-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GVNnC7BbQ5ktppKxhN/9JpMedX5sF1uQdYD5L52v06BSssAQT48pOsNjn8C62h8s fU9uA+QKkiJznPMpX6pL1w== 0000872625-09-000008.txt : 20090629 0000872625-09-000008.hdr.sgml : 20090629 20090629114843 ACCESSION NUMBER: 0000872625-09-000008 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20090430 FILED AS OF DATE: 20090629 DATE AS OF CHANGE: 20090629 EFFECTIVENESS DATE: 20090629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN STRATEGIC SERIES CENTRAL INDEX KEY: 0000872625 IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-06243 FILM NUMBER: 09914891 BUSINESS ADDRESS: STREET 1: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403-1906 BUSINESS PHONE: 650-570-3000 MAIL ADDRESS: STREET 1: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403-1906 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN CALIFORNIA 250 GROWTH FUND DATE OF NAME CHANGE: 19911216 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN CALIFORNIA 250 GROWTH INDEX FUND DATE OF NAME CHANGE: 19910917 0000872625 S000006878 FRANKLIN GROWTH OPPORTUNITIES FUND C000018615 CLASS A FGRAX C000018616 CLASS B FKABX C000018617 CLASS C FKACX C000018618 ADVISOR CLASS FRAAX C000018619 CLASS R FKARX 0000872625 S000006879 FRANKLIN STRATEGIC INCOME FUND C000018620 CLASS A FRSTX C000018621 CLASS B FKSBX C000018622 CLASS C FSGCX C000018623 ADVISOR CLASS FKSAX C000018624 CLASS R FKSRX 0000872625 S000006882 FRANKLIN BIOTECHNOLOGY DISCOVERY FUND C000018631 CLASS A FBDIX 0000872625 S000006884 FRANKLIN FLEX CAP GROWTH FUND C000018636 CLASS A FKCGX C000018637 CLASS B FKCBX C000018638 CLASS C FCIIX C000018639 CLASS R FRCGX C000018640 ADVISOR CLASS FKCAX 0000872625 S000006887 FRANKLIN NATURAL RESOURCES FUND C000018647 CLASS C C000018648 CLASS A FRNRX C000018649 ADVISOR CLASS FNRAX 0000872625 S000006888 FRANKLIN SMALL-MID CAP GROWTH FUND C000018650 CLASS A FRSGX C000018651 CLASS B FBSMX C000018652 CLASS C FRSIX C000018653 ADVISOR CLASS FSGAX C000018654 CLASS R FSMRX 0000872625 S000006889 FRANKLIN SMALL CAP GROWTH FUND C000018655 CLASS A FSGRX C000018656 CLASS B FBSGX C000018657 CLASS C FCSGX C000018658 ADVISOR CLASS FSSAX C000018659 CLASS R FSSRX 0000872625 S000019837 Franklin Focused Core Equity Fund C000055670 A C000055671 C C000055672 R C000055673 Advisor N-CSR 1 fssncsr0609.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-06243 --------- FRANKLIN STRATEGIC SERIES ---------------------------- (Exact name of registrant as specified in charter) ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ----------------------------------------------- (Address of principal executive offices) (Zip code) CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area Code: (650) 312-2000 -------------- Date of fiscal year end: 4/30 ---- Date of reporting period: 4/30/09 --------- ITEM 1. REPORTS TO STOCKHOLDERS. (GRAPHIC) APRIL 30, 2009 ANNUAL REPORT AND SHAREHOLDER LETTER Franklin Flex Cap Growth Fund Franklin Focused Core Equity Fund Franklin Growth Opportunities Fund Franklin Small Cap Growth Fund Franklin Small-Mid Cap Growth Fund SIGN UP FOR EDELIVERY Log onto franklintempleton.com and click "My Profile" FRANKLIN STRATEGIC SERIES (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) FRANKLIN - Templeton - Mutual Series Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE(R) Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups-Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS (GRAPHIC) Not part of the annual report Contents SHAREHOLDER LETTER ....................................................... 1 ANNUAL REPORT Economic and Market Overview ............................................. 3 Franklin Flex Cap Growth Fund ............................................ 5 Franklin Focused Core Equity Fund ........................................ 15 Franklin Growth Opportunities Fund ....................................... 25 Franklin Small Cap Growth Fund ........................................... 35 Franklin Small-Mid Cap Growth Fund ....................................... 45 Financial Highlights and Statements of Investments ....................... 55 Financial Statements ..................................................... 94 Notes to Financial Statements ............................................ 103 Report of Independent Registered Public Accounting Firm .................. 122 Tax Designation .......................................................... 123 Board Members and Officers ............................................... 124 Shareholder Information .................................................. 129
Shareholder Letter Dear Shareholder: The 12-month period ended April 30, 2009, was an extraordinary and stressful time for investors and those of us who have worked in financial markets for many years. During this turbulent period, the U.S. recession deepened, the unemployment rate surged and consumer spending fell. Most stocks suffered major losses as investors worried about an uncertain future. With a new president, Barack Obama, the country and the financial markets were eager to see how effectively the government could address these problems. Although this environment is bound to provoke great concern, we think it is important to put short-term market developments in perspective. Keep in mind that as daunting as current conditions may be, we have navigated through other periods of high market volatility, such as the U.S. stock market's severe decline of 1987 and the bursting of the technology bubble in 2000. We remain committed to our long-term perspective and disciplined investment philosophy. Therefore, we view recent declines as potential opportunities to find bargains that we believe may be well positioned to become eventual winners. Although conditions remain challenging, our experience gives us ample reason to be optimistic about future market stabilization and recovery. Franklin Strategic Series' annual report goes into greater detail about prevailing conditions during the period under review. In addition, you will find performance data, financial information and a discussion about investment management decisions. Please remember that all securities markets fluctuate, as do mutual fund share prices. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Not part of the annual report | 1 If you would like more frequent updates, franklintempleton.com provides daily prices, monthly performance figures, portfolio holdings and other information. You can also access your account, buy and sell shares, read timely articles, and find helpful financial planning tools. We hope you will take advantage of these online services. Although market conditions are constantly changing, we remain committed to our disciplined strategy as we manage the Funds, keeping in mind the trust you have placed in us. As always, we recommend investors consult their financial advisors and review their portfolios to design a long-term strategy and portfolio allocation that meet their individual needs, goals and risk tolerance. We firmly believe that most people benefit from professional advice, and that advice is invaluable as investors navigate current market conditions. We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to serving your investment needs in the years ahead. Sincerely, /s/ Rupert H. Johnson, Jr. Rupert H. Johnson, Jr. President and Chief Executive Officer - - Investment Management Franklin Strategic Series THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF APRIL 30, 2009. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. 2 | Not part of the annual report Annual Report Economic and Market Overview During the 12-month period ended April 30, 2009, the U.S. economy and stock markets suffered significant declines, but tentative signs of stabilization emerged near period-end. The government's abrupt conservatorship of Fannie Mae and Freddie Mac in early September 2008 and the failure of several blue chip banks and financial institutions roiled equity markets for most of the reporting period. Despite government interventions and massive emergency funding, the nation's economic troubles were exacerbated as manufacturing activity weakened at its fastest pace in nearly 30 years. Although home sales declined for most of the period, they edged higher near period-end. Jobless claims mounted and the unemployment rate rose to 8.9% in April 2009.1 Reflecting a broad-based contraction in consumer spending, falling corporate profits and slowing exports, economic growth, as measured by gross domestic product (GDP), fell in the third and fourth quarters of 2008 at annualized rates of 0.5% and 6.3% after increasing at a 2.8% annualized rate in the second quarter. In 2009's first quarter, GDP declined at an estimated 5.7% annualized rate. Oil prices stood at $113 per barrel at the beginning of the period, but retreated dramatically to $51 by period-end. Many other commodities such as agricultural products and base metals followed similar trends. Partially as a result of the steep price corrections, inflation declined significantly during the period, and April's inflation rate was an annualized -0.7%.(1) Core inflation, which excludes food and energy costs, rose at a 1.9% annual rate, which was within the Federal Reserve Board's (Fed's) informal target range of 1.5%-2.0%.(1) A slowing economy and decelerating inflation prompted policymakers to further lower interest rates and enact stimulus plans. During the 12 months under review, the Fed lowered the federal funds target rate to a range of 0% to 0.25% from 2.00% at the start of the period. The government introduced various new measures to enhance market liquidity and outlined details of its Public-Private Investment Program, with an objective of removing devalued real estate-related assets from banks' balance sheets. (1.) Source: Bureau of Labor Statistics. Annual Report | 3 Market volatility was high during the reporting period, but near period-end, stock markets began to rebound from severely depressed levels. Overall, however, they declined significantly during the period. For the 12 months under review, the blue chip stocks of the Dow Jones Industrial Average had a total return of - -34.19%, the broader Standard & Poor's 500 Index (S&P 500) a -35.31% total return, and the technology-heavy NASDAQ Composite Index a -28.13% total return.(2) All sectors lost value, and the financials, industrials and energy sectors had the largest declines. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF APRIL 30, 2009. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. (2.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. 4 | Annual Report Franklin Flex Cap Growth Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Flex Cap Growth Fund seeks capital appreciation. The Fund invests predominantly in equity securities of companies that the manager believes have the potential for capital appreciation. The Fund has flexibility to invest in companies located, headquartered or operating inside and outside the U.S., across the entire market capitalization spectrum from small, emerging growth companies to well-established, large cap companies. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This annual report for Franklin Flex Cap Growth Fund covers the fiscal year ended April 30, 2009. PERFORMANCE OVERVIEW For the 12 months under review, Franklin Flex Cap Growth Fund - Class A had a - -29.08% cumulative total return. The Fund performed better than its narrow benchmark, the Russell 3000(R) Growth Index, which had a -31.46% total return, and its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which had a - -35.31% total return for the same period.(1) The Fund also performed better than the -34.35% total return of its peers in the Lipper Multi-Cap Growth Funds Classification Average.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 8. (1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The Russell 3000 Growth Index is market capitalization weighted and measures performance of those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. 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. (2.) Source: Lipper Inc. The Lipper Multi-Cap Growth Funds Classification Average is calculated by averaging the total returns of all funds within the Lipper Multi-Cap Growth Funds classification in the Lipper Open-End underlying funds universe for the period indicated. Lipper Multi-Cap Growth Funds are defined as funds that normally invest in companies, of any size, with long-term earnings expected to grow significantly faster than the earnings of the stocks represented in the major unmanaged stock indexes. For the 12-month period ended 4/30/09, there were 457 funds in this category. Lipper calculations do not include sales charges or subsidization by a Fund's manager. The Fund's performance relative to the average may have differed if these or other factors had been considered. The average includes reinvestment of any income or distributions. One cannot invest directly in the average, nor is the average representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 60. Annual Report | 5 PORTFOLIO BREAKDOWN Franklin Flex Cap Growth Fund Based on Total Net Assets as of 4/30/09 (BAR CHART) Software & Services* 19.9% Technology Hardware & Equipment* 14.9% Pharmaceuticals, Biotechnology & Life Sciences 9.2% Energy 8.8% Health Care Equipment & Services 7.7% Capital Goods 5.8% Materials 4.4% Transportation 3.0% Semiconductors & Semiconductor Equipment* 3.0% Household & Personal Products 3.0% Telecommunication Services 2.9% Food, Beverage & Tobacco 2.7% Diversified Financials 2.0% Other 10.0% Short-Term Investments & Other Net Assets 2.7%
* Significant exposure to a single sector may result in greater volatility for the Fund than a more broadly diversified portfolio. There are specific risks to investing in technology company stocks, which can be subject to abrupt or erratic price movements and have been volatile, especially over the short term. INVESTMENT STRATEGY We are research-driven, fundamental investors pursuing a growth strategy. As bottom-up investors we focus primarily on finding individual securities that meet our criteria for growth potential, quality and valuation. We search for high-quality companies that have identifiable drivers of future earnings growth. We rely on our team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies. Our analysts identify each company's market opportunity, competitive position, management and financial strength, business and financial risks, and valuation. We choose to invest in those companies that, in our opinion, offer the best trade-off between growth opportunity, business and financial risk, and valuation. MANAGER'S DISCUSSION During the 12 months under review, among the holdings that detracted most from Fund performance relative to the Russell 3000 Growth Index were Microsemi (sold by period-end), a semiconductor company; Covance, a drug research, development and testing laboratory; and Smith International, a U.S.-based provider of drilling equipment and services to the oil and gas industries. From a sector perspective, our stock selection in the information technology sector was a major detractor from the Fund's relative performance, particularly holdings such as specialized imaging systems manufacturer FLIR Systems and graphics card manufacturer NVIDIA (sold by period-end).(3) Within the consumer discretionary sector, stock selection and underweighting in the hotels, restaurants and leisure industry hurt relative returns.(4) Stock selection in the telecommunication services sector also hampered relative results as shares in wireless telecommunication industry component NII Holdings declined in value. During a fiscal year marred by financial crises and a broad-based sell-off for stocks globally, the Fund's small cash position helped performance relative to the index. Top contributors to relative results by individual security included pharmaceutical manufacturer Schering-Plough and biotechnology companies Genentech (not held at period-end) and Gilead Sciences. (3.) The information technology sector comprises semiconductors and semiconductor equipment and software and services in the SOI. (4.) The consumer discretionary sector comprises automobiles and components, consumer services, media, and retailing in the SOI. 6 | Annual Report From a sector perspective, industrials was a major positive contributor to performance relative to the benchmark index, due to our underweighted allocation and stock selection.(5) Most notably, our holding in air freight and logistics company C.H. Robinson Worldwide aided the Fund's relative results, as did an underweighted position and stock selection in the machinery industry. Additionally, an underweighting and stock selection in the materials sector also contributed to relative returns. Within materials, our overweighted allocation and stock selection in the chemicals industry boosted relative performance. In the energy sector, an underweighted allocation helped relative results. Thank you for your continued participation in Franklin Flex Cap Growth Fund. We look forward to serving your future investment needs. (PHOTO OF CONRAD B. HERRMANN) /s/ Conrad B. Herrmann Conrad B. Herrmann, CFA Portfolio Manager Franklin Flex Cap Growth Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF APRIL 30, 2009, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. (5.) The industrials sector comprises capital goods, commercial and professional services, and transportation in the SOI. TOP 10 HOLDINGS Franklin Flex Cap Growth Fund 4/30/09
% OF TOTAL COMPANY SECTOR/INDUSTRY NET ASSETS - ----------------------- ---------- QUALCOMM Inc. TECHNOLOGY HARDWARE & EQUIPMENT 3.2% Apple Inc. TECHNOLOGY HARDWARE & EQUIPMENT 2.8% Cisco Systems Inc. TECHNOLOGY HARDWARE & EQUIPMENT 2.8% Google Inc., A SOFTWARE & SERVICES 2.6% Praxair Inc. MATERIALS 2.5% MasterCard Inc., A SOFTWARE & SERVICES 2.3% American Tower Corp., A TELECOMMUNICATION SERVICES 2.3% Gilead Sciences Inc. PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 2.3% Oracle Corp. SOFTWARE & SERVICES 2.2% FLIR Systems Inc. TECHNOLOGY HARDWARE & EQUIPMENT 2.1%
Annual Report | 7 Performance Summary as of 4/30/09 FRANKLIN FLEX CAP GROWTH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION
CLASS A (SYMBOL: FKCGX) CHANGE 4/30/09 4/30/08 - ----------------------- ------- ------- ------- Net Asset Value (NAV) -$13.31 $32.46 $45.77
CLASS B (SYMBOL: FKCBX) CHANGE 4/30/09 4/30/08 - ----------------------- ------- ------- ------- Net Asset Value (NAV) -$12.62 $30.04 $42.66
CLASS C (SYMBOL: FCIIX) CHANGE 4/30/09 4/30/08 - ----------------------- ------- ------- ------- Net Asset Value (NAV) -$12.66 $30.10 $42.76
CLASS R (SYMBOL: FRCGX) CHANGE 4/30/09 4/30/08 - ----------------------- ------- ------- ------- Net Asset Value (NAV) -$13.19 $31.91 $45.10
ADVISOR CLASS (SYMBOL: FKCAX) CHANGE 4/30/09 4/30/08 - ----------------------------- ------- ------- ------- Net Asset Value (NAV) -$13.33 $32.82 $46.15
8 | Annual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR 10-YEAR - ------- ------ ------ ------- Cumulative Total Return(1) -29.08% -2.20% +36.39% Average Annual Total Return(2) -33.15% -1.62% +2.54% Value of $10,000 Investment(3) $6,685 $9,218 $12,856 Avg. Ann. Total Return (3/31/09)(4) -35.00% -3.99% +1.73% Total Annual Operating Expenses(5) 0.96%
CLASS B 1-YEAR 5-YEAR 10-YEAR - ------- ------ ------ ------- Cumulative Total Return(1) -29.58% -5.76% +28.41% Average Annual Total Return(2) -32.40% -1.57% +2.53% Value of $10,000 Investment(3) $6,760 $9,238 $12,841 Avg. Ann. Total Return (3/31/09)(4) -34.31% -3.96% +1.72% Total Annual Operating Expenses(5) 1.71%
CLASS C 1-YEAR 5-YEAR 10-YEAR - ------- ------ ------ ------- Cumulative Total Return(1) -29.61% -5.78% +26.51% Average Annual Total Return(2) -30.31% -1.18% +2.38% Value of $10,000 Investment(3) $6,969 $9,422 $12,651 Avg. Ann. Total Return (3/31/09)(4) -32.26% -3.58% +1.57% Total Annual Operating Expenses(5) 1.71%
INCEPTION CLASS R 1-YEAR 5-YEAR (1/1/02) - ------- ------ ------ --------- Cumulative Total Return(1) -29.25% -3.38% +1.87% Average Annual Total Return(2) -29.25% -0.68% +0.25% Value of $10,000 Investment(3) $7,075 $9,662 $10,187 Avg. Ann. Total Return (3/31/09)(4) -31.23% -3.09% -1.14% Total Annual Operating Expenses(5) 1.21%
ADVISOR CLASS(6) 1-YEAR 5-YEAR 10-YEAR - ---------------- ------ ------ ------- Cumulative Total Return(1) -28.88% -1.04% +38.00% Average Annual Total Return(2) -28.88% -0.21% +3.27% Value of $10,000 Investment(3) $7,112 $9,896 $13,800 Avg. Ann. Total Return (3/31/09)(4) -30.86% -2.62% +2.45% Total Annual Operating Expenses(5) 0.71%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. Annual Report | 9 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/09 - ------- ------- 1-Year -33.15% 5-Year -1.62% 10-Year +2.54%
CLASS A (5/1/99-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN FLEX CAP GROWTH RUSSELL 3000 DATE FUND - CLASS A S&P 500 Index Growth Index - ------------- --------------- ------------- -------------- 5/1/1999 $ 9,427 $10,000 $10,000 5/31/1999 $ 9,397 $ 9,764 $ 9,717 6/30/1999 $10,349 $10,306 $10,384 7/30/1999 $10,448 $ 9,984 $10,055 8/31/1999 $10,866 $ 9,935 $10,180 9/30/1999 $11,082 $ 9,662 $ 9,994 10/29/1999 $12,452 $10,274 $10,714 11/30/1999 $14,240 $10,482 $11,328 12/31/1999 $17,329 $11,100 $12,562 1/31/2000 $17,343 $10,542 $12,007 2/29/2000 $21,838 $10,343 $12,757 3/31/2000 $20,633 $11,354 $13,479 4/28/2000 $18,373 $11,013 $12,785 5/31/2000 $17,167 $10,787 $12,109 6/30/2000 $19,732 $11,053 $13,070 7/31/2000 $19,208 $10,880 $12,485 8/31/2000 $22,018 $11,556 $13,627 9/29/2000 $21,333 $10,946 $12,379 10/31/2000 $19,475 $10,899 $11,764 11/30/2000 $15,321 $10,040 $10,003 12/29/2000 $16,108 $10,089 $ 9,746 1/31/2001 $16,393 $10,447 $10,428 2/28/2001 $13,359 $ 9,495 $ 8,681 3/30/2001 $11,923 $ 8,893 $ 7,748 4/30/2001 $13,258 $ 9,584 $ 8,726 5/31/2001 $13,262 $ 9,648 $ 8,622 6/29/2001 $13,180 $ 9,414 $ 8,455 7/31/2001 $12,686 $ 9,321 $ 8,208 8/31/2001 $12,043 $ 8,737 $ 7,547 9/28/2001 $10,377 $ 8,032 $ 6,763 10/31/2001 $11,093 $ 8,185 $ 7,136 11/30/2001 $12,133 $ 8,813 $ 7,816 12/31/2001 $12,367 $ 8,890 $ 7,833 1/31/2002 $12,102 $ 8,760 $ 7,685 2/28/2002 $11,638 $ 8,591 $ 7,355 3/29/2002 $12,534 $ 8,915 $ 7,634 4/30/2002 $11,954 $ 8,374 $ 7,043 5/31/2002 $11,689 $ 8,312 $ 6,855 6/28/2002 $10,747 $ 7,720 $ 6,224 7/31/2002 $ 9,633 $ 7,118 $ 5,840 8/30/2002 $ 9,583 $ 7,165 $ 5,856 9/30/2002 $ 8,862 $ 6,386 $ 5,260 10/31/2002 $ 9,345 $ 6,949 $ 5,729 11/29/2002 $ 9,921 $ 7,358 $ 6,056 12/31/2002 $ 9,283 $ 6,925 $ 5,637 1/31/2003 $ 9,298 $ 6,744 $ 5,499 2/28/2003 $ 9,252 $ 6,643 $ 5,466 3/31/2003 $ 9,333 $ 6,707 $ 5,567 4/30/2003 $ 9,952 $ 7,260 $ 5,986 5/30/2003 $10,700 $ 7,642 $ 6,309 6/30/2003 $10,766 $ 7,740 $ 6,398 7/31/2003 $11,206 $ 7,876 $ 6,579 8/29/2003 $11,751 $ 8,030 $ 6,757 9/30/2003 $11,405 $ 7,944 $ 6,677 10/31/2003 $12,398 $ 8,394 $ 7,067 11/28/2003 $12,791 $ 8,468 $ 7,153 12/31/2003 $13,040 $ 8,912 $ 7,383 1/30/2004 $13,247 $ 9,075 $ 7,552 2/27/2004 $13,359 $ 9,202 $ 7,595 3/31/2004 $13,418 $ 9,063 $ 7,468 4/30/2004 $13,145 $ 8,920 $ 7,359 5/31/2004 $13,539 $ 9,043 $ 7,496 6/30/2004 $13,776 $ 9,219 $ 7,602 7/30/2004 $12,943 $ 8,914 $ 7,151 8/31/2004 $12,873 $ 8,950 $ 7,106 9/30/2004 $13,313 $ 9,047 $ 7,199 10/29/2004 $13,620 $ 9,185 $ 7,317 11/30/2004 $14,197 $ 9,556 $ 7,599 12/31/2004 $14,730 $ 9,882 $ 7,895 1/31/2005 $14,193 $ 9,641 $ 7,623 2/28/2005 $14,450 $ 9,844 $ 7,707 3/31/2005 $14,115 $ 9,669 $ 7,553 4/29/2005 $13,729 $ 9,486 $ 7,381 5/31/2005 $14,407 $ 9,788 $ 7,751 6/30/2005 $14,306 $ 9,802 $ 7,746 7/29/2005 $14,948 $10,166 $ 8,139 8/31/2005 $14,839 $10,073 $ 8,033 9/30/2005 $14,999 $10,155 $ 8,072 10/31/2005 $14,765 $ 9,986 $ 7,975 11/30/2005 $15,622 $10,363 $ 8,328 12/30/2005 $15,645 $10,367 $ 8,303 1/31/2006 $16,424 $10,642 $ 8,506 2/28/2006 $16,443 $10,670 $ 8,489 3/31/2006 $16,607 $10,803 $ 8,641 4/28/2006 $16,529 $10,948 $ 8,628 5/31/2006 $15,559 $10,633 $ 8,305 6/30/2006 $15,746 $10,648 $ 8,276 7/31/2006 $15,415 $10,713 $ 8,095 8/31/2006 $15,684 $10,968 $ 8,346 9/29/2006 $15,992 $11,251 $ 8,561 10/31/2006 $16,377 $11,617 $ 8,883 11/30/2006 $16,763 $11,838 $ 9,062 12/29/2006 $16,546 $12,004 $ 9,088 1/31/2007 $17,069 $12,186 $ 9,316 2/28/2007 $16,761 $11,948 $ 9,153 3/30/2007 $16,909 $12,081 $ 9,206 4/30/2007 $17,603 $12,616 $ 9,623 5/31/2007 $18,157 $13,057 $ 9,977 6/29/2007 $18,069 $12,840 $ 9,836 7/31/2007 $17,948 $12,442 $ 9,652 8/31/2007 $18,529 $12,628 $ 9,813 9/28/2007 $19,703 $13,100 $10,214 10/31/2007 $20,261 $13,309 $10,571 11/30/2007 $19,333 $12,752 $10,153 12/31/2007 $19,198 $12,664 $10,124 1/31/2008 $17,308 $11,904 $ 9,323 2/29/2008 $16,781 $11,518 $ 9,127 3/31/2008 $16,841 $11,468 $ 9,072 4/30/2008 $18,128 $12,026 $ 9,547 5/30/2008 $18,904 $12,182 $ 9,912 6/30/2008 $17,554 $11,155 $ 9,209 7/31/2008 $17,467 $11,061 $ 9,062 8/29/2008 $17,732 $11,221 $ 9,169 9/30/2008 $15,744 $10,221 $ 8,110 10/31/2008 $13,177 $ 8,505 $ 6,656 11/28/2008 $12,211 $ 7,895 $ 6,106 12/31/2008 $12,235 $ 7,979 $ 6,232 1/30/2009 $11,573 $ 7,306 $ 5,919 2/27/2009 $10,702 $ 6,528 $ 5,462 3/31/2009 $11,613 $ 7,100 $ 5,949 4/30/2009 $12,856 $ 7,779 $ 6,544 Total Returns 28.56% -22.21% -34.56%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/09 - ------- ------- 1-Year -32.40% 5-Year -1.57% 10-Year +2.53%
CLASS B (5/1/99-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN FLEX CAP GROWTH FUND RUSSELL 3000 DATE - CLASS B S&P 500 INDEX GROWTH INDEX - ------------- --------------- ------------- ------------ 5/1/1999 $10,000 $10,000 $10,000 5/31/1999 $ 9,965 $ 9,764 $ 9,717 6/30/1999 $10,965 $10,306 $10,384 7/31/1999 $11,058 $ 9,984 $10,055 8/31/1999 $11,498 $ 9,935 $10,180 9/30/1999 $11,716 $ 9,662 $ 9,994 10/31/1999 $13,158 $10,274 $10,714 11/30/1999 $15,035 $10,482 $11,328 12/31/1999 $18,284 $11,100 $12,562 1/31/2000 $18,284 $10,542 $12,007 2/29/2000 $23,008 $10,343 $12,757 3/31/2000 $21,723 $11,354 $13,479 4/30/2000 $19,335 $11,013 $12,785 5/31/2000 $18,054 $10,787 $12,109 6/30/2000 $20,737 $11,053 $13,070 7/31/2000 $20,177 $10,880 $12,485 8/31/2000 $23,113 $11,556 $13,627 9/30/2000 $22,377 $10,946 $12,379 10/31/2000 $20,414 $10,899 $11,764 11/30/2000 $16,048 $10,040 $10,003 12/31/2000 $16,865 $10,089 $ 9,746 1/31/2001 $17,151 $10,447 $10,428 2/28/2001 $13,973 $ 9,495 $ 8,681 3/31/2001 $12,460 $ 8,893 $ 7,748 4/30/2001 $13,853 $ 9,584 $ 8,726 5/31/2001 $13,844 $ 9,648 $ 8,622 6/30/2001 $13,749 $ 9,414 $ 8,455 7/31/2001 $13,227 $ 9,321 $ 8,208 8/31/2001 $12,551 $ 8,737 $ 7,547 9/30/2001 $10,803 $ 8,032 $ 6,763 10/31/2001 $11,540 $ 8,185 $ 7,136 11/30/2001 $12,618 $ 8,813 $ 7,816 12/31/2001 $12,854 $ 8,890 $ 7,833 1/31/2002 $12,572 $ 8,760 $ 7,685 2/28/2002 $12,083 $ 8,591 $ 7,355 3/31/2002 $13,003 $ 8,915 $ 7,634 4/30/2002 $12,394 $ 8,374 $ 7,043 5/31/2002 $12,112 $ 8,312 $ 6,855 6/30/2002 $11,130 $ 7,720 $ 6,224 7/31/2002 $ 9,970 $ 7,118 $ 5,840 8/31/2002 $ 9,912 $ 7,165 $ 5,856 9/30/2002 $ 9,162 $ 6,386 $ 5,260 10/31/2002 $ 9,651 $ 6,949 $ 5,729 11/30/2002 $10,243 $ 7,358 $ 6,056 12/31/2002 $ 9,576 $ 6,925 $ 5,637 1/31/2003 $ 9,585 $ 6,744 $ 5,499 2/28/2003 $ 9,531 $ 6,643 $ 5,466 3/31/2003 $ 9,609 $ 6,707 $ 5,567 4/30/2003 $10,243 $ 7,260 $ 5,986 5/31/2003 $11,002 $ 7,642 $ 6,309 6/30/2003 $11,068 $ 7,740 $ 6,398 7/31/2003 $11,511 $ 7,876 $ 6,579 8/31/2003 $12,063 $ 8,030 $ 6,757 9/30/2003 $11,698 $ 7,944 $ 6,677 10/31/2003 $12,709 $ 8,394 $ 7,067 11/30/2003 $13,103 $ 8,468 $ 7,153 12/31/2003 $13,351 $ 8,912 $ 7,383 1/31/2004 $13,558 $ 9,075 $ 7,552 2/29/2004 $13,662 $ 9,202 $ 7,595 3/31/2004 $13,716 $ 9,063 $ 7,468 4/30/2004 $13,426 $ 8,920 $ 7,359 5/31/2004 $13,819 $ 9,043 $ 7,496 6/30/2004 $14,056 $ 9,219 $ 7,602 7/31/2004 $13,194 $ 8,914 $ 7,151 8/31/2004 $13,115 $ 8,950 $ 7,106 9/30/2004 $13,558 $ 9,047 $ 7,199 10/31/2004 $13,861 $ 9,185 $ 7,317 11/30/2004 $14,437 $ 9,556 $ 7,599 12/31/2004 $14,971 $ 9,882 $ 7,895 1/31/2005 $14,416 $ 9,641 $ 7,623 2/28/2005 $14,669 $ 9,844 $ 7,707 3/31/2005 $14,321 $ 9,669 $ 7,553 4/30/2005 $13,919 $ 9,486 $ 7,381 5/31/2005 $14,594 $ 9,788 $ 7,751 6/30/2005 $14,487 $ 9,802 $ 7,746 7/31/2005 $15,125 $10,166 $ 8,139 8/31/2005 $15,009 $10,073 $ 8,033 9/30/2005 $15,162 $10,155 $ 8,072 10/31/2005 $14,913 $ 9,986 $ 7,975 11/30/2005 $15,771 $10,363 $ 8,328 12/31/2005 $15,779 $10,367 $ 8,303 1/31/2006 $16,554 $10,642 $ 8,506 2/28/2006 $16,567 $10,670 $ 8,489 3/31/2006 $16,720 $10,803 $ 8,641 4/30/2006 $16,633 $10,948 $ 8,628 5/31/2006 $15,647 $10,633 $ 8,305 6/30/2006 $15,825 $10,648 $ 8,276 7/31/2006 $15,481 $10,713 $ 8,095 8/31/2006 $15,742 $10,968 $ 8,346 9/30/2006 $16,041 $11,251 $ 8,561 10/31/2006 $16,418 $11,617 $ 8,883 11/30/2006 $16,791 $11,838 $ 9,062 12/31/2006 $16,567 $12,004 $ 9,088 1/31/2007 $17,081 $12,186 $ 9,316 2/28/2007 $16,762 $11,948 $ 9,153 3/31/2007 $16,898 $12,081 $ 9,206 4/30/2007 $17,582 $12,616 $ 9,623 5/31/2007 $18,136 $13,057 $ 9,977 6/29/2007 $18,049 $12,840 $ 9,836 7/31/2007 $17,928 $12,442 $ 9,652 8/31/2007 $18,509 $12,628 $ 9,813 9/28/2007 $19,682 $13,100 $10,214 10/31/2007 $20,239 $13,309 $10,571 11/30/2007 $19,312 $12,752 $10,153 12/31/2007 $19,177 $12,664 $10,124 1/31/2008 $17,290 $11,904 $ 9,323 2/29/2008 $16,764 $11,518 $ 9,127 3/31/2008 $16,823 $11,468 $ 9,072 4/30/2008 $18,108 $12,026 $ 9,547 5/30/2008 $18,883 $12,182 $ 9,912 6/30/2008 $17,535 $11,155 $ 9,209 7/31/2008 $17,447 $11,061 $ 9,062 8/29/2008 $17,713 $11,221 $ 9,169 9/30/2008 $15,727 $10,221 $ 8,110 10/31/2008 $13,164 $ 8,505 $ 6,656 11/28/2008 $12,199 $ 7,895 $ 6,106 12/31/2008 $12,222 $ 7,979 $ 6,232 1/30/2009 $11,561 $ 7,306 $ 5,919 2/27/2009 $10,690 $ 6,528 $ 5,462 3/31/2009 $11,600 $ 7,100 $ 5,949 4/30/2009 $12,841 $ 7,779 $ 6,544 Total Returns 28.41% -22.21% -34.56%
10 | Annual Report Performance Summary (CONTINUED) CLASS C (5/1/99-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN FLEX CAP GROWTH RUSSELL 3000 DATE FUND - CLASS C S&P 500 INDEX GROWTH INDEX - ------------ --------------- ------------- ------------ 5/1/1999 $10,000 $10,000 $10,000 5/31/1999 $ 9,961 $ 9,764 $ 9,717 6/30/1999 $10,963 $10,306 $10,384 7/31/1999 $11,061 $ 9,984 $10,055 8/31/1999 $11,498 $ 9,935 $10,180 9/30/1999 $11,717 $ 9,662 $ 9,994 10/31/1999 $13,162 $10,274 $10,714 11/30/1999 $15,040 $10,482 $11,328 12/31/1999 $18,292 $11,100 $12,562 1/31/2000 $18,296 $10,542 $12,007 2/29/2000 $23,024 $10,343 $12,757 3/31/2000 $21,739 $11,354 $13,479 4/30/2000 $19,346 $11,013 $12,785 5/31/2000 $18,065 $10,787 $12,109 6/30/2000 $20,748 $11,053 $13,070 7/31/2000 $20,186 $10,880 $12,485 8/31/2000 $23,122 $11,556 $13,627 9/30/2000 $22,388 $10,946 $12,379 10/31/2000 $20,424 $10,899 $11,764 11/30/2000 $16,055 $10,040 $10,003 12/31/2000 $16,876 $10,089 $ 9,746 1/31/2001 $17,157 $10,447 $10,428 2/28/2001 $13,977 $ 9,495 $ 8,681 3/31/2001 $12,464 $ 8,893 $ 7,748 4/30/2001 $13,853 $ 9,584 $ 8,726 5/31/2001 $13,849 $ 9,648 $ 8,622 6/30/2001 $13,750 $ 9,414 $ 8,455 7/31/2001 $13,225 $ 9,321 $ 8,208 8/31/2001 $12,551 $ 8,737 $ 7,547 9/30/2001 $10,805 $ 8,032 $ 6,763 10/31/2001 $11,542 $ 8,185 $ 7,136 11/30/2001 $12,621 $ 8,813 $ 7,816 12/31/2001 $12,852 $ 8,890 $ 7,833 1/31/2002 $12,571 $ 8,760 $ 7,685 2/28/2002 $12,083 $ 8,591 $ 7,355 3/31/2002 $13,005 $ 8,915 $ 7,634 4/30/2002 $12,393 $ 8,374 $ 7,043 5/31/2002 $12,112 $ 8,312 $ 6,855 6/30/2002 $11,132 $ 7,720 $ 6,224 7/31/2002 $ 9,970 $ 7,118 $ 5,840 8/31/2002 $ 9,912 $ 7,165 $ 5,856 9/30/2002 $ 9,164 $ 6,386 $ 5,260 10/31/2002 $ 9,652 $ 6,949 $ 5,729 11/30/2002 $10,243 $ 7,358 $ 6,056 12/31/2002 $ 9,577 $ 6,925 $ 5,637 1/31/2003 $ 9,586 $ 6,744 $ 5,499 2/28/2003 $ 9,532 $ 6,643 $ 5,466 3/31/2003 $ 9,610 $ 6,707 $ 5,567 4/30/2003 $10,243 $ 7,260 $ 5,986 5/31/2003 $11,004 $ 7,642 $ 6,309 6/30/2003 $11,066 $ 7,740 $ 6,398 7/31/2003 $11,508 $ 7,876 $ 6,579 8/31/2003 $12,063 $ 8,030 $ 6,757 9/30/2003 $11,699 $ 7,944 $ 6,677 10/31/2003 $12,708 $ 8,394 $ 7,067 11/30/2003 $13,105 $ 8,468 $ 7,153 12/31/2003 $13,353 $ 8,912 $ 7,383 1/31/2004 $13,555 $ 9,075 $ 7,552 2/29/2004 $13,663 $ 9,202 $ 7,595 3/31/2004 $13,717 $ 9,063 $ 7,468 4/30/2004 $13,427 $ 8,920 $ 7,359 5/31/2004 $13,820 $ 9,043 $ 7,496 6/30/2004 $14,056 $ 9,219 $ 7,602 7/31/2004 $13,196 $ 8,914 $ 7,151 8/31/2004 $13,113 $ 8,950 $ 7,106 9/30/2004 $13,555 $ 9,047 $ 7,199 10/31/2004 $13,861 $ 9,185 $ 7,317 11/30/2004 $14,436 $ 9,556 $ 7,599 12/31/2004 $14,970 $ 9,882 $ 7,895 1/31/2005 $14,416 $ 9,641 $ 7,623 2/28/2005 $14,668 $ 9,844 $ 7,707 3/31/2005 $14,320 $ 9,669 $ 7,553 4/30/2005 $13,919 $ 9,486 $ 7,381 5/31/2005 $14,593 $ 9,788 $ 7,751 6/30/2005 $14,486 $ 9,802 $ 7,746 7/31/2005 $15,123 $10,166 $ 8,139 8/31/2005 $15,007 $10,073 $ 8,033 9/30/2005 $15,160 $10,155 $ 8,072 10/31/2005 $14,912 $ 9,986 $ 7,975 11/30/2005 $15,768 $10,363 $ 8,328 12/31/2005 $15,780 $10,367 $ 8,303 1/31/2006 $16,553 $10,642 $ 8,506 2/28/2006 $16,570 $10,670 $ 8,489 3/31/2006 $16,719 $10,803 $ 8,641 4/30/2006 $16,632 $10,948 $ 8,628 5/31/2006 $15,644 $10,633 $ 8,305 6/30/2006 $15,826 $10,648 $ 8,276 7/31/2006 $15,482 $10,713 $ 8,095 8/31/2006 $15,739 $10,968 $ 8,346 9/30/2006 $16,041 $11,251 $ 8,561 10/31/2006 $16,417 $11,617 $ 8,883 11/30/2006 $16,793 $11,838 $ 9,062 12/31/2006 $16,566 $12,004 $ 9,088 1/31/2007 $17,079 $12,186 $ 9,316 2/28/2007 $16,760 $11,948 $ 9,153 3/31/2007 $16,901 $12,081 $ 9,206 4/30/2007 $17,583 $12,616 $ 9,623 5/31/2007 $18,125 $13,057 $ 9,977 6/29/2007 $18,026 $12,840 $ 9,836 7/31/2007 $17,893 $12,442 $ 9,652 8/31/2007 $18,460 $12,628 $ 9,813 9/28/2007 $19,618 $13,100 $10,214 10/31/2007 $20,164 $13,309 $10,571 11/30/2007 $19,225 $12,752 $10,153 12/31/2007 $19,082 $12,664 $10,124 1/31/2008 $17,190 $11,904 $ 9,323 2/29/2008 $16,656 $11,518 $ 9,127 3/31/2008 $16,707 $11,468 $ 9,072 4/30/2008 $17,972 $12,026 $ 9,547 5/30/2008 $18,728 $12,182 $ 9,912 6/30/2008 $17,384 $11,155 $ 9,209 7/31/2008 $17,287 $11,061 $ 9,062 8/29/2008 $17,531 $11,221 $ 9,169 9/30/2008 $15,559 $10,221 $ 8,110 10/31/2008 $13,017 $ 8,505 $ 6,656 11/28/2008 $12,054 $ 7,895 $ 6,106 12/31/2008 $12,071 $ 7,979 $ 6,232 1/30/2009 $11,407 $ 7,306 $ 5,919 2/27/2009 $10,541 $ 6,528 $ 5,462 3/31/2009 $11,432 $ 7,100 $ 5,949 4/30/2009 $12,651 $ 7,779 $ 6,544 Total Returns 26.51% -22.21% -34.56%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/09 - ------- ------- 1-Year -30.31% 5-Year -1.18% 10-Year +2.38%
CLASS R (1/1/02-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN FLEX CAP GROWTH RUSSELL 3000 DATE FUND - CLASS R S&P 500 INDEX GROWTH INDEX - ------------- --------------- ------------- ------------ 1/1/2002 $10,000 $10,000 $10,000 1/31/2002 $ 9,758 $ 9,854 $ 9,811 2/28/2002 $ 9,384 $ 9,664 $ 9,389 3/29/2002 $10,103 $10,027 $ 9,746 4/30/2002 $ 9,632 $ 9,420 $ 8,991 5/31/2002 $ 9,415 $ 9,350 $ 8,750 6/28/2002 $ 8,659 $ 8,684 $ 7,946 7/31/2002 $ 7,760 $ 8,007 $ 7,455 8/30/2002 $ 7,719 $ 8,060 $ 7,476 9/30/2002 $ 7,139 $ 7,184 $ 6,715 10/31/2002 $ 7,525 $ 7,816 $ 7,313 11/29/2002 $ 7,987 $ 8,276 $ 7,730 12/31/2002 $ 7,471 $ 7,790 $ 7,196 1/31/2003 $ 7,481 $ 7,586 $ 7,021 2/28/2003 $ 7,443 $ 7,472 $ 6,978 3/31/2003 $ 7,506 $ 7,545 $ 7,107 4/30/2003 $ 8,005 $ 8,166 $ 7,641 5/30/2003 $ 8,602 $ 8,596 $ 8,053 6/30/2003 $ 8,655 $ 8,706 $ 8,167 7/31/2003 $ 9,007 $ 8,859 $ 8,399 8/29/2003 $ 9,444 $ 9,032 $ 8,625 9/30/2003 $ 9,165 $ 8,936 $ 8,524 10/31/2003 $ 9,955 $ 9,442 $ 9,021 11/28/2003 $10,273 $ 9,525 $ 9,131 12/31/2003 $10,470 $10,024 $ 9,425 1/30/2004 $10,634 $10,208 $ 9,641 2/27/2004 $10,722 $10,350 $ 9,696 3/31/2004 $10,765 $10,194 $ 9,533 4/30/2004 $10,543 $10,034 $ 9,394 5/31/2004 $10,857 $10,172 $ 9,570 6/30/2004 $11,046 $10,370 $ 9,704 7/30/2004 $10,376 $10,026 $ 9,129 8/31/2004 $10,317 $10,067 $ 9,072 9/30/2004 $10,669 $10,176 $ 9,191 10/29/2004 $10,913 $10,332 $ 9,341 11/30/2004 $11,369 $10,750 $ 9,701 12/31/2004 $11,796 $11,115 $10,078 1/31/2005 $11,363 $10,844 $ 9,732 2/28/2005 $11,566 $11,073 $ 9,838 3/31/2005 $11,296 $10,877 $ 9,642 4/29/2005 $10,986 $10,670 $ 9,422 5/31/2005 $11,522 $11,010 $ 9,895 6/30/2005 $11,441 $11,025 $ 9,888 7/29/2005 $11,952 $11,435 $10,390 8/31/2005 $11,865 $11,331 $10,255 9/30/2005 $11,990 $11,423 $10,305 10/31/2005 $11,799 $11,232 $10,180 11/30/2005 $12,484 $11,657 $10,631 12/30/2005 $12,496 $11,661 $10,599 1/31/2006 $13,114 $11,970 $10,858 2/28/2006 $13,130 $12,003 $10,837 3/31/2006 $13,256 $12,152 $11,031 4/28/2006 $13,190 $12,315 $11,014 5/31/2006 $12,414 $11,961 $10,603 6/30/2006 $12,562 $11,977 $10,565 7/31/2006 $12,295 $12,051 $10,334 8/31/2006 $12,506 $12,338 $10,654 9/29/2006 $12,747 $12,655 $10,929 10/31/2006 $13,056 $13,068 $11,339 11/30/2006 $13,357 $13,316 $11,568 12/29/2006 $13,182 $13,503 $11,602 1/31/2007 $13,597 $13,707 $11,893 2/28/2007 $13,349 $13,439 $11,685 3/30/2007 $13,466 $13,590 $11,752 4/30/2007 $14,015 $14,192 $12,285 5/31/2007 $14,455 $14,687 $12,736 6/29/2007 $14,378 $14,443 $12,556 7/31/2007 $14,280 $13,995 $12,322 8/31/2007 $14,739 $14,205 $12,527 9/28/2007 $15,670 $14,736 $13,039 10/31/2007 $16,113 $14,970 $13,494 11/30/2007 $15,372 $14,345 $12,961 12/31/2007 $15,259 $14,245 $12,924 1/31/2008 $13,753 $13,391 $11,902 2/29/2008 $13,334 $12,956 $11,652 3/31/2008 $13,379 $12,900 $11,581 4/30/2008 $14,397 $13,528 $12,188 5/30/2008 $15,011 $13,703 $12,654 6/30/2008 $13,937 $12,548 $11,755 7/31/2008 $13,864 $12,442 $11,568 8/29/2008 $14,068 $12,622 $11,705 9/30/2008 $12,491 $11,498 $10,352 10/31/2008 $10,455 $ 9,567 $ 8,496 11/28/2008 $ 9,685 $ 8,880 $ 7,795 12/31/2008 $ 9,701 $ 8,975 $ 7,956 1/30/2009 $ 9,172 $ 8,218 $ 7,556 2/27/2009 $ 8,482 $ 7,343 $ 6,973 3/31/2009 $ 9,200 $ 7,986 $ 7,595 4/30/2009 $10,187 $ 8,751 $ 8,353 Total Returns 1.87% -12.49% -16.47%
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/09 - ------- ------- 1-Year -29.25% 5-Year -0.68% Since Inception (1/1/02) +0.25%
Annual Report | 11 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(6) 4/30/09 - ---------------- ------- 1-Year -28.88% 5-Year -0.21% 10-Year +3.27%
ADVISOR CLASS (5/1/99-4/30/09)(6) (PERFORMANCE GRAPH)
