404,700
(a)Illumina Inc. ................. 100,000 3,250,000
(a)INAMED Corp. .................. 78,200 2,189,600
(a)Incyte Genomics Inc. .......... 285,300 10,449,113
(a)Inhale Therapeutic Systems Inc. 824,912 41,039,372
(a)Invitrogen Corp. .............. 250,000 19,015,625
(a)Minimed Inc. .................. 50,000 3,646,875
(a)Molecular Devices Corp. ....... 275,000 18,803,125
(a)Nanogen Inc. .................. 125,000 1,937,500
(a)Pain Therapeutics Inc. ........ 203,400 4,360,388
PE Corp-PE Biosystems Group .... 150,000 17,550,000
(a)Pharsight Corp. ............... 280,900 2,176,975
(a)Thermo Cardiosystems Inc. ..... 400,000 3,275,000
(a)Thoratec Laboratories Corp. ... 511,000 6,227,813
(a)Versicor Inc. ................. 64,700 849,188
(a)Watson Pharmaceuticals Inc. ... 400,000 25,025,000
-----------
389,188,200
-----------
INDUSTRIAL SERVICES .8%
(a)Catalytica Inc. ............... 375,000 5,039,063
Dynegy Inc. .................... 31,740 1,469,959
Granite Construction Inc. ...... 250,000 5,703,125
(a)Tetra Tech Inc. ............... 375,000 13,031,250
(a)Weatherford International Inc. 19,000 693,500
-----------
25,936,897
-----------
</TABLE>
45
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA GROWTH FUND SHARES VALUE
-------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
PROCESS INDUSTRIES
Bowater Inc. ................................... 10,000 $ 541,250
Ecolab Inc. .................................... 16,000 627,000
-----------
1,168,250
-----------
PRODUCER MANUFACTURING 1.5%
Avery Dennison Corp. ........................... 500,000 25,250,000
(a)Capstone Turbine Corp. ........................ 100,000 5,550,000
(a)Gentex Corp. .................................. 29,000 717,750
(a)Mettler-Toledo International Inc. (Switzerland) 21,000 980,438
(a)Simpson Manufacturing Co. Inc. ................ 75,000 3,196,875
(a)Varian Inc. ................................... 425,500 13,110,719
-----------
48,805,782
-----------
REAL ESTATE 4.1%
Alexandria Real Estate Equities Inc. ........... 250,000 8,468,750
AMB Property Corp. ............................. 550,000 12,925,000
Arden Realty Inc. .............................. 600,000 14,400,000
(a)Catellus Development Corp. .................... 800,000 14,550,000
Essex Property Trust Inc. ...................... 500,000 26,000,000
Health Care Property Investors Inc. ............ 600,000 17,625,000
Spieker Properties Inc. ........................ 650,000 35,993,750
-----------
129,962,500
-----------
RETAIL TRADE 3.5%
(a)Cost Plus Inc. ................................ 150,000 4,200,000
(a)Costco Wholesale Corp. ........................ 250,000 9,156,250
Family Dollar Stores Inc. ...................... 24,000 466,500
GAP Inc. ....................................... 1,000,000 25,812,500
(a)Safeway Inc. .................................. 1,100,000 60,156,250
(a)Williams-Sonoma Inc. .......................... 500,000 10,406,250
-----------
110,197,750
-----------
TECHNOLOGY SERVICES 21.7%
(a)Actuate Corp. ................................. 300,000 8,456,250
Adobe Systems Inc. ............................. 500,000 38,031,250
(a)Affiliated Computer Services Inc., A .......... 8,500 473,344
(a)Agile Software Corp. .......................... 100,000 7,537,500
(a)Ariba Inc. .................................... 175,000 22,115,625
(a)Art Technology Group Inc. ..................... 13,000 815,750
(a)Aspect Communications Corp. ................... 20,000 329,688
(a)BEA Systems Inc. .............................. 225,000 16,143,750
(a)Blue Martini Software Inc. .................... 2,100 79,013
(a)BroadVision Inc. .............................. 700,000 20,825,000
(a)Check Point Software Technologies Ltd. (Israel) 150,000 23,756,250
(a)Commerce One Inc. ............................. 250,000 16,046,875
(a)Computer Sciences Corp. ....................... 354,000 22,302,000
(a)CSG Systems International Inc. ................ 12,000 557,250
(a)Docent Inc. ................................... 82,800 2,132,100
(a)Entrust Technologies Inc. ..................... 45,623 1,185,651
</TABLE>
46
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA GROWTH FUND SHARES VALUE
-----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
TECHNOLOGY SERVICES (CONT.)
(a)Evolve Software Inc. ..................... 76,800 $ 1,204,800
(a)Exodus Communications Inc. ............... 460,000 15,438,750
(a)HNC Software Inc. ........................ 281,000 5,707,813
(a)Informatica Corp. ........................ 82,600 7,805,700
(a)InfoSpace Inc. ........................... 16,000 322,000
(a)Interwoven Inc. .......................... 200,000 20,150,000
(a)Intuit Inc. .............................. 380,700 23,389,256
(a)Liberate Technologies Inc. ............... 400,000 7,625,000
(a)Mercury Interactive Corp. ................ 200,000 22,200,000
(a)Micromuse Inc. ........................... 280,000 47,512,500
(a)Oracle Corp. ............................. 1,500,000 49,500,000
(a)Peregrine Systems Inc. ................... 200,000 4,800,000
(a)Quest Software Inc. ...................... 300,000 13,106,250
(a)Rational Software Corp. .................. 218,400 13,035,750
(a)Retek Inc. ............................... 349,293 13,775,243
(a)Scient Corp. ............................. 500,000 9,000,000
(a)Siebel Systems Inc. ...................... 936,000 98,221,488
(a)SonicWALL Inc. ........................... 168,800 2,521,450
(a)Support.com Inc. ......................... 35,800 510,150
(a)Tumbleweed Communications Corp. .......... 50,000 856,250
(a)VeriSign Inc. ............................ 200,000 26,400,000
(a)VERITAS Software Corp. ................... 725,000 102,236,328
(a)Vitria Technology Inc. ................... 350,000 9,406,250
(a)Yahoo! Inc. .............................. 225,000 13,190,625
-----------
688,702,899
-----------
TRANSPORTATION .9%
Expeditors International of Washington Inc. 530,000 27,493,751
-----------
UTILITIES 1.3%
American States Water Co. ................. 165,000 5,145,938
California Water Service Group ............ 180,000 4,848,750
(a)Calpine Corp. ............................ 400,000 31,575,000
-----------
41,569,688
-----------
TOTAL COMMON STOCKS (COST $1,732,100,319) . 2,868,890,542
------------
(a)PREFERRED STOCKS 1.0%
(c)ELECTRONIC TECHNOLOGY .1%
Anda Networks Inc., pfd., D ............... 145,772 1,999,992
Kestrel Solutions Inc., pfd., D ........... 124,712 1,624,997
-----------
3,624,989
-----------
HEALTH TECHNOLOGY .9%
(c)Fibrogen Inc., pfd., E ................... 2,227,171 9,999,998
(c)Masimo Corp., pfd., F .................... 772,727 8,499,997
Pro*duct Health Inc., pfd., C, 144A ....... 2,028,398 10,000,002
-----------
28,499,997
-----------
TOTAL PREFERRED STOCKS (COST $32,124,994) 32,124,986
-----------
</TABLE>
47
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA GROWTH FUND SHARES VALUE
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(a) CONVERTIBLE PREFERRED STOCKS .1%
Calpine Capital Trust III, cvt. pfd., 144A (COST $2,250,000)............ 45,000 $ 2,475,000
--------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS 1.3%
ELECTRONIC TECHNOLOGY .4%
Cyras Systems Inc., cvt., 144A, 4.50%, 8/15/05 .................. $ 790,000 855,175
Redback Networks Inc., cvt., 144A, 5.00%, 4/01/07 ............... 14,500,000 12,615,000
--------------
13,470,175
--------------
TECHNOLOGY SERVICES .9%
BEA Systems Inc., cvt., 144A, 4.00%, 12/15/06 ................... 13,000,000 28,405,000
--------------
TOTAL CONVERTIBLE BONDS (COST $28,275,285) ...................... 41,875,175
--------------
TOTAL LONG TERM INVESTMENTS (COST $1,794,750,598) ............... 2,945,365,703
--------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENTS 6.9%
(b) Franklin Institutional Fiduciary Trust Money Market Portfolio
(COST $217,578,132) ...................................... 217,578,132 217,578,132
--------------
TOTAL INVESTMENTS (COST $2,012,328,730) 99.8% ............... 3,162,943,835
OTHER ASSETS, LESS LIABILITIES .2% .......................... 7,218,016
--------------
NET ASSETS 100.0% ........................................... $3,170,161,851
==============
</TABLE>
(a) Non-income producing
(b) See Note 3 regarding investment in the "Sweep Money Fund."
(c) See Note 6 regarding restricted securities.
See notes to financial statements.
48
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights
<TABLE>
<CAPTION>
FRANKLIN LARGE CAP GROWTH FUND
CLASS A
---------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2000 YEAR ENDED
(UNAUDITED) APRIL 30, 2000(d)
---------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................ $ 14.85 $ 10.00
---------------------------------------
Income from investment operations:
Net investment loss(a) ............................. (.04) (.06)
Net realized and unrealized gains .................. 1.01 4.91
---------------------------------------
Total from investment operations .................... .97 4.85
---------------------------------------
Less distributions from net investment income ....... -- -- (e)
---------------------------------------
Net asset value, end of period ...................... $ 15.82 $ 14.85
=======================================
Total return(b) ..................................... 6.53% 48.59%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................... $ 66,123 $ 39,402
Ratios to average net assets:
Expenses(c) ........................................ 1.25% 1.23%
Expenses excluding waiver and payments by
affiliate(c) ..................................... 1.25% 1.39%
Net investment loss(c) ............................. (.48)% (.46)%
Portfolio turnover rate ............................. 33.62% 93.95%
</TABLE>
(a) Based on average shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(c) Annualized
(d) For the period June 7, 1999 (effective date) to April 30, 2000.
(e) Includes distributions of net investment income in the amount of $.008.
49
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
<TABLE>
<CAPTION>
FRANKLIN LARGE CAP GROWTH FUND (CONT.)
CLASS B
--------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2000 YEAR ENDED
(UNAUDITED) APRIL 30, 2000(d)
--------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................. $ 14.77 $ 10.00
--------------------------------------
Income from investment operations:
Net investment loss(a) ............................... (.09) (.13)
Net realized and unrealized gains .................... 1.00 4.90
--------------------------------------
Total from investment operations ...................... .91 4.77
--------------------------------------
Net asset value, end of period ........................ $ 15.68 $ 14.77
======================================
Total return(b) ....................................... 6.16% 47.70%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ..................... $ 8,006 $ 4,502
Ratios to average net assets:
Expenses(c) .......................................... 1.90% 1.84%
Expenses excluding waiver and payments by
affiliate(c)......................................... 1.90% 2.00%
Net investment loss(c) ............................... (1.12)% (1.06)%
Portfolio turnover rate ............................... 33.62% 93.95%
</TABLE>
(a) Based on average shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Annualized
(d) For the period June 7, 1999 (effective date) to April 30, 2000.
50
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
<TABLE>
<CAPTION>
FRANKLIN LARGE CAP GROWTH FUND (CONT.)
CLASS C
-------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2000 YEAR ENDED
(UNAUDITED) APRIL 30, 2000(d)
-------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................. $ 14.77 $ 10.00
-------------------------------------
Income from investment operations:
Net investment loss(a) ............................... (.09) (.14)
Net realized and unrealized gains .................... 1.00 4.91
-------------------------------------
Total from investment operations ...................... .91 4.77
Net asset value, end of period ........................ $ 15.68 $ 14.77
=====================================
Total return(b) ....................................... 6.16% 47.70%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ..................... $ 59,430 $ 35,345
Ratios to average net assets:
Expenses(c) .......................................... 1.90% 1.90%
Expenses excluding waiver and payments by affiliate(c) 1.90% 2.06%
Net investment loss(c) ............................... (1.13)% (1.13)%
Portfolio turnover rate ............................... 33.62% 93.95%
</TABLE>
(a) Based on average shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(c) Annualized
(d) For the period June 7, 1999 (effective date) to April 30, 2000.
51
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
<TABLE>
<CAPTION>
FRANKLIN LARGE CAP GROWTH FUND (CONT.)
ADVISOR CLASS
--------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2000 YEAR ENDED
(UNAUDITED) APRIL 30, 2000(d)
--------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................. $ 14.88 $ 10.00
--------------------------------------
Income from investment operations:
Net investment loss(a) ............................... (.01) (.01)
Net realized and unrealized gains .................... 1.01 4.91
--------------------------------------
Total from investment operations ...................... 1.00 4.90
Less distributions from net investment income ......... -- (.02)
Net asset value, end of period ........................ $ 15.88 $ 14.88
======================================
Total return(b) ....................................... 6.72% 49.01%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ..................... $ 24,560 $ 19,902
Ratios to average net assets:
Expenses(c) .......................................... .90% .90%
Expenses excluding waiver and payments by affiliate(c) .90% 1.06%
Net investment loss(c) ............................... (.12)% (.06)%
Portfolio turnover rate ............................... 33.62% 93.95%
</TABLE>
(a) Based on average shares outstanding.
(b) Total return is not annualized for periods less than one year.
(c) Annualized
(d) For the period June 7, 1999 (effective date) to April 30, 2000.
See notes to financial statements.
52
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN LARGE CAP GROWTH FUND SHARES VALUE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 92.9%
COMMUNICATIONS 3.1%
AT&T Corp. ............................................................................ 26,200 $ 607,513
SBC Communications Inc. ............................................................... 52,500 3,028,594
Sprint Corp. (Fon Group) .............................................................. 16,900 430,950
(a) VoiceStream Wireless Corp. ............................................................ 5,800 762,700
------------
4,829,757
------------
CONSUMER NON-DURABLES 2.9%
Anheuser-Busch Cos. Inc. .............................................................. 51,000 2,333,250
Avon Products Inc. .................................................................... 27,400 1,328,900
Estee Lauder Cos. Inc., A ............................................................. 21,800 1,012,338
------------
4,674,488
------------
CONSUMER SERVICES 1.7%
(a) Clear Channel Communications Inc. ..................................................... 22,500 1,351,406
Time Warner Inc. ...................................................................... 14,400 1,093,104
(a) Viacom Inc., B ........................................................................ 4,100 233,188
------------
2,677,698
------------
ELECTRONIC TECHNOLOGY 37.0%
(a) ADC Telecommunications Inc. ........................................................... 59,400 1,269,675
(a) Applied Materials Inc. ................................................................ 37,300 1,981,563
(a) Applied Micro Circuits Corp. .......................................................... 9,000 684,000
(a) Avici Systems Inc. .................................................................... 400 17,350
(a) Brocade Communications Systems Inc. ................................................... 15,900 3,615,262
(a) CIENA Corp. ........................................................................... 45,000 4,730,624
(a) Cisco Systems Inc. .................................................................... 80,600 4,342,325
(a) Comverse Technology Inc. .............................................................. 22,300 2,492,025
Corning Inc. .......................................................................... 37,200 2,845,800
(a) EMC Corp. ............................................................................. 45,900 4,087,968
(a) Extreme Networks Inc. ................................................................. 26,100 2,164,669
(a) Infineon Technologies AG, ADR (Germany) ............................................... 15,800 677,425
Intel Corp. ........................................................................... 46,300 2,083,500
International Business Machines Corp. ................................................. 17,700 1,743,450
(a) JDS Uniphase Corp. .................................................................... 14,200 1,156,413
(a) Juniper Networks Inc. ................................................................. 24,000 4,680,000
(a) Network Appliance Inc. ................................................................ 7,400 880,600
Nokia Corp., ADR (Finland) ............................................................ 33,100 1,415,025
Nortel Networks Corp. (Canada) ........................................................ 69,000 3,139,500
(a) PMC-Sierra Inc. (Canada) .............................................................. 18,100 3,067,950
(a) Redback Networks Inc. ................................................................. 7,300 776,994
(a) SDL Inc. .............................................................................. 13,800 3,577,650
(a) Stratos Lightwave Inc. ................................................................ 5,400 142,763
(a) Sun Microsystems Inc. ................................................................. 38,300 4,246,513
(a) Xilinx Inc. ........................................................................... 37,400 2,709,163
------------
58,528,207
------------
(a) ENERGY MINERALS 1.1%
Petroleo Brasileiro SA (Petrobras), ADR (Brazil) ...................................... 60,800 1,767,000
------------
</TABLE>
53
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN LARGE CAP GROWTH FUND SHARES VALUE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
FINANCE 8.0%
American International Group Inc. ..................................................... 38,500 $3,773,000
Capital One Financial Corp. ........................................................... 29,400 1,855,875
Charles Schwab Corp. .................................................................. 36,000 1,264,500
Citigroup Inc. ........................................................................ 63,333 3,332,898
Goldman Sachs Group Inc. .............................................................. 14,800 1,477,225
Morgan Stanley Dean Witter & Co. ...................................................... 12,300 987,844
------------
12,691,342
------------
HEALTH TECHNOLOGY 13.8%
(a) Amgen Inc. ............................................................................ 21,300 1,234,069
Baxter International Inc. ............................................................. 37,200 3,057,374
(a) Biogen Inc. ........................................................................... 45,800 2,756,588
(a) Genentech Inc. ........................................................................ 19,800 1,633,500
(a) MedImmune Inc. ........................................................................ 22,400 1,464,400
Medtronic Inc. ........................................................................ 28,000 1,520,750
PE Corp.-PE Biosystems Group .......................................................... 16,800 1,965,600
Pfizer Inc. ........................................................................... 88,275 3,812,377
Schering-Plough Corp. ................................................................. 62,200 3,214,962
Serono SA, B (Switzerland) ............................................................ 570 512,591
(a) Watson Pharmaceuticals Inc. ........................................................... 10,000 625,625
------------
21,797,836
------------
INDUSTRIAL SERVICES 6.2%
(a) AES Corp. ............................................................................. 51,600 2,915,400
Dynegy Inc. ........................................................................... 87,500 4,052,343
Transocean Sedco Forex Inc. ........................................................... 53,000 2,809,000
------------
9,776,743
------------
PROCESS INDUSTRIES 2.7%
General Electric Co. .................................................................. 76,800 4,209,600
------------
PRODUCER MANUFACTURING 1.2%
Tyco International Ltd. (Bermuda) ..................................................... 33,000 1,870,688
------------
RETAIL TRADE 2.0%
CVS Corp. ............................................................................. 7,100 375,856
Home Depot Inc. ....................................................................... 14,750 634,250
Target Corp. .......................................................................... 22,800 629,850
Wal-Mart Stores Inc. .................................................................. 32,825 1,489,433
------------
3,129,389
------------
(a) TECHNOLOGY SERVICES 9.1%
Ariba Inc. ............................................................................ 10,200 1,289,025
BEA Systems Inc. ...................................................................... 19,500 1,399,125
BroadVision Inc. ...................................................................... 13,100 389,725
i2 Technologies Inc. .................................................................. 5,000 850,000
Inktomi Corp. ......................................................................... 3,300 209,344
Microsoft Corp. ....................................................................... 24,000 1,653,000
Oracle Corp. .......................................................................... 50,000 1,650,000
</TABLE>
54
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN LARGE CAP GROWTH FUND SHARES VALUE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a) TECHNOLOGY SERVICES (CONT.)
Siebel Systems Inc. ................................................................... 21,800 $2,287,638
Software.com Inc. ..................................................................... 5,200 774,800
VeriSign Inc. ......................................................................... 2,300 303,600
VERITAS Software Corp. ................................................................ 25,775 3,634,678
------------
14,440,935
------------
UTILITIES 4.1%
Enron Corp. ........................................................................... 45,500 3,733,844
(a) Southern Energy Inc. .................................................................. 100,200 2,730,449
------------
6,464,293
------------
TOTAL COMMON STOCKS (COST $125,202,938) ............................................... 146,857,976
------------
SHORT TERM INVESTMENTS 7.0%
(b) Franklin Institutional Fiduciary Trust Money Market Portfolio
(COST $11,016,438) ................................................................. 11,016,438 11,016,438
------------
TOTAL INVESTMENTS (COST $136,219,376) 99.9% ........................................... 157,874,414
OTHER ASSETS, LESS LIABILITIES .1% .................................................... 243,612
------------
NET ASSETS 100.0% ..................................................................... $158,118,026
============
</TABLE>
(a) Non-income producing
(b) See Note 3 regarding investment in the "Sweep Money Fund."
See notes to financial statements.
55
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights
<TABLE>
<CAPTION>
FRANKLIN SMALL CAP GROWTH FUND I
CLASS A
----------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2000 ---------------------------------------------------------------------
(UNAUDITED) 2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .... $ 45.48 $ 24.65 $ 25.93 $ 18.96 $ 19.75 $ 14.90
----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............... .08 .09 .06 .07 .03 .01
Net realized and unrealized gains
(losses) .............................. 1.20 21.04 (1.02) 7.92 .04 6.23
----------------------------------------------------------------------------------------
Total from investment operations ........ 1.28 21.13 (.96) 7.99 .07 6.24
----------------------------------------------------------------------------------------
Less distributions from:
Net investment income .................. -- (.04) (.14) (.09) (.06) (.01)
Net realized gains ..................... -- (.26) (.18) (.93) (.80) (1.38)
----------------------------------------------------------------------------------------
Total distributions ..................... -- (.30) (.32) (1.02) (.86) (1.39)
----------------------------------------------------------------------------------------
Net asset value, end of period .......... $ 46.76 $ 45.48 $ 24.65 $ 25.93 $ 18.96 $ 19.75
========================================================================================
Total return(b) ......................... 2.81% 85.97% (3.44)% 43.09% .14% 44.06%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ....... $12,661,087 $11,199,559 $4,251,284 $3,957,972 $1,071,352 $444,912
Ratios to average net assets:
Expenses ............................... .82%(c) .85% .94% .89% .92% .97%
Expenses excluding waiver and
payments by affiliate ................. .82%(c) .85% .94% .89% .92% 1.00%
Net investment income .................. .36%(c) .24% .30% .32% .10% .09%
Portfolio turnover rate ................. 11.48% 24.67% 46.73% 42.97% 55.27% 87.92%
</TABLE>
(a) Based on average shares outstanding effective year ended April 30, 2000.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(c) Annualized
56
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
<TABLE>
<CAPTION>
FRANKLIN SMALL CAP GROWTH FUND I (CONT.)
CLASS C
------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2000 ----------------------------------------------------------
(UNAUDITED) 2000 1999 1998 1997 1996(d)
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period $ 44.58 $ 24.32 $ 25.59 $ 18.78 $ 19.66 $17.94
------------------------------------------------------------------------------
Income from investment operations:
Net investment loss(a) (.09) (.19) (.09) (.02) (.05) (.03)
Net realized and unrealized gains
(losses) 1.17 20.71 (1.00) 7.76 (.03) 2.71
------------------------------------------------------------------------------
Total from investment operations 1.08 20.52 (1.09) 7.74 (.08) 2.68
------------------------------------------------------------------------------
Less distributions from net realized
gains -- (.26) (.18) (.93) (.80) (.96)
------------------------------------------------------------------------------
Net asset value, end of period $ 45.66 $ 44.58 $ 24.32 $ 25.59 $ 18.78 $ 19.66
==============================================================================
Total return(b) 2.42% 84.58% (4.08)% 42.06% (.65)% 15.98%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $1,750,172 $1,667,870 $764,715 $731,707 $146,164 $24,102
Ratios to average net assets:
Expenses 1.57%(c) 1.60% 1.69% 1.64% 1.69% 1.76%(c)
Net investment loss (.40)%(c) (.52)% (.44)% (.42)% (.70)% (.69)%(c)
Portfolio turnover rate 11.48% 24.67% 46.73% 42.97% 55.27% 87.92%
</TABLE>
(a) Based on average shares outstanding effective year ended April 30, 2000.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(c) Annualized
(d) For the period October 1, 1995 (effective date) to April 30, 1996.
57
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Financial Highlights (continued)
<TABLE>
<CAPTION>
FRANKLIN SMALL CAP GROWTH FUND I (CONT.)
ADVISOR CLASS
---------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2000 YEAR ENDED APRIL 30,
-------------------------------------------------------
(UNAUDITED) 2000 1999 1998 1997(d)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 45.74 $ 24.73 $ 26.01 $ 18.97 $ 20.48
---------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................... .15 .18 .10 .09 .01
Net realized and unrealized gains (losses) ... 1.20 21.15 (1.00) 8.01 (1.52)
---------------------------------------------------------------------------
Total from investment operations .............. 1.35 21.33 (.90) 8.10 (1.51)
---------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ -- (.06) (.20) (.13) --
Net realized gains ........................... -- (.26) (.18) (.93) --
---------------------------------------------------------------------------
Total distributions ........................... -- (.32) (.38) (1.06) --
---------------------------------------------------------------------------
Net asset value, end of period ................ $ 47.09 $ 45.74 $ 24.73 $ 26.01 $ 18.97
===========================================================================
Total return(b) ............................... 2.95% 86.43% (3.12)% 43.68% ( 7.37)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $485,801 $436,864 $168,055 $118,683 $18,777
Ratios to average net assets:
Expenses ..................................... .57%(c) .60% .69% .64% .69%(c)
Net investment income ........................ .60%(c) .49% .56% .58% .30%(c)
Portfolio turnover rate ....................... 11.48% 24.67% 46.73% 42.97% 55.27%
</TABLE>
(a) Based on average shares outstanding effective year ended April 30, 2000.
(b) Total return is not annualized for periods less than one year.
(c) Annualized
(d) For the period January 2, 1997 (effective date) to April 30, 1997.
See notes to financial statements.
58
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STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN SMALL CAP GROWTH FUND I SHARES VALUE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 89.5%
COMMERCIAL SERVICES 2.3%
(a) Aether Systems Inc. ...................................................... 85,000 $ 6,853,125
(a) Answerthink Inc. ......................................................... 1,000,000 16,375,000
(a) Concord EFS Inc. ......................................................... 1,905,000 78,700,313
(a) Corporate Executive Board Co. ............................................ 459,800 21,208,275
(a) DigitalThink Inc. ........................................................ 612,600 21,584,578
(a) Hotjobs.com Ltd. ......................................................... 973,200 15,206,250
(a,d) Interep National Radio Sales Inc. ........................................ 489,100 1,650,713
(a) Internet Pictures Corp. .................................................. 893,753 1,913,190
(a,c) Learning Tree International Inc. ......................................... 1,064,000 48,146,000
(a) Netcentives Inc. ......................................................... 90,600 645,525
(a) Probusiness Services Inc. ................................................ 1,062,200 34,720,663
Viad Corp. ............................................................... 4,364,600 93,293,325
-------------
340,296,957
-------------
(a) COMMUNICATIONS 3.6%
(d) Alaska Communications Systems Holdings Inc. .............................. 2,411,700 16,429,706
Asia Global Crossing (Bermuda) ........................................... 227,200 1,590,400
AT&T Canada Inc., B (Canada) ............................................. 227,600 7,041,375
DSL.net Inc. ............................................................. 593,000 1,556,625
Efficient Networks Inc. .................................................. 964,000 40,442,813
Intermedia Communications Inc. ........................................... 680,000 15,045,000
ITC Deltacom Inc. ........................................................ 978,700 7,921,353
Leap Wireless International Inc. ......................................... 100,000 4,975,000
Millicom International Cellular SA (Luxembourg) .......................... 878,500 27,013,875
Pinnacle Holdings Inc. ................................................... 1,547,400 24,371,550
Primus Telecommunications Group Inc., 144A ............................... 1,115,900 5,649,244
(d) Rural Cellular Corp., A .................................................. 765,700 41,156,375
Time Warner Telecom Inc., A .............................................. 194,400 11,591,100
VoiceStream Wireless Corp. ............................................... 1,869,200 245,799,800
Western Wireless Corp., A ................................................ 1,619,200 76,912,000
-------------
527,496,216
-------------
CONSUMER DURABLES .6%
Callaway Golf Co. ........................................................ 1,000,000 16,000,000
Centex Corp. ............................................................. 1,185,200 43,852,400
D.R. Horton Inc. ......................................................... 744,361 13,770,679
(a) Meade Instruments Corp. .................................................. 800,000 14,650,000
-------------
88,273,079
-------------
CONSUMER NON-DURABLES .3%
(a) Tommy Hilfiger Corp. ..................................................... 2,997,800 34,849,425
Wolverine World Wide Inc. ................................................ 1,575,500 17,035,094
-------------
51,884,519
-------------
(a) CONSUMER SERVICES 2.4%
Clear Channel Communications Inc. ........................................ 612,810 36,806,901
Cumulus Media Inc., A .................................................... 1,181,800 7,386,250
DeVry Inc. ............................................................... 1,064,800 39,331,050
Entravision Communications Corp. ......................................... 1,867,500 33,031,406
</TABLE>
59
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STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
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------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a) CONSUMER SERVICES (CONT.)
Hispanic Broadcasting Corp., A ........................................... 3,043,600 $ 95,112,500
(d) Insight Communications Co. Inc., A ....................................... 4,090,800 56,759,850
Jack in the Box Inc. ..................................................... 1,299,700 31,842,650
MeriStar Hotels & Resorts Inc. ........................................... 1,330,000 3,158,750
Radio One Inc. ........................................................... 281,200 2,232,025
Radio One Inc., D ........................................................ 562,400 4,507,988
Sotheby's Holdings Inc., A ............................................... 375,000 10,195,313
Spanish Broadcasting Systems Inc. ........................................ 708,300 6,374,700
Vail Resorts Inc. ........................................................ 276,000 5,847,750
XM Satellite Radio Holdings Inc. ......................................... 955,900 27,721,100
-------------
360,308,233
-------------
(a) DISTRIBUTION SERVICES
SciQuest.com Inc. ........................................................ 83,200 371,800
-------------
ELECTRONIC TECHNOLOGY 26.0%
(a) Accelerated Networks Inc. ................................................ 95,700 1,333,819
(a) Adaptec Inc. ............................................................. 2,000,200 31,628,163
(a) Advanced Energy Industries Inc. .......................................... 876,600 15,121,350
(a) Advanced Fibre Communications Inc. ....................................... 1,298,400 42,279,150
(a) Aeroflex Inc. ............................................................ 587,000 34,926,500
(a) Alpha Industries Inc. .................................................... 1,024,000 40,832,000
(a) Anaren Microwave Inc. .................................................... 413,400 42,993,600
(a) Applied Materials Inc. ................................................... 769,992 40,905,825
(a) Applied Micro Circuits Corp. ............................................. 680,900 51,748,400
ASM Pacific Technology Ltd. (Hong Kong) .................................. 500,000 1,019,348
(a,c) Auspex Systems Inc. ...................................................... 2,394,885 21,823,390
(a) Avocent Corp. ............................................................ 813,036 57,674,741
(a) AXT Inc. ................................................................. 136,300 5,247,550
(a,d) Catapult Communications Corp. ............................................ 656,800 7,963,700
(a) Celeritek Inc. ........................................................... 305,900 10,113,819
(a) Celestica Inc. (Canada) .................................................. 337,500 24,257,813
(a) Centillium Communications Inc. ........................................... 100,000 3,798,438
(a) Cirrus Logic Inc. ........................................................ 732,800 31,602,000
(a,d) Cobalt Networks Inc. ..................................................... 1,482,000 81,695,250
(a) Com21 Inc. ............................................................... 557,600 6,029,050
(a) Conexant Systems Inc. .................................................... 272,700 7,175,419
(a) Copper Mountain Networks Inc. ............................................ 339,100 3,878,456
(a) Cosine Communications Inc. ............................................... 137,600 4,549,400
CTS Corp. ................................................................ 341,700 14,671,744
(a) DDI Corp. ................................................................ 967,800 38,651,513
(a) Ditech Communications Corp. .............................................. 1,182,100 40,708,569
(a) DMC Stratex Networks Inc. ................................................ 1,339,200 30,969,000
(a) Electro Scientific Industries Inc. ....................................... 1,129,400 39,458,413
(a,c) eMachines Inc. ........................................................... 1,378,446 1,279,370
(a) eMachines Inc., 144A ..................................................... 885,500 913,172
(a) EMCORE Corp. ............................................................. 1,033,600 42,377,600
(a) Endwave Corp. ............................................................ 333,000 4,786,875
</TABLE>
60
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STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
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------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
ELECTRONIC TECHNOLOGY (CONT.)
(a) Flextronics International Ltd. (Singapore) ............................... 3,855,630 $ 146,513,940
(a,d) FLIR Systems Inc. ........................................................ 1,028,600 6,171,600
(a) Foundry Networks Inc. .................................................... 556,600 36,979,113
(a) Gemstar-TV Guide International Inc. ...................................... 2,258,400 154,841,550
(a) Handspring Inc. .......................................................... 230,100 16,639,106
(a) Harmonic Inc. ............................................................ 463,400 6,719,300
(a) Integrated Circuit Systems Inc. .......................................... 1,036,600 14,123,675
(a) Intersil Holding Corp. ................................................... 1,137,700 54,538,494
(a) Ixia ..................................................................... 32,900 771,094
(a) Jabil Circuit Inc. ....................................................... 1,600,000 91,300,000
(a) JDS Uniphase Corp. ....................................................... 4,769,024 388,377,392
(a) Lam Research Corp. ....................................................... 1,165,400 22,579,625
(a) Lattice Semiconductor Corp. .............................................. 884,000 25,801,750
(a) MCK Communications Inc. .................................................. 144,700 2,260,938
(a) Micrel Inc. .............................................................. 2,442,200 110,509,550
(a) Mirapoint Inc., 144A ..................................................... 682,128 4,999,998
(a) Nanometrics Inc. ......................................................... 483,100 11,111,300
(a) Natural MicroSystems Corp. ............................................... 728,400 32,914,575
(a) Netro Corp. .............................................................. 566,600 12,358,963
Newport Corp. ............................................................ 975,000 111,348,047
(a) NICE Systems Ltd., ADR (Israel) .......................................... 180,400 8,433,700
Nortel Networks Corp. (Canada) ........................................... 786,620 35,791,210
(a) Novellus Systems Inc. .................................................... 918,300 37,592,906
(a) PC-Tel Inc. .............................................................. 411,100 7,091,475
(a) Perceptron Inc. .......................................................... 135,900 363,108
PerkinElmer Inc. ......................................................... 685,800 81,953,100
(a) Photronics Inc. .......................................................... 587,500 13,255,469
(a) Pinnacle Systems Inc. .................................................... 825,000 10,415,625
(a) PLX Technology Inc. ...................................................... 256,800 6,163,200
(a) PMC-Sierra Inc. (Canada) ................................................. 3,200,828 542,540,346
(a) Polycom Inc. ............................................................. 2,428,800 157,872,000
(a) Power Integrations Inc. .................................................. 1,300,000 17,468,750
(a) Powerwave Technologies Inc. .............................................. 1,355,300 65,223,813
(a) Proxim Inc. .............................................................. 589,800 35,756,625
(a) QLogic Corp. ............................................................. 931,100 90,083,925
(a) QuickLogic Corp. ......................................................... 395,600 3,510,950
(a) Radiant Systems Inc. ..................................................... 282,600 5,210,438
(a) Redback Networks Inc. .................................................... 166,300 17,700,556
(a) Sanmina Corp. ............................................................ 646,400 73,891,600
(a) Semtech Corp. ............................................................ 791,400 25,522,650
(a) Sierra Wireless Inc. (Canada) ............................................ 510,200 33,545,650
(a) Silicon Laboratories Inc. ................................................ 353,400 9,917,288
(a) SMTC Corp. (Canada) ...................................................... 161,600 3,050,200
(a) Stanford Microdevices Inc. ............................................... 150,600 3,774,413
(a) Sunrise Telecom Inc. ..................................................... 19,500 485,063
(a) Synopsys Inc. ............................................................ 1,525,400 53,198,325
(a) Tekelec .................................................................. 1,823,300 67,120,231
(a) Tektronix Inc. ........................................................... 2,087,600 148,741,500
</TABLE>
61
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STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN SMALL CAP GROWTH FUND I SHARES VALUE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
ELECTRONIC TECHNOLOGY (CONT.)
(a) Triquint Semiconductor Inc. .............................................. 1,093,800 $ 41,906,213
(a) Varian Semiconductor Equipment Associates Inc. ........................... 782,000 17,986,000
(a) Veeco Instruments Inc. ................................................... 474,083 31,385,776
(a) Virage Logic Corp. ....................................................... 128,000 1,280,000
(a) Waters Corp. ............................................................. 2,479,200 179,896,950
(a) Western Multiplex Corp. .................................................. 559,400 7,901,525
-------------
3,869,304,027
-------------
ENERGY MINERALS 2.2%
(a,d) Barrett Resources Corp. .................................................. 1,860,900 67,690,238
(a,d) Basin Exploration Inc. ................................................... 1,425,200 28,236,775
Cabot Oil & Gas Corp., A ................................................. 341,400 6,699,975
(a) Chesapeake Energy Corp. .................................................. 2,076,900 11,682,563
(a) Denbury Resources Inc. ................................................... 1,116,300 7,674,563
Devon Energy Corp. ....................................................... 220,088 11,092,435
(a) Forest Oil Corp. ......................................................... 798,800 11,033,425
(a) Louis Dreyfus Natural Gas Corp. .......................................... 318,600 10,215,113
(a) Newfield Exploration Co. ................................................. 1,687,000 63,684,250
(a,d) Nuevo Energy Co. ......................................................... 1,075,500 19,493,438
(a,d) Pennaco Energy Inc. ...................................................... 1,704,500 21,199,719
(a) Pure Resources Inc. ...................................................... 668,450 11,029,425
(a,d) Range Resources Corp. .................................................... 2,896,900 12,673,938
(a) Spinnaker Exploration Co. ................................................ 271,000 8,197,750
(a) Syntroleum Corp. ......................................................... 50,000 975,000
(a) Tom Brown Inc. ........................................................... 1,569,500 35,902,313
-------------
327,480,920
-------------
FINANCE 5.8%
(a) Affiliated Managers Group Inc. ........................................... 653,400 39,285,675
Allied Capital Corp. ..................................................... 1,678,300 34,614,938
(a) AmeriCredit Corp. ........................................................ 275,000 7,390,625
(a) Arch Capital Group Ltd. .................................................. 410,500 6,362,750
Bank United Corp., A ..................................................... 1,000,000 56,687,500
City National Corp. ...................................................... 758,900 26,087,188
Commerce Bancorp Inc. .................................................... 365,400 22,129,538
(a) eSPEED Inc., A ........................................................... 158,800 3,334,800
Federated Investors Inc., B .............................................. 3,383,400 98,541,525
Golden State Bancorp Inc. ................................................ 2,000,000 52,250,000
HCC Insurance Holdings Inc. .............................................. 724,300 13,806,969
(a) Knight Trading Group Inc. ................................................ 1,207,200 36,140,550
(a) Labranche & Co. Inc. ..................................................... 1,780,400 70,548,350
Metris Cos. Inc. ......................................................... 859,550 27,827,931
Mutual Risk Management Ltd. (Bermuda) .................................... 990,900 17,960,063
National Commerce Bancorp. ............................................... 2,226,400 47,311,000
(a) National Discount Brokers Group Inc. ..................................... 297,300 14,474,794
Protective Life Corp. .................................................... 478,200 11,058,375
Radian Group Inc. ........................................................ 578,897 41,029,325
Reinsurance Group of America Inc. ........................................ 1,681,600 62,849,800
</TABLE>
62
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STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
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<S> <C> <C>
COMMON STOCKS (CONT.)
FINANCE (CONT.)
(a,d) Silicon Valley Bancshares ................................................ 2,840,000 $ 131,350,000
TCF Financial Corp. ...................................................... 999,400 40,413,238
Tucker Anthony Sutro Corp. ............................................... 396,800 9,176,000
-------------
870,630,934
-------------
(a) HEALTH SERVICES .6%
American Dental Partners Inc. ............................................ 266,200 1,597,200
Beverly Enterprises Inc. ................................................. 2,131,800 10,659,000
PAREXEL International Corp. .............................................. 1,000,000 8,750,000
(d) Pharmaceutical Product Development Inc. .................................. 1,300,000 40,706,250
Renal Care Group Inc. .................................................... 1,303,800 30,639,300
-------------
92,351,750
-------------
(a) HEALTH TECHNOLOGY 5.9%
Abgenix Inc. ............................................................. 1,181,000 93,151,375
Alexion Pharmaceuticals Inc. ............................................. 451,800 46,704,825
American Medical Systems Holdings Ltd. ................................... 454,700 8,014,088
Aviron ................................................................... 18,000 1,176,750
Bruker Daltronics Inc. ................................................... 252,300 8,641,275
CIMA Labs Inc. ........................................................... 576,800 31,724,000
(d) Coherent Inc. ............................................................ 1,850,000 64,403,125
Collateral Therapeutics Inc. ............................................. 312,000 7,887,750
COR Therapeutics Inc. .................................................... 381,000 21,526,500
(d) Epoch Pharmaceuticals Inc. ............................................... 1,368,900 14,202,338
Exelixis Inc. ............................................................ 89,500 1,974,594
Illumina Inc. ............................................................ 180,400 5,863,000
ImClone Systems Inc. ..................................................... 225,200 12,315,625
INAMED Corp. ............................................................. 491,000 13,748,000
(d) Inhale Therapeutic Systems Inc. .......................................... 3,751,732 186,648,667
Inspire Pharmaceuticals Inc. ............................................. 263,000 5,161,375
Intermune Pharmaceuticals Inc. ........................................... 201,300 10,065,000
Ista Pharmaceuticals Inc. ................................................ 227,500 2,502,500
Luminex Corp. ............................................................ 517,200 14,029,050
Medicines Co. ............................................................ 308,000 9,278,500
Neurocrine Biosciences Inc. .............................................. 29,300 1,135,375
Packard BioScience Co. ................................................... 2,188,400 35,287,950
(d) Serologicals Corp. ....................................................... 1,894,900 12,790,575
St. Jude Medical Inc. .................................................... 1,551,400 85,327,000
SuperGen Inc. ............................................................ 711,500 9,160,563
Texas Biotechnology Corp. ................................................ 1,215,300 17,925,675
Thoratec Laboratories Corp. .............................................. 471,900 5,751,281
United Therapeutics Corp. ................................................ 454,600 24,321,100
Varian Medical Systems Inc. .............................................. 946,800 46,274,850
Ventana Medical Systems Inc. ............................................. 744,300 19,537,875
Versicor Inc. ............................................................ 322,900 4,238,063
(d) Visible Genetics Inc. (Canada) ........................................... 1,206,000 36,481,500
-------------
857,250,144
-------------
</TABLE>
63
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STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN SMALL CAP GROWTH FUND I SHARES VALUE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a) INDUSTRIAL SERVICES 3.2%
(d) Atwood Oceanics Inc. ..................................................... 1,216,600 $ 40,832,138
(d) Catalytica Inc. .......................................................... 1,965,733 26,414,537
(d) Core Laboratories NV (Netherlands) ....................................... 1,900,000 40,968,750
Dycom Industries Inc. .................................................... 836,200 31,462,025
(d) Grey Wolf Inc. ........................................................... 11,445,600 52,935,900
Marine Drilling Cos. Inc. ................................................ 1,697,700 40,532,588
Pride International Inc. ................................................. 1,049,700 26,570,531
Rowan Cos. Inc. .......................................................... 1,000,000 25,187,500
(a) Superior Energy Services Inc. ............................................ 2,635,500 23,719,500
(d) Trico Marine Services Inc. ............................................... 2,540,400 42,234,150
(d) US Liquids Inc. .......................................................... 1,003,400 4,264,450
(d) Varco International Inc. ................................................. 5,678,281 97,950,347
Waste Connections Inc. ................................................... 818,800 20,930,575
-------------
474,002,991
-------------
NON-ENERGY MINERALS .2%
Reliance Steel & Aluminum Co. ............................................ 1,345,000 31,943,750
-------------
PROCESS INDUSTRIES .5%
Cambrex Corp. ............................................................ 653,000 26,079,188
(d) ChemFirst Inc. ........................................................... 764,900 17,592,700
(a) CoorsTek Inc. ............................................................ 180,800 5,288,400
(a) CUNO Inc. ................................................................ 581,900 14,765,713
(a) Packaging Corp. of America ............................................... 817,100 12,001,156
(a) Symyx Technologies Inc. .................................................. 77,100 3,638,156
-------------
79,365,313
-------------
PRODUCER MANUFACTURING 2.0%
(a) Cable Design Technologies Corp. .......................................... 700,000 16,143,750
(a) Gentex Corp. ............................................................. 2,276,700 56,348,325
(d) Gibraltar Steel Corp. .................................................... 1,012,800 12,723,300
(a,d) Mettler-Toledo International Inc. (Switzerland) .......................... 2,931,600 136,869,075
Roper Industries Inc. .................................................... 1,224,340 42,851,900
(a) Varian Inc. .............................................................. 1,167,200 35,964,350
(a) Wilson Greatbatch Technologies Inc. ...................................... 114,000 2,736,000
-------------
303,636,700
-------------
REAL ESTATE 2.4%
Alexandria Real Estate Equities Inc. ..................................... 345,500 11,703,813
Arden Realty Inc. ........................................................ 1,512,600 36,302,400
Brandywine Realty Trust .................................................. 585,600 11,199,600
Camden Property Trust .................................................... 1,200,000 34,350,000
(a) Catellus Development Corp. ............................................... 549,100 9,986,756
CBL & Associates Properties Inc. ......................................... 229,900 5,316,438
Colonial Properties Trust ................................................ 273,400 6,715,388
Developers Diversified Realty Corp. ...................................... 977,200 11,665,325
FelCor Lodging Trust Inc. ................................................ 687,300 15,077,644
General Growth Properties Inc. ........................................... 1,356,400 40,013,800
Glenborough Realty Trust Inc. ............................................ 818,900 13,153,581
</TABLE>
64
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STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN SMALL CAP GROWTH FUND I SHARES VALUE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
REAL ESTATE (CONT.)
Health Care Property Investors Inc. ...................................... 881,100 $ 25,882,313
Healthcare Realty Trust Inc. ............................................. 285,600 5,694,150
(d)Innkeepers USA Trust ..................................................... 2,102,800 21,422,275
Liberty Property Trust ................................................... 319,500 8,446,781
(d)MeriStar Hospitality Corp. ............................................... 2,330,000 44,561,250
Reckson Associates Realty Corp. .......................................... 1,462,300 33,084,538
SL Green Realty Corp. .................................................... 816,800 21,900,450
-------------
356,476,502
-------------
RETAIL TRADE 1.7%
(a)BJ's Wholesale Club Inc. ................................................. 2,414,800 79,537,475
Dollar General Corp. ..................................................... 6,000,000 93,000,000
Family Dollar Stores Inc. ................................................ 3,721,000 72,326,938
(a)Webvan Group Inc. ........................................................ 3,374,600 3,321,872
-------------
248,186,285
-------------
(a)TECHNOLOGY SERVICES 27.7%
Actuate Corp. ............................................................ 2,504,900 70,606,869
(d)Affiliated Computer Services Inc., A ..................................... 2,765,800 154,020,488
Akamai Technologies Inc. ................................................. 119,140 6,076,140
Art Technology Group Inc. ................................................ 544,600 34,173,650
Aspect Communications Corp. .............................................. 1,065,000 17,555,859
BEA Systems Inc. ......................................................... 7,292,800 523,258,400
Bindview Development Corp. ............................................... 1,630,000 12,734,375
Blue Martini Software Inc. ............................................... 10,500 395,063
(d)Brio Technology Inc. ..................................................... 1,620,700 13,269,481
Broadbase Software Inc. .................................................. 456,500 4,907,375
BroadVision Inc. ......................................................... 4,422,600 131,572,350
Check Point Software Technologies Ltd. (Israel) .......................... 1,166,000 184,665,250
(d)Clarus Corp. ............................................................. 1,050,800 10,508,000
CNet Networks Inc. ....................................................... 859,250 27,066,381
Commerce One Inc. ........................................................ 572,640 36,756,330
Complete Business Solutions Inc. ......................................... 1,690,900 17,543,088
Critical Path Inc. ....................................................... 231,700 11,251,931
Cysive Inc. .............................................................. 821,600 6,521,450
Digital Island Inc. ...................................................... 276,800 3,494,600
Docent Inc. .............................................................. 379,800 9,779,850
Documentum Inc. .......................................................... 500,000 42,500,000
E.piphany Inc. ........................................................... 450,200 40,574,275
Efunds Corp. ............................................................. 260,400 2,083,200
Embarcadero Technologies Inc. ............................................ 198,600 12,002,888
Entrust Technologies Inc. ................................................ 1,307,200 40,114,700
Evolve Software Inc. ..................................................... 990,300 15,535,331
Exodus Communications Inc. ............................................... 664,000 22,285,500
Extensity Inc. ........................................................... 895,000 11,411,250
H.T.E. Inc. .............................................................. 609,100 742,341
(d)HNC Software Inc. ........................................................ 1,922,800 39,056,875
i2 Technologies Inc. ..................................................... 3,207,800 545,326,000
</TABLE>
65
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN SMALL CAP GROWTH FUND I SHARES VALUE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a)TECHNOLOGY SERVICES (CONT.)
Iasiaworks Inc. .......................................................... 1,818,700 $ 13,185,575
Ibeam Broadcasting Corp. ................................................. 1,741,500 9,795,938
Informatica Corp. ........................................................ 281,800 26,630,100
InfoSpace Inc. ........................................................... 1,400,390 28,182,849
Internap Network Services Corp. .......................................... 909,200 14,547,200
Internet Security Systems Inc. ........................................... 200,400 17,685,300
Intertrust Technologies Corp. ............................................ 346,000 3,460,000
Interwoven Inc. .......................................................... 372,700 37,549,525
Intuit Inc. .............................................................. 1,366,200 83,935,913
ITXC Corp. ............................................................... 172,900 1,826,256
Kana Communications Inc. ................................................. 908,300 21,345,050
Keynote Systems Inc. ..................................................... 722,600 17,342,400
Liberate Technologies Inc. ............................................... 1,144,800 21,822,750
Matrixone Inc. ........................................................... 692,600 20,561,563
Mercury Interactive Corp. ................................................ 462,800 51,370,800
Micromuse Inc. ........................................................... 1,500,400 254,599,125
N2H2 Inc. ................................................................ 102,500 64,063
Navisite Inc. ............................................................ 179,600 1,829,675
Netiq Corp. .............................................................. 747,500 64,378,438
NetScout Systems Inc. .................................................... 140,000 2,616,250
Nuance Communications Inc. ............................................... 340,600 29,376,750
(d)Predictive Systems Inc. .................................................. 2,051,300 28,461,788
Proxicom Inc. ............................................................ 2,118,800 28,603,800
PSINet Inc. .............................................................. 2,996,340 19,944,388
Quest Software Inc. ...................................................... 617,100 26,959,556
Rare Medium Group Inc. ................................................... 729,800 3,375,325
Rational Software Corp. .................................................. 359,000 21,427,813
Resonate Inc. ............................................................ 308,900 13,089,638
(d)Retek Inc. ............................................................... 2,390,113 94,260,081
(d)RSA Security Inc. ........................................................ 2,220,000 128,760,000
Sapient Corp. ............................................................ 2,972,200 105,698,863
Scient Corp. ............................................................. 2,161,300 38,903,400
Selectica Inc. ........................................................... 693,900 18,301,613
Serena Software Inc. ..................................................... 811,200 41,269,800
Signalsoft Corp. ......................................................... 164,000 4,663,750
Software.com Inc. ........................................................ 357,600 53,282,400
SonicWALL Inc. ........................................................... 574,600 8,583,088
Speechworks International Inc. ........................................... 311,800 25,957,350
Tumbleweed Communications Corp. .......................................... 454,700 7,786,738
VA Linux Systems Inc. .................................................... 904,200 26,447,850
Valicert Inc. ............................................................ 479,500 8,301,344
VERITAS Software Corp. ................................................... 2,482,650 350,092,441
Verity Inc. .............................................................. 1,572,200 36,946,700
Versata Inc. ............................................................. 134,300 2,215,950
Viant Corp. .............................................................. 1,323,800 7,860,063
Vignette Corp. ........................................................... 1,489,200 44,396,775
Vitria Technology Inc. ................................................... 303,200 8,148,500
</TABLE>
66
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN SMALL CAP GROWTH FUND I SHARES VALUE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a) TECHNOLOGY SERVICES (CONT.)
Webmethods Inc. .......................................................... 500,000 $ 44,437,500
Wind River Systems Inc. .................................................. 3,532,524 145,054,267
---------------
4,113,125,591
---------------
TRANSPORTATION 2.0%
(a) Alaska Air Group Inc. .................................................... 825,000 21,398,438
(a,d) Atlantic Coast Airlines Holdings Inc. .................................... 1,400,000 50,050,000
C.H. Robinson Worldwide Inc. ............................................. 1,275,600 69,759,375
(d) Expeditors International of Washington Inc. .............................. 2,929,300 151,957,438
(a) Hub Group Inc., A ........................................................ 300,000 2,428,125
(a) Mesa Air Group Inc. ...................................................... 1,467,200 8,619,800
---------------
304,213,176
---------------
UTILITIES .1%
Northwestern Corp. ....................................................... 800,000 17,700,000
(a) TNPC Inc. ................................................................ 266,500 4,430,532
---------------
22,130,532
---------------
TOTAL COMMON STOCKS (COST $7,951,061,716) ................................ $13,318,729,419
---------------
CONVERTIBLE PREFERRED STOCKS .2%
(a,c) ELECTRONIC TECHNOLOGY .1%
3Ware Inc., pfd., D, ..................................................... 855,446 4,770,822
Anda Networks Inc., pfd., D .............................................. 364,431 4,999,993
Kestrel Solutions Inc., pfd., D .......................................... 239,831 3,124,998
---------------
12,895,813
---------------
FINANCE .1%
Bank United Corp., 8.00%, cvt. pfd ....................................... 300,000 20,325,000
---------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $27,895,820) .................... 33,220,813
---------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
---------------
<S> <C> <C>
CONVERTIBLE BONDS .2%
ELECTRONIC TECHNOLOGY
Cyras Systems Inc., cvt., 4.50%, 8/15/05 ................................... $ 3,830,000 4,145,975
---------------
TECHNOLOGY SERVICES .2%
Citrix Systems Inc., cvt. sub. deb., 144A, zero cpn., 3/22/19 .............. 30,000,000 12,000,000
Citrix Systems Inc., cvt., zero cpn., 3/22/19 .............................. 27,200,000 10,880,000
---------------
22,880,000
---------------
UTILITIES
Primus Telecommunications Group Inc., cvt., 144A, 5.75%, 2/15/07 ........... 19,750,000 5,406,563
---------------
TOTAL CONVERTIBLE BONDS (COST $56,663,734) ................................. 32,432,538
---------------
TOTAL LONG TERM INVESTMENTS (COST $8,035,621,270) .......................... 13,384,382,770
---------------
</TABLE>
67
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN SMALL CAP GROWTH FUND I AMOUNT VALUE
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS 11.6%
(b) Joint Repurchase Agreement, 6.563%, 10/31/2000,
(Maturity Value $1,406,986,766) ..................................... $ 1,406,730,311 $ 1,406,730,311
Barclays Capital Inc. (Maturity Value $169,632,378)
Bear, Stearns & Co. Inc. (Maturity Value $96,932,809)
Deutsche Bank Securities (Maturity Value $169,632,378)
Dresdner Kleinwort Benson, North America, LLC
(Maturity Value $169,632,378)
Lehman Brothers Inc. (Maturity Value $122,627,311)
Nesbitt Burns Securities Inc.
(Maturity Value $169,632,378)
Paribas Corp. (Maturity Value $169,632,378)
Societe Generale (Maturity Value $169,632,378)
UBS Warburg (Maturity Value $169,632,378)
Collateralized by U.S. Treasury Bills and Notes
(e) Bear, Stearns & Co. Inc., 6.560%, 11/01/00,
(Maturity Value $82,090,474) ........................................ 82,075,518 82,075,518
Collateralized by U.S. Treasury Notes and Bonds
(e) Dresdner Kleinwort Benson, North America, LLC,
6.540%, 11/01/00, (Maturity Value $82,090,383) ..................... 82,075,473 82,075,473
Collateralized by U.S. Treasury Notes and Bonds
(e) Goldman Sachs & Co., 6.540%, 11/01/00,
(Maturity Value $82,090,383) ....................................... 82,075,473 82,075,473
Collateralized by U.S. Treasury Notes and Bonds
(e) Paribas Corp., 6.570%, 11/01/00,
(Maturity Value $82,090,520) ....................................... 82,075,541 82,075,541
Collateralized by U.S. Treasury Notes and Bonds
TOTAL REPURCHASE AGREEMENTS (COST $1,735,032,316) ..................... 1,735,032,316
----------------
TOTAL INVESTMENTS (COST $9,770,653,586) 101.5% ........................ 15,119,415,086
OTHER ASSETS, LESS LIABILITIES (1.5)% ................................. (222,354,972)
----------------
NET ASSETS 100.0% ..................................................... $ 14,897,060,114
================
</TABLE>
(a) Non-income producing
(b) See Note 1(c) regarding joint repurchase agreement.
(c) See Note 6 regarding restricted securities.
(d) See Note 7 regarding holdings of 5% voting securities.
(e) Cash collateral invested by Bank of New York for Securities Lending
Agreement.
See notes to financial statements.
68
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN SMALL CAP GROWTH FUND II
<TABLE>
<CAPTION>
CLASS A
----------------
SIX MONTHS ENDED
OCTOBER 31, 2000
(UNAUDITED)
----------------
<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(a) .................................... (.01)
Net realized and unrealized gains ......................... 1.69
----------------
Total from investment operations ........................... 1.68
----------------
Net asset value, end of period ............................. $ 11.68
================
Total return(b) ............................................ 16.80%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .......................... $ 307,967
Ratios to average net assets:
Expenses(c) ............................................... 1.26%
Net investment loss(c) .................................... (.12)%
Portfolio turnover rate .................................... 37.45%
</TABLE>
(a)Based on average shares outstanding.
(b)Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(c)Annualized
69
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN SMALL CAP GROWTH FUND II (CONT.)
<TABLE>
<CAPTION>
CLASS B
----------------
SIX MONTHS ENDED
OCTOBER 31, 2000
(UNAUDITED)
----------------
<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(a) ...................................... (.05)
Net realized and unrealized gains ........................... 1.69
----------------
Total from investment operations ............................. 1.64
----------------
Net asset value, end of period ............................... $ 11.64
================
Total return(b) .............................................. 16.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............................ $ 58,099
Ratios to average net assets:
Expenses(c) ................................................. 1.90%
Net investment loss(c) ...................................... (.80)%
Portfolio turnover rate ...................................... 37.45%
</TABLE>
(a)Based on average shares outstanding.
(b)Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c)Annualized
70
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN SMALL CAP GROWTH FUND II (CONT.)
<TABLE>
<CAPTION>
CLASS C
----------------
SIX MONTHS ENDED
OCTOBER 31, 2000
(UNAUDITED)
----------------
<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(a) ...................................... (.05)
Net realized and unrealized gains ........................... 1.70
----------------
Total from investment operations ............................. 1.65
----------------
Net asset value, end of period ............................... $ 11.65
================
Total return(b) .............................................. 16.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............................ $ 86,950
Ratios to average net assets:
Expenses(c) ................................................. 1.90%
Net investment loss(c) ...................................... (.80)%
Portfolio turnover rate ...................................... 37.45%
</TABLE>
(a)Based on average shares outstanding.
(b)Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(c)Annualized
71
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN SMALL CAP GROWTH FUND II (CONT.)
<TABLE>
<CAPTION>
ADVISOR CLASS
----------------
SIX MONTHS ENDED
OCTOBER 31, 2000
(UNAUDITED)
----------------
<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 income(a) .................................... .01
Net realized and unrealized gains ........................... 1.70
----------------
Total from investment operations ............................. 1.71
----------------
Net asset value, end of period ............................... $ 11.71
================
Total return(b) .............................................. 17.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............................ $ 22,165
Ratios to average net assets:
Expenses(c) ................................................. .90%
Net investment income(c) .................................... .22%
Portfolio turnover rate ...................................... 37.45%
</TABLE>
(a)Based on average shares outstanding.
(b)Total return is not annualized for periods less than one year.
(c)Annualized
72
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN SMALL CAP GROWTH FUND II SHARES VALUE
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 87.9%
(a)COMMERCIAL SERVICES 1.7%
Probusiness Services Inc. .......................................................... 250,000 $ 8,171,875
------------
(a)COMMUNICATIONS 2.5%
Leap Wireless International Inc. ................................................... 225,000 11,193,750
Metrocall Inc. ..................................................................... 446,800 572,463
------------
11,766,213
------------
(a)CONSUMER NON-DURABLES 4.3%
Hain Celestial Group Inc. .......................................................... 300,000 11,906,250
Timberland Co., A .................................................................. 170,000 8,776,250
------------
20,682,500
------------
(a)CONSUMER SERVICES 4.5%
Cheap Tickets Inc. ................................................................. 350,000 3,718,750
Citadel Communications Corp. ....................................................... 700,000 8,487,500
Entravision Communications Corp. ................................................... 425,000 7,517,188
Station Casinos Inc. ............................................................... 100,000 1,612,500
------------
21,335,938
------------
ELECTRONIC TECHNOLOGY 31.3%
(a)Advanced Digital Information Corp. ................................................. 450,000 5,850,000
(a)Alpha Industries Inc. .............................................................. 370,000 14,753,750
(a)Avocent Corp. ...................................................................... 197,899 14,038,460
(a)Benchmark Electronics Inc. ......................................................... 200,000 8,050,000
(a)Caliper Technologies Corp. ......................................................... 140,000 7,892,500
(a)Centillium Communications Inc. ..................................................... 100,000 3,798,438
(a)Cobalt Networks Inc. ............................................................... 300,000 16,537,500
CTS Corp. .......................................................................... 50,000 2,146,875
(a)DDI Corp. .......................................................................... 100,000 3,993,750
(a)Ditech Communications Corp. ........................................................ 300,000 10,331,250
(a)Integrated Circuit Systems Inc. .................................................... 500,000 6,812,500
(a)Intrusion.com Inc. ................................................................. 325,000 3,331,250
(a)Ixys Corp. ......................................................................... 25,000 632,813
Keithley Instruments Inc. .......................................................... 150,000 8,025,000
(a)Nanometrics Inc. ................................................................... 80,000 1,840,000
(a)Parthus Technologies PLC, ADR (Irish Republic) ..................................... 78,200 2,756,550
(a)Plexus Corp. ....................................................................... 80,000 5,045,000
(a)Power Integrations Inc. ............................................................ 150,000 2,015,625
(a)Quantum Corp. - Hard Disk Drive .................................................... 642,300 7,346,306
(a)Sierra Wireless Inc. (Canada) ...................................................... 150,000 9,862,500
(a)Silicon Graphics Inc. .............................................................. 1,300,000 5,850,000
(a)Varian Semiconductor Equipment Associates Inc. ..................................... 100,000 2,300,000
(a)Western Multiplex Corp. ............................................................ 376,200 5,313,825
------------
148,523,892
------------
(a)ENERGY MINERALS 2.2%
Basin Exploration Inc. ............................................................. 300,000 5,943,750
Chesapeake Energy Corp. ............................................................ 800,000 4,500,000
------------
10,443,750
------------
</TABLE>
See notes to financial statements.
73
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN SMALL CAP GROWTH FUND II SHARES VALUE
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
FINANCE 5.5%
(a)AmeriCredit Corp. .................................................................. 250,000 $ 6,718,750
Metris Cos. Inc. ................................................................... 200,000 6,475,000
Reinsurance Group of America Inc. .................................................. 150,000 5,606,250
(a)Security Capital Group Inc., B ..................................................... 100,000 1,906,250
(a)Silicon Valley Bancshares .......................................................... 120,000 5,550,000
------------
26,256,250
------------
(a)HEALTH SERVICES 1.5%
Triad Hospitals Inc. ............................................................... 250,300 6,945,825
------------
HEALTH TECHNOLOGY 10.6%
(a)Argonaut Technologies Inc. ......................................................... 250,000 4,500,000
(a)Aviron ............................................................................. 100,000 6,537,500
(a)Digene Corp. ....................................................................... 175,000 5,679,297
(a)ORATEC Interventions Inc. .......................................................... 260,000 2,600,000
(a)Ortec International Inc. ........................................................... 444,444 4,555,551
(a)Packard BioScience Co. ............................................................. 300,000 4,837,500
(a)Staar Surgical Co. ................................................................. 420,000 6,615,000
Varian Medical Systems Inc. ........................................................ 150,000 7,331,250
(a)Ventana Medical Systems Inc. ....................................................... 300,000 7,875,000
------------
50,531,098
------------
(a)INDUSTRIAL SERVICES .9%
Superior Energy Services Inc. ...................................................... 500,000 4,500,000
------------
NON-ENERGY MINERALS 1.2%
Reliance Steel & Aluminum Co. ...................................................... 240,000 5,700,000
------------
PROCESS INDUSTRIES 3.0%
Cambrex Corp. ...................................................................... 43,100 1,721,306
(a)CoorsTek Inc. ...................................................................... 300,000 8,775,000
(a)Pactiv Corp. ....................................................................... 350,000 3,675,000
------------
14,171,306
------------
PRODUCER MANUFACTURING 6.9%
(a)Gentex Corp. ....................................................................... 330,000 8,167,500
(a)Mettler-Toledo International Inc. (Switzerland) .................................... 210,000 9,804,375
Roper Industries Inc. .............................................................. 200,000 7,000,000
(a)Varian Inc. ........................................................................ 250,000 7,703,125
------------
32,675,000
------------
REAL ESTATE 1.2%
Reckson Associates Realty Corp. .................................................... 250,000 5,656,250
------------
(a)TECHNOLOGY SERVICES 9.5%
Actuate Corp. ...................................................................... 200,000 5,637,500
Bindview Development Corp. ......................................................... 650,000 5,078,125
Brio Technology Inc. ............................................................... 400,000 3,275,000
Clarus Corp. ....................................................................... 150,000 1,500,000
Evolve Software Inc. ............................................................... 175,000 2,745,313
Extensity Inc. ..................................................................... 22,300 284,325
</TABLE>
See notes to financial statements.
74
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN SMALL CAP GROWTH FUND II SHARES VALUE
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a)TECHNOLOGY SERVICES (CONT.)
Inforte Corp. ...................................................................... 174,000 $ 5,328,750
Matrixone Inc. ..................................................................... 175,000 5,195,313
NetScout Systems Inc. .............................................................. 75,000 1,401,563
Predictive Systems Inc. ............................................................ 350,000 4,856,250
Scient Corp. ....................................................................... 150,000 2,700,000
Selectica Inc. ..................................................................... 87,500 2,307,809
Ulticom Inc. ....................................................................... 100,000 4,775,000
------------
45,084,948
------------
(a)TRANSPORTATION 1.1%
Atlantic Coast Airlines Holdings Inc. .............................................. 140,000 5,005,000
------------
TOTAL COMMON STOCKS (COST $408,434,753) ............................................ 417,449,845
------------
(a),(c)PREFERRED STOCKS .1%
Micro Photonix Integration Corp., pfd., C (COST $600,888) .......................... 95,148 600,888
------------
TOTAL LONG TERM INVESTMENTS (COST $409,035,641) .................................... 418,050,733
------------
SHORT TERM INVESTMENTS 9.4%
(b)Franklin Institutional Fiduciary Trust Money Market Portfolio (COST $44,565,059) ... 44,565,059 44,565,059
------------
TOTAL INVESTMENTS (COST $453,600,700) 97.4% ........................................ 462,615,792
OTHER ASSETS, LESS LIABILITIES 2.6% ................................................ 12,565,355
------------
NET ASSETS 100.0% .................................................................. $475,181,147
============
</TABLE>
(a)Non-income producing
(b)See Note 3 regarding investment in the "Sweep Money Fund."
(c)See Note 6 regarding restricted securities.
See notes to financial statements.
75
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE CALIFORNIA LARGE CAP
GROWTH FUND GROWTH FUND GROWTH FUND
-----------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost .................................. $ 344,709,714 $ 2,012,328,730 $ 136,219,376
===========================================================
Value ................................. 385,946,783 3,162,943,835 157,874,414
Receivables:
Investment securities sold ............ 10,245,063 1,049,823 1,656,865
Capital shares sold ................... 1,903,459 14,497,449 801,642
Dividends and interest ................ -- 495,595 25,818
-----------------------------------------------------------
Total assets ....................... 398,095,305 3,178,986,702 160,358,739
-----------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ....... 7,864,052 1,486,341 1,978,456
Capital shares redeemed ............... 814,304 4,328,627 15,336
Affiliates ............................ 522,645 2,813,089 220,050
Shareholders .......................... 10,894 110,993 5,538
Other liabilities ...................... 99,162 85,801 21,333
-----------------------------------------------------------
Total liabilities .................. 9,311,057 8,824,851 2,240,713
-----------------------------------------------------------
Net assets, at value ............... $ 388,784,248 $ 3,170,161,851 $ 158,118,026
===========================================================
Net assets consist of:
Undistributed net investment loss ...... $ (1,869,730) $ (1,838,430) $ (452,954)
Net unrealized appreciation ............ 41,237,069 1,150,615,105 21,655,038
Accumulated net realized gain (loss) ... (30,859,702) 102,782,150 (2,707,854)
Capital shares ......................... 380,276,611 1,918,603,026 139,623,796
-----------------------------------------------------------
Net assets, at value ............... $ 388,784,248 $ 3,170,161,851 $ 158,118,026
===========================================================
</TABLE>
See notes to financial statements.
76
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE CALIFORNIA LARGE CAP
GROWTH FUND GROWTH FUND GROWTH FUND
------------------------------------------------------
<S> <C> <C> <C>
CLASS A:
Net assets, at value ...................................... $ 199,620,070 $2,496,587,064 $ 66,122,826
======================================================
Shares outstanding ........................................ 8,064,030 46,963,945 4,180,109
======================================================
Net asset value per share(a) .............................. $ 24.75 $ 53.16 $ 15.82
======================================================
Maximum offering price per share
(net asset value per share / 94.25%) ..................... $ 26.26 $ 56.40 $ 16.79
======================================================
CLASS B:
Net assets, at value ...................................... $ 43,083,106 $ 137,293,426 $ 8,005,772
======================================================
Shares outstanding ........................................ 1,749,221 2,619,296 510,536
======================================================
Net asset value and maximum offering price per share(a) ... $ 24.63 $ 52.42 $ 15.68
======================================================
CLASS C:
Net assets, at value ...................................... $ 94,401,884 $ 536,281,361 $ 59,429,622
======================================================
Shares outstanding ........................................ 3,840,752 10,251,213 3,789,636
======================================================
Net asset value per share(a) .............................. $ 24.58 $ 52.31 $ 15.68
======================================================
Maximum offering price per share
(net asset value per share / 99%) ........................ $ 24.83 $ 52.84 $ 15.84
======================================================
ADVISOR CLASS:
Net assets, at value ...................................... $ 51,679,188 -- $ 24,559,806
======================================================
Shares outstanding ........................................ 2,077,073 -- 1,546,556
======================================================
Net asset value and maximum offering price per share ...... $ 24.88 -- $ 15.88
======================================================
</TABLE>
(a)Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
77
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
SMALL CAP SMALL CAP
GROWTH FUND I GROWTH FUND II
------------------------------------
<S> <C> <C>
Assets:
Investments in securities:
Cost - Unaffiliated issuers ................. $ 6,460,523,889 $ 453,600,700
Cost - Non-controlled affiliated issuers .... 1,575,097,381 --
====================================
Value - Unaffiliated issuers ................ 11,327,565,990 462,615,792
Value - Non-controlled affiliated issuers ... 2,056,816,780 --
Repurchase agreements, at value and cost ..... 1,735,032,316 --
Receivables:
Investment securities sold .................. 104,004,551 5,696,755
Capital shares sold ......................... 67,293,223 11,148,759
Dividends and interest ...................... 888,313 --
Offering costs ............................... -- 63,988
------------------------------------
Total assets ............................. 15,291,601,173 479,525,294
------------------------------------
Liabilities:
Payables:
Investment securities purchased ............. 20,273,814 2,241,846
Capital shares redeemed ..................... 33,648,109 1,537,469
Affiliates .................................. 11,350,122 539,750
Shareholders ................................ 164,112 5,805
Collateral on securities loaned, at value .... 328,302,005 --
Other liabilities ............................ 802,897 19,277
------------------------------------
Total liabilities ........................ 394,541,059 4,344,147
------------------------------------
Net assets, at value .................... $14,897,060,114 $ 475,181,147
====================================
Net assets consist of:
Undistributed net investment income (loss) ... $ 32,387,311 $ (345,147)
Net unrealized appreciation .................. 5,348,761,500 9,015,092
Accumulated net realized gain (loss) ......... 63,685,756 (8,445,710)
Capital shares ............................... 9,452,225,547 474,956,912
------------------------------------
Net assets, at value .................... $14,897,060,114 $ 475,181,147
====================================
</TABLE>
See notes to financial statements.
78
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
SMALL CAP SMALL CAP
GROWTH FUND I GROWTH FUND II
------------------------------------
<S> <C> <C>
CLASS A:
Net assets, at value .................................................... $12,661,087,051 $ 307,966,663
====================================
Shares outstanding ...................................................... 270,782,174 26,373,146
====================================
Net asset value per share(a) ............................................ $ 46.76 $ 11.68
====================================
Maximum offering price per share (net asset value per share / 94.25%) ... $ 49.61 $ 12.39
====================================
CLASS B:
Net assets, at value .................................................... -- $ 58,099,122
====================================
Shares outstanding ...................................................... -- 4,990,438
====================================
Net asset value and maximum offering price per share(a) ................. -- $ 11.64
====================================
CLASS C:
Net assets, at value .................................................... $ 1,750,172,267 $ 86,950,244
====================================
Shares outstanding ...................................................... 38,333,427 7,465,186
====================================
Net asset value per share(a) .............................................. $ 45.66 $ 11.65
====================================
Maximum offering price per share (net asset value per share / 99%) ...... $ 46.12 $ 11.77
====================================
ADVISOR CLASS:
Net assets, at value .................................................... $ 485,800,796 $ 22,165,118
====================================
Shares outstanding ...................................................... 10,316,001 1,893,613
====================================
Net asset value and maximum offering price per share .................... $ 47.09 $ 11.71
====================================
</TABLE>
(a) Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
79
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE CALIFORNIA LARGE CAP
GROWTH FUND GROWTH FUND GROWTH FUND
-----------------------------------------------------
<S> <C> <C> <C>
Investment income:
Dividends(a) ..................................................... $ 889,434 $ 12,245,089 $ 512,570
Interest ......................................................... -- 629,809 --
-----------------------------------------------------
Total investment income ...................................... 889,434 12,874,898 512,570
-----------------------------------------------------
Expenses:
Management fees (Note 3) ......................................... 913,755 6,376,931 311,534
Administrative fees (Note 3) ..................................... 384,905 -- 132,701
Distribution fees (Note 3)
Class A ......................................................... 348,055 2,928,129 91,883
Class B ......................................................... 206,977 500,918 31,283
Class C ......................................................... 472,061 2,480,127 245,203
Transfer agent fees (Note 3) ..................................... 338,679 1,804,445 79,659
Custodian fees ................................................... 1,744 13,848 625
Reports to shareholders .......................................... 22,047 214,119 4,605
Registration and filing fees ..................................... 145,634 321,041 48,512
Professional fees (Note 3) ....................................... 19,079 33,325 5,413
Trustees' fees and expenses ...................................... 1,431 14,493 456
Amortization of offering costs (Note 1) .......................... 12,745 -- 13,003
Other ............................................................ 1,054 25,952 647
-----------------------------------------------------
Total expenses ............................................... 2,868,166 14,713,328 965,524
Expenses waived/paid by affiliate (Note 3) ................... (109,002) -- --
-----------------------------------------------------
Net expenses ............................................... 2,759,164 14,713,328 965,524
-----------------------------------------------------
Net investment loss ...................................... (1,869,730) (1,838,430) (452,954)
-----------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ..................................................... (29,259,848) (45,780,261) (2,433,588)
Foreign currency transactions ................................... (12,892) -- 7,191
-----------------------------------------------------
Net realized loss .......................................... (29,272,740) (45,780,261) (2,426,397)
Net unrealized appreciation on investments ....................... 19,627,774 188,534,806 9,234,967
-----------------------------------------------------
Net realized and unrealized gain (loss) ........................... (9,644,966) 142,754,545 6,808,570
-----------------------------------------------------
Net increase (decrease) in net assets resulting from operations ... $ (11,514,696) $ 140,916,115 $ 6,355,616
=====================================================
</TABLE>
(a) Net of foreign taxes of $394, $1,979, and $269 for the Franklin Aggressive
Growth Fund, Franklin California Growth Fund, and Franklin Large Cap Growth
Fund, respectively.
See notes to financial statements.
80
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF OPERATIONS (CONT.)
FOR THE SIX MONTHS ENDED OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
SMALL CAP SMALL CAP
GROWTH FUND I GROWTH FUND II
----------------------------------
<S> <C> <C>
Investment income:
Dividends
Unaffiliated issuers ............................................... $ 17,110,858 $ 1,243,250
Non-controlled affiliated issuers (Note 7) ......................... 3,949,667 --
Interest ............................................................ 65,005,915 41,221
----------------------------------
Total investment income ............................................ 86,066,440 1,284,471
----------------------------------
Expenses:
Management fees (Note 3) ............................................ 32,678,262 565,908
Administrative fees (Note 3) ........................................ -- 226,529
Distribution fees (Note 3)
Class A ............................................................ 15,486,920 263,011
Class B ............................................................ -- 133,893
Class C ............................................................ 8,883,897 205,819
Transfer agent fees (Note 3) ........................................ 6,836,956 105,372
Custodian fees ...................................................... 64,705 780
Reports to shareholders ............................................. 588,262 2,428
Registration and filing fees ........................................ 1,532,859 23,144
Professional fees (Note 3) .......................................... 119,537 31,051
Trustees' fees and expenses ......................................... 72,421 427
Organization costs .................................................. -- 6,250
Amortization of offering costs (Note 1) ............................. -- 64,695
Other ............................................................... 61,354 311
----------------------------------
Total expenses .................................................. 66,325,173 1,629,618
----------------------------------
Net investment income (loss) .................................. 19,741,267 (345,147)
----------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments
Unaffiliated issuers .............................................. 15,686,191 (8,445,710)
Non-controlled affiliated issuers (Note 7) ........................ (60,474,122) --
Foreign currency transactions ...................................... (93,313) --
----------------------------------
Net realized loss ............................................. (44,881,244) (8,445,710)
Net unrealized appreciation on investments .......................... 354,688,734 9,015,092
----------------------------------
Net realized and unrealized gain ..................................... 309,807,490 569,382
----------------------------------
Net increase in net assets resulting from operations ................. $ 329,548,757 $ 224,235
==================================
</TABLE>
See notes to financial statements.
81
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2000 (UNAUDITED)
AND THE YEAR ENDED APRIL 30, 2000
<TABLE>
<CAPTION>
FRANKLIN AGGRESSIVE GROWTH FUND FRANKLIN CALIFORNIA GROWTH FUND
-----------------------------------------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
OCTOBER 31, 2000 APRIL 30, 2000(a) OCTOBER 31, 2000 APRIL 30, 2000
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment loss .................................... $ (1,869,730) $ (840,190) $ (1,838,430) $ (369,562)
Net realized gain (loss) from investments and
foreign currency transactions ......................... (29,272,740) 1,403,190 (45,780,261) 209,962,858
Net unrealized appreciation on investments ............. 19,627,774 21,609,295 188,534,806 707,495,834
-----------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ........................... (11,514,696) 22,172,295 140,916,115 917,089,130
Distributions to shareholders from:
Net investment income:
Class A ................................................. -- (35,724) -- (2,379,497)
Class B ................................................. -- (931) -- (9,812)
Class C ................................................. -- -- -- (107,868)
Advisor Class ........................................... -- (44,448) -- --
Net realized gains:
Class A ................................................. -- (919,936) -- --
Class B ................................................. -- (147,024) -- --
Class C ................................................. -- (367,784) -- --
Advisor Class ........................................... -- (731,226) -- --
-----------------------------------------------------------------------
Total distributions to shareholders ...................... -- (2,247,073) -- (2,497,177)
Capital share transactions: (Note 2)
Class A ................................................. 33,098,175 171,716,009 353,852,718 488,036,697
Class B ................................................. 10,982,118 33,589,716 71,318,613 55,673,390
Class C ................................................. 17,145,595 81,820,441 86,058,150 117,149,571
Advisor Class ........................................... 6,285,174 25,736,494 -- --
-----------------------------------------------------------------------
Total capital share transactions ......................... 67,511,062 312,862,660 511,229,481 660,859,658
Net increase in net assets ........................... 55,996,366 332,787,882 652,145,596 1,575,451,611
Net assets:
Beginning of period ...................................... 332,787,882 -- 2,518,016,255 942,564,644
-----------------------------------------------------------------------
End of period ............................................ $ 388,784,248 $ 332,787,882 $ 3,170,161,851 $2,518,016,255
=======================================================================
Undistributed net investment loss included in net assets:
End of period ............................................ $ (1,869,730) $ -- $ (1,838,430) $ --
=======================================================================
</TABLE>
(a)For the period June 23, 1999 (effective date) to April 30, 2000.
See notes to financial statements.
82
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE SIX MONTHS ENDED OCTOBER 31, 2000 (UNAUDITED)
AND THE YEAR ENDED APRIL 30, 2000
<TABLE>
<CAPTION>
FRANKLIN LARGE CAP GROWTH FUND FRANKLIN SMALL CAP GROWTH FUND I
----------------------------------------------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
OCTOBER 31, 2000 APRIL 30, 2000(a) OCTOBER 31, 2000 APRIL 30, 2000
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ................... $ (452,954) $ (210,550) $ 19,741,267 $ 12,874,510
Net realized gain (loss) from investments and
foreign currency transactions ................. (2,426,397) (143,706) (44,881,244) 282,200,850
Net unrealized appreciation on investments ..... 9,234,967 12,420,071 354,688,734 4,340,182,573
----------------------------------------------------------------------------
Net increase in net assets resulting
from operations ............................. 6,355,616 12,065,815 329,548,757 4,635,257,933
Distributions to shareholders from:
Net investment income:
Class A ......................................... -- (6,366) -- (8,352,984)
Advisor Class ................................... -- (17,052) -- (475,439)
Net realized gains:
Class A ......................................... -- -- -- (50,760,225)
Class C ......................................... -- -- -- (8,644,938)
Advisor Class ................................... -- -- -- (2,071,882)
----------------------------------------------------------------------------
Total distributions to shareholders .............. -- (23,418) -- (70,305,468)
Capital share transactions: (Note 2)
Class A ....................................... 24,321,986 36,180,213 1,183,041,367 3,193,018,064
Class B ....................................... 3,254,109 3,951,744 -- --
Class C ....................................... 21,867,344 31,603,097 42,977,479 251,757,129
Advisor Class ................................. 3,169,120 15,372,400 37,198,999 110,511,362
----------------------------------------------------------------------------
Total capital share transactions ................. 52,612,559 87,107,454 1,263,217,845 3,555,286,555
Net increase in net assets..................... 58,968,175 99,149,851 1,592,766,602 8,120,239,020
Net assets:
Beginning of period .............................. 99,149,851 -- 13,304,293,512 5,184,054,492
----------------------------------------------------------------------------
End of period .................................... $ 158,118,026 $ 99,149,851 $ 14,897,060,114 $ 13,304,293,512
=============================================================================
Undistributed net investment income (loss)
included in net assets:
End of period ..................................... $ (452,954) $ -- $ 32,387,311 $ 12,646,044
=============================================================================
</TABLE>
(a)For the period June 7, 1999 (effective date) to April 30, 2000.
See notes to financial statements.
83
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE SIX MONTHS ENDED OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN SMALL CAP
GROWTH FUND II
-------------------
SIX MONTHS
ENDED
OCTOBER 31, 2000
-------------------
<S> <C>
Increase (decrease) in net assets:
Operations:
Net investment loss ...................................... $ (345,147)
Net realized loss from investments ................... (8,445,710)
Net unrealized appreciation on investments............ 9,015,092
------------------
Net increase in net assets resulting from operations .. 224,235
Capital share transactions: (Note 2)
Class A............................................... 308,177,484
Class B............................................... 58,129,061
Class C............................................... 86,232,793
Advisor Class ........................................ 22,417,574
-------------------
Total capital share transactions ........................ 474,956,912
Net increase in net assets ........................... 475,181,147
Net assets:
Beginning of period ..................................... --
-------------------
End of period ........................................... $475,181,147
===================
Undistributed investment loss included in net assets:
End of period ........................................... $ (345,147)
===================
</TABLE>
See notes to financial statements.
84
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (the Trust) is registered under the Investment Company
Act of 1940 as an open-end investment company, consisting of thirteen 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.
Effective May 1, 2000, the Franklin Small Cap Growth Fund was renamed the
Franklin Small Cap Growth Fund I and the Franklin Strategic Series began
offering shares of the Franklin Small Cap Growth Fund II.
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 its invested cash
balance is deposited into a joint 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 Fund based on its pro-rata interest. A repurchase
agreement is accounted for as a loan by the Fund to the seller, collateralized
by the securities which are delivered to the Fund's 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 Fund, with the value of the
underlying securities marked to market daily to maintain a coverage of at least
100%. At October 31, 2000, all repurchase agreements had been entered into on
that date.
85
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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.
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.
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.
f. OFFERING COSTS:
Offering costs are amortized on a straight line basis over twelve months.
g. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the Funds are indicated below. 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 C, & ADVISOR CLASS CLASS A, CLASS B, & CLASS C CLASS A, CLASS B, CLASS C, & ADVISOR CLASS
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Franklin Small Cap Growth Fund I Franklin California Growth Fund Franklin Aggressive Growth Fund
Franklin Large Cap Growth Fund
Franklin Small Cap Growth Fund II
</TABLE>
86
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
At October 31, 2000, 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 CALIFORNIA GROWTH FUND
--------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Six months ended October 31, 2000
Shares sold ........................................... 3,997,888 $ 107,439,394 13,731,532 $ 739,750,062
Shares issued on merger (Note 9) ...................... -- -- 1,337,534 70,755,525
Shares redeemed ....................................... (2,753,170) (74,341,219) (8,497,942) (456,652,869)
--------------------------------------------------------------------
Net increase .......................................... 1,244,718 $ 33,098,175 6,571,124 $ 353,852,718
====================================================================
Year ended April 30, 2000(a)
Shares sold ........................................... 9,199,950 $ 228,039,109 40,682,193 $ 1,739,833,942
Shares issued in reinvestment of distributions ........ 41,575 868,510 87,505 2,238,602
Shares redeemed ....................................... (2,422,213) (57,191,610) (30,612,722) (1,254,035,847)
--------------------------------------------------------------------
Net increase .......................................... 6,819,312 $ 171,716,009 10,156,976 $ 488,036,697
====================================================================
CLASS B SHARES:
Six Months ended October 31, 2000
Shares sold ........................................... 505,982 $ 13,377,728 1,394,513 $ 74,681,861
Shares redeemed ....................................... (91,447) (2,395,610) (63,747) (3,363,248)
--------------------------------------------------------------------
Net increase .......................................... 414,535 $ 10,982,118 1,330,766 $ 71,318,613
====================================================================
Year ended April 30, 2000(a)
Shares sold ........................................... 1,415,432 $ 35,839,371 1,224,381 $ 57,540,240
Shares issued in reinvestment of distributions ........ 5,883 122,903 366 9,348
Shares redeemed ....................................... (86,629) (2,372,558) (39,396) (1,876,198)
--------------------------------------------------------------------
Net increase .......................................... 1,334,686 $ 33,589,716 1,185,351 $ 55,673,390
====================================================================
</TABLE>
87
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
AGGRESSIVE GROWTH FUND CALIFORNIA GROWTH FUND
------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C SHARES:
Six Months ended October 31, 2000
Shares sold ............................................. 1,180,366 $ 31,501,867 2,100,131 $ 111,889,972
Shares redeemed ......................................... (542,813) (14,356,272) (490,259) (25,831,822)
------------------------------------------------------------------
Net increase ............................................ 637,553 $ 17,145,595 1,609,872 $ 86,058,150
==================================================================
Year ended April 30, 2000(a)
Shares sold ............................................. 3,542,640 $ 90,778,820 3,758,694 $ 167,987,977
Shares issued in reinvestment of distributions .......... 16,200 338,092 3,833 97,626
Shares redeemed ......................................... (355,641) (9,296,471) (1,336,546) (50,936,032)
------------------------------------------------------------------
Net increase ............................................ 3,203,199 $ 81,820,441 2,425,981 $ 117,149,571
==================================================================
ADVISOR CLASS SHARES:
Six Months ended October 31, 2000
Shares sold ............................................. 496,404 $ 12,921,206
Shares redeemed ......................................... (265,326) (6,636,032)
----------------------------
Net increase ............................................ 231,078 $ 6,285,174
============================
Year ended April 30, 2000(a)
Shares sold ............................................. 2,545,707 $ 41,383,189
Shares issued in reinvestment of distributions .......... 35,243 737,625
Shares redeemed ......................................... (734,955) (16,384,320)
----------------------------
Net increase ............................................ 1,845,995 $ 25,736,494
============================
</TABLE>
(a) For the Franklin Aggressive Growth Fund, for the period June 23, 1999
(effective date) to April 30, 2000.
88
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
LARGE CAP GROWTH FUND SMALL CAP GROWTH FUND I
----------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------
CLASS A SHARES:
<S> <C> <C> <C> <C>
Six months ended October 31, 2000
Shares sold ....................................... 1,961,580 $ 31,343,966 86,085,174 $ 4,105,188,457
Shares redeemed ................................... (435,427) (7,021,980) (61,558,740) (2,922,147,090)
----------------------------------------------------------------------
Net increase ...................................... 1,526,153 $ 24,321,986 24,526,434 $ 1,183,041,367
======================================================================
Year ended April 30, 2000(b)
Shares sold ....................................... 2,924,412 $ 39,983,795 288,032,174 $ 11,002,537,784
Shares issued in reinvestment of distributions .... 425 5,394 1,370,984 52,139,031
Shares redeemed ................................... (270,881) (3,808,976) (215,619,217) (7,861,658,751)
----------------------------------------------------------------------
Net increase ...................................... 2,653,956 $ 36,180,213 73,783,941 $ 3,193,018,064
======================================================================
CLASS B SHARES:
Six months ended October 31, 2000
Shares sold ....................................... 230,523 $ 3,648,708
Shares redeemed ................................... (24,839) (394,599)
------------------------------
Net increase ...................................... 205,684 $ 3,254,109
==============================
Year ended April 30, 2000(b)
Shares sold ....................................... 312,870 $ 4,073,874
Shares redeemed ................................... (8,018) (122,130)
------------------------------
Net increase ...................................... 304,852 $ 3,951,744
==============================
CLASS C SHARES:
Six months ended October 31, 2000
Shares sold ....................................... 1,541,862 $ 24,165,942 3,911,742 $ 182,673,941
Shares redeemed ................................... (145,522) (2,298,598) (2,993,052) (139,696,462)
----------------------------------------------------------------------
Net increase ...................................... 1,396,340 $ 21,867,344 918,690 $ 42,977,479
======================================================================
Year ended April 30, 2000(b)
Shares sold ....................................... 2,641,224 $ 35,011,789 11,524,782 $ 447,983,335
Shares issued in reinvestment of distributions .... -- -- 202,348 7,563,366
Shares redeemed ................................... (247,928) (3,408,692) (5,758,041) (203,789,572)
----------------------------------------------------------------------
Net increase ...................................... 2,393,296 $ 31,603,097 5,969,089 $ 251,757,129
======================================================================
</TABLE>
89
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
LARGE CAP GROWTH FUND SMALL CAP GROWTH FUND I
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
ADVISOR CLASS SHARES:
Six months ended October 31, 2000
Shares sold ........................................... 297,071 $ 4,628,423 2,278,598 $ 109,588,502
Shares redeemed ....................................... (88,287) (1,459,303) (1,513,772) (72,389,503)
-------------------------------------------------------------------
Net increase .......................................... 208,784 $ 3,169,120 764,826 $ 37,198,999
===================================================================
Year ended April 30, 2000(b)
Shares sold ........................................... 1,572,648 $ 18,058,940 6,861,496 $ 262,240,429
Shares issued in reinvestment of distributions ........ 1,229 15,598 52,137 1,992,113
Shares redeemed ....................................... (236,105) (2,702,138) (4,156,748) (153,721,180)
-------------------------------------------------------------------
Net increase .......................................... 1,337,772 $ 15,372,400 2,756,885 $ 110,511,362
===================================================================
</TABLE>
(b) For the Franklin Large Cap Growth Fund, for the period June 7, 1999
(effective date) to April 30, 2000.