FRANKLIN FLEX CAP GROWTH FUND RUSSELL 3000 DATE - ADVISOR CLASS S&P 500 INDEX GROWTH INDEX - ------------- --------------- ------------- ------------ 5/1/1999 $10,000 $10,000 $10,000 5/31/1999 $ 9,969 $ 9,764 $ 9,717 6/30/1999 $10,979 $10,306 $10,384 7/31/1999 $11,084 $ 9,984 $10,055 8/31/1999 $11,527 $ 9,935 $10,180 9/30/1999 $11,756 $ 9,662 $9,994 10/31/1999 $13,210 $10,274 $10,714 11/30/1999 $15,106 $10,482 $11,328 12/31/1999 $18,383 $11,100 $12,562 1/31/2000 $18,398 $10,542 $12,007 2/29/2000 $23,167 $10,343 $12,757 3/31/2000 $21,888 $11,354 $13,479 4/30/2000 $19,490 $11,013 $12,785 5/31/2000 $18,212 $10,787 $12,109 6/30/2000 $20,932 $11,053 $13,070 7/31/2000 $20,376 $10,880 $12,485 8/31/2000 $23,357 $11,556 $13,627 9/30/2000 $22,630 $10,946 $12,379 10/31/2000 $20,660 $10,899 $11,764 11/30/2000 $16,253 $10,040 $10,003 12/31/2000 $17,088 $10,089 $ 9,746 1/31/2001 $17,390 $10,447 $10,428 2/28/2001 $14,172 $ 9,495 $ 8,681 3/31/2001 $12,648 $ 8,893 $ 7,748 4/30/2001 $14,065 $ 9,584 $ 8,726 5/31/2001 $14,069 $ 9,648 $ 8,622 6/30/2001 $13,982 $ 9,414 $ 8,455 7/31/2001 $13,457 $ 9,321 $ 8,208 8/31/2001 $12,776 $ 8,737 $ 7,547 9/30/2001 $11,008 $ 8,032 $ 6,763 10/31/2001 $11,768 $ 8,185 $ 7,136 11/30/2001 $12,871 $ 8,813 $ 7,816 12/31/2001 $13,119 $ 8,890 $ 7,833 1/31/2002 $12,838 $ 8,760 $ 7,685 2/28/2002 $12,346 $ 8,591 $ 7,355 3/31/2002 $13,296 $ 8,915 $ 7,634 4/30/2002 $12,681 $ 8,374 $ 7,043 5/31/2002 $12,400 $ 8,312 $ 6,855 6/30/2002 $11,400 $ 7,720 $ 6,224 7/31/2002 $10,219 $ 7,118 $ 5,840 8/31/2002 $10,165 $ 7,165 $ 5,856 9/30/2002 $ 9,401 $ 6,386 $ 5,260 10/31/2002 $ 9,913 $ 6,949 $ 5,729 11/30/2002 $10,525 $ 7,358 $ 6,056 12/31/2002 $ 9,847 $ 6,925 $ 5,637 1/31/2003 $ 9,864 $ 6,744 $ 5,499 2/28/2003 $ 9,814 $ 6,643 $ 5,466 3/31/2003 $ 9,901 $ 6,707 $ 5,567 4/30/2003 $10,558 $ 7,260 $ 5,986 5/31/2003 $11,351 $ 7,642 $ 6,309 6/30/2003 $11,421 $ 7,740 $ 6,398 7/31/2003 $11,888 $ 7,876 $ 6,579 8/31/2003 $12,466 $ 8,030 $ 6,757 9/30/2003 $12,099 $ 7,944 $ 6,677 10/31/2003 $13,152 $ 8,394 $ 7,067 11/30/2003 $13,569 $ 8,468 $ 7,153 12/31/2003 $13,833 $ 8,912 $ 7,383 1/31/2004 $14,052 $ 9,075 $ 7,552 2/29/2004 $14,172 $ 9,202 $ 7,595 3/31/2004 $14,234 $ 9,063 $ 7,468 4/30/2004 $13,945 $ 8,920 $ 7,359 5/31/2004 $14,362 $ 9,043 $ 7,496 6/30/2004 $14,614 $ 9,219 $ 7,602 7/31/2004 $13,730 $ 8,914 $ 7,151 8/31/2004 $13,656 $ 8,950 $ 7,106 9/30/2004 $14,127 $ 9,047 $ 7,199 10/31/2004 $14,457 $ 9,185 $ 7,317 11/30/2004 $15,068 $ 9,556 $ 7,599 12/31/2004 $15,638 $ 9,882 $ 7,895 1/31/2005 $15,073 $ 9,641 $ 7,623 2/28/2005 $15,349 $ 9,844 $ 7,707 3/31/2005 $14,994 $ 9,669 $ 7,553 4/30/2005 $14,589 $ 9,486 $ 7,381 5/31/2005 $15,308 $ 9,788 $ 7,751 6/30/2005 $15,209 $ 9,802 $ 7,746 7/31/2005 $15,890 $10,166 $ 8,139 8/31/2005 $15,783 $10,073 $ 8,033 9/30/2005 $15,957 $10,155 $ 8,072 10/31/2005 $15,709 $ 9,986 $ 7,975 11/30/2005 $16,626 $10,363 $ 8,328 12/31/2005 $16,650 $10,367 $ 8,303 1/31/2006 $17,481 $10,642 $ 8,506 2/28/2006 $17,510 $10,670 $ 8,489 3/31/2006 $17,683 $10,803 $ 8,641 4/30/2006 $17,605 $10,948 $ 8,628 5/31/2006 $16,576 $10,633 $ 8,305 6/30/2006 $16,778 $10,648 $ 8,276 7/31/2006 $16,432 $10,713 $ 8,095 8/31/2006 $16,717 $10,968 $ 8,346 9/30/2006 $17,051 $11,251 $ 8,561 10/31/2006 $17,468 $11,617 $ 8,883 11/30/2006 $17,877 $11,838 $ 9,062 12/31/2006 $17,654 $12,004 $ 9,088 1/31/2007 $18,213 $12,186 $ 9,316 2/28/2007 $17,890 $11,948 $ 9,153 3/31/2007 $18,052 $12,081 $ 9,206 4/30/2007 $18,797 $12,616 $ 9,623 5/31/2007 $19,393 $13,057 $ 9,977 6/29/2007 $19,300 $12,840 $ 9,836 7/31/2007 $19,179 $12,442 $ 9,652 8/31/2007 $19,801 $12,628 $ 9,813 9/28/2007 $21,060 $13,100 $10,214 10/31/2007 $21,660 $13,309 $10,571 11/30/2007 $20,675 $12,752 $10,153 12/31/2007 $20,535 $12,664 $10,124 1/31/2008 $18,517 $11,904 $ 9,323 2/29/2008 $17,958 $11,518 $ 9,127 3/31/2008 $18,025 $11,468 $ 9,072 4/30/2008 $19,404 $12,026 $ 9,547 5/30/2008 $20,241 $12,182 $ 9,912 6/30/2008 $18,799 $11,155 $ 9,209 7/31/2008 $18,711 $11,061 $ 9,062 8/29/2008 $18,996 $11,221 $ 9,169 9/30/2008 $16,873 $10,221 $ 8,110 10/31/2008 $14,128 $ 8,505 $ 6,656 11/28/2008 $13,093 $ 7,895 $ 6,106 12/31/2008 $13,123 $ 7,979 $ 6,232 1/30/2009 $12,412 $ 7,306 $ 5,919 2/27/2009 $11,483 $ 6,528 $ 5,462 3/31/2009 $12,462 $ 7,100 $ 5,949 4/30/2009 $13,800 $ 7,779 $ 6,544 Total Returns 38.00% -22.21% -34.56%
ENDNOTES INVESTORS SHOULD BE COMFORTABLE WITH FLUCTUATIONS IN THE VALUE OF THEIR INVESTMENTS, AS SMALL AND MIDSIZED COMPANY STOCKS CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM. SMALLER, MIDSIZED AND RELATIVELY NEW OR UNSEASONED COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC CONDITIONS, AND THEIR PROSPECTS FOR GROWTH ARE LESS CERTAIN THAN THOSE OF LARGER, MORE ESTABLISHED COMPANIES. THE FUND ALSO INVESTS IN TECHNOLOGY STOCKS, WHICH CAN BE HIGHLY VOLATILE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) Cumulative total return represents the change in value of an investment over the periods indicated. (2.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (3.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (4.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (6.) Effective 8/2/04, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 8/2/04, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 8/1/04, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 8/2/04 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +0.17% and +0.04%. (7.) Source: (C) 2009 Morningstar. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The Russell 3000 Growth Index is market capitalization weighted and measures performance of those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values. 12 | Annual Report Your Fund's Expenses FRANKLIN FLEX CAP GROWTH FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 13 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
EXPENSES PAID DURING BEGINNING ACCOUNT ENDING ACCOUNT PERIOD* VALUE 11/1/08 VALUE 4/30/09 11/1/08-4/30/09 ----------------- -------------- --------------- CLASS A Actual $1,000 $ 975.70 $5.24 Hypothetical (5% return before expenses) $1,000 $1,019.49 $5.36 CLASS B Actual $1,000 $ 972.20 $8.85 Hypothetical (5% return before expenses) $1,000 $1,015.82 $9.05 CLASS C Actual $1,000 $ 971.90 $8.85 Hypothetical (5% return before expenses) $1,000 $1,015.82 $9.05 CLASS R Actual $1,000 $ 974.40 $6.46 Hypothetical (5% return before expenses) $1,000 $1,018.25 $6.61 ADVISOR CLASS Actual $1,000 $ 976.80 $4.02 Hypothetical (5% return before expenses) $1,000 $1,020.73 $4.11
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 1.07%; B: 1.81%; C: 1.81%; R: 1.32%; and Advisor: 0.82%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. 14 | Annual Report Franklin Focused Core Equity Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Focused Core Equity Fund seeks capital appreciation by investing at least 80% of its net assets in equity securities. The Fund will invest primarily in equity securities of large capitalization companies, which are similar in size to those in the Standard & Poor's 500 Index (S&P 500).(1) PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This annual report for Franklin Focused Core Equity Fund covers the fiscal year ended April 30, 2009. PERFORMANCE OVERVIEW For the 12 months under review, Franklin Focused Core Equity Fund - Class A had a -26.07% cumulative total return. The Fund performed better than its benchmark, the S&P 500, which had a -35.31% total return for the same period.(2) You can find more of the Fund's performance data in the Performance Summary beginning on page 18. INVESTMENT STRATEGY We are research-driven, fundamental investors. As bottom-up investors focusing primarily on individual securities, we seek to invest in financially strong companies with favorable growth potential and sustainable competitive advantages and that present, in our opinion, the most compelling trade-off between growth potential, valuation and risk. We rely on a team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to (1.) The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. (2.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. See footnote 1 for a description of the S&P 500. 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 AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 67. Annual Report | 15 evaluate companies. We will generally seek to maintain a portfolio of securities representing approximately 30-40 companies, and we will apply a long-term perspective through market and business cycles. PORTFOLIO BREAKDOWN Franklin Focused Core Equity Fund Based on Total Net Assets as of 4/30/09 (BAR CHART) Health Care 17.6% Industrials 15.6% Information Technology 14.1% Financials 10.8% Consumer Staples 10.1% Energy 9.9% Consumer Discretionary 8.3% Materials 3.8% Telecommunication Services 3.0% Short-Term Investments & Other Net Assets 6.8%
MANAGER'S DISCUSSION For the 12 months under review, significant detractors from the Fund's absolute performance included Petroplus Holdings, which specializes in oil refining, storage and marketing; NII Holdings, a wireless telecommunications provider; and Legg Mason, an asset management company. In a difficult environment for equities, most sectors declined in value. Financials and energy holdings particularly weighed on Fund performance during the period. In the financials sector, the aforementioned Legg Mason and real estate investment trusts CapitalSource and iStar Financial were significant detractors. Credit card companies Discover Financial Services and American Express (sold by period-end) also hurt the Fund's returns. Within the energy sector, the aforementioned Petroplus and oil and gas company Marathon Oil detracted from performance. On a more positive note, the health care sector benefited Fund performance. Health care holdings Genentech (not held at period-end), a biotechnology company, and Mylan and Schering-Plough, pharmaceutical manufacturers, appreciated in value. Some holdings in the consumer staples sector also contributed to Fund returns such as beverage manufacturer Hansen Natural and food and staples retailer CVS Caremark. 16 | Annual Report Thank you for your participation in Franklin Focused Core Equity Fund. We look forward to serving your future investment needs. (PHOTO OF STEVEN KORNFELD) /s/ Steven Kornfeld Steven Kornfeld, CFA (PHOTO OF EDWARD PERKS) /s/ Edward Perks Edward Perks, CFA Portfolio Management Team Franklin Focused Core Equity Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF APRIL 30, 2009, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. TOP 10 EQUITY HOLDINGS Franklin Focused Core Equity Fund 4/30/09
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------- ---------- Berkshire Hathaway Inc., B FINANCIALS 5.0% Petroplus Holdings AG (Switzerland) ENERGY 4.9% Roche Holding AG (Switzerland) HEALTH CARE 4.7% Schering-Plough Corp. HEALTH CARE 4.7% CVS Caremark Corp. CONSUMER STAPLES 4.6% MasterCard Inc., A INFORMATION TECHNOLOGY 4.3% Precision Castparts Corp. INDUSTRIALS 4.2% Marathon Oil Corp. ENERGY 4.1% Merck & Co. Inc. HEALTH CARE 3.9% Corn Products International Inc. CONSUMER STAPLES 3.8%
Annual Report | 17 Performance Summary as of 4/30/09 FRANKLIN FOCUSED CORE EQUITY FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: N/A) CHANGE 4/30/09 4/30/08 - --------------------- ------ ------- ------- Net Asset Value (NAV) -$2.42 $6.27 $8.69 DISTRIBUTIONS (5/1/08-4/30/09) Dividend Income $0.0989 Short-Term Capital Gain $0.0217 Long-Term Capital Gain $0.0002 TOTAL $0.1208
CLASS C (SYMBOL: N/A) CHANGE 4/30/09 4/30/08 - --------------------- ------ ------- ------- Net Asset Value (NAV) -$2.43 $6.24 $8.67 DISTRIBUTIONS (5/1/08-4/30/09) Dividend Income $0.0829 Short-Term Capital Gain $0.0217 Long-Term Capital Gain $0.0002 TOTAL $0.1048
CLASS R (SYMBOL: N/A) CHANGE 4/30/09 4/30/08 - --------------------- ------ ------- ------- Net Asset Value (NAV) -$2.41 $6.27 $8.68 DISTRIBUTIONS (5/1/08-4/30/09) Dividend Income $0.0827 Short-Term Capital Gain $0.0217 Long-Term Capital Gain $0.0002 TOTAL $0.1046
ADVISOR CLASS (SYMBOL: N/A) CHANGE 4/30/09 4/30/08 - --------------------------- ------ ------- ------- Net Asset Value (NAV) -$2.42 $6.28 $8.70 DISTRIBUTIONS (5/1/08-4/30/09) Dividend Income $0.1129 Short-Term Capital Gain $0.0217 Long-Term Capital Gain $0.0002 TOTAL $0.1348
18 | Annual Report Performance Summary (CONTINUED) PERFORMANCE(1) CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
INCEPTION CLASS A 1-YEAR (12/13/07) - ------- ------- ---------- Cumulative Total Return(2) -26.07% -35.83% Average Annual Total Return(3) -30.33% -30.52% Value of $10,000 Investment(4) $ 6,967 $ 6,048 Avg. Ann. Total Return (3/31/09)(5) -35.77% -39.40% Total Annual Operating Expenses(6) Without Waiver 5.53% With Waiver 1.25%
INCEPTION CLASS C 1-YEAR (12/13/07) - ------- ------- ---------- Cumulative Total Return(2) -26.56% -36.33% Average Annual Total Return(3) -27.28% -27.89% Value of $10,000 Investment(4) $ 7,272 $ 6,367 Avg. Ann. Total Return (3/31/09)(5) -32.89% -36.99% Total Annual Operating Expenses(6) Without Waiver 6.16% With Waiver 1.88%
INCEPTION CLASS R 1-YEAR (12/13/07) - ------- ------- ---------- Cumulative Total Return(2) -26.30% -36.03% Average Annual Total Return(3) -26.30% -27.64% Value of $10,000 Investment(4) $ 7,370 $ 6,397 Avg. Ann. Total Return (3/31/09)(5) -32.03% -36.72% Total Annual Operating Expenses(6) Without Waiver 5.70% With Waiver 1.42%
INCEPTION ADVISOR CLASS 1-YEAR (12/13/07) - ------------- ------- ---------- Cumulative Total Return(2) -25.93% -35.56% Average Annual Total Return(3) -25.93% -27.26% Value of $10,000 Investment(4) $ 7,407 $ 6,444 Avg. Ann. Total Return (3/31/09)(5) -31.60% -36.35% Total Annual Operating Expenses(6) Without Waiver 5.20% With Waiver 0.92%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. THE INVESTMENT MANAGER AND ADMINISTRATOR HAVE CONTRACTUALLY AGREED TO WAIVE OR LIMIT THEIR RESPECTIVE FEES AND TO ASSUME AS THEIR OWN EXPENSE CERTAIN EXPENSES OTHERWISE PAYABLE BY THE FUND SO THAT COMMON EXPENSES (I.E., A COMBINATION OF INVESTMENT MANAGEMENT FEES, FUND ADMINISTRATION FEES, AND OTHER EXPENSES, BUT EXCLUDING RULE 12B-1 FEES AND ACQUIRED FUND FEES AND EXPENSES) FOR EACH CLASS OF THE FUND DO NOT EXCEED 0.89% (OTHER THAN CERTAIN NON-ROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS) UNTIL 8/31/09. Annual Report | 19 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any applicable maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged index includes reinvestment of any income or distributions. It differs from the Fund in composition and does not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/09 - ------- ------- 1-Year -30.33% Since Inception (12/13/07) -30.52%
CLASS A (12/13/07-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN FOCUSED CORE EQUITY FUND - S&P 500 DATE CLASS A INDEX - ------------- ------------- ------- 12/13/2007 $ 9,425 $10,000 12/31/2007 $ 9,529 $ 9,960 1/31/2008 $ 8,775 $ 9,362 2/29/2008 $ 8,247 $ 9,058 3/31/2008 $ 7,653 $ 9,019 4/30/2008 $ 8,181 $ 9,458 5/31/2008 $ 8,539 $ 9,581 6/30/2008 $ 7,729 $ 8,773 7/31/2008 $ 7,653 $ 8,699 8/31/2008 $ 8,077 $ 8,825 9/30/2008 $ 7,220 $ 8,039 10/31/2008 $ 5,580 $ 6,689 11/30/2008 $ 5,052 $ 6,209 12/31/2008 $ 5,276 $ 6,275 1/31/2009 $ 5,035 $ 5,746 2/28/2009 $ 4,572 $ 5,134 3/31/2009 $ 5,218 $ 5,584 4/30/2009 $ 6,048 $ 6,118 Total Returns -39.52% -38.82%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/09 - ------- ------- 1-Year -27.28% Since Inception (12/13/07) -27.89%
CLASS C (12/13/07-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN FOCUSED CORE EQUITY FUND - S&P 500 DATE CLASS C INDEX - ------------- ------------- ------- 12/13/2007 $10,000 $10,000 12/31/2007 $10,110 $ 9,960 1/31/2008 $ 9,300 $ 9,362 2/29/2008 $ 8,740 $ 9,058 3/31/2008 $ 8,100 $ 9,019 4/30/2008 $ 8,670 $ 9,458 5/31/2008 $ 9,040 $ 9,581 6/30/2008 $ 8,180 $ 8,773 7/31/2008 $ 8,100 $ 8,699 8/31/2008 $ 8,540 $ 8,825 9/30/2008 $ 7,620 $ 8,039 10/31/2008 $ 5,890 $ 6,689 11/30/2008 $ 5,320 $ 6,209 12/31/2008 $ 5,561 $ 6,275 1/31/2009 $ 5,306 $ 5,746 2/28/2009 $ 4,806 $ 5,134 3/31/2009 $ 5,490 $ 5,584 4/30/2009 $ 6,367 $ 6,118 Total Returns -36.33% -38.82%
20 | Annual Report Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/09 - ------- ------- 1-Year -26.30% Since Inception (12/13/07) -27.64%
AVERAGE ANNUAL TOTAL RETURN (PERFORMANCE GRAPH)
FRANKLIN FOCUSED CORE EQUITY FUND - S&P 500 DATE CLASS R INDEX - ------------- ------------- ------- 12/13/2007 $10,000 $10,000 12/31/2007 $10,110 $ 9,960 1/31/2008 $ 9,310 $ 9,362 2/29/2008 $ 8,750 $ 9,058 3/31/2008 $ 8,120 $ 9,019 4/30/2008 $ 8,680 $ 9,458 5/31/2008 $ 9,050 $ 9,581 6/30/2008 $ 8,190 $ 8,773 7/31/2008 $ 8,110 $ 8,699 8/31/2008 $ 8,560 $ 8,825 9/30/2008 $ 7,650 $ 8,039 10/31/2008 $ 5,910 $ 6,689 11/30/2008 $ 5,350 $ 6,209 12/31/2008 $ 5,591 $ 6,275 1/31/2009 $ 5,336 $ 5,746 2/28/2009 $ 4,836 $ 5,134 3/31/2009 $ 5,519 $ 5,584 4/30/2009 $ 6,397 $ 6,118 Total Returns -3603% -38.82%
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 4/30/09 - ------------- ------- 1-Year -25.93% Since Inception (12/13/07) -27.26%
AVERAGE ANNUAL TOTAL RETURN (PERFORMANCE GRAPH)
FRANKLIN FOCUSED CORE EQUITY FUND - S&P 500 DATE ADVISOR CLASS INDEX - ------------- ------------- ------- 12/13/2007 $10,000 $10,000 12/31/2007 $10,120 $ 9,960 1/31/2008 $ 9,320 $ 9,362 2/29/2008 $ 8,760 $ 9,058 3/31/2008 $ 8,130 $ 9,019 4/30/2008 $ 8,700 $ 9,458 5/31/2008 $ 9,070 $ 9,581 6/30/2008 $ 8,220 $ 8,773 7/31/2008 $ 8,140 $ 8,699 8/31/2008 $ 8,590 $ 8,825 9/30/2008 $ 7,680 $ 8,039 10/31/2008 $ 5,940 $ 6,689 11/30/2008 $ 5,370 $ 6,209 12/31/2008 $ 5,613 $ 6,275 1/31/2009 $ 5,366 $ 5,746 2/28/2009 $ 4,864 $ 5,134 3/31/2009 $ 5,561 $ 5,584 4/30/2009 $ 6,444 $ 6,118 Total Returns -35.56% -38.82%
Annual Report | 21 Performance Summary (CONTINUED) ENDNOTES WHILE STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORT TERM. THERE ARE SPECIAL RISKS INVOLVED WITH SIGNIFICANT EXPOSURE TO A PARTICULAR SECTOR, INCLUDING INCREASED SUSCEPTIBILITY RELATED TO ECONOMIC, BUSINESS, OR OTHER DEVELOPMENTS AFFECTING THAT SECTOR, WHICH MAY RESULT IN INCREASED VOLATILITY. THE FUND ALSO HAS THE POTENTIAL TO INVEST IN FOREIGN COMPANY STOCKS, WHICH INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL UNCERTAINTY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS C: These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) If the manager and administrator had not waived fees, the Fund's total returns would have been lower. (2.) Cumulative total return represents the average annual change in value of an investment over the periods indicated. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (4.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (5.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (6.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (7.) Source: (C) 2009 Morningstar. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. 22 | Annual Report Your Fund's Expenses FRANKLIN FOCUSED CORE EQUITY FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 23 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
EXPENSES PAID BEGINNING ENDING DURING PERIOD* ACCOUNT ACCOUNT ACTUAL VALUE 11/1/08 VALUE 4/30/09 11/1/08-4/30/09 ------------- ------------- --------------- CLASS A Actual $1,000 $1,083.90 $5.94 Hypothetical (5% return before expenses) $1,000 $1,019.09 $5.76 CLASS C Actual $1,000 $1,081.00 $9.39 Hypothetical (5% return before expenses) $1,000 $1,015.77 $9.10 CLASS R Actual $1,000 $1,082.40 $7.28 Hypothetical (5% return before expenses) $1,000 $1,017.80 $7.05 ADVISOR CLASS Actual $1,000 $1,084.80 $4.60 Hypothetical (5% return before expenses) $1,000 $1,020.38 $4.46
* Expenses are calculated using the most recent six-month expense ratio, net of expense waivers, annualized for each class (A: 1.15%; C: 1.82%; R: 1.41%; and Advisor: 0.89%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. 24 | Annual Report Franklin Growth Opportunities Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Growth Opportunities Fund seeks capital appreciation by investing substantially in equity securities of companies demonstrating accelerating growth, increasing profitability, or above-average growth or growth potential, when compared with the overall economy. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This annual report for Franklin Growth Opportunities Fund covers the fiscal year ended April 30, 2009. PERFORMANCE OVERVIEW For the 12 months under review, Franklin Growth Opportunities Fund - Class A had a -30.81% cumulative total return. The Fund performed comparably with its narrow benchmark, the Russell 3000 Growth Index, which had a -31.46% total return, and performed better than its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -35.31% total return for the same period.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 28. INVESTMENT STRATEGY We are research-driven, fundamental investors pursuing a growth strategy. As bottom-up investors we focus primarily on finding individual securities that meet our criteria for growth potential, quality and valuation. We search for high-quality companies that have identifiable drivers of future earnings growth. We rely on our team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies. Our analysts identify each company's market opportunity, competitive position, management and financial strength, business and financial risks, and valuation. We choose (1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The Russell 3000 Growth Index is market capitalization weighted and measures performance of those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. 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 AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 74. Annual Report | 25 to invest in those companies that, in our opinion, offer the best trade-off between growth opportunity, business and financial risk, and valuation. PORTFOLIO BREAKDOWN Franklin Growth Opportunities Fund Based on Total Net Assets as of 4/30/09 (BAR CHART)
Information Technology* 35.0% Health Care 19.2% Energy 11.6% Industrials 10.9% Consumer Discretionary 7.8% Financials 3.7% Telecommunication Services 3.6% Materials 2.4% Consumer Staples 1.7% Short-Term Investments & Other Net Assets 4.1%
* Significant exposure to a single sector may result in greater volatility for the Fund than a more broadly diversified portfolio. There are specific risks to investing in technology company stocks, which can be subject to abrupt or erratic price movements and have been volatile, especially over the short term. MANAGER'S DISCUSSION Among the most significant detractors from the Fund's absolute performance during the 12 months under review were NII Holdings in the telecommunications sector, Celgene in the health care sector and FLIR Systems in the information technology sector. From a sector perspective, our investments in the information technology, industrials and health care sectors were significant detractors from the Fund's total returns. A key information technology underperformer included Google, which operates the world's leading Internet search engine. In the industrials sector, the Fund was negatively impacted by investments in ABB, a developer and manufacturer of power and automation technologies for a broad base of utilities, industrial and commercial customers; and Precision Castparts, which makes tools and parts used primarily in aerospace and power generation applications. In the health care sector, Covance, a contract research organization for the pharmaceutical industry, was a notable detractor. During a period when almost every sector represented in the Fund fell in tandem with the overall equity market, we had some contributors. Individual securities that aided the Fund's absolute performance included Myriad Genetics, which manufactures drugs and diagnostic testing systems aimed at finding and treating specific cancers; Research in Motion, a Canadian wireless equipment and services company that produces the popular Blackberry smart phone; and ITT Educational Services, a provider of technology-oriented postsecondary degree programs in the U.S. One sector that delivered positive results for the Fund was the consumer staples sector. Within the sector, food products manufacturer Bunge benefited Fund performance. Within the consumer discretionary sector, gaming machine distributor WMS Industries and specialty retailer Abercrombie & Fitch boosted Fund returns. In the energy sector, oil and natural gas producer Continental Resources performed well for the Fund. 26 | Annual Report Thank you for your continued participation in Franklin Growth Opportunities Fund. We look forward to serving your future investment needs. (PHOTO OF GRANT BOWERS) /s/ Grant Bowers Grant Bowers Portfolio Manager Franklin Growth Opportunities Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF APRIL 30, 2009, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. TOP 10 HOLDINGS Franklin Growth Opportunities Fund 4/30/09
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------- ---------- Apple Inc. 3.0% INFORMATION TECHNOLOGY FLIR Systems Inc. 2.9% INFORMATION TECHNOLOGY QUALCOMM Inc. 2.8% INFORMATION TECHNOLOGY MasterCard Inc., A 2.8% INFORMATION TECHNOLOGY Celgene Corp. 2.6% HEALTH CARE Myriad Genetics Inc. 2.6% HEALTH CARE C.H. Robinson Worldwide Inc. 2.4% INDUSTRIALS Life Technologies Corp. 2.2% HEALTH CARE Illumina Inc. 2.2% HEALTH CARE Visa Inc., A 2.2% INFORMATION TECHNOLOGY
Annual Report | 27 Performance Summary as of 4/30/09 FRANKLIN GROWTH OPPORTUNITIES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION
CLASS A (SYMBOL: FGRAX) CHANGE 4/30/09 4/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$6.18 $13.88 $20.06
CLASS B (SYMBOL: FKABX) CHANGE 4/30/09 4/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$5.93 $13.02 $18.95
CLASS C (SYMBOL: FKACX) CHANGE 4/30/09 4/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$5.92 $12.99 $18.91
CLASS R (SYMBOL: FKARX) CHANGE 4/30/09 4/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$6.13 $13.67 $19.80
ADVISOR CLASS (SYMBOL: FRAAX) CHANGE 4/30/09 4/30/08 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) -$6.30 $14.30 $20.60
28 | Annual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR INCEPTION (6/23/99) - ------- ------ ------- ------------------- Cumulative Total Return(1) -30.81% +10.42% +42.12% Average Annual Total Return(2) -34.77% +0.80% +3.01% Value of $10,000 Investment(3) $6,523 $10,405 $13,395 Avg. Ann. Total Return (3/31/09)(4) -34.61% -1.90% +2.02% Total Annual Operating Expenses(5) 1.29%
CLASS B 1-YEAR 5-YEAR INCEPTION (6/23/99) - ------- ------ ------- ------------------- Cumulative Total Return(1) -31.29% +6.55% +34.99% Average Annual Total Return(2) -34.04% +0.89% +3.09% Value of $10,000 Investment(3) $6,596 $10,455 $13,499 Avg. Ann. Total Return (3/31/09)(4) -33.86% -1.82% +2.10% Total Annual Operating Expenses(5) 2.01%
CLASS C 1-YEAR 5-YEAR INCEPTION (6/23/99) - ------- ------ ------- ------------------- Cumulative Total Return(1) -31.31% +6.56% +32.90% Average Annual Total Return(2) -31.99% +1.28% +2.93% Value of $10,000 Investment(3) $6,801 $10,656 $13,290 Avg. Ann. Total Return (3/31/09)(4) -31.80% -1.43% +1.95% Total Annual Operating Expenses(5) 2.01%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------- ------ ------- ------------------- Cumulative Total Return(1) -30.96% +9.27% -0.58% Average Annual Total Return(2) -30.96% +1.79% -0.08% Value of $10,000 Investment(3) $6,904 $10,927 $9,942 Avg. Ann. Total Return (3/31/09)(4) -30.71% -0.92% -1.41% Total Annual Operating Expenses(5) 1.51%
ADVISOR CLASS 1-YEAR 5-YEAR INCEPTION (6/23/99) - ------------- ------ ------- ------------------- Cumulative Total Return(1) -30.58% +12.06% +46.59% Average Annual Total Return(2) -30.58% +2.30% +3.96% Value of $10,000 Investment(3) $6,942 $11,206 $14,659 Avg. Ann. Total Return (3/31/09)(4) -30.40% -0.44% +2.96% Total Annual Operating Expenses(5) 1.01%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. Annual Report | 29 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/09 - ------- ------- 1-Year -34.77% 5-Year +0.80% Since Inception (6/23/99) +3.01%
CLASS A (6/23/99-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN GROWTH OPPORTUNITIES RUSSELL 3000 DATE FUND - CLASS A S&P 500 INDEX GROWTH INDEX - ------------- --------------- ------------- ------------ 6/23/1999 $ 9,425 $10,000 $10,000 6/30/1999 $10,160 $10,129 $10,160 7/31/1999 $11,235 $ 9,813 $ 9,838 8/31/1999 $12,385 $ 9,765 $ 9,960 9/30/1999 $13,195 $ 9,497 $ 9,778 10/31/1999 $15,438 $10,098 $10,482 11/30/1999 $18,596 $10,303 $11,084 12/31/1999 $23,095 $10,910 $12,291 1/31/2000 $22,603 $10,362 $11,748 2/29/2000 $30,639 $10,166 $12,482 3/31/2000 $28,536 $11,160 $13,188 4/30/2000 $24,330 $10,824 $12,509 5/31/2000 $21,899 $10,602 $11,848 6/30/2000 $26,443 $10,864 $12,788 7/31/2000 $25,594 $10,694 $12,215 8/31/2000 $28,401 $11,358 $13,333 9/30/2000 $27,147 $10,759 $12,112 10/31/2000 $23,896 $10,713 $11,510 11/30/2000 $17,239 $ 9,868 $ 9,787 12/31/2000 $17,130 $ 9,917 $ 9,536 1/31/2001 $19,340 $10,269 $10,203 2/28/2001 $14,833 $ 9,332 $ 8,494 3/31/2001 $12,874 $ 8,741 $ 7,581 4/30/2001 $14,766 $ 9,420 $ 8,537 5/31/2001 $14,717 $ 9,483 $ 8,436 6/30/2001 $14,611 $ 9,253 $ 8,273 7/31/2001 $13,694 $ 9,162 $ 8,031 8/31/2001 $12,411 $ 8,588 $ 7,385 9/30/2001 $10,046 $ 7,895 $ 6,617 10/31/2001 $11,253 $ 8,045 $ 6,982 11/30/2001 $12,835 $ 8,662 $ 7,647 12/31/2001 $13,260 $ 8,738 $ 7,664 1/31/2002 $12,652 $ 8,611 $ 7,520 2/28/2002 $11,726 $ 8,444 $ 7,196 3/31/2002 $12,652 $ 8,762 $ 7,470 4/30/2002 $11,948 $ 8,231 $ 6,891 5/31/2002 $11,523 $ 8,170 $ 6,707 6/30/2002 $10,268 $ 7,588 $ 6,090 7/31/2002 $ 8,850 $ 6,997 $ 5,714 8/31/2002 $ 8,657 $ 7,043 $ 5,730 9/30/2002 $ 7,798 $ 6,277 $ 5,146 10/31/2002 $ 8,531 $ 6,830 $ 5,605 11/30/2002 $ 9,458 $ 7,232 $ 5,925 12/31/2002 $ 8,522 $ 6,807 $ 5,516 1/31/2003 $ 8,483 $ 6,629 $ 5,381 2/28/2003 $ 8,415 $ 6,529 $ 5,348 3/31/2003 $ 8,512 $ 6,593 $ 5,447 4/30/2003 $ 9,168 $ 7,136 $ 5,857 5/31/2003 $ 9,959 $ 7,512 $ 6,172 6/30/2003 $10,046 $ 7,607 $ 6,260 7/31/2003 $10,539 $ 7,741 $ 6,437 8/31/2003 $11,060 $ 7,892 $ 6,611 9/30/2003 $10,712 $ 7,809 $ 6,533 10/31/2003 $11,668 $ 8,250 $ 6,914 11/30/2003 $11,967 $ 8,323 $ 6,998 12/31/2003 $12,266 $ 8,759 $ 7,224 1/31/2004 $12,546 $ 8,920 $ 7,389 2/29/2004 $12,565 $ 9,044 $ 7,431 3/31/2004 $12,613 $ 8,908 $ 7,307 4/30/2004 $12,131 $ 8,768 $ 7,200 5/31/2004 $12,469 $ 8,888 $ 7,335 6/30/2004 $12,913 $ 9,061 $ 7,438 7/31/2004 $11,996 $ 8,761 $ 6,997 8/31/2004 $11,812 $ 8,797 $ 6,953 9/30/2004 $12,498 $ 8,892 $ 7,044 10/31/2004 $12,903 $ 9,028 $ 7,159 11/30/2004 $13,800 $ 9,393 $ 7,435 12/31/2004 $14,389 $ 9,713 $ 7,724 1/31/2005 $13,849 $ 9,476 $ 7,459 2/28/2005 $13,849 $ 9,675 $ 7,540 3/31/2005 $13,472 $ 9,504 $ 7,390 4/30/2005 $12,864 $ 9,324 $ 7,222 5/31/2005 $13,714 $ 9,620 $ 7,584 6/30/2005 $13,907 $ 9,634 $ 7,579 7/31/2005 $14,669 $ 9,992 $ 7,963 8/31/2005 $14,582 $ 9,901 $ 7,860 9/30/2005 $14,881 $ 9,981 $ 7,898 10/31/2005 $14,891 $ 9,815 $ 7,803 11/30/2005 $15,895 $10,186 $ 8,148 12/31/2005 $15,982 $10,190 $ 8,124 1/31/2006 $17,082 $10,460 $ 8,322 2/28/2006 $17,188 $10,488 $ 8,306 3/31/2006 $17,738 $10,618 $ 8,455 4/30/2006 $17,661 $10,761 $ 8,442 5/31/2006 $16,281 $10,451 $ 8,126 6/30/2006 $16,474 $10,465 $ 8,098 7/31/2006 $15,711 $10,530 $ 7,920 8/31/2006 $15,846 $10,781 $ 8,166 9/30/2006 $16,242 $11,058 $ 8,376 10/31/2006 $16,618 $11,419 $ 8,691 11/30/2006 $17,178 $11,636 $ 8,867 12/31/2006 $17,062 $11,799 $ 8,892 1/31/2007 $17,487 $11,978 $ 9,115 2/28/2007 $17,217 $11,743 $ 8,956 3/31/2007 $17,487 $11,875 $ 9,007 4/30/2007 $17,892 $12,401 $ 9,416 5/31/2007 $18,529 $12,833 $ 9,762 6/30/2007 $18,655 $12,620 $ 9,623 7/31/2007 $18,635 $12,229 $ 9,444 8/31/2007 $19,243 $12,412 $ 9,602 9/30/2007 $21,145 $12,876 $ 9,994 10/31/2007 $22,351 $13,081 $10,343 11/30/2007 $20,604 $12,534 $ 9,934 12/31/2007 $20,633 $12,447 $ 9,906 1/31/2008 $18,317 $11,701 $ 9,122 2/29/2008 $17,574 $11,321 $ 8,930 3/31/2008 $17,526 $11,272 $ 8,876 4/30/2008 $19,359 $11,821 $ 9,341 5/31/2008 $20,623 $11,974 $ 9,698 6/30/2008 $19,099 $10,964 $ 9,010 7/31/2008 $18,549 $10,872 $ 8,867 8/31/2008 $18,481 $11,029 $ 8,972 9/30/2008 $15,663 $10,047 $ 7,935 10/31/2008 $13,250 $ 8,359 $ 6,512 11/30/2008 $12,092 $ 7,760 $ 5,974 12/31/2008 $12,363 $ 7,842 $ 6,098 1/31/2009 $12,054 $ 7,181 $ 5,792 2/28/2009 $11,147 $ 6,416 $ 5,344 3/31/2009 $12,160 $ 6,979 $ 5,821 4/30/2009 $13,395 $ 7,646 $ 6,402 Total Returns 33.95% -23.54% -35.98%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/09 - ------- ------- 1-Year -34.04% 5-Year +0.89% Since Inception (6/23/99) +3.09%
CLASS B (6/23/99-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN GROWTH OPPORTUNITIES RUSSELL 3000 DATE FUND - CLASS B S&P 500 INDEX Growth INDEX - ------------- --------------- ------------- ------------ 6/23/1999 $10,000 $10,000 $10,000 6/30/1999 $10,780 $10,129 $10,160 7/31/1999 $11,920 $ 9,813 $ 9,838 8/31/1999 $13,140 $ 9,765 $ 9,960 9/30/1999 $13,970 $ 9,497 $ 9,778 10/31/1999 $16,380 $10,098 $10,482 11/30/1999 $19,720 $10,303 $11,084 12/31/1999 $24,486 $10,910 $12,291 1/31/2000 $23,975 $10,362 $11,748 2/29/2000 $32,485 $10,166 $12,482 3/31/2000 $30,245 $11,160 $13,188 4/30/2000 $25,755 $10,824 $12,509 5/31/2000 $23,177 $10,602 $11,848 6/30/2000 $27,964 $10,864 $12,788 7/31/2000 $27,043 $10,694 $12,215 8/31/2000 $29,999 $11,358 $13,333 9/30/2000 $28,660 $10,759 $12,112 10/31/2000 $25,213 $10,713 $11,510 11/30/2000 $18,176 $ 9,868 $ 9,787 12/31/2000 $18,049 $ 9,917 $ 9,536 1/31/2001 $20,362 $10,269 $10,203 2/28/2001 $15,604 $ 9,332 $ 8,494 3/31/2001 $13,547 $ 8,741 $ 7,581 4/30/2001 $15,522 $ 9,420 $ 8,537 5/31/2001 $15,461 $ 9,483 $ 8,436 6/30/2001 $15,348 $ 9,253 $ 8,273 7/31/2001 $14,376 $ 9,162 $ 8,031 8/31/2001 $13,015 $ 8,588 $ 7,385 9/30/2001 $10,529 $ 7,895 $ 6,617 10/31/2001 $11,798 $ 8,045 $ 6,982 11/30/2001 $13,435 $ 8,662 $ 7,647 12/31/2001 $13,875 $ 8,738 $ 7,664 1/31/2002 $13,230 $ 8,611 $ 7,520 2/28/2002 $12,258 $ 8,444 $ 7,196 3/31/2002 $13,220 $ 8,762 $ 7,470 4/30/2002 $12,483 $ 8,231 $ 6,891 5/31/2002 $12,023 $ 8,170 $ 6,707 6/30/2002 $10,713 $ 7,588 $ 6,090 7/31/2002 $ 9,219 $ 6,997 $ 5,714 8/31/2002 $ 9,014 $ 7,043 $ 5,730 9/30/2002 $ 8,114 $ 6,277 $ 5,146 10/31/2002 $ 8,881 $ 6,830 $ 5,605 11/30/2002 $ 9,843 $ 7,232 $ 5,925 12/31/2002 $ 8,861 $ 6,807 $ 5,516 1/31/2003 $ 8,820 $ 6,629 $ 5,381 2/28/2003 $ 8,738 $ 6,529 $ 5,348 3/31/2003 $ 8,830 $ 6,593 $ 5,447 4/30/2003 $ 9,516 $ 7,136 $ 5,857 5/31/2003 $10,324 $ 7,512 $ 6,172 6/30/2003 $10,406 $ 7,607 $ 6,260 7/31/2003 $10,907 $ 7,741 $ 6,437 8/31/2003 $11,450 $ 7,892 $ 6,611 9/30/2003 $11,081 $ 7,809 $ 6,533 10/31/2003 $12,064 $ 8,250 $ 6,914 11/30/2003 $12,360 $ 8,323 $ 6,998 12/31/2003 $12,667 $ 8,759 $ 7,224 1/31/2004 $12,943 $ 8,920 $ 7,389 2/29/2004 $12,964 $ 9,044 $ 7,431 3/31/2004 $13,005 $ 8,908 $ 7,307 4/30/2004 $12,504 $ 8,768 $ 7,200 5/31/2004 $12,841 $ 8,888 $ 7,335 6/30/2004 $13,291 $ 9,061 $ 7,438 7/31/2004 $12,340 $ 8,761 $ 6,997 8/31/2004 $12,135 $ 8,797 $ 6,953 9/30/2004 $12,841 $ 8,892 $ 7,044 10/31/2004 $13,250 $ 9,028 $ 7,159 11/30/2004 $14,161 $ 9,393 $ 7,435 12/31/2004 $14,755 $ 9,713 $ 7,724 1/31/2005 $14,202 $ 9,476 $ 7,459 2/28/2005 $14,192 $ 9,675 $ 7,540 3/31/2005 $13,793 $ 9,504 $ 7,390 4/30/2005 $13,169 $ 9,324 $ 7,222 5/31/2005 $14,028 $ 9,620 $ 7,584 6/30/2005 $14,212 $ 9,634 $ 7,579 7/31/2005 $14,980 $ 9,992 $ 7,963 8/31/2005 $14,888 $ 9,901 $ 7,860 9/30/2005 $15,184 $ 9,981 $ 7,898 10/31/2005 $15,184 $ 9,815 $ 7,803 11/30/2005 $16,187 $10,186 $ 8,148 12/31/2005 $16,279 $10,190 $ 8,124 1/31/2006 $17,384 $10,460 $ 8,322 2/28/2006 $17,476 $10,488 $ 8,306 3/31/2006 $18,019 $10,618 $ 8,455 4/30/2006 $17,937 $10,761 $ 8,442 5/31/2006 $16,525 $10,451 $ 8,126 6/30/2006 $16,709 $10,465 $ 8,098 7/31/2006 $15,931 $10,530 $ 7,920 8/31/2006 $16,064 $10,781 $ 8,166 9/30/2006 $16,453 $11,058 $ 8,376 10/31/2006 $16,821 $11,419 $ 8,691 11/30/2006 $17,384 $11,636 $ 8,867 12/31/2006 $17,251 $11,799 $ 8,892 1/31/2007 $17,671 $11,978 $ 9,115 2/28/2007 $17,384 $11,743 $ 8,956 3/31/2007 $17,650 $11,875 $ 9,007 4/30/2007 $18,049 $12,401 $ 9,416 5/31/2007 $18,684 $12,833 $ 9,762 6/30/2007 $18,811 $12,620 $ 9,623 7/31/2007 $18,792 $12,229 $ 9,444 8/31/2007 $19,405 $12,412 $ 9,602 9/30/2007 $21,322 $12,876 $ 9,994 10/31/2007 $22,540 $13,081 $10,343 11/30/2007 $20,777 $12,534 $ 9,934 12/31/2007 $20,806 $12,447 $ 9,906 1/31/2008 $18,470 $11,701 $ 9,122 2/29/2008 $17,720 $11,321 $ 8,930 3/31/2008 $17,672 $11,272 $ 8,876 4/30/2008 $19,520 $11,821 $ 9,341 5/31/2008 $20,795 $11,974 $ 9,698 6/30/2008 $19,258 $10,964 $ 9,010 7/31/2008 $18,704 $10,872 $ 8,867 8/31/2008 $18,636 $11,029 $ 8,972 9/30/2008 $15,794 $10,047 $ 7,935 10/31/2008 $13,362 $ 8,359 $ 6,512 11/30/2008 $12,194 $ 7,760 $ 5,974 12/31/2008 $12,466 $ 7,842 $ 6,098 1/31/2009 $12,154 $ 7,181 $ 5,792 2/28/2009 $11,239 $ 6,416 $ 5,344 3/31/2009 $12,261 $ 6,979 $ 5,821 4/30/2009 $13,499 $ 7,646 $ 6,402 Total Returns 34.99% -23.54% -35.98%
30 | Annual Report Performance Summary (CONTINUED) CLASS C (6/23/99-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN GROWTH OPPORTUNITIES RUSSELL 3000 DATE FUND - CLASS C S&P 500 INDEX GROWTH INDEX - ------------- --------------- ------------- ------------ 6/23/1999 $10,000 $10,000 $10,000 6/30/1999 $10,780 $10,129 $10,160 7/31/1999 $11,920 $ 9,813 $ 9,838 8/31/1999 $13,150 $ 9,765 $ 9,960 9/30/1999 $13,980 $ 9,497 $ 9,778 10/31/1999 $16,370 $10,098 $10,482 11/30/1999 $19,710 $10,303 $11,084 12/31/1999 $24,443 $10,910 $12,291 1/31/2000 $23,921 $10,362 $11,748 2/29/2000 $32,389 $10,166 $12,482 3/31/2000 $30,149 $11,160 $13,188 4/30/2000 $25,690 $10,824 $12,509 5/31/2000 $23,123 $10,602 $11,848 6/30/2000 $27,899 $10,864 $12,788 7/31/2000 $26,989 $10,694 $12,215 8/31/2000 $29,935 $11,358 $13,333 9/30/2000 $28,595 $10,759 $12,112 10/31/2000 $25,158 $10,713 $11,510 11/30/2000 $18,133 $ 9,868 $ 9,787 12/31/2000 $18,016 $ 9,917 $ 9,536 1/31/2001 $20,329 $10,269 $10,203 2/28/2001 $15,582 $ 9,332 $ 8,494 3/31/2001 $13,515 $ 8,741 $ 7,581 4/30/2001 $15,489 $ 9,420 $ 8,537 5/31/2001 $15,428 $ 9,483 $ 8,436 6/30/2001 $15,316 $ 9,253 $ 8,273 7/31/2001 $14,344 $ 9,162 $ 8,031 8/31/2001 $12,983 $ 8,588 $ 7,385 9/30/2001 $10,507 $ 7,895 $ 6,617 10/31/2001 $11,776 $ 8,045 $ 6,982 11/30/2001 $13,413 $ 8,662 $ 7,647 12/31/2001 $13,853 $ 8,738 $ 7,664 1/31/2002 $13,208 $ 8,611 $ 7,520 2/28/2002 $12,236 $ 8,444 $ 7,196 3/31/2002 $13,198 $ 8,762 $ 7,470 4/30/2002 $12,461 $ 8,231 $ 6,891 5/31/2002 $12,001 $ 8,170 $ 6,707 6/30/2002 $10,691 $ 7,588 $ 6,090 7/31/2002 $ 9,208 $ 6,997 $ 5,714 8/31/2002 $ 9,003 $ 7,043 $ 5,730 9/30/2002 $ 8,103 $ 6,277 $ 5,146 10/31/2002 $ 8,870 $ 6,830 $ 5,605 11/30/2002 $ 9,822 $ 7,232 $ 5,925 12/31/2002 $ 8,839 $ 6,807 $ 5,516 1/31/2003 $ 8,798 $ 6,629 $ 5,381 2/28/2003 $ 8,727 $ 6,529 $ 5,348 3/31/2003 $ 8,819 $ 6,593 $ 5,447 4/30/2003 $ 9,494 $ 7,136 $ 5,857 5/31/2003 $10,302 $ 7,512 $ 6,172 6/30/2003 $10,384 $ 7,607 $ 6,260 7/31/2003 $10,886 $ 7,741 $ 6,437 8/31/2003 $11,428 $ 7,892 $ 6,611 9/30/2003 $11,059 $ 7,809 $ 6,533 10/31/2003 $12,042 $ 8,250 $ 6,914 11/30/2003 $12,338 $ 8,323 $ 6,998 12/31/2003 $12,635 $ 8,759 $ 7,224 1/31/2004 $12,921 $ 8,920 $ 7,389 2/29/2004 $12,942 $ 9,044 $ 7,431 3/31/2004 $12,973 $ 8,908 $ 7,307 4/30/2004 $12,471 $ 8,768 $ 7,200 5/31/2004 $12,809 $ 8,888 $ 7,335 6/30/2004 $13,259 $ 9,061 $ 7,438 7/31/2004 $12,308 $ 8,761 $ 6,997 8/31/2004 $12,113 $ 8,797 $ 6,953 9/30/2004 $12,819 $ 8,892 $ 7,044 10/31/2004 $13,218 $ 9,028 $ 7,159 11/30/2004 $14,139 $ 9,393 $ 7,435 12/31/2004 $14,722 $ 9,713 $ 7,724 1/31/2005 $14,170 $ 9,476 $ 7,459 2/28/2005 $14,159 $ 9,675 $ 7,540 3/31/2005 $13,760 $ 9,504 $ 7,390 4/30/2005 $13,136 $ 9,324 $ 7,222 5/31/2005 $13,996 $ 9,620 $ 7,584 6/30/2005 $14,180 $ 9,634 $ 7,579 7/31/2005 $14,947 $ 9,992 $ 7,963 8/31/2005 $14,855 $ 9,901 $ 7,860 9/30/2005 $15,152 $ 9,981 $ 7,898 10/31/2005 $15,152 $ 9,815 $ 7,803 11/30/2005 $16,154 $10,186 $ 8,148 12/31/2005 $16,236 $10,190 $ 8,124 1/31/2006 $17,351 $10,460 $ 8,322 2/28/2006 $17,433 $10,488 $ 8,306 3/31/2006 $17,986 $10,618 $ 8,455 4/30/2006 $17,894 $10,761 $ 8,442 5/31/2006 $16,492 $10,451 $ 8,126 6/30/2006 $16,676 $10,465 $ 8,098 7/31/2006 $15,899 $10,530 $ 7,920 8/31/2006 $16,032 $10,781 $ 8,166 9/30/2006 $16,410 $11,058 $ 8,376 10/31/2006 $16,779 $11,419 $ 8,691 11/30/2006 $17,341 $11,636 $ 8,867 12/31/2006 $17,208 $11,799 $ 8,892 1/31/2007 $17,628 $11,978 $ 9,115 2/28/2007 $17,351 $11,743 $ 8,956 3/31/2007 $17,617 $11,875 $ 9,007 4/30/2007 $18,016 $12,401 $ 9,416 5/31/2007 $18,641 $12,833 $ 9,762 6/30/2007 $18,753 $12,620 $ 9,623 7/31/2007 $18,733 $12,229 $ 9,444 8/31/2007 $19,326 $12,412 $ 9,602 9/30/2007 $21,219 $12,876 $ 9,994 10/31/2007 $22,416 $13,081 $10,343 11/30/2007 $20,656 $12,534 $ 9,934 12/31/2007 $20,666 $12,447 $ 9,906 1/31/2008 $18,334 $11,701 $ 9,122 2/29/2008 $17,577 $11,321 $ 8,930 3/31/2008 $17,525 $11,272 $ 8,876 4/30/2008 $19,346 $11,821 $ 9,341 5/31/2008 $20,595 $11,974 $ 9,698 6/30/2008 $19,070 $10,964 $ 9,010 7/31/2008 $18,497 $10,872 $ 8,867 8/31/2008 $18,426 $11,029 $ 8,972 9/30/2008 $15,602 $10,047 $ 7,935 10/31/2008 $13,187 $ 8,359 $ 6,512 11/30/2008 $12,031 $ 7,760 $ 5,974 12/31/2008 $12,287 $ 7,842 $ 6,098 1/31/2009 $11,980 $ 7,181 $ 5,792 2/28/2009 $11,070 $ 6,416 $ 5,344 3/31/2009 $12,072 $ 6,979 $ 5,821 4/30/2009 $13,290 $ 7,646 $ 6,402 Total Returns 32.90% -23.54% -35.98%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/09 - ------- ------- 1-Year -31.99% 5-Year +1.28% Since Inception (6/23/99) +2.93%