<TABLE>
<CAPTION>
FRANKLIN
SMALL CAP GROWTH FUND II
------------------------------------------
SHARES AMOUNT
------------------------------------------
CLASS A SHARES:
<S> <C> <C>
Six months ended October 31, 2000
Shares sold ......................................................... 28,216,048 $ 330,349,000
Shares redeemed ..................................................... (1,842,902) (22,171,516)
------------------------------------------
Net increase ........................................................ 26,373,146 $ 308,177,484
==========================================
CLASS B SHARES:
Six months ended October 31, 2000
Shares sold ......................................................... 5,040,929 $ 58,732,804
Shares redeemed ..................................................... (50,491) (603,743)
------------------------------------------
Net increase ........................................................ 4,990,438 $ 58,129,061
==========================================
CLASS C SHARES:
Six months ended October 31, 2000
Shares sold ......................................................... 8,000,588 $ 92,488,067
Shares redeemed ..................................................... (535,402) (6,255,274)
------------------------------------------
Net increase ........................................................ 7,465,186 $ 86,232,793
==========================================
ADVISOR CLASS SHARES:
Six months ended October 31, 2000
Shares sold ......................................................... 1,972,303 $ 23,302,651
Shares redeemed ..................................................... (78,690) (885,077)
------------------------------------------
Net increase ........................................................ 1,893,613 $ 22,417,574
==========================================
</TABLE>
90
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), Franklin/Templeton Distributors, Inc.
(Distributors), Franklin Templeton Services, Inc. (FT Services), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Funds'
investment manager, principal underwriter, administrative manager and transfer
agent, respectively.
Certain funds in the Trust may invest in the Franklin Institutional Fiduciary
Trust Money Market Portfolio (the Sweep Money Fund) which is managed by
Advisers.
The Funds earned dividend income from the investment in the Sweep Money Fund as
follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE CALIFORNIA LARGE CAP SMALL CAP
GROWTH FUND GROWTH FUND GROWTH FUND GROWTH FUND II
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Dividend income $868,373 $6,790,369 $363,648 $1,049,703
</TABLE>
The Franklin California Growth Fund and the Franklin Small Cap Growth Fund I 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
.440% Over $10 billion, up to and including $12.5 billion
.420% Over $12.5 billion, up to and including $15 billion
</TABLE>
Fees are further reduced on net assets over $15 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
.300% Over $1.5 billion, up to and including $6.5 billion
</TABLE>
Fees are further reduced on net assets over $6.5 billion.
91
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES (CONT.)
The Franklin Small Cap Growth Fund II pays 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>
.550% First $500 million
.450% Over $500 million, up to and including $1 billion
.400% Over $1 billion, up to and including $1.5 billion
.350% Over $1.5 billion, up to and including $6.5 billion
</TABLE>
Fees are further reduced on net assets over $6.5 billion.
The Franklin Aggressive Growth Fund, the Franklin Large Cap Growth Fund, and the
Franklin Small Cap Growth Fund II pay an administrative fee to FT Services of
.20% per year of the funds' average daily net assets.
Under an agreement with Advisers, FT Services provides administrative services
to the Franklin California Growth Fund and the Franklin Small Cap Growth Fund I.
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 fees for the Franklin
Aggressive Growth Fund, as noted in the Statements of Operations.
Management fees were reduced on assets invested in the Sweep Money Fund.
The Funds reimburse Distributors for costs incurred in marketing the Funds'
shares up to certain percentage per year of their average daily net assets of
each class as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE CALIFORNIA LARGE CAP SMALL CAP SMALL CAP
GROWTH FUND GROWTH FUND GROWTH FUND GROWTH FUND I GROWTH FUND II
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A ............................. .35% .25% .35% .25% .35%
Class B ............................. 1.00% 1.00% 1.00% -- 1.00%
Class C ............................. 1.00% 1.00% 1.00% 1.00% 1.00%
</TABLE>
Distributors paid net commissions on sales of the Funds' shares, and received
contingent deferred sales charges for the year as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE CALIFORNIA LARGE CAP SMALL CAP SMALL CAP
GROWTH FUND GROWTH FUND GROWTH FUND GROWTH FUND I GROWTH FUND II
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net commissions paid ...................... $615,545 $3,587,973 $286,664 $3,826,038 $2,784,552
Contingent deferred sales charges ......... $ 89,146 $ 101,341 $ 18,136 $ 120,770 $ 20,978
</TABLE>
92
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES (CONT.)
The Funds paid transfer agent fees of $9,165,111, of which $5,180,092 was paid
to Investor Services.
At October 31, 2000, Advisers and/or investment companies managed by Advisers
owned 11.90% and 16.01% of the Franklin Aggressive Growth Fund and the Franklin
Large Cap Growth Fund, respectively.
Included in professional fees are legal fees of $65,131 that were paid to a law
firm in which a partner of the law firm was an officer of the Fund.
4. INCOME TAXES
At April 30, 2000, the Franklin Small Cap Growth Fund I had deferred capital
losses and currency losses occurring subsequent to October 31, 1999 of
$23,645,230 and $4,112, respectively. For tax purposes, such losses will be
reflected in the year ending April 30, 2001.
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions, offering
costs and merger related expenses.
Net realized capital gains (losses) differ for financial statement and tax
purposes primarily due to differing treatments of wash sales and foreign
currency transactions.
At October 31, 2000, the net unrealized appreciation based on the cost of
investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE CALIFORNIA LARGE CAP SMALL CAP SMALL CAP
GROWTH FUND GROWTH FUND GROWTH FUND GROWTH FUND I GROWTH FUND II
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost ......................... $345,780,316 $2,014,003,534 $136,848,873 $ 9,780,921,781 $455,566,356
=====================================================================================
Unrealized appreciation ..................... $ 89,861,453 $1,315,794,018 $ 31,381,359 $ 6,612,301,430 $ 49,661,769
Unrealized depreciation ..................... (49,694,986) (166,853,717) (10,355,818) (1,273,808,125) (42,612,333)
-------------------------------------------------------------------------------------
Net unrealized appreciation ................. $ 40,166,467 $1,148,940,301 $ 21,025,541 $ 5,338,493,305 $ 7,049,436
=====================================================================================
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended October 31, 2000 were as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE CALIFORNIA LARGE CAP SMALL CAP SMALL CAP
GROWTH FUND GROWTH FUND GROWTH FUND GROWTH FUND I GROWTH FUND II
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases ................................... $280,611,022 $782,262,003 $91,333,479 $3,773,241,037 $504,177,922
Sales ....................................... $223,010,286 $283,765,834 $40,750,679 $1,451,222,748 $ 86,696,570
</TABLE>
93
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
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 costs of registering such securities are paid by the issuer.
Restricted securities held at October 31, 2000 are as follows:
<TABLE>
<CAPTION>
ACQUISITION
SHARES ISSUER DATE COST VALUE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FRANKLIN AGGRESSIVE GROWTH FUND
31,328 eMachines Inc. 8/16/99 $ 199,998 $ 29,076
329,274 Micro Photonix Integration Corp., pfd., C 6/23/00 2,079,464 2,079,464
-----------
TOTAL RESTRICTED SECURITIES (.54% of Net Assets) $ 2,108,540
===========
FRANKLIN CALIFORNIA GROWTH FUND
145,772 Anda Networks Inc., pfd., D 3/24/00 $ 2,000,000 $ 1,999,992
783,208 eMachines Inc 8/16/99 5,000,000 726,915
2,227,171 Fibrogen Inc., pfd., E 5/19/00 9,999,998 9,999,998
124,712 Kestrel Solutions Inc., pfd., D 1/20/00 1,624,997 1,624,997
530,000 Learning Tree International Inc. 9/22/00 24,910,000 23,982,500
772,727 Masimo Corp., pfd., F 5/15/00 8,499,997 8,499,997
-----------
TOTAL RESTRICTED SECURITIES (1.48% of Net Assets) $46,834,399
===========
FRANKLIN SMALL CAP GROWTH FUND I
855,446 3Ware Inc, pfd., D 7/28/00 $ 4,770,822 $ 4,770,822
364,431 Anda Networks Inc., pfd., D 3/24/00 5,000,000 4,999,993
2,394,885 Auspex Systems Inc. 9/22/00 19,069,272 21,823,390
1,378,446 eMachines Inc. 8/16/99 8,799,999 1,279,370
239,831 Kestrel Solutions Inc., pfd., D 1/20/00 3,124,998 3,124,998
1,064,000 Learning Tree International Inc. 9/22/00 50,008,000 48,146,000
-----------
TOTAL RESTRICTED SECURITIES (.56% of Net Assets) $84,144,573
===========
FRANKLIN SMALL CAP GROWTH FUND II
95,148 Micro Photonix Integration Corp., pfd., C (.13% of Net Assets) 6/23/00 $ 600,888 $ 600,888
===========
</TABLE>
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, 2000
were as shown below.
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES REALIZED
HELD AT GROSS GROSS HELD AT VALUE AT DIVIDEND CAPITAL
NAME OF ISSUER BEGINNING OF PERIOD ADDITIONS REDUCTIONS END OF PERIOD END OF PERIOD INCOME GAIN (LOSS)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FRANKLIN CALIFORNIA GROWTH FUND:
RemedyTemp Inc. ................ 400,000 -- 400,000 -- $ -- $ -- $(3,054,498)
====================================
</TABLE>
94
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
7. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (CONT.)
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES
HELD AT GROSS GROSS HELD AT VALUE AT
NAME OF ISSUER BEGINNING OF PERIOD ADDITIONS REDUCTIONS END OF PERIOD END OF PERIOD
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FRANKLIN SMALL CAP GROWTH FUND I:
Affiliated Computer Services
Inc., A ........................... 1,862,300 903,500 -- 2,765,800 $154,020,488
Alaska Communications Systems
Holdings Inc. ..................... 2,198,700 213,000 -- 2,411,700 16,429,706
Atlantic Coast Airlines Holdings Inc. 1,400,000 -- -- 1,400,000 50,050,000
Atwood Oceanics Inc. ................ 1,216,600 -- -- 1,216,600 40,832,138
Barrett Resources Corp. ............. 1,860,900 -- -- 1,860,900 67,690,238
Basin Exploration Inc. .............. 1,425,200 -- -- 1,425,200 28,236,775
Brio Technology Inc. ................ 670,800 949,900 -- 1,620,700 13,269,481
Catalytica Inc. ..................... 1,965,733 -- -- 1,965,733 26,414,537
Catapult Communications Corp. ....... 656,800 -- -- 656,800 7,963,700
ChemFirst Inc. ...................... -- 764,900 -- 764,900 17,592,700
CIMA Labs Inc. ...................... 600,000 -- 23,200 576,800 (a)
Clarus Corp. ........................ 974,000 86,600 9,800 1,050,800 10,508,000
Classic Communications Inc., A ...... 590,900 -- 590,900 -- --
Cobalt Networks Inc. ................ -- 1,482,000 -- 1,482,000 81,695,250
Coherent Inc. ....................... 1,763,400 86,600 -- 1,850,000 64,403,125
Core Laboratories NV (Netherlands) .. 1,632,400 267,600 -- 1,900,000 40,968,750
Epoch Pharmaceuticals Inc. .......... 678,800 690,100 -- 1,368,900 14,202,338
Expeditors International of
Washington Inc. ................... 2,562,200 367,100 -- 2,929,300 151,957,438
FLIR Systems Inc. ................... 1,028,600 -- -- 1,028,600 6,171,600
Gibraltar Steel Corp. ............... 1,012,800 -- -- 1,012,800 12,723,300
Grey Wolf Inc. ...................... 11,329,800 115,800 -- 11,445,600 52,935,900
HNC Software Inc. ................... 1,736,200 186,600 -- 1,922,800 39,056,875
Inhale Therapeutic Systems Inc.(b) .. 3,751,732 -- -- 3,751,732 186,648,667
Innkeepers USA Trust ................ 2,102,800 -- -- 2,102,800 21,422,275
Insight Communications Co. ..........
Inc., A ........................... 4,090,800 -- -- 4,090,800 56,759,850
Interep National Radio Sales Inc. ... 489,100 -- -- 489,100 1,650,713
Itron Inc. .......................... 1,118,300 -- 1,118,300 -- --
Komag Inc. .......................... 3,606,900 -- 3,606,900 -- --
MeriStar Hospitality Corp. .......... 2,330,000 -- -- 2,330,000 44,561,250
Mettler-Toledo International Inc. ...
(Switzerland) ..................... 2,758,500 173,100 -- 2,931,600 136,869,075
Navidec Inc. ........................ 666,200 -- 666,200 -- --
Newfield Exploration Co. ............ 2,138,600 111,400 563,000 1,687,000 (a)
Newport Corp.(c) .................... 1,537,500 -- 562,500 975,000 (a)
Nuevo Energy Co. .................... 1,075,500 -- -- 1,075,500 19,493,438
Pacific Gateway Exchange Inc. ....... 515,100 -- 515,100 -- --
Pennaco Energy Inc. ................. 1,704,500 -- -- 1,704,500 21,199,719
Perceptron Inc. ..................... 722,000 -- 586,100 135,900 (a)
</TABLE>
<TABLE>
<CAPTION>
REALIZED
DIVIDEND CAPITAL
NAME OF ISSUER INCOME GAIN (LOSS)
--------------------------------------------------------------------
<S> <C> <C>
FRANKLIN SMALL CAP GROWTH FUND I:
Affiliated Computer Services
Inc., A ........................... $ -- $ --
Alaska Communications Systems
Holdings Inc. ..................... -- --
Atlantic Coast Airlines Holdings Inc. -- --
Atwood Oceanics Inc. ................ -- --
Barrett Resources Corp. ............. -- --
Basin Exploration Inc. .............. -- --
Brio Technology Inc. ................ -- --
Catalytica Inc. ..................... -- --
Catapult Communications Corp. ....... -- --
ChemFirst Inc. ...................... 152,980 --
CIMA Labs Inc. ...................... -- 890,047
Clarus Corp. ........................ -- (728,294)
Classic Communications Inc., A ...... -- (10,344,942)
Cobalt Networks Inc. ................ -- --
Coherent Inc. ....................... -- --
Core Laboratories NV (Netherlands) .. -- --
Epoch Pharmaceuticals Inc. .......... -- --
Expeditors International of
Washington Inc. ................... 205,051 --
FLIR Systems Inc. ................... -- --
Gibraltar Steel Corp. ............... 60,768 --
Grey Wolf Inc. ...................... -- --
HNC Software Inc. ................... -- --
Inhale Therapeutic Systems Inc.(b) .. -- --
Innkeepers USA Trust ................ 1,177,568 --
Insight Communications Co. ..........
Inc., A ........................... -- --
Interep National Radio Sales Inc. ... -- --
Itron Inc. .......................... -- (15,414,322)
Komag Inc. .......................... -- (51,254,732)
MeriStar Hospitality Corp. .......... 2,353,300 --
Mettler-Toledo International Inc. ...
(Switzerland) ..................... -- --
Navidec Inc. ........................ -- (85,021)
Newfield Exploration Co. ............ -- 9,310,175
Newport Corp.(c) .................... -- 57,465,616
Nuevo Energy Co. .................... -- --
Pacific Gateway Exchange Inc. ....... -- (12,440,758)
Pennaco Energy Inc. ................. -- --
Perceptron Inc. ..................... -- (12,094,233)
</TABLE>
95
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
7. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (CONT.)
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES
HELD AT GROSS GROSS HELD AT VALUE AT
NAME OF ISSUER BEGINNING OF PERIOD ADDITIONS REDUCTIONS END OF PERIOD END OF PERIOD
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FRANKLIN SMALL CAP GROWTH FUND I:
(CONT.)
Pharmaceutical Product
Development Inc. ............... 1,300,000 -- -- 1,300,000 $ 40,706,250
Predictive Systems Inc. ......... 1,010,600 1,040,700 -- 2,051,300 28,461,788
Primus Telecommunications
Group Inc., 144A ............... 1,813,100 -- 697,200 1,115,900 (a)
Range Resources Corp. ........... 2,896,900 -- -- 2,896,900 12,673,938
Retek Inc. ...................... 96,600 2,293,513 -- 2,390,113 94,260,081
RSA Security Inc. ............... 2,220,000 -- -- 2,220,000 128,760,000
Rural Cellular Corp., A ......... 765,700 -- -- 765,700 41,156,375
Serologicals Corp. .............. 2,022,700 -- 127,800 1,894,900 12,790,575
Silicon Valley Bancshares (d) ... 2,702,200 137,800 -- 2,840,000 131,350,000
SOS Staffing Services Inc. ...... 693,900 -- 693,900 -- --
Tom Brown Inc. .................. 1,944,800 -- 375,300 1,569,500 (a)
Trico Marine Services Inc. ...... -- 2,540,400 -- 2,540,400 42,234,150
US Liquids Inc. ................. 1,003,400 -- -- 1,003,400 4,264,450
Varco International Inc. ........ 5,162,500 515,781 -- 5,678,281 97,950,347
Verity Inc. ..................... 1,572,200 -- -- 1,572,200 (a)
Visible Genetics Inc. (Canada) .. 943,700 262,300 -- 1,206,000 36,481,500
Wind River Systems Inc. ......... 3,532,524 -- -- 3,532,524 (a)
--------------
TOTAL NON-CONTROLLED
AFFILIATED ISSUERS ...... $2,056,816,780
==============
</TABLE>
<TABLE>
<CAPTION>
REALIZED
DIVIDEND CAPITAL
NAME OF ISSUER INCOME GAIN (LOSS)
--------------------------------------------------------------------
<S> <C> <C>
FRANKLIN SMALL CAP GROWTH FUND I:
(CONT.)
Pharmaceutical Product
Development Inc. ............... $ -- $ --
Predictive Systems Inc. ......... -- --
Primus Telecommunications
Group Inc., 144A ............... -- (12,103,100)
Range Resources Corp. ........... -- --
Retek Inc. ...................... -- --
RSA Security Inc. ............... -- --
Rural Cellular Corp., A ......... -- --
Serologicals Corp. .............. -- (1,576,911)
Silicon Valley Bancshares (d) ... -- --
SOS Staffing Services Inc. ...... -- (10,704,013)
Tom Brown Inc. .................. -- (1,393,634)
Trico Marine Services Inc. ...... -- --
US Liquids Inc. ................. -- --
Varco International Inc. ........ -- --
Verity Inc. ..................... -- --
Visible Genetics Inc. (Canada) .. -- --
Wind River Systems Inc. ......... -- --
---------- -------------
TOTAL NON-CONTROLLED
AFFILIATED ISSUERS ...... $3,949,667 $ (60,474,122)
========== =============
</TABLE>
(a) As of October 31, 2000, no longer an affiliate.
(b) Reflects a 2:1 stock split during the current period. Balance as of
4/30/00 was 1,875,866.
(c) Reflects a 3:1 stock split during the current period. Balance as of
4/30/00 was 512,500.
(d) Reflects a 2:1 stock split during the current period. Balance as of
4/30/00 was 1,351,100.
8. LENDING OF PORTFOLIO SECURITIES
Under the Security Lending Agreement, securities held by the Franklin Small Cap
Growth Fund I are loaned by the Bank of New York, as agent, to certain brokers
(the "Borrowers"). The Borrowers provided cash as collateral against loans in an
amount equal to at least 102% of the market value of the loaned securities.
The value of the loaned securities for the Franklin Small Cap Growth Fund I was
$322,318,474 at October 31, 2000. The cash collateral is invested by the agent
in short-term investments as noted in the Statement of Investments. Net interest
income from the investment of the cash collateral received was $1,135,481 for
the period ended October 31, 2000. The Franklin Small Cap Growth Fund I bears
the risk of loss with respect to the investment of the cash collateral.
96
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
9. MERGERS
On August 4, 2000, the Franklin California Growth Fund acquired the net assets
of the Franklin MidCap Growth Fund pursuant to a plan of reorganization approved
by the Franklin MidCap Growth Fund's shareholders. The merger was accomplished
by a tax-free exchange of 1,337,534 Class A shares of the Franklin California
Growth Fund (valued at $52.90) for the net assets of the Franklin MidCap Growth
Fund which aggregated $70,755,525, including $25,311,798 of unrealized
appreciation. The merger was accounted for as a pooling-of-interests without
restatement for financial reporting purposes. The combined net assets of the
Fund immediately after the merger were $2,897,156,439.
97
<PAGE>
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<PAGE>
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<PAGE>
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SHAREHOLDER LETTER
Your Fund's Goal: Franklin Blue Chip Fund seeks long-term capital appreciation
by investing primarily in blue chip companies with market capitalization of $1
billion or more, which the managers believe have quality management and superior
products or services.
Dear Shareholder:
This semiannual report covers the period ended October 31, 2000. During this
time, higher oil prices, an anemic manufacturing sector, a weak euro and an
apparent slowing of global economic growth led to volatility in equity markets
around the world. The last six weeks of the reporting period involved unusual
volatility in the technology sector and many "new economy" stocks, and at
period's end, the Dow Jones(R) Industrial Average was 2.93% higher than it had
been on April 30, while the Nasdaq(R) was 12.31% lower.(1) The Fund's benchmark,
the Standard & Poor's 500(R) (S&P 500(R)) Composite
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Shareholder Letter 1
Performance Summary 4
Financial Highlights &
Statement of Investments 6
Financial Statements 12
Notes to
Financial Statements 16
</TABLE>
[PYRAMID GRAPHIC]
(1) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price-weighted based on the average market price of 30 blue chip stocks. The
average is found by adding the prices of the 30 stocks and dividing by a
denominator that has been adjusted for stock splits, stock dividends and
substitutions of stocks. The Nasdaq Composite Index measures all Nasdaq
domestic and non-U.S.-based common stocks listed on The Nasdaq Stock
Market(R). The index is market-value weighted and includes over 4,800
companies (as of 10/31/00). Indexes are unmanaged and include reinvested
dividends. One cannot invest directly in an index.
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 9.
<PAGE>
TOP 10 HOLDINGS
10/31/00
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
SECTOR NET ASSETS
------ ----------
<S> <C>
General Electric Co. 3.1%
Producer Manufacturing
Pfizer Inc. 2.9%
Health Technology
Cisco Systems Inc. 2.8%
Electronic Technology
Exxon Mobil Corp. 2.8%
Energy Minerals
Microsoft Corp. 2.6%
Technology Services
Wal-Mart Stores Inc. 2.5%
Retail Trade
Intel Corp. 2.3%
Electronic Technology
SBC Communications Inc. 2.0%
Communications
International Business
Machines Corp. 1.7%
Electronic Technology
J.P. Morgan & Co. Inc. 1.7%
Finance
</TABLE>
Index, dropped 1.03%, while Franklin Blue Chip Fund's Class A shares posted a
-0.22% six-month cumulative total return, as shown in the Performance Summary on
page 4.(2)
Throughout the six months under review, we adhered to the Fund's bottom-up
strategy and focused on market leaders with sustainable competitive advantages
in industries with strong sequential earnings growth rates. To qualify for the
Fund, a company must offer market dominance as well as management excellence,
and possess strong revenue growth, strong cash-flow growth or strong earnings
growth. Our rigorous analysis eliminates all but the highest-quality companies,
while the long-term orientation leads to lower costs associated with portfolio
turnover.
Although the technology sector was the Fund's highest weighting, we were
underweighted compared to the S&P 500 due to our concerns about excessively high
valuations and the possibility that earnings growth of some technology companies
might decline. However, we feel we are still in a strong product cycle in the
technology sector and believe the sector should do well over the long term. We,
therefore, added to our holdings in this area when market declines allowed us to
find what we believed to be bargains in storage, network equipment and
business-to-business e-commerce software. Examples of stocks we continue to be
optimistic about include fiber optics company Corning, optical network equipment
provider Nortel and semiconductor maker Xilinx.
(2) Source: Standard & Poor's Micropal. The S&P 500 Composite Index consists of
500 domestic stocks, comprising four broad sectors: industrials, utilities,
financials and transportation. The S&P 500 serves as the standard for
measuring large-cap U.S. stock market performance. Since some industries are
characterized by companies of relatively small stock capitalization, the
index is not composed of the 500 largest, U.S. publicly traded companies.
The index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
2
<PAGE>
At the end of the period, we were overweighted relative to the S&P 500 in the
food, beverage, oil and gas equipment, wireless, consumer finance, biotechnology
and utilities industries. If the economy slows, investors, in our opinion, will
desire companies such as these that possess strong and predictable growth.
Following this belief, we purchased shares of energy companies Devon Energy and
Schlumberger, as well as SBC Communications and Watson Pharmaceuticals.
Looking forward, we are optimistic about the growth prospects for high-quality,
proven market leaders. We believe that even if the global economy does indeed
slow, these companies should fare the best due to their strong market positions,
leading-edge products and strong management teams.
Thank you for your support of Franklin Blue Chip Fund. We welcome your comments
and suggestions, and look forward to serving you in the future.
Sincerely,
/s/ Sally Edwards Haff
Sally Edwards Haff
Portfolio Manager
Franklin Blue Chip Fund
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. 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.
3
<PAGE>
CLASS A: Subject to the current, maximum 5.75% initial sales charge. Prior to
8/3/98, Fund shares were offered at a lower initial sales charge; thus actual
total returns may differ.*
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.*
* 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.
PERFORMANCE SUMMARY AS OF 10/31/00
Six-month total return represents the change in value of an investment for the
period indicated and does not include sales charges. 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 operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
<TABLE>
<S> <C> <C>
CLASS A
Six-Month Total Return -0.22%
Net Asset Value (NAV) $17.86 (10/31/00) $17.90 (4/30/00)
Change in NAV -$0.04
CLASS B
Six-Month Total Return -0.62%
Net Asset Value (NAV) $17.76 (10/31/00) $17.87 (4/30/00)
Change in NAV -$0.11
CLASS C
Six-Month Total Return -0.50%
Net Asset Value (NAV) $17.82 (10/31/00) $17.91 (4/30/00)
Change in NAV -$0.09
</TABLE>
4 Past performance does not guarantee future results.
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 3-YEAR (6/3/96)
------- ------ ------ --------
<S> <C> <C> <C>
Cumulative Total Return(1) +28.52% +59.70% +92.46%
Average Annual Total Return(2) +21.14% +14.61% +14.73%
Value of $10,000 Investment(3) $12,114 $15,053 $18,139
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B (2/1/00)
------- --------
<S> <C>
Cumulative Total Return(1) +10.33%
Aggregate Total Return(2) +6.33%
Value of $10,000 Investment(3) $10,633
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C (2/1/00)
------- --------
<S> <C>
Cumulative Total Return(1) +10.70%
Aggregate Total Return(2) +8.58%
Value of $10,000 Investment(3) $10,858
</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 and C shares have
existed for less than one year, the figures represent aggregate total return
since inception, including the respective class's applicable, maximum sales
charge(s).
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.
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
Past performance does not guarantee future results.
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.
5
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN BLUE CHIP FUND
<TABLE>
<CAPTION>
CLASS A
-------
SIX MONTHS ENDED
OCTOBER 31, 2000 YEAR ENDED APRIL 30,
---------------------------------------------
(UNAUDITED) 2000 1999 1998 1997(d)
----------- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period $ 17.90 $ 14.41 $ 12.46 $ 10.85 $10.00
-------- -------- ------- ------- ------
Income from investment operations:
Net investment income(a) .01 -- .04 .09 .09
Net realized and unrealized gains (losses) (.04) 3.97 1.97 1.67 .82
-------- -------- ------- ------- ------
Total from investment operations (.03) 3.97 2.01 1.76 .91
-------- -------- ------- ------- ------
Less distributions from:
Net investment income -- (.01) (.06) (.06) (.06)
Net realized gains -- (.47) -- (.09) --
-------- -------- ------- ------- ------
Total distributions -- (.48) (.06) (.15) (.06)
-------- -------- ------- ------- ------
Net asset value, end of period $ 17.87 $ 17.90 $ 14.41 $ 12.46 $10.85
======== ======== ======= ======= ======
Total return(b) (.22)% 27.96% 16.18% 16.41% 9.14%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $163,906 $140,685 $54,880 $16,836 $5,600
Ratios to average net assets:
Expenses 1.26%(c) 1.23% 1.25% 1.25% 1.25%(c)
Expenses excluding waiver and payments by affiliate 1.35%(c) 1.39% 1.51% 1.95%
2.22%(c)
Net investment income .12%(c) -- .55% 1.04% 1.07%(c)
Portfolio turnover rate 40.52% 63.04% 35.74% 57.67% 11.14%
</TABLE>
(a)Based on average shares outstanding effective year ended April 30, 2000.
(b)Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(c)Annualized
(d)For the period June 3, 1996 (effective date) to April 30, 1997.
6
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN BLUE CHIP FUND (CONT.)
<TABLE>
<CAPTION>
CLASS B
-------
SIX MONTHS ENDED
OCTOBER 31, 2000 YEAR ENDED
(UNAUDITED) APRIL 30, 2000(d)
----------- -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period $17.87 $16.45
----------------------------------------
Income from investment operations:
Net investment loss(a) (.06) (.03)
Net realized and unrealized gains (losses) (.05) 1.45
----------------------------------------
Total from investment operations (.11) 1.42
----------------------------------------
Net asset value, end of period $17.76 $17.87
========================================
Total return(b) (.62)% 8.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $7,369 $2,026
Ratios to average net assets:
Expenses 1.92%(c) 1.82%(c)
Expenses excluding waiver and payments by affiliate 2.00%(c) 2.06%(c)
Net investment loss (.62)%(c) (7.15)%(c)
Portfolio turnover rate 40.52% 63.04%
</TABLE>
(a)Based on average shares outstanding.
(b)Total return does not reflect contingent deferred sales charge, and is not
annualized for periods less than one year.
(c)Annualized
(d)For the period February 1, 2000 (effective date) to April 30, 2000.
7
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN BLUE CHIP FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
-------
SIX MONTHS ENDED
OCTOBER 31, 2000 YEAR ENDED
(UNAUDITED) APRIL 30, 2000(d)
----------- -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period $ 17.91 $16.45
------- ------
Income from investment operations:
Net investment loss(a) (.06) (.03)
Net realized and unrealized gains (losses) (.03) 1.49
------- ------
Total from investment operations (.09) 1.46
------- ------
Net asset value, end of period $ 17.82 $17.91
======= ======
Total return(b) (.50)% 8.88%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $12,443 $3,608
Ratios to average net assets:
Expenses 1.92%(c) 1.82%(c)
Expenses excluding waiver and payments by affiliate 2.00%(c) 2.06%(c)
Net investment loss (.62)%(c) (6.88)%(c)
Portfolio turnover rate 40.52% 63.04%
</TABLE>
(a)Based on average shares outstanding.
(b)Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for years less than one year.
(c)Annualized
(d)For the period February 1, 2000 (effective date) to April 30, 2000.
8 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN BLUE CHIP FUND SHARES VALUE
----------------------- ------ -----
<S> <C> <C>
COMMON STOCKS 93.2%
(a)COMMERCIAL SERVICES 2.4%
CheckFree Corp. 48,000 $ 2,388,000
Robert Half International Inc. 64,000 1,952,000
-----------
4,340,000
-----------
COMMUNICATIONS 5.1%
SBC Communications Inc. 65,000 3,749,688
(a)Sprint Corp. (PCS Group) 47,500 1,810,938
Vodafone Group PLC, ADR (United Kingdom) 48,000 2,043,000
(a)Worldcom Inc. 77,000 1,828,750
-----------
9,432,376
-----------
CONSUMER DURABLES .3%
Sony Corp. (Japan) 6,000 479,165
Sony Corp., ADR (Japan) 2,000 166,000
-----------
645,165
-----------
CONSUMER NON-DURABLES 7.8%
Coca-Cola Co. 37,000 2,233,875
Colgate-Palmolive Co. 35,000 2,056,600
Gillette Co. 35,000 1,220,625
Nestle SA (Switzerland) 1,000 2,071,631
PepsiCo Inc. 48,000 2,325,000
Philip Morris Cos. Inc. 39,000 1,428,375
Ralston Purina Group 120,000 2,910,000
-----------
14,246,106
-----------
CONSUMER SERVICES 3.9%
(a)Clear Channel Communications Inc. 30,000 1,801,878
McDonald's Corp. 41,000 1,271,000
(a)Starbucks Corp. 45,000 2,010,938
Walt Disney Co. 61,000 2,184,563
-----------
7,268,379
-----------
ELECTRONIC TECHNOLOGY 17.7%
(a)Agilent Technologies Inc. 23,432 1,085,195
(a)Applied Materials Inc. 15,000 796,875
(a)Cisco Systems Inc. 96,000 5,172,000
(a)Comverse Technology Inc. 20,000 2,235,000
Corning Inc. 29,000 2,218,500
(a)Dell Computer Corp. 54,000 1,593,000
(a)EMC Corp. 22,000 1,959,375
Hewlett-Packard Co. 27,000 1,253,813
(a)Infineon Technologies AG, ADR (Germany) 9,500 407,313
Intel Corp. 92,000 4,140,000
International Business Machines Corp. 32,000 3,152,000
(a)Intersil Holding Corp. 14,900 714,269
(a)JDS Uniphase Corp. 15,000 1,221,563
(a)Network Appliance Inc. 16,000 1,904,000
</TABLE>
9
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN BLUE CHIP FUND SHARES VALUE
----------------------- ------ -----
<S> <C> <C>
COMMON STOCKS (CONT.)
ELECTRONIC TECHNOLOGY (CONT.)
Nortel Networks Corp. (Canada) 41,050 $ 1,867,775
(a)Sun Microsystems Inc. 16,000 1,774,000
(a)Xilinx Inc. 15,000 1,086,563
-----------
32,581,241
-----------
ENERGY MINERALS 3.9%
Conoco Inc., B 47,000 1,277,813
Devon Energy Corp. 16,000 806,400
Exxon Mobil Corp. 57,000 5,083,688
-----------
7,167,901
-----------
FINANCE 13.8%
Aflac Inc. 19,000 1,388,188
American International Group Inc. 23,999 2,351,902
Capital One Financial Corp. 36,000 2,272,501
Citigroup Inc. 59,000 3,104,875
Countrywide Credit Industries Inc. 53,000 1,984,188
Equity Office Properties Trust 60,000 1,807,500
Fannie Mae 13,000 1,001,000
Fleet Boston Financial Corp. 44,000 1,672,000
Goldman Sachs Group Inc. 18,000 1,796,625
J.P. Morgan & Co. Inc. 18,870 3,122,985
Marsh & McLennan Cos. Inc. 20,000 2,615,000
Merrill Lynch & Co. Inc. 31,000 2,170,000
-----------
25,286,764
-----------
HEALTH TECHNOLOGY 9.8%
Abbott Laboratories 43,000 2,270,938
(a)Amgen Inc. 13,700 793,744
Bristol-Myers Squibb Co. 30,000 1,828,125
(a)Genentech Inc. 24,000 1,980,000
Johnson & Johnson 10,500 967,313
Pfizer Inc. 125,000 5,398,438
Schering-Plough Corp. 39,500 2,041,656
(a)Watson Pharmaceuticals Inc. 43,700 2,733,981
-----------
18,014,195
-----------
INDUSTRIAL SERVICES 3.8%
Enron Corp. 34,000 2,790,125
Schlumberger Ltd. 16,500 1,256,063
(a)Stuart Energy Systems Corp. (Canada) 96,300 1,456,511
Transocean Sedco Forex Inc. 27,000 1,431,000
-----------
6,933,699
-----------
NON-ENERGY MINERALS .4%
Alcoa Inc. 25,000 717,188
-----------
PROCESS INDUSTRIES 1.2%
Bowater Inc. 24,000 1,299,000
E. I. du Pont de Nemours and Co. 19,000 862,125
-----------
2,161,125
-----------
</TABLE>
10
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN BLUE CHIP FUND SHARES VALUE
-----------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
PRODUCER MANUFACTURING 6.1%
Avery Dennison Corp. ............................ 21,000 $ 1,060,500
General Electric Co. ............................ 103,000 5,645,688
(a)Mettler-Toledo International Inc. (Switzerland) 40,000 1,867,500
Minnesota Mining & Manufacturing Co. ............ 27,000 2,608,875
-------------
11,182,563
-------------
RETAIL TRADE 5.1%
(a)Best Buy Co. Inc. ............................. 31,000 1,555,813
Home Depot Inc. ................................. 33,000 1,419,000
Target Corp. .................................... 65,000 1,795,625
Wal-Mart Stores Inc. ............................ 100,000 4,537,500
-------------
9,307,938
-------------
TECHNOLOGY SERVICES 9.6%
(a)America Online Inc. ........................... 45,000 2,269,350
(a)Art Technology Group Inc. ..................... 22,000 1,380,500
Automatic Data Processing Inc. .................. 38,000 2,481,875
(a)Check Point Software Technologies Ltd. (Israel) 7,000 1,108,625
Electronic Data Systems Corp. ................... 13,000 610,188
(a)Microsoft Corp. ............................... 68,000 4,683,500
(a)Oracle Corp. .................................. 46,000 1,518,000
(a)Quest Software Inc. ........................... 16,000 699,000
(a)VERITAS Software Corp. ........................ 16,000 2,256,250
(a)Yahoo! Inc. ................................... 12,000 703,500
-------------
17,710,788
-------------
TRANSPORTATION .3%
United Parcel Service Inc., B ................... 9,500 577,125
-------------
UTILITIES 2.0%
Duke Energy Corp. ............................... 25,000 2,160,938
(a)Southern Energy Inc. .......................... 57,500 1,566,876
-------------
3,727,814
-------------
TOTAL COMMON STOCKS (COST $150,734,415) ......... 171,300,367
-------------
SHORT TERM INVESTMENTS 8.6%
(b)Franklin Institutional Fiduciary Trust Money
Market Portfolio (COST $15,720,952) ........ 15,720,952 15,720,952
-------------
TOTAL INVESTMENTS (COST $166,455,367) 101.8% .... 187,021,319
OTHER ASSETS, LESS LIABILITIES (1.8%) ........... (3,302,633)
-------------
NET ASSETS 100.0% ............................... $ 183,718,686
=============
</TABLE>
(a) Non-income producing
(b) The Franklin Institutional Fiduciary Trust Money Market Portfolio is managed
by Franklin Advisers, Inc.
See notes to financial statements.
11
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN BLUE CHIP FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments in securities:
Cost ................................................. $166,455,367
============
Value ................................................ 187,021,319
Receivables:
Investment securities sold ........................... 1,019,966
Capital shares sold .................................. 852,840
Dividends ............................................ 71,437
------------
Total assets ....................................... 188,965,562
------------
Liabilities:
Payables:
Investment securities purchased ...................... 4,731,342
Capital shares redeemed .............................. 242,805
Affiliates ........................................... 231,614
Shareholders ......................................... 25,526
Other liabilities ...................................... 15,589
------------
Total liabilities .................................. 5,246,876
------------
Net assets, at value ............................. $183,718,686
============
Net assets consist of:
Undistributed net investment income .................... $ 50,268
Net unrealized appreciation ............................ 20,565,941
Accumulated net realized gain .......................... 5,883,119
Capital shares ......................................... 157,219,358
------------
Net assets, at value ............................. $183,718,686
============
</TABLE>
See notes to financial statements.
12
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN BLUE CHIP FUND
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
CLASS A:
Net assets, at value ................................................ $163,906,326
============
Shares outstanding .................................................. 9,174,326
============
Net asset value per share(a) ........................................ $ 17.87
============
Maximum offering price per share (net asset value per share / 94.25%) $ 18.96
============
CLASS B:
Net assets, at value ................................................ $ 7,369,068
============
Shares outstanding .................................................. 414,860
============
Net asset value and maximum offering price per share(a) ............. $ 17.76
============
CLASS C:
Net assets, at value ................................................ $ 12,443,292
============
Shares outstanding .................................................. 698,334
============
Net asset value per share(a) ........................................ $ 17.82
============
Maximum offering price per share (net asset value per share / 99%) .. $ 18.00
============
</TABLE>
(a) Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
13
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN BLUE CHIP FUND
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
Investment Income:
(net of foreign taxes of $9,798)
Dividends ............................................................ $ 1,137,117
-----------
Expenses:
Management fees (Note 3) ............................................. 608,189
Distribution fees (Note 3)
Class A ............................................................. 261,135
Class B ............................................................. 23,207
Class C ............................................................. 38,710
Transfer agent fees (Note 3) ......................................... 151,235
Custodian fees ....................................................... 2,159
Reports to shareholders .............................................. 16,596
Registration and filing fees ......................................... 52,205
Professional fees (Note 3) ........................................... 8,386
Trustees' fees and expenses .......................................... 741
Other ................................................................ 1,139
-----------
Total expenses .................................................. 1,163,702
Expenses waived/paid by affiliate (Note 3) ...................... (76,853)
-----------
Net expenses .................................................. 1,086,849
-----------
Net investment income ......................................... 50,268
-----------
Realized and unrealized gains (losses):
Net realized gain from:
Investments ......................................................... 1,467,991
Foreign currency transactions ....................................... 8,101
-----------
Net realized gain ............................................. 1,476,092
Net unrealized depreciation on:
Investments ......................................................... (2,078,324)
Translation of assets and liabilities denominated in foreign
currencies (2)
-----------
Net unrealized depreciation ................................... (2,078,326)
-----------
Net realized and unrealized loss ...................................... (602,234)
-----------
Net decrease in net assets resulting from operations .................. $ (551,966)
===========
</TABLE>
See notes to financial statements.
14
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN BLUE CHIP FUND
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2000 (UNAUDITED)
AND THE YEAR ENDED APRIL 30, 2000
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
OCTOBER 31, 2000 APRIL 30, 2000
---------------- --------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ................................................. $ 50,268 $ (8,592)
Net realized gain from investments and foreign currency transactions ......... 1,476,092 5,781,102
Net unrealized appreciation (depreciation) on investments and translation of
assets and liabilities denominated in foreign currencies .................... (2,078,326) 16,361,296
--------------------------------
Net increase (decrease) in net assets resulting from operations .............. (551,966) 22,133,806
Distributions to shareholders from:
Net investment income:
Class A ..................................................................... -- (72,881)
Net realized gains:
Class A ..................................................................... -- (2,438,788)
--------------------------------
Total distributions to shareholders ......................................... -- (2,511,669)
Capital share transactions: (Note 2)
Class A ..................................................................... 23,671,809 66,352,802
Class B ..................................................................... 5,387,890 1,974,823
Class C ..................................................................... 8,891,956 3,488,770
--------------------------------
Total capital share transactions ............................................ 37,951,655 71,816,395
Net increase in net assets ................................................... 37,399,689 91,438,532
Net assets:
Beginning of period ......................................................... 146,318,997 54,880,465
--------------------------------
End of period ............................................................... $183,718,686 $146,318,997
================================
Undistributed net investment income included in net assets:
End of period ............................................................... $ 50,268 $ --
================================
</TABLE>
See notes to financial statements
15
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN BLUE CHIP FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Blue Chip Fund (the Fund) is a separate, diversified series of Franklin
Strategic Series (the Trust), which is an open-end investment company registered
under the Investment Company Act of 1940. The Fund seeks 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. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. INCOME TAXES:
No provision has been made for income taxes because the fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
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. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
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.
16
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN BLUE CHIP FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:(CONT.)
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.
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.
e. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The Fund offers three classes of shares: Class A, Class B, and Class C. Each
class of shares differs by its initial sales load, distribution fees, voting
rights on matters affecting a single class and its exchange privilege.
At October 31, 2000, there were an unlimited number of shares authorized ($.01
par value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
OCTOBER 31, 2000 APRIL 30, 2000(a)
---------------- -----------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Shares sold .................................. 2,186,873 $ 39,291,573 7,203,769 $ 118,228,802
Shares issued in reinvestment of distributions -- -- 139,795 2,257,678
Share redeemed ............................... (872,335) (15,619,764) (3,292,887) (54,133,678)
--------- ------------- ---------- -------------
Net increase ................................. 1,314,538 $ 23,671,809 4,050,677 $ 66,352,802
========= ============= ========== =============
CLASS B SHARES:
Shares sold .................................. 321,313 $ 5,746,199 115,371 $ 2,009,719
Share redeemed ............................... (19,843) (358,309) (1,981) (34,896)
--------- ------------- ---------- -------------
Net increase ................................. 301,470 $ 5,387,890 113,390 $ 1,974,823
========= ============= ========== =============
CLASS C SHARES:
Shares sold .................................. 517,810 $ 9,268,142 206,454 $ 3,577,185
Share redeemed ............................... (20,967) (376,186) (4,963) (88,415)
--------- ------------- ---------- -------------
Net increase ................................. 496,843 $ 8,891,956 201,491 $ 3,488,770
========= ============= ========== =============
</TABLE>
(a) For the period February 1, 2000 (effective date) to April 30, 2000
for Class B and Class C.
17
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN BLUE CHIP FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or
directors of the following entities:
<TABLE>
<CAPTION>
ENTITY AFFILIATION
---------------------------------------------------------------------------------------------
<S> <C>
Franklin Templeton Services, Inc. (FT Services) Administration manager
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin/Templeton Distributors, Inc. (Distributors) Principal Underwriter
Franklin/Templeton Investor Services, Inc.
(Investor Services) Transfer Agent
</TABLE>
The Fund pays an investment management fee to Advisers based on the average net
assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE DAILY NET ASSETS
-------- ----------------
<S> <C>
.750% First $500 million
.625% Over $500 million, up to and including $1 billion
.500% Over $1 billion
</TABLE>
Management fees were reduced on assets invested in the Franklin Institutional
Fiduciary Trust Money Market Portfolio.
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
Advisers agreed in advance to waive management fees for the Fund, as noted in
the Statements of Operations.
The Fund reimburses Distributors up to .35%, 1.00%, and 1.00% per year of the
average net assets of Class A, Class B, and Class C, respectively, for costs
incurred in marketing the Funds' shares.
Distributors paid net commissions on sales of the Fund's shares, and received
contingent deferred sales charges for the year of $197,324 and $8,650,
respectively.
The Fund paid transfer agent fees of $151,235 of which $134,033 was paid to
Investors Services.
Included in professional fees are legal fees of $462 that were paid to a law
firm in which a partner of that firm was an officer of the Fund.
4. INCOME TAXES
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 treatment of wash sales and foreign currency
transactions.
18
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN BLUE CHIP FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
4. INCOME TAXES (CONT.)
At October 31, 2000, the net unrealized appreciation based on the cost of
investments for income tax purposes of $166,602,449 was as follows:
<TABLE>
<CAPTION>
<S> <C>
Unrealized appreciation $30,414,405
Unrealized depreciation (9,995,535)
-----------
Net unrealized appreciation $20,418,870
===========
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended October 31, 2000 aggregated $98,388,213 and $63,643,564,
respectively.
19
<PAGE>
This page intentionally left blank.
SHAREHOLDER LETTER
Dear Shareholder:
This semiannual report for Franklin Strategic Series covers the six months ended
October 31, 2000.
A ROARING ECONOMY
The U.S. economy continued to grow vigorously during the period under review.
Concerned that this rapid growth could lead to future inflation, the Federal
Reserve Board (the Fed) raised short-term interest rates in May. Energy prices
soared throughout the period, adversely affecting U.S. corporate profits, while
the euro's free-fall hampered sales of American exports and cut into earnings of
U.S. multinationals as they converted their European profits into dollars. A
third-quarter slowing in the growth of annualized gross domestic product (GDP),
and the Fed's decision to hold short-term rates steady at their June and August
meetings, suggested that the economy might be slowing to a more sustainable
pace.
A ROLLERCOASTER MARKET
Illustrating the precept that Main Street and Wall Street are not always one and
the same, U.S. equity markets experienced severe volatility from May through
October. For example, the blue chips of the Dow Jones(R) Industrial Average
CONTENTS
<TABLE>
<S> <C>
Shareholder Letter ...... 1
Fund Reports
Franklin Biotechnology
Discovery Fund ......... 4
Franklin Global
Communications Fund .... 9
Franklin Global
Health Care Fund ....... 16
Franklin Natural
Resources Fund ......... 24
Franklin
Technology Fund ........ 30
Financial Highlights &
Statements of Investments 36
Financial Statements .... 63
Notes to
Financial Statements .... 72
</TABLE>
<PAGE>
(DJIA(TM)), which opened the period at 10733.91 and closed it at 10971.14,
dropped 404 points during the week ended October 13 but proceeded to gain 398
points by October 27. The tech-heavy Nasdaq Composite Index (Nasdaq(R)), which
opened the period at 3860.66 and closed it at 3369.63, was even more turbulent.
After losing 460 points in May, the index rallied throughout most of the summer,
only to plummet 303 points in October. However, it turned in near-record
positive performance on October 19 when it gained 7.79%. The Standard and Poor's
500(R) (S&P 500(R)) Composite Index, a broader market measure that fell 1.03%
during the period, was only slightly less volatile.(1)
SURVIVING THE SEESAW
While fluctuation such as this can be unsettling, it is important to remember
that securities markets always have been -- and always will be -- subject to
volatility. No one can predict exactly how they will perform. However, over the
long term, stocks and bonds have provided impressive results. For that reason,
we urge you to exercise patience, consult with your investment representative,
and focus on your long-term objectives rather than on short-term market cycles.
1. The Dow Jones Industrial Average is a price-weighted index based on the
average market price of 30 blue chip stocks. The Nasdaq Composite Index measures
all Nasdaq domestic and non-U.S.-based common stocks listed on The Nasdaq Stock
Market(R). The index is market-value weighted and includes over 4,800 companies
(as of 10/31/00). The S&P 500 Composite Index consists of 500 domestic stocks,
comprising four broad sectors: industrials, utilities, financials and
transportation. The S&P 500 serves as the standard for measuring large-cap U.S.
stock market performance. Since some industries are characterized by companies
of relatively small stock capitalization, the index is not composed of the 500
largest, publicly traded U.S. companies.
2
<PAGE>
One way to help minimize the impact of market volatility on your portfolio is to
diversify your investments. Each of the Funds included in this report offers
individual investors a level of diversification that would be almost impossible
for them to achieve on their own. Although each Fund has a distinct investment
goal, all of Franklin Templeton's management teams are dedicated to providing
shareholders with a careful selection of securities, diversification and
constant professional supervision. For specific information about each Fund,
please refer to the Fund reports following this letter.
As always, we appreciate your support, welcome your comments and questions, and
look forward to continuing to serve your investment needs.
Sincerely,
/s/ Rupert H. Johnson, Jr.
Rupert H. Johnson, Jr.
President
Franklin Strategic Series
3
<PAGE>
[FUND CATEGORY PYRAMID GRAPHIC]
FRANKLIN BIOTECHNOLOGY
DISCOVERY FUND
Your Fund's Goal: Franklin Biotechnology Discovery Fund seeks capital
appreciation by investing primarily in equity securities of biotechnology
companies and discovery research firms located in the U.S. and other countries.
We are pleased to bring you this semiannual report of Franklin Biotechnology
Discovery Fund, which covers the six months ended October 31, 2000 -- an
extremely volatile period for the U.S. stock market, especially the technology
sector. But biotechnology stocks generally delivered strong returns largely due
to sound fundamentals in the biotechnology and health care markets. Within this
environment, Franklin Biotechnology Discovery Fund - Class A produced a +38.54%
six-month cumulative total return, as shown in the Performance Summary on page
8, compared to the Fund's benchmarks, the Standard and Poor's 500 Composite
Index and the Amex Biotechnology Index, which returned -1.03% and 50.65%,
respectively, during the same time.(1)
One factor contributing to the strength of the biotechnology sector was the
progress made on the Human Genome Project, a
1. Source: Standard & Poor's Micropal. The S&P 500 Composite Index consists of
500 domestic stocks, comprising four broad sectors: industrials, utilities,
financials and transportation. The S&P 500 serves as the standard for measuring
large-cap U.S. stock market performance. Since some industries are characterized
by companies of relatively small stock capitalization, the index is not composed
of the 500 largest, publicly traded U.S. companies. The Amex Biotechnology Index
is an equal-dollar weighted index designed to measure the performance of a cross
section of companies in the biotechnology industry that are primarily involved
in the use of biological processes to develop products or provide services.
Indexes are unmanaged and include reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the Fund's portfolio.
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 37.
4
<PAGE>
government-sponsored project dedicated to the identification of all the genes in
the human genome. PE-Celera, a private sector company pursuing the same goal,
announced it had completed a rough draft of the human genome. Made in
conjunction with the government-sponsored effort, this announcement sent many
biotechnology stocks soaring because such a collaboration might accelerate the
time-to-market for future gene-based, disease-preventing therapies.
Fundamentals of many biotech companies remained strong during the six months
under review, and core holdings Amgen, Genentech and Abgenix posted impressive
results. COR Therapeutics, another large Fund holding, also performed well.
Clinical data demonstrated a reduced mortality rate associated with the use of
Integrilin(R), the company's lead drug used to treat cardiovascular conditions,
and it gained market share against competing therapies.
To help us more easily identify potential stock ideas, we increased our
communication with leading clinicians and researchers in the medical arena. We
believe their education and experience give us valuable perspective on potential
and existing therapies. Many of them can provide not only academic insights into
the toxicity, efficacy and feasibility of different treatment regimens, but also
practical viewpoints of administration and reimbursement.
We believe the biotechnology sector is poised to benefit from the increasing
number of new products coming out of the pipeline, as well as the aging of the
country's population. Our goal, as always, is to provide superior returns to our
shareholders. Consistent with that goal, we have closed the Fund to new
investors (except retirement accounts) in order to preserve the Fund's liquidity
and focus on long-term investments. Looking forward, we will continue to pursue
investments in promising
PORTFOLIO BREAKDOWN
Franklin Biotechnology Discovery Fund
Based on Total Net Assets
10/31/00
[PIE CHART]
<TABLE>
<S> <C>
Biotechnology 69.2%
Medical Specialties 13.9%
Other Pharmaceuticals 8.4%
Electronic Equipment/Instruments 3.5%
Other 1.8%
Short-Term Investments & Other Net Assets 3.2%
</TABLE>
5
<PAGE>
TOP 10 HOLDINGS
Franklin Biotechnology
Discovery Fund
10/31/00
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
SECTOR NET ASSETS
<S> <C>
Abgenix Inc. 5.0%
Biotechnology
Amgen Inc. 4.8%
Biotechnology
COR Therapeutics Inc. 4.7%
Biotechnology
IDEC Pharmaceuticals Corp. 4.1%
Biotechnology
Genentech Inc. 3.9%
Biotechnology
Inhale Therapeutic
Systems Inc. 3.8%
Medical Specialties
Invitrogen Corp. 3.7%
Biotechnology
MedImmune Inc. 3.6%
Biotechnology
PE Corp. PE Biosystems Group 3.3%
Medical Specialties
Alexion Pharmaceuticals Inc. 3.3%
Biotechnology
</TABLE>
companies with new technologies we feel are attractively valued in the market.
Having said this, we believe it is important to sound a note of caution. It is
unlikely the new economy will escape all the business cycle rules and
price/earnings ratio considerations that generally govern shares prices. Thus,
investors should not have unrealistic expectations that the ongoing performance
of this, or any, fund will deliver results like those of this reporting period.
Many biotechnology companies are a long way from earnings that would sustain
current share prices, and we may see some corrections. In addition, some
companies that appear promising today may be eclipsed by even newer, more
cutting-edge competitors. We are very proud of the Fund performance during the
past six months. Although we would love to bring you similar news in the future,
we cannot promise that this will be possible.
Thank you for your investment in Franklin Biotechnology Discovery Fund. We
welcome your comments and look forward to servicing your investment needs in the
years to come.
/s/ Kurt von Emster
Kurt von Emster
/s/ Evan McCulloch
Evan McCulloch
/s/ Paul Walker
Paul Walker
Portfolio Management Team
Franklin Biotechnology Discovery Fund
6
<PAGE>
EVAN MCCULLOCH assumed primary portfolio management responsibilities for
Franklin Biotechnology Discovery Fund in October 2000. He specializes in
research analysis of the health care industry, including pharmaceuticals, health
care information systems/Internet and health care providers. Mr. McCulloch
received a bachelor's degree in economics from the University of California at
Berkeley. He is also a Chartered Financial Analyst (CFA) and a member of the
Association for Investment Management and Research (AIMR) and the Security
Analysts of San Francisco (SASF).
PAUL WALKER is an assistant portfolio manager for Franklin Biotechnology
Discovery Fund. He specializes in equity research analysis of the health care
services and biotechnology industries. Mr. Walker received a bachelor of science
degree in biochemistry and cell biology from the University of California at San
Diego, and he is a CFA.
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. 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. There are, of course, special risks
involved with investing in a non-diversified fund concentrating its investments
in a single industry. These risks, which include increased susceptibility to
adverse economic, political, social and regulatory developments, are further
outlined in the Fund's prospectus.
7
<PAGE>
FRANKLIN BIOTECHNOLOGY
DISCOVERY FUND
CLASS A: Subject to the current, maximum 5.75% initial sales charge. Prior to
8/3/98, Fund shares were offered at a lower initial sales charge; thus actual
total returns may differ.
Past expense reductions by the Fund's manager increased the Fund's total return.
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, 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, maximum sales charge.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
PERFORMANCE SUMMARY AS OF 10/31/00
Six-month total return represents the change in value of an investment for the
period indicated and does not include sales charges. 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 trends. All total
returns include reinvested distributions at net asset value.
<TABLE>
<CAPTION>
CLASS A
<S> <C> <C>
Six-Month Total Return +38.54%
Net Asset Value (NAV) $83.72 (10/31/00) $60.43 (4/30/00)
Change in NAV +$23.29
</TABLE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 3-YEAR (9/15/97)
<S> <C> <C> <C>
Cumulative Total Return (1) +199.88% +256.71% +279.26%
Average Annual Total Return (2) +182.65% +49.81% +52.02%
Value of $10,000 Investment (3) $18,265 $23,622 $25,739
</TABLE>
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
Past performance does not guarantee future results.
8
<PAGE>
[FUND CATEGORY PYRAMID GRAPHIC]
FRANKLIN GLOBAL
COMMUNICATIONS FUND
Your Fund's Goal: Franklin Global Communications Fund seeks capital appreciation
and current income by investing in equity securities of companies that are
primarily engaged in providing communications services and communications
equipment.
This semiannual report for Franklin Global Communications Fund covers the
six-month period ended October 31, 2000. During this time, interest rates rose
in most countries, inflation generally remained subdued and most global
economies produced strong gains in terms of gross domestic product. However, the
world's equity markets were generally weak during the six-month period, with
most major indexes declining after having already priced in the good economic
news earlier in 1999 and first quarter 2000.
The growth stock segment of the market, led by telecommunications, technology
and media companies, suffered significant corrections. Communication stocks were
exceptionally hard hit by a series of declines, as evidenced by the -29.90%
six-month return in the Nasdaq Telecommunications Index compared to a -12.31%
return for the broader Nasdaq
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 43.
9
<PAGE>
TOP 10 EQUITY HOLDINGS
Franklin Global
Communications Fund
10/31/00
<TABLE>
<CAPTION>
COMPANY %OF TOTAL
SECTOR NET ASSETS
<S> <C>
BellSouth Corp. 3.3%
Major Telecommunications
Corning Inc. 3.3%
Telecommunications
Equipment
Vodafone Group PLC, ADR 2.5%
Wireless Communications
CIENA Corp. 2.5%
Telecommunications
Equipment
SBC Communications Inc. 2.4%
Major Telecommunications
Time Warner Telecom Inc., A 2.4%
Specialty Telecommunications
VoiceStream Wireless Corp. 2.4%
Wireless Communications
Motorola Inc. 2.2%
Telecommunications
Equipment
Leap Wireless International Inc. 2.2%
Wireless Communications
Worldcom Inc. 2.0%
Major Telecommunications
</TABLE>
Composite Index.(1) The fallout from these declines created a global ripple
effect, causing many investors to become cautious about extraordinarily high
price-to-earnings ratios and a string of corporate earnings warnings released by
some of the key participants within the "new economy." Although both "new
economy" and traditional "old economy" companies continued to invest heavily in
cutting-edge communications equipment and services, communications stocks fell
in tandem with the tech-heavy Nasdaq despite evidence of strong earnings. In our
opinion, this situation was not too surprising. Ballooning valuations often need
to be reduced after sustained periods of strong performance and widespread
momentum-style investing such as we've seen recently. The telecommunications
sector, which includes most of the Fund's holdings, witnessed a particularly
protracted decline since it had been outperforming the general market for a long
time amid considerable investor enthusiasm.
Within this challenging environment, Franklin Global Communications Fund - Class
A produced a -11.96% six-month cumulative total return as shown in the
Performance Summary on page 14. During the same time, the broader Standard &
Poor's 500 (S&P 500) Composite Index returned -1.03%.(2)
1. Source: Standard & Poor's Micropal. The Nasdaq Telecommunications Index is a
capitalization-weighted index designed to measure the performance of all Nasdaq
stocks in the telecommunications sector. The Nasdaq Composite Index measures all
Nasdaq domestic and non-U.S.-based common stocks listed on The Nasdaq Stock
Market. The index is market-value weighted and includes over 4,800 companies (as
of 10/31/00).
2. Source: Standard & Poor's Micropal. The S&P 500 Composite Index consists of
500 domestic stocks, comprising four broad sectors: industrials, utilities,
financials and transportation. The S&P 500 serves as the standard for measuring
large-cap U.S. stock market performance. Since some industries are characterized
by companies of relatively small stock capitalization, the index is not composed
of the 500 largest, publicly traded U.S. companies.
The index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index nor is an index representative of the Fund's portfolio.
10
<PAGE>
Throughout the reporting period, we continued to strive for broad
diversification across many different types of communications services and
equipment companies while searching for stocks that we believed held excellent
long-term potential. We generally evaluate potential investments based on the
fundamentals of each individual company and the regulatory and economic
environment in which it operates. While we want to own industry leaders, we also
invest in smaller and emerging companies with new products and technologies. In
addition to researching individual companies, we consider investment themes we
feel may positively impact the industry and individual companies. In our
opinion, this second layer of analysis helps position the Fund for strong future
growth.
Adhering to these strategies, we added both cable and cable services issues to
the Fund's portfolio. Until this reporting period, cable stocks were not held in
significant amounts because of record-high valuations that we did not consider
compelling. But these issues endured severe declines during the spring and
summer, depressing stock prices we had previously deemed too expensive. In our
assessment, such widespread selling tended to indiscriminately punish good
PORTFOLIO BREAKDOWN
Franklin Global Communications Fund
Based on Total Net Assets
10/31/00
<TABLE>
<S> <C>
Major Telecommunications 20.3%
Telecommunications Equipment 19.4%
Wireless Communications 14.3%
Specialty Telecommunications 12.2%
Semiconductors 6.5%
Computer Communications 5.3%
Electronic Equipment/Instruments 3.3%
Cable/Satellite TV 2.9%
Broadcasting 2.3%
Computer Peripherals 1.3%
Other Sectors 2.6%
Short-Term Investments & Other Net Assets 9.6%
</TABLE>
11
<PAGE>
companies with the bad, allowing us the opportunity to buy quality companies
such as Comcast, Charter Communications, NTL and Scientific-Atlanta at relative
bargains. We also continued to invest heavily in wireless services stocks such
as VoiceStream Wireless, based on our belief that strong acceptance of wireless
technology, both domestically and abroad, will continue to bode well for
companies involved in cellular phone and wireline infrastructure manufacturing
and services.
Looking forward, we remain optimistic about the fundamentals of the
communications sector, despite recent gyrations in the market. Internet growth
continues to weigh heavily on the expansion of data networks. We believe this
trend will continue as the number of users and the complexity of the information
they send and retrieve increases, possibly benefiting network services and
equipment providers. We are confident about the increasingly important role
communications products and services play in the lives of both businesses and
individuals, and plan to keep investing in what we assess as quality companies
that will benefit from this trend.
12
<PAGE>
Thank you for investing in Franklin Global Communications Fund. We welcome your
questions and comments, and look forward to serving you in the future.
/s/ Alex W. Peters
Alex W. Peters
Portfolio Manager
Franklin Global Communications Fund
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. 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.
13
<PAGE>
FRANKLIN GLOBAL
COMMUNICATIONS FUND
CLASS A: Subject to the current, maximum 5.75% initial sales charge. Prior to
8/3/98, Fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Past expense reductions by the Fund's manager
increased the Fund's total return.
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.
PERFORMANCE SUMMARY AS OF 10/31/00
Six-month total return represents the change in value of an investment for the
period indicated and does not include sales charges. 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 operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
<TABLE>
<CAPTION>
CLASS A
<S> <C> <C>
Six-Month Total Return -11.96%
Net Asset Value (NAV) $17.59 (10/31/00) $19.98 (4/30/00)
Change in NAV -$2.39
</TABLE>
<TABLE>
<CAPTION>
CLASS B
<S> <C> <C>
Six-Month Total Return -12.28%
Net Asset Value (NAV) $17.36 (10/31/00) $19.79 (4/30/00)
Change in NAV -$2.43
</TABLE>
<TABLE>
<CAPTION>
CLASS C
<S> <C> <C>
Six-Month Total Return -12.28%
Net Asset Value (NAV) $17.36 (10/31/00) $19.79 (4/30/00)
Change in NAV -$2.43
</TABLE>
Past performance does not guarantee future results.
14
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR (7/2/92)
<S> <C> <C> <C>
Cumulative Total Return(1) +21.77% +129.37% +244.29%
Average Annual Total Return(2) +14.79% +16.67% +15.34%
Value of $10,000 Investment(3) $11,479 $21,613 $32,449
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 1-YEAR (1/1/99)
<S> <C> <C>
Cumulative Total Return(1) +20.94% +35.62%
Average Annual Total Return(2) +16.94% +17.02%
Value of $10,000 Investment(3) $11,694 $13,162
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 5-YEAR (5/1/95)
<S> <C> <C> <C>
Cumulative Total Return(1) +20.92% +121.72% +146.09%
Average Annual Total Return(2) +18.70% +17.03% +17.86%
Value of $10,000 Investment(3) $11,870 $21,955 $24,368
</TABLE>
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
Past performance does not guarantee future results.
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
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.
15
<PAGE>
FRANKLIN GLOBAL HEALTH CARE FUND
[FUND CATEGORY PYRAMID GRAPHIC]
--------------------------------------------------------------------------------
Your Fund's Goal: Franklin Global Health Care Fund seeks capital appreciation by
investing primarily in equity securities of health care companies, including
small capitalization companies, located throughout the world.
--------------------------------------------------------------------------------
This semiannual report for Franklin Global Health Care Fund covers the six
months ended October 31, 2000. We are pleased to report that during this time
the Fund's Class A shares produced a +38.74% cumulative total return, as shown
in the Performance Summary on page 22. During the same time, the S&P(R)
Healthcare Index provided a 17.10% return, the Nasdaq Composite declined 12.31%
and the Fund's benchmark, the Standard & Poor's 500 (S&P 500) Composite Index,
fell 1.03%.(1)
1. Source: Standard and Poor's Micropal. The S&P 500 Composite Index consists of
500 domestic stocks, comprising four broad sectors: industrials, utilities,
financials and transportation. The S&P 500 serves as the standard for measuring
large-cap U.S. stock market performance. Since some industries are characterized
by companies of relatively small stock capitalization, the index is not composed
of the 500 largest, publicly traded U.S. companies. The Nasdaq Composite Index
measures all Nasdaq domestic and non-U.S.-based common stocks listed on the
Nasdaq Stock Market. The index is market-value weighted and includes over 4,800
companies (as of 10/31/00). The S&P Health Care Index is a subsector of the
Industrial Sector of the S&P 500. It includes all the companies in the health
care industry that are in the S&P 500. The index, calculated by Standard &
Poor's, is a total return index with dividends reinvested. Indexes are unmanaged
and include reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the Fund's portfolio.
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 49.
16
<PAGE>
Many factors contributed to the Fund's strong performance during the reporting
period. First, even though the economy decelerated throughout 2000 and other
companies experienced earnings disappointments, health care companies benefited
from stable demand trends and continued to meet or exceed earnings forecasts.
Second, the completion of the Human Genome Project generated renewed excitement
in biotechnology stocks. Third, following their underperformance relative to
other sectors in 1999, health care companies with real earnings and solid
business models came back into favor, as many Internet stocks crashed in March
and April.
Although the Fund has the ability to invest in equity securities of health care
companies around the world, we concentrated most of our investments in the U.S.
during the reporting period. The domestic market grew faster than most foreign
markets, and we felt that foreign health care valuations were too high to
justify their lower earnings growth rates.
Our largest sector for most of the period was biotechnology, which represented
over a fifth of the Fund's total net assets on October 31, 2000. Believing that
this sector was entering a period of explosive growth, we concentrated on
companies
GEOGRAPHIC DISTRIBUTION
Franklin Global Health Care Fund
Based on Total Net Assets
10/31/00
[PIE CHART]
<TABLE>
<S> <C>
U.S. 89.9%
U.K. 2.5%
Switzerland 2.2%
Canada 1.5%
Other Countries 0.4%
Short-Term
Investments &
Other Net Assets 3.5%
</TABLE>
17
<PAGE>
PORTFOLIO BREAKDOWN
Franklin Global Health Care Fund
Based on Total Net Assets
10/31/00
[BAR CHART]
<TABLE>
<S> <C>
Biotechnology 22.4%
Major Pharmaceuticals 22.1%
Medical Specialties 21.8%
Hospital/Nursing Management 10.7%
Generic Pharmaceuticals 6.1%
Managed Health Care 5.2%
Other Pharmaceuticals 3.0%
Services to the Health Industry 1.9%
Electronic Equipment/Instruments 1.8%
Medical/Nursing Services 0.7%
Drug Store Chains 0.1%
Other Sectors 0.7%
Short-Term Investments &
Other Net Assets 3.5%
</TABLE>
with products already on the market or in late-stage clinical trials. We
believe core holdings Genentech and Amgen possess well-established products,
strong management, developed marketing efforts and rich new product pipelines.
We also favor COR Therapeutics because of its cardiovascular drug Integrilin.
This drug has been on the market for two years, but recent clinical data
demonstrating a reduced mortality rate among its users has added to Integrilin's
already strong growth potential.
Compared to large pharmaceutical companies, which can spread risk over many
products, many biotechnology companies depend on a single drug, often one that's
not even on the market. As we increased our biotechnology sector weighting, we
attempted to minimize this risk by creating a Scientific Advisory Board of
physician thought-leaders and researchers and by expanding our base of
practicing physician consultants. The former should bring us closer to
cutting-edge academic research; the latter relies on practicing physicians to
provide a practical viewpoint of current treatment regimens.
18
<PAGE>
Looking forward, we will continue our efforts to seize upon the investment
opportunities which present themselves in the health care sector in a timely and
disciplined fashion, providing our shareholders with unique opportunities to
invest in today's newest and fastest growing health care companies. We believe
robust biotechnology stock performance, government progress toward providing
senior citizens with a Medicare prescription drug benefit and health care
companies' stable demand trends amid potential broader equity market volatility
should benefit health care stocks in general, and Franklin Global Health Care
Fund in particular.
Having said this, we also believe it's important to sound a note of caution.
Investors should be aware that the Fund is unlikely to deliver returns like
those of this past year. In any given year, we may see some corrections. In
addition, health care and biotechnology companies that appear promising today
may be eclipsed by even newer, more cutting-edge competitors. We're very proud
of the Fund's performance during the past year and, although we would like to
bring you similar news next year, we cannot promise that this will be possible.
TOP 10 HOLDINGS
Franklin Global Health Care Fund
10/31/00
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
SECTOR, COUNTRY NET ASSETS
------------------------------------------
<S> <C>
Pfizer Inc. 4.2%
Major Pharmaceuticals, U.S.
Bristol-Myers Squibb Co. 4.1%
Major Pharmaceuticals, U.S.
Abbott Laboratories 3.8%
Major Pharmaceuticals, U.S.
Schering-Plough Corp. 3.6%
Major Pharmaceuticals, U.S.
Watson Pharmaceuticals Inc. 3.4%
Generic Pharmaceuticals, U.S.
Genentech Inc. 3.3%
Biotechnology, U.S.
American Home Products Corp. 3.3%
Major Pharmaceuticals, U.S.
COR Therapeutics Inc. 3.2%
Biotechnology, U.S.
Alpharma Inc., A 2.7%
Generic Pharmaceuticals, U.S.
CIGNA Corp. 2.7%
Managed Health Care, U.S.
</TABLE>
19
<PAGE>
Thank you for your participation in the Fund. We welcome your comments and
suggestions, and look forward to servicing your investment needs in the years to
come.
Sincerely,
/s/ Kurt von Emster
Kurt von Emster
/s/ Jason R. Nunn
Jason R. Nunn
/s/ Evan McCulloch
Evan McCulloch
Portfolio Management Team
Franklin Global Health Care Fund
--------------------------------------------------------------------------------
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. 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. There are, of course, special risks
involved with investing globally in a non-diversified fund concentrating its
investments in a single industry. These risks, which include currency
fluctuations and increased susceptibility to adverse economic, political, social
and regulatory developments, are further discussed in the Fund's prospectus.
--------------------------------------------------------------------------------
20
<PAGE>
--------------------------------------------------------------------------------
JASON (JAKE) NUNN is a portfolio manager and research analyst for Franklin
Advisers, Inc., and will assume lead responsibility for the Fund's investments
going forward. He specializes in research analysis of the medical technology
sector.
Prior to joining Franklin Templeton Investments, Mr. Nunn worked in corporate
finance for Alex. Brown & Sons and as a financial analyst for GE Industrial
Power Systems. He received an MBA from Stanford Graduate School of Business and
a bachelor of arts degree in economics from Dartmouth College.
EVAN MCCULLOCH became an assistant portfolio manager for Franklin Global Health
Care Fund in July 1995 and co-manager in May 1998. A vice president, he
specializes in research analysis of the health care industry; including
pharmaceuticals, health care information systems/Internet and health care
providers.
Mr. McCulloch received a bachelor's degree in economics from the University of
California at Berkeley. He is also a Chartered Financial Analyst (CFA) and a
member of the Association for Investment Management and Research (AIMR) and the
Security Analysts of San Francisco (SASF).
--------------------------------------------------------------------------------
21
<PAGE>
FRANKLIN GLOBAL
HEALTH CARE FUND
--------------------------------------------------------------------------------
CLASS A: Subject to the current, maximum 5.75% initial sales charge. Prior to
8/3/98, 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.
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.
--------------------------------------------------------------------------------
PERFORMANCE SUMMARY AS OF 10/31/00
Six-month total return represents the change in value of an investment for the
period indicated and does not include sales charges. 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 operating expenses for
each class. All total returns include reinvested distributions at net asset
value.
<TABLE>
<S> <C> <C>
CLASS A
Six-Month Total Return +38.74%
Net Asset Value (NAV) $28.15 (10/31/00) $20.29 (4/30/00)
Change in NAV +$7.86
CLASS B
Six-Month Total Return +38.13%
Net Asset Value (NAV) $27.75 (10/31/00) $20.09 (4/30/00)
Change in NAV +$7.66
CLASS C
Six-Month Total Return +38.21%
Net Asset Value (NAV) $27.49 (10/31/00) $19.89 (4/30/00)
Change in NAV +$7.60
</TABLE>
22 Past performance does not guarantee future results.
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR (2/14/92)
---------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +107.92% +132.73% +284.35%
Average Annual Total Return(2) + 96.03% + 17.01% + 16.09%
Value of $10,000 Investment(3) $19,603 $21,937 $36,225
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 1-YEAR (1/1/99)
---------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +106.25% + 69.30%
Average Annual Total Return(2) +102.25% + 33.31%
Value of $10,000 Investment(3) $20,225 $16,530
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (9/3/96)
---------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +106.23% + 38.08% + 79.12%
Average Annual Total Return(2) +103.17% + 10.99% + 15.09%
Value of $10,000 Investment(3) $20,317 $13,672 $17,728
</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.
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
--------------------------------------------------------------------------------
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 does not guarantee future results. 23
<PAGE>
FRANKLIN NATURAL RESOURCES FUND
[FUND CATEGORY PYRAMID GRAPHIC]
--------------------------------------------------------------------------------
Your Fund's Goal: Franklin Natural Resources Fund seeks high total return by
investing at least 65% of its total assets in securities of companies that own,
produce, refine, process or market natural resources, as well as those that
provide support services for natural resources companies.
--------------------------------------------------------------------------------
We are pleased to bring you this semiannual report of Franklin Natural Resources
Fund for the six months ended October 31, 2000. During this time, oil and gas
prices rose, contributing to strong cash flow growth rates for many energy
companies and solid performance by many energy-related stocks. Natural
gas-related stocks performed especially well, but investor concerns about
moderating economic growth, both in the U.S. and on a global basis, hurt most
non-energy cyclical stocks during the period.
Within this environment, Franklin Natural Resources Fund - Class A posted a
+4.96% six-month cumulative total return,
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 54.
24
<PAGE>
as shown in the Performance Summary on page 28. The Standard & Poor's 500 (S&P
500) Composite Index, the Fund's benchmark, delivered -1.03% over the same
period.(1)
During the six months under review, the Fund benefited from its heavy
concentration of natural gas-related equities. Our holdings in EOG Resources and
Chesapeake Energy increased in value 58.29% and 50.00%, respectively, and
contributed significantly to the Fund's performance. Also contributing to the
Fund's performance was Exxon Mobil, a new addition to the Fund's top 10
holdings. The world's largest integrated oil company, Exxon Mobil has
significant cash flow growth and an improving balance sheet. The company
announced the repurchase of over $1 billion of its stock and, in our opinion,
should soon have the ability to repurchase several billion dollars more in
stock. We believe the company could benefit significantly from synergies
achieved by the merger between Exxon and Mobil in late 1999.
Looking forward, we are optimistic about long-term prospects for natural
resources companies and for Franklin Natural Resources Fund. We believe that the
Fund is well-positioned with investments in companies having superior management
teams and advantageous relative market positions. In our opinion, oil prices may
remain at current,
PORTFOLIO BREAKDOWN
Franklin Natural Resources Fund
Based on Total Net Assets
10/31/00
[PIE CHART]
<TABLE>
<S> <C>
Energy Minerals 36.9%
Industrial Services 27.6%
Process Industries 14.3%
Non-Energy Minerals 8.0%
Utilities 1.9%
Finance 1.7%
Producer Manufacturing 1.2%
Short-Term Investments &
Other Net Assets 8.4%
</TABLE>
1. Source: Standard and Poor's Micropal. The S&P 500 Composite Index consists of
500 domestic stocks, comprising four broad sectors: industrials, utilities,
financials and transportation. The S&P 500 serves as the standard for measuring
large-cap U.S. stock market performance. Since some industries are characterized
by companies of relatively small capitalization, the index is not composed of
the 500 largest, publicly traded U.S. companies. The index is unmanaged and
includes reinvested dividends. One cannot invest directly in an index, nor is an
index representative of the Fund's portfolio.
25
<PAGE>
GEOGRAPHIC DISTRIBUTION
Franklin Natural Resources Fund
Based on Total Net Assets
10/31/00
[BAR GRAPH]
<TABLE>
<S> <C>
U.S. 74.8%
Canada 6.6%
Europe 3.6%
Asia 3.5%
Latin America 1.7%
Africa 1.4%
Short-Term Investments &
Other Net Assets 8.4%
</TABLE>
high levels through the winter due to low product inventories and tension in the
Middle East. However, our investment thesis is predicated on an oil price in the
low $20 range that could lead to a lengthened oil cycle while still generating
significant cash flow for energy-related companies.
We are still optimistic about the prospects for natural gas. Although a high
level of drilling resulted in increased supply, we feel this new supply may be
insufficient to offset the expected increase in demand from new power generation
facilities seeking to use cleaner fuels. However, it is important to remember
that investing in the Fund involves the special risks of a non-diversified,
sector fund, as well as the currency volatility and social, political, economic
or regulatory uncertainty associated with foreign, and especially developing
market, investing.
26
<PAGE>
TOP 10 HOLDINGS
Franklin Natural Resources Fund
10/31/00
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
SECTOR, COUNTRY NET ASSETS
---------------------------------------------
<S> <C>
Conoco Inc., B 4.1%
Energy Minerals, U.S.
Exxon Mobil Corp. 4.0%
Energy Minerals, U.S.
Devon Energy Corp. 2.8%
Energy Minerals, U.S.
EOG Resources Inc. 2.5%
Energy Minerals, U.S.
Weatherford International Inc. 2.5%
Industrial Services, U.S.
Bowater Inc. 2.4%
Process Industries, U.S.
Transocean Sedco Forex Inc. 2.3%
Industrial Services, U.S.
Grey Wolf Inc. 2.3%
Industrial Services, U.S.
Chesapeake Energy Corp. 2.2%
Energy Minerals, U.S.
Enron Corp. 2.2%
Industrial Services, U.S.
</TABLE>
Thank you for your participation in Franklin Natural Resources Fund. We
appreciate your support, welcome your comments or suggestions, and look forward
to serving your investment needs in the future.
/s/ Michael R. Ward
Michael R. Ward
/s/ Stephen M. Land
Stephen M. Land
Portfolio Management Team
Franklin Natural Resources Fund
--------------------------------------------------------------------------------
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. 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.
--------------------------------------------------------------------------------
27
<PAGE>
FRANKLIN NATURAL
RESOURCES FUND
--------------------------------------------------------------------------------
CLASS A: Subject to the current, maximum 5.75% initial sales charge. Prior to
8/3/98, Fund shares were offered at a lower initial sales charge; thus actual
total returns may differ.*
ADVISOR CLASS: No initial sales charge or Rule 12b-1 fees and are available to a
limited class of investors.*
*The Fund's manager has agreed in advance to waive a portion of its management
fees, which reduces operating expenses and increases total return to
shareholders. Without this waiver, total returns would have been lower. The
waiver may be discontinued at any time upon notice to the Fund's Board of
Directors.
--------------------------------------------------------------------------------
PERFORMANCE SUMMARY AS OF 10/31/00
Six-month total return represents the change in value of an investment for the
period indicated and does not include sales charges. 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 operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
<TABLE>
<CAPTION>
CLASS A
<S> <C> <C>
Six-Month Total Return + 4.96%
Net Asset Value (NAV) $16.52 (10/31/00) $15.74 (4/30/00)
Change in NAV +$0.78
</TABLE>
<TABLE>
<CAPTION>
ADVISOR CLASS
<S> <C> <C>
Six-Month Total Return + 5.11%
Net Asset Value (NAV) $17.07 (10/31/00) $16.24 (4/30/00)
Change in NAV +$0.83
</TABLE>
28 Past performance does not guarantee future results.
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR (6/5/95)
---------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) + 29.63% + 95.58% +101.25%
Average Annual Total Return(2) + 22.21% + 13.01% + 12.79%
Value of $10,000 Investment(3) $12,221 $18,430 $18,968
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS(4) 1-YEAR 5-YEAR (6/5/95)
---------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) + 30.04% +106.16% +112.14%
Average Annual Total Return(2) + 30.04% + 15.57% + 15.18%
Value of $10,000 Investment(3) $13,004 $20,616 $21,214
</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. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not
have sales charges or Rule 12b-1 plans. Performance quotations for this class
reflect the following methods of calculation: (a) For periods prior to 1/2/97, a
restated figure is used based upon the Fund's Class A performance, excluding the
effect of Class A's maximum initial sales charge and including the effect of the
Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, an actual Advisor
Class figure is used reflecting a deduction of all charges and fees applicable
to that class. Since 1/2/97 (commencement of sales), the cumulative and average
annual total returns of Advisor Class shares were +37.20% and +8.80%.
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
--------------------------------------------------------------------------------
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 does not guarantee future results.
29
<PAGE>
FRANKLIN TECHNOLOGY FUND
[FUND CATEGORY PYRAMID GRAPHIC]
--------------------------------------------------------------------------------
Your Fund's Goal: Franklin Technology Fund seeks capital appreciation by
investing at least 65% of its total assets in equity securities of companies
expected to benefit from the development, advancement, and use of technology.
--------------------------------------------------------------------------------
We are pleased to bring you this inaugural semiannual report for Franklin
Technology Fund, which covers the six months ended October 31, 2000. During the
first part of the period, the U.S. economy grew at a blistering pace. However,
due to higher oil prices and Federal Reserve Board interest rate hikes, it
showed signs of slowing by period's end. Nevertheless, consumer spending
remained relatively strong, unemployment neared 30-year lows, and technology
continued to drive historically high productivity gains. Despite volatility for
equity markets in general and technology stocks in particular, the Fund
performed relatively well, and its Class A shares posted a +7.50% six-month
cumulative total return, as shown in the Performance Summary on page 34. In
comparison, the technology-heavy Nasdaq Composite Index fell 12.31% over the
same period.(1)
1. Source: Standard & Poor's Micropal. The Nasdaq Composite Index measures all
Nasdaq domestic and non-U.S.-based common stocks listed on The Nasdaq Stock
Market. The index is market-value weighted and includes over 4,800 companies (as
of 10/31/00). The index is unmanaged and includes reinvested dividends. One
cannot invest directly in an index, nor is an index representative of the Fund's
portfolio.
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 61.
30
<PAGE>
Several factors, including euro currency weakness, seasonal difficulties in some
technology subsectors, profit warnings from a number of technology companies and
the threat of an overall technology spending slowdown contributed to technology
stocks' general decline during the period. Intel, Lucent, Apple and Xerox, among
others, issued sales or earnings warnings, which were primarily related to
company-specific issues. And, seasonal weakness in personal computer sales
negatively impacted performance for some hardware companies. Also, the
transition from explosive "dot-com" spending to longer sales cycles and bigger
projects sent fear through the Internet software and services group. While this
transition hampered information technology stocks during the reporting period,
we believe it should lead to healthier, more sustainable growth for the market
leaders over time.
Amid widespread technology sector turbulence, SDL Inc. and EMC Corp., two of the
Fund's largest holdings, reported earnings well ahead of expectations. Both of
these stocks' earnings reports were met by positive investor reaction. Viewing
the technology market's volatility as an opportunity to purchase shares of high
quality, rapidly growing companies, we added to positions in IBM, Genentech, EMC
Corp., Applied Micro Circuits and Sun Microsystems during the period.
PORTFOLIO BREAKDOWN
Franklin Technology Fund
Based on Total Net Assets
10/31/00
[PIE CHART]
<TABLE>
<S> <C>
Electronic Technology 59.8%
Technology Services 23.9%
Health Technology 8.7%
Commercial Services 2.4%
Industrial Services 0.7%
Producer Manufacturing 0.2%
Process Industries 0.1%
Short-Term Investments &
Other Net Assets 4.2%
</TABLE>
31
<PAGE>
TOP 10 HOLDINGS
Franklin Technology Fund
Based on Total Net Assets
10/31/00
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
SECTOR NET ASSETS
--------------------------------------
<S> <C>
SDL Inc. 3.4%
Electronic Technology
Xilinx Inc. 3.0%
Electronic Technology
EMC Corp. 2.9%
Electronic Technology
Tektronix Inc. 2.7%
Electronic Technology
Nortel Networks Corp. 2.5%
Electronic Technology
Concord EFS Inc. 2.4%
Commercial Services
QLogic Corp. 2.1%
Electronic Technology
Cobalt Networks Inc. 2.1%
Electronic Technology
Analog Devices Inc. 2.0%
Electronic Technology
Cisco Systems Inc. 2.0%
Electronic Technology
</TABLE>
We're enthusiastic about long-term prospects for the technology sector in
general and Franklin Technology Fund in particular. We expect corporate
spending, electronic commerce, Internet traffic, new wireless devices, software
applications and technology outsourcing to continue to grow substantially.
Biotechnology advances and the digital information explosion also contribute to
our optimism. Technology stocks may be subject to higher volatility than the
broader market, but we believe their potential long-term returns compensate for
their increased short-term volatility. Looking forward, we'll continue to apply
our disciplined investment approach by targeting what we believe are existing
and future leaders across all segments of the broader technology industry.
32
<PAGE>
Thank you for your participation in Franklin Technology Fund. We appreciate your
support, welcome your comments, and look forward to serving your investment
needs in the years ahead.
Sincerely,
/s/ Ian Link
Ian Link
/s/ Robert R. Dean
Robert R. Dean
Portfolio Management Team
Franklin Technology Fund
--------------------------------------------------------------------------------
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. Our strategies and the Fund's portfolio composition will change
depending on market and economic conditions. Although historical performance is
no guarantee of future results, these insights may help you understand our
investment and management philosophy.
--------------------------------------------------------------------------------
33
<PAGE>
FRANKLIN TECHNOLOGY FUND
--------------------------------------------------------------------------------
CLASS A: Subject to the 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.*
*The Fund's manager and administrator have agreed in advance to waive a
portion of their respective fees. If the manager and administrator had not
taken this action, the Fund's total returns would have been lower. After April
30, 2001, the manager and administrator may end this arrangement at any time.
--------------------------------------------------------------------------------
PERFORMANCE SUMMARY AS OF 10/31/00
Six-month total return represents the change in value of an investment for the
period indicated and does not include sales charges. 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 operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
<TABLE>
<S> <C> <C>
CLASS A
Six-Month Total Return +7.50%
Net Asset Value (NAV) $10.75(10/31/00) $10.00 (5/1/00)
Change in NAV +$0.75
CLASS B
Six-Month Total Return +7.20%
Net Asset Value (NAV) $10.72(10/31/00) $10.00 (5/1/00)
Change in NAV +$0.72
CLASS C
Six-Month Total Return +6.90%
Net Asset Value (NAV) $10.69(10/31/00) $10.00 (5/1/00)
Change in NAV +$0.69
ADVISOR CLASS
Six-Month Total Return +7.60%
Net Asset Value (NAV) $10.76(10/31/00) $10.00 (5/1/00)
Change in NAV +$0.76
</TABLE>
34 Past performance does not guarantee future results.
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A (5/1/00)
----------------------------------------------------------------
<S> <C>
Cumulative Total Return(1) +21.10%
Aggregate Total Return(2) +14.14%
Value of $10,000 Investment(3) $14,414
INCEPTION
CLASS B (5/1/00)
----------------------------------------------------------------
Cumulative Total Return(1) +20.80%
Aggregate Total Return(2) +16.80%
Value of $10,000 Investment(3) $11,680
INCEPTION
CLASS C (5/1/00)
----------------------------------------------------------------
Cumulative Total Return(1) +20.50%
Aggregate Total Return(2) +18.32%
Value of $10,000 Investment(3) $11,832
INCEPTION
ADVISOR CLASS (5/1/00)
----------------------------------------------------------------
Cumulative Total Return(1) +21.10%
Aggregate Total Return(2) +21.10%
Value of $10,000 Investment(3) $12,110
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Aggregate total return represents the change in value of an investment since
inception, including the maximum sales charge(s) for that class. Since the Fund
has existed for less than one year, average annual total returns are not
provided.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and include the 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.