CLASS R (1/1/02-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN GROWTH OPPORTUNITIES RUSSELL 3000 DATE FUND - CLASS R S&P 500 INDEX GROWTH INDEX - ------------- --------------- ------------- ------------ 1/1/2002 $10,000 $10,000 $10,000 1/31/2002 $ 9,535 $ 9,854 $ 9,811 2/28/2002 $ 8,837 $ 9,664 $ 9,389 3/31/2002 $ 9,535 $10,027 $ 9,746 4/30/2002 $ 8,997 $ 9,420 $ 8,991 5/31/2002 $ 8,678 $ 9,350 $ 8,750 6/30/2002 $ 7,731 $ 8,684 $ 7,946 7/31/2002 $ 6,655 $ 8,007 $ 7,455 8/31/2002 $ 6,510 $ 8,060 $ 7,476 9/30/2002 $ 5,862 $ 7,184 $ 6,715 10/31/2002 $ 6,415 $ 7,816 $ 7,313 11/30/2002 $ 7,114 $ 8,276 $ 7,730 12/31/2002 $ 6,408 $ 7,790 $ 7,196 1/31/2003 $ 6,379 $ 7,586 $ 7,021 2/28/2003 $ 6,321 $ 7,472 $ 6,978 3/31/2003 $ 6,393 $ 7,545 $ 7,107 4/30/2003 $ 6,888 $ 8,166 $ 7,641 5/31/2003 $ 7,477 $ 8,596 $ 8,053 6/30/2003 $ 7,542 $ 8,706 $ 8,167 7/31/2003 $ 7,906 $ 8,859 $ 8,399 8/31/2003 $ 8,299 $ 9,032 $ 8,625 9/30/2003 $ 8,037 $ 8,936 $ 8,524 10/31/2003 $ 8,757 $ 9,442 $ 9,021 11/30/2003 $ 8,975 $ 9,525 $ 9,131 12/31/2003 $ 9,201 $10,024 $ 9,425 1/31/2004 $ 9,412 $10,208 $ 9,641 2/29/2004 $ 9,426 $10,350 $ 9,696 3/31/2004 $ 9,455 $10,194 $ 9,533 4/30/2004 $ 9,099 $10,034 $ 9,394 5/31/2004 $ 9,346 $10,172 $ 9,570 6/30/2004 $ 9,674 $10,370 $ 9,704 7/31/2004 $ 8,982 $10,026 $ 9,129 8/31/2004 $ 8,844 $10,067 $ 9,072 9/30/2004 $ 9,361 $10,176 $ 9,191 10/31/2004 $ 9,659 $10,332 $ 9,341 11/30/2004 $10,335 $10,750 $ 9,701 12/31/2004 $10,772 $11,115 $10,078 1/31/2005 $10,371 $10,844 $ 9,732 2/28/2005 $10,364 $11,073 $ 9,838 3/31/2005 $10,081 $10,877 $ 9,642 4/30/2005 $ 9,630 $10,670 $ 9,422 5/31/2005 $10,263 $11,010 $ 9,895 6/30/2005 $10,400 $11,025 $ 9,888 7/31/2005 $10,968 $11,435 $10,390 8/31/2005 $10,903 $11,331 $10,255 9/30/2005 $11,128 $11,423 $10,305 10/31/2005 $11,136 $11,232 $10,180 11/30/2005 $11,871 $11,657 $10,631 12/31/2005 $11,942 $11,661 $10,599 1/31/2006 $12,758 $11,970 $10,858 2/28/2006 $12,830 $12,003 $10,837 3/31/2006 $13,238 $12,152 $11,031 4/30/2006 $13,180 $12,315 $11,014 5/31/2006 $12,146 $11,961 $10,603 6/30/2006 $12,292 $11,977 $10,565 7/31/2006 $11,725 $12,051 $10,334 8/31/2006 $11,820 $12,338 $10,654 9/30/2006 $12,110 $12,655 $10,929 10/31/2006 $12,386 $13,068 $11,339 11/30/2006 $12,808 $13,316 $11,568 12/31/2006 $12,714 $13,503 $11,602 1/31/2007 $13,034 $13,707 $11,893 2/28/2007 $12,830 $13,439 $11,685 3/31/2007 $13,027 $13,590 $11,752 4/30/2007 $13,332 $14,192 $12,285 5/31/2007 $13,797 $14,687 $12,736 6/30/2007 $13,885 $14,443 $12,556 7/31/2007 $13,877 $13,995 $12,322 8/31/2007 $14,321 $14,205 $12,527 9/30/2007 $15,732 $14,736 $13,039 10/31/2007 $16,627 $14,970 $13,494 11/30/2007 $15,332 $14,345 $12,961 12/31/2007 $15,346 $14,245 $12,924 1/31/2008 $13,615 $13,391 $11,902 2/29/2008 $13,063 $12,956 $11,652 3/31/2008 $13,027 $12,900 $11,581 4/30/2008 $14,401 $13,528 $12,188 5/31/2008 $15,339 $13,703 $12,654 6/30/2008 $14,205 $12,548 $11,755 7/31/2008 $13,790 $12,442 $11,568 8/31/2008 $13,739 $12,622 $11,705 9/30/2008 $11,638 $11,498 $10,352 10/31/2008 $ 9,841 $ 9,567 $ 8,496 11/30/2008 $ 8,982 $ 8,880 $ 7,795 12/31/2008 $ 9,179 $ 8,975 $ 7,956 1/31/2009 $ 8,953 $ 8,218 $ 7,556 2/28/2009 $ 8,277 $ 7,343 $ 6,973 3/31/2009 $ 9,026 $ 7,986 $ 7,595 4/30/2009 $ 9,942 $ 8,751 $ 8,353 Total Returns -0.58% -12.49% -16.47%
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/09 - ------- ------- 1-Year -30.96% 5-Year +1.79% Since Inception (1/1/02) -0.08%
Annual Report | 31 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 4/30/09 - ------------------ --------- 1-Year -30.53% 5-Year +2.30% Since Inception (6/23/99) +3.96%
Advisor Class (6/23/99-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN GROWTH OPPORTUNITIES FUND - RUSSELL 3000 DATE Advisor Class S&P 500 INDEX GROWTH INDEX - ------------- --------------- ------------- ------------ 6/23/1999 $10,000 $10,000 $10,000 6/30/1999 $10,780 $10,129 $10,160 7/31/1999 $11,920 $ 9,813 $ 9,838 8/31/1999 $13,150 $ 9,765 $ 9,960 9/30/1999 $14,000 $ 9,497 $ 9,778 10/31/1999 $16,410 $10,098 $10,482 11/30/1999 $19,770 $10,303 $11,084 12/31/1999 $24,566 $10,910 $12,291 1/31/2000 $24,064 $10,362 $11,748 2/29/2000 $32,615 $10,166 $12,482 3/31/2000 $30,393 $11,160 $13,188 4/30/2000 $25,918 $10,824 $12,509 5/31/2000 $23,337 $10,602 $11,848 6/30/2000 $28,191 $10,864 $12,788 7/31/2000 $27,280 $10,694 $12,215 8/31/2000 $30,290 $11,358 $13,333 9/30/2000 $28,959 $10,759 $12,112 10/31/2000 $25,498 $10,713 $11,510 11/30/2000 $18,402 $ 9,868 $ 9,787 12/31/2000 $18,285 $ 9,917 $ 9,536 1/31/2001 $20,652 $10,269 $10,203 2/28/2001 $15,837 $ 9,332 $ 8,494 3/31/2001 $13,747 $ 8,741 $ 7,581 4/30/2001 $15,776 $ 9,420 $ 8,537 5/31/2001 $15,724 $ 9,483 $ 8,436 6/30/2001 $15,622 $ 9,253 $ 8,273 7/31/2001 $14,649 $ 9,162 $ 8,031 8/31/2001 $13,266 $ 8,588 $ 7,385 9/30/2001 $10,746 $ 7,895 $ 6,617 10/31/2001 $12,047 $ 8,045 $ 6,982 11/30/2001 $13,737 $ 8,662 $ 7,647 12/31/2001 $14,198 $ 8,738 $ 7,664 1/31/2002 $13,542 $ 8,611 $ 7,520 2/28/2002 $12,559 $ 8,444 $ 7,196 3/31/2002 $13,563 $ 8,762 $ 7,470 4/30/2002 $12,805 $ 8,231 $ 6,891 5/31/2002 $12,344 $ 8,170 $ 6,707 6/30/2002 $11,002 $ 7,588 $ 6,090 7/31/2002 $ 9,486 $ 6,997 $ 5,714 8/31/2002 $ 9,281 $ 7,043 $ 5,730 9/30/2002 $ 8,359 $ 6,277 $ 5,146 10/31/2002 $ 9,158 $ 6,830 $ 5,605 11/30/2002 $10,152 $ 7,232 $ 5,925 12/31/2002 $ 9,148 $ 6,807 $ 5,516 1/31/2003 $ 9,117 $ 6,629 $ 5,381 2/28/2003 $ 9,035 $ 6,529 $ 5,348 3/31/2003 $ 9,148 $ 6,593 $ 5,447 4/30/2003 $ 9,855 $ 7,136 $ 5,857 5/31/2003 $10,705 $ 7,512 $ 6,172 6/30/2003 $10,797 $ 7,607 $ 6,260 7/31/2003 $11,330 $ 7,741 $ 6,437 8/31/2003 $11,893 $ 7,892 $ 6,611 9/30/2003 $11,524 $ 7,809 $ 6,533 10/31/2003 $12,559 $ 8,250 $ 6,914 11/30/2003 $12,887 $ 8,323 $ 6,998 12/31/2003 $13,204 $ 8,759 $ 7,224 1/31/2004 $13,512 $ 8,920 $ 7,389 2/29/2004 $13,542 $ 9,044 $ 7,431 3/31/2004 $13,594 $ 8,908 $ 7,307 4/30/2004 $13,081 $ 8,768 $ 7,200 5/31/2004 $13,440 $ 8,888 $ 7,335 6/30/2004 $13,921 $ 9,061 $ 7,438 7/31/2004 $12,938 $ 8,761 $ 6,997 8/31/2004 $12,743 $ 8,797 $ 6,953 9/30/2004 $13,491 $ 8,892 $ 7,044 10/31/2004 $13,932 $ 9,028 $ 7,159 11/30/2004 $14,905 $ 9,393 $ 7,435 12/31/2004 $15,540 $ 9,713 $ 7,724 1/31/2005 $14,966 $ 9,476 $ 7,459 2/28/2005 $14,977 $ 9,675 $ 7,540 3/31/2005 $14,557 $ 9,504 $ 7,390 4/30/2005 $13,911 $ 9,324 $ 7,222 5/31/2005 $14,833 $ 9,620 $ 7,584 6/30/2005 $15,048 $ 9,634 $ 7,579 7/31/2005 $15,878 $ 9,992 $ 7,963 8/31/2005 $15,786 $ 9,901 $ 7,860 9/30/2005 $16,114 $ 9,981 $ 7,898 10/31/2005 $16,124 $ 9,815 $ 7,803 11/30/2005 $17,210 $10,186 $ 8,148 12/31/2005 $17,312 $10,190 $ 8,124 1/31/2006 $18,511 $10,460 $ 8,322 2/28/2006 $18,623 $10,488 $ 8,306 3/31/2006 $19,217 $10,618 $ 8,455 4/30/2006 $19,136 $10,761 $ 8,442 5/31/2006 $17,650 $10,451 $ 8,126 6/30/2006 $17,865 $10,465 $ 8,098 7/31/2006 $17,046 $10,530 $ 7,920 8/31/2006 $17,199 $10,781 $ 8,166 9/30/2006 $17,630 $11,058 $ 8,376 10/31/2006 $18,039 $11,419 $ 8,691 11/30/2006 $18,654 $11,636 $ 8,867 12/31/2006 $18,531 $11,799 $ 8,892 1/31/2007 $19,002 $11,978 $ 9,115 2/28/2007 $18,705 $11,743 $ 8,956 3/31/2007 $19,013 $11,875 $ 9,007 4/30/2007 $19,453 $12,401 $ 9,416 5/31/2007 $20,150 $12,833 $ 9,762 6/30/2007 $20,293 $12,620 $ 9,623 7/31/2007 $20,283 $12,229 $ 9,444 8/31/2007 $20,949 $12,412 $ 9,602 9/30/2007 $23,008 $12,876 $ 9,994 10/31/2007 $24,329 $13,081 $10,343 11/30/2007 $22,444 $12,534 $ 9,934 12/31/2007 $22,475 $12,447 $ 9,906 1/31/2008 $19,955 $11,701 $ 9,122 2/29/2008 $19,146 $11,321 $ 8,930 3/31/2008 $19,105 $11,272 $ 8,876 4/30/2008 $21,102 $11,821 $ 9,341 5/31/2008 $22,485 $11,974 $ 9,698 6/30/2008 $20,836 $10,964 $ 9,010 7/31/2008 $20,232 $10,872 $ 8,867 8/31/2008 $20,170 $11,029 $ 8,972 9/30/2008 $17,097 $10,047 $ 7,935 10/31/2008 $14,475 $ 8,359 $ 6,512 11/30/2008 $13,215 $ 7,760 $ 5,974 12/31/2008 $13,512 $ 7,842 $ 6,098 1/31/2009 $13,184 $ 7,181 $ 5,792 2/28/2009 $12,190 $ 6,416 $ 5,344 3/31/2009 $13,297 $ 6,979 $ 5,821 4/30/2009 $14,659 $ 7,646 $ 6,402 Total Returns 46.59% -23.54% -35.98%
ENDNOTES THE MANAGER OF THE FUND USES AN AGGRESSIVE GROWTH STRATEGY SO AN INVESTMENT IN THE FUND INVOLVES A GREATER DEGREE OF RISK. THE FUND MAY BE MORE VOLATILE THAN A MORE CONSERVATIVE EQUITY FUND AND MAY BE BEST SUITED FOR LONG-TERM INVESTORS. THE FUND'S INVESTMENTS IN SMALLER AND MIDSIZED COMPANY STOCKS INVOLVE SPECIAL RISKS SUCH AS RELATIVELY SMALLER REVENUES, LIMITED PRODUCT LINES AND SMALLER MARKET SHARE. SMALLER AND MIDSIZED COMPANY STOCKS HISTORICALLY HAVE EXHIBITED GREATER PRICE VOLATILITY THAN LARGER COMPANY STOCKS, PARTICULARLY OVER THE SHORT TERM. THE FUND'S PORTFOLIO INCLUDES TECHNOLOGY STOCKS, A SECTOR WHICH HAS BEEN ONE OF THE MOST VOLATILE AND INVOLVES SPECIAL RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) Cumulative total return represents the change in value of an investment over the periods indicated. (2.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (3.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (4.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (6.) Source: (C) 2009 Morningstar. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The Russell 3000 Growth Index is market capitalization weighted and measures performance of those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values. 32 | Annual Report Your Fund's Expenses FRANKLIN GROWTH OPPORTUNITIES FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 33 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 11/1/08 VALUE 4/30/09 PERIOD* 11/1/08-4/30/09 - --------------------------------------- ------------------- ---------------- ------------------------ Actual $1,000 $1,010.90 $6.83 Hypothetical (5% return before expenses) $1,000 $1,018.00 $6.85 CLASS B Actual $1,000 $1,007.70 $10.40 Hypothetical (5% return before expenses) $1,000 $1,014.43 $10.44 CLASS C Actual $1,000 $1,007.80 $10.40 Hypothetical (5% return before expenses) $1,000 $1,014.43 $10.44 CLASS R Actual $1,000 $1,010.30 $8.02 Hypothetical (5% return before expenses) $1,000 $1,016.81 $8.05 ADVISOR CLASS Actual $1,000 $1,012.70 $5.54 Hypothetical (5% return before expenses) $1,000 $1,019.29 $5.56
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 1.37%; B: 2.09%; C: 2.09%; R: 1.61%; and Advisor: 1.11%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. 34 | Annual Report Franklin Small Cap Growth Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Small Cap Growth Fund seeks long-term capital growth by investing at least 80% of its net assets in equity securities of small-capitalization companies with market capitalizations not exceeding that of the highest market capitalization in the Russell 2000(R) Index or $1.5 billion, whichever is greater, at the time of purchase.(1) PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This annual report for Franklin Small Cap Growth Fund covers the fiscal year ended April 30, 2009. PERFORMANCE OVERVIEW For the 12 months under review, Franklin Small Cap Growth Fund - Class A had a - -28.54% cumulative total return. The Fund performed better than its benchmarks, the Russell 2000 Growth Index and the Standard & Poor's 500 Index (S&P 500), which had total returns of -30.36% and -35.31% for the same period.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 38. INVESTMENT STRATEGY We are research-driven, fundamental investors pursuing a growth strategy. As bottom-up investors we focus primarily on finding individual securities that meet our criteria for growth potential, quality and valuation. We search for high-quality companies that have identifiable drivers of future earnings growth. We rely on our team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies. Our analysts identify each company's market opportunity, competitive position, management (1.) The Russell 2000 Index is market capitalization weighted and measures performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of total market capitalization of the Russell 3000 Index. (2.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The Russell 2000 Growth Index is market capitalization weighted and measures performance of those Russell 2000 Index companies with higher price-to-book ratios and higher forecasted growth values. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. 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 AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 82. Annual Report | 35 PORTFOLIO BREAKDOWN Franklin Small Cap Growth Fund Based on Total Net Assets as of 4/30/09 (BAR CHART) Information Technology* 38.0% Health Care 16.8% Consumer Discretionary 12.7% Industrials 10.2% Energy 7.5% Financials 5.2% Consumer Staples 4.5% Telecommunication Services 1.8% Materials 1.2% Short-Term Investments & Other Net Assets 2.1%
* Significant exposure to a single sector may result in greater volatility for the Fund than a more broadly diversified portfolio. There are specific risks to investing in technology company stocks, which can be subject to abrupt or erratic price movements and have been volatile, especially over the short term. and financial strength, business and financial risks, and valuation. We choose to invest in those companies that, in our opinion, offer the best trade-off between growth opportunity, business and financial risk, and valuation. MANAGER'S DISCUSSION Among the most significant detractors from Fund performance relative to the Russell 2000 Growth Index for the 12 months under review were K-V Pharmaceutical, a generic drug manufacturer (sold by period-end); Tenneco, an auto parts company; and Mariner Energy, an oil and gas exploration and production company. On a sector basis, stock selection in consumer discretionary, health care and financials constrained relative Fund performance. An overweighted position in the consumer discretionary sector including Fund holding Lions Gate Entertainment,(3) an independent film distribution and production company, also hindered returns. In the health care sector, significant detractors included Angiotech Pharmaceuticals,(3) a medical products company (sold by period-end), and Psychiatric Solutions, which owns a franchise of 90 psychiatric hospitals and residential treatment facilities across the U.S. and the Caribbean. An underweighting in the financials sector and Fund positions in real estate investment trusts FelCor Lodging Trust and iStar Financial(3) also detracted from relative performance. In contrast, major contributors during the reporting period included Allegiant Travel, a charter flight operator; Force Protection, a military armored land vehicles manufacturer; and beverages company Hansen Natural.(3) Our investments in the industrials, information technology and telecommunication services sectors supported the Fund's relative performance. Stock selection and an underweighting in the industrials sector contributed to Fund returns. An overweighted position in the information technology sector aided relative performance, supported by positive returns from Riverbed Technology, which designs and manufactures Wide Area Network (WAN) optimization products, and ViaSat, an advanced broadband digital satellite communications distributor and television broadcaster. Despite a loss in absolute terms, wireless communications infrastructure company SBA Communications,(3) the Fund's only telecommunication services holding, performed better than the sector overall and helped relative Fund performance. (3.) This holding is not an index component. 36 | Annual Report Thank you for your continued participation in Franklin Small Cap Growth Fund. We look forward to serving your future investment needs. (PHOTO OF MICHAEL P. MCCARTHY) /s/ Michael P. McCarthy Michael P. McCarthy, CFA Portfolio Manager Franklin Small Cap Growth Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF APRIL 30, 2009, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. TOP 10 HOLDINGS Franklin Small Cap Growth Fund 4/30/09
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------- ---------- Nuance Communications Inc. 2.2% INFORMATION TECHNOLOGY ViaSat Inc. 2.2% INFORMATION TECHNOLOGY Bottomline Technologies Inc. 2.0% INFORMATION TECHNOLOGY Hain Celestial Group Inc. 1.9% CONSUMER STAPLES FGX International Holdings Ltd. (British Virgin Islands) 1.9% CONSUMER DISCRETIONARY FTI Consulting Inc. 1.9% INDUSTRIALS SBA Communications Corp. 1.8% TELECOMMUNICATION SERVICES Sapient Corp. 1.8% INFORMATION TECHNOLOGY Silicon Laboratories Inc. 1.8% INFORMATION TECHNOLOGY Varian Semiconductor Equipment Associates Inc. 1.7% INFORMATION TECHNOLOGY
Annual Report | 37 Performance Summary as of 4/30/09 FRANKLIN SMALL CAP GROWTH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FSGRX) CHANGE 4/30/09 4/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$2.68 $6.41 $9.09 DISTRIBUTIONS (5/1/08-4/30/09) Short-Term Capital Gain $0.0669 Long-Term Capital Gain $0.0071 TOTAL $0.0740
CLASS B (SYMBOL: FBSGX) CHANGE 4/30/09 4/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$2.54 $5.89 $8.43 DISTRIBUTIONS (5/1/08-4/30/09) Short-Term Capital Gain $0.0669 Long-Term Capital Gain $0.0071 TOTAL $0.0740
CLASS C (SYMBOL: FCSGX) CHANGE 4/30/09 4/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$2.54 $5.89 $8.43 DISTRIBUTIONS (5/1/08-4/30/09) Short-Term Capital Gain $0.0669 Long-Term Capital Gain $0.0071 TOTAL $0.0740
CLASS R (SYMBOL: FSSRX) CHANGE 4/30/09 4/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$2.65 $6.26 $8.91 DISTRIBUTIONS (5/1/08-4/30/09) Short-Term Capital Gain $0.0669 Long-Term Capital Gain $0.0071 TOTAL $0.0740
ADVISOR CLASS (SYMBOL: FSSAX) CHANGE 4/30/09 4/30/08 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) -$2.74 $6.63 $9.37 DISTRIBUTIONS (5/1/08-4/30/09) Short-Term Capital Gain $0.0669 Long-Term Capital Gain $0.0071 TOTAL $0.0740
38 | Annual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR INCEPTION (5/1/00) - ------- -------- ------- ------------------ Cumulative Total Return(1) -28.54% -16.48% -11.89% Average Annual Total Return(2) -32.61% -4.67% -2.04% Value of $10,000 Investment(3) $ 6,739 $ 7,874 $ 8,305 Avg. Ann. Total Return (3/31/09)(4) -37.47% -7.94% -3.55% Total Annual Operating Expenses(5) 1.17%
CLASS B 1-YEAR 5-YEAR INCEPTION (5/1/00) - ------- -------- ------- ------------------ Cumulative Total Return(1) -29.11% -19.55% -16.80% Average Annual Total Return(2) -31.91% -4.53% -2.02% Value of $10,000 Investment(3) $ 6,809 $ 7,930 $ 8,320 Avg. Ann. Total Return (3/31/09)(4) -36.87% -7.84% -3.53% Total Annual Operating Expenses(5) 1.92%
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/00) - ------- -------- ------- ------------------ Cumulative Total Return(1) -29.11% -19.57% -17.40% Average Annual Total Return(2) -29.81% -4.26% -2.10% Value of $10,000 Investment(3) $ 7,019 $ 8,043 $ 8,260 Avg. Ann. Total Return (3/31/09)(4) -34.80% -7.55% -3.61% Total Annual Operating Expenses(5) 1.92%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------- -------- ------- ------------------ Cumulative Total Return(1) -28.78% -17.53% -12.44% Average Annual Total Return(2) -28.78% -3.78% -1.80% Value of $10,000 Investment(3) $ 7,122 $ 8,247 $ 8,756 Avg. Ann. Total Return (3/31/09)(4) -33.79% -7.07% -3.65% Total Annual Operating Expenses(5) 1.42%
ADVISOR CLASS 1-YEAR 5-YEAR INCEPTION (5/1/00) - ------------- -------- ------- ------------------ Cumulative Total Return(1) -28.32% -15.41% -9.57% Average Annual Total Return(2) -28.32% -3.29% -1.11% Value of $10,000 Investment(3) $ 7,168 $ 8,459 $ 9,043 Avg. Ann. Total Return (3/31/09)(4) -33.47% -6.61% -2.63% Total Annual Operating Expenses(5) 0.92%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. Annual Report | 39 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/09 - ------- ------- 1-Year -32.61% 5-Year -4.67% Since Inception (5/1/00) -2.04%
CLASS A (5/1/00-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000 DATE GROWTH FUND - CLASS A INDEX GROWTH INDEX - ------------- --------------------- ------- ------------ 5/1/2000 $ 9,425 $10,000 $10,000 5/31/2000 $ 8,982 $ 9,795 $ 9,124 6/30/2000 $11,178 $10,036 $10,303 7/31/2000 $10,688 $ 9,879 $ 9,420 8/31/2000 $12,319 $10,493 $10,411 9/30/2000 $11,744 $ 9,939 $ 9,894 10/31/2000 $11,008 $ 9,897 $ 9,091 11/30/2000 $ 9,048 $ 9,117 $ 7,440 12/31/2000 $ 9,623 $ 9,161 $ 7,895 1/31/2001 $10,707 $ 9,486 $ 8,534 2/28/2001 $ 9,161 $ 8,621 $ 7,365 3/31/2001 $ 8,539 $ 8,075 $ 6,695 4/30/2001 $ 9,680 $ 8,703 $ 7,515 5/31/2001 $ 9,623 $ 8,761 $ 7,689 6/30/2001 $ 9,906 $ 8,548 $ 7,898 7/31/2001 $ 9,444 $ 8,464 $ 7,225 8/31/2001 $ 8,954 $ 7,934 $ 6,773 9/30/2001 $ 7,333 $ 7,293 $ 5,680 10/31/2001 $ 8,096 $ 7,432 $ 6,227 11/30/2001 $ 8,822 $ 8,002 $ 6,747 12/31/2001 $ 9,303 $ 8,072 $ 7,167 1/31/2002 $ 9,161 $ 7,955 $ 6,912 2/28/2002 $ 8,775 $ 7,801 $ 6,464 3/31/2002 $ 9,510 $ 8,095 $ 7,026 4/30/2002 $ 9,227 $ 7,604 $ 6,874 5/31/2002 $ 8,803 $ 7,548 $ 6,472 6/30/2002 $ 8,096 $ 7,010 $ 5,923 7/31/2002 $ 6,814 $ 6,464 $ 5,013 8/31/2002 $ 6,795 $ 6,506 $ 5,011 9/30/2002 $ 6,013 $ 5,799 $ 4,649 10/31/2002 $ 6,579 $ 6,310 $ 4,884 11/30/2002 $ 7,220 $ 6,681 $ 5,368 12/31/2002 $ 6,767 $ 6,288 $ 4,998 1/31/2003 $ 6,692 $ 6,124 $ 4,862 2/28/2003 $ 6,550 $ 6,032 $ 4,733 3/31/2003 $ 6,428 $ 6,090 $ 4,804 4/30/2003 $ 7,031 $ 6,592 $ 5,259 5/31/2003 $ 7,729 $ 6,939 $ 5,851 6/30/2003 $ 7,851 $ 7,028 $ 5,964 7/31/2003 $ 8,238 $ 7,152 $ 6,415 8/31/2003 $ 9,048 $ 7,291 $ 6,760 9/30/2003 $ 8,577 $ 7,214 $ 6,589 10/31/2003 $ 9,595 $ 7,622 $ 7,158 11/30/2003 $ 9,953 $ 7,689 $ 7,391 12/31/2003 $10,047 $ 8,092 $ 7,424 1/31/2004 $10,415 $ 8,241 $ 7,814 2/29/2004 $10,358 $ 8,355 $ 7,802 3/31/2004 $10,320 $ 8,229 $ 7,839 4/30/2004 $ 9,943 $ 8,100 $ 7,445 5/31/2004 $10,236 $ 8,211 $ 7,593 6/30/2004 $10,622 $ 8,371 $ 7,846 7/31/2004 $ 9,774 $ 8,094 $ 7,142 8/31/2004 $ 9,548 $ 8,127 $ 6,988 9/30/2004 $10,057 $ 8,215 $ 7,374 10/31/2004 $10,207 $ 8,340 $ 7,553 11/30/2004 $10,782 $ 8,678 $ 8,192 12/31/2004 $11,159 $ 8,973 $ 8,486 1/31/2005 $10,707 $ 8,754 $ 8,104 2/28/2005 $10,999 $ 8,938 $ 8,215 3/31/2005 $10,688 $ 8,780 $ 7,907 4/30/2005 $10,019 $ 8,614 $ 7,404 5/31/2005 $10,669 $ 8,888 $ 7,926 6/30/2005 $11,018 $ 8,900 $ 8,182 7/31/2005 $11,640 $ 9,231 $ 8,754 8/31/2005 $11,404 $ 9,147 $ 8,631 9/30/2005 $11,508 $ 9,221 $ 8,699 10/31/2005 $10,971 $ 9,067 $ 8,378 11/30/2005 $11,762 $ 9,410 $ 8,852 12/31/2005 $11,659 $ 9,414 $ 8,839 1/31/2006 $12,592 $ 9,663 $ 9,691 2/28/2006 $12,743 $ 9,689 $ 9,640 3/31/2006 $13,148 $ 9,810 $10,108 4/30/2006 $13,101 $ 9,941 $10,079 5/31/2006 $12,224 $ 9,655 $ 9,370 6/30/2006 $12,205 $ 9,668 $ 9,375 7/31/2006 $11,480 $ 9,728 $ 8,888 8/31/2006 $11,772 $ 9,959 $ 9,149 9/30/2006 $11,744 $10,216 $ 9,211 10/31/2006 $12,356 $10,549 $ 9,807 11/30/2006 $12,771 $10,750 $10,042 12/31/2006 $12,761 $10,900 $10,018 1/31/2007 $13,106 $11,065 $10,205 2/28/2007 $13,263 $10,849 $10,172 3/31/2007 $13,315 $10,970 $10,266 4/30/2007 $13,628 $11,456 $10,535 5/31/2007 $14,161 $11,856 $11,015 6/30/2007 $14,025 $11,659 $10,953 7/31/2007 $13,263 $11,297 $10,384 8/31/2007 $13,492 $11,467 $10,645 9/30/2007 $13,868 $11,896 $10,955 10/31/2007 $14,464 $12,085 $11,448 11/30/2007 $13,263 $11,580 $10,657 12/31/2007 $13,181 $11,499 $10,724 1/31/2008 $11,736 $10,810 $ 9,740 2/29/2008 $11,225 $10,458 $ 9,403 3/31/2008 $10,918 $10,413 $ 9,348 4/30/2008 $11,621 $10,920 $ 9,829 5/31/2008 $12,311 $11,062 $10,386 6/30/2008 $11,276 $10,129 $ 9,766 7/31/2008 $11,237 $10,044 $ 9,994 8/31/2008 $11,749 $10,189 $10,242 9/30/2008 $10,394 $ 9,281 $ 9,084 10/31/2008 $ 8,335 $ 7,723 $ 7,113 11/30/2008 $ 7,428 $ 7,169 $ 6,252 12/31/2008 $ 7,761 $ 7,245 $ 6,591 1/31/2009 $ 7,191 $ 6,634 $ 6,090 2/28/2009 $ 6,491 $ 5,928 $ 5,459 3/31/2009 $ 7,242 $ 6,447 $ 5,949 4/30/2009 $ 8,305 $ 7,064 $ 6,844 Total Returns -16.95% -29.36% -31.56%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/09 - ------- ------- 1-Year -31.91% 5-Year -4.53% Since Inception (5/1/00) -2.02%
CLASS B (5/1/00-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000 DATE GROWTH FUND - CLASS B INDEX GROWTH INDEX - ------------- --------------------- ------- ------------ 5/1/2000 $10,000 $10,000 $10,000 5/31/2000 $ 9,530 $ 9,795 $ 9,124 6/30/2000 $11,850 $10,036 $10,303 7/31/2000 $11,330 $ 9,879 $ 9,420 8/31/2000 $13,040 $10,493 $10,411 9/30/2000 $12,430 $ 9,939 $ 9,894 10/31/2000 $11,640 $ 9,897 $ 9,091 11/30/2000 $ 9,570 $ 9,117 $ 7,440 12/31/2000 $10,170 $ 9,161 $ 7,895 1/31/2001 $11,300 $ 9,486 $ 8,534 2/28/2001 $ 9,670 $ 8,621 $ 7,365 3/31/2001 $ 9,010 $ 8,075 $ 6,695 4/30/2001 $10,200 $ 8,703 $ 7,515 5/31/2001 $10,140 $ 8,761 $ 7,689 6/30/2001 $10,430 $ 8,548 $ 7,898 7/31/2001 $ 9,940 $ 8,464 $ 7,225 8/31/2001 $ 9,420 $ 7,934 $ 6,773 9/30/2001 $ 7,710 $ 7,293 $ 5,680 10/31/2001 $ 8,510 $ 7,432 $ 6,227 11/30/2001 $ 9,270 $ 8,002 $ 6,747 12/31/2001 $ 9,760 $ 8,072 $ 7,167 1/31/2002 $ 9,610 $ 7,955 $ 6,912 2/28/2002 $ 9,200 $ 7,801 $ 6,464 3/31/2002 $ 9,970 $ 8,095 $ 7,026 4/30/2002 $ 9,660 $ 7,604 $ 6,874 5/31/2002 $ 9,220 $ 7,548 $ 6,472 6/30/2002 $ 8,470 $ 7,010 $ 5,923 7/31/2002 $ 7,130 $ 6,464 $ 5,013 8/31/2002 $ 7,100 $ 6,506 $ 5,011 9/30/2002 $ 6,280 $ 5,799 $ 4,649 10/31/2002 $ 6,870 $ 6,310 $ 4,884 11/30/2002 $ 7,540 $ 6,681 $ 5,368 12/31/2002 $ 7,060 $ 6,288 $ 4,998 1/31/2003 $ 6,980 $ 6,124 $ 4,862 2/28/2003 $ 6,830 $ 6,032 $ 4,733 3/31/2003 $ 6,690 $ 6,090 $ 4,804 4/30/2003 $ 7,330 $ 6,592 $ 5,259 5/31/2003 $ 8,040 $ 6,939 $ 5,851 6/30/2003 $ 8,160 $ 7,028 $ 5,964 7/31/2003 $ 8,560 $ 7,152 $ 6,415 8/31/2003 $ 9,400 $ 7,291 $ 6,760 9/30/2003 $ 8,900 $ 7,214 $ 6,589 10/31/2003 $ 9,950 $ 7,622 $ 7,158 11/30/2003 $10,320 $ 7,689 $ 7,391 12/31/2003 $10,410 $ 8,092 $ 7,424 1/31/2004 $10,780 $ 8,241 $ 7,814 2/29/2004 $10,710 $ 8,355 $ 7,802 3/31/2004 $10,670 $ 8,229 $ 7,839 4/30/2004 $10,270 $ 8,100 $ 7,445 5/31/2004 $10,560 $ 8,211 $ 7,593 6/30/2004 $10,960 $ 8,371 $ 7,846 7/31/2004 $10,070 $ 8,094 $ 7,142 8/31/2004 $ 9,840 $ 8,127 $ 6,988 9/30/2004 $10,350 $ 8,215 $ 7,374 10/31/2004 $10,500 $ 8,340 $ 7,553 11/30/2004 $11,090 $ 8,678 $ 8,192 12/31/2004 $11,470 $ 8,973 $ 8,486 1/31/2005 $10,990 $ 8,754 $ 8,104 2/28/2005 $11,290 $ 8,938 $ 8,215 3/31/2005 $10,960 $ 8,780 $ 7,907 4/30/2005 $10,260 $ 8,614 $ 7,404 5/31/2005 $10,930 $ 8,888 $ 7,926 6/30/2005 $11,280 $ 8,900 $ 8,182 7/31/2005 $11,910 $ 9,231 $ 8,754 8/31/2005 $11,660 $ 9,147 $ 8,631 9/30/2005 $11,750 $ 9,221 $ 8,699 10/31/2005 $11,200 $ 9,067 $ 8,378 11/30/2005 $12,000 $ 9,410 $ 8,852 12/31/2005 $11,890 $ 9,414 $ 8,839 1/31/2006 $12,830 $ 9,663 $ 9,691 2/28/2006 $12,980 $ 9,689 $ 9,640 3/31/2006 $13,380 $ 9,810 $10,108 4/30/2006 $13,320 $ 9,941 $10,079 5/31/2006 $12,420 $ 9,655 $ 9,370 6/30/2006 $12,400 $ 9,668 $ 9,375 7/31/2006 $11,650 $ 9,728 $ 8,888 8/31/2006 $11,940 $ 9,959 $ 9,149 9/30/2006 $11,910 $10,216 $ 9,211 10/31/2006 $12,520 $10,549 $ 9,807 11/30/2006 $12,930 $10,750 $10,042 12/31/2006 $12,920 $10,900 $10,018 1/31/2007 $13,254 $11,065 $10,205 2/28/2007 $13,410 $10,849 $10,172 3/31/2007 $13,444 $10,970 $10,266 4/30/2007 $13,756 $11,456 $10,535 5/31/2007 $14,290 $11,856 $11,015 6/30/2007 $14,134 $11,659 $10,953 7/31/2007 $13,366 $11,297 $10,384 8/31/2007 $13,589 $11,467 $10,645 9/30/2007 $13,956 $11,896 $10,955 10/31/2007 $14,546 $12,085 $11,448 11/30/2007 $13,332 $11,580 $10,657 12/31/2007 $13,231 $11,499 $10,724 1/31/2008 $11,780 $10,810 $ 9,740 2/29/2008 $11,268 $10,458 $ 9,403 3/31/2008 $10,950 $10,413 $ 9,348 4/30/2008 $11,655 $10,920 $ 9,829 5/31/2008 $12,347 $11,062 $10,386 6/30/2008 $11,309 $10,129 $ 9,766 7/31/2008 $11,270 $10,044 $ 9,994 8/31/2008 $11,783 $10,189 $10,242 9/30/2008 $10,425 $ 9,281 $ 9,084 10/31/2008 $ 8,361 $ 7,723 $ 7,113 11/30/2008 $ 7,450 $ 7,169 $ 6,252 12/31/2008 $ 7,784 $ 7,245 $ 6,591 1/31/2009 $ 7,212 $ 6,634 $ 6,090 2/28/2009 $ 6,510 $ 5,928 $ 5,459 3/31/2009 $ 7,264 $ 6,447 $ 5,949 4/30/2009 $ 8,320 $ 7,064 $ 6,844 Total Returns -16.80% -29.36% -31.56%
40 | Annual Report Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/09 - ------- ------- 1-Year -29.81% 5-Year -4.26% Since Inception (5/1/00) -2.10%
CLASS C (5/1/00-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000 DATE GROWTH FUND - CLASS C INDEX GROWTH INDEX - ------------- --------------------- ------- ------------ 5/1/2000 $10,000 $10,000 $10,000 5/31/2000 $ 9,530 $ 9,795 $ 9,124 6/30/2000 $11,840 $10,036 $10,303 7/31/2000 $11,330 $ 9,879 $ 9,420 8/31/2000 $13,040 $10,493 $10,411 9/30/2000 $12,430 $ 9,939 $ 9,894 10/31/2000 $11,650 $ 9,897 $ 9,091 11/30/2000 $ 9,570 $ 9,117 $ 7,440 12/31/2000 $10,180 $ 9,161 $ 7,895 1/31/2001 $11,310 $ 9,486 $ 8,534 2/28/2001 $ 9,680 $ 8,621 $ 7,365 3/31/2001 $ 9,020 $ 8,075 $ 6,695 4/30/2001 $10,210 $ 8,703 $ 7,515 5/31/2001 $10,150 $ 8,761 $ 7,689 6/30/2001 $10,440 $ 8,548 $ 7,898 7/31/2001 $ 9,950 $ 8,464 $ 7,225 8/31/2001 $ 9,420 $ 7,934 $ 6,773 9/30/2001 $ 7,720 $ 7,293 $ 5,680 10/31/2001 $ 8,520 $ 7,432 $ 6,227 11/30/2001 $ 9,270 $ 8,002 $ 6,747 12/31/2001 $ 9,770 $ 8,072 $ 7,167 1/31/2002 $ 9,620 $ 7,955 $ 6,912 2/28/2002 $ 9,210 $ 7,801 $ 6,464 3/31/2002 $ 9,970 $ 8,095 $ 7,026 4/30/2002 $ 9,670 $ 7,604 $ 6,874 5/31/2002 $ 9,230 $ 7,548 $ 6,472 6/30/2002 $ 8,470 $ 7,010 $ 5,923 7/31/2002 $ 7,130 $ 6,464 $ 5,013 8/31/2002 $ 7,110 $ 6,506 $ 5,011 9/30/2002 $ 6,280 $ 5,799 $ 4,649 10/31/2002 $ 6,870 $ 6,310 $ 4,884 11/30/2002 $ 7,550 $ 6,681 $ 5,368 12/31/2002 $ 7,070 $ 6,288 $ 4,998 1/31/2003 $ 6,990 $ 6,124 $ 4,862 2/28/2003 $ 6,830 $ 6,032 $ 4,733 3/31/2003 $ 6,700 $ 6,090 $ 4,804 4/30/2003 $ 7,330 $ 6,592 $ 5,259 5/31/2003 $ 8,050 $ 6,939 $ 5,851 6/30/2003 $ 8,170 $ 7,028 $ 5,964 7/31/2003 $ 8,570 $ 7,152 $ 6,415 8/31/2003 $ 9,400 $ 7,291 $ 6,760 9/30/2003 $ 8,910 $ 7,214 $ 6,589 10/31/2003 $ 9,960 $ 7,622 $ 7,158 11/30/2003 $10,330 $ 7,689 $ 7,391 12/31/2003 $10,410 $ 8,092 $ 7,424 1/31/2004 $10,780 $ 8,241 $ 7,814 2/29/2004 $10,720 $ 8,355 $ 7,802 3/31/2004 $10,670 $ 8,229 $ 7,839 4/30/2004 $10,270 $ 8,100 $ 7,445 5/31/2004 $10,570 $ 8,211 $ 7,593 6/30/2004 $10,960 $ 8,371 $ 7,846 7/31/2004 $10,080 $ 8,094 $ 7,142 8/31/2004 $ 9,840 $ 8,127 $ 6,988 9/30/2004 $10,360 $ 8,215 $ 7,374 10/31/2004 $10,500 $ 8,340 $ 7,553 11/30/2004 $11,090 $ 8,678 $ 8,192 12/31/2004 $11,480 $ 8,973 $ 8,486 1/31/2005 $11,000 $ 8,754 $ 8,104 2/28/2005 $11,290 $ 8,938 $ 8,215 3/31/2005 $10,970 $ 8,780 $ 7,907 4/30/2005 $10,270 $ 8,614 $ 7,404 5/31/2005 $10,930 $ 8,888 $ 7,926 6/30/2005 $11,280 $ 8,900 $ 8,182 7/31/2005 $11,920 $ 9,231 $ 8,754 8/31/2005 $11,660 $ 9,147 $ 8,631 9/30/2005 $11,760 $ 9,221 $ 8,699 10/31/2005 $11,210 $ 9,067 $ 8,378 11/30/2005 $12,010 $ 9,410 $ 8,852 12/31/2005 $11,900 $ 9,414 $ 8,839 1/31/2006 $12,840 $ 9,663 $ 9,691 2/28/2006 $12,990 $ 9,689 $ 9,640 3/31/2006 $13,380 $ 9,810 $10,108 4/30/2006 $13,330 $ 9,941 $10,079 5/31/2006 $12,430 $ 9,655 $ 9,370 6/30/2006 $12,400 $ 9,668 $ 9,375 7/31/2006 $11,660 $ 9,728 $ 8,888 8/31/2006 $11,950 $ 9,959 $ 9,149 9/30/2006 $11,920 $10,216 $ 9,211 10/31/2006 $12,530 $10,549 $ 9,807 11/30/2006 $12,940 $10,750 $10,042 12/31/2006 $12,919 $10,900 $10,018 1/31/2007 $13,264 $11,065 $10,205 2/28/2007 $13,420 $10,849 $10,172 3/31/2007 $13,454 $10,970 $10,266 4/30/2007 $13,766 $11,456 $10,535 5/31/2007 $14,300 $11,856 $11,015 6/30/2007 $14,144 $11,659 $10,953 7/31/2007 $13,376 $11,297 $10,384 8/31/2007 $13,599 $11,467 $10,645 9/30/2007 $13,966 $11,896 $10,955 10/31/2007 $14,556 $12,085 $11,448 11/30/2007 $13,342 $11,580 $10,657 12/31/2007 $13,241 $11,499 $10,724 1/31/2008 $11,790 $10,810 $ 9,740 2/29/2008 $11,265 $10,458 $ 9,403 3/31/2008 $10,947 $10,413 $ 9,348 4/30/2008 $11,652 $10,920 $ 9,829 5/31/2008 $12,329 $11,062 $10,386 6/30/2008 $11,293 $10,129 $ 9,766 7/31/2008 $11,237 $10,044 $ 9,994 8/31/2008 $11,749 $10,189 $10,242 9/30/2008 $10,394 $ 9,281 $ 9,084 10/31/2008 $ 8,321 $ 7,723 $ 7,113 11/30/2008 $ 7,422 $ 7,169 $ 6,252 12/31/2008 $ 7,741 $ 7,245 $ 6,591 1/31/2009 $ 7,166 $ 6,634 $ 6,090 2/28/2009 $ 6,465 $ 5,928 $ 5,459 3/31/2009 $ 7,208 $ 6,447 $ 5,949 4/30/2009 $ 8,260 $ 7,064 $ 6,844 Total Returns -17.40% -29.36% -31.56%
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/09 - ------- ------- 1-Year -28.78% 5-Year -3.78% Since Inception (1/1/02) -1.80%
CLASS R (1/1/02-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000 DATE GROWTH FUND - CLASS R INDEX GROWTH INDEX - ------------- --------------------- ------- ------------ 1/1/2002 $10,000 $10,000 $10,000 1/31/2002 $ 9,838 $ 9,854 $ 9,644 2/28/2002 $ 9,423 $ 9,664 $ 9,020 3/31/2002 $10,213 $10,027 $ 9,804 4/30/2002 $ 9,909 $ 9,420 $ 9,592 5/31/2002 $ 9,463 $ 9,350 $ 9,031 6/30/2002 $ 8,694 $ 8,684 $ 8,265 7/31/2002 $ 7,318 $ 8,007 $ 6,995 8/31/2002 $ 7,288 $ 8,060 $ 6,992 9/30/2002 $ 6,447 $ 7,184 $ 6,487 10/31/2002 $ 7,045 $ 7,816 $ 6,815 11/30/2002 $ 7,743 $ 8,276 $ 7,490 12/31/2002 $ 7,257 $ 7,790 $ 6,974 1/31/2003 $ 7,176 $ 7,586 $ 6,784 2/28/2003 $ 7,014 $ 7,472 $ 6,603 3/31/2003 $ 6,883 $ 7,545 $ 6,703 4/30/2003 $ 7,540 $ 8,166 $ 7,338 5/31/2003 $ 8,280 $ 8,596 $ 8,165 6/30/2003 $ 8,400 $ 8,706 $ 8,322 7/31/2003 $ 8,816 $ 8,859 $ 8,951 8/31/2003 $ 9,686 $ 9,032 $ 9,432 9/30/2003 $ 9,180 $ 8,936 $ 9,193 10/31/2003 $10,263 $ 9,442 $ 9,987 11/30/2003 $10,647 $ 9,525 $10,313 12/31/2003 $10,739 $10,024 $10,359 1/31/2004 $11,124 $10,208 $10,903 2/29/2004 $11,063 $10,350 $10,886 3/31/2004 $11,022 $10,194 $10,937 4/30/2004 $10,617 $10,034 $10,388 5/31/2004 $10,921 $10,172 $10,595 6/30/2004 $11,335 $10,370 $10,948 7/31/2004 $10,425 $10,026 $ 9,965 8/31/2004 $10,193 $10,067 $ 9,750 9/30/2004 $10,729 $10,176 $10,289 10/31/2004 $10,881 $10,332 $10,539 11/30/2004 $11,498 $10,750 $11,430 12/31/2004 $11,903 $11,115 $11,841 1/31/2005 $11,406 $10,844 $11,308 2/28/2005 $11,720 $11,073 $11,463 3/31/2005 $11,386 $10,877 $11,033 4/30/2005 $10,668 $10,670 $10,331 5/31/2005 $11,356 $11,010 $11,059 6/30/2005 $11,731 $11,025 $11,417 7/31/2005 $12,388 $11,435 $12,215 8/31/2005 $12,136 $11,331 $12,043 9/30/2005 $12,237 $11,423 $12,138 10/31/2005 $11,670 $11,232 $11,690 11/30/2005 $12,510 $11,657 $12,351 12/31/2005 $12,398 $11,661 $12,333 1/31/2006 $13,390 $11,970 $13,523 2/28/2006 $13,542 $12,003 $13,450 3/31/2006 $13,968 $12,152 $14,104 4/30/2006 $13,917 $12,315 $14,063 5/31/2006 $12,976 $11,961 $13,074 6/30/2006 $12,955 $11,977 $13,082 7/31/2006 $12,186 $12,051 $12,402 8/31/2006 $12,500 $12,338 $12,765 9/30/2006 $12,469 $12,655 $12,852 10/31/2006 $13,118 $13,068 $13,685 11/30/2006 $13,542 $13,316 $14,012 12/31/2006 $13,532 $13,503 $13,979 1/31/2007 $13,891 $13,707 $14,239 2/28/2007 $14,060 $13,439 $14,194 3/31/2007 $14,116 $13,590 $14,325 4/30/2007 $14,441 $14,192 $14,701 5/31/2007 $15,003 $14,687 $15,370 6/30/2007 $14,857 $14,443 $15,283 7/31/2007 $14,049 $13,995 $14,489 8/31/2007 $14,284 $14,205 $14,854 9/30/2007 $14,688 $14,736 $15,285 10/31/2007 $15,306 $14,970 $15,974 11/30/2007 $14,037 $14,345 $14,870 12/31/2007 $13,936 $14,245 $14,964 1/31/2008 $12,418 $13,391 $13,591 2/29/2008 $11,866 $12,956 $13,121 3/31/2008 $11,535 $12,900 $13,044 4/30/2008 $12,295 $13,528 $13,715 5/31/2008 $13,012 $13,703 $14,491 6/30/2008 $11,922 $12,548 $13,628 7/31/2008 $11,866 $12,442 $13,944 8/31/2008 $12,404 $12,622 $14,291 9/30/2008 $10,983 $11,498 $12,676 10/31/2008 $ 8,803 $ 9,567 $ 9,925 11/30/2008 $ 7,851 $ 8,880 $ 8,724 12/31/2008 $ 8,183 $ 8,975 $ 9,197 1/31/2009 $ 7,595 $ 8,218 $ 8,497 2/28/2009 $ 6,854 $ 7,343 $ 7,617 3/31/2009 $ 7,637 $ 7,986 $ 8,301 4/30/2009 $ 8,756 $ 8,751 $ 9,550 Total Returns -12.44% -12.49% -4.50%
Annual Report | 41 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 4/30/09 - ------------- ------- 1-Year -28.32% 5-Year -3.29% Since Inception (5/1/00) -1.11%
ADVISOR CLASS (5/1/00-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN SMALL CAP GROWTH S&P 500 RUSSELL 2000 DATE FUND - ADVISOR CLASS INDEX GROWTH INDEX - ------------- ------------------------- ------- ------------ 5/1/2000 $10,000 $10,000 $10,000 5/31/2000 $ 9,530 $ 9,795 $ 9,124 6/30/2000 $11,870 $10,036 $10,303 7/31/2000 $11,350 $ 9,879 $ 9,420 8/31/2000 $13,080 $10,493 $10,411 9/30/2000 $12,490 $ 9,939 $9,894 10/31/2000 $11,710 $ 9,897 $ 9,091 11/30/2000 $ 9,630 $ 9,117 $ 7,440 12/31/2000 $10,240 $ 9,161 $ 7,895 1/31/2001 $11,390 $ 9,486 $ 8,534 2/28/2001 $ 9,760 $ 8,621 $ 7,365 3/31/2001 $ 9,100 $ 8,075 $ 6,695 4/30/2001 $10,310 $ 8,703 $ 7,515 5/31/2001 $10,250 $ 8,761 $ 7,689 6/30/2001 $10,560 $ 8,548 $ 7,898 7/31/2001 $10,070 $ 8,464 $ 7,225 8/31/2001 $ 9,550 $ 7,934 $ 6,773 9/30/2001 $ 7,830 $ 7,293 $ 5,680 10/31/2001 $ 8,640 $ 7,432 $ 6,227 11/30/2001 $ 9,420 $ 8,002 $ 6,747 12/31/2001 $ 9,930 $ 8,072 $ 7,167 1/31/2002 $ 9,780 $ 7,955 $ 6,912 2/28/2002 $ 9,370 $ 7,801 $ 6,464 3/31/2002 $10,160 $ 8,095 $ 7,026 4/30/2002 $ 9,860 $ 7,604 $ 6,874 5/31/2002 $ 9,420 $ 7,548 $ 6,472 6/30/2002 $ 8,660 $ 7,010 $ 5,923 7/31/2002 $ 7,290 $ 6,464 $ 5,013 8/31/2002 $ 7,270 $ 6,506 $ 5,011 9/30/2002 $ 6,430 $ 5,799 $ 4,649 10/31/2002 $ 7,040 $ 6,310 $ 4,884 11/30/2002 $ 7,740 $ 6,681 $ 5,368 12/31/2002 $ 7,250 $ 6,288 $ 4,998 1/31/2003 $ 7,180 $ 6,124 $ 4,862 2/28/2003 $ 7,030 $ 6,032 $ 4,733 3/31/2003 $ 6,890 $ 6,090 $ 4,804 4/30/2003 $ 7,550 $ 6,592 $ 5,259 5/31/2003 $ 8,300 $ 6,939 $ 5,851 6/30/2003 $ 8,430 $ 7,028 $ 5,964 7/31/2003 $ 8,850 $ 7,152 $ 6,415 8/31/2003 $ 9,720 $ 7,291 $ 6,760 9/30/2003 $ 9,220 $ 7,214 $ 6,589 10/31/2003 $10,310 $ 7,622 $ 7,158 11/30/2003 $10,700 $ 7,689 $ 7,391 12/31/2003 $10,800 $ 8,092 $ 7,424 1/31/2004 $11,190 $ 8,241 $ 7,814 2/29/2004 $11,140 $ 8,355 $ 7,802 3/31/2004 $11,100 $ 8,229 $ 7,839 4/30/2004 $10,690 $ 8,100 $ 7,445 5/31/2004 $11,010 $ 8,211 $ 7,593 6/30/2004 $11,430 $ 8,371 $ 7,846 7/31/2004 $10,510 $ 8,094 $ 7,142 8/31/2004 $10,280 $ 8,127 $ 6,988 9/30/2004 $10,820 $ 8,215 $ 7,374 10/31/2004 $10,980 $ 8,340 $ 7,553 11/30/2004 $11,610 $ 8,678 $ 8,192 12/31/2004 $12,020 $ 8,973 $ 8,486 1/31/2005 $11,530 $ 8,754 $ 8,104 2/28/2005 $11,850 $ 8,938 $ 8,215 3/31/2005 $11,520 $ 8,780 $ 7,907 4/30/2005 $10,790 $ 8,614 $ 7,404 5/31/2005 $11,500 $ 8,888 $ 7,926 6/30/2005 $11,880 $ 8,900 $ 8,182 7/31/2005 $12,550 $ 9,231 $ 8,754 8/31/2005 $12,300 $ 9,147 $ 8,631 9/30/2005 $12,410 $ 9,221 $ 8,699 10/31/2005 $11,840 $ 9,067 $ 8,378 11/30/2005 $12,690 $ 9,410 $ 8,852 12/31/2005 $12,590 $ 9,414 $ 8,839 1/31/2006 $13,600 $ 9,663 $ 9,691 2/28/2006 $13,760 $ 9,689 $ 9,640 3/31/2006 $14,200 $ 9,810 $10,108 4/30/2006 $14,150 $ 9,941 $10,079 5/31/2006 $13,200 $ 9,655 $ 9,370 6/30/2006 $13,190 $ 9,668 $ 9,375 7/31/2006 $12,400 $ 9,728 $ 8,888 8/31/2006 $12,730 $ 9,959 $ 9,149 9/30/2006 $12,700 $10,216 $ 9,211 10/31/2006 $13,370 $10,549 $ 9,807 11/30/2006 $13,810 $10,750 $10,042 12/31/2006 $13,810 $10,900 $10,018 1/31/2007 $14,186 $11,065 $10,205 2/28/2007 $14,363 $10,849 $10,172 3/31/2007 $14,418 $10,970 $10,266 4/30/2007 $14,750 $11,456 $10,535 5/31/2007 $15,336 $11,856 $11,015 6/30/2007 $15,192 $11,659 $10,953 7/31/2007 $14,374 $11,297 $10,384 8/31/2007 $14,617 $11,467 $10,645 9/30/2007 $15,037 $11,896 $10,955 10/31/2007 $15,679 $12,085 $11,448 11/30/2007 $14,385 $11,580 $10,657 12/31/2007 $14,300 $11,499 $10,724 1/31/2008 $12,738 $10,810 $ 9,740 2/29/2008 $12,186 $10,458 $ 9,403 3/31/2008 $11,849 $10,413 $ 9,348 4/30/2008 $12,616 $10,920 $ 9,829 5/31/2008 $13,370 $11,062 $10,386 6/30/2008 $12,253 $10,129 $ 9,766 7/31/2008 $12,199 $10,044 $ 9,994 8/31/2008 $12,765 $10,189 $10,242 9/30/2008 $11,297 $ 9,281 $ 9,084 10/31/2008 $ 9,062 $ 7,723 $ 7,113 11/30/2008 $ 8,079 $ 7,169 $ 6,252 12/31/2008 $ 8,443 $ 7,245 $ 6,591 1/31/2009 $ 7,829 $ 6,634 $ 6,090 2/28/2009 $ 7,065 $ 5,928 $ 5,459 3/31/2009 $ 7,884 $ 6,447 $ 5,949 4/30/2009 $ 9,043 $ 7,064 $ 6,844 Total Returns -9.57% -29.36% -31.56%
ENDNOTES SMALLER OR NEWER COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC CONDITIONS. THEIR GROWTH PROSPECTS ARE LESS CERTAIN THAN THOSE OF LARGER, MORE ESTABLISHED COMPANIES, AND THEY CAN BE VOLATILE. THE FUND IS INTENDED FOR LONG-TERM INVESTORS WHO ARE COMFORTABLE WITH SHORT-TERM FLUCTUATIONS IN SHARE PRICE. THERE ARE SPECIAL RISKS INVOLVED WITH SIGNIFICANT EXPOSURE TO A PARTICULAR SECTOR, INCLUDING INCREASED SUSCEPTIBILITY RELATED TO ECONOMIC, BUSINESS, OR OTHER DEVELOPMENTS AFFECTING THAT SECTOR. THE FUND INCLUDES INVESTMENTS IN THE TECHNOLOGY SECTOR, WHICH HAS BEEN HIGHLY VOLATILE AND INVOLVES SPECIAL RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) Cumulative total return represents the change in value of an investment over the periods indicated. (2.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (3.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (4.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (6.) Source: (C) 2009 Morningstar. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The Russell 2000 Growth Index is market capitalization weighted and measures performance of those Russell 2000 Index companies with higher price-to-book ratios and higher forecasted growth values. 42 | Annual Report Your Fund's Expenses FRANKLIN SMALL CAP GROWTH FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 43 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 11/1/08 VALUE 4/30/09 PERIOD* 11/1/08-4/30/09 ----------------- -------------- ----------------------- CLASS A Actual $1,000 $ 996.30 $ 6.73 Hypothetical (5% return before expenses) $1,000 $1,018.05 $ 6.80 CLASS B Actual $1,000 $ 992.70 $10.18 Hypothetical (5% return before expenses) $1,000 $1,014.58 $10.29 CLASS C Actual $1,000 $ 992.70 $10.23 Hypothetical (5% return before expenses) $1,000 $1,014.53 $10.34 CLASS R Actual $1,000 $ 994.70 $ 7.76 Hypothetical (5% return before expenses) $1,000 $1,017.01 $ 7.85 ADVISOR CLASS Actual $1,000 $ 997.90 $ 5.30 Hypothetical (5% return before expenses) $1,000 $1,019.49 $ 5.36
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 1.36%; B: 2.06%; C: 2.07%; R: 1.57%; and Advisor: 1.07%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. 44 | Annual Report Franklin Small-Mid Cap Growth Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Small-Mid Cap Growth Fund seeks long-term capital growth by investing at least 80% of its net assets in equity securities of small-cap and mid-cap companies. The Fund defines small-cap companies as those within the market capitalization range of companies in the Russell 2500(TM) Index at the time of purchase, and mid-cap companies as those within the market capitalization range of the Russell Midcap(R) Index at the time of purchase.(1) PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This annual report for Franklin Small-Mid Cap Growth Fund covers the fiscal year ended April 30, 2009. PERFORMANCE OVERVIEW For the 12 months under review, Franklin Small-Mid Cap Growth Fund -Class A had a -31.46% cumulative total return. The Fund performed better than its benchmarks, the Russell Midcap Growth Index and the Standard & Poor's 500 Index (S&P 500), which had total returns of -35.66% and -35.31% for the same period.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 48. INVESTMENT STRATEGY We are research-driven, fundamental investors pursuing a growth strategy. As bottom-up investors we focus primarily on finding individual securities that meet our criteria for growth potential, quality and valuation. We search for high-quality companies that have identifiable drivers of future earnings growth. We rely on our team of analysts to help provide in-depth industry expertise and use (1.) The Russell 2500 Index is market capitalization weighted and measures performance of the 2,500 smallest companies in the Russell 3000 Index, which represent approximately 17% of total market capitalization of the Russell 3000 Index. The Russell Midcap Index is market capitalization weighted and measures performance of the 800 smallest companies in the Russell 1000(R) Index, which represent approximately 26% of total market capitalization of the Russell 1000 Index. (2.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The Russell Midcap Growth Index is market capitalization weighted and measures performance of those Russell Midcap Index companies with higher price-to-book ratios and higher forecasted growth values. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. 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 AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 90. Annual Report | 45 PORTFOLIO BREAKDOWN Franklin Small-Mid Cap Growth Fund Based on Total Net Assets as of 4/30/09 (BAR CHART) Information Technology 27.9% Health Care 21.2% Industrials 13.1% Consumer Discretionary 11.4% Energy 8.8% Financials 5.7% Consumer Staples 3.4% Telecommunication Services 2.4% Materials 1.0% Utilities 0.8% Short-Term Investments & Other Net Assets 4.3%
* Significant exposure to a single sector may result in greater volatility for the Fund than a more broadly diversified portfolio. There are specific risks to investing in technology company stocks, which can be subject to abrupt or erratic price movements and have been volatile, especially over the short term. both qualitative and quantitative analysis to evaluate companies. Our analysts identify each company's market opportunity, competitive position, management and financial strength, business and financial risks, and valuation. We choose to invest in those companies that, in our opinion, offer the best trade-off between growth opportunity, business and financial risk, and valuation. MANAGER'S DISCUSSION Major detractors relative to the Russell Midcap Growth Index during the 12-month reporting period included iStar Financial,(3) a real estate investment trust; Sequenom,(3) which makes a sequencing system to analyze DNA variations; and Smith International, a U.S.-based provider of drilling equipment and services to the oil and gas industries. From a sector perspective, stock selection in consumer discretionary, financials and telecommunication services had a negative impact on the Fund's relative performance. Our underweighted position in the consumer discretionary sector also hurt Fund returns, and upscale department store chain Nordstrom was a key detractor. In the financials sector, another real estate investment trust that weighed on relative performance besides iStar Financial was FelCor Lodging Trust.(3) Wireless services provider NII Holdings in the telecommunication services sector was another significant detractor. On the other hand, notable contributors to relative Fund performance during the reporting period included molecular diagnostic test designer Myriad Genetics,(3) and oil and gas exploration and production companies Petrohawk Energy and Southwestern Energy. Our investments in the energy, industrials and utilities sectors supported the Fund's relative performance. Stock selection in energy and industrials stocks had a positive impact on Fund results. Despite a loss in absolute terms, in the industrials sector, freight and logistics company C.H. Robinson Worldwide was a major relative contributor as it performed better than the overall sector. In addition, an underweighting in utilities, one of the poorest performing sectors, benefited relative Fund performance. (3.) This holding is not an index component. 46 | Annual Report Thank you for your continued participation in Franklin Small-Mid Cap Growth Fund. We look forward to serving your future investment needs. (PHOTO OF EDWARD B. JAMIESON) /s/ Edward B. Jamieson Edward B. Jamieson Portfolio Manager Franklin Small-Mid Cap Growth Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF APRIL 30, 2009, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. TOP 10 HOLDINGS Franklin Small-Mid Cap Growth Fund 4/30/09
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------- ---------- Nuance Communications Inc. 2.5% INFORMATION TECHNOLOGY MasterCard Inc., A 2.5% INFORMATION TECHNOLOGY Precision Castparts Corp. 2.4% INDUSTRIALS Southwestern Energy Co. 2.4% ENERGY Express Scripts Inc. 2.2% HEALTH CARE Silicon Laboratories Inc. 2.2% INFORMATION TECHNOLOGY FLIR Systems Inc. 1.9% INFORMATION TECHNOLOGY Guess? Inc. 1.8% CONSUMER DISCRETIONARY Community Health Systems Inc. 1.8% HEALTH CARE AMETEK Inc. 1.8% INDUSTRIALS
Annual Report | 47 Performance Summary as of 4/30/09 FRANKLIN SMALL-MID CAP GROWTH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FRSGX) CHANGE 4/30/09 4/30/08 - ----------------------- ------- ------- ------- Net Asset Value (NAV) -$10.36 $22.34 $32.70 DISTRIBUTIONS (5/1/08-4/30/09) Long-Term Capital Gain $0.0620
CLASS B (SYMBOL: FBSMX) CHANGE 4/30/09 4/30/08 - ----------------------- ------- ------- ------- Net Asset Value (NAV) -$9.99 $21.01 $31.00 DISTRIBUTIONS (5/1/08-4/30/09) Long-Term Capital Gain $0.0620
CLASS C (SYMBOL: FRSIX) CHANGE 4/30/09 4/30/08 - ----------------------- ------- ------- ------- Net Asset Value (NAV) -$9.63 $20.29 $29.92 DISTRIBUTIONS (5/1/08-4/30/09) Long-Term Capital Gain $0.0620
CLASS R (SYMBOL: FSMRX) CHANGE 4/30/09 4/30/08 - ----------------------- ------- ------- ------- Net Asset Value (NAV) -$10.21 $21.85 $32.06 DISTRIBUTIONS (5/1/08-4/30/09) Long-Term Capital Gain $0.0620
ADVISOR CLASS (SYMBOL: FSGAX) CHANGE 4/30/09 4/30/08 - ----------------------------- ------- ------- ------- Net Asset Value (NAV) -$10.53 $22.90 $33.43 DISTRIBUTIONS (5/1/08-4/30/09) Long-Term Capital Gain $0.0620
48 | Annual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR 10-YEAR - ------- ------ ------ ------- Cumulative Total Return(1) -31.46% -3.34% +19.10% Average Annual Total Return(2) -35.39% -1.85% +1.16% Value of $10,000 Investment(3) $ 6,461 $9,111 $11,227 Avg. Ann. Total Return (3/31/09)(4) -37.70% -4.90% +0.68% Total Annual Operating Expenses(5) 1.04%
CLASS B 1-YEAR 5-YEAR INCEPTION (7/1/02) - ------- ------ ------ ------------------ Cumulative Total Return(1) -31.99% -6.91% +12.03% Average Annual Total Return(2) -34.70% -1.73% +1.68% Value of $10,000 Investment(3) $ 6,530 $9,165 $11,203 Avg. Ann. Total Return (3/31/09)(4) -37.05% -4.79% -0.06% Total Annual Operating Expenses(5) 1.79%
CLASS C 1-YEAR 5-YEAR 10-YEAR - ------- ------ ------ ------- Cumulative Total Return(1) -31.94% -6.84% +10.55% Average Annual Total Return(2) -32.62% -1.41% +1.01% Value of $10,000 Investment(3) $ 6,738 $9,316 $11,055 Avg. Ann. Total Return (3/31/09)(4) -35.06% -4.48% +0.52% Total Annual Operating Expenses(5) 1.79%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------- ------ ------ ------------------ Cumulative Total Return(1) -31.62% -4.51% -9.60% Average Annual Total Return(2) -31.62% -0.92% -1.37% Value of $10,000 Investment(3) $ 6,838 $9,549 $9,040 Avg. Ann. Total Return (3/31/09)(4) -34.09% -4.00% -2.98% Total Annual Operating Expenses(5) 1.29%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR - ------------- ------ ------ ------- Cumulative Total Return(1) -31.28% -2.10% +22.05% Average Annual Total Return(2) -31.28% -0.42% +2.01% Value of $10,000 Investment(3) $ 6,872 $9,790 $12,205 Avg. Ann. Total Return (3/31/09)(4) -33.74% -3.52% +1.52% Total Annual Operating Expenses(5) 0.79%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. Annual Report | 49 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/09 - ------- ------- 1-Year -35.39% 5-Year -1.85% 10-Year +1.16%
CLASS A (5/1/99-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP RUSSELL MIDCAP S&P 500 DATE GROWTH FUND - CLASS A GROWTH INDEX INDEX - ------------- ---------------------- -------------- ------- 5/1/1999 $ 9,426 $10,000 $10,000 5/31/1999 $ 9,388 $ 9,871 $ 9,764 6/30/1999 $10,172 $10,561 $10,306 7/31/1999 $10,119 $10,224 $ 9,984 8/31/1999 $10,272 $10,118 $ 9,935 9/30/1999 $10,646 $10,032 $ 9,662 10/31/1999 $11,893 $10,808 $10,274 11/30/1999 $13,667 $11,927 $10,482 12/31/1999 $17,010 $13,992 $11,100 1/31/2000 $16,752 $13,989 $10,542 2/29/2000 $21,127 $16,930 $10,343 3/31/2000 $19,342 $16,948 $11,354 4/30/2000 $17,530 $15,302 $11,013 5/31/2000 $16,378 $14,187 $10,787 6/30/2000 $18,914 $15,692 $11,053 7/31/2000 $17,769 $14,699 $10,880 8/31/2000 $20,209 $16,916 $11,556 9/30/2000 $19,535 $16,089 $10,946 10/31/2000 $18,024 $14,987 $10,899 11/30/2000 $14,162 $11,731 $10,040 12/31/2000 $15,343 $12,348 $10,089 1/31/2001 $16,100 $13,054 $10,447 2/28/2001 $13,057 $10,796 $ 9,495 3/31/2001 $11,645 $ 9,251 $ 8,893 4/30/2001 $13,322 $10,793 $ 9,584 5/31/2001 $13,205 $10,742 $ 9,648 6/30/2001 $13,065 $10,748 $ 9,414 7/31/2001 $12,382 $10,023 $ 9,321 8/31/2001 $11,536 $ 9,296 $ 8,737 9/30/2001 $ 9,780 $ 7,760 $ 8,032 10/31/2001 $10,615 $ 8,576 $ 8,185 11/30/2001 $11,594 $ 9,499 $ 8,813 12/31/2001 $12,194 $ 9,860 $ 8,890 1/31/2002 $11,720 $ 9,540 $ 8,760 2/28/2002 $11,055 $ 8,999 $ 8,591 3/31/2002 $11,857 $ 9,686 $ 8,915 4/30/2002 $11,286 $ 9,173 $ 8,374 5/31/2002 $10,922 $ 8,899 $ 8,312 6/30/2002 $ 9,886 $ 7,917 $ 7,720 7/31/2002 $ 8,630 $ 7,148 $ 7,118 8/31/2002 $ 8,583 $ 7,123 $ 7,165 9/30/2002 $ 7,828 $ 6,557 $ 6,386 10/31/2002 $ 8,509 $ 7,065 $ 6,949 11/30/2002 $ 9,244 $ 7,618 $ 7,358 12/31/2002 $ 8,587 $ 7,158 $ 6,925 1/31/2003 $ 8,473 $ 7,087 $ 6,744 2/28/2003 $ 8,368 $ 7,026 $ 6,643 3/31/2003 $ 8,379 $ 7,157 $ 6,707 4/30/2003 $ 9,052 $ 7,644 $ 7,260 5/31/2003 $ 9,901 $ 8,379 $ 7,642 6/30/2003 $ 9,956 $ 8,499 $ 7,740 7/31/2003 $10,206 $ 8,803 $ 7,876 8/31/2003 $10,734 $ 9,287 $ 8,030 9/30/2003 $10,394 $ 9,107 $ 7,944 10/31/2003 $11,223 $ 9,841 $ 8,394 11/30/2003 $11,607 $10,105 $ 8,468 12/31/2003 $11,822 $10,215 $ 8,912 1/31/2004 $12,158 $10,552 $ 9,075 2/29/2004 $12,166 $10,729 $ 9,202 3/31/2004 $12,088 $10,709 $ 9,063 4/30/2004 $11,615 $10,406 $ 8,920 5/31/2004 $11,978 $10,652 $ 9,043 6/30/2004 $12,338 $10,822 $ 9,219 7/31/2004 $11,513 $10,105 $ 8,914 8/31/2004 $11,360 $ 9,980 $ 8,950 9/30/2004 $11,818 $10,353 $ 9,047 10/31/2004 $12,233 $10,704 $ 9,185 11/30/2004 $12,847 $11,257 $ 9,556 12/31/2004 $13,363 $11,796 $ 9,882 1/31/2005 $12,996 $11,480 $ 9,641 2/28/2005 $13,312 $11,771 $ 9,844 3/31/2005 $12,867 $11,599 $ 9,669 4/30/2005 $12,248 $11,140 $ 9,486 5/31/2005 $12,992 $11,778 $ 9,788 6/30/2005 $13,383 $11,997 $ 9,802 7/31/2005 $14,197 $12,697 $10,166 8/31/2005 $14,185 $12,620 $10,073 9/30/2005 $14,326 $12,783 $10,155 10/31/2005 $13,997 $12,407 $ 9,986 11/30/2005 $14,733 $13,080 $10,363 12/31/2005 $14,772 $13,223 $10,367 1/31/2006 $15,595 $14,015 $10,642 2/28/2006 $15,564 $13,843 $10,670 3/31/2006 $15,877 $14,230 $10,803 4/30/2006 $15,826 $14,290 $10,948 5/31/2006 $14,968 $13,617 $10,633 6/30/2006 $14,929 $13,562 $10,648 7/31/2006 $14,447 $13,076 $10,713 8/31/2006 $14,816 $13,377 $10,968 9/30/2006 $14,953 $13,682 $11,251 10/31/2006 $15,427 $14,207 $11,617 11/30/2006 $16,034 $14,765 $11,838 12/31/2006 $15,884 $14,632 $12,004 1/31/2007 $16,363 $15,165 $12,186 2/28/2007 $16,548 $15,132 $11,948 3/31/2007 $16,821 $15,212 $12,081 4/30/2007 $17,469 $15,880 $12,616 5/31/2007 $18,239 $16,524 $13,057 6/30/2007 $18,028 $16,237 $12,840 7/31/2007 $17,591 $15,874 $12,442 8/31/2007 $17,894 $15,960 $12,628 9/30/2007 $18,911 $16,586 $13,100 10/31/2007 $19,416 $17,009 $13,309 11/30/2007 $17,742 $16,260 $12,752 12/31/2007 $17,737 $16,304 $12,664 1/31/2008 $15,899 $15,009 $11,904 2/29/2008 $15,448 $14,780 $11,518 3/31/2008 $15,097 $14,519 $11,468 4/30/2008 $16,380 $15,573 $12,026 5/31/2008 $17,111 $16,393 $12,182 6/30/2008 $15,849 $15,194 $11,155 7/31/2008 $15,293 $14,617 $11,061 8/31/2008 $15,678 $14,751 $11,221 9/30/2008 $13,830 $12,497 $10,221 10/31/2008 $11,130 $ 9,755 $ 8,505 11/30/2008 $10,153 $ 8,756 $ 7,895 12/31/2008 $10,196 $ 9,078 $ 7,979 1/31/2009 $ 9,805 $ 8,669 $ 7,306 2/28/2009 $ 9,151 $ 8,009 $ 6,528 3/31/2009 $ 9,980 $ 8,772 $ 7,100 4/30/2009 $11,227 $10,019 $ 7,779 Total Returns 12.27% 0.19% -22.21%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/09 - ------- ------- 1-Year -34.70% 5-Year -1.73% Since Inception (7/1/02) +1.68%
CLASS B (7/1/02-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP RUSSELL MIDCAP S&P 500 DATE GROWTH FUND - CLASS B GROWTH INDEX INDEX - ------------- ---------------------- -------------- ------- 7/1/2002 $10,000 $10,000 $10,000 7/31/2002 $ 9,063 $ 9,028 $ 9,220 8/31/2002 $ 9,001 $ 8,997 $ 9,281 9/30/2002 $ 8,208 $ 8,282 $ 8,272 10/31/2002 $ 8,915 $ 8,924 $ 9,000 11/30/2002 $ 9,684 $ 9,622 $ 9,530 12/31/2002 $ 8,989 $ 9,041 $ 8,970 1/31/2003 $ 8,861 $ 8,952 $ 8,735 2/28/2003 $ 8,751 $ 8,874 $ 8,604 3/31/2003 $ 8,755 $ 9,039 $ 8,688 4/30/2003 $ 9,453 $ 9,655 $ 9,403 5/31/2003 $10,329 $10,584 $ 9,899 6/30/2003 $10,382 $10,735 $10,025 7/31/2003 $10,637 $11,118 $10,202 8/31/2003 $11,180 $11,731 $10,401 9/30/2003 $10,814 $11,503 $10,290 10/31/2003 $11,673 $12,430 $10,873 11/30/2003 $12,063 $12,763 $10,968 12/31/2003 $12,277 $12,902 $11,543 1/31/2004 $12,618 $13,328 $11,755 2/29/2004 $12,622 $13,552 $11,919 3/31/2004 $12,532 $13,526 $11,739 4/30/2004 $12,035 $13,144 $11,555 5/31/2004 $12,400 $13,454 $11,713 6/30/2004 $12,766 $13,668 $11,941 7/31/2004 $11,903 $12,763 $11,546 8/31/2004 $11,739 $12,606 $11,592 9/30/2004 $12,207 $13,077 $11,718 10/31/2004 $12,626 $13,520 $11,897 11/30/2004 $13,251 $14,218 $12,378 12/31/2004 $13,777 $14,899 $12,800 1/31/2005 $13,391 $14,501 $12,488 2/28/2005 $13,707 $14,868 $12,750 3/31/2005 $13,239 $14,651 $12,525 4/30/2005 $12,598 $14,071 $12,287 5/31/2005 $13,350 $14,877 $12,678 6/30/2005 $13,744 $15,153 $12,696 7/31/2005 $14,570 $16,038 $13,168 8/31/2005 $14,550 $15,940 $13,048 9/30/2005 $14,686 $16,146 $13,154 10/31/2005 $14,340 $15,671 $12,934 11/30/2005 $15,080 $16,521 $13,424 12/31/2005 $15,113 $16,702 $13,428 1/31/2006 $15,943 $17,702 $13,784 2/28/2006 $15,902 $17,485 $13,821 3/31/2006 $16,219 $17,973 $13,993 4/30/2006 $16,157 $18,049 $14,181 5/31/2006 $15,269 $17,200 $13,773 6/30/2006 $15,216 $17,129 $13,792 7/31/2006 $14,718 $16,516 $13,877 8/31/2006 $15,080 $16,896 $14,207 9/30/2006 $15,212 $17,282 $14,573 10/31/2006 $15,688 $17,945 $15,048 11/30/2006 $16,293 $18,649 $15,334 12/31/2006 $16,131 $18,482 $15,549 1/31/2007 $16,608 $19,155 $15,784 2/28/2007 $16,785 $19,113 $15,476 3/31/2007 $17,051 $19,214 $15,649 4/30/2007 $17,697 $20,057 $16,342 5/31/2007 $18,467 $20,871 $16,912 6/30/2007 $18,241 $20,509 $16,631 7/31/2007 $17,790 $20,050 $16,116 8/31/2007 $18,082 $20,158 $16,357 9/30/2007 $19,099 $20,949 $16,969 10/31/2007 $19,595 $21,484 $17,239 11/30/2007 $17,896 $20,538 $16,518 12/31/2007 $17,876 $20,594 $16,403 1/31/2008 $16,016 $18,957 $15,420 2/29/2008 $15,554 $18,669 $14,919 3/31/2008 $15,192 $18,339 $14,854 4/30/2008 $16,473 $19,669 $15,578 5/31/2008 $17,195 $20,706 $15,779 6/30/2008 $15,915 $19,191 $14,449 7/31/2008 $15,346 $18,462 $14,328 8/31/2008 $15,724 $18,631 $14,535 9/30/2008 $13,864 $15,785 $13,240 10/31/2008 $11,148 $12,321 $11,016 11/30/2008 $10,165 $11,059 $10,226 12/31/2008 $10,200 $11,466 $10,335 1/31/2009 $ 9,800 $10,950 $ 9,463 2/28/2009 $ 9,145 $10,116 $ 8,456 3/31/2009 $ 9,960 $11,080 $ 9,197 4/30/2009 $11,203 $12,655 $10,077 Total Returns 12.03% 26.55% 0.77%
50 | Annual Report Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/09 - ------- ------- 1-Year -32.62% 5-Year -1.41% 10-Year +1.01%
CLASS C (5/1/99-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP RUSSELL MIDCAP S&P 500 DATE GROWTH FUND - CLASS C GROWTH INDEX INDEX - ------------- ---------------------- -------------- ------- 5/1/1999 $10,000 $10,000 $10,000 5/31/1999 $ 9,955 $ 9,871 $ 9,764 6/30/1999 $10,777 $10,561 $10,306 7/31/1999 $10,715 $10,224 $ 9,984 8/31/1999 $10,868 $10,118 $ 9,935 9/30/1999 $11,258 $10,032 $ 9,662 10/31/1999 $12,570 $10,808 $10,274 11/30/1999 $14,437 $11,927 $10,482 12/31/1999 $17,953 $13,992 $11,100 1/31/2000 $17,671 $13,989 $10,542 2/29/2000 $22,276 $16,930 $10,343 3/31/2000 $20,379 $16,948 $11,354 4/30/2000 $18,458 $15,302 $11,013 5/31/2000 $17,233 $14,187 $10,787 6/30/2000 $19,891 $15,692 $11,053 7/31/2000 $18,673 $14,699 $10,880 8/31/2000 $21,224 $16,916 $11,556 9/30/2000 $20,504 $16,089 $10,946 10/31/2000 $18,905 $14,987 $10,899 11/30/2000 $14,844 $11,731 $10,040 12/31/2000 $16,069 $12,348 $10,089 1/31/2001 $16,857 $13,054 $10,447 2/28/2001 $13,658 $10,796 $ 9,495 3/31/2001 $12,175 $ 9,251 $ 8,893 4/30/2001 $13,916 $10,793 $ 9,584 5/31/2001 $13,791 $10,742 $ 9,648 6/30/2001 $13,633 $10,748 $ 9,414 7/31/2001 $12,912 $10,023 $ 9,321 8/31/2001 $12,025 $ 9,296 $ 8,737 9/30/2001 $10,184 $ 7,760 $ 8,032 10/31/2001 $11,050 $ 8,576 $ 8,185 11/30/2001 $12,058 $ 9,499 $ 8,813 12/31/2001 $12,675 $ 9,860 $ 8,890 1/31/2002 $12,175 $ 9,540 $ 8,760 2/28/2002 $11,479 $ 8,999 $ 8,591 3/31/2002 $12,304 $ 9,686 $ 8,915 4/30/2002 $11,700 $ 9,173 $ 8,374 5/31/2002 $11,317 $ 8,899 $ 8,312 6/30/2002 $10,238 $ 7,917 $ 7,720 7/31/2002 $ 8,934 $ 7,148 $ 7,118 8/31/2002 $ 8,876 $ 7,123 $ 7,165 9/30/2002 $ 8,093 $ 6,557 $ 6,386 10/31/2002 $ 8,789 $ 7,065 $ 6,949 11/30/2002 $ 9,543 $ 7,618 $ 7,358 12/31/2002 $ 8,859 $ 7,158 $ 6,925 1/31/2003 $ 8,734 $ 7,087 $ 6,744 2/28/2003 $ 8,622 $ 7,026 $ 6,643 3/31/2003 $ 8,626 $ 7,157 $ 6,707 4/30/2003 $ 9,318 $ 7,644 $ 7,260 5/31/2003 $10,184 $ 8,379 $ 7,642 6/30/2003 $10,234 $ 8,499 $ 7,740 7/31/2003 $10,488 $ 8,803 $ 7,876 8/31/2003 $11,021 $ 9,287 $ 8,030 9/30/2003 $10,663 $ 9,107 $ 7,944 10/31/2003 $11,509 $ 9,841 $ 8,394 11/30/2003 $11,892 $10,105 $ 8,468 12/31/2003 $12,104 $10,215 $ 8,912 1/31/2004 $12,442 $10,552 $ 9,075 2/29/2004 $12,446 $10,729 $ 9,202 3/31/2004 $12,358 $10,709 $ 9,063 4/30/2004 $11,867 $10,406 $ 8,920 5/31/2004 $12,229 $10,652 $ 9,043 6/30/2004 $12,596 $10,822 $ 9,219 7/31/2004 $11,746 $10,105 $ 8,914 8/31/2004 $11,584 $ 9,980 $ 8,950 9/30/2004 $12,046 $10,353 $ 9,047 10/31/2004 $12,462 $10,704 $ 9,185 11/30/2004 $13,079 $11,257 $ 9,556 12/31/2004 $13,587 $11,796 $ 9,882 1/31/2005 $13,204 $11,480 $ 9,641 2/28/2005 $13,520 $11,771 $ 9,844 3/31/2005 $13,054 $11,599 $ 9,669 4/30/2005 $12,421 $11,140 $ 9,486 5/31/2005 $13,166 $11,778 $ 9,788 6/30/2005 $13,554 $11,997 $ 9,802 7/31/2005 $14,370 $12,697 $10,166 8/31/2005 $14,349 $12,620 $10,073 9/30/2005 $14,483 $12,783 $10,155 10/31/2005 $14,141 $12,407 $ 9,986 11/30/2005 $14,874 $13,080 $10,363 12/31/2005 $14,907 $13,223 $10,367 1/31/2006 $15,724 $14,015 $10,642 2/28/2006 $15,686 $13,843 $10,670 3/31/2006 $15,994 $14,230 $10,803 4/30/2006 $15,932 $14,290 $10,948 5/31/2006 $15,057 $13,617 $10,633 6/30/2006 $15,007 $13,562 $10,648 7/31/2006 $14,516 $13,076 $10,713 8/31/2006 $14,874 $13,377 $10,968 9/30/2006 $15,003 $13,682 $11,251 10/31/2006 $15,470 $14,207 $11,617 11/30/2006 $16,069 $14,765 $11,838 12/31/2006 $15,905 $14,632 $12,004 1/31/2007 $16,381 $15,165 $12,186 2/28/2007 $16,557 $15,132 $11,948 3/31/2007 $16,817 $15,212 $12,081 4/30/2007 $17,455 $15,880 $12,616 5/31/2007 $18,210 $16,524 $13,057 6/30/2007 $17,990 $16,237 $12,840 7/31/2007 $17,545 $15,874 $12,442 8/31/2007 $17,833 $15,960 $12,628 9/30/2007 $18,835 $16,586 $13,100 10/31/2007 $19,329 $17,009 $13,309 11/30/2007 $17,649 $16,260 $12,752 12/31/2007 $17,633 $16,304 $12,664 1/31/2008 $15,798 $15,009 $11,904 2/29/2008 $15,337 $14,780 $11,518 3/31/2008 $14,984 $14,519 $11,468 4/30/2008 $16,243 $15,573 $12,026 5/31/2008 $16,955 $16,393 $12,182 6/30/2008 $15,695 $15,194 $11,155 7/31/2008 $15,136 $14,617 $11,061 8/31/2008 $15,505 $14,751 $11,221 9/30/2008 $13,670 $12,497 $10,221 10/31/2008 $10,994 $ 9,755 $ 8,505 11/30/2008 $10,027 $ 8,756 $ 7,895 12/31/2008 $10,063 $ 9,078 $ 7,979 1/31/2009 $ 9,671 $ 8,669 $ 7,306 2/28/2009 $ 9,022 $ 8,009 $ 6,528 3/31/2009 $ 9,829 $ 8,772 $ 7,100 4/30/2009 $11,055 $10,019 $ 7,779 Total Returns 10.55% 0.19% -22.21%
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/09 - ------- ------- 1-Year -31.62% 5-Year -0.92% Since Inception (1/1/02) -1.37%
CLASS R (1/1/02-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP RUSSELL MIDCAP S&P 500 DATE GROWTH FUND - CLASS R GROWTH INDEX INDEX - ------------- ---------------------- -------------- ------- 1/1/2002 $10,000 $10,000 $10,000 1/31/2002 $ 9,612 $ 9,675 $ 9,854 2/28/2002 $ 9,067 $ 9,127 $ 9,664 3/31/2002 $ 9,722 $ 9,823 $10,027 4/30/2002 $ 9,247 $ 9,303 $ 9,420 5/31/2002 $ 8,952 $ 9,026 $ 9,350 6/30/2002 $ 8,104 $ 8,030 $ 8,684 7/31/2002 $ 7,074 $ 7,249 $ 8,007 8/31/2002 $ 7,029 $ 7,224 $ 8,060 9/30/2002 $ 6,413 $ 6,650 $ 7,184 10/31/2002 $ 6,965 $ 7,165 $ 7,816 11/30/2002 $ 7,568 $ 7,726 $ 8,276 12/31/2002 $ 7,026 $ 7,259 $ 7,790 1/31/2003 $ 6,933 $ 7,188 $ 7,586 2/28/2003 $ 6,846 $ 7,126 $ 7,472 3/31/2003 $ 6,852 $ 7,258 $ 7,545 4/30/2003 $ 7,401 $ 7,753 $ 8,166 5/31/2003 $ 8,094 $ 8,498 $ 8,596 6/30/2003 $ 8,132 $ 8,620 $ 8,706 7/31/2003 $ 8,338 $ 8,928 $ 8,859 8/31/2003 $ 8,766 $ 9,419 $ 9,032 9/30/2003 $ 8,486 $ 9,237 $ 8,936 10/31/2003 $ 9,163 $ 9,981 $ 9,442 11/30/2003 $ 9,471 $10,248 $ 9,525 12/31/2003 $ 9,645 $10,360 $10,024 1/31/2004 $ 9,917 $10,702 $10,208 2/29/2004 $ 9,924 $10,882 $10,350 3/31/2004 $ 9,856 $10,861 $10,194 4/30/2004 $ 9,468 $10,554 $10,034 5/31/2004 $ 9,763 $10,803 $10,172 6/30/2004 $10,052 $10,975 $10,370 7/31/2004 $ 9,378 $10,248 $10,026 8/31/2004 $ 9,253 $10,122 $10,067 9/30/2004 $ 9,625 $10,500 $10,176 10/31/2004 $ 9,962 $10,856 $10,332 11/30/2004 $10,456 $11,417 $10,750 12/31/2004 $10,877 $11,964 $11,115 1/31/2005 $10,575 $11,643 $10,844 2/28/2005 $10,833 $11,938 $11,073 3/31/2005 $10,466 $11,764 $10,877 4/30/2005 $ 9,962 $11,298 $10,670 5/31/2005 $10,562 $11,945 $11,010 6/30/2005 $10,881 $12,168 $11,025 7/31/2005 $11,538 $12,878 $11,435 8/31/2005 $11,526 $12,799 $11,331 9/30/2005 $11,638 $12,965 $11,423 10/31/2005 $11,368 $12,583 $11,232 11/30/2005 $11,962 $13,266 $11,657 12/31/2005 $11,995 $13,411 $11,661 1/31/2006 $12,656 $14,214 $11,970 2/28/2006 $12,630 $14,039 $12,003 3/31/2006 $12,884 $14,432 $12,152 4/30/2006 $12,839 $14,493 $12,315 5/31/2006 $12,143 $13,811 $11,961 6/30/2006 $12,104 $13,754 $11,977 7/31/2006 $11,716 $13,261 $12,051 8/31/2006 $12,008 $13,567 $12,338 9/30/2006 $12,117 $13,876 $12,655 10/31/2006 $12,502 $14,409 $13,068 11/30/2006 $12,990 $14,975 $13,316 12/31/2006 $12,864 $14,840 $13,503 1/31/2007 $13,251 $15,380 $13,707 2/28/2007 $13,396 $15,347 $13,439 3/31/2007 $13,617 $15,428 $13,590 4/30/2007 $14,138 $16,105 $14,192 5/31/2007 $14,756 $16,758 $14,687 6/30/2007 $14,583 $16,468 $14,443 7/31/2007 $14,228 $16,099 $13,995 8/31/2007 $14,469 $16,186 $14,205 9/30/2007 $15,287 $16,821 $14,736 10/31/2007 $15,692 $17,251 $14,970 11/30/2007 $14,335 $16,491 $14,345 12/31/2007 $14,331 $16,536 $14,245 1/31/2008 $12,842 $15,222 $13,391 2/29/2008 $12,475 $14,990 $12,956 3/31/2008 $12,190 $14,725 $12,900 4/30/2008 $13,222 $15,794 $13,528 5/31/2008 $13,807 $16,626 $13,703 6/30/2008 $12,788 $15,410 $12,548 7/31/2008 $12,335 $14,825 $12,442 8/31/2008 $12,644 $14,960 $12,622 9/30/2008 $11,151 $12,675 $11,498 10/31/2008 $ 8,970 $ 9,893 $ 9,567 11/30/2008 $ 8,186 $ 8,880 $ 8,880 12/31/2008 $ 8,217 $ 9,207 $ 8,975 1/31/2009 $ 7,898 $ 8,792 $ 8,218 2/28/2009 $ 7,373 $ 8,123 $ 7,343 3/31/2009 $ 8,035 $ 8,897 $ 7,986 4/30/2009 $ 9,040 $10,161 $ 8,751 Total Returns -9.60% 1.61% -12.49%
Annual Report | 51 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 4/30/09 - ------------- ------- 1-Year -31.28% 5-Year -0.42% 10-Year +2.01%
ADVISOR CLASS (5/1/99-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP RUSSELL MIDCAP S&P 500 DATE GROWTH FUND - ADVISOR CLASS GROWTH INDEX INDEX - ------------- --------------------------- -------------- ------- 5/1/1999 $10,000 $10,000 $10,000 5/31/1999 $ 9,960 $ 9,871 $ 9,764 6/30/1999 $10,792 $10,561 $10,306 7/31/1999 $10,740 $10,224 $ 9,984 8/31/1999 $10,901 $10,118 $ 9,935 9/30/1999 $11,302 $10,032 $ 9,662 10/31/1999 $12,631 $10,808 $10,274 11/30/1999 $14,523 $11,927 $10,482 12/31/1999 $18,072 $13,992 $11,100 1/31/2000 $17,803 $13,989 $10,542 2/29/2000 $22,454 $16,930 $10,343 3/31/2000 $20,563 $16,948 $11,354 4/30/2000 $18,643 $15,302 $11,013 5/31/2000 $17,424 $14,187 $10,787 6/30/2000 $20,127 $15,692 $11,053 7/31/2000 $18,912 $14,699 $10,880 8/31/2000 $21,512 $16,916 $11,556 9/30/2000 $20,799 $16,089 $10,946 10/31/2000 $19,193 $14,987 $10,899 11/30/2000 $15,085 $11,731 $10,040 12/31/2000 $16,345 $12,348 $10,089 1/31/2001 $17,159 $13,054 $10,447 2/28/2001 $13,911 $10,796 $ 9,495 3/31/2001 $12,411 $ 9,251 $ 8,893 4/30/2001 $14,200 $10,793 $ 9,584 5/31/2001 $14,081 $10,742 $ 9,648 6/30/2001 $13,932 $10,748 $ 9,414 7/31/2001 $13,209 $10,023 $ 9,321 8/31/2001 $12,304 $ 9,296 $ 8,737 9/30/2001 $10,432 $ 7,760 $ 8,032 10/31/2001 $11,325 $ 8,576 $ 8,185 11/30/2001 $12,370 $ 9,499 $ 8,813 12/31/2001 $13,016 $ 9,860 $ 8,890 1/31/2002 $12,509 $ 9,540 $ 8,760 2/28/2002 $11,806 $ 8,999 $ 8,591 3/31/2002 $12,663 $ 9,686 $ 8,915 4/30/2002 $12,056 $ 9,173 $ 8,374 5/31/2002 $11,669 $ 8,899 $ 8,312 6/30/2002 $10,563 $ 7,917 $ 7,720 7/31/2002 $ 9,225 $ 7,148 $ 7,118 8/31/2002 $ 9,175 $ 7,123 $ 7,165 9/30/2002 $ 8,372 $ 6,557 $ 6,386 10/31/2002 $ 9,096 $ 7,065 $ 6,949 11/30/2002 $ 9,890 $ 7,618 $ 7,358 12/31/2002 $ 9,187 $ 7,158 $ 6,925 1/31/2003 $ 9,067 $ 7,087 $ 6,744 2/28/2003 $ 8,959 $ 7,026 $ 6,643 3/31/2003 $ 8,971 $ 7,157 $ 6,707 4/30/2003 $ 9,694 $ 7,644 $ 7,260 5/31/2003 $10,605 $ 8,379 $ 7,642 6/30/2003 $10,667 $ 8,499 $ 7,740 7/31/2003 $10,937 $ 8,803 $ 7,876 8/31/2003 $11,507 $ 9,287 $ 8,030 9/30/2003 $11,141 $ 9,107 $ 7,944 10/31/2003 $12,035 $ 9,841 $ 8,394 11/30/2003 $12,446 $10,105 $ 8,468 12/31/2003 $12,679 $10,215 $ 8,912 1/31/2004 $13,045 $10,552 $ 9,075 2/29/2004 $13,058 $10,729 $ 9,202 3/31/2004 $12,974 $10,709 $ 9,063 4/30/2004 $12,467 $10,406 $ 8,920 5/31/2004 $12,862 $10,652 $ 9,043 6/30/2004 $13,249 $10,822 $ 9,219 7/31/2004 $12,368 $10,105 $ 8,914 8/31/2004 $12,205 $ 9,980 $ 8,950 9/30/2004 $12,700 $10,353 $ 9,047 10/31/2004 $13,149 $10,704 $ 9,185 11/30/2004 $13,810 $11,257 $ 9,556 12/31/2004 $14,371 $11,796 $ 9,882 1/31/2005 $13,980 $11,480 $ 9,641 2/28/2005 $14,321 $11,771 $ 9,844 3/31/2005 $13,843 $11,599 $ 9,669 4/30/2005 $13,182 $11,140 $ 9,486 5/31/2005 $13,985 $11,778 $ 9,788 6/30/2005 $14,409 $11,997 $ 9,802 7/31/2005 $15,286 $12,697 $10,166 8/31/2005 $15,278 $12,620 $10,073 9/30/2005 $15,435 $12,783 $10,155 10/31/2005 $15,082 $12,407 $ 9,986 11/30/2005 $15,876 $13,080 $10,363 12/31/2005 $15,926 $13,223 $10,367 1/31/2006 $16,814 $14,015 $10,642 2/28/2006 $16,781 $13,843 $10,670 3/31/2006 $17,127 $14,230 $10,803 4/30/2006 $17,077 $14,290 $10,948 5/31/2006 $16,155 $13,617 $10,633 6/30/2006 $16,113 $13,562 $10,648 7/31/2006 $15,600 $13,076 $10,713 8/31/2006 $15,997 $13,377 $10,968 9/30/2006 $16,151 $13,682 $11,251 10/31/2006 $16,668 $14,207 $11,617 11/30/2006 $17,323 $14,765 $11,838 12/31/2006 $17,164 $14,632 $12,004 1/31/2007 $17,692 $15,165 $12,186 2/28/2007 $17,893 $15,132 $11,948 3/31/2007 $18,193 $15,212 $12,081 4/30/2007 $18,896 $15,880 $12,616 5/31/2007 $19,732 $16,524 $13,057 6/30/2007 $19,513 $16,237 $12,840 7/31/2007 $19,043 $15,874 $12,442 8/31/2007 $19,374 $15,960 $12,628 9/30/2007 $20,480 $16,586 $13,100 10/31/2007 $21,030 $17,009 $13,309 11/30/2007 $19,218 $16,260 $12,752 12/31/2007 $19,217 $16,304 $12,664 1/31/2008 $17,230 $15,009 $11,904 2/29/2008 $16,747 $14,780 $11,518 3/31/2008 $16,369 $14,519 $11,468 4/30/2008 $17,761 $15,573 $12,026 5/31/2008 $18,558 $16,393 $12,182 6/30/2008 $17,193 $15,194 $11,155 7/31/2008 $16,593 $14,617 $11,061 8/31/2008 $17,012 $14,751 $11,221 9/30/2008 $15,015 $12,497 $10,221 10/31/2008 $12,082 $ 9,755 $ 8,505 11/30/2008 $11,030 $ 8,756 $ 7,895 12/31/2008 $11,081 $ 9,078 $ 7,979 1/31/2009 $10,654 $ 8,669 $ 7,306 2/28/2009 $ 9,946 $ 8,009 $ 6,528 3/31/2009 $10,846 $ 8,772 $ 7,100 4/30/2009 $12,205 $10,019 $ 7,779 Total Returns 22.05% 0.19% -22.21%
ENDNOTES INVESTORS SHOULD BE COMFORTABLE WITH FLUCTUATIONS IN THE VALUE OF THEIR INVESTMENT, AS SMALL AND MIDSIZED COMPANY STOCKS CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM. SMALLER OR RELATIVELY NEW OR UNSEASONED COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC CONDITIONS, AND THEIR PROSPECTS FOR GROWTH ARE LESS CERTAIN THAN THOSE OF LARGER, MORE ESTABLISHED COMPANIES. THE FUND INCLUDES INVESTMENTS IN THE TECHNOLOGY SECTOR, WHICH HAS BEEN HIGHLY VOLATILE AND INVOLVES SPECIAL RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) Cumulative total return represents the change in value of an investment over the periods indicated. (2.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (3.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (4.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (6.) Source: (C) 2009 Morningstar. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The Russell Midcap Growth Index is market capitalization weighted and measures performance of those Russell Midcap Index companies with higher price-to-book ratios and higher forecasted growth values. 52 | Annual Report Your Fund's Expenses FRANKLIN SMALL-MID CAP GROWTH FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 53 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 11/1/08 VALUE 4/30/09 PERIOD* 11/1/08-4/30/09 ----------------- -------------- ----------------------- CLASS A Actual $1,000 $1,008.70 $5.23 Hypothetical (5% return before expenses) $1,000 $1,019.59 $5.26 CLASS B Actual $1,000 $1,004.90 $8.90 Hypothetical (5% return before expenses) $1,000 $1,015.92 $8.95 CLASS C Actual $1,000 $1,005.60 $8.90 Hypothetical (5% return before expenses) $1,000 $1,015.92 $8.95 CLASS R Actual $1,000 $1,007.90 $6.47 Hypothetical (5% return before expenses) $1,000 $1,018.35 $6.51 ADVISOR CLASS Actual $1,000 $1,010.20 $3.99 Hypothetical (5% return before expenses) $1,000 $1,020.83 $4.01