--------------------------------------------------------------------------------
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
Past performance does not guarantee future results. 35
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2000 -----------------------------------
(UNAUDITED) 2000 1999 1998(d)
---------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ....................... $60.44 $23.41 $26.89 $25.00
---------------------------------------------------------
Income from investment operations:
Net investment loss(a) ................................... (.13) (.23) (.10) (.05)
Net realized and unrealized gains (losses) ............... 23.41 37.32 (2.96) 1.99
---------------------------------------------------------
Total from investment operations ........................... 23.28 37.09 (3.06) 1.94
---------------------------------------------------------
Less distributions from net realized gains ................. -- (.06) (.42) (.05)
---------------------------------------------------------
Net asset value, end of period ............................. $83.72 $60.44 $23.41 $26.89
=========================================================
Total return(b) ............................................ 38.54% 158.78% (11.46)% 7.78%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .......................... $1,587,809 $918,473 $69,450 $73,546
Ratios to average net assets:
Expenses ................................................. 1.00%(c) 1.13% 1.52% 1.50%(c)
Expenses excluding waiver and payments by affiliate ...... 1.00%(c) 1.13% 1.52% 1.61%(c)
Net investment loss ...................................... (.34)%(c) (.40)% (.40)% (.44)%(c)
Portfolio turnover rate .................................... 15.54% 40.87% 97.62% 75.50%
</TABLE>
(a) Based on average shares outstanding effective year ended April 30, 2000.
(b) Total return does not reflect sales commissions or contingent deferred sales
charge, and is not annualized for periods less than one year.
(c) Annualized
(d) For the period September 15, 1997 (effective date) to April 30, 1998.
36 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000(UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND COUNTRY SHARES VALUE
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 95.8%
(a) BIOTECHNOLOGY 69.2%
3 Dimensional Pharmaceutical Inc. .................................... United States 165,000 $ 3,939,375
Abgenix Inc. ......................................................... United States 1,000,200 78,890,775
Affymetrix Inc. ...................................................... United States 125,100 6,927,413
Alexion Pharmaceuticals Inc. ......................................... United States 499,800 51,666,825
Alkermes Inc. ........................................................ United States 478,800 17,745,525
Amgen Inc. ........................................................... United States 1,325,900 76,819,331
Axys Pharmaceuticals Inc. ............................................ United States 950,000 5,225,000
Biogen Inc. .......................................................... United States 268,600 16,166,363
Celera Genomics ...................................................... United States 260,000 17,550,000
Cell Genesys Inc. .................................................... United States 255,200 5,885,550
Chiron Corp. ......................................................... United States 900,000 38,981,250
Ciphergen Biosystems Inc. ............................................ United States 84,200 2,610,200
COR Therapeutics Inc. ................................................ United States 1,325,000 74,862,500
Coulter Pharmaceutical Inc. .......................................... United States 176,200 6,750,663
Cubist Pharmaceuticals Inc. .......................................... United States 477,400 20,513,281
Diversa Corp. ........................................................ United States 119,600 3,042,325
Epoch Pharmaceuticals Inc. ........................................... United States 100,000 1,037,500
Exelixis Inc. ........................................................ United States 233,900 5,160,419
Genentech Inc. ....................................................... United States 760,000 62,700,000
Genmab A/S ........................................................... Denmark 408,900 10,756,789
Genomica Corp. ....................................................... United States 124,400 1,562,775
Genzyme Corp. ........................................................ United States 500,000 35,500,000
Gilead Sciences Inc. ................................................. United States 464,500 39,947,000
IDEC Pharmaceuticals Corp. ........................................... United States 333,600 65,427,300
ILEX Oncology Inc. ................................................... United States 475,800 17,247,750
Illumina Inc. ........................................................ United States 16,800 546,000
ImClone Systems Inc. ................................................. United States 299,800 16,395,313
Immunex Corp. ........................................................ United States 800,000 34,050,000
Immunomedics Inc. .................................................... United States 637,500 14,742,188
Incyte Genomics Inc. ................................................. United States 142,600 5,222,725
Invitrogen Corp. ..................................................... United States 776,100 59,032,106
Kosan Biosciences Inc. C ............................................. United States 449,000 6,763,063
(c) Kosan Biosciences Inc. C ............................................. United States 1,161,291 15,742,751
Large Scale Biology Corp. ............................................ United States 262,200 4,867,088
LifeCell Corp. ....................................................... United States 153,000 564,188
Luminex Corp. ........................................................ United States 190,400 5,164,600
Medarex Inc. ......................................................... United States 250,000 15,281,250
Medicines Co. ........................................................ United States 98,500 2,967,313
MedImmune Inc. ....................................................... United States 885,000 57,856,875
MGI Pharma Inc. ...................................................... United States 650,300 18,208,400
NPS Pharmaceuticals Inc. ............................................. United States 331,000 14,191,625
Orchid Biosciences Inc. .............................................. United States 850,000 17,371,875
Progenics Pharmaceuticals Inc. ....................................... United States 82,800 2,038,950
QLT PhotoTherapeutics Inc. ........................................... Canada 190,000 9,449,531
Sangstat Medical Corp. ............................................... United States 325,000 3,250,000
Sequenom Inc. ........................................................ United States 156,900 5,079,638
SuperGen Inc. ........................................................ United States 617,000 7,943,875
</TABLE>
37
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000(UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND COUNTRY SHARES VALUE
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
(a) BIOTECHNOLOGY (CONT.)
Targeted Genetics Corp. ........................................... United States 928,571 $ 9,285,710
Texas Biotechnology Corp. ......................................... United States 715,100 10,547,725
Titan Pharmaceuticals Inc. ........................................ United States 460,300 19,369,424
Transgenomic Inc. ................................................. United States 83,700 1,255,500
Trimeris Inc. ..................................................... United States 89,300 6,317,975
Variagenics Inc. .................................................. United States 116,800 1,927,200
Vertex Pharmaceuticals Inc. ....................................... United States 538,400 50,130,088
ViroPharma Inc. ................................................... United States 700,000 16,362,500
--------------
1,098,841,385
--------------
(a) CHEMICALS: AGRICULTURAL .1%
Eden Biosciences Corp. ............................................ United States 44,900 1,700,588
--------------
(a) DRUG STORE CHAINS .2%
Pharmagene PLC, 144A .............................................. United Kingdom 621,100 2,403,484
--------------
(a) ELECTRONIC EQUIPMENT/INSTRUMENTS 3.5%
Agilent Technologies Inc. ......................................... United States 166,300 7,701,769
Caliper Technologies Corp. ........................................ United States 270,000 15,221,250
Waters Corp. ...................................................... United States 443,300 32,166,956
--------------
55,089,975
--------------
MEDICAL SPECIALTIES 13.9%
(a) Argonaut Technologies Inc. ........................................ United States 73,700 1,326,600
(a),(d) BioSource International Inc. ...................................... United States 873,800 18,622,863
(a) CIMA Labs Inc. .................................................... United States 288,300 15,856,500
(a) Compugen Ltd. ..................................................... Israel 326,900 2,942,100
(a) Cygnus Inc. ....................................................... United States 400,000 3,575,000
(a) Digene Corp. ...................................................... United States 150,000 4,867,969
(a) Discovery Partners International Inc. ............................. United States 333,900 5,008,500
(a),(d) Fusion Medical Technologies Inc. .................................. United States 730,000 6,022,500
(a) Inhale Therapeutic Systems Inc. ................................... United States 1,201,800 59,789,550
(a) Molecular Devices Corp. ........................................... United States 152,600 10,434,025
(a) Oxford GlycoSciences PLC .......................................... United Kingdom 575,000 20,852,392
(a) Packard BioScience Co. ............................................ United States 610,900 9,850,763
PE Corp.-PE Biosystems Group ...................................... United States 450,000 52,650,000
(a) Serologicals Corp. ................................................ United States 151,600 1,023,300
(a) Visible Genetics Inc. ............................................. Canada 281,385 8,511,896
--------------
221,333,958
--------------
OTHER PHARMACEUTICALS 8.4%
(a) Angiotech Pharmaceuticals Inc. .................................... Canada 218,200 12,001,000
(a) Aviron ............................................................ United States 635,900 41,571,963
(a) Collateral Therapeutics Inc. ...................................... United States 278,000 7,028,181
(a) Sepracor Inc. ..................................................... United States 400,000 27,250,000
Serono SA, B ...................................................... Switzerland 25,430 22,868,756
(a) United Therapeutics Corp. ......................................... United States 437,400 23,400,900
--------------
134,120,800
--------------
</TABLE>
38
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000(UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND COUNTRY SHARES VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
(a) PACKAGED SOFTWARE .1%
Informax Inc. ....................................................... United States 41,700 $ 1,159,781
---------------
(a) SERVICES TO THE HEALTH INDUSTRY .4%
Medichem Life Sciences Inc. ......................................... United States 620,800 5,703,600
---------------
TOTAL COMMON STOCKS (COST $1,196,638,157) ........................... 1,520,353,571
---------------
PREFERRED STOCKS .6%
(a),(c) Fibrogen Inc., pfd., E(COST $10,000,002) ............................ United States 2,227,172 10,000,002
---------------
PRINCIPAL
AMOUNT
---------
CONVERTIBLE BONDS .4%
Curagen Corp., cvt., 144A, 6.00%, 2/02/07(COST $6,000,000) .......... United States 6,000,000 6,990,000
---------------
TOTAL LONG TERM INVESTMENTS (COST $1,212,638,159) ................... 1,537,343,573
---------------
SHARES
------
SHORT TERM INVESTMENTS 3.1%
(b) Franklin Institutional Fiduciary Trust Money Market Portfolio
(COST $49,331,140) United States 49,331,140 49,331,140
---------------
TOTAL INVESTMENTS (COST $1,261,969,299) 99.9% ....................... 1,586,674,713
OTHER ASSETS, LESS LIABILITIES .1% .................................. 1,134,438
---------------
NET ASSETS 100.0% ................................................... $ 1,587,809,151
---------------
</TABLE>
(a) Non-income producing
(b) The Franklin Institutional Fiduciary Trust Money Market Portfolio is
managed by Franklin Advisers, Inc.
(c) See Note 6 regarding restricted securities.
(d) The Investment Company Act of 1940 defines affiliated companies as
investments in portfolio companies in which the fund owns 5% or more of the
outstanding voting securities. Investments in affiliated companies at
October 31, 2000 were $24,645,363.
See notes to financial statements. 39
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN GLOBAL COMMUNICATIONS FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2000 ---------------------------------------------------------
(UNAUDITED) 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $19.98 $16.97 $17.36 $14.46 $14.28 $12.23
-----------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ........................ .01 .13 .27 .33 .42 .37
Net realized and unrealized gains (losses) ...... (2.40) 6.20 .31 4.69 1.35 2.39
-----------------------------------------------------------------------------
Total from investment operations .................. (2.39) 6.33 .58 5.02 1.77 2.76
-----------------------------------------------------------------------------
Less distributions from:
Net investment income ........................... -- (.35) (.19) (.37) (.38) (.39)
Net realized gains .............................. -- (2.97) (.78) (1.75) (1.21) (.32)
-----------------------------------------------------------------------------
Total distributions ............................... -- (3.32) (.97) (2.12) (1.59) (.71)
-----------------------------------------------------------------------------
Net asset value, end of period .................... $17.59 $19.98 $16.97 $17.36 $14.46 $14.28
=============================================================================
Total return(b) ................................... (11.96)% 38.93% 4.02% 37.02% 12.94% 23.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $254,527 $291,103 $199,824 $226,594 $174,023 $167,225
Ratios to average net assets:
Expenses ........................................ .98%(c) .99% 1.05% 1.03% 1.00% 1.04%
Net investment income ........................... .08%(c) .64% 1.55% 2.02% 2.82% 2.85%
Portfolio turnover rate ........................... 55.07% 132.25% 68.50% 45.51% 47.55% 50.51%
</TABLE>
(a) Based on average shares outstanding effective year ended April 30, 2000.
(b) Total return does not reflect sales commissions or contingent deferred sales
charge, and is not annualized for periods less than one year.
(c) Annualized
40
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN GLOBAL COMMUNICATIONS FUND (CONT.)
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2000 -------------------------
(UNAUDITED) 2000 1999(d)
----------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ..................... $19.80 $16.92 $15.84
---------------------------------------------
Income from investment operations:
Net investment income (loss)(a) ........................ (.06) (.08) .02
Net realized and unrealized gains (losses) ............. (2.38) 6.25 1.06
------------------------------------------------
Total from investment operations ......................... (2.44) 6.17 1.08
------------------------------------------------
Less distributions from:
Net investment income .................................. -- (.32) --
Net realized gains ..................................... -- (2.97) --
------------------------------------------------
Total distributions ...................................... -- (3.29) --
------------------------------------------------
Net asset value, end of period ........................... $17.36 $19.80 $16.92
================================================
Total return(b) .......................................... (12.28)% 37.98% 6.82%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ........................ $8,041 $4,338 $79
Ratios to average net assets:
Expenses ............................................... 1.74%(c) 1.74% 1.80%(c)
Net investment income (loss) ........................... (.66)%(c) (.38)% .83%(c)
Portfolio turnover rate .................................. 55.07% 132.25% 68.50%
</TABLE>
(a) Based on average shares outstanding effective year ended April 30, 2000.
(b) Total return does not reflect contingent deferred sales charge, and is not
annualized for periods less than one year.
(c) Annualized
(d) For the period January 1, 1999 (effective date) to April 30, 1999.
41
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN GLOBAL COMMUNICATIONS FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2000 --------------------------------------------------------
(UNAUDITED) 2000 1999 1998 1997 1996
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $19.79 $16.85 $17.25 $14.37 $14.24 $12.23
----------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a) ................. (.06) (.03) .14 .24 .32 .37
Net realized and unrealized gains (losses) ...... (2.37) 6.16 .32 4.66 1.33 2.32
----------------------------------------------------------------------------
Total from investment operations .................. (2.43) 6.13 .46 4.90 1.65 2.69
----------------------------------------------------------------------------
Less distributions from:
Net investment income ........................... -- (.22) (.08) (.27) (.31) (.36)
Net realized gains .............................. -- (2.97) (.78) (1.75) (1.21) (.32)
----------------------------------------------------------------------------
Total distributions ............................... -- (3.19) (.86) (2.02) (1.52) (.68)
----------------------------------------------------------------------------
Net asset value, end of period .................... $17.36 $19.79 $16.85 $17.25 $14.37 $14.24
============================================================================
Total return(b) ................................... (12.28)% 37.93% 3.19% 36.21% 12.04% 22.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $33,026 $33,216 $16,807 $16,324 $8,467 $2,727
Ratios to average net assets:
Expenses ........................................ 1.74%(c) 1.74% 1.80% 1.78% 1.77% 1.81%
Net investment income (loss) .................... (.68)%(c) (.14)% .81% 1.29% 1.98% 2.10%
Portfolio turnover rate ........................... 55.07% 132.25% 68.50% 45.51% 47.55% 50.51%
</TABLE>
(a) Based on average shares outstanding effective year ended April 30, 2000.
(b) Total return does not reflect sales commissions or contingent deferred
sales charge, and is not annualized for periods less than one year.
(c) Annualized
42 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000(UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN GLOBAL COMMUNICATIONS FUND COUNTRY SHARES VALUE
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 90.0%
(a) BROADCASTING 2.3%
Clear Channel Communications Inc. .................................... United States 62,000 $ 3,723,875
Univision Communications Inc., A ..................................... United States 80,400 3,075,300
------------
6,799,175
------------
(a) CABLE/SATELLITE TV 2.9%
Charter Communications Inc., A ....................................... United States 237,400 4,629,300
Comcast Corp., A ..................................................... United States 100,700 4,103,525
------------
8,732,825
------------
(a) COMPUTER COMMUNICATIONS 5.3%
Cisco Systems Inc. ................................................... United States 74,500 4,013,688
Cosine Communications Inc. ........................................... United States 1,800 59,513
Extreme Networks Inc. ................................................ United States 22,100 1,832,919
Foundry Networks Inc. ................................................ United States 40,000 2,657,500
Juniper Networks Inc. ................................................ United States 23,100 4,504,500
Redback Networks Inc. ................................................ United States 25,900 2,756,731
------------
15,824,851
------------
(a) COMPUTER PERIPHERALS 1.3%
EMC Corp. ............................................................ United States 44,200 3,936,563
------------
(a) DATA PROCESSING SERVICES 1.1%
Amdocs Ltd. .......................................................... United States 50,300 3,260,069
------------
ELECTRICAL PRODUCTS 1.1%
Furukawa Electric Co. Ltd. ........................................... Japan 120,000 3,154,135
------------
(a) ELECTRONIC EQUIPMENT/INSTRUMENTS 3.3%
Agilent Technologies Inc. ............................................ United States 106,000 4,909,125
Tektronix Inc. ....................................................... United States 66,400 4,731,000
------------
9,640,125
------------
MAJOR TELECOMMUNICATIONS 20.3%
(a) Alaska Communications Systems Holdings Inc. .......................... United States 51,400 350,163
Alltel Corp. ......................................................... United States 80,500 5,187,219
AT&T Corp. ........................................................... United States 156,500 3,628,844
BellSouth Corp. ...................................................... United States 201,400 9,730,138
(a) Broadwing Inc. ....................................................... United States 110,800 3,130,100
Cable & Wireless PLC ................................................. United Kingdom 225,000 3,198,510
Korea Telecom Corp. .................................................. South Korea 65,560 3,861,556
Korea Telecom Corp., ADR ............................................. South Korea 500 18,438
(a) NTL Inc. ............................................................. United States 97,500 4,283,906
SBC Communications Inc. .............................................. United States 125,000 7,210,938
Sprint Corp. (FON Group) ............................................. United States 158,000 4,029,000
Telecom Italia SpA ................................................... Italy 960,000 5,215,799
(a) Telecomunicacoes Brasileiras SA, ADR ................................. Brazil 9,500 149
(a) Telefonica SA,ADR .................................................... Spain 70,500 4,084,594
(a) Worldcom Inc. ........................................................ United States 251,000 5,961,250
------------
59,890,604
------------
</TABLE>
43
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN GLOBAL COMMUNICATIONS FUND COUNTRY SHARES VALUE
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
(a) PACKAGED SOFTWARE
Avaya Inc. ........................................................... United States 10,080 $ 135,450
-------------
(a) SEMICONDUCTORS 6.5%
Analog Devices Inc. .................................................. United States 51,200 3,328,000
Cypress Semiconductor Corp. .......................................... United States 90,000 3,369,375
Infineon Technologies AG, ADR ........................................ Germany 60,100 2,576,788
Intersil Holding Corp. ............................................... United States 92,900 4,453,394
Triquint Semiconductor Inc ........................................... United States 95,000 3,639,688
Vitesse Semiconductor Corp. .......................................... United States 25,200 1,762,425
-------------
19,129,670
-------------
SPECIALTY TELECOMMUNICATIONS 12.2%
(a) Citizens Communications Co., B ....................................... United States 267,900 3,884,550
(a) COLT Telecom Group PLC ............................................... United Kingdom 95,000 3,022,376
Embratel Participacoes SA, ADR, pfd .................................. Brazil 151,000 2,444,313
(a) General Motors Corp., H .............................................. United States 151,000 4,892,400
(a) Global Crossing Ltd .................................................. Bermuda 216,500 5,114,813
(a) McLeodUSA Inc. ....................................................... United States 225,000 4,331,250
(a) Time Warner Telecom Inc., A .......................................... United States 119,600 7,131,150
(a) XO Communications Inc. ............................................... United States 152,600 5,147,866
-------------
35,968,718
-------------
TELECOMMUNICATIONS EQUIPMENT 19.4%
(a) ADC Telecommunications Inc. .......................................... United States 107,900 2,306,363
(a) Advanced Fibre Communications Inc .................................... United States 80,800 2,631,050
(a) CIENA Corp. .......................................................... United States 70,400 7,400,800
(a) Comverse Technology Inc .............................................. United States 38,300 4,280,025
Corning Inc. ......................................................... United States 126,900 9,707,850
Lucent Technologies Inc. ............................................. United States 120,965 2,819,997
Motorola Inc ......................................................... United States 264,600 6,598,463
(a) NICE Systems Ltd., ADR ............................................... Israel 17,000 794,750
Nokia Corp., ADR ..................................................... Finland 128,900 5,510,475
Nortel Networks Corp. ................................................ Canada 73,200 3,330,600
(a) Polycom Inc. ......................................................... United States 60,000 3,900,000
Scientific-Atlanta Inc. .............................................. United States 86,000 5,885,625
Telefonaktiebolaget LM Ericsson AB, ADR, B ........................... Sweden 161,100 2,235,263
-------------
57,401,261
-------------
WIRELESS COMMUNICATIONS 14.3%
(a) China Mobile Ltd., ADR ............................................... China 120,500 3,690,313
(a) Leap Wireless International Inc ...................................... United States 128,700 6,402,825
(a) Metrocall Inc. ....................................................... United States 306,500 392,703
(a) Nextel Communications Inc., A ........................................ United States 97,800 3,759,188
(a) Nextel Partners Inc., A .............................................. United States 127,300 3,118,850
SK Telecom Co. Ltd., ADR ............................................. South Korea 180,000 4,511,250
(a) U.S. Cellular Corp. .................................................. United States 25,200 1,612,800
Vodafone Group PLC, ADR .............................................. United Kingdom 176,200 7,499,513
</TABLE>
44
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000(UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN GLOBAL COMMUNICATIONS FUND COUNTRY SHARES VALUE
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
WIRELESS COMMUNICATIONS (CONT.)
(a) VoiceStream Wireless Corp ........................................ United States 52,800 $ 6,943,200
(a) Western Wireless Corp., A ........................................ United States 90,600 4,303,491
-------------
42,234,133
-------------
TOTAL COMMON STOCKS (COST $237,099,076) .......................... 266,107,579
-------------
PREFERRED STOCKS .4%
(a),(c) Kestrel Solutions, pfd., D (COST $1,249,994) ..................... United States 95,932 1,249,994
-------------
TOTAL LONG TERM INVESTMENTS (COST $238,349,070) .................. 267,357,573
-------------
SHORT TERM INVESTMENTS 6.3%
(b) Franklin Institutional Fiduciary Trust Money Market
Portfolio (COST $18,505,272) ..................................... United States 18,505,272 18,505,272
-------------
TOTAL INVESTMENTS (COST $256,854,342) 96.7% ...................... 285,862,845
OTHER ASSETS, LESS LIABILITIES 3.3% .............................. 9,731,180
-------------
NET ASSETS 100.0% ................................................ $ 295,594,025
=============
</TABLE>
(a) Non-income producing
(b) The Franklin Institutional Fiduciary Trust Money Market Portfolio is managed
by Franklin Advisers, Inc.
(c) See Note 6 regarding restricted securities.
See notes to financial statements. 45
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN GLOBAL HEALTH CARE FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2000 ---------------------------------------------------------
(UNAUDITED) 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $20.29 $13.88 $19.28 $16.11 $19.34 $11.45
-------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a) ................. (.05) (.12) (.16) (.14) (.06) .11
Net realized and unrealized gains (losses) ...... 7.92 6.53 (5.23) 4.58 (2.75) 8.96
-------------------------------------------------------------------------
Total from investment operations .................. 7.87 6.41 (5.39) 4.44 (2.81) 9.07
-------------------------------------------------------------------------
Less distributions from:
Net investment income ........................... -- -- -- (.09) (.04) (.13)
Net realized gains .............................. -- -- (.01) (1.18) (.38) (1.05)
-------------------------------------------------------------------------
Total distributions ............................... -- -- (.01) (1.27) (.42) (1.18)
-------------------------------------------------------------------------
Net asset value, end of period .................... $28.16 $20.29 $13.88 $19.28 $16.11 $19.34
=========================================================================
Total return(b) ................................... 38.74% 46.18% (27.95)% 28.22% (14.71)% 82.78%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $176,750 $90,563 $74,252 $176,545 $150,653 $108,914
Ratios to average net assets:
Expenses ........................................ 1.24%(c) 1.52% 1.34% 1.15% 1.14% .73%
Expenses excluding waiver and payments
by affiliate ................................... 1.24%(c) 1.52% 1.34% 1.15% 1.14% 1.16%
Net investment income (loss) .................... (.40)%(c) (.70)% (.72)% (.67)% (.39)% .50%
Portfolio turnover rate ........................... 69.45% 123.48% 66.54% 66.84% 73.17% 54.78%
</TABLE>
(a) Based on average shares outstanding effective year ended April 30, 2000.
(b) Total return does not reflect sales commissions or contingent deferred sales
charge, and is not annualized for periods less than one year.
(c) Annualized
46
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN GLOBAL HEALTH CARE FUND (CONT.)
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2000 -------------------------
(UNAUDITED) 2000 1999(d)
----------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period........................ $20.09 $13.84 $16.97
----------------------------------------------
Income from investment operations:
Net investment loss(a).................................... (.15) (.26) (.03)
Net realized and unrealized gains (losses)................ 7.82 6.51 (3.10)
----------------------------------------------
Total from investment operations............................ 7.67 6.25 (3.13)
----------------------------------------------
Net asset value, end of period.............................. $27.76 $20.09 $13.84
==============================================
Total return(b)............................................. 38.13% 45.16% (18.44)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $10,692 $3,037 $208
Ratios to average net assets:
Expenses.................................................. 2.00%(c) 2.27% 1.84%(c)
Net investment loss....................................... (1.18)%(c) (1.44)% (1.22)%(c)
Portfolio turnover rate..................................... 69.45% 123.48% 66.54%
</TABLE>
(a) Based on average shares outstanding effective year ended April 30, 2000.
(b) Total return does not reflect contingent deferred sales charge, and is not
annualized for periods less than one year.
(c) Annualized
(d) For the period January 1, 1999 (effective date) to April 30, 1999.
47
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN GLOBAL HEALTH CARE FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2000 -----------------------------------------------
(UNAUDITED) 2000 1999 1998 1997(d)
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $19.89 $13.71 $19.17 $16.07 $17.37
-------------------------------------------------------------------
Income from investment operations:
Net investment loss(a) .......................... (.14) (.23) (.29) (.20) (.07)
Net realized and unrealized gains (losses) ...... 7.75 6.41 (5.16) 4.48 (.85)
-------------------------------------------------------------------
Total from investment operations .................. 7.61 6.18 (5.45) 4.28 (.92)
-------------------------------------------------------------------
Less distributions from net realized gains ........ -- -- (.01) (1.18) (.38)
-------------------------------------------------------------------
Net asset value, end of period .................... $27.50 $19.89 $13.71 $19.17 $16.07
===================================================================
Total return(b) ................................... 38.21% 45.08% (28.42)% 27.22% (5.47)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $35,010 $20,398 $13,747 $25,321 $10,099
Ratios to average net assets:
Expenses ........................................ 2.00%(c) 2.27% 2.07% 1.90% 1.92%(c)
Net investment loss ............................. (1.14)%(c) (1.44)% (1.45)% (1.44)% (1.29)%(c)
Portfolio turnover rate ........................... 69.45% 123.48% 66.54% 66.84% 73.17%
</TABLE>
(a) Based on average shares outstanding effective year ended April 30, 2000.
(b) Total return does not reflect sales commissions or contingent deferred sales
charge, and is not annualized for periods less than one year.
(c) Annualized
(d) For the period September 3, 1996 (effective date) to April 30, 1997.
48 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN GLOBAL HEALTH CARE FUND COUNTRY WARRANTS VALUE
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS 95.8%
(a)BIOTECHNOLOGY 22.4%
Abgenix Inc. ............................................................ United States 69,000 $ 5,442,375
Amgen Inc. .............................................................. United States 92,900 5,382,394
Biogen Inc. ............................................................. United States 86,700 5,218,256
COR Therapeutics Inc. ................................................... United States 126,700 7,158,550
Cubist Pharmaceuticals Inc. ............................................. United States 84,800 3,643,750
Genentech Inc. .......................................................... United States 90,200 7,441,500
Gilead Sciences Inc. .................................................... United States 22,300 1,917,800
Incyte Genomics Inc. .................................................... United States 40,600 1,486,976
Large Scale Biology Corp. ............................................... United States 42,300 785,194
Luminex Corp. ........................................................... United States 62,000 1,681,750
Orchid Biosciences Inc. ................................................. United States 80,100 1,637,044
Titan Pharmaceuticals Inc. .............................................. United States 54,400 2,289,152
Vertex Pharmaceuticals Inc. ............................................. United States 48,000 4,469,250
ViroPharma Inc. ......................................................... United States 50,000 1,168,750
-------------
49,722,741
-------------
(a)DRUG STORE CHAINS .1%
Pharmagene PLC, 144A .................................................... United Kingdom 83,900 324,670
-------------
(a)ELECTRONIC EQUIPMENT/INSTRUMENTS 1.8%
Agilent Technologies Inc. ............................................... United States 28,700 1,329,169
Caliper Technologies Corp. .............................................. United States 48,100 2,711,638
-------------
4,040,807
-------------
GENERIC PHARMACEUTICALS 6.1%
Alpharma Inc., A ........................................................ United States 156,500 6,074,146
(a)Watson Pharmaceuticals Inc. ............................................. United States 119,200 7,457,450
-------------
13,531,596
-------------
HOSPITAL/NURSING MANAGEMENT 10.7%
(a)Beverly Enterprises Inc. ................................................ United States 500,000 2,500,000
HCA-The Healthcare Co. .................................................. United States 143,000 5,711,063
(a)Health Management Associates Inc., A .................................... United States 94,200 1,866,338
(a)Paracelsus Healthcare Corp. ............................................. United States 43,365 911
(a)Tenet Healthcare Corp. .................................................. United States 120,000 4,717,500
(a)Triad Hospitals Inc. .................................................... United States 174,000 4,828,500
(a)Universal Health Services Inc., B ....................................... United States 50,800 4,260,850
-------------
23,885,162
-------------
HOUSEHOLD/PERSONAL CARE
Givaudan AG ............................................................. Switzerland 100 23,970
-------------
MAJOR PHARMACEUTICALS 22.1%
Abbott Laboratories ..................................................... United States 160,600 8,481,688
American Home Products Corp. ............................................ United States 115,000 7,302,500
Bristol-Myers Squibb Co. ................................................ United States 150,900 9,195,469
Glaxo Wellcome PLC, ADR ................................................. United Kingdom 34,200 1,990,013
Pfizer Inc. ............................................................. United States 218,500 9,436,470
Pharmacia Corp. ......................................................... United States 70,350 3,869,250
</TABLE>
49
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN GLOBAL HEALTH CARE FUND COUNTRY WARRANTS VALUE
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
MAJOR PHARMACEUTICALS (CONT.)
Roche Holding AG ........................................................ Switzerland 100 $ 913,186
Schering-Plough Corp. ................................................... United States 154,500 7,985,719
-------------
49,174,295
-------------
MANAGED HEALTH CARE 5.2%
CIGNA Corp. ............................................................. United States 49,200 5,999,940
UnitedHealth Group Inc. ................................................. United States 51,900 5,676,563
-------------
11,676,503
-------------
MEDICAL SPECIALTIES 21.8%
(a)Argonaut Technologies Inc. .............................................. United States 65,100 1,171,800
Baxter International Inc. ............................................... United States 43,000 3,534,063
(a)CIMA Labs Inc. .......................................................... United States 104,900 5,769,500
(a)Compugen Ltd. ........................................................... Israel 2,100 18,900
Cooper Cos. Inc. ........................................................ United States 46,000 1,644,500
(a)Cryolife Inc. ........................................................... United States 126,600 5,040,263
(a)Digene Corp. ............................................................ United States 50,800 1,648,619
(a)Guidant Corp. ........................................................... United States 40,000 2,117,500
(a)INAMED Corp. ............................................................ United States 82,400 2,307,200
(a)Inhale Therapeutic Systems Inc. ......................................... United States 104,000 5,174,000
(a)Inverness Medical Technology Inc. ....................................... United States 73,500 2,021,250
Medtronic Inc. .......................................................... United States 40,000 2,172,500
(a)Molecular Devices Corp. ................................................. United States 37,500 2,564,063
Nycomed Amersham PLC .................................................... United Kingdom 350,000 3,153,497
(a)ORATEC Interventions Inc. ............................................... United States 233,000 2,330,000
(a)Ortec International Inc. ................................................ United States 222,222 2,277,776
(a)Pharsight Corp. ......................................................... United States 16,000 124,000
(a)Serologicals Corp. ...................................................... United States 103,350 697,613
(a)Staar Surgical Co. ...................................................... United States 189,300 2,981,475
(a)Visible Genetics Inc. ................................................... Canada 54,100 1,636,525
-------------
48,385,044
-------------
(a)MEDICAL/NURSING SERVICES .7%
Renal Care Group Inc. ................................................... United States 70,000 1,645,000
-------------
OTHER PHARMACEUTICALS 3.0%
(a)Angiotech Pharmaceuticals Inc. .......................................... Canada 30,600 1,683,000
FH Faulding & Co. Ltd. .................................................. Australia 172,615 912,294
Serono SA, B ............................................................ Switzerland 4,500 4,046,772
-------------
6,642,066
-------------
(a)SERVICES TO THE HEALTH INDUSTRY 1.9%
CareScience Inc. ........................................................ United States 87,900 258,206
Laboratory Corp. of America Holdings .................................... United States 9,200 1,240,850
Per-Se Technologies Inc., wts., 7/08/03 ................................. United States 1,719 --
Pharmaceutical Product Development Inc. ................................. United States 85,000 2,661,563
-------------
4,160,619
-------------
TOTAL COMMON STOCKS AND WARRANTS (COST $164,969,012) .................... 213,212,473
-------------
</TABLE>
50
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN GLOBAL HEALTH CARE FUND COUNTRY WARRANTS VALUE
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKS .7%
(a),(c) Masimo Corp., pfd., F (COST $1,500,004) United States 136,364 $ 1,500,004
-------------
TOTAL LONG TERM INVESTMENTS (COST $166,469,016) 214,712,477
-------------
SHORT TERM INVESTMENTS 3.9%
(b) Franklin Institutional Fiduciary Trust Money Market
Portfolio (COST $8,600,568) United States 8,600,568 8,600,568
-------------
TOTAL INVESTMENTS (COST $175,069,584) 100.4% 223,313,045
OTHER ASSETS, LESS LIABILITIES (.4)% (860,029)
-------------
NET ASSETS 100.0% $ 222,453,016
=============
</TABLE>
(a) Non-income producing
(b) The Franklin Institutional Fiduciary Trust Money Market Portfolio is managed
by Franklin Advisers, Inc.
(c) See Note 6 regarding restricted securities.
See notes to financial statements. 51
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN NATURAL RESOURCES FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2000 ---------------------------------------------------------
(UNAUDITED) 2000 1999 1998 1997 1996(d)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............ $15.74 $13.25 $15.46 $14.07 $13.14 $10.00
-----------------------------------------------------------------------------
Income from investment operations:
Net investment income(a)....................... .05 .05 .12 .10 .09 .08
Net realized and unrealized gains (losses) .... .73 2.52 (2.21) 2.26 1.25 3.22
-----------------------------------------------------------------------------
Total from investment operations ................ .78 2.57 (2.09) 2.36 1.34 3.30
-----------------------------------------------------------------------------
Less distributions from:
Net investment income ......................... -- (.08) (.12) (.09) (.09) (.06)
Net realized gains ............................ -- -- -- (.88) (.32) (.10)
-----------------------------------------------------------------------------
Total distributions ............................. -- (.08) (.12) (.97) (.41) (.16)
-----------------------------------------------------------------------------
Net asset value, end of period .................. $16.52 $15.74 $13.25 $15.46 $14.07 $13.14
=============================================================================
Total return(b) ................................. 4.96% 19.47% (13.42)% 17.57% 10.23% 33.36%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............... $49,819 $41,106 $44,014 $62,274 $45,386 $9,909
Ratios to average net assets:
Expenses ...................................... 1.00%(c) .98% .97% .96% .98% .99%(c)
Expenses excluding waiver and payments
by affiliate ................................. 1.32%(c) 1.43% 1.47% 1.31% 1.31% 1.77%(c)
Net investment income ......................... .61%(c) .39% .97% .67% .72% 1.16%(c)
Portfolio turnover rate ......................... 23.70% 81.52% 74.03% 72.93% 46.31% 59.04%
</TABLE>
(a) Based on average shares outstanding effective year ended April 30, 2000.
(b) Total return does not reflect sales commissions or contingent deferred sales
charge, and is not annualized for periods less than one year.
(c) Annualized
(d) For the period June 5, 1995 (effective date) to April 30, 1996.
52
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN NATURAL RESOURCES FUND (CONT.)
<TABLE>
<CAPTION>
ADVISOR CLASS
-----------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2000 ------------------------------------------
(UNAUDITED) 2000 1999 1998 1997(d)
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period..................... $16.24 $13.63 $15.48 $14.07 $14.66
-----------------------------------------------------------------
Income from investment operations:
Net investment income(a)............................... .08 .07 .19 .23 --
Net realized and unrealized gains (losses)............. .75 2.63 (1.85) 2.20 (.59)
-----------------------------------------------------------------
Total from investment operations......................... .83 2.70 (1.66) 2.43 (.59)
-----------------------------------------------------------------
Less distributions from:
Net investment income.................................. -- (.09) (.19) (.14) --
Net realized gains..................................... -- -- -- (.88) --
-----------------------------------------------------------------
Total distributions...................................... -- (.09) (.19) (1.02) --
-----------------------------------------------------------------
Net asset value, end of period........................... $17.07 $16.24 $13.63 $15.48 $14.07
=================================================================
Total return(b) ......................................... 5.11% 19.91% (10.48)% 18.11% (4.02)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................ $10,317 $8,791 $319 $892 $1,123
Ratios to average net assets:
Expenses............................................... .65%(c) .65% .65% .64% .64%(c)
Expenses excluding waiver and payments by affiliate.... 1.00%(c) 1.10% 1.15% 1.03% .86%(c)
Net investment income.................................. .93%(c) .49% 1.29% 1.02% 1.03%(c)
Portfolio turnover rate.................................. 23.70% 81.52% 74.03% 72.93% 46.31%
</TABLE>
(a) Based on average shares outstanding effective year ended April 30, 2000.
(b) Total return is not annualized for periods less than one year.
(c) Annualized
(d) For the period January 2, 1997 (effective date) to April 30, 1997.
See notes to financial statements. 53
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000(UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 88.9%
ENERGY MINERALS 36.9%
Anadarko Petroleum Corp. ............................................... United States 14,287 $ 915,082
(a) Barrett Resources Corp. ................................................ United States 34,100 1,240,388
(a) Basin Exploration Inc. ................................................. United States 60,900 1,206,581
Cabot Oil & Gas Corp., A ............................................... United States 52,000 1,020,500
(a) Callon Petroleum Co. ................................................... United States 17,000 259,250
(a) Chesapeake Energy Corp. ................................................ United States 238,300 1,340,438
Conoco Inc., B ......................................................... United States 91,097 2,476,700
Devon Energy Corp. ..................................................... United States 32,886 1,657,454
EOG Resources Inc....................................................... United States 38,400 1,512,000
Exxon Mobil Corp. ...................................................... United States 27,008 2,408,776
(a) Gulf Indonesia Resources Ltd. .......................................... Indonesia 40,000 435,000
(a) Newfield Exploration Co. ............................................... United States 28,400 1,072,100
(a) Pennaco Energy Inc. .................................................... United States 68,000 845,750
(a) Petroleo Brasileiro SA (Petrobras),ADR ................................. Brazil 35,000 1,017,188
Shell Transport & Trading Co. PLC, N.Y. shs. ........................... United Kingdom 26,500 1,303,469
(a) Spinnaker Exploration Co. .............................................. United States 15,000 453,750
(a) Tesoro Petroleum Corp. ................................................. United States 55,000 570,625
Texaco Inc. ............................................................ United States 11,500 679,219
(a) Triton Energy Ltd. ..................................................... United States 18,000 553,500
Unocal Corp. ........................................................... United States 17,000 580,125
Valero Energy Corp. .................................................... United States 20,000 661,250
------------
22,209,145
------------
INDUSTRIAL SERVICES 27.6%
(a) Atwood Oceanics Inc. ................................................... United States 7,000 234,938
Baker Hughes Inc. ...................................................... United States 34,900 1,199,688
(a) Cal Dive International Inc. ............................................ United States 25,100 1,248,725
(a) Casella Waste Systems Inc., A .......................................... United States 24,700 214,581
Diamond Offshore Drilling Inc. ......................................... United States 14,000 483,875
Dynegy Inc. ............................................................ United States 17,200 796,575
Enron Corp. ............................................................ United States 15,900 1,304,794
(a) Grey Wolf Inc. ......................................................... United States 295,000 1,364,375
(a) Gulf Island Fabrication Inc. ........................................... United States 37,000 483,313
Halliburton Co. ........................................................ United States 4,800 177,900
(a) Marine Drilling Cos. Inc. .............................................. United States 25,000 596,875
(a) Oceaneering International Inc. ......................................... United States 30,000 421,875
(a) Parker Drilling Co. .................................................... United States 175,000 1,050,000
(a) Stuart Energy Systems Corp. ............................................ Canada 33,100 500,629
(a) Superior Energy Services Inc. .......................................... United States 110,000 990,000
Transocean Sedco Forex Inc. ............................................ United States 26,500 1,404,500
(a) Trico Marine Services Inc. ............................................. United States 61,500 1,022,438
(a) Universal Compression Holdings Inc. .................................... United States 14,100 407,138
(a) Varco International Inc. ............................................... United States 37,255 642,649
(a) Weatherford International Inc. ......................................... United States 40,300 1,470,950
Williams Cos. Inc. ..................................................... United States 14,100 589,556
------------
16,605,374
------------
</TABLE>
54
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000(UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
NON-ENERGY MINERALS 8.0%
Alcoa Inc. .............................................................. United States 18,000 $ 516,375
Barrick Gold Corp. ...................................................... Canada 30,100 402,588
De Beers Consolidated Mines AG, ADR ..................................... South Africa 29,400 819,525
Franco-Nevada Mining Corp. Ltd .......................................... Canada 36,000 329,994
(a) Freeport-McMoRan Copper & Gold Inc., A .................................. United States 11,700 90,675
Ispat International NV, A, N.Y. shs. .................................... Netherlands 136,700 529,713
Newmont Mining Corp. .................................................... United States 11,135 151,018
(a) NS Group Inc. ........................................................... United States 47,500 406,125
Pohang Iron & Steel Co. Ltd., ADR ....................................... South Korea 51,100 808,019
Rio Tinto PLC ........................................................... United Kingdom 18,600 300,871
(a) Stillwater Mining Co. ................................................... United States 16,200 469,800
------------
4,824,703
------------
PROCESS INDUSTRIES 14.3%
Abitibi-Consolidated Inc. ............................................... Canada 102,000 892,500
(a) Asia Pulp & Paper Co. Ltd., ADR ......................................... Indonesia 69,300 121,275
Bowater Inc. ............................................................ United States 26,600 1,439,721
(a) China Petroleum & Chemical Corp., ADR ................................... China 39,900 783,038
Eastman Chemical Co. .................................................... United States 11,000 471,625
Georgia-Pacific Corp. ................................................... United States 23,000 618,125
Nova Chemicals Corp. .................................................... Canada 33,000 672,375
(a) Packaging Corp. of America .............................................. United States 55,100 809,281
Potash Corp. of Saskatchewan Inc. ....................................... Canada 8,285 491,922
Praxair Inc. ............................................................ United States 12,000 447,000
(a) Smurfit Stone Container Corp. ........................................... United States 47,500 641,250
Union Carbide Corp. ..................................................... United States 27,300 1,173,900
------------
8,562,012
------------
(a) PRODUCER MANUFACTURING 1.2%
(c) Hydrogenics Corp. ....................................................... Canada 10,400 125,450
Westport Innovations Inc. ............................................... Canada 51,000 567,668
------------
693,118
------------
(a) UTILITIES .9%
Southern Energy Inc. .................................................... United States 19,300 525,925
TNPC Inc. ............................................................... United States 1,200 19,950
------------
545,875
------------
TOTAL COMMON STOCKS (COST $48,812,637)................................... 53,440,227
------------
CONVERTIBLE PREFERRED STOCKS 2.7%
IMC Global/Merrill Lynch, 6.25%, cvt. pfd., IGL ......................... United States 77,000 1,020,250
Enron Corp., 7.00%, cvt. pfd. ........................................... United States 17,500 598,281
------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $1,518,736) .................... 1,618,531
------------
TOTAL LONG TERM INVESTMENTS (COST $50,331,373) .......................... 55,058,758
------------
</TABLE>
55
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS 7.8%
(b) Franklin Institutional Fiduciary Trust Money Market
Portfolio (COST $4,718,690) .................................... United States 4,718,690 $ 4,718,690
-------------
TOTAL INVESTMENTS (COST $55,050,063) 99.4% ...................... 59,777,448
OTHER ASSETS, LESS LIABILITIES .6% .............................. 358,163
-------------
NET ASSETS 100.0% ............................................... $ 60,135,611
==============
</TABLE>
(a) Non-income producing
(b) The Franklin Institutional Fiduciary Trust Money Market Portfolio is managed
by Franklin Advisers, Inc.
(c) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
56 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights
FRANKLIN TECHNOLOGY FUND
<TABLE>
<CAPTION>
CLASS A
-------
SIX MONTHS ENDED
OCTOBER 31, 2000
(UNAUDITED)
-----------
<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(a) ........................................ (.05)
Net realized and unrealized gains ............................. .80
-------
Total from investment operations ............................... .75
-------
Net asset value, end of period ................................. $ 10.75
=======
Total return(b) ................................................ 7.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............................. $42,286
Ratios to average net assets:
Expenses ...................................................... 1.40%(c)
Expenses excluding waiver and payments by affiliate ........... 1.54%(c)
Net investment loss ........................................... (.82)%(c)
Portfolio turnover rate ........................................ 82.47%
</TABLE>
(a) Based on average shares outstanding.