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 1.05%; B: 1.79%; C: 1.79%; R: 1.30%; and Advisor: 0.80%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. 54 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30, ------------------------------------------------------------------ CLASS A 2009 2008 2007 2006 2005 - ------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $ 45.77 $ 45.15 $ 42.45 $ 35.26 $ 33.76 ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income (loss)(b) ............. (0.03) (0.05) 0.06 0.11 (0.10) Net realized and unrealized gains (losses) .. (13.28) 1.43 2.70 7.08 1.60 ---------- ---------- ---------- ---------- ---------- Total from investment operations ............... (13.31) 1.38 2.76 7.19 1.50 ---------- ---------- ---------- ---------- ---------- Less distributions from: Net investment income ....................... -- (0.02) (0.06) -- -- Net realized gains .......................... -- (0.74) -- -- -- ---------- ---------- ---------- ---------- ---------- Total distributions ............................ -- (0.76) (0.06) -- -- ---------- ---------- ---------- ---------- ---------- Redemption fees(c, d) .......................... -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net asset value, end of year ................... $ 32.46 $ 45.77 $ 45.15 $ 42.45 $ 35.26 ========== ========== ========== ========== ========== Total return(e) ................................ (29.08)% 2.98% 6.50% 20.39% 4.44% RATIOS TO AVERAGE NET ASSETS Expenses(f) .................................... 1.00% 0.93%(g) 0.96% 0.93% 0.96% Net investment income (loss) ................... (0.08)% (0.10)% 0.15% 0.27% (0.29)% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $1,370,025 $2,011,348 $1,977,605 $2,070,364 $1,505,342 Portfolio turnover rate ........................ 35.95% 36.70% 62.54% 66.63% 41.91%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Ratio of expenses to average net assets before waiver and payments by affiliates was 0.94%. The accompanying notes are an integral part of these financial statements. Annual Report | 55 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30, -------------------------------------------------------- CLASS B 2009 2008 2007 2006 2005 - ------- ------- ------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $ 42.66 $ 42.43 $ 40.14 $ 33.59 $ 32.40 ------- ------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ............. (0.29) (0.37) (0.23) (0.19) (0.35) Net realized and unrealized gains (losses) .. (12.33) 1.34 2.52 6.74 1.54 ------- ------- -------- -------- -------- Total from investment operations ............... (12.62) 0.97 2.29 6.55 1.19 ------- ------- -------- -------- -------- Less distributions from net realized gains ..... -- (0.74) -- -- -- ------- ------- -------- -------- -------- Redemption fees(c, d) .......................... -- -- -- -- -- ------- ------- -------- -------- -------- Net asset value, end of year ................... $ 30.04 $ 42.66 $ 42.43 $ 40.14 $ 33.59 ======= ======= ======== ======== ======== Total return(e) ................................ (29.58)% 2.19% 5.71% 19.50% 3.67% RATIOS TO AVERAGE NET ASSETS Expenses(f) .................................... 1.75% 1.68%(g) 1.71% 1.68% 1.70% Net investment income (loss) ................... (0.83)% (0.85)% (0.60)% (0.48)% (1.03)% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $42,485 $95,600 $118,806 $143,477 $136,052 Portfolio turnover rate ........................ 35.95% 36.70% 62.54% 66.63% 41.91%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Ratio of expenses to average net assets before waiver and payments by affiliates was 1.69%. The accompanying notes are an integral part of these financial statements. 56 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30, ---------------------------------------------------------- CLASS C 2009 2008 2007 2006 2005 - ------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $ 42.76 $ 42.52 $ 40.22 $ 33.66 $ 32.47 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ............. (0.28) (0.37) (0.23) (0.18) (0.35) Net realized and unrealized gains (losses) .. (12.38) 1.35 2.53 6.74 1.54 -------- -------- -------- -------- -------- Total from investment operations ............... (12.66) 0.98 2.30 6.56 1.19 -------- -------- -------- -------- -------- Less distributions from net realized gains ..... -- (0.74) -- -- -- -------- -------- -------- -------- -------- Redemption fees(c,d) ........................... -- -- -- -- -- -------- -------- -------- -------- -------- Net asset value, end of year ................... $ 30.10 $ 42.76 $ 42.52 $ 40.22 $ 33.66 ======== ======== ======== ======== ======== Total return(e) ................................ (29.61)% 2.21% 5.72% 19.49% 3.67% RATIOS TO AVERAGE NET ASSETS Expenses(f) .................................... 1.74% 1.68%(g) 1.69% 1.68% 1.71% Net investment income (loss) ................... (0.82)% (0.85)% (0.58)% (0.48)% (1.04)% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $243,308 $375,822 $371,164 $388,478 $296,868 Portfolio turnover rate ........................ 35.95% 36.70% 62.54% 66.63% 41.91%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Ratio of expenses to average net assets before waiver and payments by affiliates was 1.69%. The accompanying notes are an integral part of these financial statements. Annual Report | 57 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30, ----------------------------------------------------- CLASS R 2009 2008 2007 2006 2005 - ------- ------- ------- ------- ------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $ 45.10 $ 44.61 $ 42.01 $ 34.98 $ 33.57 ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) ............. (0.12) (0.16) (0.04) 0.01 (0.19) Net realized and unrealized gains (losses) .. (13.07) 1.41 2.66 7.02 1.60 ------- ------- ------- ------- ------- Total from investment operations ............... (13.19) 1.25 2.62 7.03 1.41 ------- ------- ------- ------- ------- Less distributions from: Net investment income ....................... -- (0.02) (0.02) -- -- Net realized gains .......................... -- (0.74) -- -- -- ------- ------- ------- ------- ------- Total distributions ............................ -- (0.76) (0.02) -- -- ------- ------- ------- ------- ------- Redemption fees(c,d) ........................... -- -- -- -- -- ------- ------- ------- ------- ------- Net asset value, end of year ................... $ 31.91 $ 45.10 $ 44.61 $ 42.01 $ 34.98 ======= ======= ======= ======= ======= Total return(e) ................................ (29.25)% 2.73% 6.25% 20.07% 4.20% RATIOS TO AVERAGE NET ASSETS Expenses(f) .................................... 1.25% 1.18%(g) 1.21% 1.18% 1.21% Net investment income (loss) ................... (0.33)% (0.35)% (0.10)% 0.02% (0.54)% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $43,940 $66,250 $81,398 $91,229 $69,103 Portfolio turnover rate ........................ 35.95% 36.70% 62.54% 66.63% 41.91%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Ratio of expenses to average net assets before waiver and payments by affiliates was 1.19%. The accompanying notes are an integral part of these financial statements. 58 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30, ------------------------------------------------------ ADVISOR CLASS 2009 2008 2007 2006 2005(a) - ------------- -------- -------- -------- -------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $ 46.15 $ 45.41 $ 42.63 $ 35.32 $ 33.35 -------- -------- -------- -------- ------- Income from investment operations(b): Net investment income (loss)(c) ............. 0.07 0.07 0.16 0.23 (0.01) Net realized and unrealized gains (losses) .. (13.40) 1.43 2.71 7.08 1.98 -------- -------- -------- -------- ------- Total from investment operations ............... (13.33) 1.50 2.87 7.31 1.97 -------- -------- -------- -------- ------- Less distributions from: Net investment income ....................... -- (0.02) (0.09) -- -- Net realized gains .......................... -- (0.74) -- -- -- -------- -------- -------- -------- ------- Total distributions ............................ -- (0.76) (0.09) -- -- -------- -------- -------- -------- ------- Redemption fees(d, e) .......................... -- -- -- -- -- -------- -------- -------- -------- ------- Net asset value, end of year ................... $ 32.82 $ 46.15 $ 45.41 $ 42.63 $ 35.32 ======== ======== ======== ======== ======= Total return(f) ................................ (28.88)% 3.23% 6.77% 20.67% 5.91% RATIOS TO AVERAGE NET ASSETS(g) Expenses(h) .................................... 0.75% 0.68%(i) 0.71% 0.68% 0.71% Net investment income (loss) ................... 0.17% 0.15% 0.40% 0.52% (0.04)% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $364,798 $348,245 $297,856 $209,680 $71,193 Portfolio turnover rate ........................ 35.95% 36.70% 62.54% 66.63% 41.91%
(a) For the period August 2, 2004 (effective date) to April 30, 2005. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Amount rounds to less than $0.01 per share. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Total return is not annualized for periods less than one year. (g) Ratios are annualized for periods less than one year. (h) Benefit of expense reduction rounds to less than 0.01%. (i) Ratio of expenses to average net assets before waiver and payments by affiliates was 0.69%. The accompanying notes are an integral part of these financial statements. Annual Report | 59 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE ----------------------------- ---------- -------------- COMMON STOCKS 96.7% AUTOMOBILES & COMPONENTS 0.7% Johnson Controls Inc. ................................................... 800,000 $ 15,208,000 -------------- BANKS 0.7% Wells Fargo & Co. ....................................................... 699,800 14,002,998 -------------- CAPITAL GOODS 5.8% AMETEK Inc. ............................................................. 600,000 19,326,000 Danaher Corp. ........................................................... 600,000 35,064,000 (a) Jacobs Engineering Group Inc. ........................................... 330,000 12,553,200 Precision Castparts Corp. ............................................... 400,000 29,944,000 (a) SunPower Corp., A ....................................................... 375,000 10,267,500 United Technologies Corp. ............................................... 250,000 12,210,000 -------------- 119,364,700 -------------- COMMERCIAL & PROFESSIONAL SERVICES 1.4% (a) Stericycle Inc. ......................................................... 600,000 28,248,000 -------------- CONSUMER SERVICES 0.5% (a) ITT Educational Services Inc. ........................................... 100,000 10,077,000 -------------- DIVERSIFIED FINANCIALS 2.0% BlackRock Inc. .......................................................... 145,000 21,245,400 T. Rowe Price Group Inc. ................................................ 500,000 19,260,000 -------------- 40,505,400 -------------- ENERGY 8.8% Devon Energy Corp. ...................................................... 425,000 22,036,250 (a) FMC Technologies Inc. ................................................... 500,000 17,115,000 Occidental Petroleum Corp. .............................................. 400,000 22,516,000 (a) Petrohawk Energy Corp. .................................................. 1,100,000 25,960,000 Range Resources Corp. ................................................... 575,000 22,982,750 Schlumberger Ltd. ....................................................... 450,000 22,045,500 Smith International Inc. ................................................ 800,000 20,680,000 XTO Energy Inc. ......................................................... 800,000 27,728,000 -------------- 181,063,500 -------------- FOOD & STAPLES RETAILING 1.9% CVS Caremark Corp. ...................................................... 1,250,000 39,725,000 -------------- FOOD, BEVERAGE & TOBACCO 2.7% (a) Hansen Natural Corp. .................................................... 600,000 24,456,000 PepsiCo Inc. ............................................................ 650,000 32,344,000 -------------- 56,800,000 -------------- HEALTH CARE EQUIPMENT & SERVICES 7.7% Baxter International Inc. ............................................... 500,000 24,250,000 C. R. Bard Inc. ......................................................... 368,300 26,381,329 (a) DaVita Inc. ............................................................. 400,000 18,548,000 (a) Express Scripts Inc. .................................................... 550,000 35,183,500 Stryker Corp. ........................................................... 450,000 17,419,500 (a) Varian Medical Systems Inc. ............................................. 250,000 8,342,500 (a) VCA Antech Inc. ......................................................... 1,150,000 28,773,000 -------------- 158,897,829 --------------
60 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE ----------------------------- ---------- -------------- COMMON STOCKS (CONTINUED) HOUSEHOLD & PERSONAL PRODUCTS 3.0% Clorox Co. .............................................................. 450,000 $ 25,222,500 (a) Mead Johnson Nutrition Co. , A .......................................... 325,000 9,181,250 The Procter & Gamble Co. ................................................ 550,000 27,192,000 -------------- 61,595,750 -------------- INSURANCE 1.4% AFLAC Inc. .............................................................. 575,000 16,611,750 Assurant Inc. ........................................................... 500,000 12,220,000 -------------- 28,831,750 -------------- MATERIALS 4.4% Ecolab Inc. ............................................................. 1,000,000 38,550,000 Praxair Inc. ............................................................ 700,000 52,227,000 -------------- 90,777,000 -------------- MEDIA 1.2% (a) The DIRECTV Group Inc. .................................................. 550,000 13,601,500 The Walt Disney Co. ..................................................... 500,000 10,950,000 -------------- 24,551,500 -------------- PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 8.6% Abbott Laboratories ..................................................... 375,000 15,693,750 (a) Celgene Corp. ........................................................... 575,000 24,564,000 (a) Covance Inc. ............................................................ 250,000 9,820,000 (a) Gilead Sciences Inc. .................................................... 1,025,000 46,945,000 Johnson & Johnson ....................................................... 500,000 26,180,000 Schering-Plough Corp. ................................................... 1,500,000 34,530,000 (a) Waters Corp. ............................................................ 450,000 19,876,500 -------------- 177,609,250 -------------- RETAILING 1.8% (a) Amazon.com Inc. ......................................................... 275,000 22,143,000 PetSmart Inc. ........................................................... 700,000 16,016,000 -------------- 38,159,000 -------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 3.0% Altera Corp. ............................................................ 850,000 13,863,500 (a) Lam Research Corp. ...................................................... 600,000 16,728,000 Microchip Technology Inc. ............................................... 1,350,000 31,050,000 -------------- 61,641,500 -------------- SOFTWARE & SERVICES 19.9% Accenture Ltd. , A ...................................................... 800,000 23,544,000 (a) Activision Blizzard Inc. ................................................ 2,500,000 26,925,000 (a) Adobe Systems Inc. ...................................................... 950,000 25,982,500 (a) Alliance Data Systems Corp. ............................................. 300,000 12,561,000 (a) Autodesk Inc. ........................................................... 600,000 11,964,000 (a) Concur Technologies Inc. ................................................ 500,000 13,535,000 FactSet Research Systems Inc. ........................................... 600,000 32,154,000 (a) Google Inc., A .......................................................... 133,000 52,664,010 MasterCard Inc., A ...................................................... 260,000 47,697,000 (a) Nuance Communications Inc. .............................................. 1,600,000 21,360,000
Annual Report | 61 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE ----------------------------- ---------- -------------- COMMON STOCKS (CONTINUED) SOFTWARE & SERVICES (CONTINUED) Oracle Corp. ............................................................ 2,350,000 $ 45,449,000 Paychex Inc. ............................................................ 1,050,000 28,360,500 Quality Systems Inc. .................................................... 250,000 13,405,000 (a) Salesforce.com Inc. ..................................................... 300,000 12,843,000 Visa Inc., A ............................................................ 650,000 42,224,000 -------------- 410,668,010 -------------- TECHNOLOGY HARDWARE & EQUIPMENT 14.9% (a) Apple Inc. .............................................................. 467,600 58,838,108 (a) Cisco Systems Inc. ...................................................... 3,000,000 57,960,000 (a) FLIR Systems Inc. ....................................................... 1,933,500 42,885,030 Hewlett-Packard Co. ..................................................... 1,000,000 35,980,000 QUALCOMM Inc. ........................................................... 1,550,000 65,596,000 (a) Research In Motion Ltd. (Canada) ........................................ 350,000 24,325,000 (a) Trimble Navigation Ltd. ................................................. 1,050,000 22,512,000 -------------- 308,096,138 -------------- TELECOMMUNICATION SERVICES 2.9% (a) American Tower Corp., A ................................................. 1,500,000 47,640,000 (a, b) Anda Networks ........................................................... 36,443 28,061 (a) NII Holdings Inc. ....................................................... 774,800 12,520,768 -------------- 60,188,829 -------------- TRANSPORTATION 3.0% C.H. Robinson Worldwide Inc. ............................................ 525,000 27,909,000 Expeditors International of Washington Inc. ............................. 1,000,000 34,710,000 -------------- 62,619,000 -------------- UTILITIES 0.4% Allegheny Energy Inc. ................................................... 300,000 7,776,000 -------------- TOTAL COMMON STOCKS (COST $2,005,670,866) ............................... 1,996,406,154 -------------- PREFERRED STOCKS (COST $9,999,998) 0.6% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.6% (a, b) Fibrogen Inc., pfd., E .................................................. 2,227,171 11,224,942 -------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $2,015,670,864) ... 2,007,631,096 -------------- SHORT TERM INVESTMENTS (COST $56,101,240) 2.7% MONEY MARKET FUNDS 2.7% (c) Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.04% .... 56,101,240 56,101,240 -------------- TOTAL INVESTMENTS (COST $2,071,772,104) 100.0% .......................... 2,063,732,336 OTHER ASSETS, LESS LIABILITIES 0.0%(d) .................................. 823,878 -------------- NET ASSETS 100.0% ....................................................... $2,064,556,214 ==============
See Abbreviations on page 121. (a) Non-income producing. (b) See Note 8 regarding restricted and illiquid securities. (c) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. (d) Rounds to less than 0.1% of net assets. The accompanying notes are an integral part of these financial statements. 62 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN FOCUSED CORE EQUITY FUND
YEAR ENDED PERIOD ENDED APRIL 30, APRIL 30, CLASS A 2009 2008(a) - ------- ---------- ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................... $ 8.69 $ 10.00 ------- ------- Income from investment operations(b): Net investment income(c) .................................. 0.06 0.03 Net realized and unrealized gains (losses) ................ (2.36) (1.34) ------- ------- Total from investment operations ............................. (2.30) (1.31) ------- ------- Less distributions from: Net investment income ..................................... (0.10) -- Net realized gains ........................................ (0.02) -- ------- ------- Total distributions .......................................... (0.12) -- ------- ------- Net asset value, end of year ................................. $ 6.27 $ 8.69 ======= ======= Total return(d) .............................................. (26.07)% (13.10)% RATIOS TO AVERAGE NET ASSETS(e) Expenses before waiver and payments by affiliates ............ 3.99% 5.48% Expenses net of waiver and payments by affiliates ............ 1.17% 1.22% Net investment income ........................................ 0.91% 0.91% SUPPLEMENTAL DATA Net assets, end of year (000's) .............................. $ 4,889 $ 4,652 Portfolio turnover rate ...................................... 83.29% 35.64%
(a) For the period December 13, 2007 (commencement of operations) to April 30, 2008. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (e) Ratios are annualized for periods less than one year. The accompanying notes are an integral part of these financial statements. Annual Report | 63 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FOCUSED CORE EQUITY FUND
YEAR ENDED PERIOD ENDED APRIL 30, APRIL 30, CLASS C 2009 2008(a) - ------- ---------- ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................... $ 8.67 $ 10.00 ------- ------- Income from investment operations(b): Net investment income(c) .................................. --(d) 0.01 Net realized and unrealized gains (losses) ................ (2.33) (1.34) ------- ------- Total from investment operations ............................. (2.33) (1.33) ------- ------- Less distributions from: Net investment income ..................................... (0.08) -- Net realized gains ........................................ (0.02) -- ------- ------- Total distributions .......................................... (0.10) -- ------- ------- Net asset value, end of year ................................. $ 6.24 $ 8.67 ======= ======= Total return(e) .............................................. (26.56)% (13.30)% RATIOS TO AVERAGE NET ASSETS(f) Expenses before waiver and payments by affiliates ............ 4.67% 6.11% Expenses net of waiver and payments by affiliates ............ 1.85% 1.85% Net investment income ........................................ 0.23% 0.28% SUPPLEMENTAL DATA Net assets, end of year (000's) .............................. $ 106 $ 41 Portfolio turnover rate ...................................... 83.29% 35.64%
(a) For the period December 13, 2007 (commencement of operations) to April 30, 2008. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. The accompanying notes are an integral part of these financial statements. 64 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FOCUSED CORE EQUITY FUND
YEAR ENDED PERIOD ENDED APRIL 30, APRIL 30, CLASS R 2009 2008(a) - ------- ---------- ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................... $ 8.68 $10.00 ------- ------ Income from investment operations(b): Net investment income(c) .................................. 0.05 0.03 Net realized and unrealized gains (losses) ................ (2.36) (1.35) ------- ------- Total from investment operations ............................. (2.31) (1.32) ------- ------- Less distributions from: Net investment income ..................................... (0.08) -- Net realized gains ........................................ (0.02) -- ------- ------- Total distributions .......................................... (0.10) -- ------- ------- Net asset value, end of year ................................. $ 6.27 $ 8.68 ======= ======= Total return(d) .............................................. (26.30)% (13.20)% RATIOS TO AVERAGE NET ASSETS(e) Expenses before waiver and payments by affiliates ............ 4.21% 5.65% Expenses net of waiver and payments by affiliates ............ 1.39% 1.39% Net investment income ........................................ 0.69% 0.74% SUPPLEMENTAL DATA Net assets, end of year (000's) .............................. $ 6 $ 9 Portfolio turnover rate ...................................... 83.29% 35.64%
(a) For the period December 13, 2007 (commencement of operations) to April 30, 2008. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (e) Ratios are annualized for periods less than one year. The accompanying notes are an integral part of these financial statements. Annual Report | 65 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FOCUSED CORE EQUITY FUND
YEAR ENDED PERIOD ENDED APRIL 30, APRIL 30, ADVISOR CLASS 2009 2008(a) - ------------- ---------- ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................. $ 8.70 $ 10.00 ------- ------- Income from investment operations(b): Net investment income(c) ......................... 0.08 0.04 Net realized and unrealized gains (losses) ....... (2.37) (1.34) ------- ------- Total from investment operations .................... (2.29) (1.30) ------- ------- Less distributions from: Net investment income ............................ (0.11) -- Net realized gains ............................... (0.02) -- ------- ------- Total distributions ................................. (0.13) -- ------- ------- Net asset value, end of year ........................ $ 6.28 $ 8.70 ======= ======= Total return(d) ..................................... (25.93)% (13.00)% RATIOS TO AVERAGE NET ASSETS(e) Expenses before waiver and payments by affiliates ... 3.71% 5.15% Expenses net of waiver and payments by affiliates ... 0.89% 0.89% Net investment income ............................... 1.19% 1.24% SUPPLEMENTAL DATA Net assets, end of year (000's) ..................... $ 167 $ 171 Portfolio turnover rate ............................. 83.29% 35.64%
(a) For the period December 13, 2007 (commencement of operations) to April 30, 2008. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Total return is not annualized for periods less than one year. (e) Ratios are annualized for periods less than one year. The accompanying notes are an integral part of these financial statements. 66 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009
FRANKLIN FOCUSED CORE EQUITY FUND COUNTRY SHARES VALUE --------------------------------- ------------- ------- ---------- COMMON STOCKS 90.9% CONSUMER DISCRETIONARY 8.3% CBS Corp., B ............................................................... United States 4,920 $ 34,638 Harley-Davidson Inc. ....................................................... United States 5,840 129,414 Harman International Industries Inc. ....................................... United States 3,800 69,122 (a) R.H. Donnelley Corp. ....................................................... United States 13,440 1,882 Target Corp. ............................................................... United States 4,700 193,922 ---------- 428,978 ---------- CONSUMER STAPLES 10.1% Corn Products International Inc. ........................................... United States 8,310 198,609 CVS Caremark Corp. ......................................................... United States 7,430 236,125 (a) Hansen Natural Corp. ....................................................... United States 2,100 85,596 ---------- 520,330 ---------- ENERGY 9.9% Marathon Oil Corp. ......................................................... United States 7,150 212,355 Petroplus Holdings AG ...................................................... Switzerland 14,723 254,089 (a) SEACOR Holdings Inc. ....................................................... United States 700 46,004 ---------- 512,448 ---------- FINANCIALS 10.8% (a) Berkshire Hathaway Inc., B ................................................. United States 85 260,525 CapitalSource Inc. ......................................................... United States 8,200 25,338 Discover Financial Services ................................................ United States 13,130 106,747 iStar Financial Inc. ....................................................... United States 5,400 18,198 Legg Mason Inc. ............................................................ United States 3,280 65,830 U.S. Bancorp ............................................................... United States 4,620 84,176 ---------- 560,814 ---------- HEALTH CARE 15.3% Merck & Co. Inc. ........................................................... United States 8,220 199,253 Pharmaceutical Product Development Inc. .................................... United States 5,230 102,560 Roche Holding AG ........................................................... Switzerland 1,930 244,315 Schering-Plough Corp. ...................................................... United States 10,520 242,170 ---------- 788,298 ---------- INDUSTRIALS 15.6% 3M Co. ..................................................................... United States 2,760 158,976 Precision Castparts Corp. .................................................. United States 2,920 218,591 Republic Services Inc. ..................................................... United States 8,640 181,440 Rockwell Collins Inc. ...................................................... United States 3,830 146,881 (a) Ryanair Holdings PLC, ADR .................................................. Ireland 3,640 99,554 ---------- 805,442 ---------- INFORMATION TECHNOLOGY 14.1% (a) Apple Inc. ................................................................. United States 420 52,849 (a) Autodesk Inc. .............................................................. United States 9,450 188,433 Corning Inc. ............................................................... United States 4,370 63,889 MasterCard Inc., A ......................................................... United States 1,210 221,974
Annual Report | 67 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND COUNTRY SHARES VALUE --------------------------------- ------------- ------- ---------- COMMON STOCKS (CONTINUED) INFORMATION TECHNOLOGY (CONTINUED) Maxim Integrated Products Inc. ............................................. United States 11,990 $ 162,465 (a) VeriFone Holdings Inc. ..................................................... United States 5,170 38,827 ---------- 728,437 ---------- MATERIALS 3.8% Celanese Corp., A .......................................................... United States 9,510 198,188 ---------- TELECOMMUNICATION SERVICES 3.0% (a) NII Holdings Inc. .......................................................... United States 9,490 153,358 ---------- TOTAL COMMON STOCKS (COST $6,086,206) ...................................... 4,696,293 ---------- CONVERTIBLE PREFERRED STOCKS (COST $84,854) 2.3% HEALTH CARE 2.3% Mylan Inc., 6.50%, cvt. pfd. ............................................... United States 140 119,280 ---------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $6,171,060) ........... 4,815,573 ---------- SHORT TERM INVESTMENTS (COST $148,644) 2.9% MONEY MARKET FUNDS 2.9% (b) Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.04% ....... United States 148,644 148,644 ---------- TOTAL INVESTMENTS (COST $6,319,704) 96.1% .................................. 4,964,217 OTHER ASSETS, LESS LIABILITIES 3.9% ........................................ 203,458 ---------- NET ASSETS 100.0% .......................................................... $5,167,675 ==========
See Abbreviations on page 121. (a) Non-income producing. (b) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. 68 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30, -------------------------------------------------- CLASS A 2009 2008 2007 2006 2005 - ------- ------- -------- -------- -------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............. $ 20.06 $ 18.54 $ 18.30 $ 13.33 $ 12.57 ------- -------- -------- -------- ------- Income from investment operations(a): Net investment income (loss)(b) .............. (0.14) (0.15) (0.12) (0.15) (0.14) Net realized and unrealized gains (losses) ... (6.04) 1.67 0.36 5.12 0.90 ------- -------- -------- -------- ------- Total from investment operations ................ (6.18) 1.52 0.24 4.97 0.76 ------- -------- -------- -------- ------- Redemption fees(c, d) ........................... -- -- -- -- -- ------- -------- -------- -------- ------- Net asset value, end of year .................... $ 13.88 $ 20.06 $ 18.54 $ 18.30 $ 13.33 ======= ======== ======== ======== ======= Total return(e) ................................. (30.81)% 8.20% 1.31% 37.28% 6.05% RATIOS TO AVERAGE NET ASSETS Expenses(f) ..................................... 1.32% 1.27% 1.38% 1.39% 1.51% Net investment income (loss) .................... (0.89)% (0.77)% (0.70)% (0.92)% (1.05)% SUPPLEMENTAL DATA Net assets, end of year (000's) ................. $99,939 $137,313 $105,407 $113,713 $80,611 Portfolio turnover rate ......................... 90.24% 133.58% 176.15% 183.31% 157.48%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 69 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30, ----------------------------------------------- CLASS B 2009 2008 2007 2006 2005 - ------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............. $ 18.95 $ 17.64 $ 17.53 $ 12.87 $ 12.22 ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) .............. (0.24) (0.28) (0.23) (0.26) (0.23) Net realized and unrealized gains (losses) ... (5.69) 1.59 0.34 4.92 0.88 ------- ------- ------- ------- ------- Total from investment operations ................ (5.93) 1.31 0.11 4.66 0.65 ------- ------- ------- ------- ------- Redemption fees(c, d) ........................... -- -- -- -- -- ------- ------- ------- ------- ------- Net asset value, end of year .................... $ 13.02 $ 18.95 $ 17.64 $ 17.53 $ 12.87 ======= ======= ======= ======= ======= Total return(e) ................................. (31.29)% 7.43% 0.63% 36.21% 5.32% RATIOS TO AVERAGE NET ASSETS Expenses(f) ..................................... 2.02% 1.99% 2.08% 2.13% 2.21% Net investment income (loss) .................... (1.59)% (1.49)% (1.40)% (1.66)% (1.75)% SUPPLEMENTAL DATA Net assets, end of year (000's) ................. $ 5,124 $11,528 $15,638 $19,508 $17,017 Portfolio turnover rate ......................... 90.24% 133.58% 176.15% 183.31% 157.48%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 70 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30, ----------------------------------------------- CLASS C 2009 2008 2007 2006 2005 - ------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............. $ 18.91 $ 17.61 $ 17.49 $ 12.84 $ 12.19 ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) .............. (0.23) (0.28) (0.23) (0.26) (0.23) Net realized and unrealized gains (losses) ... (5.69) 1.58 0.35 4.91 0.88 ------- ------- ------- ------- ------- Total from investment operations ................ (5.92) 1.30 0.12 4.65 0.65 ------- ------- ------- ------- ------- Redemption fees(c, d) ........................... -- -- -- -- -- ------- ------- ------- ------- ------- Net asset value, end of year .................... $ 12.99 $ 18.91 $ 17.61 $ 17.49 $ 12.84 ======= ======= ======= ======= ======= Total return(e) ................................. (31.31)% 7.38% 0.69% 36.21% 5.33% RATIOS TO AVERAGE NET ASSETS Expenses(f) ..................................... 2.03% 1.99% 2.09% 2.14% 2.22% Net investment income (loss) .................... (1.60)% (1.49)% (1.41)% (1.67)% (1.76)% SUPPLEMENTAL DATA Net assets, end of year (000's) ................. $27,519 $40,253 $31,518 $31,167 $24,450 Portfolio turnover rate ......................... 90.24% 133.58% 176.15% 183.31% 157.48%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 71 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30, ------------------------------------------------ CLASS R 2009 2008 2007 2006 2005 - ------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................ $ 19.80 $ 18.33 $ 18.12 $ 13.24 $ 12.51 ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) ........................ (0.17) (0.20) (0.16) (0.19) (0.17) Net realized and unrealized gains (losses) ............. (5.96) 1.67 0.37 5.07 0.90 ------- ------- ------- ------- ------- Total from investment operations .......................... (6.13) 1.47 0.21 4.88 0.73 ------- ------- ------- ------- ------- Redemption fees(c, d) ..................................... -- -- -- -- -- ------- ------- ------- ------- ------- Net asset value, end of year .............................. $ 13.67 $ 19.80 $ 18.33 $ 18.12 $ 13.24 ======= ======= ======= ======= ======= Total return(e) ........................................... (30.96)% 8.02% 1.16% 36.86% 5.84% RATIOS TO AVERAGE NET ASSETS Expenses(f) ............................................... 1.54% 1.49% 1.59% 1.64% 1.72% Net investment income (loss) .............................. (1.11)% (0.99)% (0.91)% (1.17)% (1.26)% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................... $ 7,320 $ 7,863 $ 7,413 $ 5,171 $ 3,041 Portfolio turnover rate ................................... 90.24% 133.58% 176.15% 183.31% 157.48%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 72 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30, ----------------------------------------------------- ADVISOR CLASS 2009 2008 2007 2006 2005 - ------------- -------- -------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................ $ 20.60 $ 18.99 $ 18.68 $ 13.58 $ 12.77 -------- -------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) ........................ (0.10) (0.10) (0.07) (0.11) (0.10) Net realized and unrealized gains (losses) ............. (6.20) 1.71 0.38 5.21 0.91 -------- -------- ------- ------- ------- Total from investment operations .......................... (6.30) 1.61 0.31 5.10 0.81 -------- -------- ------- ------- ------- Redemption fees(c, d) ..................................... -- -- -- -- -- -------- -------- ------- ------- ------- Net asset value, end of year .............................. $ 14.30 $ 20.60 $ 18.99 $ 18.68 $ 13.58 ======== ======== ======= ======= ======= Total return .............................................. (30.58)% 8.48% 1.66% 37.56% 6.34% RATIOS TO AVERAGE NET ASSETS Expenses(e) ............................................... 1.04% 0.99% 1.09% 1.14% 1.22% Net investment income (loss) .............................. (0.61)% (0.49)% (0.41)% (0.67)% (0.76)% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................... $141,010 $101,885 $85,486 $36,744 $22,731 Portfolio turnover rate ................................... 90.24% 133.58% 176.15% 183.31% 157.48%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 73 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY SHARES/WARRANTS VALUE ---------------------------------- ------------- --------------- ------------ COMMON STOCKS AND OTHER EQUITY INTERESTS 95.7% CONSUMER DISCRETIONARY 7.8% Abercrombie & Fitch Co., A .............................................. United States 52,400 $ 1,417,944 Guess? Inc. ............................................................. United States 164,200 4,275,768 (a) ITT Educational Services Inc. ........................................... United States 39,300 3,960,261 NIKE Inc., B ............................................................ United States 39,600 2,077,812 Strayer Education Inc. .................................................. United States 23,400 4,432,194 (a) Urban Outfitters Inc. ................................................... United States 114,200 2,225,758 (a) WMS Industries Inc. ..................................................... United States 109,100 3,503,201 ------------ 21,892,938 ------------ CONSUMER STAPLES 1.7% Bunge Ltd. .............................................................. United States 27,100 1,301,071 (a) Hansen Natural Corp. .................................................... United States 70,800 2,885,808 (a) Mead Johnson Nutrition Co., A ........................................... United States 17,800 502,850 ------------ 4,689,729 ------------ ENERGY 11.6% (a) Alpha Natural Resources Inc. ............................................ United States 112,600 2,306,048 (a) Continental Resources Inc. .............................................. United States 200,700 4,686,345 (a) FMC Technologies Inc. ................................................... United States 142,280 4,870,244 (a) McMoRan Exploration Co. ................................................. United States 860,409 4,723,646 (a) Petrohawk Energy Corp. .................................................. United States 164,300 3,877,480 Schlumberger Ltd. ....................................................... United States 86,880 4,256,251 (a) Southwestern Energy Co. ................................................. United States 103,600 3,715,096 (a) Weatherford International Ltd. .......................................... United States 171,900 2,858,697 XTO Energy Inc. ......................................................... United States 36,700 1,272,022 ------------ 32,565,829 ------------ FINANCIALS 3.7% BlackRock Inc. .......................................................... United States 38,780 5,682,046 The Charles Schwab Corp. ................................................ United States 151,200 2,794,176 (a) MSCI Inc., A ............................................................ United States 94,000 1,973,060 ------------ 10,449,282 ------------ HEALTH CARE 19.2% Allergan Inc. ........................................................... United States 62,600 2,920,916 (a) Athenahealth Inc. ....................................................... United States 21,400 680,520 (a) BioMarin Pharmaceutical Inc. ............................................ United States 315,800 4,061,188 (a) Celgene Corp. ........................................................... United States 172,800 7,382,016 (a) Covance Inc. ............................................................ United States 57,260 2,249,173 (a) Gilead Sciences Inc. .................................................... United States 124,960 5,723,168 (a) Illumina Inc. ........................................................... United States 164,400 6,140,340 (a) Intuitive Surgical Inc. ................................................. United States 19,700 2,831,481 (a) Life Technologies Corp. ................................................. United States 165,200 6,161,960 (a) Myriad Genetics Inc. .................................................... United States 185,980 7,214,164 Perrigo Co. ............................................................. United States 186,466 4,833,199 (a) Psychiatric Solutions Inc. .............................................. United States 87,600 1,698,564 Roche Holding AG, ADR ................................................... Switzerland 62,300 1,970,549 ------------ 53,867,238 ------------
74 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY SHARES/WARRANTS VALUE ---------------------------------- ------------- --------------- ------------ COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) INDUSTRIALS 10.9% ABB Ltd., ADR ........................................................... Switzerland 295,900 $ 4,207,698 AMETEK Inc. ............................................................. United States 131,000 4,219,510 (a) BE Aerospace Inc. ....................................................... United States 91,800 990,522 C.H. Robinson Worldwide Inc. ............................................ United States 126,030 6,699,754 Expeditors International of Washington Inc. ............................. United States 60,100 2,086,071 (a) First Solar Inc. ........................................................ United States 12,100 2,266,209 Flowserve Corp. ......................................................... United States 21,000 1,425,900 (a) Huron Consulting Group Inc. ............................................. United States 53,100 2,546,145 (a) Jacobs Engineering Group Inc. ........................................... United States 26,800 1,019,472 Precision Castparts Corp. ............................................... United States 54,730 4,097,088 (a) Ryanair Holdings PLC, ADR ............................................... Ireland 44,500 1,217,075 ------------ 30,775,444 ------------ INFORMATION TECHNOLOGY 34.8% Accenture Ltd., A ....................................................... United States 38,400 1,130,112 (a) Activision Blizzard Inc. ................................................ United States 393,500 4,237,995 (a) Adobe Systems Inc. ...................................................... United States 58,500 1,599,975 (a) Alliance Data Systems Corp. ............................................. United States 36,900 1,545,003 (a) ANSYS Inc. .............................................................. United States 80,300 2,217,886 (a) Apple Inc. .............................................................. United States 67,000 8,430,610 (a) Cavium Networks Inc. .................................................... United States 110,200 1,386,316 (a) Cisco Systems Inc. ...................................................... United States 159,100 3,073,812 (a) Concur Technologies Inc. ................................................ United States 204,850 5,545,289 (a) Data Domain Inc. ........................................................ United States 114,700 1,901,726 (a, b) Dilithium Networks Inc., wts., 12/31/09 ................................. United States 12,447 -- (a) Dolby Laboratories Inc., A .............................................. United States 50,300 2,018,539 (a) Equinix Inc. ............................................................ United States 10,200 716,346 (a) FLIR Systems Inc. ....................................................... United States 369,200 8,188,856 (a) FormFactor Inc. ......................................................... United States 123,300 2,149,119 (a) Google Inc., A .......................................................... United States 12,390 4,906,068 Harris Corp. ............................................................ United States 94,030 2,875,437 (a) Hittite Microwave Corp. ................................................. United States 59,291 2,203,254 (a) Juniper Networks Inc. ................................................... United States 134,700 2,916,255 MasterCard Inc., A ...................................................... United States 42,400 7,778,280 (a) Netlogic Microsystems Inc. .............................................. United States 67,800 2,209,602 QUALCOMM Inc. ........................................................... United States 184,780 7,819,890 (a) Research In Motion Ltd. ................................................. Canada 57,900 4,024,050 (a) Riverbed Technology Inc. ................................................ United States 105,785 1,937,981 (a) SAIC Inc. ............................................................... United States 126,900 2,296,890 (a) Salesforce.com Inc. ..................................................... United States 54,100 2,316,021 Tandberg ASA ............................................................ Norway 169,800 2,419,621 (a) Trimble Navigation Ltd. ................................................. United States 177,740 3,810,746 Visa Inc., A ............................................................ United States 93,400 6,067,264 ------------ 97,722,943 ------------ MATERIALS 2.4% Ecolab Inc. ............................................................. United States 75,800 2,922,090 Monsanto Co. ............................................................ United States 45,900 3,896,451 ------------ 6,818,541 ------------
Annual Report | 75 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY SHARES/WARRANTS VALUE ---------------------------------- ------------- --------------- ------------ COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) TELECOMMUNICATION SERVICES 3.6% (a) NII Holdings Inc. ....................................................... United States 268,380 $ 4,337,021 (a) SBA Communications Corp. ................................................ United States 229,060 5,772,312 ------------ 10,109,333 ------------ TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS (COST $234,065,268) .................................................. 268,891,277 ------------ PREFERRED STOCKS (COST $873,300) 0.2% INFORMATION TECHNOLOGY 0.2% (a, b) Dilithium Networks Inc., depository receipt, D, pfd., 144A, PIPES ....... United States 374,806 487,248 ------------
PRINCIPAL AMOUNT --------------- NOTES (COST $14,501) 0.0%(c) INFORMATION TECHNOLOGY 0.0%(c) (a, b) Dilithium Networks Inc., 11.00%, 12/31/09 ............................... United States $ 14,501 14,501 ------------ TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $234,953,069) .................................................. 269,393,026 ------------
SHARES --------------- SHORT TERM INVESTMENTS (COST $15,835,304) 5.6% MONEY MARKET FUNDS 5.6% (d) Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.04% .... United States 15,835,304 15,835,304 ------------ TOTAL INVESTMENTS (COST $250,788,373) 101.5% ............................ 285,228,330 OTHER ASSETS, LESS LIABILITIES (1.5)% ................................... (4,316,277) ------------ NET ASSETS 100.0% ....................................................... $280,912,053 ============
See Abbreviations on page 121. (a) Non-income producing. (b) See Note 8 regarding restricted and illiquid securities. (c) Rounds to less than 0.1% of net assets. (d) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. 76 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30, -------------------------------------------------------- CLASS A 2009 2008 2007 2006 2005 - ------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................ $ 9.09 $ 13.05 $ 13.90 $ 10.63 $ 10.55 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ................ (0.08) (0.09) (0.10) (0.08) (0.09) Net realized and unrealized gains (losses) ..... (2.53) (1.59) 0.58 3.35 0.17 -------- -------- -------- -------- -------- Total from investment operations .................. (2.61) (1.68) 0.48 3.27 0.08 -------- -------- -------- -------- -------- Less distributions from net realized gains ........ (0.07) (2.28) (1.33) -- -- -------- -------- -------- -------- -------- Redemption fees(c, d) ............................. -- -- -- -- -- -------- -------- -------- -------- -------- Net asset value, end of year ...................... $ 6.41 $ 9.09 $ 13.05 $ 13.90 $ 10.63 ======== ======== ======== ======== ======== Total return(e) ................................... (28.54)% (14.73)% 4.02% 30.76% 0.76% RATIOS TO AVERAGE NET ASSETS Expenses(f) ....................................... 1.34% 1.17% 1.20% 1.16% 1.15% Net investment income (loss) ...................... (1.07)% (0.72)% (0.77)% (0.61)% (0.84)% SUPPLEMENTAL DATA Net assets, end of year (000's) ................... $123,037 $274,142 $549,733 $693,084 $765,216 Portfolio turnover rate ........................... 43.04% 48.52% 51.49% 44.34% 46.35%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 77 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30, ----------------------------------------------------- CLASS B 2009 2008 2007 2006 2005 - ------- ------- ------- ------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................ $ 8.43 $ 12.35 $ 13.32 $ 10.26 $ 10.27 ------- ------- ------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ........................ (0.12) (0.16) (0.18) (0.16) (0.17) Net realized and unrealized gains (losses) ............. (2.35) (1.48) 0.54 3.22 0.16 ------- ------- ------- -------- -------- Total from investment operations .......................... (2.47) (1.64) 0.36 3.06 (0.01) ------- ------- ------- -------- -------- Less distributions from net realized gains ................ (0.07) (2.28) (1.33) -- -- ------- ------- ------- -------- -------- Redemption fees(c, d) ..................................... -- -- -- -- -- ------- ------- ------- -------- -------- Net asset value, end of year .............................. $ 5.89 $ 8.43 $ 12.35 $ 13.32 $ 10.26 ======= ======= ======= ======== ======== Total return(e) ........................................... (29.11)% (15.27)% 3.27% 29.82% (0.10)% RATIOS TO AVERAGE NET ASSETS Expenses(f) ............................................... 2.04% 1.92% 1.96% 1.91% 1.91% Net investment income (loss) .............................. (1.77)% (1.47)% (1.53)% (1.36)% (1.60)% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................... $15,159 $52,465 $85,684 $111,458 $105,070 Portfolio turnover rate ................................... 43.04% 48.52% 51.49% 44.34% 46.35%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 78 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30, ------------------------------------------------------ CLASS C 2009 2008 2007 2006 2005 - ------- ------- ------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................ $ 8.43 $ 12.36 $ 13.33 $ 10.27 $ 10.27 ------- ------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ........................ (0.12) (0.16) (0.18) (0.16) (0.17) Net realized and unrealized gains (losses) ............. (2.35) (1.49) 0.54 3.22 0.17 ------- ------- -------- -------- -------- Total from investment operations .......................... (2.47) (1.65) 0.36 3.06 -- ------- ------- -------- -------- -------- Less distributions from net realized gains ................ (0.07) (2.28) (1.33) -- -- ------- ------- -------- -------- -------- Redemption fees(c, d) ..................................... -- -- -- -- -- ------- ------- -------- -------- -------- Net asset value, end of year .............................. $ 5.89 $8.43 $ 12.36 $ 13.33 $ 10.27 ======= ======= ======== ======== ======== Total return(e) ........................................... (29.11)% (15.35)% 3.27% 29.80% --% RATIOS TO AVERAGE NET ASSETS Expenses(f) ............................................... 2.04% 1.92% 1.95% 1.92% 1.91% Net investment income (loss) .............................. (1.77)% (1.47)% (1.52)% (1.37)% (1.60)% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................... $40,180 $75,846 $120,900 $170,159 $164,117 Portfolio turnover rate ................................... 43.04% 48.52% 51.49% 44.34% 46.35%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 79 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30, ------------------------------------------------ CLASS R 2009 2008 2007 2006 2005 - ------- ------ ------- ------ ------ ------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................ $ 8.91 $ 12.86 $13.75 $10.54 $10.49 ------- ------- ------ ------ ------ Income from investment operations(a): Net investment income (loss)(b) ........................ (0.09) (0.11) (0.13) (0.11) (0.12) Net realized and unrealized gains (losses) ............. (2.49) (1.56) 0.57 3.32 0.17 ------- ------- ------ ------ ------ Total from investment operations .......................... (2.58) (1.67) 0.44 3.21 0.05 ------- ------ ------ ------ ------ Less distributions from net realized gains ................ (0.07) (2.28) (1.33) -- -- ------- ------- ------ ------ ------ Redemption fees(c, d) ..................................... -- -- -- -- -- ------- ------- ------ ------ ------ Net asset value, end of year .............................. $ 6.26 $ 8.91 $12.86 $13.75 $10.54 ======= ======= ====== ====== ====== Total return(e) ........................................... (28.78)% (14.87)% 3.77% 30.46% 0.48% RATIOS TO AVERAGE NET ASSETS Expenses(f) ............................................... 1.54% 1.42% 1.46% 1.42% 1.41% Net investment income (loss) .............................. (1.27)% (0.97)% (1.03)% (0.87)% (1.10)% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................... $ 1,912 $ 3,166 $5,759 $6,328 $4,392 Portfolio turnover rate ................................... 43.04% 48.52% 51.49% 44.34% 46.35%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 80 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30, ------------------------------------------------------- ADVISOR CLASS 2009 2008 2007 2006 2005 - ------------- ------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................ $ 9.37 $ 13.34 $ 14.15 $ 10.79 $ 10.69 ------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ........................ (0.06) (0.05) (0.07) (0.05) (0.07) Net realized and unrealized gains (losses) ............. (2.61) (1.64) 0.59 3.41 0.17 ------- -------- -------- -------- -------- Total from investment operations .......................... (2.67) (1.69) 0.52 3.36 0.10 ------- -------- -------- -------- -------- Less distributions from net realized gains ................ (0.07) (2.28) (1.33) -- -- ------- -------- -------- -------- -------- Redemption fees(c, d) ..................................... -- -- -- -- -- ------- -------- -------- -------- -------- Net asset value, end of year .............................. $ 6.63 $9.37 $ 13.34 $ 14.15 $ 10.79 ======= ===== ======== ======== ======== Total return .............................................. (28.32)% (14.46)% 4.24% 31.14% 0.94% RATIOS TO AVERAGE NET ASSETS Expenses(e) ............................................... 1.04% 0.92% 0.96% 0.92% 0.91% Net investment income (loss) .............................. (0.77)% (0.47)% (0.53)% (0.37)% (0.60)% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................... $57,957 $220,857 $325,425 $326,475 $235,101 Portfolio turnover rate ................................... 43.04% 48.52% 51.49% 44.34% 46.35%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 81 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE ------------------------------ ---------- ------------ COMMON STOCKS 97.9% CONSUMER DISCRETIONARY 12.7% (a) Capella Education Co. ......................................................... 56,200 $ 2,887,556 (a) Chipotle Mexican Grill Inc., B ................................................ 19,800 1,297,098 (a) Drew Industries Inc. .......................................................... 221,200 3,158,736 (a) FGX International Holdings Ltd. (Virgin Islands (British)) .................... 391,924 4,514,964 (a) Gaiam Inc., A ................................................................. 315,000 1,833,300 Guess? Inc. ................................................................... 40,100 1,044,204 (a) K12 Inc. ...................................................................... 171,100 3,009,649 (a) Lions Gate Entertainment Corp. ................................................ 601,900 2,955,329 (a) Panera Bread Co. .............................................................. 19,700 1,103,397 (a) Shuffle Master Inc. ........................................................... 976,100 3,718,941 Strayer Education Inc. ........................................................ 6,500 1,231,165 (a) Tenneco Inc. .................................................................. 241,300 738,378 (a) Tractor Supply Co. ............................................................ 29,600 1,195,248 (a) Under Armour Inc., A .......................................................... 17,300 407,242 (a) Universal Technical Institute Inc. ............................................ 78,400 1,116,416 ------------ 30,211,623 ------------ CONSUMER STAPLES 4.5% (a) Hain Celestial Group Inc. ..................................................... 276,600 4,616,454 (a) Hansen Natural Corp. .......................................................... 58,500 2,384,460 (a) TreeHouse Foods Inc. .......................................................... 136,400 3,626,876 ------------ 10,627,790 ------------ ENERGY 7.5% (a) Alpha Natural Resources Inc. .................................................. 95,100 1,947,648 (a) Bill Barrett Corp. ............................................................ 122,800 3,190,344 (a) Dril-Quip Inc. ................................................................ 77,800 2,674,764 (a) Helix Energy Solutions Group Inc. ............................................. 206,400 1,876,176 (a) Mariner Energy Inc. ........................................................... 306,400 3,486,832 (a) McMoRan Exploration Co. ....................................................... 428,600 2,353,014 (a) Superior Energy Services Inc. ................................................. 119,700 2,299,437 ------------ 17,828,215 ------------ FINANCIALS 5.2% (a) Affiliated Managers Group Inc. ................................................ 61,700 3,507,645 FelCor Lodging Trust Inc. ..................................................... 447,000 885,060 iStar Financial Inc. .......................................................... 383,600 1,292,732 (a) MSCI Inc., A .................................................................. 117,300 2,462,127 optionsXpress Holdings Inc. ................................................... 45,900 755,514 Waddell & Reed Financial Inc., A .............................................. 154,700 3,466,827 ------------ 12,369,905 ------------ HEALTH CARE 16.8% (a) American Medical Systems Holdings Inc. ........................................ 326,700 4,041,279 (a) Athenahealth Inc. ............................................................. 89,100 2,833,380 (a) BioMarin Pharmaceutical Inc. .................................................. 183,300 2,357,238 (a) Cadence Pharmaceuticals Inc. .................................................. 297,900 3,014,748 (a) Community Health Systems Inc. ................................................. 172,900 3,949,036
82 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE ------------------------------ ---------- ------------ COMMON STOCKS (CONTINUED) HEALTH CARE (CONTINUED) (a) Dexcom Inc. ................................................................... 489,300 $ 2,192,064 (a) IDEXX Laboratories Inc. ....................................................... 70,300 2,762,790 (a) Impax Laboratories Inc. ....................................................... 190,700 1,008,803 (a) Masimo Corp. .................................................................. 41,700 1,205,130 (a) MWI Veterinary Supply Inc. .................................................... 45,800 1,423,464 (a) Myriad Genetics Inc. .......................................................... 48,600 1,885,194 (a) PAREXEL International Corp. ................................................... 301,000 2,982,910 (a) Penwest Pharmaceuticals Co. ................................................... 354,000 580,560 (a) Phase Forward Inc. ............................................................ 207,500 2,958,950 (a) Psychiatric Solutions Inc. .................................................... 192,500 3,732,575 (a) Sequenom Inc. ................................................................. 196,900 712,778 (a) VCA Antech Inc. ............................................................... 99,200 2,481,984 ------------ 40,122,883 ------------ INDUSTRIALS 10.2% (a) Allegiant Travel Co. .......................................................... 78,400 4,079,936 (a) Astec Industries Inc. ......................................................... 40,300 1,242,046 (a) BE Aerospace Inc. ............................................................. 340,300 3,671,837 (a) Force Protection Inc. ......................................................... 373,700 2,847,594 (a) FTI Consulting Inc. ........................................................... 81,100 4,450,768 (a) Huron Consulting Group Inc. ................................................... 80,200 3,845,590 (a) ICF International Inc. ........................................................ 26,200 720,762 (a) Mobile Mini Inc. .............................................................. 256,400 3,512,680 ------------ 24,371,213 ------------ INFORMATION TECHNOLOGY 38.0% (a) ANSYS Inc. .................................................................... 121,500 3,355,830 (a) Atheros Communications ........................................................ 134,100 2,309,202 (a) Bottomline Technologies Inc. .................................................. 592,504 4,651,157 (a) Coherent Inc. ................................................................. 154,600 2,937,400 (a) Compellent Technologies Inc. .................................................. 161,136 1,799,889 (a) Concur Technologies Inc. ...................................................... 81,000 2,192,670 (a) CyberSource Corp. ............................................................. 131,300 1,918,293 (a) Data Domain Inc. .............................................................. 72,500 1,202,050 (a) DealerTrack Holdings Inc. ..................................................... 202,500 3,073,950 (a) DivX Inc. ..................................................................... 168,800 865,944 (a) EPIQ Systems Inc. ............................................................. 156,100 2,414,867 (a) FARO Technologies Inc. ........................................................ 226,900 3,439,804 (a) FLIR Systems Inc. ............................................................. 164,700 3,653,046 (a) FormFactor Inc. ............................................................... 228,900 3,989,727 Global Payments Inc. .......................................................... 53,700 1,721,622 (a) Ixia .......................................................................... 421,200 2,426,112 (a) Microsemi Corp. ............................................................... 136,900 1,837,198 (a) Microtune Inc. ................................................................ 561,200 1,172,908 (a) Netlogic Microsystems Inc. .................................................... 126,800 4,132,412 (a) Nuance Communications Inc. .................................................... 390,300 5,210,505 (a) Omniture Inc. ................................................................. 147,800 1,820,896
Annual Report | 83 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE ------------------------------ ---------- ------------ COMMON STOCKS (CONTINUED) INFORMATION TECHNOLOGY (CONTINUED) Power Integrations Inc. ....................................................... 109,600 $ 2,334,480 Quality Systems Inc. .......................................................... 27,500 1,474,550 (a) Quest Software Inc. ........................................................... 229,900 3,340,447 (a) Riverbed Technology Inc. ...................................................... 156,300 2,863,416 (a) Sapient Corp. ................................................................. 833,800 4,277,394 (a) Silicon Laboratories Inc. ..................................................... 125,400 4,170,804 (a) SPSS Inc. ..................................................................... 61,400 1,897,260 Tandberg ASA (Norway) ......................................................... 111,200 1,584,581 (a) Trimble Navigation Ltd. ....................................................... 117,300 2,514,912 (a) Varian Semiconductor Equipment Associates Inc. ................................ 161,875 4,142,381 (a) ViaSat Inc. ................................................................... 222,900 5,124,471 (a) Xyratex Ltd. (Bermuda) ........................................................ 194,300 650,905 ------------ 90,501,083 ------------ MATERIALS 1.2% FMC Corp. ..................................................................... 59,900 2,918,927 ------------ TELECOMMUNICATION SERVICES 1.8% (a) SBA Communications Corp. ...................................................... 171,800 4,329,360 ------------ TOTAL COMMON STOCKS (COST $254,766,055) ....................................... 233,280,999 ------------ SHORT TERM INVESTMENTS (COST $7,667,621) 3.2% MONEY MARKET FUNDS 3.2% (b) Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.04% .......... 7,667,621 7,667,621 ------------ TOTAL INVESTMENTS (COST $262,433,676) 101.1% .................................. 240,948,620 OTHER ASSETS, LESS LIABILITIES (1.1)% ......................................... (2,703,649) ------------ NET ASSETS 100.0% ............................................................. $238,244,971 ============
See Abbreviations on page 121. (a) Non-income producing. (b) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. 84 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30, -------------------------------------------------------------------- CLASS A 2009 2008 2007 2006 2005 - ------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................. $ 32.70 $ 41.54 $ 40.42 $ 31.31 $ 29.69 ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income (loss)(b) .................. (0.11) (0.19) (0.13) --(c) (0.08) Net realized and unrealized gains (losses) ....... (10.19) (1.93) 4.09 9.15 1.70 ---------- ---------- ---------- ---------- ---------- Total from investment operations .................... (10.30) (2.12) 3.96 9.15 1.62 ---------- ---------- ---------- ---------- ---------- Less distributions from: Net investment income ............................ -- -- -- (0.04) -- Net realized gains ............................... (0.06) (6.72) (2.84) -- -- ---------- ---------- ---------- ---------- ---------- Total distributions ................................. (0.06) (6.72) (2.84) (0.04) -- ---------- ---------- ---------- ---------- ---------- Redemption fees(c, d) ............................... -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net asset value, end of year ........................ $ 22.34 $ 32.70 $ 41.54 $ 40.42 $ 31.31 ========== ========== ========== ========== ========== Total return(e) ..................................... (31.46)% (6.24)% 10.38% 29.21% 5.46% RATIOS TO AVERAGE NET ASSETS Expenses(f) ......................................... 1.08% 1.02% 0.98% 0.96% 0.97% Net investment income (loss) ........................ (0.45)% (0.50)% (0.33)% --%(g) (0.27)% SUPPLEMENTAL DATA Net assets, end of year (000's) ..................... $2,195,975 $4,331,657 $5,619,694 $6,532,284 $6,636,792 Portfolio turnover rate ............................. 54.86% 55.09% 52.76% 39.84% 42.96%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 85 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30, --------------------------------------------------- CLASS B 2009 2008 2007 2006 2005 - ------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................. $ 31.00 $ 40.00 $ 39.31 $ 30.65 $ 29.28 ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) .................. (0.29) (0.46) (0.40) (0.27) (0.31) Net realized and unrealized gains (losses) ....... (9.64) (1.82) 3.93 8.93 1.68 ------- ------- ------- ------- ------- Total from investment operations .................... (9.93) (2.28) 3.53 8.66 1.37 ------- ------- ------- ------- ------- Less distributions from net realized gains .......... (0.06) (6.72) (2.84) -- -- ------- ------- ------- ------- ------- Redemption fees(c, d) ............................... -- -- -- -- -- ------- ------- ------- ------- ------- Net asset value, end of year ........................ $ 21.01 $ 31.00 $ 40.00 $ 39.31 $ 30.65 ======= ======= ======= ======= ======= Total return(e) ..................................... (31.99)% (6.92)% 9.53% 28.25% 4.68% RATIOS TO AVERAGE NET ASSETS Expenses(f) ......................................... 1.83% 1.77% 1.73% 1.71% 1.72% Net investment income (loss) ........................ (1.20)% (1.25)% (1.08)% (0.75)% (1.02)% SUPPLEMENTAL DATA Net assets, end of year (000's) ..................... $13,399 $25,457 $32,570 $36,911 $31,733 Portfolio turnover rate ............................. 54.86% 55.09% 52.76% 39.84% 42.76%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 86 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30, -------------------------------------------------------- CLASS C 2009 2008 2007 2006 2005 - ------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................. $ 29.92 $ 38.85 $ 38.25 $ 29.82 $ 28.49 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) .................. (0.27) (0.45) (0.39) (0.26) (0.31) Net realized and unrealized gains (losses) ....... (9.30) (1.76) 3.83 8.69 1.64 -------- -------- -------- -------- -------- Total from investment operations .................... (9.57) (2.21) 3.44 8.43 1.33 -------- -------- -------- -------- -------- Less distributions from net realized gains .......... (0.06) (6.72) (2.84) -- -- -------- -------- -------- -------- -------- Redemption fees(c, d) ............................... -- -- -- -- -- -------- -------- -------- -------- -------- Net asset value, end of year ........................ $ 20.29 $ 29.92 $ 38.85 $ 38.25 $ 29.82 ======== ======== ======== ======== ======== Total return(e) ..................................... (31.94)% (6.94)% 9.56% 28.27% 4.67% RATIOS TO AVERAGE NET ASSETS Expenses(f) ......................................... 1.83% 1.77% 1.72% 1.71% 1.72% Net investment income (loss) ........................ (1.20)% (1.25)% (1.07)% (0.75)% (1.02)% SUPPLEMENTAL DATA Net assets, end of year (000's) ..................... $285,597 $523,040 $653,529 $728,710 $654,549 Portfolio turnover rate ............................. 54.86% 55.09% 52.76% 39.84% 42.96%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 87 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30, ------------------------------------------------ CLASS R 2009 2008 2007 2006 2005 - ------- ------- ------- -------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............. $ 32.06 $ 40.96 $ 39.98 $ 31.04 $ 29.50 ------- ------- -------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) .............. (0.17) (0.29) (0.23) (0.08) (0.15) Net realized and unrealized gains (losses) ... (9.98) (1.89) 4.05 9.04 1.69 ------- ------- -------- ------- ------- Total from investment operations ................ (10.15) (2.18) 3.82 8.96 1.54 ------- ------- -------- ------- ------- Less distributions from: Net investment income ........................ -- -- -- (0.02) -- Net realized gains ........................... (0.06) (6.72) (2.84) -- -- ------- ------- -------- ------- ------- Total distributions ............................. (0.06) (6.72) (2.84) (0.02) -- ------- ------- -------- ------- ------- Redemption fees(c, d) ........................... -- -- -- -- -- ------- ------- -------- ------- ------- Net asset value, end of year .................... $ 21.85 $ 32.06 $ 40.96 $ 39.98 $ 31.04 ======= ======= ======== ======= ======= Total return(e) ................................. (31.62)% (6.48)% 10.11% 28.88% 5.22% RATIOS TO AVERAGE NET ASSETS Expenses(f) ..................................... 1.33% 1.27% 1.23% 1.21% 1.22% Net investment income (loss) .................... (0.70)% (0.75)% (0.58)% (0.25)% (0.52)% SUPPLEMENTAL DATA Net assets, end of year (000's) ................. $54,180 $94,334 $118,387 $93,916 $54,139 Portfolio turnover rate ......................... 54.86% 55.09% 52.76% 39.84% 42.96%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 88 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30, ---------------------------------------------------- ADVISOR CLASS 2009 2008 2007 2006 2005 - ------------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............. $ 33.43 $ 42.22 $ 40.93 $ 31.71 $ 29.99 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) .............. (0.05) (0.10) (0.03) 0.10 --(c) Net realized and unrealized gains (losses) ... (10.42) (1.97) 4.16 9.26 1.72 -------- -------- -------- -------- -------- Total from investment operations ................ (10.47) (2.07) 4.13 9.36 1.72 -------- -------- -------- -------- -------- Less distributions from: Net investment income ........................ -- -- -- (0.14) -- Net realized gains ........................... (0.06) (6.72) (2.84) -- -- -------- -------- -------- -------- -------- Total distributions ............................. (0.06) (6.72) (2.84) (0.14) -- -------- -------- -------- -------- -------- Redemption fees(c, d) ........................... -- -- -- -- -- -------- -------- -------- -------- -------- Net asset value, end of year .................... $ 22.90 $ 33.43 $ 42.22 $ 40.93 $ 31.71 ======== ======== ======== ======== ======== Total return .................................... (31.28)% (6.00)% 10.65% 29.55% 5.74% RATIOS TO AVERAGE NET ASSETS Expenses(e) ..................................... 0.83% 0.77% 0.73% 0.71% 0.72% Net investment income (loss) .................... (0.20)% (0.25)% (0.08)% 0.25% (0.02)% SUPPLEMENTAL DATA Net assets, end of year (000's) ................. $498,207 $812,503 $803,365 $794,395 $347,518 Portfolio turnover rate ......................... 54.86% 55.09% 52.76% 39.84% 42.96%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 89 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE ---------------------------------- --------------- -------------- COMMON STOCKS 95.3% CONSUMER DISCRETIONARY 11.4% Abercrombie & Fitch Co., A .............................................................. 827,200 $ 22,384,033 BorgWarner Inc. ......................................................................... 1,112,200 32,198,190 (a) Chipotle Mexican Grill Inc., A .......................................................... 219,900 17,831,691 (a) Dick's Sporting Goods Inc. .............................................................. 1,509,550 28,681,450 Guess? Inc. ............................................................................. 2,109,200 54,923,568 (a) ITT Educational Services Inc. ........................................................... 357,100 35,984,967 (a) Jarden Corp. ............................................................................ 798,000 16,039,800 Johnson Controls Inc. ................................................................... 411,200 7,816,912 (a) Liberty Media Corp. - Entertainment, A .................................................. 1,147,800 27,948,930 NIKE Inc., B ............................................................................ 291,200 15,279,264 PetSmart Inc. ........................................................................... 635,360 14,537,037 (a) Under Armour Inc., A .................................................................... 155,700 3,665,178 (a) Urban Outfitters Inc. ................................................................... 1,248,700 24,337,163 Wolverine World Wide Inc. ............................................................... 2,269,075 47,264,832 -------------- 348,893,015 -------------- CONSUMER STAPLES 3.4% Clorox Co. .............................................................................. 484,500 27,156,225 (a) Hain Celestial Group Inc. ............................................................... 1,437,200 23,986,868 (a) Hansen Natural Corp. .................................................................... 709,800 28,931,448 (a) Mead Johnson Nutrition Co., A ........................................................... 811,500 22,924,875 -------------- 102,999,416 -------------- ENERGY 8.8% (a) Cameron International Corp. ............................................................. 931,900 23,838,002 (a) Concho Resources Inc. ................................................................... 189,100 5,185,122 (a) FMC Technologies Inc. ................................................................... 1,359,256 46,527,333 (a) Petrohawk Energy Corp. .................................................................. 2,000,300 47,207,080 Range Resources Corp. ................................................................... 1,269,800 50,753,906 Smith International Inc. ................................................................ 935,100 24,172,335 (a) Southwestern Energy Co. ................................................................. 1,999,600 71,705,656 -------------- 269,389,434 -------------- FINANCIALS 5.7% (a) Affiliated Managers Group Inc. .......................................................... 855,300 48,623,805 BlackRock Inc. .......................................................................... 182,400 26,725,248 The Charles Schwab Corp. ................................................................ 1,833,400 33,881,232 FelCor Lodging Trust Inc. ............................................................... 2,072,500 4,103,550 (b) iStar Financial Inc. .................................................................... 3,968,090 13,372,463 M&T Bancorp ............................................................................. 263,030 13,795,924 T. Rowe Price Group Inc. ................................................................ 840,100 32,360,652 -------------- 172,862,874 -------------- HEALTH CARE 21.2% Allergan Inc. ........................................................................... 319,000 14,884,540 Allscripts-Misys Healthcare Solutions Inc. .............................................. 1,448,700 17,992,854 (a) Athenahealth Inc. ....................................................................... 294,800 9,374,640 (a) BioMarin Pharmaceutical Inc. ............................................................ 1,148,500 14,769,710