(b) Total return does not reflect sales commissions or contingent deferred
sales charge, and is not annualized for periods less than one year.
(c) Annualized
57
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN TECHNOLOGY FUND (CONT.)
<TABLE>
<CAPTION>
CLASS B
-------
SIX MONTHS ENDED
OCTOBER 31, 2000
(UNAUDITED)
-----------
<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(a) ........................................ (.08)
Net realized and unrealized gains ............................. .80
------
Total from investment operations ............................... .72
------
Net asset value, end of period ................................. $10.72
======
Total return(b) ................................................ 7.20%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............................. $8,376
Ratios to average net assets:
Expenses ...................................................... 2.03%(c)
Expenses excluding waiver and payments by affiliate ........... 2.17%(c)
Net investment loss ........................................... (1.46)%(c)
Portfolio turnover rate ........................................ 82.47%
</TABLE>
(a) Based on average shares outstanding.
(b) Total return does not reflect contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Annualized
58
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN TECHNOLOGY FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
-------
SIX MONTHS ENDED
OCTOBER 31, 2000
(UNAUDITED)
-----------
<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(a) ............................................. (.08)
Net realized and unrealized gains .................................. .77
-------
Total from investment operations .................................... .69
-------
Net asset value, end of period ...................................... $ 10.69
=======
Total return(b) ..................................................... 6.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................................... $14,519
Ratios to average net assets:
Expenses ........................................................... 2.04%(c)
Expenses excluding waiver and payments by affiliate ................ 2.18%(c)
Net investment loss ................................................ (1.46)%(c)
Portfolio turnover rate ............................................. 82.47%
</TABLE>
(a) Based on average shares outstanding.
(b) Total return does not reflect sales commissions or contingent deferred
sales charge, and is not annualized for periods less than one year.
(c) Annualized
59
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
FRANKLIN TECHNOLOGY FUND (CONT.)
<TABLE>
<CAPTION>
ADVISOR CLASS
-------------
SIX MONTHS ENDED
OCTOBER 31, 2000
(UNAUDITED)
-----------
<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(a) ................................................. (.03)
Net realized and unrealized gains ...................................... .79
------
Total from investment operations ........................................ .76
------
Net asset value, end of period .......................................... $10.76
======
Total return(b) ......................................................... 7.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ....................................... $11,403
Ratios to average net assets:
Expenses ............................................................... 1.05%(c)
Expenses excluding waiver and payments by affiliate .................... 1.19%(c)
Net investment loss .................................................... (.48)%(c)
Portfolio turnover rate ................................................. 82.47%
</TABLE>
(a) Based on average shares outstanding.
(b) Total return is not annualized for periods less than one year.
(c) Annualized
60 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000(UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN TECHNOLOGY FUND COUNTRY SHARES VALUE
------------------------ ------- ------ -----
<S> <C> <C> <C>
COMMON STOCKS 95.6%
(a)COMMERCIAL SERVICES 2.4%
Concord EFS Inc .............................................. United States 45,000 $ 1,859,063
------------
ELECTRONIC TECHNOLOGY 59.8%
(a)Adaptec Inc. ................................................. United States 60,000 948,750
(a)ADC Telecommunications Inc. .................................. United States 32,000 684,000
(a)Advanced Fibre Communications Inc. ........................... United States 22,500 732,656
(a)Analog Devices Inc. .......................................... United States 24,000 1,560,000
(a)Applied Micro Circuits Corp. ................................. United States 16,000 1,216,000
(a)ARC International PLC ........................................ United Kingdom 24,800 121,537
(a)Caliper Technologies Corp. ................................... United States 15,000 845,625
(a)Cisco Systems Inc. ........................................... United States 28,500 1,535,438
(a)Cobalt Networks Inc. ......................................... United States 28,500 1,571,063
Corning Inc. ................................................. United States 15,000 1,147,500
(a)Dell Computer Corp. .......................................... United States 35,000 1,032,500
(a)EMC Corp. .................................................... United States 25,000 2,226,563
(a)Extreme Networks Inc. ........................................ United States 12,000 995,250
(a)Flextronics International Ltd. ............................... Singapore 22,000 836,000
(a)Foundry Networks Inc. ........................................ United States 16,500 1,096,219
(a)Integrated Device Technology Inc. ............................ United States 11,500 647,594
Intel Corp. .................................................. United States 34,000 1,530,000
International Business Machines Corp. ........................ United States 13,000 1,280,500
(a)Intersil Holding Corp. ....................................... United States 29,000 1,390,188
(a)Juniper Networks Inc. ........................................ United States 4,000 780,000
(a)Maxim Integrated Products Inc. ............................... United States 15,500 1,027,844
(a)McDATA Corp., B .............................................. United States 11,000 916,953
(a)Micrel Inc. .................................................. United States 17,000 769,250
(a)Micron Technology Inc. ....................................... United States 25,000 868,750
(a)Network Appliance Inc. ....................................... United States 9,000 1,071,000
(a)Nokia Corp., ADR ............................................. Finland 21,400 914,850
Nortel Networks Corp. ........................................ Canada 42,500 1,933,750
(a)PMC-Sierra Inc. .............................................. Canada 7,500 1,271,250
(a)Polycom Inc. ................................................. United States 13,600 884,000
(a)QLogic Corp. ................................................. United States 17,000 1,644,750
(a)SDL Inc. ..................................................... United States 10,000 2,592,500
(a)Sierra Wireless Inc. ......................................... Canada 12,000 789,000
(a)Solectron Corp. .............................................. United States 26,600 1,170,400
(a)Sonus Networks Inc. .......................................... United States 18,000 621,000
(a)Stanford Microdevices Inc. ................................... United States 17,200 431,075
(a)Sun Microsystems Inc. ........................................ United States 13,200 1,463,550
(a)Tektronix Inc. ............................................... United States 29,000 2,066,250
(a)Western Multiplex Corp. ...................................... United States 60,000 847,500
(a)Xilinx Inc. .................................................. United States 32,000 2,318,000
----------
45,779,055
----------
(a)HEALTH TECHNOLOGY 8.7%
Abgenix Inc. ................................................. United States 13,300 1,049,038
Alexion Pharmaceuticals Inc. ................................. United States 11,000 1,137,125
Argonaut Technologies Inc. ................................... United States 38,100 685,800
Biogen Inc. .................................................. United States 14,000 842,625
</TABLE>
61
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000(UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FRANKLIN TECHNOLOGY FUND COUNTRY SHARES VALUE
------------------------ ------- ------ -----
<S> <C> <C> <C>
(a) COMMON STOCKS (CONT.)
(a) HEALTH TECHNOLOGY (CONT.)
Genentech Inc. ................................................. United States 14,800 $ 1,221,000
Large Scale Biology Corp. ...................................... United States 48,000 891,000
Medicines Co. .................................................. United States 27,000 813,375
-----------
6,639,963
-----------
(a) INDUSTRIAL SERVICES .7%
Stuart Energy Systems Corp. .................................... Canada 38,600 583,815
-----------
(a) PROCESS INDUSTRIES .1%
Eden Biosciences Corp. ......................................... United States 1,900 71,963
-----------
(a) PRODUCER MANUFACTURING .2%
(d) Hydrogenics Corp. .............................................. Canada 13,500 162,844
-----------
(a) TECHNOLOGY SERVICES 23.7%
Affiliated Computer Services Inc., A ........................... United States 27,000 1,503,563
Ariba Inc. ..................................................... United States 7,000 884,625
Art Technology Group Inc. ...................................... United States 10,500 658,875
BEA Systems Inc. ............................................... United States 16,000 1,148,000
BroadVision Inc. ............................................... United States 33,600 999,600
Commerce One Inc. .............................................. United States 10,600 680,388
Evolve Software Inc. ........................................... United States 68,000 1,066,750
i2 Technologies Inc. ........................................... United States 7,500 1,275,000
Microsoft Corp. ................................................ United States 22,000 1,515,250
Oracle Corp. ................................................... United States 22,000 726,000
Predictive Systems Inc. ........................................ United States 75,000 1,040,625
Quest Software Inc. ............................................ United States 15,000 655,313
Sapient Corp. .................................................. United States 32,000 1,138,000
Scient Corp. ................................................... United States 70,000 1,260,000
Siebel Systems Inc. ............................................ United States 13,900 1,458,631
VeriSign Inc. .................................................. United States 5,500 726,000
VERITAS Software Corp. ......................................... United States 10,000 1,410,150
-----------
18,146,770
-----------
TOTAL COMMON STOCKS (COST $71,948,643) ......................... 73,243,473
-----------
PREFERRED STOCKS .2%
(a,c)Micro Photonix Integration Corp., pfd., C (COST $190,255) ...... United States 30,126 190,255
-----------
TOTAL LONG TERM INVESTMENTS (COST $72,138,898) ................. 73,433,728
-----------
SHORT TERM INVESTMENTS 1.8%
(b) Franklin Institutional Fiduciary Trust Money Market Portfolio
(COST $1,348,867) ............................................. United States 1,348,867 1,348,867
-----------
TOTAL INVESTMENTS (COST $73,487,765) 97.6% ..................... 74,782,595
OTHER ASSETS, LESS LIABILITIES 2.4% ............................ 1,801,934
NET ASSETS 100.0% .............................................. $76,584,529
===========
</TABLE>
(a) Non-income producing
(b) The Franklin Institutional Fiduciary Trust Money Market Portfolio is managed
by Franklin Advisers, Inc.
(c) See Note 6 regarding restricted securities.
(d) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
62 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN GLOBAL FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH FRANKLIN NATURAL
DISCOVERY FUND FUND CARE FUND RESOURCES FUND
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost .............................. $ 1,261,969,299 $ 256,854,342 $ 175,069,584 $ 55,050,063
===========================================================================
Value ............................. 1,586,674,713 285,862,845 223,313,045 59,777,448
Receivables:
Investment securities sold ........ 671,353 13,494,411 2,827,306 139,125
Capital shares sold ............... 9,796,960 432,867 2,513,774 615,996
Dividends and interest ............ 89,000 160,062 100,446 20,165
Deposits with brokers (Note 1) ..... 4,297,811 -- -- --
Other assets ....................... 150,000 -- -- --
---------------------------------------------------------------------------
Total assets .................. 1,601,679,837 299,950,185 228,754,571 60,552,734
---------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ... 6,795,844 3,491,597 5,534,403 250,800
Capital shares redeemed ........... 5,795,771 522,040 473,461 84,451
Affiliates ........................ 1,226,928 264,198 225,307 46,583
Shareholders ...................... 21,282 33,493 10,417 7,606
Other liabilities .................. 30,861 44,832 57,967 27,683
---------------------------------------------------------------------------
Total liabilities ............. 13,870,686 4,356,160 6,301,555 417,123
---------------------------------------------------------------------------
Net assets, at value ......... $ 1,587,809,151 $ 295,594,025 $ 222,453,016 $ 60,135,611
===========================================================================
Net assets consist of:
Undistributed net investment income $ -- $ 126,641 $ -- $ 370,704
Accumulated net operating loss ..... (2,201,761) -- (477,888) --
Net unrealized appreciation ........ 324,705,414 29,008,358 48,243,055 4,727,385
Accumulated net realized gain (loss) 3,096,489 25,778,736 12,169,245 (1,051,761)
Capital shares ..................... 1,262,209,009 240,680,290 162,518,604 56,089,283
---------------------------------------------------------------------------
Net assets, at value ......... $ 1,587,809,151 $ 295,594,025 $ 222,453,016 $ 60,135,611
===========================================================================
</TABLE>
See notes to financial statements.
63
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN GLOBAL FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH FRANKLIN NATURAL
DISCOVERY FUND FUND CARE FUND RESOURCES FUND
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A:
Net assets, at value .................................. $ 1,587,809,151 $254,526,845 $176,750,385 $ 49,818,924
===================================================================
Shares outstanding .................................... 18,966,056 14,469,234 6,277,011 3,016,281
===================================================================
Net asset value per share(a)........................... $ 83.72 $ 17.59 $ 28.16 $ 16.52
===================================================================
Maximum offering price per share
(net asset value per share / 94.25%) .................. $ 88.83 $ 18.66 $ 29.88 $ 17.53
===================================================================
CLASS B:
Net assets, at value .................................. -- $ 8,041,215 $ 10,692,447 --
===================================================================
Shares outstanding .................................... -- 463,203 385,173 --
===================================================================
Net asset value and maximum offering price per share(a) -- $ 17.36 $ 27.76 --
===================================================================
CLASS C:
Net assets, at value .................................. -- $ 33,025,965 $ 35,010,184 --
===================================================================
Shares outstanding .................................... -- 1,902,938 1,273,247 --
===================================================================
Net asset value per share(a)........................... -- $ 17.36 $ 27.50 --
===================================================================
Maximum offering price per share
(net asset value per share / 99%) ..................... -- $ 17.54 $ 27.78 --
===================================================================
ADVISOR CLASS:
Net assets, at value .................................. -- -- -- $ 10,316,687
===================================================================
Shares outstanding .................................... -- -- -- 604,366
===================================================================
Net asset value and maximum offering price per share .. -- -- -- $ 17.07
===================================================================
</TABLE>
(a) Redemption price is equal to net asset value less any applicable
contingent deferred sales charge.
See notes to financial statements.
64
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN
TECHNOLOGY
FUND
------------
<S> <C>
Assets:
Investments in securities:
Cost .......................................... $ 73,487,765
============
Value ......................................... 74,782,595
Receivables:
Investment securities sold .................... 1,620,347
Capital shares sold ........................... 853,359
Dividends and interest ........................ 570
Offering costs ................................. 58,496
------------
Total assets .............................. 77,315,367
------------
Liabilities:
Payables:
Investment securities purchased................ 563,896
Capital shares redeemed ....................... 65,473
Affiliates .................................... 95,789
Shareholders .................................. 2,112
Other liabilities .............................. 3,568
------------
Total liabilities ......................... 730,838
------------
Net assets, at value ..................... $ 76,584,529
============
Net assets consist of:
Accumulated net operating loss ................. $ (239,021)
Net unrealized appreciation .................... 1,294,830
Accumulated net realized loss .................. (1,853,209)
Capital shares ................................. 77,381,929
------------
Net assets, at value ..................... $ 76,584,529
============
</TABLE>
See notes to financial statements.
65
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN
TECHNOLOGY
FUND
-----------
<S> <C>
CLASS A:
Net assets, at value ............................................................... $42,286,053
===========
Shares outstanding ................................................................. 3,933,204
===========
Net asset value per share(a)........................................................ $ 10.75
===========
Maximum offering price per share (net asset value per share / 94.25%)............... $ 11.41
===========
CLASS B:
Net assets, at value ............................................................... $ 8,376,000
===========
Shares outstanding ................................................................. 781,028
===========
Net asset value and maximum offering price per share(a)............................. $ 10.72
===========
CLASS C:
Net assets, at value ............................................................... $14,519,040
===========
Shares outstanding ................................................................. 1,357,692
===========
Net asset value per share(a)........................................................ $ 10.69
===========
Maximum offering price per share (net asset value per share / 99%) ................. $ 10.80
===========
ADVISOR CLASS:
Net assets, at value ............................................................... $11,403,436
===========
Shares outstanding ................................................................. 1,059,687
===========
Net asset value and maximum offering price per share ............................... $ 10.76
===========
</TABLE>
(a) Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
66
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN GLOBAL FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH FRANKLIN NATURAL
DISCOVERY FUND FUND CARE FUND RESOURCES FUND
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:(a)
Dividends ..................................... $ 4,104,512 $ 1,602,430 $ 741,818 $ 471,635
Interest ...................................... 323,255 94,195 -- --
----------------------------------------------------------------------
Total investment income .................. 4,427,767 1,696,625 741,818 471,635
----------------------------------------------------------------------
Expenses:
Management fees (Note 3) ...................... 2,903,498 808,779 485,000 176,062
Administrative fees (Note 3) .................. 782,298 -- -- --
Distribution fees (Note 3)
Class A ...................................... 1,733,317 354,513 176,790 80,071
Class B ...................................... -- 33,026 32,148 --
Class C ...................................... -- 170,983 140,947 --
Transfer agent fees (Note 3) .................. 971,706 237,548 266,818 85,637
Custodian fees ................................ 8,980 21,061 1,570 765
Reports to shareholders ....................... 92,264 31,182 37,001 7,582
Registration and filing fees .................. 94,582 48,855 54,629 15,658
Professional fees (Note 3) .................... 35,029 9,806 20,942 4,305
Trustees' fees and expenses ................... 4,025 2,178 877 318
Other ......................................... 2,640 8,067 2,984 932
----------------------------------------------------------------------
Total expenses ........................... 6,628,339 1,725,998 1,219,706 371,330
Expenses waived/paid by affiliate (Note 3) -- -- -- (95,256)
----------------------------------------------------------------------
Net expenses ............................ 6,628,339 1,725,998 1,219,706 276,074
----------------------------------------------------------------------
Net investment income (loss) ........... (2,200,572) (29,373) (477,888) 195,561
----------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .................................. 3,951,500 (2,373,103) 17,560,277 2,191,313
Foreign currency transactions ................ 150,246 (111,063) 19,571 2,415
----------------------------------------------------------------------
Net realized gain (loss) ................. 4,101,746 (2,484,166) 17,579,848 2,193,728
Net unrealized appreciation (depreciation) on:
Investments .................................. 349,802,720 (38,366,207) 33,364,403 (180,661)
Translation of assets and liabilities
denominated in foreign currencies .......... -- 4,978 (406) --
----------------------------------------------------------------------
Net unrealized appreciation (depreciation) 349,802,720 (38,361,229) 33,363,997 (180,661)
----------------------------------------------------------------------
Net realized and unrealized gain (loss) ........ 353,904,466 (40,845,395) 50,943,845 2,013,067
----------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations .................... $ 351,703,894 $ (40,874,768) $ 50,465,957 $ 2,208,628
======================================================================
</TABLE>
(a)Net of foreign taxes of $16,042, $7,319, and $10,203 for the Franklin Global
Communications Fund, Franklin Global Health Care Fund, and Franklin Natural
Resources Fund, respectively.
See notes to financial statements.
67
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF OPERATIONS (CONT.)
FOR THE SIX MONTHS ENDED OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN
TECHNOLOGY
FUND
------------
<S> <C>
Investment income:
(net of foreign taxes of $101)
Dividends .................................................... $ 138,082
Interest ..................................................... 4,542
------------
Total investment income ................................. 142,624
------------
Expenses:
Management fees (Note 3) ..................................... 127,446
Administrative fees (Note 3) ................................. 49,012
Distribution fees (Note 3)
Class A ..................................................... 49,526
Class B ..................................................... 29,479
Class C ..................................................... 45,304
Transfer agent fees (Note 3) ................................. 48,069
Custodian fees ............................................... 534
Reports to shareholders ...................................... 1,730
Registration and filing fees ................................. 1,128
Professional fees (Note 3) ................................... 6,081
Trustees' fees and expenses .................................. 230
Amortization of offering costs (Note 1) ...................... 57,747
Other ........................................................ 343
------------
Total expenses .......................................... 416,629
Expenses waived/paid by affiliate (Note 3) .............. (34,984)
------------
Net expenses ........................................... 381,645
------------
Net investment loss ................................... (239,021)
------------
Realized and unrealized gains (losses):
Net realized loss from:
Investments ................................................. (1,852,933)
Foreign currency transactions ............................... (276)
------------
Net realized loss ....................................... (1,853,209)
Net unrealized appreciation on investments ................... 1,294,830
------------
Net realized and unrealized loss .............................. (558,379)
------------
Net decrease in net assets resulting from operations .......... $ (797,400)
============
</TABLE>
See notes to financial statements.
68
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2000 (UNAUDITED)
AND THE YEAR ENDED APRIL 30, 2000
<TABLE>
<CAPTION>
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND FRANKLIN GLOBAL COMMUNICATIONS FUND
----------------------------------------------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
OCTOBER 31, 2000 APRIL 30, 2000 OCTOBER 31, 2000 APRIL 30, 2000
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ......... $ (2,200,572) $ (1,384,129) $ (29,373) $ 1,517,088
Net realized gain (loss) from
investments and foreign currency
transactions ........................ 4,101,746 4,784,048 (2,484,166) 46,156,983
Net unrealized appreciation
(depreciation) on investments and
translation of assets and liabilities
denominated in foreign currencies ... 349,802,720 (21,785,672) (38,361,229) 28,526,623
---------------------------------------------------------------------------
Net increase (decrease) in
net assets resulting from
operations ...................... 351,703,894 (18,385,753) (40,874,768) 76,200,694
Distributions to shareholders from:
Net investment income:
Class A ............................. -- -- -- (4,009,477)
Class B ............................. -- -- -- (6,176)
Class C ............................. -- -- -- (215,000)
Net realized gains:
Class A ............................. -- (223,281) -- (33,553,640)
Class B ............................. -- -- -- (110,158)
Class C ............................. -- -- -- (3,053,817)
---------------------------------------------------------------------------
Total distributions to shareholders ... -- (223,281) -- (40,948,268)
Capital share transactions: (Note 2)
Class A ............................. 317,631,988 867,632,458 (1,172,059) 57,951,832
Class B ............................. -- -- 4,671,141 4,489,511
Class C ............................. -- -- 4,313,585 14,252,127
---------------------------------------------------------------------------
Total capital share transactions ...... 317,631,988 867,632,458 7,812,667 76,693,470
Net increase (decrease)
in net assets ................... 669,335,882 849,023,424 (33,062,101) 111,945,896
Net assets:
Beginning of period ................... 918,473,269 69,449,845 328,656,126 216,710,230
---------------------------------------------------------------------------
End of period ......................... $ 1,587,809,151 $ 918,473,269 $ 295,594,025 $ 328,656,126
===========================================================================
Undistributed net investment income
(accumulated net operating loss)
included in net assets:
End of period ........................ $ (2,201,761) $ (1,189) $ 126,641 $ 156,014
===========================================================================
</TABLE>
See notes to financial statements.
69
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE SIX MONTHS ENDED OCTOBER 31, 2000 (UNAUDITED)
AND THE YEAR ENDED APRIL 30, 2000
<TABLE>
<CAPTION>
FRANKLIN GLOBAL HEALTH CARE FUND FRANKLIN NATURAL RESOURCES FUND
-----------------------------------------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
OCTOBER 31, 2000 APRIL 30, 2000 OCTOBER 31, 2000 APRIL 30, 2000
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ........... $ (477,888) $ (758,261) $ 195,561 $ 164,594
Net realized gain from investments
and foreign currency transactions ..... 17,579,848 9,286,216 2,193,728 3,472,068
Net unrealized appreciation
(depreciation) on investments and
translation of assets and liabilities
denominated in foreign currencies ..... 33,363,997 23,890,150 (180,661) 3,095,782
---------------------------------------------------------------------
Net increase in net assets resulting
from operations ................... 50,465,957 32,418,105 2,208,628 6,732,444
Distributions to shareholders from:
Net investment income:
Class A ............................... -- -- -- (250,190)
Advisor Class ......................... -- -- -- (2,323)
---------------------------------------------------------------------
Total distributions to shareholders ..... -- -- -- (252,513)
Capital share transactions: (Note 2)
Class A ............................... 45,851,770 (10,806,942) 6,929,360 (9,142,232)
Class B ............................... 5,948,685 2,675,497 -- --
Class C ............................... 6,187,778 1,505,360 -- --
Advisor Class ......................... -- -- 1,100,667 8,226,100
---------------------------------------------------------------------
Total capital share transactions ........ 57,988,233 (6,626,085) 8,030,027 (916,132)
Net increase in net assets ......... 108,454,190 25,792,020 10,238,655 5,563,799
Net assets:
Beginning of period ..................... 113,998,826 88,206,806 49,896,956 44,333,157
---------------------------------------------------------------------
End of period ........................... $ 222,453,016 $ 113,998,826 $ 60,135,611 $ 49,896,956
=====================================================================
Undistributed net investment income
(accumulated net operating loss)
included in net assets:
End of period .......................... $ (477,888) $ -- $ 370,704 $ 175,143
=====================================================================
</TABLE>
See notes to financial statements.
70
<PAGE>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE SIX MONTHS ENDED OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN
TECHNOLOGY FUND
---------------
SIX MONTHS
ENDED
OCTOBER 31, 2000
----------------
<S> <C>
Increase (decrease) in net assets:
Operations:
Net investment loss .............................................................. $ (239,021)
Net realized loss from investments and foreign currency transactions ............. (1,853,209)
Net unrealized appreciation on investments ....................................... 1,294,830
---------------
Net decrease in net assets resulting from operations ......................... (797,400)
Capital share transactions: (Note 2)
Class A .......................................................................... 42,513,407
Class B .......................................................................... 8,249,263
Class C .......................................................................... 14,759,605
Advisor Class .................................................................... 11,859,654
---------------
Total capital share transactions .................................................. 77,381,929
Net increase in net assets ................................................... 76,584,529
Net assets:
Beginning of period ............................................................... --
---------------
End of period ..................................................................... $76,584,529
===============
Accumulated net operating loss included in net assets:
End of period ..................................................................... $ (239,021)
===============
</TABLE>
See notes to financial statements.
71
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (the Trust) is registered under the Investment Company
Act of 1940 as an open-end investment company, consisting of thirteen separate
series. All funds included in this report (the Funds) are non-diversified. The
investment objectives of the Funds are:
<TABLE>
<CAPTION>
CAPITAL GROWTH TOTAL RETURN
-----------------------------------------------------------------------------------------
<S> <C>
Franklin Biotechnology Discovery Fund Franklin Global Communications Fund
Franklin Global Health Care Fund Franklin Natural Resources Fund
Franklin Technology Fund
</TABLE>
Effective May 1, 2000, the Franklin Strategic Series began offering shares of
the Franklin Technology Fund.
The following summarizes the Funds' significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Trustees.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. SECURITIES SOLD SHORT:
The Franklin Biotechnology Discovery Fund can engage in selling securities
short, which obligates the fund to replace a borrowed security with the same
security at current market value. The fund would incur a loss if the price of
the security increases between the date of the short sale and the date on which
the fund replaces the borrowed security. The fund would realize a gain if the
price of the security declines between those dates.
72
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
c. SECURITIES SOLD SHORT: (CONT.)
The fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the fund must maintain a deposit for the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short. At October 31, 2000, the Franklin
Biotechnology Discovery Fund had no open short sales.
d. INCOME TAXES:
No provision has been made for income taxes because each fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
e. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
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.
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.
f. OFFERING COSTS:
Offering costs are amortized on a straight line basis over twelve months.
g. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the Funds are indicated below. 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 A & ADVISOR CLASS
------------------------------------------------------------------------
<S> <C>
Franklin Biotechnology Discovery Fund Franklin Natural Resources Fund
</TABLE>
<TABLE>
<CAPTION>
CLASS A, CLASS B & CLASS C CLASS A, CLASS B, CLASS C & ADVISOR CLASS
-------------------------------------------------------------------------------
<S> <C>
Franklin Global Communications Fund Franklin Technology Fund
Franklin Global Health Care Fund
</TABLE>
73
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
At October 31, 2000, there were an unlimited number of shares authorized ($.01
par value). Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
FRANKLIN BIOTECHNOLOGY FRANKLIN GLOBAL FRANKLIN GLOBAL
DISCOVERY FUND COMMUNICATIONS FUND HEALTH CARE FUND
-------------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES:
Six months ended
October 31, 2000
Shares sold .................. 6,891,855 $ 561,191,626 1,970,917 $ 38,396,246 6,408,006 $159,523,957
Shares redeemed .............. (3,122,799) (243,559,638) (2,069,656) (39,568,305) (4,594,139) (113,672,187)
-------------------------------------------------------------------------------------------------
Net increase (decrease) ...... 3,769,056 $ 317,631,988 (98,739) $ (1,172,059) 1,813,867 $45,851,770
=================================================================================================
Year ended April 30, 2000
Shares sold ................... 17,971,248 $1,271,076,030 6,271,281 $129,648,724 7,355,772 $125,127,747
Shares issued in reinvestment
of distributions ............ 4,597 178,540 1,754,362 32,769,923 -- --
Shares redeemed ............... (5,745,246) (403,622,112) (5,232,137) (104,466,815) (8,241,799) (135,934,689)
-------------------------------------------------------------------------------------------------
Net increase (decrease) ....... 12,230,599 $ 867,632,458 2,793,506 $ 57,951,832 (886,027) $(10,806,942)
=================================================================================================
CLASS B SHARES:
Six months ended October 31, 2000
Shares sold .......................................................... 258,335 $ 4,931,093 256,370 $ 6,513,771
Shares redeemed ...................................................... (14,167) (259,952) (22,405) (565,086)
---------------------------------------------------------
Net increase ......................................................... 244,168 $ 4,671,141 233,965 $ 5,948,685
=========================================================
Year ended April 30, 2000
Shares sold .......................................................... 211,587 $ 4,444,191 140,895 $ 2,768,142
Shares issued in reinvestment of distributions ....................... 5,728 106,660 -- --
Shares redeemed ...................................................... (2,948) (61,340) (4,723) (92,645)
---------------------------------------------------------
Net increase ......................................................... 214,367 $ 4,489,511 136,172 $ 2,675,497
=========================================================
CLASS C SHARES:
Six months ended October 31, 2000
Shares sold .......................................................... 424,627 $ 8,040,267 507,525 $ 12,778,559
Shares redeemed ...................................................... (199,801) (3,726,682) (259,681) (6,590,781)
---------------------------------------------------------
Net increase ......................................................... 224,826 $ 4,313,585 247,844 $ 6,187,778
=========================================================
Year ended April 30, 2000
Shares sold .......................................................... 759,183 $ 15,751,309 486,834 $ 8,924,197
Shares issued in reinvestment of distributions ....................... 154,008 2,861,777 -- --
Shares redeemed ...................................................... (232,780) (4,360,959) (464,033) (7,418,837)
---------------------------------------------------------
Net increase ......................................................... 680,411 $ 14,252,127 22,801 $ 1,505,360
=========================================================
</TABLE>
74
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
FRANKLIN
NATURAL RESOURCES FUND FRANKLIN TECHNOLOGY FUND
------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Six months ended October 31, 2000
Shares sold ....................................... 2,065,885 $ 35,196,494 4,546,077 $49,655,368
Shares redeemed ................................... (1,661,975) (28,267,134) (612,873) (7,141,961)
-------------------------------------------------------------------
Net increase ...................................... 403,910 $ 6,929,360 3,933,204 $42,513,407
===================================================================
Year ended April 30, 2000
Shares sold ....................................... 2,824,749 $ 39,331,408
Shares issued in reinvestment of distributions .... 17,350 232,665
Shares redeemed ................................... (3,551,679) (48,706,305)
-------------------------------
Net decrease ...................................... (709,580) $ (9,142,232)
===============================
CLASS B SHARES:
Six months ended October 31, 2000
Shares sold ............................................................................. 800,405 $ 8,474,091
Shares redeemed ......................................................................... (19,377) (224,828)
-----------------------------
Net increase ............................................................................ 781,028 $ 8,249,263
=============================
CLASS C SHARES:
Six months ended October 31, 2000
Shares sold ............................................................................. 1,396,174 $15,197,653
Shares redeemed ......................................................................... (38,482) (438,048)
-----------------------------
Net increase ............................................................................ 1,357,692 $14,759,605
=============================
ADVISOR CLASS SHARES:
Six months ended October 31, 2000
Shares sold ....................................... 75,760 $ 1,322,037 1,109,084 $12,409,318
Shares redeemed ................................... (12,790) (221,370) (49,397) (549,664)
-------------------------------------------------------------------
Net increase ...................................... 62,970 $ 1,100,667 1,059,687 $11,859,654
===================================================================
Year ended April 30, 2000
Shares sold ....................................... 532,473 $ 8,436,067
Shares issued in reinvestment of distributions .... 166 2,297
Shares redeemed ................................... (14,648) (212,264)
--------------------------------
Net increase ...................................... 517,991 $ 8,226,100
================================
</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.
75
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES (CONT.)
All Funds, except the Franklin Technology Fund, pay an investment management fee
to Advisers based on the average net assets of the funds as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE DAILY NET ASSETS
---------------------------------------------------------------
<S> <C>
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million, up to and including $10 billion
</TABLE>
Fees are further reduced on net assets over $10 billion.
The Franklin Technology Fund pays an investment management fee to Advisers based
on the average net assets of the fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE DAILY NET ASSETS
-------------------------------------------------------------------------
<S> <C>
.550% First $500 million
.450% Over $500 million, up to and including $1 billion
.400% Over $1 billion, up to and including $1.5 billion
</TABLE>
Fees are further reduced on net assets over $1.5 billion.
The Franklin Technology Fund pays an administrative fee to FT Services based on
an annual rate of .20% of the fund's average daily net assets.
Advisers agreed in advance to waive management fees and/or administrative fees
for the Franklin Natural Resources Fund and the Franklin Technology Fund, as
noted in the Statements of Operations.
Management fees were reduced on assets invested in the Franklin Institutional
Fiduciary Trust Money Market Portfolio.
The Franklin Biotechnology Discovery Fund pays an administrative fee to FT
Services based on the fund's average net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE DAILY NET ASSETS
---------------------------------------------------------------
<S> <C>
.150% First $200 million
.135% Over $200 million, up to and including $700 million
.100% Over $700 million, up to and including $1.2 billion
.075% Over $1.2 billion
</TABLE>
Under an agreement with Advisers, FT Services provides administrative services
to the Franklin Global Communications Fund, the Franklin Global Health Care
Fund, and the Franklin Natural Resources Fund. The fee is paid by Advisers based
on the average daily net assets, and is not an additional expense of the funds.
76
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES (CONT.)
The Funds reimburse Distributors for costs incurred in marketing the Funds'
shares as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN GLOBAL FRANKLIN FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH FRANKLIN NATURAL TECHNOLOGY
DISCOVERY FUND FUND CARE FUND RESOURCES FUND FUND
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A ........ .25% .25% .25% .35% .35%
Class B ........ -- 1.00% 1.00% -- 1.00%
Class C ........ -- 1.00% 1.00% -- 1.00%
</TABLE>
The Franklin Biotechnology Discovery Fund reimburses .25% to Distributors when
the fund is closed and .35% when it is open to new investors.
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 GLOBAL FRANKLIN FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH FRANKLIN NATURAL TECHNOLOGY
DISCOVERY FUND FUND CARE FUND RESOURCES FUND FUND
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net commissions received (paid) ...... $2,027,520 $(197,134) $(258,422) $31,125 $(354,222)
Contingent deferred sales charges .... $ 87,247 $ 4,826 $ 35,721 -- $ 5,722
</TABLE>
The Funds paid transfer agent fees of $1,609,778, of which $1,420,603 was paid
to Investor Services.
At October 31, 2000, Advisers and/or investment companies managed by Advisers
owned 13.36% of the Franklin Technology Fund.
Included in professional fees are legal fees of $25,569 that were paid to a law
firm in which a partner was an officer of the Funds.
4. INCOME TAXES
At April 30, 2000, the funds had tax basis capital losses which may be carried
over to offset future capital gains. Such losses expire as follows:
<TABLE>
<CAPTION>
FRANKLIN
GLOBAL HEALTH FRANKLIN NATURAL
CARE FUND RESOURCES FUND
-------------------------------------
Capital loss carryovers expiring in:
<S> <C> <C>
2007 ............................... $3,510,661 $3,167,296
2008 ............................... 1,450,448 --
-------------------------------------
$4,961,109 $3,167,296
=====================================
</TABLE>
At April 30, 2000, the Franklin Biotechnology Discovery Fund had deferred
capital losses occurring subsequent to October 31, 1999 of $84,321. For tax
purposes, such losses will be reflected in the year ending April 30, 2001.
77
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
4. INCOME TAXES (CONT.)
At April 30, 2000, the Franklin Biotechnology Discovery Fund and the Franklin
Global Communications Fund had deferred currency losses occurring subsequent to
October 31, 1999 of $1,189 and $40,776, respectively. For tax purposes, such
losses will be reflected in the year ending April 30, 2001.
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatment of foreign currency transactions.
Net realized capital gains (losses) differ for financial statement and tax
purposes primarily due to differing treatments of cash sales and foreign
currency transactions.
At October 31, 2000, the net unrealized appreciation (depreciation) based on the
cost of investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN GLOBAL FRANKLIN FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH FRANKLIN NATURAL TECHNOLOGY
DISCOVERY FUND FUND CARE FUND RESOURCES FUND FUND
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost $1,265,194,290 $256,947,513 $175,957,260 $55,105,237 $74,934,632
---------------------------------------------------------------------------------------
Unrealized appreciation $ 451,923,927 $ 54,808,597 $ 54,976,130 $10,200,620 $ 8,853,292
Unrealized depreciation (130,443,504) (25,893,265) (7,620,345) (5,528,409) (9,005,329)
---------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) $ 321,480,423 $ 28,915,332 $ 47,355,785 $ 4,672,211 $ (152,037)
=======================================================================================
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended October 31, 2000 were as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN GLOBAL FRANKLIN FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH FRANKLIN NATURAL TECHNOLOGY
DISCOVERY FUND FUND CARE FUND RESOURCES FUND FUND
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases $516,093,905 $174,031,444 $176,019,890 $20,006,228 $111,171,149
Sales $165,622,342 $161,680,581 $114,769,279 $12,680,288 $ 37,179,317
</TABLE>
78
<PAGE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited) (continued)
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 costs of registering such securities are paid by the issuer. At
October 31, 2000, the funds held restricted securities as follows:
<TABLE>
<CAPTION>
ACQUISITION
SHARES ISSUER DATE COST VALUE
--------------------------------------------------------------------------------------------------------------------------------
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
<S> <C> <C> <C> <C>
2,227,172 Fibrogen Inc., pfd., F ......................................... 5/19/00 $10,000,002 $10,000,002
1,161,291 Kosan Biosciences Inc., C ...................................... 3/24/00 12,000,007 15,742,751
-----------
TOTAL RESTRICTED SECURITIES (1.62% of Net Assets) .............. $25,742,753
===========
FRANKLIN GLOBAL COMMUNICATIONS FUND
95,932 Kestrel Solutions, pfd., D (.42% of Net Assets) ................ 1/20/00 $ 1,249,994 $ 1,249,994
===========
FRANKLIN GLOBAL HEALTH CARE FUND
136,364 Masimo Corp., pfd., F (.67% of Net Assets) ..................... 5/15/00 $ 1,500,004 $ 1,500,004
===========
FRANKLIN TECHNOLOGY FUND
30,126 Micro Photonix Integration Corp., pfd., C (.25% of Net Assets).. 6/23/00 $ 190,255 $ 190,255
===========
</TABLE>
79
<PAGE>
This page intentionally left blank.
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
Your Fund's Goal: Franklin Strategic Income Fund seeks a high level of current
income, with capital appreciation over the long term as a secondary objective.
The Fund uses an active asset allocation process and invests in securities of
U.S. and foreign governments, U.S. and foreign high yield, fixed-income
securities, asset-backed securities, preferred stock, common stock that pays
dividends, and income-producing securities convertible into common stock of such
companies.
--------------------------------------------------------------------------------
Dear Shareholder:
This semiannual report for Franklin Strategic Income Fund covers the six-month
period ended October 31, 2000. During this time, the fixed-income markets
continued to report mixed results. Decelerating U.S. economic growth somewhat
offset the impact of rising energy prices, curbing inflationary pressures.
Consequently, after a 50-basis-point increase in the federal funds target rate
in May, the Federal Reserve Board held the target rate steady at 6.50% for the
remainder of the reporting period. With a favorable outlook toward domestic
inflationary pressures, interest rates declined over the course of the reporting
period, pushing the 10-year Treasury yield
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 18.
CONTENTS
Shareholder Letter ........................................................ 1
Performance Summary ....................................................... 12
Financial Highlights & Statement of Investments ........................... 14
Financial Statements ...................................................... 27
Notes to Financial Statements ............................................. 30
[FUND CATEGORY PYRAMID GRAPHIC]
<PAGE>
down to 5.75% on October 31, 2000, from 6.21% at the beginning of the reporting
period. On the other hand, equity market volatility pressured the
growth-oriented fixed-income sectors during the period.
Within this environment, Franklin Strategic Income Fund sought to take advantage
of relative value opportunities within the fixed-income universe, given the
Fund's flexibility to invest across six primary asset classes: high yield
corporate bonds, foreign government bonds, emerging market debt securities, U.S.
government bonds, mortgage- and asset-backed securities and convertible
securities. Over the past six months we added to the Fund's mortgage-backed
security sector, which rebounded with the moderate decline in interest rates
combined with tighter yield spreads, or the yield difference, between
mortgage-backed issues and Treasuries. We reduced our emerging market bond
allocation following strong year-to-date results. Finally, we capitalized on the
continued weakness in the high yield corporate bond market, which appeared to be
largely driven by negative technical trading dynamics, to increase the Fund's
exposure at what we considered more attractive prices.
Although the impact from equity market declines did constrain returns within its
more growth-oriented fixed-income sectors, the Fund's Class A shares were still
able to generate a +1.17% cumulative total return during the period under
review, as shown in the Performance Summary beginning on page 12. Considering
the global economic environment and current relative valuation levels, we
believe our portfolio positioning, currently
2
<PAGE>
favoring growth-oriented over interest rate-sensitive fixed-income sectors,
should lead to superior income and returns for our shareholders over the longer
term, which is consistent with the Fund's long-term performance. We encourage
you to read further for more detailed sector discussions and our portfolio
management strategies during the period under review.
SECTOR DISCUSSIONS
HIGH YIELD CORPORATE BONDS
Over the past six months, a combination of broad equity market weakness and a
negative supply/demand trading environment for lower-rated corporate debt
pressured high yield corporate bond prices. As asset outflows from dedicated
high yield mutual funds persisted throughout the reporting period, the sector's
yield spread over Treasuries widened to levels not seen since early 1991.
Although the default rate has risen from historically low levels over the past
three years, our near-term outlook for a moderately growing domestic economy
should provide some support to the credit profiles for many of this market's
issuers. And at recent pricing levels, much of the impact from this rise in
default rates now appears to be priced into the market. Consequently, we
increased the portfolio's exposure to high yield corporate bonds, which remained
the Fund's largest sector weighting on October 31, 2000, as shown in the table
on page 5.
A sharp rise in energy prices helped support the Fund's high yield positions in
related industries. R&B Falcon, a provider of deepwater drilling equipment and
services, recently announced its proposed merger with investment-grade rated
Transocean
3
<PAGE>
Sedco Forex. Subsequently, R&B Falcon announced a tender offer for its
outstanding preferred stock, which the Fund holds, at a substantial premium.
Consolidation activity also continued in the broadcasting industry. After
merging with investment-grade rated Clear Channel Communications, radio station
operator AMFM announced the redemption of its 9.0% senior subordinated notes,
allowing the Fund to book a significant gain on its related bond holdings.
We also continued to overweight companies operating in the communications
industries, which remained the Fund's largest industry allocation at period end.
We found wireless communications issues to be particularly attractive, given
their favorable long-term growth prospects, generally improving credit profiles,
and the continued trend toward industry consolidation. For example, the Fund
initiated a position in Crown Castle, one of the largest owners and operators of
wireless communications towers. We believe this communications infrastructure
company should benefit from the increasing demand for transmission towers,
currently fueled by rapid growth in global wireless communication penetration.
As is our usual practice, the Fund proactively managed its existing high yield
bonds, selling those positions whose outlooks had fundamentally deteriorated or
whose valuations we deemed overvalued. For example, the improved outlook for
domestic refinery fundamentals gave the Fund an opportunity to sell its Clark
Refining & Marketing bonds on strength, even though the company's longer-term
credit outlook remained questionable given its substantial degree of leverage.
4
<PAGE>
PORTFOLIO BREAKDOWN
Based on Total Net Assets
<TABLE>
<CAPTION>
10/31/00 4/30/00
--------------------------------------------------------------------------------
<S> <C> <C>
High Yield Corporate Bonds and Preferred Stock 37.7% 37.2%
Emerging Market Debt Securities 19.1% 20.4%
Mortgage and Other Asset-Backed Securities 12.9% 11.9%
Convertible Securities 8.8% 8.9%
Developed Country International Bonds 8.3% 9.1%
U.S. Government Securities 6.2% 7.2%
Short-Term Investments & Other Net Assets 7.0% 5.3%
</TABLE>
EMERGING MARKET DEBT SECURITIES
Our emerging market bonds provided a positive total return for the Fund during
the period under review. However, toward the end of the reporting period,
concerns arose over the economic outlook for select sovereign issuers and the
impact that worsening equity markets and a slowing U.S. economy could have on
developing markets, putting some downward pressure on emerging market bond
prices. We took advantage of the year-to-date gains in this sector to moderately
reduce the Fund's exposure during the six-month period. Despite these sales,
emerging market sovereign bonds still represented the second-largest sector
weighting in the portfolio due to their attractive yield spreads over Treasuries
and our favorable outlook for stable to improving economic growth in certain
developing countries.
5
<PAGE>
Throughout the period, Latin America remained our top region within this
sector's holdings. However, we did significantly reduce our exposure to
Argentina, given concerns over that country's economic malaise and its external
financing needs going forward, while increasing our holdings in Brazil and
Mexico. This swap proved timely, as what we view as favorable fundamentals in
Brazil and Mexico provided support to their sovereign bonds, while the difficult
Argentinean economic picture caused its bonds to underperform. Rising energy
prices also provided an opportunity for the Fund to lower its exposure to
Venezuela on strength, as the positive short-term impact from higher crude oil
revenues was tempered by a less optimistic view on that country's political
leadership.
DEVELOPED COUNTRY INTERNATIONAL BONDS
The U.S. dollar's continued strength, particularly versus a flagging euro,
offset a modest interest-rate decline and continued to pressure returns from the
international developed country bond sector. We kept this sector underweighted
in the portfolio, given relatively low nominal yields and what we assessed as
limited total return potential, absent favorable currency moves. The Fund's
positions in the international developed country bond sector were generally
unhedged at period-end, as the probability for rebounds in certain currencies
versus the U.S. dollar increased following their depreciation thus far in 2000.