90 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE ---------------------------------- --------------- -------------- COMMON STOCKS (CONTINUED) HEALTH CARE (CONTINUED) C. R. Bard Inc. ......................................................................... 523,200 $ 37,476,816 (a) Celgene Corp. ........................................................................... 716,600 30,613,152 (a) Cerner Corp. ............................................................................ 755,212 40,630,405 (a) Community Health Systems Inc. ........................................................... 2,389,064 54,566,222 (a) DaVita Inc. ............................................................................. 581,800 26,978,066 (a) Express Scripts Inc. .................................................................... 1,071,000 68,511,870 (a) Henry Schein Inc. ....................................................................... 462,000 18,960,480 (a) Illumina Inc. ........................................................................... 716,800 26,772,480 (a) Intuitive Surgical Inc. ................................................................. 140,100 20,136,573 (a) Life Technologies Corp. ................................................................. 887,100 33,088,830 (a) Masimo Corp. ............................................................................ 575,000 16,617,500 (a) Myriad Genetics Inc. .................................................................... 871,600 33,809,364 (a) OSI Pharmaceuticals Inc. ................................................................ 170,900 5,737,113 Perrigo Co. ............................................................................. 1,181,490 30,624,221 Pharmaceutical Product Development Inc. ................................................. 1,265,100 24,808,611 (a) QIAGEN NV (Netherlands) ................................................................. 1,563,700 25,769,776 (a) Sequenom Inc. ........................................................................... 1,156,000 4,184,720 (a) Stereotaxis Inc. ........................................................................ 1,463,200 4,887,088 (a) Varian Medical Systems Inc. ............................................................. 1,214,500 40,527,865 (a) Waters Corp. ............................................................................ 1,019,100 45,013,647 -------------- 646,736,543 -------------- INDUSTRIALS 12.9% (a) Allegiant Travel Co. .................................................................... 455,270 23,692,251 AMETEK Inc. ............................................................................. 1,672,000 53,855,120 C.H. Robinson Worldwide Inc. ............................................................ 518,200 27,547,512 Danaher Corp. ........................................................................... 398,400 23,282,496 Expeditors International of Washington Inc. ............................................. 856,800 29,739,528 Flowserve Corp. ......................................................................... 360,400 24,471,160 (a) Force Protection Inc. ................................................................... 2,409,100 18,357,342 (a) Jacobs Engineering Group Inc. ........................................................... 489,900 18,635,796 Precision Castparts Corp. ............................................................... 996,010 74,561,308 Robert Half International Inc. .......................................................... 1,543,400 37,072,468 Rockwell Collins Inc. ................................................................... 624,200 23,938,070 (a) Ryanair Holdings PLC, ADR (Ireland) ..................................................... 1,348,800 36,889,680 -------------- 392,042,731 -------------- INFORMATION TECHNOLOGY 27.7% (a) Activision Blizzard Inc. ................................................................ 3,868,700 41,665,899 (a) Affiliated Computer Services Inc., A .................................................... 734,100 35,515,758 (a) Alliance Data Systems Corp. ............................................................. 901,400 37,741,618 (a) ANSYS Inc. .............................................................................. 1,122,200 30,995,164 (a) Concur Technologies Inc. ................................................................ 559,600 15,148,372 (a) F5 Networks Inc. ........................................................................ 889,200 24,248,484 (b) FactSet Research Systems Inc. ........................................................... 826,200 44,276,058 (a) FLIR Systems Inc. ....................................................................... 2,597,200 57,605,896 (a, c) FormFactor Inc. ......................................................................... 2,717,524 47,366,443
Annual Report | 91 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE ---------------------------------- --------------- -------------- COMMON STOCKS (CONTINUED) INFORMATION TECHNOLOGY (CONTINUED) Harris Corp. ............................................................................ 1,123,500 $ 34,356,630 (a) Hittite Microwave Corp. ................................................................. 799,300 29,701,988 (a) Juniper Networks Inc. ................................................................... 1,086,300 23,518,395 (a) Lam Research Corp. ...................................................................... 1,088,000 30,333,440 MasterCard Inc., A ...................................................................... 407,200 74,700,840 (a) Mettler-Toledo International Inc. ....................................................... 403,327 24,857,043 (a) Netlogic Microsystems Inc. .............................................................. 263,700 8,593,983 (a) Nuance Communications Inc. .............................................................. 5,804,500 77,490,075 (b) Quality Systems Inc. .................................................................... 350,200 18,777,724 (a) SAIC Inc. ............................................................................... 2,379,700 43,072,570 (a) Silicon Laboratories Inc. ............................................................... 2,030,400 67,531,104 Tandberg ASA (Norway) ................................................................... 2,607,800 37,160,704 (a) Trimble Navigation Ltd. ................................................................. 1,512,660 32,431,431 (a) ViaSat Inc. ............................................................................. 299,067 6,875,550 -------------- 843,965,169 -------------- MATERIALS 1.0% Ecolab Inc. ............................................................................. 821,300 31,661,115 -------------- TELECOMMUNICATION SERVICES 2.4% (a) American Tower Corp., A ................................................................. 838,100 26,618,056 (a, d) Anda Networks ........................................................................... 91,107 70,152 (a) SBA Communications Corp. ................................................................ 1,844,000 46,468,800 -------------- 73,157,008 -------------- UTILITIES 0.8% (a) Calpine Corp. ........................................................................... 1,722,900 13,972,719 (a) Dynegy Inc. ............................................................................. 5,892,300 10,488,294 -------------- 24,461,013 -------------- TOTAL COMMON STOCKS (COST $2,857,291,816) ............................................... 2,906,168,318 --------------
PRINCIPAL AMOUNT --------------- CONVERTIBLE BONDS 0.4% INDUSTRIALS 0.2% SunPower Corp., cvt., senior bond, 1.25%, 2/15/27 ....................................... $ 6,704,000 5,338,060 -------------- INFORMATION TECHNOLOGY 0.2% Microchip Technology Inc., cvt., 2.125%, 12/15/37 ....................................... 8,161,000 6,345,178 -------------- TOTAL CONVERTIBLE BONDS (COST $10,008,798) .............................................. 11,683,238 -------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $2,867,300,614) ................................................................ 2,917,851,556 --------------
92 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE ---------------------------------- --------------- -------------- SHORT TERM INVESTMENTS 4.8% MONEY MARKET FUNDS (COST $119,092,575) 3.9% (e) Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.04% .................... 119,092,575 $ 119,092,575 -------------- (f) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 0.9% MONEY MARKET FUNDS (COST $25,968,221) 0.9% (g) Bank of New York Institutional Cash Reserve Fund, 0.14% ................................. 25,968,221 25,708,538 -------------- TOTAL INVESTMENTS (COST $3,012,361,410) 100.5% .......................................... 3,062,652,669 OTHER ASSETS, LESS LIABILITIES (0.5)% ................................................... (15,294,836) -------------- NET ASSETS 100.0% ....................................................................... $3,047,357,833 ==============
See Abbreviations on page 121. (a) Non-income producing. (b) A portion or all of the security is on loan at April 30, 2009. See Note 1(d). (c) See Note 9 regarding holdings of 5% voting securities. (d) See Note 8 regarding restricted and illiquid securities. (e) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. (f) See Note 1(d) regarding securities on loan. (g) The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. Annual Report | 93 Franklin Strategic Series FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES April 30, 2009
FRANKLIN FRANKLIN FRANKLIN GROWTH FLEX CAP FOCUSED CORE OPPORTUNITIES GROWTH FUND EQUITY FUND FUND -------------- ------------ -------------- Assets: Investments in securities: Cost - Unaffiliated issuers ................ $2,015,670,864 $ 6,171,060 $ 234,953,069 Cost - Sweep Money Fund (Note 7) ........... 56,101,240 148,644 15,835,304 -------------- ----------- ------------- Total cost of investments .................. $2,071,772,104 $ 6,319,704 $ 250,788,373 ============== =========== ============= Value - Unaffiliated issuers ............... $2,007,631,096 $ 4,815,573 $ 269,393,026 Value - Sweep Money Fund (Note 7) .......... 56,101,240 148,644 15,835,304 -------------- ----------- ------------- Total value of investments ................. 2,063,732,336 4,964,217 285,228,330 Receivables: Investment securities sold ................. 2,778,349 112,920 588,467 Capital shares sold ........................ 3,336,453 3,263 626,060 Dividends .................................. 1,327,991 7,357 48,595 Affiliates ................................. -- 83,378 -- Other assets .................................. 3,579 316 381 -------------- ----------- ------------- Total assets ............................ 2,071,178,708 5,171,451 286,491,833 -------------- ----------- ------------- Liabilities: Payables: Investment securities purchased ............ 2,042,934 -- 4,851,150 Capital shares redeemed .................... 2,468,047 -- 436,496 Affiliates ................................. 1,523,389 -- 221,701 Reports to shareholders .................... 150,970 440 20,780 Professional fees .......................... 9,871 1,866 1,860 Unaffiliated transfer agent fees ........... 408,976 168 44,766 Accrued expenses and other liabilities ........ 18,307 1,302 3,027 -------------- ----------- ------------- Total liabilities ....................... 6,622,494 3,776 5,579,780 -------------- ----------- ------------- Net assets, at value ................. $2,064,556,214 $ 5,167,675 $ 280,912,053 ============== =========== ============= Net assets consist of: Paid-in capital ............................... $2,169,148,719 $ 7,208,763 $ 453,819,115 Undistributed net investment income (loss) .... (4,440) 2,136 -- Net unrealized appreciation (depreciation) .... (8,039,768) (1,355,612) 34,440,127 Accumulated net realized gain (loss) .......... (96,548,297) (687,612) (207,347,189) -------------- ----------- ------------- Net assets, at value ................. $2,064,556,214 $ 5,167,675 $ 280,912,053 ============== =========== =============
The accompanying notes are an integral part of these financial statements. 94 | Annual Report Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) April 30, 2009
FRANKLIN FRANKLIN FRANKLIN GROWTH FLEX CAP FOCUSED CORE OPPORTUNITIES GROWTH FUND EQUITY FUND FUND -------------- ------------ ------------- CLASS A: Net assets, at value ............................................. $1,370,025,294 $4,888,717 $ 99,939,154 -------------- ---------- ------------ Shares outstanding ............................................... 42,201,071 779,258 7,200,360 -------------- ---------- ------------ Net asset value per share(a) ..................................... $ 32.46 $ 6.27 $ 13.88 -------------- ---------- ------------ Maximum offering price per share (net asset value per share / 94.25%) ........................................... $ 34.44 $ 6.65 $ 14.73 -------------- ---------- ------------ CLASS B: Net assets, at value ............................................. $ 42,485,427 -- $ 5,124,284 -------------- ---------- ------------ Shares outstanding ............................................... 1,414,321 -- 393,531 -------------- ---------- ------------ Net asset value and maximum offering price per share(a) .......... $ 30.04 -- $ 13.02 -------------- ---------- ------------ CLASS C: Net assets, at value ............................................. $ 243,307,740 $ 105,542 $ 27,518,871 -------------- ---------- ------------ Shares outstanding ............................................... 8,082,731 16,923 2,118,612 -------------- ---------- ------------ Net asset value and maximum offering price per share(a) .......... $ 30.10 $ 6.24 $ 12.99 -------------- ---------- ------------ CLASS R: Net assets, at value ............................................. $ 43,939,910 $ 6,274 $ 7,320,126 -------------- ---------- ------------ Shares outstanding ............................................... 1,376,962 1,000 535,544 -------------- ---------- ------------ Net asset value and maximum offering price per share ............. $ 31.91 $ 6.27 $ 13.67 -------------- ---------- ------------ ADVISOR CLASS: Net assets, at value ............................................. $ 364,797,843 $ 167,142 $141,009,618 -------------- ---------- ------------ Shares outstanding ............................................... 11,113,738 26,599 9,858,865 -------------- ---------- ------------ Net asset value and maximum offering price per share ............. $ 32.82 $ 6.28 $ 14.30 -------------- ---------- ------------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable. The accompanying notes are an integral part of these financial statements. Annual Report | 95 Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) April 30, 2009
FRANKLIN FRANKLIN SMALL CAP SMALL-MID CAP GROWTH FUND GROWTH FUND ------------- -------------- Assets: Investments in securities: Cost - Unaffiliated issuers .......................... $ 254,766,055 $2,825,922,083 Cost - Non-controlled affiliated issuers (Note 9) .... -- 67,346,752 Cost - Sweep Money Fund (Note 7) ..................... 7,667,621 119,092,575 ------------- -------------- Total cost of investments ............................ $ 262,433,676 $3,012,361,410 ============= ============== Value - Unaffiliated issuers ......................... $ 233,280,999 $2,896,193,651 Value - Non-controlled affiliated issuers (Note 9) ... -- 47,366,443 Value - Sweep Money Fund (Note 7) .................... 7,667,621 119,092,575 ------------- -------------- Total value of investments(a) ........................ 240,948,620 3,062,652,669 Receivables: Investment securities sold ........................... 1,991,353 45,142,843 Capital shares sold .................................. 191,603 1,625,597 Dividends and interest ............................... 50,003 1,510,432 Other assets ............................................ 594 102,843 ------------- -------------- Total assets ................................... 243,182,173 3,111,034,384 ------------- -------------- Liabilities: Payables: Investment securities purchased ...................... 3,618,029 16,347,446 Capital shares redeemed .............................. 932,941 17,413,414 Affiliates ........................................... 258,357 2,265,589 Reports to shareholders .............................. 34,360 228,762 Professional fees .................................... 5,440 13,150 Unaffiliated transfer agent fees ..................... 82,940 1,393,510 Payable upon return of securities loaned ................ -- 25,968,221 Accrued expenses and other liabilities .................. 5,135 46,459 ------------- -------------- Total liabilities .............................. 4,937,202 63,676,551 ------------- -------------- Net assets, at value ........................ $ 238,244,971 $3,047,357,833 ============= ============== Net assets consist of: Paid-in capital ......................................... $ 381,099,177 $3,670,632,734 Undistributed net investment income (loss) .............. -- (285,426) Net unrealized appreciation (depreciation) .............. (21,484,943) 50,386,205 Accumulated net realized gain (loss) .................... (121,369,263) (673,375,680) ------------- -------------- Net assets, at value ........................ $ 238,244,971 $3,047,357,833 ============= ============== (a) Includes securities loaned ............................ -- $ 21,649,874
The accompanying notes are an integral part of these financial statements. 96 | Annual Report Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) April 30, 2009
FRANKLIN FRANKLIN SMALL CAP SMALL-MID CAP GROWTH FUND GROWTH FUND ------------ -------------- CLASS A: Net assets, at value .................................................... $123,037,378 $2,195,975,182 ------------ -------------- Shares outstanding ...................................................... 19,198,471 98,290,141 ------------ -------------- Net asset value per share(a) ............................................ $ 6.41 $ 22.34 ------------ -------------- Maximum offering price per share (net asset value per share / 94.25%) ... $ 6.80 $ 23.70 ------------ -------------- CLASS B: Net assets, at value .................................................... $ 15,159,462 $ 13,399,182 ------------ -------------- Shares outstanding ...................................................... 2,575,144 637,749 ------------ -------------- Net asset value and maximum offering price per share(a) ................. $ 5.89 $ 21.01 ------------ -------------- CLASS C: Net assets, at value .................................................... $ 40,179,992 $ 285,596,896 ------------ -------------- Shares outstanding ...................................................... 6,816,426 14,078,914 ------------ -------------- Net asset value and maximum offering price per share(a) ................. $ 5.89 $ 20.29 ------------ -------------- CLASS R: Net assets, at value .................................................... $ 1,911,628 $ 54,179,598 ------------ -------------- Shares outstanding ...................................................... 305,175 2,479,973 ------------ -------------- Net asset value and maximum offering price per share .................... $ 6.26 $ 21.85 ------------ -------------- ADVISOR CLASS: Net assets, at value .................................................... $ 57,956,511 $ 498,206,975 ------------ -------------- Shares outstanding ...................................................... 8,743,185 21,751,617 ------------ -------------- Net asset value and maximum offering price per share .................... $ 6.63 $ 22.90 ------------ --------------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable. The accompanying notes are an integral part of these financial statements. Annual Report | 97 Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the year ended April 30, 2009
FRANKLIN FRANKLIN FRANKLIN GROWTH FLEX CAP FOCUSED CORE OPPORTUNITIES GROWTH FUND EQUITY FUND FUND ------------- ------------ ------------- Investment income: Dividends: Unaffiliated issuers ............................................... $ 20,101,600 $ 90,748 $ 1,005,853 Sweep Money Fund (Note 7) .......................................... 1,161,485 3,309 92,732 Interest .............................................................. 171 -- -- Income from securities loaned ......................................... 40,098 -- 7,864 ------------- ----------- ------------ Total investment income ...................................... 21,303,354 94,057 1,106,449 ------------- ----------- ------------ Expenses: Management fees (Note 3a) ............................................. 10,396,304 33,144 1,255,622 Administrative fees (Note 3b) ......................................... -- 9,040 514,157 Distribution fees: (Note 3c) Class A ............................................................ 3,932,240 11,864 313,786 Class B ............................................................ 643,480 -- 75,203 Class C ............................................................ 2,890,889 897 319,843 Class R ............................................................ 250,108 34 32,777 Transfer agent fees (Note 3e) ......................................... 6,026,147 1,772 713,142 Custodian fees (Note 4) ............................................... 39,148 30 4,804 Reports to shareholders ............................................... 430,693 1,988 62,681 Registration and filing fees .......................................... 132,811 40,635 79,285 Professional fees ..................................................... 55,498 33,928 33,357 Trustees' fees and expenses ........................................... 39,841 99 5,558 Amortization of offering costs ........................................ -- 43,665 -- Other ................................................................. 144,352 3,560 14,488 ------------- ----------- ------------ Total expenses ............................................... 24,981,511 180,656 3,424,703 Expense reductions (Note 4) .................................. (288) (30) (635) Expenses waived/paid by affiliates (Note 3f) ................. -- (127,604) -- ------------- ----------- ------------ Net expenses .............................................. 24,981,223 53,022 3,424,068 ------------- ----------- ------------ Net investment income (loss) ........................... (3,677,869) 41,035 (2,317,619) ------------- ----------- ------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ........................................................ (87,241,385) (680,200) (73,196,492) Foreign currency transactions ...................................... 9,259 (3,256) 3,600 ------------- ----------- ------------ Net realized gain (loss) ............................... (87,232,126) (683,456) (73,192,892) ------------- ----------- ------------ Net change in unrealized appreciation (depreciation) on: Investments ........................................................ (764,613,305) (643,842) (18,033,117) Translation of other assets and liabilities denominated in foreign currencies ........................................... -- (957) 2,592 ------------- ----------- ------------ Net change in unrealized appreciation (depreciation) ... (764,613,305) (644,799) (18,030,525) ------------- ----------- ------------ Net realized and unrealized gain (loss) .................................. (851,845,431) (1,328,255) (91,223,417) ------------- ----------- ------------ Net increase (decrease) in net assets resulting from operations .......... $(855,523,300) $(1,287,220) $(93,541,036) ============= =========== ============
The accompanying notes are an integral part of these financial statements. 98 | Annual Report Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS (CONTINUED) for the year ended April 30, 2009
FRANKLIN FRANKLIN SMALL CAP SMALL-MID CAP GROWTH FUND GROWTH FUND ------------- --------------- Investment income: Dividends: Unaffiliated issuers ............................................... $ 770,372 $ 15,467,711 Non-controlled affiliated issuers (Note 9) ......................... -- 1,560,878 Sweep Money Fund (Note 7) .......................................... 112,586 2,398,494 Interest .............................................................. 68 1,219,985 Income from securities loaned ......................................... 219,328 3,927,702 ------------- --------------- Total investment income ...................................... 1,102,354 24,574,770 ------------- --------------- Expenses: Management fees (Note 3a) ............................................. 2,194,667 17,341,750 Administrative fees (Note 3b) ......................................... 820,861 -- Distribution fees: (Note 3c) Class A ............................................................ 538,564 7,191,501 Class B ............................................................ 304,365 172,930 Class C ............................................................ 523,168 3,620,984 Class R ............................................................ 11,252 331,488 Transfer agent fees (Note 3e) ......................................... 1,012,717 13,804,127 Custodian fees (Note 4) ............................................... 11,618 82,146 Reports to shareholders ............................................... 90,103 612,962 Registration and filing fees .......................................... 67,946 122,325 Professional fees ..................................................... 38,200 76,691 Trustees' fees and expenses ........................................... 10,662 82,797 Other ................................................................. 23,903 177,656 ------------- --------------- Total expenses ............................................... 5,648,026 43,617,357 Expense reductions (Note 4) .................................. (1,157) (392) ------------- --------------- Net expenses .............................................. 5,646,869 43,616,965 ------------- --------------- Net investment income (loss) ........................... (4,544,515) (19,042,195) ------------- --------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments: Unaffiliated issuers ............................................ (100,914,360) (481,038,995) Non-controlled affiliated issuers (Note 9) ...................... -- (188,613,978) Foreign currency transactions ...................................... 10,553 (243,831) ------------- --------------- Net realized gain (loss) ............................... (100,903,807) (669,896,804) ------------- --------------- Net change in unrealized appreciation (depreciation) on: Investments ........................................................ (67,036,827) (976,762,079) Translation of other assets and liabilities denominated in foreign currencies ........................................... 112 (13,443) ------------- --------------- Net change in unrealized appreciation (depreciation) ... (67,036,715) (976,775,522) ------------- --------------- Net realized and unrealized gain (loss) .................................. (167,940,522) (1,646,672,326) ------------- --------------- Net increase (decrease) in net assets resulting from operations .......... $(172,485,037) $(1,665,714,521) ============= ===============
The accompanying notes are an integral part of these financial statements. Annual Report | 99 Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN FLEX CAP FRANKLIN FOCUSED CORE GROWTH FUND EQUITY FUND ------------------------------- ------------------------ YEAR ENDED APRIL 30, YEAR ENDED APRIL 30, ------------------------------- ------------------------ 2009 2008 2009 2008(a) -------------- -------------- ----------- ---------- Increase (decrease) in net assets: Operations: Net investment income (loss) ........................... $ (3,677,869) $ (6,082,319) $ 41,035 $ 16,737 Net realized gain (loss) from investments and foreign currency transactions ............................... (87,232,126) 73,881,873 (683,456) 8,991 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies ....... (764,613,305) 11,048,494 (644,799) (710,813) -------------- -------------- ----------- ---------- Net increase (decrease) in net assets resulting from operations ............................ (855,523,300) 78,848,048 (1,287,220) (685,085) -------------- -------------- ----------- ---------- Distributions to shareholders from: Net investment income: Class A ............................................. -- (1,062,345) (74,501) -- Class C ............................................. -- -- (1,612) -- Class R ............................................. -- (43,876) (83) -- Advisor Class ....................................... -- (161,537) (2,076) -- Net realized gains: Class A ............................................. -- (32,084,220) (16,497) -- Class B ............................................. -- (1,853,887) -- -- Class C ............................................. -- (6,486,834) (426) -- Class R ............................................. -- (1,221,188) (22) -- Advisor Class ....................................... -- (5,050,987) (403) -- -------------- -------------- ----------- ---------- Total distributions to shareholders ....................... -- (47,964,874) (95,620) -- -------------- -------------- ----------- ---------- Capital share transactions: (Note 2) Class A ............................................. (51,271,229) 10,019,089 1,542,220 5,311,800 Class B ............................................. (26,638,743) (23,776,783) -- -- Class C ............................................. (19,089,342) 4,256,506 97,423 41,349 Class R ............................................. (3,859,450) (15,994,000) -- 10,000 Advisor Class ....................................... 123,671,368 45,026,229 38,570 194,238 -------------- -------------- ----------- ---------- Total capital share transactions .......................... 22,812,604 19,531,041 1,678,213 5,557,387 -------------- -------------- ----------- ---------- Redemption fees ........................................... 2,260 20,391 -- -- -------------- -------------- ----------- ---------- Net increase (decrease) in net assets ......... (832,708,436) 50,434,606 295,373 4,872,302 Net assets: Beginning of year ......................................... 2,897,264,650 2,846,830,044 4,872,302 -- -------------- -------------- ----------- ---------- End of year ............................................... $2,064,556,214 $2,897,264,650 $ 5,167,675 $4,872,302 ============== ============== =========== ========== Undistributed net investment income (loss) included in net assets: End of year ............................................ $ (4,440) $ -- $ 2,136 $ 28,566 ============== ============== =========== ==========
(a) For the period December 13, 2007 (commencement of operations) to April 30, 2008. The accompanying notes are an integral part of these financial statements. 100 | Annual Report Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN GROWTH FRANKLIN SMALL CAP OPPORTUNITIES FUND GROWTH FUND --------------------------- ------------------------------ YEAR ENDED APRIL 30, YEAR ENDED APRIL 30, --------------------------- ------------------------------ 2009 2008 2009 2008 ------------ ------------ ------------- -------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ........................... $ (2,317,619) $ (2,243,513) $ (4,544,515) $ (7,026,827) Net realized gain (loss) from investments and foreign currency transactions ............................... (73,192,892) 12,002,488 (100,903,807) 89,522,745 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies ....... (18,030,525) 7,496,019 (67,036,715) (204,815,321) ------------ ------------ ------------- -------------- Net increase (decrease) in net assets resulting from operations ............................ (93,541,036) 17,254,994 (172,485,037) (122,319,403) ------------ ------------ ------------- -------------- Distributions to shareholders from net realized gains: Class A ................................................ -- -- (1,831,877) (80,597,900) Class B ................................................ -- -- (287,838) (13,185,309) Class C ................................................ -- -- (552,458) (19,085,424) Class R ................................................ -- -- (22,400) (619,705) Advisor Class .......................................... -- -- (1,312,092) (40,266,927) ------------ ------------ ------------- -------------- Total distributions to shareholders ....................... -- -- (4,006,665) (153,755,265) ------------ ------------ ------------- -------------- Capital share transactions: (Note 2) Class A ................................................ 10,380,355 25,504,203 (75,656,594) (131,750,498) Class B ................................................ (2,912,763) (5,044,139) (24,020,660) (9,331,447) Class C ................................................ 1,204,624 6,765,860 (14,625,680) (10,395,508) Class R ................................................ 1,865,922 (69,825) (472,497) (1,529,576) Advisor Class .......................................... 65,072,564 8,963,605 (96,965,191) (31,944,950) ------------ ------------ ------------- -------------- Total capital share transactions .......................... 75,610,702 36,119,704 (211,740,622) (184,951,979) ------------ ------------ ------------- -------------- Redemption fees ........................................... 966 3,208 1,057 3,008 ------------ ------------ ------------- -------------- Net increase (decrease) in net assets ......... (17,929,368) 53,377,906 (388,231,267) (461,023,639) ------------ ------------ ------------- -------------- Net assets: Beginning of year ......................................... 298,841,421 245,463,515 626,476,238 1,087,499,877 ------------ ------------ ------------- -------------- End of year ............................................... $280,912,053 $298,841,421 $ 238,244,971 $ 626,476,238 ============ ============ ============= ============== Undistributed net investment income (loss) included in net assets: End of year ............................................ $ -- $ -- $ -- $ -- ============ ============ ============= ==============
The accompanying notes are an integral part of these financial statements. Annual Report | 101 Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND --------------------------------- YEAR ENDED APRIL 30, --------------------------------- 2009 2008 --------------- --------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ....................................................... $ (19,042,195) $ (35,942,600) Net realized gain (loss) from investments and foreign currency transactions ........ (669,896,804) 535,546,104 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies ... (976,775,522) (898,481,620) --------------- --------------- Net increase (decrease) in net assets resulting from operations ........... (1,665,714,521) (398,878,116) --------------- --------------- Distributions to shareholders from net realized gains: Class A ............................................................................ (6,612,344) (790,889,652) Class B ............................................................................ (42,726) (5,111,384) Class C ............................................................................ (939,029) (105,273,976) Class R ............................................................................ (162,759) (16,775,519) Advisor Class ...................................................................... (1,349,787) (160,138,265) --------------- --------------- Total distributions to shareholders ................................................... (9,106,645) (1,078,188,796) --------------- --------------- Capital share transactions: (Note 2) Class A ............................................................................ (895,592,567) (221,023,942) Class B ............................................................................ (4,302,513) 132,361 Class C ............................................................................ (75,422,060) 16,278,421 Class R ............................................................................ (11,231,755) (1,881,624) Advisor Class ...................................................................... (78,299,057) 242,909,931 --------------- --------------- Total capital share transactions ...................................................... (1,064,847,952) 36,415,147 --------------- --------------- Redemption fees ....................................................................... 35,916 97,409 --------------- --------------- Net increase (decrease) in net assets ..................................... (2,739,633,202) (1,440,554,356) Net assets: Beginning of year ..................................................................... 5,786,991,035 7,227,545,391 --------------- --------------- End of year ........................................................................... $ 3,047,357,833 $ 5,786,991,035 =============== =============== Undistributed net investment income (loss) included in net assets: End of year ........................................................................... $ (285,426) $ -- =============== ===============
The accompanying notes are an integral part of these financial statements. 102 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Strategic Series (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of eight separate funds, five of which are included in this report (Funds). The financial statements of the remaining funds in the Trust are presented separately. The classes of shares offered within each of the Funds are indicated below. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege.