We kept the Fund's two largest international developed country holdings in
European benchmark countries Germany and the
6
<PAGE>
U.K., although we modestly reduced exposure to Germany and France based upon
relative value analysis. Within the dollar-bloc countries (Australia, New
Zealand and Canada), Australia retained its top weighting in the portfolio.
CONVERTIBLE SECURITIES
Economic concerns, based on sharply rising energy prices combined with a spate
of disappointing corporate profit warnings, pushed domestic equity markets lower
during the reporting period. For example, the Standard & Poor's 500(TM) Stock
Index declined 1.03% and the technology-oriented Nasdaq Composite Index fell
12.31%.(1) Consequently, returns in the convertible security markets were
largely constrained.
Within this challenging market environment, we initiated a position in the
convertible preferred stock of Cox Communications, one of the largest cable
television system operators in the United States. We believe the company could
benefit from increasing revenue streams from new service introductions, which
include telephony, digital television and high-speed Internet access. We bought
Cox following a dip in the company's share price, which subsequently rebounded
to provide a meaningful gain for the portfolio. We also added to our holdings of
SCI Systems, a leading provider of electronic manufacturing services,
(1) Source: Standard & Poor's Micropal. The Nasdaq Composite Index measures all
Nasdaq domestic and non-U.S.-based common stocks listed on The Nasdaq Stock
Market(R). The index is market-value weighted and includes over 4,800 companies
(as of 10/31/00).
The S&P 500 Stock Index consists of 500 domestic stocks, comprising four broad
sectors: industrials, utilities, financials and transportation. The S&P 500
serves as the standard for measuring large-cap U.S. stock market performance.
Since some industries are characterized by companies of relatively small stock
capitalization, the index is not composed of the 500 largest, publicly traded
U.S. companies.
7
<PAGE>
DIVIDEND DISTRIBUTIONS
5/1/00 - 10/31/00
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
---------------------------------------------------------
MONTH CLASS A CLASS B CLASS C ADVISOR CLASS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
May 6.4 cents 6.03 cents 6.06 cents 6.60 cents
June 6.4 cents 6.05 cents 6.07 cents 6.58 cents
July 6.4 cents 6.05 cents 6.07 cents 6.60 cents
August 6.4 cents 6.05 cents 6.07 cents 6.61 cents
September 6.6 cents 6.26 cents 6.26 cents 6.83 cents
October 6.6 cents 6.26 cents 6.26 cents 6.80 cents
--------------------------------------------------------------------------------
TOTAL 38.8 CENTS 36.70 CENTS 36.79 CENTS 40.02 CENTS
</TABLE>
during a technology-led market sell-off. SCI's stock price subsequently moved
higher following the purchase. Elsewhere, we sold our position in Clear Channel
Communications' convertible note after recording a substantial gain, given
concerns over the company's high valuation and the potential for decelerating
advertising growth. The Fund also exited its position in Global TeleSystems, as
we anticipated potential liquidity problems with the funding of that company's
telecommunications expansion plans. Since we sold them, Global TeleSystems'
convertible bond prices dropped more than 50% by October 31, 2000.
Considering the still relatively healthy valuation levels being priced into
equity markets despite the volatility, the Fund maintained a
8
<PAGE>
lower exposure to the convertible securities market during this reporting
period. However, given the recently bearish market trends and our constructive
outlook toward the domestic economy going into 2001, we will continue to analyze
future stock market dips for possible buying opportunities in regard to
convertible securities.
U.S. GOVERNMENT SECURITIES
During the six-month reporting period, bonds rallied following moderate declines
in domestic interest rates, supporting total return performance in the U.S.
government securities sector. However, given the relatively low nominal yields
offered in the U.S. government bond sector, we maintained a lower exposure to
this sector as shown in the table on page 5. Within this sector, we favored U.S.
government agency issues, given the yield-spread pickup versus Treasuries.
During the period, this yield spread to Treasuries narrowed, causing the
portfolio's agency issues to strengthen the Fund's total return performance.
U.S. MORTGAGE AND OTHER ASSET-BACKED SECURITIES
Within the more interest-rate sensitive sectors, we maintained a heavier
exposure to mortgage and other asset-backed securities markets, given the
relatively attractive yield spreads being offered compared to Treasuries. In the
latter half of the reporting period, this yield spread began to contract,
particularly in the
9
<PAGE>
commercial mortgage-backed sector, providing relatively strong returns for the
Fund. We continued to overweight this sector relative to Treasuries, given our
more sanguine total return outlook for this sector at existing yield levels
within the current interest-rate environment.
LOOKING FORWARD
As we anticipated in our report six months ago, the rate of domestic economic
growth has slowed, with third quarter gross domestic product (GDP) posting an
estimated 2.4% annualized increase compared to the 5.6% rate generated during
the second quarter of 2000. However, expectations remain for an economic soft
landing, with the overall economy likely continuing its expansion into 2001.
Moreover, although higher energy costs recently put some upward pressure on
commodity prices, retail (Consumer Price Index or CPI) and wholesale (Producer
Price Index or PPI) pricing levels generally continued to point toward a
controlled level of domestic inflation. On the international front, economic
growth is generally expected to continue over the intermediate term, although
persistent weakness in the euro may prompt additional interest rate increases in
Europe. In emerging markets, our outlook for certain leading developing nations
appears bright; however, weakness in the fiscal outlooks for select countries as
well as a spillover impact from increasing volatility in the U.S. capital
markets could increase the importance of prudent country selection in that
sector. As always, we
10
<PAGE>
will continue to look for opportunities to enhance the Fund's current income and
long-term returns while reducing overall volatility by actively managing its
sector and security mixture.
Sincerely,
/s/ Christopher J. Molumphy
---------------------------
Christopher J. Molumphy
Portfolio Manager
Franklin Strategic Income Fund
--------------------------------------------------------------------------------
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. Our strategies and the Fund's portfolio composition will change
depending on market and economic conditions. Although historical performance is
no guarantee of future results, these insights may help you understand our
investment and management philosophy.
--------------------------------------------------------------------------------
11
<PAGE>
--------------------------------------------------------------------------------
CLASS A: Subject to the maximum 4.25% initial sales charge.*
CLASS B: Subject to no initial sales charge, but subject to a contingent
deferred sales charge (CDSC) declining from 4% to 0% over six years. These
shares have higher annual fees and expenses than Class A shares.
CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed
within 18 months of investment. These shares have higher annual fees and
expenses than Class A shares.*
ADVISOR CLASS: No initial sales charge or Rule 12b-1 fees and are available to a
limited class of investors.*
*The Fund's manager has agreed in advance to waive a portion of its management
fees and to make certain payments to reduce expenses (see Additional
Performance). If the manager had not taken this action, the Fund's distribution
rate and total return would have been lower and the yield for the period would
have been 8.28%, 8.24%, 8.16% and 8.91% for Classes A, B, C and Advisor,
respectively. The fee waiver may be discontinued at any time, upon notice to the
Fund's Board of Directors.
--------------------------------------------------------------------------------
PERFORMANCE SUMMARY AS OF 10/31/00
Six-month total return represents the change in value of an investment for the
period indicated and does not include sales charges. 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 operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
<TABLE>
<S> <C> <C>
CLASS A
Six-Month Total Return +1.17%
Net Asset Value (NAV) $9.57 (10/31/00) $9.84 (4/30/00)
Change in NAV -$0.27
Distributions (5/1/00 - 10/31/00) Dividend Income $0.3880
CLASS B
Six-Month Total Return +1.06%
Net Asset Value (NAV) $9.60 (10/31/00) $9.86 (4/30/00)
Change in NAV -$0.26
Distributions (5/1/00 - 10/31/00) Dividend Income $0.3670
CLASS C
Six-Month Total Return +0.97%
Net Asset Value (NAV) $9.57 (10/31/00) $9.84 (4/30/00)
Change in NAV -$0.27
Distributions (5/1/00 - 10/31/00) Dividend Income $0.3679
ADVISOR CLASS
Six-Month Total Return +1.40%
Net Asset Value (NAV) $9.58 (10/31/00) $9.84 (4/30/00)
Change in NAV -$0.26
Distributions (5/1/00 - 10/31/00) Dividend Income $0.4002
</TABLE>
Past performance does not guarantee future results.
12
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR (5/24/94)
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +5.19% +45.21% +69.49%
Average Annual Total Return(2) +0.71% +6.81% +7.93%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 1-YEAR (1/1/99)
--------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +4.76% +4.32%
Average Annual Total Return(2) +0.87% +0.37%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR (5/1/98)
--------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +4.77% +4.39%
Average Annual Total Return(2) +2.78% +1.38%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS(3) 1-YEAR 5-YEAR (5/24/94)
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +5.45% +45.75% +70.12%
Average Annual Total Return(2) +5.45% +7.83% +8.72%
</TABLE>
AS OF 10/31/00
<TABLE>
<CAPTION>
SHARE CLASS A B C ADVISOR
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Distribution Rate(4) 7.93% 7.83% 7.77% 8.52%
30-Day Standardized Yield(5) 8.54% 8.51% 8.42% 9.18%
</TABLE>
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
Past performance does not guarantee future results.
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the applicable, maximum
sales charge(s) for that class.
3. Effective 9/1/99, the Fund began offering 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 8/12/99, 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 8/11/99, figures
reflect actual Advisor Class performance, including the deduction of all fees
and expenses applicable only to that class. Since 9/1/99 (commencement of
sales), the cumulative total return of Advisor Class shares was +5.91%.
4. Distribution rate is based on an annualization of the respective class's
October dividend and the maximum offering price (net asset value for Class B and
Advisor Class) per share on 10/31/00.
5. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 10/31/00.
--------------------------------------------------------------------------------
Bond prices, and thus the Fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions,
currency volatility and the social, economic and political climates of countries
where the Fund invests. Emerging markets involve heightened risks related to the
same factors, in addition to those associated with their relatively small size
and lesser liquidity. High yield corporate securities entail greater risk than
higher-rated securities. You may have a gain or loss when you sell your shares.
--------------------------------------------------------------------------------
13
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, YEAR ENDED APRIL 30,
2000 ---------------------------------------------------------------
(UNAUDITED) 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........... $ 9.84 $ 10.84 $ 11.24 $ 10.86 $ 10.77 $ 10.18
---------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ...................... .40 .82 .86 .87 .93 .85
Net realized and unrealized gains (losses) .... (.28) (1.02) (.43) .50 .39 .67
---------------------------------------------------------------------------------
Total from investment operations ............... .12 (.20) .43 1.37 1.32 1.52
---------------------------------------------------------------------------------
Less distributions from:
Net investment income ......................... (.39) (.80) (.83) (.90) (.96) (.82)
Net realized gains ............................ -- -- -- (.09) (.27) (.11)
---------------------------------------------------------------------------------
Total distributions ............................ (.39) (.80) (.83) (.99) (1.23) (.93)
---------------------------------------------------------------------------------
Net asset value, end of period ................. $ 9.57 $ 9.84 $ 10.84 $ 11.24 $ 10.86 $ 10.77
=================================================================================
Total return(b) ................................ 1.17% (1.81)% 4.23% 13.10% 12.64% 15.59%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............. $ 242,704 $ 254,419 $ 247,574 $ 166,633 $ 34,864 $ 13,022
Ratios to average net assets:
Expenses ...................................... .75%(c) .75% .58% .25% .23% .25%
Expenses excluding waiver and
payments by affiliate ....................... 1.03%(c) .99% .99% 1.05% 1.05% 1.08%
Net investment income ......................... 8.04%(c) 8.10% 7.99% 7.65% 8.60% 8.53%
Portfolio turnover rate ........................ 21.92% 43.71% 48.68% 47.47% 114.26% 73.95%
</TABLE>
(a) Based on average shares outstanding effective year ended April 30, 2000.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(c) Annualized
14
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS B
---------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2000 ---------------------
(UNAUDITED) 2000 1999(d)
---------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............... $ 9.86 $ 10.86 $ 10.76
---------------------------------------
Income from investment operations:
Net investment income(a)........................... .38 .79 .29
Net realized and unrealized gains (losses) ........ (.27) (1.03) .07
---------------------------------------
Total from investment operations ................... .11 (.24) .36
---------------------------------------
Less distributions from net investment income ...... (.37) (.76) (.26)
---------------------------------------
Net asset value, end of period ..................... $ 9.60 $ 9.86 $ 10.86
=======================================
Total return(b)..................................... 1.06% (2.18)% 3.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $ 16,272 $ 13,641 $ 4,281
Ratios to average net assets:
Expenses .......................................... 1.15%(c) 1.15% .98%(c)
Expenses excluding waiver and payments by affiliate 1.43%(c) 1.39% 1.39%(c)
Net investment income ............................. 7.66%(c) 7.78% 7.59%(c)
Portfolio turnover rate ............................ 21.92% 43.71% 48.68%
</TABLE>
(a) Based on average shares outstanding effective year ended April 30, 2000.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Annualized
(d) For the period January 1, 1999 (effective date) to April 30, 1999.
15
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS C
---------------------------------------
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2000 ---------------------
(UNAUDITED) 2000 1999
---------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............... $ 9.84 $ 10.84 $ 11.19
---------------------------------------
Income from investment operations:
Net investment income(a) .......................... .38 .78 .76
Net realized and unrealized losses ................ (.28) (1.02) (.40)
---------------------------------------
Total from investment operations ................... .10 (.24) .36
---------------------------------------
Less distributions from net investment income ...... (.37) (.76) (.71)
---------------------------------------
Net asset value, end of period ..................... $ 9.57 $ 9.84 $ 10.84
=======================================
Total return(b) .................................... .97% (2.20)% 3.59%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $ 40,648 $ 39,713 $ 36,245
Ratios to average net assets:
Expenses .......................................... 1.15%(c) 1.15% .98%
Expenses excluding waiver and payments by affiliate 1.43%(c) 1.39% 1.39%
Net investment income ............................. 7.66%(c) 7.72% 7.59%
Portfolio turnover rate ............................ 21.92% 43.71% 48.68%
</TABLE>
(a) Based on average shares outstanding effective year ended April 30, 2000.
(b) Total return does not reflect sales commissions or the contingent
deferred sales charge, and is not annualized for periods less than one
year.
(c) Annualized
16
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
ADVISOR CLASS
------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2000 YEAR ENDED
(UNAUDITED) APRIL 30, 2000(d)
------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................... $ 9.84 $ 10.11
------------------------------------
Income from investment operations:
Net investment income(a)................................ .41 .61
Net realized and unrealized losses ..................... (.27) (.33)
------------------------------------
Total from investment operations ........................ .14 .28
------------------------------------
Less distributions from net investment income ........... (.40) (.55)
------------------------------------
Net asset value, end of period .......................... $ 9.58 $ 9.84
====================================
Total return(b).......................................... 1.40% (1.64)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ....................... $ 23,287 $ 21,809
Ratios to average net assets:
Expenses(c)............................................. .50% .50%
Expenses excluding waiver and payments by affiliate(c).. .78% .74%
Net investment income(c)................................ 8.33% 8.53%
Portfolio turnover rate ................................. 21.92% 43.71%
</TABLE>
(a) Based on average shares outstanding.
(b) Total return is not annualized for periods less than one year.
(c) Annualized
(d) For the period August 12, 1999 (effective date) to April 30, 2000.
See notes to financial statements.
17
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES/
WARRANTS &
COUNTRY RIGHTS VALUE
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(a) COMMON STOCKS, WARRANTS AND RIGHTS .3%
Abraxas Petroleum Corp. ................................................. United States 52,463 $ 157,389
Abraxas Petroleum Corp., rts., 11/01/04 ................................. United States 52,463 26,232
Harvard Industries Inc. ................................................. United States 8,240 13,905
Loral Space & Communications Ltd., wts., 1/15/07 ........................ United States 300 809
Purina Mills Inc. ....................................................... United States 41,879 314,093
R&B Falcon Corp., 144A, wts., 5/01/09 ................................... United States 750 412,500
Republic of Venezuela, Oil Value Recovery, wts., 4/15/20 ................ Venezuela 3,035 --
-----------
TOTAL COMMON STOCKS, WARRANTS AND RIGHTS (COST $2,051,595) .............. 924,928
-----------
PREFERRED STOCKS 1.3%
Fresenius Medical Care Capital Trust I, 9.00%, pfd. ..................... Germany 100 99,500
Fresenius Medical Care Capital Trust II, 7.875%, pfd. ................... Germany 2,750 2,585,000
R&B Falcon Corp., 13.875%, pfd., PIK .................................... United States 923 1,176,825
Sinclair Capital, 11.625%, pfd. ......................................... United States 3,000 270,750
-----------
TOTAL PREFERRED STOCKS (COST $3,912,219) ................................ 4,132,075
-----------
CONVERTIBLE PREFERRED STOCKS 4.5%
CONSUMER SERVICES 1.3%
Cox Communications Inc., 7.00%, cvt. pfd. ............................... United States 32,000 1,872,000
MediaOne Group Inc., 7.00%, cvt. pfd. ................................... United States 55,600 2,303,925
-----------
4,175,925
-----------
ENERGY MINERALS .6%
Kerr-McGee Corp., 5.50%, cvt. pfd. ...................................... United States 45,000 2,067,188
-----------
FINANCE .7%
Apartment Investment & Management Co., 8.00%, K, cvt. pfd. .............. United States 80,000 2,125,000
-----------
TRANSPORTATION .7%
Union Pacific Capital Trust, 6.25%, cvt. pfd. ........................... United States 47,500 2,149,375
-----------
UTILITIES 1.2%
AES Trust III, 6.75%, cvt. pfd. ......................................... United States 24,000 2,136,000
TXU Corp., 9.25%, cvt. pfd. ............................................. United States 40,000 1,760,000
-----------
3,896,000
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $12,710,553) ................... 14,413,488
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT*
---------
<S> <C> <C> <C>
BONDS 38.2%
COMMERCIAL SERVICES .1%
(a,c) AmeriServe Food Distribution Inc., senior note, 8.875%, 10/15/06 ...... United States $700,000 10,500
(a,c) AmeriServe Food Distribution Inc., senior sub. note, 10.125%, 7/15/07 . United States 700,000 3,570
Fleming Cos. Inc., senior sub. note, B, 10.50%, 12/01/04 .............. United States 350,000 299,250
-------
313,320
-------
</TABLE>
18
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT* VALUE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
COMMUNICATIONS 11.7%
Allegiance Telecom Inc., senior disc. note, B, zero cpn. to 2/15/03, 11.75%
thereafter, 2/15/08 ............................................................... United States $ 2,000,000 $ 1,390,000
Call-Net Enterprises Inc., senior note, 9.375%, 5/15/09 ............................ Canada 2,750,000 1,196,250
Clearnet Communications Inc., senior disc. note, zero cpn. to 5/01/04, 10.125%
thereafter, 5/01/09 ............................................................... Canada 3,250,000 2,632,500
Crown Castle International Corp., senior note, 10.75%, 8/01/11 ..................... United States 2,250,000 2,323,125
Dobson/Sygnet Communications Co., senior note, 12.25%, 12/15/08 .................... United States 2,000,000 2,005,000
Global Crossing Holdings Ltd., 9.50%, 11/15/09 ..................................... Bermuda 3,000,000 2,846,832
ICG Holdings Inc., zero cpn. to 5/01/01, 12.50% thereafter, 5/01/06 ................ United States 2,250,000 382,500
Intermedia Communications Inc., senior disc. note, B, zero cpn. to 7/15/02, 11.25%
thereafter, 7/15/07 ............................................................... United States 2,000,000 1,655,000
Level 3 Communications Inc., senior disc. note, zero cpn. to 12/01/03, 10.50%
thereafter, 2/01/08 ............................................................... United States 4,000,000 2,180,000
Loral Space and Communications Ltd., senior disc. note, zero cpn. to 1/15/02, 12.50%
thereafter, 1/15/07 ............................................................... United States 300,000 75,000
McLeodUSA Inc., senior note, 8.125%, 2/15/09 ....................................... United States 2,500,000 2,150,000
Metrocall Inc., senior sub. note, 9.75%, 11/01/07 .................................. United States 1,000,000 435,000
Metrocall Inc., senior sub. note, 11.00%, 9/15/08 .................................. United States 1,000,000 445,000
Microcell Telecommunications Inc., senior disc. note, B, zero cpn. to 12/01/01,
14.00% thereafter, 6/01/06 ........................................................ Canada 450,000 435,375
Millicom International Cellular SA, senior disc. note, zero cpn. to 6/01/01, 13.50%
thereafter, 6/01/06 ............................................................... Luxembourg 300,000 244,500
Nextel Communications Inc., senior disc. note, zero cpn. to 10/31/02, 9.75%
thereafter, 10/31/07 .............................................................. United States 500,000 391,250
Nextel Communications Inc., senior disc. note, zero cpn. to 2/15/03, 9.95%
thereafter, 2/15/08 ............................................................... United States 3,500,000 2,668,750
Nextel Partners Inc., senior note, 11.00%, 3/15/10 ................................. United States 2,500,000 2,493,750
RSL Communications PLC, senior disc. note, zero cpn. to 3/01/03, 10.125%
thereafter, 3/01/08 ............................................................... United Kingdom 1,000,000 75,000
RSL Communications PLC, senior note, 12.00%, 11/01/08 .............................. United Kingdom 750,000 123,750
RSL Communications PLC, senior note, 12.875%, 3/01/10 .............................. United Kingdom 1,250,000 212,500
Spectrasite Holdings Inc., senior disc. note, zero cpn. to 4/15/04, 11.25%
thereafter, 4/15/09 ............................................................... United States 4,000,000 2,080,000
Triton PCS Inc., sub. disc. note, zero cpn. to 5/01/03, 11.00% thereafter, 5/01/08 . United States 1,750,000 1,334,375
VoiceStream Wireless Corp., senior disc. note, zero cpn. to 11/15/04, 11.875%
thereafter, 11/15/09 .............................................................. United States 1,500,000 1,087,500
VoiceStream Wireless Corp., senior note, 11.50%, 9/15/09 ........................... United States 2,000,000 2,230,000
Williams Communications Group Inc., senior note, 10.875%, 10/01/09 ................. United States 3,000,000 2,565,000
XO Communications Inc., senior disc. note, zero cpn. to 4/15/03, 9.45%
thereafter, 4/15/08 ............................................................... United States 650,000 367,250
XO Communications Inc., senior disc. note, zero cpn. to 6/01/04, 12.25%
thereafter, 6/01/09 ............................................................... United States 2,000,000 1,040,000
XO Communications Inc., senior note, 9.625%, 10/01/07 .............................. United States 250,000 215,000
XO Communications Inc., senior note, 9.00%, 3/15/08 ................................ United States 750,000 618,750
-----------
37,898,957
-----------
</TABLE>
19
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT* VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
CONSUMER DURABLES .2%
Pillowtex Corp., senior sub. note, B, 9.00%, 12/15/07 ....................... United States $ 2,000,000 $ 310,000
Sealy Mattress Co., senior disc. note, B, zero cpn. to 12/15/02, 10.875%
thereafter, 12/15/07 ....................................................... United States 300,000 226,500
Sealy Mattress Co., senior sub. note, B, 9.875%, 12/15/07 ................... United States 200,000 191,000
-----------
727,500
-----------
CONSUMER NON-DURABLES .4%
Revlon Consumer Products Corp., senior note, 9.00%, 11/01/06 ................ United States 500,000 362,500
Revlon Consumer Products Corp., senior sub. note, 8.625%, 2/01/08 ........... United States 1,500,000 862,500
-----------
1,225,000
-----------
CONSUMER SERVICES 9.6%
AMF Bowling Worldwide Inc., senior disc. note, B, zero cpn. to 3/15/01,
12.25% thereafter, 3/15/06 ................................................. United States 1,118,000 218,010
AMFM Inc., senior note, 8.00%, 11/01/08 ..................................... United States 1,000,000 1,015,000
Century Communications Corp., senior disc. note, B, 1/15/08 ................. United States 5,000,000 1,962,500
Charter Communications Holdings LLC, senior disc. note, zero cpn. to 4/01/04,
9.92% thereafter, 4/01/11 .................................................. United States 4,250,000 2,507,500
CSC Holdings Inc., senior sub. deb., 9.875%, 4/01/23 ........................ United States 1,750,000 1,776,250
Diamond Holdings PLC, senior note, 9.125%, 2/01/08 .......................... United Kingdom 1,000,000 875,000
EchoStar Broadband Corp., senior note, 144A, 10.375%, 10/01/07 .............. United States 3,000,000 3,015,000
Fox/Liberty Networks LLC, senior disc. note, zero cpn. to 8/15/02, 9.75%
thereafter, 8/15/07 ........................................................ United States 2,000,000 1,690,000
Host Marriott LP, senior note, 144A, 9.25%, 10/01/07 ........................ United States 3,000,000 2,955,000
MGM Mirage Inc., senior note, 8.50%, 9/15/10 ................................ United States 2,300,000 2,284,058
Park Place Entertainment Corp., senior sub. note, 9.375%, 2/15/07 ........... United States 3,000,000 3,022,500
Regal Cinemas Inc., senior sub. note, 9.50%, 6/01/08 ........................ United States 1,500,000 157,500
Sinclair Broadcast Group Inc., senior sub. note, 8.75%, 12/15/07 ............ United States 2,200,000 1,925,000
Six Flags Entertainment Corp., senior note, 8.875%, 4/01/06 ................. United States 2,500,000 2,337,500
Station Casinos Inc., senior sub. note, 144A, 9.875%, 7/01/10 ............... United States 2,000,000 2,015,000
Telewest Communications PLC, senior disc. note, zero cpn. to 4/15/04, 9.25%
thereafter, 4/15/09 ........................................................ United Kingdom 500,000 226,250
Telewest Communications PLC, senior disc. note, 144A, zero cpn. to 2/01/05,
11.375% thereafter, 2/01/10 ................................................ United Kingdom 3,500,000 1,531,250
United Pan-Europe Communications NV, senior disc. note, B, zero cpn. to
8/01/04, 12.50% thereafter, 8/01/09 ........................................ Netherlands 4,250,000 1,678,750
-----------
31,192,068
-----------
ENERGY MINERALS 3.3%
Abraxas Petroleum Corp., second lien note, A, 11.50%, 11/01/04 .............. United States 616,000 540,540
Chesapeake Energy Corp., senior note, B, 9.625%, 5/01/05 .................... United States 2,500,000 2,512,500
Conproca SA, S.F., senior secured note, 144A, 12.00%, 6/16/10 ............... Mexico 1,800,000 1,872,000
P&L Coal Holdings Corp., senior sub. note, B, 9.625%, 5/15/08 ............... United States 2,500,000 2,450,000
Pioneer Natural Resources Co., senior note, 9.625%, 4/01/10 ................. United States 3,000,000 3,157,269
-----------
10,532,309
-----------
</TABLE>
20
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT* VALUE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
FINANCE 1.7%
Southtrust Bank of Birmingham, 5.58%, 2/06/06 ............................. United States $ 2,500,000 $ 2,490,060
Sovereign Bancorp Inc., senior note, 10.50%, 11/15/06 ..................... United States 3,000,000 3,060,000
-----------
5,550,060
-----------
HEALTH SERVICES 1.5%
Express Scripts Inc., senior note, 9.625%, 6/15/09 ........................ United States 2,000,000 2,025,000
HCA-The Healthcare Co., 8.75%, 9/01/10 .................................... United States 1,100,000 1,119,549
Magellan Health Services Inc., senior sub. note, 9.00%, 2/15/08 ........... United States 2,000,000 1,320,000
(a),(c) Vencor Operating Inc., 9.875%, 5/01/05 .................................... United States 1,500,000 309,375
-----------
4,773,924
-----------
INDUSTRIAL SERVICES 2.0%
Allied Waste North America Inc., senior note, B, 7.875%, 1/01/09 .......... United States 3,000,000 2,595,000
Calpine Corp., senior note, 8.625%, 8/15/10 ............................... United States 3,000,000 3,003,261
Universal Compression Inc., senior disc. note, zero cpn. to 2/15/03, 9.875%
thereafter, 2/15/08 ...................................................... United States 1,250,000 1,006,250
-----------
6,604,511
-----------
NON-ENERGY MINERALS .1%
LTV Corp., senior note, 8.20%, 9/15/07 .................................... United States 450,000 213,750
-----------
PROCESS INDUSTRIES 3.9%
Anchor Glass, first mortgage, 11.25%, 4/01/05 ............................. United States 2,000,000 1,510,000
Anchor Glass Container, senior note, 9.875%, 3/15/08 ...................... United States 700,000 318,500
Consolidated Container Co. LLC, senior disc. note, 10.125%, 7/15/09 ....... United States 2,000,000 1,810,000
Georgia Gulf Corp., senior sub. note, 10.375%, 11/01/07 ................... United States 1,000,000 985,000
Graham Packaging Co., senior disc. note, B, zero cpn. to 1/15/03, 10.75%
thereafter, 1/15/09 ...................................................... United States 1,700,000 654,500
Graham Packaging Co., senior sub. note, B, 8.75%, 1/15/08 ................. United States 200,000 131,000
Lyondell Chemical Co., senior secured note, B, 9.875%, 5/01/07 ............ United States 2,500,000 2,462,500
Packaging Corp. of America, senior sub. note, 9.625%, 4/01/09 ............. United States 2,250,000 2,311,875
Pindo Deli Finance Mauritius Ltd., senior note, 10.25%, 10/01/02 .......... Indonesia 2,500,000 1,556,250
Repap New Brunswick, senior note, 9.00%, 6/01/04 .......................... Canada 700,000 731,500
-----------
12,471,125
-----------
PRODUCER MANUFACTURING 1.7%
American Axle & Manufacturing Inc., senior sub. note, 9.75%, 3/01/09 ...... United States 1,000,000 897,500
(a),(c) Cambridge Industries Inc., senior sub. note, B, 10.25%, 7/15/07 ........... United States 500,000 107,500
Dura Operating Corp., senior sub. note, B, 9.00%, 5/01/09 ................. United States 1,000,000 805,000
Nortek Inc., senior note, 8.875%, 8/01/08 ................................. United States 2,000,000 1,750,000
Nortek Inc., senior note, B, 9.125%, 9/01/07 .............................. United States 300,000 268,500
Talon Automotive Group Inc., senior sub. note, B, 9.625%, 5/01/08 ......... United States 800,000 188,000
Terex Corp., senior sub. note, 8.875%, 4/01/08 ............................ United States 1,500,000 1,312,500
-----------
5,329,000
-----------
RETAIL TRADE .4%
J.C. Penney Co. Inc., 6.90%, 8/15/26 ...................................... United States 1,500,000 1,175,951
-----------
</TABLE>
21
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT* VALUE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
TECHNOLOGY SERVICES .4%
PSINet Inc., senior note, 10.50%, 12/01/06 ...................................... United States $ 700,000 $ 336,000
PSINet Inc., senior note, 11.00%, 8/01/09 ....................................... United States 2,250,000 1,080,000
------------
1,416,000
------------
TRANSPORTATION .5%
American Commercial Lines LLC, senior note, 10.25%, 6/30/08 ..................... United States 1,000,000 825,000
Ultrapetrol Ltd., first mortgage, 10.50%, 4/01/08 ............................... Bahamas 1,000,000 805,000
------------
1,630,000
------------
UTILITIES .7%
CMS Energy Corp., senior note, 7.50%, 1/15/09 ................................... United States 2,650,000 2,313,159
------------
TOTAL BONDS (COST $149,359,468) ................................................. 123,366,634
------------
CONVERTIBLE BONDS 4.3%
ELECTRONIC TECHNOLOGY 1.7%
Amkor Technology Inc., cvt., sub. note, 5.00%, 3/15/07 .......................... United States 2,250,000 1,620,000
ASM Lithography Holding NV, cvt., sub. note, 144A, 4.25%, 11/30/04 .............. Netherlands 1,500,000 1,522,500
SCI Systems Inc., cvt., sub. note, 3.00%, 3/15/07 ............................... United States 2,400,000 2,499,000
------------
5,641,500
------------
FINANCE .7%
Equity Office Properties Trust, cvt., exchangeable senior note, 144A,
7.25%, 11/15/08 ............................................................... United States 2,250,000 2,252,813
------------
HEALTH SERVICES .7%
Omnicare Inc., cvt. sub. deb., 5.00%, 12/01/07 .................................. United States 3,000,000 2,253,750
------------
TECHNOLOGY SERVICES .8%
Affiliated Computer Services, cvt., sub. note, 4.00%, 3/15/05 ................... United States 1,800,000 2,533,500
------------
TELECOMMUNICATIONS .4%
Level 3 Communications Inc., cvt., sub. note, 6.00%, 3/15/10 .................... United States 2,000,000 1,212,960
------------
TOTAL CONVERTIBLE BONDS (COST $14,690,585) ...................................... 13,894,523
------------
OTHER MORTGAGES/ASSET BACKED SECURITIES 3.2%
Champion Home Equity Loan Trust, Series 1996-2, Class A4, 8.00%, 9/25/28 ........ United States 1,000,000 997,425
Conseco Inc., Series 1999-6, Class M2, 8.74%, 6/01/30 ........................... United States 2,000,000 2,010,576
Delta Home Equity, Series 1998-2, Class A6F, 6.37%, 7/15/28 ..................... United States 2,000,000 1,932,567
Green Tree Financial Corp., Series 1992-2, Class A6, 6.92%, 12/01/30 ............ United States 1,000,000 844,275
Green Tree Financial Corp., Series 1996-2, Class A4, 7.20%, 4/15/27 ............. United States 1,200,000 1,198,074
Green Tree Financial Corp., Series 1998-7, Class B1, 7.68%, 7/01/30 ............. United States 1,000,000 918,645
Green Tree Financial Corp., Series 1999-3, Class B1, 8.37%, 2/01/31 ............. United States 1,450,000 1,344,473
Merrill Lynch Mortgage Investors Inc., Series 1995-C3, Class A3, 7.068%, 12/26/25 United States 500,000 500,772
Residential Asset Securities Corp., Series 1999-KS1, Class A18, 6.32%, 4/25/30 .. United States 750,000 716,749
------------
TOTAL OTHER MORTGAGES/ASSET BACKED SECURITIES (COST $10,486,448) ................ 10,463,556
------------
</TABLE>
22
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT* VALUE
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES 15.9%
U.S. GOVERNMENT AGENCIES/MORTGAGES 9.7%
FHLMC, 7.00%, 1/01/09 ..................... United States $ 10,241 $ 10,273
FHLMC, 6.50%, 4/01/11 ..................... United States 18,956 18,660
FHLMC, 7.00%, 9/01/11 ..................... United States 20,630 20,597
FHLMC, 7.50%, 10/01/14 .................... United States 450,313 454,081
FHLMC, 7.00%, 4/01/24 ..................... United States 28,692 28,288
FHLMC, 7.50%, 4/01/24 ..................... United States 22,133 22,241
FHLMC, 8.50%, 12/01/24 .................... United States 9,674 9,942
FHLMC, 9.00%, 12/01/24 .................... United States 5,029 5,226
FHLMC, 7.00%, 11/01/25 .................... United States 13,412 13,195
FHLMC, 8.00%, 11/01/25 .................... United States 10,720 10,885
FHLMC, 6.50%, 12/01/25 .................... United States 25,259 24,424
FHLMC, 7.50%, 1/01/26 ..................... United States 14,592 14,647
FHLMC, 8.00%, 1/01/26 ..................... United States 7,754 7,873
FHLMC, 6.50%, 3/01/26 ..................... United States 38,466 37,140
FHLMC, 7.00%, 9/01/26 ..................... United States 21,612 21,248
FHLMC, 7.50%, 1/01/27 ..................... United States 27,765 27,828
FHLMC, 7.00%, 4/01/28 ..................... United States 276,389 271,709
FHLMC, 7.00%, 5/01/28 ..................... United States 409,011 401,660
FHLMC, 6.50%, 6/01/29 ..................... United States 469,967 452,369
FNMA, 7.50%, 10/01/07 ..................... United States 15,621 15,817
FNMA, 6.50%, 2/01/09 ...................... United States 16,024 15,829
FNMA, 6.50%, 4/01/11 ...................... United States 13,095 12,900
FNMA, 6.00%, 4/01/13 ...................... United States 811,080 781,949
FNMA, 6.50%, 6/01/13 ...................... United States 703,012 689,970
FNMA, 5.50%, 3/01/14 ...................... United States 881,725 832,489
FNMA, 5.50%, 6/01/14 ...................... United States 949,854 896,811
FNMA, 6.50%, 1/01/24 ...................... United States 23,542 22,804
FNMA, 7.00%, 5/01/24 ...................... United States 8,610 8,488
FNMA, 8.00%, 1/01/25 ...................... United States 9,688 9,836
FNMA, 9.00%, 3/01/25 ...................... United States 1,253 1,299
FNMA, 9.00%, 5/01/25 ...................... United States 2,444 2,533
FNMA, 8.50%, 7/01/25 ...................... United States 6,605 6,776
FNMA, 8.00%, 12/01/25 ..................... United States 336,265 341,141
FNMA, 7.00%, 1/01/26 ...................... United States 24,443 24,045
FNMA, 7.00%, 3/01/26 ...................... United States 32,512 31,957
FNMA, 8.00%, 5/01/26 ...................... United States 8,846 8,972
FNMA, 8.00%, 6/01/26 ...................... United States 5,200 5,275
FNMA, 7.50%, 10/01/26 ..................... United States 5,155 5,160
FNMA, 8.00%, 1/01/27 ...................... United States 10,700 10,842
FNMA, 7.00%, 4/01/27 ...................... United States 489,705 481,269
FNMA, 6.50%, 3/01/28 ...................... United States 2,120,851 2,041,679
FNMA, 7.00%, 5/01/28 ...................... United States 991,708 973,206
FNMA, 7.00%, 6/01/28 ...................... United States 1,120,708 1,098,995
FNMA, 6.00%, 9/01/28 ...................... United States 873,416 821,080
FNMA, 6.00%, 10/01/28 ..................... United States 891,989 838,541
</TABLE>
23
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT* VALUE
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES (CONT.)
U.S. GOVERNMENT AGENCIES/MORTGAGES (CONT.)
FNMA, 6.50%, 12/01/28 ....................... United States $ 853,714 $ 821,845
FNMA, 7.50%, 12/01/28 ....................... United States 36,966 36,962
FNMA, 6.00%, 1/01/29 ........................ United States 1,831,380 1,721,643
FNMA, 6.00%, 5/01/29 ........................ United States 821,555 770,942
FNMA, 7.00%, 5/01/29 ........................ United States 890,029 873,143
FNMA, 6.50%, 6/01/29 ........................ United States 942,400 906,608
FNMA, 6.50%, 8/01/29 ........................ United States 955,213 918,934
FNMA, 6.50%, 9/01/29 ........................ United States 113,379 109,073
FNMA, 7.50%, 10/01/29 ....................... United States 2,498,482 2,497,077
FNMA, 6.00%, 3/01/30 ........................ United States 34,516 32,376
FNMA, 7.00%, 4/01/30 ........................ United States 998,949 979,997
FNMA, 7.00%, 7/01/30 ........................ United States 999,047 980,093
FNMA, 7.00%, 8/01/30 ........................ United States 249,492 244,677
FNMA, 7.00%, 9/01/30 ........................ United States 998,984 979,704
GNMA, 7.00%, 7/15/08 ........................ United States 668,800 674,761
GNMA, SF, 7.50%, 9/15/23 .................... United States 10,087 10,170
GNMA, SF, 6.50%, 3/15/24 .................... United States 39,005 37,904
GNMA, SF, 8.00%, 6/15/24 .................... United States 19,874 20,274
GNMA, SF, 8.50%, 8/15/24 .................... United States 4,199 4,327
GNMA, SF, 9.00%, 1/15/25 .................... United States 3,900 4,059
GNMA, SF, 8.00%, 2/15/25 .................... United States 8,571 8,745
GNMA, SF, 9.50%, 6/15/25 .................... United States 6,347 6,658
GNMA, SF, 7.50%, 1/15/26 .................... United States 23,455 23,586
GNMA, SF, 7.50%, 2/15/26 .................... United States 16,489 16,581
GNMA, SF, 9.00%, 3/15/26 .................... United States 23,607 24,543
GNMA, SF, 8.00%, 6/15/26 .................... United States 22,223 22,638
GNMA, SF, 8.00%, 7/15/26 .................... United States 32,448 33,055
GNMA, SF, 8.50%, 7/15/26 .................... United States 8,713 8,968
GNMA, SF, 8.00%, 9/15/26 .................... United States 595,175 606,303
GNMA, SF, 8.00%, 12/15/26 ................... United States 416,884 424,679
GNMA, SF, 7.50%, 5/15/27 .................... United States 672,360 675,864
GNMA, SF, 7.50%, 9/15/27 .................... United States 441,626 443,928
GNMA, SF, 8.00%, 9/15/27 .................... United States 290,267 295,472
GNMA, SF, 7.00%, 11/15/27 ................... United States 828,524 818,591
GNMA, SF, 8.00%, 4/15/28 .................... United States 464,299 472,489
GNMA, SF, 7.00%, 5/15/28 .................... United States 39,308 38,804
GNMA, SF, 6.50%, 12/15/28 ................... United States 418,411 404,406
GNMA, SF, 6.50%, 2/15/29 .................... United States 848,773 819,959
GNMA II, SF, 6.50%, 7/20/28 ................. United States 849,276 816,856
GNMA II, SF, 6.50%, 7/20/30 ................. United States 896,928 862,142
-----------
31,280,785
-----------
</TABLE>
24
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT* VALUE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES (CONT.)
U.S. GOVERNMENT SECURITIES .9%
U.S. Treasury Bond, 6.125%, 11/15/27 ............................ United States $ 850,000 $ 869,234
U.S. Treasury Note, 5.375%, 2/15/01 ............................. United States 2,000,000 1,993,900
------------
2,863,134
------------
OTHER U.S. GOVERNMENT AND AGENCY SECURITIES 5.3%
FHLB, 5.477%, 1/28/09 ........................................... United States 6,000,000 5,464,206
FHLMC, 6.60%, 4/20/09 ........................................... United States 4,300,000 4,121,516
FHLMC, 7.625%, 9/09/09 .......................................... United States 1,000,000 997,109
FNMA, 5.75%, 4/15/03 ............................................ United States 1,000,000 985,122
FNMA, 5.75%, 6/15/05 ............................................ United States 6,000,000 5,820,474
------------
17,388,427
------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $52,341,656) .. 51,532,346
------------
FOREIGN GOVERNMENT AND AGENCY SECURITIES 27.4%
Republic of Argentina, 11.75%, 4/07/09 .......................... Argentina 270,000 236,250
Republic of Argentina, 11.375%, 3/15/10 ......................... Argentina 353,000 299,168
Republic of Argentina, 11.375%, 1/30/17 ......................... Argentina 2,000,000 1,686,000
Republic of Argentina, 9.75%, 9/19/27 ........................... Argentina 730,000 545,675
New South Wales Treasury Corp., 7.00%, 4/01/04 .................. Australia 3,000,000 AUD 1,584,578
Queensland Treasury Corp., 6.50%, 6/14/05 ....................... Australia 1,180,000 AUD 613,674
Kingdom of Belgium, 7.75%, 10/15/04 ............................. Belgium 1,793,000 EUR 1,649,080
Republic of Brazil, 11.25%, 7/26/07 ............................. Brazil 2,500,000 2,468,750
Republic of Brazil, 9.375%, 4/07/08 ............................. Brazil 4,000,000 3,520,000
Republic of Brazil, 14.50%, 10/15/09 ............................ Brazil 5,180,000 5,543,895
Republic of Brazil, 12.25%, 3/06/30 ............................. Brazil 3,705,000 3,237,244
Republic of Brazil, 11.00%, 8/17/40 ............................. Brazil 2,500,000 1,921,875
Republic of Bulgaria, FRN, 7.063%, 7/28/11 ...................... Bulgaria 110,000 82,500
Republic of Bulgaria, FRN, 7.75%, 7/28/11 ....................... Bulgaria 7,560,000 5,670,000
Government of Canada, 8.75%, 12/01/05 ........................... Canada 303,000 CAD 222,900
Government of Canada, 7.00%, 12/01/06 ........................... Canada 359,000 CAD 248,101
Republic of Colombia, 9.75%, 4/23/09 ............................ Colombia 700,000 561,575
Kingdom of Denmark, 7.00%, 12/15/04 ............................. Denmark 15,160,000 DKK 1,817,601
Republic of Ecuador, 144A, 12.00%, 11/15/12 ..................... Ecuador 1,166,000 792,151
(d) Government of France, 6.75%, 10/25/03 ........................... France 1,178,000 EUR 1,042,108
(d) Government of France, 4.00%, 10/25/09 ........................... France 2,039,000 EUR 1,567,012
Federal Republic of Germany, 3.25%, 2/17/04 ..................... Germany 880,000 EUR 704,567
Federal Republic of Germany, 7.375%, 1/03/05 .................... Germany 1,000,000 EUR 915,325
Federal Republic of Germany, 4.50%, 7/04/09 ..................... Germany 4,674,000 EUR 3,761,227
Buoni Poliennali Del Tes, 7.75%, 11/01/06 ....................... Italy 1,319,000 EUR 1,249,349
Italy Government, 6.75%, 2/01/07 ................................ Italy 1,513,216 EUR 1,372,386
Government of Jamaica, Reg S, 9.625%, 7/02/02 ................... Jamaica 1,750,000 1,728,125
United Mexican States, 9.75%, 4/06/05 ........................... Mexico 2,000,000 2,082,500
United Mexican States, 8.625%, 3/12/08 .......................... Mexico 7,470,000 7,283,250
United Mexican States, 10.375%, 2/17/09 ......................... Mexico 2,930,000 3,116,788
United Mexican States, 11.375%, 9/15/16 ......................... Mexico 1,500,000 1,703,625
</TABLE>
25
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT* VALUE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONT.)
United Mexican States, 11.50%, 5/15/26 .......................... Mexico $ 1,500,000 $ 1,772,250
Netherlands Government, 8.50%, 6/01/06 .......................... Netherlands 1,619,707 EUR 1,577,560
Government of New Zealand, 7.00%, 7/15/09 ....................... New Zealand 2,000,000 NZD 810,964
Republic of Panama, 8.875%, 9/30/27 ............................. Panama 1,500,000 1,271,250
Republic of Panama, 9.375%, 4/01/29 ............................. Panama 3,530,000 3,408,215
Republic of Peru, FRN, 4.50%, 3/07/17 ........................... Peru 3,605,000 2,174,284
Republic of Philippines, 9.875%, 3/16/10 ........................ Philippines 1,500,000 1,267,500
Russia Ministry of Finance, Reg S, 10.00%, 6/26/07 .............. Russia 4,000,000 2,862,500
Bonos Y Oblig Del Estado, 3.25%, 1/31/05 ........................ Spain 2,578,000 EUR 2,015,879
Swedish Government, 10.25%, 5/05/03 ............................. Sweden 7,000,000 SEK 785,452
SEI Holdings IX Inc., 144A, 11.00%, 11/30/00 .................... Trinidad and Tobago 125,000 125,000
Republic of Turkey, 12.375%, 6/15/09 ............................ Turkey 1,217,000 1,226,128
Republic of Turkey, 144A, 10.00%, 9/19/07 ....................... Turkey 410,000 379,045
Republic of Turkey, Reg S, 10.00%, 9/19/07 ...................... Turkey 628,000 580,586
United Kingdom, 6.50%, 12/07/03 ................................. United Kingdom 995,000 GBP 1,475,350
United Kingdom, 7.50%, 12/07/06 ................................. United Kingdom 2,081,000 GBP 3,326,766
Republic of Venezuela, 9.25%, 9/15/27 ........................... Venezuela 4,493,000 2,970,996
Republic of Venezuela, 144A, 9.125%, 6/18/07 .................... Venezuela 100,000 80,681
Republic of Venezuela, FRN, 7.563%, 3/31/20 ..................... Venezuela 250,000 201,802
Republic of Venezuela, Reg S, 9.125%, 6/18/07 ................... Venezuela 1,200,000 968,159
------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $94,856,492) 88,507,646
------------
TOTAL LONG TERM INVESTMENTS (COST $340,409,016) ................. 307,235,196
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
----------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS 3.0%
(b) Franklin Institutional Fiduciary Trust Money Market Portfolio (COST $9,643,497) United States 9,643,497 9,643,497
------------
TOTAL INVESTMENTS (COST $350,052,513) 98.1% ................................... 316,878,693
OTHER ASSETS, LESS LIABILITIES 1.9% ........................................... 6,032,482
------------
NET ASSETS 100.0% ............................................................. $322,911,175
============
</TABLE>
CURRENCY ABBREVIATIONS:
AUD - Australian Dollar
CAD - Canadian Dollar
DKK - Danish Krone
EUR - European Union Euro
GBP - British Pound
NZD - New Zealand Dollar
SEK - Swedish Krona
* The principal amount is stated in U.S. dollars unless otherwise indicated.
(a) Non-income producing
(b) The Franklin Institutional Fiduciary Trust Money Market Portfolio is managed
by Franklin Advisers, Inc.
(c) See Note 6 regarding defaulted securities.
(d) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery.
See notes to financial statements.
26
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<S> <C>
Assets:
Investments in securities:
Cost ............................................................................................ $ 350,052,513
=============
Value ........................................................................................... 316,878,693
Receivables:
Investment securities sold ...................................................................... 6,904,860
Capital shares sold ............................................................................. 279,485
Dividends and interest .......................................................................... 5,625,417
-------------
Total assets ................................................................................ 329,688,455
-------------
Liabilities:
Payables:
Investment securities purchased ................................................................. 5,794,694
Capital shares redeemed ......................................................................... 691,716
Affiliates ...................................................................................... 172,606
Shareholders .................................................................................... 24,673
Other liabilities ................................................................................ 93,591
-------------
Total liabilities ........................................................................... 6,777,280
-------------
Net assets, at value ....................................................................... $ 322,911,175
=============
Net assets consist of:
Undistributed net investment income .............................................................. $ 1,003,659
Net unrealized depreciation ...................................................................... (33,231,646)
Accumulated net realized loss .................................................................... (9,805,148)
Capital shares ................................................................................... 364,944,310
=============
Net assets, at value ........................................................................ $ 322,911,175
=============
CLASS A:
Net asset value per share (a) ($242,703,896 / 25,355,945 shares outstanding) ..................... $ 9.57
=============
Maximum offering price per share ($9.57 / 95.75%) ................................................ $ 9.99
=============
CLASS B:
Net asset value and maximum offering price per share (a) ($16,272,202 / 1,695,801 shares
outstanding) .................................................................................... $ 9.60
=============
CLASS C:
Net asset value per share (a) ($40,647,885 / 4,246,331 shares outstanding) ...................... $ 9.57
=============
Maximum offering price per share ($9.57 / 99%) ................................................... $ 9.67
=============
ADVISOR CLASS:
Net asset value and maximum offering price per share ($23,287,192 / 2,431,795 shares outstanding) $ 9.58
=============
</TABLE>
(a) Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
27
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<S> <C>
Investment income:
Dividends .............................................................. $ 766,320
Interest ............................................................... 13,862,495
------------
Total investment income ........................................... 14,628,815
------------
Expenses:
Management fees (Note 3) ............................................... 861,119
Distribution fees (Note 3)
Class A ............................................................... 321,927
Class B ............................................................... 49,915
Class C ............................................................... 131,350
Transfer agent fees (Note 3) ........................................... 242,587
Custodian fees ......................................................... 25,342
Reports to shareholders ................................................ 42,636
Registration and filing fees ........................................... 69,880
Professional fees (Note 3) ............................................. 16,774
Trustees' fees and expenses ............................................ 3,793
Other .................................................................. 31,937
------------
Total expenses .................................................... 1,797,260
Expenses waived/paid by affiliate (Note 3) ........................ (463,326)
------------
Net expenses ..................................................... 1,333,934
------------
Net investment income ........................................... 13,294,881
------------
Realized and unrealized losses:
Net realized loss from:
Investments ........................................................... (3,343,788)
Foreign currency transactions ......................................... (73,485)
------------
Net realized loss ................................................. (3,417,273)
Net unrealized appreciation (depreciation) on:
Investments ........................................................... (6,037,516)
Translation of assets and liabilities denominated in foreign currencies 20,820
------------
Net unrealized depreciation ....................................... (6,016,696)
------------
Net realized and unrealized loss ........................................ (9,433,969)
------------
Net increase in net assets resulting from operations .................... $ 3,860,912
============
</TABLE>
See notes to financial statements.
28
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2000 (UNAUDITED)
AND THE YEAR ENDED APRIL 30, 2000
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
OCTOBER 31, 2000 APRIL 30, 2000
-----------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .............................................................. $ 13,294,881 $ 26,020,782
Net realized loss from investments and foreign currency transactions ............... (3,417,273) (5,082,589)
Net unrealized depreciation on investments and translation of assets and liabilities
denominated in foreign currencies ................................................. (6,016,696) (24,918,903)
-----------------------------------
Net increase (decrease) in net assets resulting from operations ................ 3,860,912 (3,980,710)
Distributions to shareholders from:
Net investment income:
Class A ........................................................................... (9,959,109) (20,681,821)
Class B ........................................................................... (559,118) (701,635)
Class C ........................................................................... (1,506,056) (2,919,234)
Advisor Class ..................................................................... (914,441) (598,051)
-----------------------------------
Total distributions to shareholders ................................................. (12,938,724) (24,900,741)
Capital share transactions: (Note 2)
Class A ........................................................................... (4,868,435) 30,781,237
Class B ........................................................................... 3,069,198 10,141,223
Class C ........................................................................... 2,073,910 7,137,926
Advisor Class ..................................................................... 2,132,353 22,303,507
-----------------------------------
Total capital share transactions .................................................... 2,407,026 70,363,893
Net increase (decrease) in net assets .......................................... (6,670,786) 41,482,442
Net assets
Beginning of period ................................................................. 329,581,961 288,099,519
-----------------------------------
End of period ....................................................................... $ 322,911,175 $ 329,581,961
===================================
Undistributed net investment income included in net assets:
End of period ....................................................................... $ 1,003,659 $ 647,502
===================================
</TABLE>
See notes to financial statements.
29
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
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 thirteen separate
series (the Funds). Franklin Strategic Income Fund (the Fund) included in this
report is non-diversified. The Fund's investment objective is to obtain a high
level of current income while seeking capital appreciation.
The following summarizes the Fund's significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. MORTGAGE DOLLAR ROLLS:
The Fund enters into dollar roll transactions in which it agrees to sell and
repurchase mortgage backed securities. If the securities are substantially
similar, the difference between the sale and the purchase price is treated as
interest income and realized gains and losses are deferred.
d. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
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.
30
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Notes to Financial Statements (unaudited) (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.
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 Fund offers four classes of shares: Class A, Class B, Class C, and Advisor
Class. Each class of shares differs by its initial sales load, distribution
fees, voting rights on matters affecting a single class and its exchange
privilege.
At October 31, 2000, there were an unlimited number of shares authorized ($.01
par value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
OCTOBER 31, 2000 APRIL 30, 2000
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Shares sold .................................. 3,175,620 $ 31,127,259 10,107,775 $ 102,601,479
Shares issued on merger(2) ................... -- -- 3,713,540 37,543,893
Shares issued in reinvestment of distributions 663,097 6,496,291 1,275,159 12,919,144
Share redeemed ............................... (4,337,638) (42,491,985) (12,086,386) (122,283,279)
--------------------------------------------------------------
Net increase (decrease) ...................... (498,921) $ (4,868,435) 3,010,088 $ 30,781,237
==============================================================
CLASS B SHARES:
Shares sold .................................. 384,228 $ 3,767,545 1,082,310 $ 11,077,406
Shares issued in reinvestment of distributions 36,804 361,569 46,222 466,896
Share redeemed ............................... (108,325) (1,059,916) (139,651) (1,403,079)
--------------------------------------------------------------
Net increase ................................. 312,707 $ 3,069,198 988,881 $ 10,141,223
==============================================================
CLASS C SHARES:
Shares sold .................................. 824,140 $ 8,072,305 1,966,177 $ 20,041,073
Shares issued in reinvestment of distributions 85,283 835,555 167,498 1,699,352
Share redeemed ............................... (698,863) (6,833,950) (1,442,427) (14,602,499)
--------------------------------------------------------------
Net increase ................................. 210,560 $ 2,073,910 691,248 $ 7,137,926
==============================================================
</TABLE>
31
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Notes to Financial Statements (unaudited) (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
OCTOBER 31, 2000 APRIL 30, 2000(1)
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
<S> <C> <C> <C> <C>
ADVISOR CLASS SHARES:
Shares sold .................................. 181,573 $ 1,794,866 2,161,209 $ 21,764,041
Shares issued on merger(2) ................... -- -- 8,554 86,480
Shares issued in reinvestment of distributions 93,233 913,434 59,883 597,001
Share redeemed ............................... (58,400) (575,947) (14,257) (144,015)
-----------------------------------------------------------
Net increase ................................. 216,406 $ 2,132,353 2,215,389 $ 22,303,507
===========================================================
</TABLE>
(1) For the period August 12, 1999 (effective date) to April 30, 2000.
(2) During the year ended April 30, 2000, the Fund acquired the net assets of
the Franklin Investment Grade Income Fund pursuant to a plan of
reorganization approved by Franklin Investment Grade Income Fund's
shareholders.
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
the following entities:
<TABLE>
<CAPTION>
ENTITY AFFILIATION
---------------------------------------------------------------------------------------
<S> <C>
Franklin Templeton Services, Inc. (FT Services) Administration manager
Franklin Advisers, Inc. (Advisers) Investment manager
Templeton Investment Counsel, Inc. (TICI) Investment manager
Franklin/Templeton Distributors, Inc. (Distributors) Principal Underwriter
Franklin/Templeton Investor Services, Inc. (Investor Services) Transfer Agent
</TABLE>
The Fund pays an investment management fee to Advisers based on the average net
assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE DAILY NET ASSETS
-----------------------------------------------------------------
<S> <C>
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% In excess of $250 million
</TABLE>
Management fees were reduced on assets invested in the Franklin Institutional
Fiduciary Trust Money Market Portfolio.
Advisers agreed in advance to waive management fees, as noted in the Statement
of Operations.
Under a subadvisory agreement, Templeton Investment Counsel, Inc. (TICI)
provides subadvisory services to the Fund and receives from Advisers fees based
on the average daily net assets of the Fund.
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
32
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES (CONT.)
The Fund reimburses Distributors up to .25%, .65%, and .65% per year of the
average net assets of Class A, Class B, and Class C, respectively, for costs
incurred in marketing the Fund's shares.
Distributors paid net commissions on sales of the Fund's shares, and received
contingent deferred sales charges for the period of $178,786 and $30,564,
respectively.
The Fund paid transfer agent fees of $242,587, of which $142,765 was paid to
Investors Services.
Included in professional fees are legal fees of $456, that were paid to a law
firm in which a partner of that firm was an officer of the Fund.
4. INCOME TAXES
At April 30, 2000, the Fund had deferred capital losses and deferred currency
losses occurring subsequent to October 31, 1999 of $482,968 and $33,534,
respectively. For tax purposes, such losses will be reflected in the year ending
April 30, 2001.
At April 30, 2000, the Fund had tax basis capital losses of $5,961,894 which may
be carried over to offset future capital gains. Such losses expire as follows:
<TABLE>
<S> <C>
Capital loss carryovers expiring in:
2003 ................................ $ 254,062
2004 ................................ 368,716
2007 ................................ 780,115
2008 ................................ 4,559,001
----------
$5,961,894
==========
</TABLE>
At October 31, 2000, the net unrealized depreciation based on the cost of
investments for income tax purposes of $349,998,098 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation .............. $ 9,197,606
Unrealized depreciation .............. (42,317,011)
------------
Net unrealized depreciation .......... $(33,119,405)
============
</TABLE>
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions and defaulted
bonds.
Net realized capital losses differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, and mortgage dollar roll transactions.
33
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Notes to Financial Statements (unaudited) (continued)
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended October 31, 2000 aggregated $69,675,027 and $76,142,625,
respectively.
6. CREDIT RISK AND DEFAULTED SECURITIES
The Fund has 61.1% of its portfolio invested in lower rated and comparable
quality unrated high yield securities, which tend to be more sensitive to
economic conditions than higher rated securities. The risk of loss due to
default by the issuer may be significantly greater for the holders of high
yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer. At October 31, 2000, the
Fund held defaulted securities with a value aggregating $430,945, representing
.13% of the Fund's net assets. For information as to specific securities, see
the accompanying Statement of Investments.
For financial reporting purposes, the Fund discontinues accruing income on
defaulted bonds and provides estimates for losses on interest receivable.
34
<PAGE>
This page intentionally left blank.
<PAGE>
This page intentionally left blank.
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
Your Fund's Goal: Franklin U.S. Long-Short Fund seeks long-term capital
appreciation in both up and down (bull and bear) markets. The Fund also seeks to
provide less volatility than the overall stock market. Under normal market
conditions, the Fund will have both long and short positions in equity
securities, primarily common stocks of U.S. companies.
--------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to bring you the inaugural semiannual report for Franklin U.S.
Long-Short Fund, covering the six-month period ended October 31, 2000. Opened to
the public on May 1, 2000, the Fund's investment philosophy is that a
combination of long and short equity positions can provide positive returns in
either up or down market environments, and reduce overall volatility. When the
Fund takes a long position, it purchases a stock outright. When the Fund takes a
short position, it sells a stock it does not own at the current market price and
delivers to the buyer stock that it has borrowed. The Fund then buys the stock
back in the open market at some future date. We do not attempt to time the
direction of the entire market, but shift the portfolio's net exposure (the
value of securities held long less the value of securities held short) depending
on which specific market opportunities -- long or short -- appear to be more
attractive.
CONTENTS
<TABLE>
<S> <C>
Shareholder Letter .................................................... 1
Performance Summary ................................................... 8
Financial Highlights & Statement of Investments ....................... 9
Financial Statements .................................................. 15
Notes to Financial Statements ......................................... 18
</TABLE>
FUND CATEGORY
[PYRAMID CHART]
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 10.
<PAGE>
During the six months under review, the U.S. economy ended the second quarter of
2000 on a very strong note despite six credit-tightening moves by the Federal
Reserve Board (the Fed) over the previous year. Economic growth, as measured by
gross domestic product (GDP), increased at a 5.6% annualized pace in the second
quarter of 2000, consumer confidence reached an all-time high in May, the
unemployment rate hovered near its 30-year low of 3.9% and housing demand
remained strong despite rising mortgage financing costs. In an effort to prevent
the economy from overheating and to head off severe inflation, the Fed raised
the federal funds rate to 6.50% in May.
By the latter half of the reporting period, some preliminary evidence surfaced
showing the Fed's credit-tightening maneuvers were causing economic growth to
wane. Most notably, GDP decelerated to a 2.4% annualized rate in the third
quarter as rising energy prices, cooling real estate markets and falling
corporate profits began to take their toll on the nation. Consequently, consumer
spending also began to slow from the 7.6% pace set in first quarter 2000, to
3.1% and 4.5% in the second and third quarters. With clear signs of slackening
economic growth and no evidence of the inflationary "smoking gun," the Fed
decided to keep interest rates on hold through October.
2
<PAGE>
Equity markets grew quite volatile during the reporting period when they were
generally besieged by investors' lowered profit expectations and interest rate
concerns. This period was marked, in particular, by high sector rotation and a
return to earth for many of the technology-related stocks of companies
representing the "new economy," which includes Internet, telecommunications and
media companies. While the Dow Jones(R) Industrial Average returned 2.93% over
the six-month period, the Standard & Poor's 500TM (S&P 500(R)) Stock Index fell
1.03% and the tech-heavy Nasdaq Composite Index declined 12.31% during the same
time.(1) Within this environment, Franklin U.S. Long-Short Fund - Class A
delivered a +20.22% cumulative total return as shown in the Performance Summary
on page 8.
During the six months under review, we attempted to invest in stocks poised for
outperformance on the long side, and underperformance on the short side. On the
long side, we favored stocks with strong franchises, strong growth prospects and
favorable industry dynamics. We also maintained broad industry exposure on the
long side, with emphasis on electronic technology, wireless communications and
energy-related companies,
TOP 10 LONG HOLDINGS
10/31/00
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
SECTOR NET ASSETS
--------------------------------------------------------------------------------
<S> <C>
SBC Communications Inc. 2.94%
Communications
Devon Energy Corp. 2.36%
Energy Minerals
McLeodUSA Inc. 2.29%
Communications
Union Carbide Corp. 2.25%
Process Industries
XO Communications Inc. 2.18%
Communications
General Motors Corp.,
Hughes Electronics 2.12%
Electronic Technology
A.G. Edwards Inc. 1.87%
Finance
Target Corp. 1.51%
Retail Trade
Xilinx Inc. 1.50%
Electronic Technology
AT&T Corp. 1.48%
Communications
</TABLE>
(1) Source: Standard & Poor's Micropal. The S&P 500 Stock Index consists of 500
domestic stocks, comprising four broad sectors: industrials, utilities,
financials and transportation. The S&P 500 serves as the standard for measuring
large-cap U.S. stock market performance. Since some industries are characterized
by companies of relatively small stock capitalization, the index is not composed
of the 500 largest, U.S. publicly traded companies.
The Dow Jones Industrial Average is a price-weighted index based on the average
market price of 30 blue chip stocks. The average is found by adding the prices
of the 30 stocks and dividing by a denominator that has been adjusted for stock
splits, stock dividends and substitutions of stocks.
The Nasdaq Composite Index measures all Nasdaq domestic and non-U.S.-based
common stocks listed on The Nasdaq Stock Market(R). The index is market-value
weighted and includes over 4,800 companies (as of 10/31/00).
The indexes are unmanaged include reinvested dividends. One cannot invest
directly in an index.
3
<PAGE>
SECTOR BREAKDOWN
Based on Total Net Assets
10/31/00
<TABLE>
<CAPTION>
SECTOR % LONG % SHORT NET %
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Communications 10.3% 0.0% 10.3%
Electronic Technology 12.3% -3.1% 9.2%
Energy Minerals 6.7% 0.0% 6.7%
Industrial Services 4.8% 0.0% 4.8%
Process Industries 3.5% 0.0% 3.5%
Finance 3.6% -1.4% 2.2%
Transportation 1.4% 0.0% 1.4%
Utilities 1.0% 0.0% 1.0%
Distribution Services 0.4% -1.0% -0.6%
Consumer Services 1.7% -2.4% -0.7%
Producer Manufacturing 0.2% -1.0% -0.8%
Retail Trade 3.3% -4.5% -1.2%
Consumer Durables 0.0% -1.2% -1.2%
Health Technology 0.4% -1.9% -1.5%
Commercial Services 0.9% -3.6% -2.7%
Consumer Non-Durables 0.7% -3.6% -2.9%
Technology Services 1.5% -9.4% -7.9%
</TABLE>
where several new positions were initiated. On the short side, we remained
focused on companies with negative business fundamentals and weak industry
dynamics, which over the six-month period included a number of technology
services, commercial services and consumer non-durables stocks.
4
<PAGE>
PORTFOLIO BREAKDOWN
10/31/00
Based on Total Net Assets
<TABLE>
<CAPTION>
% OF TNA # OF POSITIONS
--------------------------------------------------------------------------------
<S> <C> <C>
Long Equity Securities Net 52.7% 51
Short Equity Securities Net 33.1% 49
================================================================================
TOTAL NET 19.6% (LONG)
</TABLE>
Throughout much of the six-month period, the Fund kept approximately 50% of
total net assets in long positions, and 36% in short. By October 31, 2000, the
Fund's portfolio breakdown included 52.7% of total net assets in long
securities, 33.1% in short securities and an overall 19.6% net long position. On
average, the Fund had a net long position of about 19.9%. At no time during this
period was the Fund net short. While the long positions helped our performance
through August, the short positions enhanced returns primarily in May, September
and October.
As noted earlier, the Fund also pursues additional goals of reduced volatility
and correlation relative to the overall market. During the six months under
review, the Fund produced relative volatility (as measured by standard deviation
of daily returns against
5
<PAGE>
the S&P 500) of 55.0%, and relative correlation of 3.6%. Since its May 28, 1999,
inception (during which time the portfolio was managed privately until May 1,
2000), the Fund's relative volatility and correlation were 54.8% and 21.1%,
respectively, through October 31, 2000.
Looking ahead, we believe investor uneasiness about the sustainability of the
historic bull market, coupled with uncertainty over the direction of interest
rates and corporate earnings, has set the stage for increased market volatility.
Increasing profit warnings, stock market volatility, higher average oil prices,
slowing international growth and a strong dollar could adversely affect the
market's returns in the coming months. But continued low unemployment and high
consumer confidence may help mitigate these factors and keep the U.S. economic
engine moving ahead, albeit at a slower pace than we've seen in the past year.
We think the Fund will continue to weather these difficult market conditions
successfully, as a result of our flexible investment strategy of maintaining
both short as well as long equity positions. Furthermore, our cash position will
allow us to take advantage of opportunities both long and short as they arise in
the markets.
6
<PAGE>
Thank you for your investment in Franklin U.S. Long-Short Fund. We appreciate
your support, welcome your comments and look forward to serving your investment
needs in the months to come.
Sincerely,
/s/ CHARLES E. JOHNSON
------------------------
Charles E. Johnson
/s/ MICHAEL R. WARD
------------------------
Michael R. Ward
Portfolio Management Team
Franklin U.S. Long-Short Fund
--------------------------------------------------------------------------------
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. Our strategies and the Fund's portfolio composition will change
depending on market and economic conditions. Although historical performance is
no guarantee of future results, these insights may help you understand our
investment and management philosophy.
--------------------------------------------------------------------------------
7
<PAGE>
--------------------------------------------------------------------------------
CLASS A: Subject to the current, maximum 5.75% initial sales charge.
The Fund's manager has agreed in advance to waive a portion of its management
fees and to make certain payments to reduce expenses. If the manager had not
taken this action, the Fund's total return would have been lower. The fee waiver
may be discontinued at any time, upon notice to the Fund's Board of Trustees.
--------------------------------------------------------------------------------
PERFORMANCE SUMMARY AS OF 10/31/00
Six-month total return represents the change in value of an investment
for the period indicated and does not include sales charges. 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 trends. All
total returns include reinvested distributions at net asset value.
<TABLE>
<CAPTION>
CLASS A
<S> <C> <C>
SIX-MONTH TOTAL RETURN +20.22%
NET ASSET VALUE (NAV) $20.57 (10/31/00) $17.11 (4/30/00)
CHANGE IN NAV +$3.46
</TABLE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR (5/28/99)
--------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +81.14% +95.34%
Average Annual Total Return(2) +70.70% +57.54%
Value of $10,000 Investment(3) $17,070 $18,408
</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 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 maximum sales charge.
--------------------------------------------------------------------------------
SINCE MARKETS CAN GO DOWN AS WELL AS UP, INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE WITH MARKET CONDITIONS, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU
SELL YOUR SHARES.
--------------------------------------------------------------------------------
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
8 Past performance does not guarantee future results.
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN U.S. LONG-SHORT FUND
Financial Highlights
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31, 2000 YEAR ENDED APRIL 30,
(UNAUDITED) 2000 1999(a)
-------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 17.12 $10.28 $10.00
-------------------------------------------------
Income from investment operations:
Net investment income(b).......................... .34 .42 .05
Net realized and unrealized gains ................ 3.12 6.80 .23
-------------------------------------------------
Total from investment operations .................. 3.46 7.22 .28
-------------------------------------------------
Less distributions from:
Net investment income ............................ -- (.25) --
Net realized gains ............................... -- (.13) --
-------------------------------------------------
Total distributions ............................... -- (.38) --
-------------------------------------------------
Net asset value, end of period .................... $ 20.58 $17.12 $10.28
=================================================
Total return(c).................................... 20.22% 71.60% 2.80%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $128,202 $1,712 $1,028
Ratios to average net assets:
Expenses ......................................... 1.82%(d) --
Expense excluding waiver and payments by affiliate 1.90%(d) 4.63%(d),(e)
Net investment income ............................ 3.58%(d) 3.33% 4.22%(d)
Portfolio turnover rate ........................... 35.50% 234.43% 13.47%
</TABLE>
(a) For the period March 15, 1999 (inception date) to April 30, 1999.
(b) Based on average shares outstanding effective year ended April 30, 2000.
(c) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(d) Annualized
(e) For the period May 28, 1999 (effective date) to April 30, 2000.
See notes to financial statements. 9
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN U.S. LONG-SHORT FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 52.7%
(e) COMMERCIAL SERVICES .9%
Viad Corp. ........................................... United States 56,000 $ 1,197,000
----------
(e) COMMUNICATIONS 10.3%
AT&T Corp. ........................................... United States 81,580 1,891,636
(a) Leap Wireless International Inc. ..................... United States 35,400 1,761,150
(a) McLeodUSA Inc. ....................................... United States 152,500 2,935,625
SBC Communications Inc. .............................. United States 65,300 3,766,994
(a) XO Communications Inc. ............................... United States 83,000 2,799,953
----------
13,155,358
----------
(a) CONSUMER NON-DURABLES .7%
Coach Inc. ........................................... United States 39,100 913,963
----------
(a),(e) CONSUMER SERVICES 1.7%
ACTV Inc. .............................................. United States 111,200 1,094,625
AT&T Corp. - Liberty Media Group, A .................... United States 63,000 1,134,000
----------
2,228,625
----------
(a),(e) DISTRIBUTION SERVICES .4%
Akorn Inc. ............................................. United States 107,800 498,575
----------
ELECTRONIC TECHNOLOGY 12.3%
(a),(e) Copper Mountain Networks Inc. .................... United States 55,900 639,356
(a),(e) General Motors Corp. (Hughes Electronics Corp.), H United States 83,800 2,715,120
(a) Integrated Device Technology Inc. .................... United States 21,500 1,210,719
Intel Corp. .......................................... United States 35,000 1,575,000
(a) Lam Research Corp. ................................... United States 41,000 794,375
Linear Technology Corp. ................................ United States 9,000 581,063
(e) Motorola Inc. ........................................ United States 57,000 1,421,438
(a) Pinnacle Systems Inc. ............................... United States 95,000 1,199,375
(a) PLX Technology Inc. ................................. United States 54,000 1,296,000
(a),(e) Proxim Inc. ...................................... United States 19,000 1,151,875
(a),(e) Taiwan Semiconductor Manufacturing Co. Ltd., ADR . Taiwan 54,000 1,225,125
(a) Xilinx Inc. ......................................... United States 26,500 1,919,594
----------
15,729,040
----------
ENERGY MINERALS 6.7%
(e) Cabot Oil & Gas Corp., A ............................. United States 77,500 1,520,938
(a),(e) Chesapeake Energy Corp. .......................... United States 191,000 1,074,375
(e) Conoco Inc., B ....................................... United States 38,000 1,033,125
(e) Devon Energy Corp. ................................... United States 60,000 3,024,000
(a) Petroleo Brasileiro SA (Petrobras), ADR .............. Brazil 65,000 1,889,063
----------
8,541,501
----------
FINANCE 3.6%
(e) A.G. Edwards Inc. .................................... United States 47,200 2,395,400
(e) Goldman Sachs Group Inc. ............................. United States 12,000 1,197,750
Merrill Lynch & Co. Inc. ............................ United States 15,000 1,050,000
----------
4,643,150
----------
</TABLE>
10
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN U.S. LONG-SHORT FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
(a) HEALTH TECHNOLOGY .4%
Cubist Pharmaceuticals Inc. ......................................... United States 13,000 $ 558,594
-------------
(a) INDUSTRIAL SERVICES 4.8%
Atwood Oceanics Inc. ................................................ United States 34,500 1,157,906
(e) Grey Wolf Inc. ...................................................... United States 389,000 1,799,125
Rowan Cos. Inc. ..................................................... United States 47,000 1,183,813
Stuart Energy Systems Corp. ......................................... Canada 39,900 603,477
Superior Energy Services Inc. ....................................... United States 85,000 765,000
(e) Trico Marine Services Inc. .......................................... United States 40,000 665,000
-------------
6,174,321
-------------
(e) PROCESS INDUSTRIES 3.5%
Bowater Inc. ........................................................ United States 18,000 974,250
(a) Packaging Corp. of America .......................................... United States 39,100 574,281
Union Carbide Corp. ................................................. United States 67,000 2,881,000
-------------
4,429,531
-------------
(a) PRODUCER MANUFACTURING .2%
Hydrogenics Corp. ................................................... Canada 20,000 241,250
-------------
RETAIL TRADE 3.3%
(a) Best Buy Co. Inc. ................................................... United States 20,000 1,003,750
(a),(e) Costco Wholesale Corp. .............................................. United States 8,000 293,000
(e) Target Corp. ........................................................ United States 70,000 1,933,750
(a) Williams-Sonoma Inc. ................................................ United States 50,000 1,040,625
-------------
4,271,125
-------------
(a) TECHNOLOGY SERVICES 1.5%
Brio Technology Inc. ................................................ United States 93,100 762,256
InfoSpace Inc. ...................................................... United States 25,000 503,125
(e) Level 8 Systems Inc. ................................................ United States 63,000 606,375
-------------
1,871,756
-------------
TRANSPORTATION 1.4%
United Parcel Service Inc., B ....................................... United States 30,000 1,822,500
-------------
(a) UTILITIES 1.0%
Southern Energy Inc. ................................................ United States 47,600 1,297,098
TNPC Inc. ........................................................... United States 1,400 23,275
-------------
1,320,373
-------------
TOTAL LONG TERM INVESTMENTS (COST $68,232,379) ...................... 67,596,662
-------------
SHORT TERM INVESTMENTS 24.3%
(b) Franklin Institutional Fiduciary Trust Money Market Portfolio
(COST $31,107,454) .................................................. 31,107,454 31,107,454
-------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT (COST $99,339,833) .... 98,704,116
-------------
</TABLE>
11
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN U.S. LONG-SHORT FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(c) REPURCHASE AGREEMENT 21.0%
Joint Repurchase Agreement 6.563%, 11/01/00 (Maturity Value
$26,891,749) (COST $26,886,848) ..................................... $ 26,886,848 $ 26,886,848
Barclays Capital Inc. (Maturity Value $3,242,069)
Bear, Stearns & Co. Inc. (Maturity Value $1,852,841)
Deutsche Bank Securities (Maturity Value $3,242,069)
Dresdner Kleinwort Benson, North America LLC (Maturity
Value $3,242,069)
Lehman Brothers Inc. (Maturity Value $2,344,425)
Nesbitt Burns Securities Inc. (Maturity Value $3,242,069)
Paribas Corp. (Maturity Value $3,242,069)
Societe Generale (Maturity Value $3,242,069)
UBS Warburg (Maturity Value $3,242,069)
Collateralized by U.S. Treasury Bills and Notes
-------------
TOTAL INVESTMENTS (COST $126,226,681) 98.0% ............................... 125,590,964
SECURITIES SOLD SHORT (33.1%) ............................................. (42,377,432)
OTHER ASSETS, LESS LIABILITIES 35.1% ...................................... 44,988,550
-------------
NET ASSETS 100.0% ......................................................... $ 128,202,082
=============
</TABLE>
<TABLE>
<CAPTION>
(d) SECURITIES SOLD SHORT
ISSUER COUNTRY SHARES VALUE
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMERCIAL SERVICES 3.6%
ADVO Inc. ............................................................ United States 42,500 $ 1,564,531
DoubleClick Inc. ..................................................... United States 26,750 434,688
FreeMarkets Inc. ..................................................... United States 25,000 1,235,938
LifeMinders Inc. ..................................................... United States 29,000 337,125
PurchasePro.com Inc. ................................................. United States 28,000 756,000
StarTek Inc. ......................................................... United States 12,300 312,881
-------------
4,641,163
-------------
CONSUMER DURABLES 1.2%
Monaco Coach Corp. ................................................... United States 45,300 772,931
Tupperware Corp. ..................................................... United States 10,000 171,250
Winnebago Industries Inc. ............................................ United States 46,700 537,050
-------------
1,481,231
-------------
CONSUMER NON-DURABLES 3.6%
Campbell Soup Co. .................................................... United States 36,000 1,053,000
Gucci Group NV, N.Y. shs. ............................................ Netherlands 7,900 772,225
Kellogg Co. .......................................................... United States 42,000 1,065,750
Kenneth Cole Productions Inc. ........................................ United States 10,500 477,094
Reebok International Ltd. ............................................ United States 56,000 1,207,500
-------------
4,575,569
-------------
CONSUMER SERVICES 2.4%
eBay Inc. ............................................................ United States 34,000 1,751,000
P.F. Chang's China Bistro Inc. ....................................... United States 33,500 1,373,500
-------------
3,124,500
</TABLE>
12
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN U.S. LONG-SHORT FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
(d) SECURITIES SOLD SHORT (CONT.)
ISSUER COUNTRY SHARES VALUE
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DISTRIBUTION SERVICES 1.0%
Polymedica Corp. ..................................................... United States 23,000 $ 1,322,500
-------------
ELECTRONIC TECHNOLOGY 3.1%
Avici Systems Inc. ................................................... United States 12,000 520,500
Broadcom Corp., A .................................................... United States 5,000 1,111,875
Corvis Corp. ......................................................... United States 19,500 1,279,688
Exar Corp. ........................................................... United States 13,000 580,938
Foundry Networks Inc. ................................................ United States 6,000 398,625
Marvell Technology Group Ltd. ........................................ Bermuda 2,500 139,375
-------------
4,031,001
-------------
FINANCE 1.4%
The Progressive Corp. ................................................ United States 18,000 1,768,500
-------------
HEALTH TECHNOLOGY 1.9%
Abiomed Inc. ......................................................... United States 55,500 1,609,500
Physiometrix Inc. .................................................... United States 35,000 829,063
-------------
2,438,563
-------------
PRODUCER MANUFACTURING 1.0%
Navistar International Corp. ......................................... United States 13,600 449,650
PACCAR Inc. .......................................................... United States 11,800 496,338
Power-One Inc. ....................................................... United States 5,000 354,688
-------------
1,300,676
-------------
RETAIL TRADE 4.5%
Amazon.com Inc. ...................................................... United States 63,000 2,307,375
Dollar Tree Stores Inc. .............................................. United States 28,500 1,115,063
Factory 2-U Stores Inc. .............................................. United States 10,000 319,375
Kohl's Corp. ......................................................... United States 15,500 839,906
Tweeter Home Entertainment Group Inc. ................................ United States 21,400 514,938
Whole Foods Market Inc. .............................................. United States 13,500 624,375
-------------
5,721,032
-------------
TECHNOLOGY SERVICES 9.4%
Akamai Technologies Inc. ............................................. United States 15,000 765,000
America Online Inc. .................................................. United States 33,500 1,689,405
CMGI Inc. ............................................................ United States 27,500 464,063
Commerce One Inc. .................................................... United States 27,600 1,771,575
Exodus Communications Inc. ........................................... United States 16,000 537,000
Internet Capital Group Inc. .......................................... United States 23,300 308,725
Interwoven Inc. ...................................................... United States 14,200 1,430,650
RealNetworks Inc. .................................................... United States 49,500 1,020,164
Red Hat Inc. ......................................................... United States 14,650 183,125
Speechworks International Inc. ....................................... United States 14,500 1,207,125
StorageNetworks Inc. ................................................. United States 13,000 824,688
</TABLE>
13
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN U.S. LONG-SHORT FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
(d) SECURITIES SOLD SHORT (CONT.)
ISSUER COUNTRY SHARES VALUE
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TECHNOLOGY SERVICES (CONT.)
VerticalNet Inc. ..................................................... United States 16,000 $ 446,250
Vignette Corp. ....................................................... United States 12,700 378,619
WebEx Communications Inc. ............................................ United States 21,000 946,308
-------------
11,972,697
-------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $45,545,022) ................... $ 42,377,432
-------------
</TABLE>
(a) Non-income producing
(b) The Franklin Institutional Fiduciary Trust Money Market Portfolio is
managed by Franklin Advisers Inc.
(c) See Note 1(c) regarding joint repurchase agreement.
(d) See Note 1(d) regarding securities sold short.
(e) See Note 1(d) regarding securities segregated with broker for securities
sold short.
14 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN U.S. LONG-SHORT FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<S> <C>
Assets:
Investments in securities:
Cost .................................................................................. $ 99,339,833
-------------
Value ................................................................................. 98,704,116
Repurchase agreement, at value and cost ................................................ 26,886,848
Receivables:
Investment securities sold ............................................................ 3,339,895
Capital shares sold ................................................................... 5,382,449
Dividends ............................................................................. 23,591
Deposits with brokers for securities sold short ........................................ 47,914,548
-------------
Total assets ...................................................................... 182,251,447
-------------
Liabilities:
Payables:
Investment securities purchased ....................................................... 11,449,271
Capital shares redeemed ............................................................... 8,812
Affiliates ............................................................................ 149,771
Securities sold short, at value (proceeds $45,545,022) ................................. 42,377,432
Other liabilities ...................................................................... 64,079
-------------
Total liabilities ................................................................. 54,049,365
-------------
Net assets, at value ............................................................. $ 128,202,082
-------------
Net assets consist of:
Undistributed net investment income .................................................... $ 1,017,635
Net unrealized appreciation ............................................................ 2,531,873
Accumulated net realized gain .......................................................... 7,305,616
Capital shares ......................................................................... 117,346,958
-------------
Net assets, at value .............................................................. $ 128,202,082
-------------
CLASS A:
Net asset value per share(a) ($128,202,082 / 6,228,803 shares outstanding) ............. $20.58
-------------
Maximum offering price per share ($20.58 / 94.25%) ..................................... $21.84
-------------
</TABLE>
(a) Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements. 15
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN U.S. LONG-SHORT FUND
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<S> <C>
Investment income:
Dividends(a) ........................................................................... $ 509,567
Interest ............................................................................... 994,142
-------------
Total investment income ........................................................... 1,503,709
-------------
Expenses:
Management fees (Note 3) ............................................................... 254,016
Administrative fees (Note 3) ........................................................... 55,502
Distribution fees (Note 3) ............................................................. 97,543
Transfer agent fees (Note 3) ........................................................... 47,002
Custodian fees ......................................................................... 207
Reports to shareholders ................................................................ 10,230
Registration and filing fees ........................................................... 16,752
Professional fees (Note 3) ............................................................. 12,518
Trustees' fees and expenses ............................................................ 166
Dividends on securities sold short ..................................................... 28,837
Other .................................................................................. 6,323
Total expenses .................................................................... 529,096
Expenses waived/paid by affiliate (Note 3) ........................................ (20,913)
-------------
Net expenses ..................................................................... 508,183
-------------
Net investment income ........................................................... 995,526
-------------
Realized and unrealized gains:
Net realized gain from:
Investments ........................................................................... 2,245,573
Foreign currency transactions ......................................................... 3,366
Securities sold short ................................................................. 4,718,982
-------------
Net realized gain ................................................................. 6,967,921
Net unrealized appreciation on investments and securities sold short .............. 2,180,055
-------------
Net realized and unrealized gain ........................................................ 9,147,976
-------------
Net increase in net assets resulting from operations .................................... $ 10,143,502
-------------
</TABLE>
(a) Net of foreign taxes of $90.
16 See notes to financial statements.
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN U.S. LONG-SHORT FUND
Financial Statements (continued)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2000 (UNAUDITED)
AND THE YEAR ENDED APRIL 30, 2000
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
OCTOBER 31, 2000 APRIL 30, 2000
------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ................................................................ $ 995,526 $ 42,423
Net realized gain from investments, securities sold short and foreign
currency transactions .............................................................. 6,967,921 345,750
Net unrealized appreciation on investments and securities sold short ................. 2,180,055 334,069
------------------------------------
Net increase in net assets resulting from operations ............................. 10,143,502 722,242
Distributions to shareholders from:
Net investment income ................................................................ -- (25,580)
Net realized gains ................................................................... -- (13,260)
------------------------------------
Total distributions to shareholders ................................................... -- (38,840)
Capital share transactions (Note 2) ................................................... 116,346,958 --
------------------------------------
Net increase in net assets ....................................................... 126,490,460 683,402
Net assets:
Beginning of period ................................................................... 1,711,622 1,028,220
------------------------------------
End of period ......................................................................... $ 128,202,082 $ 1,711,622
------------------------------------
Undistributed net investment income included in net assets:
End of period ......................................................................... $ 1,017,635 $ 22,109
------------------------------------
</TABLE>
See notes to financial statements. 17
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN U.S. LONG-SHORT FUND
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 thirteen separate
series (the Funds). Franklin U.S. Long-Short Fund (the Fund) included in this
report is diversified. The Fund's investment objective is long-term capital
appreciation.
The following summarizes the Fund's significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. JOINT REPURCHASE AGREEMENT:
The Fund may enter into a joint repurchase agreement whereby its 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 Fund based on its pro-rata interest. A repurchase
agreement is accounted for as a loan by the Fund to the seller, collateralized
by securities which are delivered to the Fund's custodian. The market value,
including accrued interest, of the initial collateralization is required to be
at least 102% of the dollar amount invested by the Funds, with the value of the
underlying securities marked to market daily to maintain coverage of at least
100%. At October 31, 2000, all repurchase agreements had been entered into on
that date.
18
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN U.S. LONG-SHORT FUND
Notes to Financial Statements (unaudited)(continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
d. SECURITIES SOLD SHORT:
The Fund is engaged in selling securities short, which obligates the Fund to
replace a borrowed security with the same security at the current market value.
The Fund would incur a loss, which could exceed the proceeds received, if the
price of the security increases between the date of the short sale and the date
on which the Fund replaces the borrowed security. The Fund would realize a gain
if the price of the security declines between those dates.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit for the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short.
e. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
f. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Dividend income,
dividends declared on securities sold short 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.
g. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
At October 31, 2000, there were an unlimited number of shares authorized ($.01
par value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31, 2000
--------------------------
SHARES AMOUNT
--------------------------
<S> <C> <C>
Shares sold ............... 6,942,182 $ 132,364,334
Shares redeemed ........... (813,379) (16,017,376)
--------------------------
Net increase .............. 6,128,803 $ 116,346,958
==========================
</TABLE>
There were no transactions in the Fund's shares for the year ended April 30,
2000.
19
<PAGE>
FRANKLIN STRATEGIC SERIES
FRANKLIN U.S. LONG-SHORT FUND
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 Fund's
investment manager, principal underwriter, administrative manager and transfer
agent, respectively.
The Fund pays an investment management fee to Advisers of 1.00% per year of the
average daily net assets of the Fund.
The Fund pays an administrative fee to FT Services of .20% per year of the
Fund's average daily net assets.
Advisers agreed in advance to waive administrative fees, as noted in the
Statement of Operations.
Management fees were reduced on assets invested in the Franklin Institutional
Fiduciary Trust Money Market Portfolio.
The Fund reimburses Distributors up to .35% per year of average daily net assets
for costs incurred in marketing the Fund's shares.
The Fund received net commissions on sales of Fund shares for the period of
$245,619.
The Fund paid transfer agent fees of $47,002, of which $12,393 was paid to
Investor Services.
Included in professional fees are legal fees of $8,583 that were paid to a law
firm in which a partner was an officer of the Fund.
4. INCOME TAXES
At October 31, 2000, the net unrealized appreciation based on the cost of
investments and short sales for income tax purposes of $81,077,637 was as
follows:
<TABLE>
<S> <C>
Unrealized appreciation $ 12,001,430
Unrealized depreciation (9,865,535)
------------
Net unrealized appreciation $ 2,135,895
============
</TABLE>
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions.
Net realized capital gains differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities and
securities sold short) for the period ended October 31, 2000, aggregated
$75,480,803 and $10,352,673, respectively.
20