CLASS A, CLASS C, CLASS R & ADVISOR CLASS CLASS A, CLASS B, CLASS C, CLASS R & ADVISOR CLASS - ----------------------------------------- -------------------------------------------------- Franklin Focused Core Equity Fund Franklin Flex Cap Growth Fund Franklin Growth Opportunities Fund Franklin Small Cap Growth Fund Franklin Small-Mid Cap Growth Fund
The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds and non-registered money market funds are valued at the closing net asset value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Trust has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of Annual Report | 103 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Trust's 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, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Trust's Board of Trustees. 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 on the Statement of Operations. 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. FOREIGN CURRENCY CONTRACTS When the Funds purchase or sell foreign securities they may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate at a future date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. 104 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. SECURITIES LENDING Certain funds participate in a principal based security lending program. The fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the market value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the fund on the next business day. The collateral is invested in a non-registered money market fund managed by the fund's custodian on the fund's behalf. The fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the principal may default on its obligations to the fund. E. INCOME TAXES No provision has been made for U.S. income taxes because it is each fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. The Funds have reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of April 30, 2009, and have determined that no provision for income tax is required in the Funds' financial statements. 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 is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Funds are notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. 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 of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses. Annual Report | 105 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. OFFERING COSTS Offering costs are amortized on a straight line basis over twelve months. H. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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 expenses during the reporting period. Actual results could differ from those estimates. I. REDEMPTION FEES A short term trading redemption fee was imposed, with some exceptions, on any fund shares that were redeemed or exchanged within seven calendar days following their purchase date. The redemption fee was 2% of the amount redeemed. Such fees were retained by the funds and accounted for as an addition to paid-in capital. Effective September 1, 2008, the redemption fee was eliminated. J. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST At April 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Funds' shares were as follows:
FRANKLIN FRANKLIN FOCUSED FLEX CAP GROWTH FUND CORE EQUITY FUND --------------------------- -------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------- ------- ---------- CLASS A SHARES: Year ended April 30, 2009 Shares sold ..................................... 10,241,362 $ 362,573,642 292,595 $1,835,475 Shares issued in reinvestment of distributions .. -- -- 5,075 26,184 Shares redeemed ................................. (11,986,727) (413,844,871) (54,000) (319,439) ----------- ------------- ------- ---------- Net increase (decrease) ......................... (1,745,365) $ (51,271,229) 243,670 $1,542,220 =========== ============= ======= ==========
106 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN FRANKLIN FOCUSED FLEX CAP GROWTH FUND CORE EQUITY FUND --------------------------- -------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------- ------- ---------- CLASS A SHARES: (CONTINUED) Year ended April 30, 2008(a) Shares sold ..................................... 8,860,704 $ 412,850,677 539,141 $5,341,810 Shares issued in reinvestment of distributions .. 564,076 27,302,324 -- -- Shares redeemed ................................. (9,275,872) (430,133,912) (3,553) (30,010) ----------- ------------- ------- ---------- Net increase (decrease) ......................... 148,908 $ 10,019,089 535,588 $5,311,800 =========== ============= ======= ========== CLASS B SHARES: Year ended April 30, 2009 Shares sold ..................................... 174,451 $ 6,264,143 Shares redeemed ................................. (1,000,893) (32,902,886) ----------- ------------- Net increase (decrease) ......................... (826,442) $ (26,638,743) =========== ============= Year ended April 30, 2008 Shares sold ..................................... 185,826 $ 8,281,945 Shares issued in reinvestment of distributions .. 38,247 1,733,727 Shares redeemed ................................. (783,309) (33,792,455) ----------- ------------- Net increase (decrease) ......................... (559,236) $ (23,776,783) =========== ============= CLASS C SHARES: Year ended April 30, 2009 Shares sold ..................................... 1,834,066 $ 61,876,028 30,484 $ 195,267 Shares issued in reinvestment of distributions .. -- -- 376 1,933 Shares redeemed ................................. (2,540,857) (80,965,370) (18,632) (99,777) ----------- ------------- ------- ---------- Net increase (decrease) ......................... (706,791) $ (19,089,342) 12,228 $ 97,423 =========== ============= ======= ========== Year ended April 30, 2008(a) Shares sold ..................................... 1,643,470 $ 72,227,327 4,695 $ 41,349 Shares issued in reinvestment of distributions .. 131,515 5,973,410 -- -- Shares redeemed ................................. (1,714,226) (73,944,231) -- -- ----------- ------------- ------- ---------- Net increase (decrease) ......................... 60,759 $ 4,256,506 4,695 $ 41,349 =========== ============= ======= ========== CLASS R SHARES: Year ended April 30, 2009 Shares sold ..................................... 439,184 $ 15,149,663 -- $ -- Shares redeemed ................................. (531,171) (19,009,113) -- -- ----------- ------------- ------- ---------- Net increase (decrease) ......................... (91,987) $ (3,859,450) -- $ -- =========== ============= ======= ========== Year ended April 30, 2008(a) Shares sold ..................................... 357,376 $ 16,514,361 1,000 $ 10,000 Shares issued in reinvestment of distributions .. 26,436 1,261,987 -- -- Shares redeemed ................................. (739,403) (33,770,348) -- -- ----------- ------------- ------- ---------- Net increase (decrease) ......................... (355,591) $ (15,994,000) 1,000 $ 10,000 =========== ============= ======= ==========
Annual Report | 107 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN FRANKLIN FOCUSED FLEX CAP GROWTH FUND CORE EQUITY FUND --------------------------- -------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------- ------- ---------- ADVISOR CLASS SHARES: Year ended April 30, 2009 Shares sold ..................................... 4,690,791 $ 161,366,894 9,728 $ 57,955 Shares issued in reinvestment of distributions .. -- -- 479 2,478 Shares redeemed ................................. (1,122,724) (37,695,526) (3,275) (21,863) ----------- ------------- ------- ---------- Net increase (decrease) ......................... 3,568,067 $ 123,671,368 6,932 $ 38,570 =========== ============= ======= ========== Year ended April 30, 2008(a) Shares sold ..................................... 1,150,962 $ 52,420,394 19,731 $ 194,788 Shares issued in reinvestment of distributions .. 106,767 5,206,091 -- -- Shares redeemed ................................. (270,893) (12,600,256) (64) (550) ----------- ------------- ------- ---------- Net increase (decrease) ......................... 986,836 $ 45,026,229 19,667 $ 194,238 =========== ============= ======= ==========
(a) For the period December 13, 2007 (commencement of operations) to April 30, 2008, for the Franklin Focused Core Equity Fund.
FRANKLIN GROWTH FRANKLIN OPPORTUNITIES FUND SMALL CAP GROWTH FUND ------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ---------- ------------ ----------- ------------- CLASS A SHARES: Year ended April 30, 2009 Shares sold ..................................... 3,112,008 $ 50,885,144 6,425,475 $ 44,816,186 Shares issued in reinvestment of distributions .. -- -- 303,971 1,674,888 Shares redeemed ................................. (2,756,442) (40,504,789) (17,673,940) (122,147,668) ---------- ------------ ----------- ------------- Net increase (decrease) ......................... 355,566 $ 10,380,355 (10,944,494) $ (75,656,594) ========== ============ =========== ============= Year ended April 30, 2008 Shares sold ..................................... 3,288,291 $ 67,103,617 5,142,888 $ 57,782,843 Shares issued in reinvestment of distributions .. -- -- 7,209,636 73,177,801 Shares redeemed ................................. (2,127,947) (41,599,414) (24,350,461) (262,711,142) ---------- ------------ ----------- ------------- Net increase (decrease) ......................... 1,160,344 $ 25,504,203 (11,997,937) $(131,750,498) ========== ============ =========== ============= CLASS B SHARES: Year ended April 30, 2009 Shares sold ..................................... 89,385 $ 1,452,710 127,271 $ 787,604 Shares issued in reinvestment of distributions .. -- -- 50,780 257,961 Shares redeemed ................................. (304,157) (4,365,473) (3,829,822) (25,066,225) ---------- ------------ ----------- ------------- Net increase (decrease) ......................... (214,772) $ (2,912,763) (3,651,771) $ (24,020,660) ========== ============ =========== ============= Year ended April 30, 2008 Shares sold ..................................... 82,357 $ 1,608,358 123,014 $ 1,243,897 Shares issued in reinvestment of distributions .. -- -- 1,228,476 11,584,529 Shares redeemed ................................. (360,405) (6,652,497) (2,064,247) (22,159,873) ---------- ------------ ----------- ------------- Net increase (decrease) ......................... (278,048) $ (5,044,139) (712,757) $ (9,331,447) ========== ============ =========== =============
108 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN GROWTH FRANKLIN OPPORTUNITIES FUND SMALL CAP GROWTH FUND ------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ---------- ------------ ----------- ------------- CLASS C SHARES: Year ended April 30, 2009 Shares sold ..................................... 835,214 $ 12,871,578 643,124 $ 3,814,156 Shares issued in reinvestment of distributions .. -- -- 99,237 504,123 Shares redeemed ................................. (845,384) (11,666,954) (2,919,407) (18,943,959) ---------- ------------ ----------- ------------- Net increase (decrease) ......................... (10,170) $ 1,204,624 (2,177,046) $ (14,625,680) ========== ============ =========== ============= Year ended April 30, 2008 Shares sold ..................................... 767,351 $ 14,696,919 305,315 $ 3,089,377 Shares issued in reinvestment of distributions .. -- -- 1,822,622 17,205,554 Shares redeemed ................................. (428,732) (7,931,059) (2,919,162) (30,690,439) ---------- ------------ ----------- ------------- Net increase (decrease) ......................... 338,619 $ 6,765,860 (791,225) $ (10,395,508) ========== ============ =========== ============= CLASS R SHARES: Year ended April 30, 2009 Shares sold ..................................... 341,730 $ 4,955,460 125,708 $ 888,845 Shares issued in reinvestment of distributions .. -- -- 4,156 22,400 Shares redeemed ................................. (203,276) (3,089,538) (180,155) (1,383,742) ---------- ------------ ----------- ------------- Net increase (decrease) ......................... 138,454 $ 1,865,922 (50,291) $ (472,497) ========== ============ =========== ============= Year ended April 30, 2008 Shares sold ..................................... 174,256 $ 3,443,236 102,048 $ 1,100,387 Shares issued in reinvestment of distributions .. -- -- 62,282 619,705 Shares redeemed ................................. (181,695) (3,513,061) (256,839) (3,249,668) ---------- ------------ ----------- ------------- Net increase (decrease) ......................... (7,439) $ (69,825) (92,509) $ (1,529,576) ========== ============ =========== ============= ADVISOR CLASS SHARES: Year ended April 30, 2009 Shares sold ..................................... 5,178,762 $ 69,117,750 4,621,864 $ 31,513,259 Shares issued in reinvestment of distributions .. -- -- 228,548 1,302,723 Shares redeemed ................................. (264,983) (4,045,186) (19,665,807) (129,781,173) ---------- ------------ ----------- ------------- Net increase (decrease) ......................... 4,913,779 $ 65,072,564 (14,815,395) $ (96,965,191) ========== ============ =========== ============= Year ended April 30, 2008 Shares sold ..................................... 780,151 $ 15,851,341 7,904,170 $ 87,488,790 Shares issued in reinvestment of distributions .. -- -- 3,652,414 38,167,731 Shares redeemed ................................. (335,773) (6,887,736) (12,389,907) (157,601,471) ---------- ------------ ----------- ------------- Net increase (decrease) ......................... 444,378 $ 8,963,605 (833,323) $ (31,944,950) ========== ============ =========== =============
Annual Report | 109 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND ----------------------------- SHARES AMOUNT ----------- --------------- CLASS A SHARES: Year ended April 30, 2009 Shares sold ..................................... 17,662,329 $ 434,589,836 Shares issued in reinvestment of distributions .. 273,597 5,217,433 Shares redeemed ................................. (52,103,900) (1,335,399,836) ----------- --------------- Net increase (decrease) ......................... (34,167,974) $ (895,592,567) =========== =============== Year ended April 30, 2008 Shares sold ..................................... 27,344,993 $ 1,030,832,137 Shares issued in reinvestment of distributions .. 17,940,000 630,770,384 Shares redeemed ................................. (48,105,487) (1,882,626,463) ----------- --------------- Net increase (decrease) ......................... (2,820,494) $ (221,023,942) =========== =============== CLASS B SHARES: Year ended April 30, 2009 Shares sold ..................................... 45,036 $ 1,007,278 Shares issued in reinvestment of distributions .. 2,216 39,845 Shares redeemed ................................. (230,737) (5,349,636) ----------- --------------- Net increase (decrease) ......................... (183,485) $ (4,302,513) =========== =============== Year ended April 30, 2008 Shares sold ..................................... 58,760 $ 2,259,539 Shares issued in reinvestment of distributions .. 142,174 4,751,473 Shares redeemed ................................. (193,900) (6,878,651) ----------- --------------- Net increase (decrease) ......................... 7,034 $ 132,361 =========== =============== CLASS C SHARES: Year ended April 30, 2009 Shares sold ..................................... 858,621 $ 19,025,475 Shares issued in reinvestment of distributions .. 46,706 810,803 Shares redeemed ................................. (4,306,440) (95,258,338) ----------- --------------- Net increase (decrease) ......................... (3,401,113) $ (75,422,060) =========== =============== Year ended April 30, 2008 Shares sold ..................................... 1,327,722 $ 46,812,879 Shares issued in reinvestment of distributions .. 2,777,328 89,596,613 Shares redeemed ................................. (3,447,379) (120,131,071) ----------- --------------- Net increase (decrease) ......................... 657,671 $ 16,278,421 =========== =============== CLASS R SHARES: Year ended April 30, 2009 Shares sold ..................................... 1,102,996 $ 27,082,387 Shares issued in reinvestment of distributions .. 8,509 158,871 Shares redeemed ................................. (1,573,683) (38,473,013) ----------- --------------- Net increase (decrease) ......................... (462,178) $ (11,231,755) =========== =============== Year ended April 30, 2008 Shares sold ..................................... 1,064,140 $ 39,882,854 Shares issued in reinvestment of distributions .. 475,058 16,389,509 Shares redeemed ................................. (1,487,464) (58,153,987) ----------- --------------- Net increase (decrease) ......................... 51,734 $ (1,881,624) =========== ===============
110 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND ----------------------------- SHARES AMOUNT ----------- --------------- ADVISOR CLASS SHARES: Year ended April 30, 2009 Shares sold ..................................... 5,582,498 $ 134,594,968 Shares issued in reinvestment of distributions .. 63,569 1,241,512 Shares redeemed ................................. (8,196,350) (214,135,537) ----------- --------------- Net increase (decrease) ......................... (2,550,283) $ (78,299,057) =========== =============== Year ended April 30, 2008 Shares sold ..................................... 11,838,328 $ 479,997,430 Shares issued in reinvestment of distributions .. 3,474,301 124,762,163 Shares redeemed ................................. (10,036,923) (361,849,662) ----------- --------------- Net increase (decrease) ......................... 5,275,706 $ 242,909,931 =========== ===============
3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
SUBSIDIARY AFFILIATION - ---------- ---------------------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES The Franklin Flex Cap Growth Fund and the Franklin Small-Mid Cap Growth Fund pay an investment management fee to Advisers based on the average daily net assets of each of the funds as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- --------------------------------------------------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $7.5 billion 0.440% Over $7.5 billion, up to and including $10 billion 0.430% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% In excess of $15 billion
Annual Report | 111 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. MANAGEMENT FEES (CONTINUED) The Franklin Focused Core Equity Fund pays an investment management fee to Advisers based on the average daily net assets as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- ----------------------------------------------------- 0.750% Up to and including $500 million 0.650% Over $500 million, up to and including $1 billion 0.600% Over $1 billion, up to and including $1.5 billion 0.550% Over $1.5 billion, up to and including $6.5 billion 0.525% Over $6.5 billion, up to and including $11.5 billion 0.500% Over $11.5 billion, up to and including $16.5 billion 0.490% Over $16.5 billion, up to and including $19 billion 0.480% Over $19 billion, up to and including $21.5 billion 0.470% In excess of $21.5 billion
The Franklin Growth Opportunities Fund pays an investment management fee to Advisers based on the average daily net assets as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- ----------------------------------------------------- 0.500% Up to and including $500 million 0.400% Over $500 million, up to and including $1 billion 0.350% Over $1 billion, up to and including $1.5 billion 0.300% Over $1.5 billion, up to and including $6.5 billion 0.275% Over $6.5 billion, up to and including $11.5 billion 0.250% Over $11.5 billion, up to and including $16.5 billion 0.240% Over $16.5 billion, up to and including $19 billion 0.230% Over $19 billion, up to and including $21.5 billion 0.220% In excess of $21.5 billion
The Franklin Small Cap Growth Fund pays an investment management fee to Advisers based on the average daily net assets as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- ----------------------------------------------------- 0.550% Up to and including $500 million 0.450% Over $500 million, up to and including $1 billion 0.400% Over $1 billion, up to and including $1.5 billion 0.350% Over $1.5 billion, up to and including $6.5 billion 0.325% Over $6.5 billion, up to and including $11.5 billion 0.300% Over $11.5 billion, up to and including $16.5 billion 0.290% Over $16.5 billion, up to and including $19 billion 0.280% Over $19 billion, up to and including $21.5 billion 0.270% In excess of $21.5 billion
112 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) B. ADMINISTRATIVE FEES The Franklin Focused Core Equity Fund, the Franklin Growth Opportunities Fund, and the Franklin Small Cap Growth Fund pay an administrative fee to FT Services of 0.20% per year of the average daily net assets of each of the funds. Under an agreement with Advisers, FT Services provides administrative services to the Franklin Flex Cap Growth Fund and the Franklin Small-Mid Cap Growth Fund. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the funds. C. DISTRIBUTION FEES The Trust's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. On December 2, 2008, the Trust's Board of Trustees approved a modification to the Class A distribution plan for the Franklin Focused Core Equity Fund and the Franklin Small Cap Growth Fund, changing the form of the plan from a compensation to a reimbursement distribution plan. Under the distribution plan, the Funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate for each class. This change was effective February 1, 2009. Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. Prior to February 1, 2009, under the fund's Class A compensation distribution plan, the fund paid Distributors for costs incurred in connection with the servicing, sale and distribution of the fund's shares up to a certain percentage per year of its average daily net assets. In addition, under the Funds' compensation distribution plans, the Funds pay Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate for each class. The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
FRANKLIN FRANKLIN FRANKLIN GROWTH FRANKLIN FRANKLIN FLEX CAP FOCUSED CORE OPPORTUNITIES SMALL CAP SMALL-MID CAP GROWTH FUND EQUITY FUND FUND GROWTH FUND GROWTH FUND ----------- ------------ ------------- ----------- ------------- Reimbursement Plans: Class A ......... 0.25% 0.35% 0.35% 0.35% 0.25% Compensation Plans: Class B ......... 1.00% -- 1.00% 1.00% 1.00% Class C ......... 1.00% 1.00% 1.00% 1.00% 1.00% Class R ......... 0.50% 0.50% 0.50% 0.50% 0.50%
Annual Report | 113 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) C. DISTRIBUTION FEES (CONTINUED) The Board of Trustees has set the current rate at 0.30% per year for Class A shares for the Franklin Focused Core Equity Fund, the Franklin Growth Opportunities Fund, and the Franklin Small Cap Growth Fund until further notice and approval by the Board. D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the year:
FRANKLIN FRANKLIN FRANKLIN GROWTH FRANKLIN FLEX CAP FOCUSED CORE OPPORTUNITIES SMALL CAP GROWTH FUND EQUITY FUND FUND GROWTH FUND ----------- ------------ ------------- ----------- Sales charges retained net of commissions paid to unaffiliated broker/dealers ....... $530,130 $1,765 $72,197 $35,750 Contingent deferred sales charges retained ... $ 55,218 $ 84 $14,869 $ 3,974
FRANKLIN SMALL-MID CAP GROWTH FUND ------------- Sales charges retained net of commissions paid to unaffiliated broker/dealers ....... $170,304 Contingent deferred sales charges retained ... $ 21,174
E. TRANSFER AGENT FEES For the year ended April 30, 2009, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
FRANKLIN FRANKLIN FRANKLIN GROWTH FRANKLIN FRANKLIN FLEX CAP FOCUSED CORE OPPORTUNITIES SMALL CAP SMALL-MID CAP GROWTH FUND EQUITY FUND FUND GROWTH FUND GROWTH FUND ----------- ------------ ------------- ----------- ------------- Transfer agent fees ... $3,802,100 $1,772 $492,012 $629,019 $7,805,377
F. WAIVER AND EXPENSE REIMBURSEMENTS For the Franklin Focused Core Equity Fund, FT Services and Advisers have agreed in advance to waive all or a portion of their respective fees and to assume payment of other expenses through August 31, 2010. Total expenses waived or paid are not subject to reimbursement by the Fund subsequent to the Fund's fiscal year end. After August 31, 2010, FT Services and Advisers may discontinue this waiver at any time upon notice to the Fund's Board of Trustees. G. OTHER AFFILIATED TRANSACTIONS At April 30, 2009, Advisers owned 60.57% of the Franklin Focused Core Equity Fund's outstanding shares. 114 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. EXPENSE OFFSET ARRANGEMENT The Funds have entered into an arrangement with their custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds' custodian expenses. During the year ended April 30, 2009, the custodian fees were reduced as noted in the Statements of Operations. 5. INCOME TAXES For tax purposes, capital losses may be carried over to offset future capital gains, if any. At April 30, 2009, the capital loss carryforwards were as follows:
FRANKLIN FRANKLIN FRANKLIN GROWTH FLEX CAP FOCUSED CORE OPPORTUNITIES GROWTH FUND EQUITY FUND FUND ----------- ------------ ------------- Capital loss carryforwards expiring in: 2010 ............................... $ -- $ -- $ 82,516,835 2011 ............................... -- -- 47,112,100 2017 ............................... 2,534,738 82,022 33,744,357 ---------- ------- ------------ $2,534,738 $82,022 $163,373,292 ========== ======= ============
FRANKLIN FRANKLIN SMALL CAP SMALL-MID CAP GROWTH FUND GROWTH FUND ----------- ------------- Capital loss carryforwards expiring in 2017 ... $33,103,850 $78,384,777 =========== ===========
For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At April 30, 2009, deferred losses were as follows:
FRANKLIN FRANKLIN FRANKLIN GROWTH FRANKLIN FLEX CAP FOCUSED CORE OPPORTUNITIES SMALL CAP GROWTH FUND EQUITY FUND FUND GROWTH FUND ----------- ------------ ------------- ----------- Realized capital losses ... $92,579,726 $573,978 $31,695,913 $75,605,864
FRANKLIN SMALL-MID CAP GROWTH FUND ------------- Realized capital losses .... $594,863,011 Realized currency losses ... $ 99,563
Annual Report | 115 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) The tax character of distributions paid during the years ended April 30, 2009 and 2008, was as follows:
FRANKLIN FLEX CAP FRANKLIN FOCUSED CORE GROWTH FUND EQUITY FUND ------------------ --------------------- 2009 2008 2009 2008 ---- ----------- ------- ---- Distributions paid from: Ordinary income .......... $-- $ 1,267,758 $95,510 $-- Long term capital gain ... -- 46,697,116 110 -- --- ----------- ------- --- $-- $47,964,874 $95,620 $-- === =========== ======= ===
FRANKLIN SMALL CAP FRANKLIN SMALL-MID CAP GROWTH FUND GROWTH FUND ------------------------- --------------------------- 2009 2008 2009 2008 ---------- ------------ ---------- -------------- Distributions paid from: Ordinary income .......... $3,622,227 $ 5,157,068 $ -- $ 36,223,776 Long term capital gain ... 384,438 148,598,197 9,106,645 1,041,965,020 ---------- ------------ ---------- -------------- $4,006,665 $153,755,265 $9,106,645 $1,078,188,796 ========== ============ ========== ==============
At April 30, 2009, the cost of investments, net unrealized appreciation (depreciation), and undistributed ordinary income for income tax purposes were as follows:
FRANKLIN FRANKLIN FRANKLIN GROWTH FLEX CAP FOCUSED CORE OPPORTUNITIES GROWTH FUND EQUITY FUND FUND -------------- ------------ ------------- Cost of investments .......................... $2,073,210,377 $ 6,351,342 $263,066,357 ============== =========== ============ Unrealized appreciation ...................... $ 262,051,782 $ 373,810 $ 41,241,469 Unrealized depreciation ...................... (271,529,823) (1,760,935) (19,079,496) -------------- ----------- ------------ Net unrealized appreciation (depreciation) ... $ (9,478,041) $(1,387,125) $ 22,161,973 ============== =========== ============ Distributable earnings - undistributed ordinary income ........................... $ -- $ 2,162 $ -- ============== =========== ============
FRANKLIN FRANKLIN SMALL CAP SMALL-MID CAP GROWTH FUND GROWTH FUND ------------ -------------- Cost of investments .......................... $275,093,229 $3,012,675,159 ============ ============== Unrealized appreciation ...................... $ 38,564,434 $ 494,447,407 Unrealized depreciation ...................... (72,709,043) (444,469,897) ------------ -------------- Net unrealized appreciation (depreciation) ... $(34,144,609) $ 49,977,510 ============ ==============
Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, bond discounts and premiums, non-deductible expenses, and offering costs. 116 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended April 30, 2009, were as follows:
FRANKLIN FRANKLIN FRANKLIN GROWTH FRANKLIN FRANKLIN FLEX CAP FOCUSED CORE OPPORTUNITIES SMALL CAP SMALL-MID CAP GROWTH FUND EQUITY FUND FUND GROWTH FUND GROWTH FUND ------------ ------------ ------------- ------------ -------------- Purchases ... $863,649,717 $5,675,725 $296,128,649 $176,472,540 $2,073,864,959 Sales ....... $817,840,117 $3,623,529 $229,755,510 $382,009,530 $2,899,506,960
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Funds are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 8. RESTRICTED SECURITIES The Funds may invest in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Funds may have registration rights for restricted securities. The issuer generally incurs all registration costs. Annual Report | 117 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. RESTRICTED SECURITIES (CONTINUED) At April 30, 2009, the funds held investments in restricted securities, excluding 144A securities deemed to be liquid, valued in accordance with procedures approved by the Trust's Board of Trustees as reflecting fair value, as follows:
SHARES/WARRANTS/ ACQUISITION PRINCIPAL AMOUNT ISSUER DATE COST VALUE - ---------------- -------------------------------------------------------- ----------- ---------- ----------- FRANKLIN FLEX CAP GROWTH FUND 36,443 Anda Networks ............................................. 3/24/00 $2,000,000 $ 28,061 2,227,171 Fibrogen Inc., pfd., E .................................... 5/19/00 9,999,998 11,224,942 ----------- TOTAL RESTRICTED SECURITIES (0.55% of Net Assets) ... $11,253,003 =========== FRANKLIN GROWTH OPPORTUNITIES FUND 374,806 Dilithium Networks Inc., depository receipt, D, pfd., 144A, PIPES ................................... 7/13/06 $ 873,300 487,248 14,501 Dilithium Networks Inc., 11.00%, 12/31/09 ............................................... 10/30/08 14,501 14,501 12,447 Dilithium Networks Inc., wts., 12/31/09 ............................................... 10/30/08 -- -- ----------- TOTAL RESTRICTED SECURITIES (0.18% of Net Assets) ... $ 501,749 =========== FRANKLIN SMALL-MID CAP GROWTH FUND 91,107 Anda Networks ............................................. 3/24/00 $5,000,000 $ 70,152 =========== TOTAL RESTRICTED SECURITIES (0.00%(a) of Net Assets)
(a) Rounds to less than 0.01% of net assets. 9. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES The 1940 Act defines "affiliated companies" to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in "affiliated companies" for the Franklin Small-Mid Cap Growth Fund for the year ended April 30, 2009, were as shown below.
NUMBER NUMBER OF SHARES OF SHARES HELD AT HELD AT REALIZED BEGINNING GROSS GROSS END OF VALUE AT INVESTMENT CAPITAL NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS YEAR END OF YEAR INCOME GAIN (LOSS) - -------------- --------- --------- ---------- --------- ----------- ---------- ------------- FRANKLIN SMALL-MID CAP GROWTH FUND NON-CONTROLLED AFFILIATES American Medical Systems Holdings Inc. ... 3,689,900 -- 3,689,900 -- $ --(a) $ -- $ (25,524,870) Force Protection Inc. .................... 3,734,600 -- 1,325,500 2,409,100 --(a) -- (6,967,125) FormFactor Inc. .......................... 3,689,300 -- 971,776 2,717,524 47,366,443 -- (25,615,375) Microsemi Corp. .......................... 5,007,300 -- 5,007,300 -- --(a) -- (46,179,780) Orbital Sciences Corp. ................... 3,420,100 -- 3,420,100 -- --(a) -- (23,689,450) Silicon Laboratories Inc. ................ 3,561,500 -- 1,531,100 2,030,400 --(a) -- (1,758,951) The Men--s Wearhouse Inc. ................ 3,301,000 -- 3,301,000 -- --(a) 394,940 (58,939,751) Wolverine World Wide Inc. ................ 3,792,210 -- 1,523,135 2,269,075 --(a) 1,165,938 61,324 ----------- ---------- ------------- TOTAL AFFILIATED SECURITIES (1.55% of Net Assets) .............. $47,366,443 $1,560,878 $(188,613,978) =========== ========== =============
(a) As of April 30, 2009 no longer an affiliate. 118 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. CREDIT FACILITY Effective January 23, 2009, the Funds, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, "Borrower"; collectively "Borrowers"), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. Under the terms of the Global Credit Facility, the Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Funds incurred commitment fees of $3,720 of their pro rata portion of the Global Credit Facility, which is reflected in Other expenses on the Statements of Operations. During the year ended April 30, 2009, the Funds did not utilize the Global Credit Facility. 11. FAIR VALUE MEASUREMENTS The Funds adopted Financial Accounting Standards Board (FASB) Statement No. 157, "Fair Value Measurement" (SFAS 157), on May 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Funds have determined that the implementation of SFAS 157 did not have a material impact on the Funds' financial statements. SFAS 157 establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Trust's own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds' investments and are summarized in the following fair value hierarchy: - Level 1 -- quoted prices in active markets for identical securities - Level 2 -- other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) - Level 3 -- significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. Annual Report | 119 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. FAIR VALUE MEASUREMENTS (CONTINUED) The following is a summary of the inputs used as of April 30, 2009, in valuing the Funds' assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL -------------- ----------- ----------- -------------- FRANKLIN FLEX CAP GROWTH FUND ASSETS: Investments in Securities $2,052,479,333 $ -- $11,253,003 $2,063,732,336 FRANKLIN FOCUSED CORE EQUITY FUND ASSETS: Investments in Securities $ 4,964,217 $ -- $ -- $ 4,964,217 FRANKLIN GROWTH OPPORTUNITIES FUND ASSETS: Investments in Securities $ 284,726,581 $ -- $ 501,749 $ 285,228,330 FRANKLIN SMALL CAP GROWTH FUND ASSETS: Investments in Securities $ 240,948,620 $ -- $ -- $ 240,948,620 FRANKLIN SMALL-MID CAP GROWTH FUND ASSETS: Investments in Securities $3,025,190,741 $37,391,776 $ 70,152 $3,062,652,669
At April 30, 2009, the reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining the funds' fair value, were as follows:
FRANKLIN FRANKLIN GROWTH FLEX CAP OPPORTUNITIES GROWTH FUND FUND ------------- --------------- INVESTMENTS INVESTMENTS IN SECURITIES IN SECURITIES ------------- --------------- Beginning Balance - May 1, 2008 ........................... $13,209,186 $1,293,081 Net realized gain (loss) ............................... -- -- Net change in unrealized appreciation (depreciation) ... (1,956,183) (805,833) Net purchases (sales) .................................. -- 14,501 Transfers in and/or out of Level 3 ..................... -- -- ----------- ---------- Ending Balance ............................................ $11,253,003 $ 501,749 =========== ========== Net change in unrealized appreciation (depreciation) attributable to assets still held at end of year ....... $(1,956,183) $ (805,833) =========== ==========
120 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. FAIR VALUE MEASUREMENTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND ------------- INVESTMENTS IN SECURITIES ------------- Beginning Balance - May 1, 2008 ................................................. $ 3,012,662 Net realized gain (loss) ..................................................... (16,635,019) Net change in unrealized appreciation (depreciation) ......................... 13,692,509 Net purchases (sales) ........................................................ -- Transfers in and/or out of Level 3 ........................................... -- ------------ Ending Balance .................................................................. $ 70,152 ============ Net change in unrealized appreciation (depreciation) attributable to assets still held at end of year .......................................................... $ (102,040) ============
12. NEW ACCOUNTING PRONOUNCEMENTS In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which expands disclosures about derivative investments and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Funds believe applying the various provisions of SFAS 161 will not have a material impact on its financial statements. In April 2009, FASB issued FASB Staff Position FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" (FSP FAS 157-4), which provides additional guidance when the volume and level of activity for the asset or liability measured at fair value have significantly decreased. Additionally, FSP FAS 157-4 amends SFAS 157, expanding disclosure requirements by reporting entities surrounding the major categories of assets and liabilities carried at fair value. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009. The Funds are currently evaluating the impact, if any, of applying FSP FAS 157-4. In May 2009, FASB issued Statement No. 165, "Subsequent Events", which is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before the statements are issued or are available to be issued. FASB 165 is effective for interim or annual financial periods ending after June 15, 2009, the adoption of FASB 165 will not have a material impact on the financial statements. ABBREVIATIONS SELECTED PORTFOLIO ADR - American Depository Receipt PIPES - Private Investment in Public Equity Security Annual Report | 121 Franklin Strategic Series REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN STRATEGIC SERIES In our opinion, the accompanying statements of assets and liabilities, including the statements of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Flex Cap Growth Fund, Franklin Focused Core Equity Fund, Franklin Growth Opportunities Fund, Franklin Small Cap Growth Fund and Franklin Small-Mid Cap Growth Fund (separate portfolios of Franklin Strategic Series, hereafter referred to as the "Funds") at April 30, 2009, the results of each of their operations for the year then ended, the changes in each of their net assets and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at April 30, 2009 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California June 19, 2009 122 | Annual Report Franklin Strategic Series TAX DESIGNATION (UNAUDITED) Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Funds designate the maximum amount allowable but no less than the following amounts as long term capital gain dividends for the fiscal year ended April 30, 2009:
FRANKLIN FRANKLIN FRANKLIN FOCUSED CORE SMALL CAP SMALL-MID CAP EQUITY FUND GROWTH FUND GROWTH FUND - ------------ ----------- ------------- $110 $384,438 $9,473,895
Under Section 871(k)(2)(C) of the Code, the Franklin Focused Core Equity Fund and Franklin Small Cap Growth Fund designate the maximum amount allowable but no less than $17,123 and $3,622,227, respectively, as short term capital gain dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended April 30, 2009. Under Section 854(b)(2) of the Code, the Franklin Focused Core Equity Fund and Franklin Small Cap Growth Fund designate 82.92% and 13.63%, respectively, of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended April 30, 2009. Under Section 854(b)(2) of the Code, the Funds designate the maximum amount allowable but no less than the following amounts as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended April 30, 2009:
FRANKLIN FRANKLIN FRANKLIN GROWTH FRANKLIN FRANKLIN FLEX CAP FOCUSED CORE OPPORTUNITIES SMALL CAP SMALL-MID CAP GROWTH FUND EQUITY FUND FUND GROWTH FUND GROWTH FUND - ----------- ------------ --------------- ----------- ------------- $20,134,906 $93,869 $904,437 $514,803 $18,027,239
Distributions, including qualified dividend income, paid during calendar year 2009 will be reported to shareholders on Form 1099-DIV in January 2010. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Annual Report | 123 Franklin Strategic Series BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member serves until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ---------------- ----------------------- ----------------------------------- HARRIS J. ASHTON (1932) Trustee Since 1991 135 Bar-S Foods (meat packing company). One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). ROBERT F. CARLSON (1928) Trustee Since 2007 112 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Retired; and FORMERLY, Vice President, senior member and President, Board of Administration, California Public Employees Retirement Systems (CALPERS) (1971-2008); member and Chairman of the Board, Sutter Community Hospitals; member, Corporate Board, Blue Shield of California; and Chief Counsel, California Department of Transportation. SAM GINN (1937) Trustee Since 2007 112 Chevron Corporation (global energy One Franklin Parkway company) and ICO Global San Mateo, CA 94403-1906 Communications (Holdings) Limited (satellite company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding company) (1988-1994). EDITH E. HOLIDAY (1952) Trustee Since 1998 135 Hess Corporation (exploration and One Franklin Parkway refining of oil and gas), H.J. San Mateo, CA 94403-1906 Heinz Company (processed foods and allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison - United States Treasury Department (1988-1989).
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NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ---------------- ----------------------- ----------------------------------- FRANK W.T. LAHAYE (1929) Trustee Since 1991 112 Center for Creative Land Recycling One Franklin Parkway (brownfield redevelopment). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital). FRANK A. OLSON (1932) Trustee Since 2007 135 Hess Corporation (exploration and One Franklin Parkway refining of oil and gas) and San Mateo, CA 94403-1906 Sentient Jet (private jet service). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). LARRY D. THOMPSON (1945) Trustee Since 2007 143 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). JOHN B. WILSON (1959) Lead Trustee since 112 None One Franklin Parkway Independent 2006 and Lead San Mateo, CA 94403-1906 Trustee Independent Trustee since 2008 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Senior Vice President - Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting firm) (1986-1990).
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ---------------- ----------------------- ----------------------------------- **CHARLES B. JOHNSON (1933) Trustee and Trustee since 135 None One Franklin Parkway Chairman of 1991 and San Mateo, CA 94403-1906 the Board Chairman of the Board since 1993 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments.
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NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ---------------- ----------------------- ----------------------------------- **RUPERT H. JOHNSON, JR. (1940) Trustee, Trustee since 52 None One Franklin Parkway President and 1991 and San Mateo, CA 94403-1906 Chief President and Executive Chief Executive Officer - Officer - Investment Investment Management Management since 2002 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments. JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable One Franklin Parkway Compliance Officer since San Mateo, CA 94403-1906 Officer and 2004 and Vice Vice President President - AML - AML Compliance since Compliance 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). LAURA F. FERGERSON (1962) Chief Since March 2009 Not Applicable Not Applicable One Franklin Parkway Executive San Mateo, CA 94403-1906 Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003). GASTON GARDEY (1967) Treasurer, Since March 2009 Not Applicable Not Applicable One Franklin Parkway Chief Financial San Mateo, CA 94403-1906 Officer and Chief Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Fund Accounting, Franklin Templeton Investments; and officer of 28 of the investment companies in Franklin Templeton Investments. EDWARD L. GEARY (1962) Vice President Since March 2009 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; director of some of the other subsidiaries of Franklin Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
126 | Annual Report
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ---------------- ----------------------- ----------------------------------- ALIYA S. GORDON (1973) Vice President Since March 2009 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel, Franklin Templeton Investments; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Litigation Associate, Steefel, Levitt & Weiss, LLP (2000-2004). DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. EDWARD B. JAMIESON (1948) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Chief Investment Officer and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC; officer and/or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of four of the investment companies in Franklin Templeton Investments. CHRISTOPHER J. MOLUMPHY (1962) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director and Executive Vice President, Franklin Advisers, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments. KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable One Franklin Parkway and Secretary San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin Templeton Investments.
Annual Report | 127
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ---------------- ----------------------- ----------------------------------- CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
- ---------- * We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers. ** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be interested persons of the Trust under the federal securities laws due to their positions as officers and directors and major shareholders of Franklin Resources, Inc., which is the parent company of the Fund's investment manager and distributor. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE 2006. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON HAS ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. WILSON IS AN INDEPENDENT BOARD MEMBER AS THAT TERM IS DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI. 128 | Annual Report Franklin Strategic Series SHAREHOLDER INFORMATION BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT At a meeting held April 14, 2009, the Board of Trustees (Board), including a majority of non-interested or independent Trustees, approved renewal of the investment management agreement for each of the separate funds within the Trust (Fund(s)). In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included investment performance reports and related financial information for each Fund, as well as periodic reports on shareholder services, legal, compliance, pricing, brokerage commissions and execution and other services provided by the Investment Manager (Manager) and its affiliates. Information furnished specifically in connection with the renewal process included a report for each Fund prepared by Lipper, Inc. (Lipper), an independent organization, as well as additional material, including a Fund profitability analysis report prepared by management. The Lipper reports compared each Fund's investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper. The Fund profitability analysis report discussed the profitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Included with such profitability analysis report was information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager and its affiliates including management's explanation of differences where relevant and a three-year expense analysis with an explanation for any increase in expense ratios. Additional material accompanying such report was a memorandum prepared by management describing project initiatives and capital investments relating to the services provided to the Funds by the Franklin Templeton Investments organization, as well as a memorandum relating to economies of scale and a comparative analysis concerning transfer agent fees charged each Fund. Such material also discussed some of the actions taken by management in coping with problems arising out of the past year's financial upheaval. In considering such materials, the independent Trustees received assistance and advice from and met separately with independent counsel. While the investment management agreements for all Funds were considered at the same Board meeting, the Board dealt with each Fund separately. In approving continuance of the investment management agreement for each Fund, the Board, including a majority of independent Trustees, determined that the existing management fee structure was fair and reasonable and that continuance of the investment management agreement was in the best interests of each Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board's decision. NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature and quality of the overall services provided by the Manager and its affiliates to the Funds and their shareholders. In addition to investment performance and expenses discussed later, the Board's opinion was based, in part, upon periodic reports furnished it showing that the investment policies and restrictions for each Fund were consistently complied with as well as other reports periodically Annual Report | 129 Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) furnished the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics adopted throughout the Franklin Templeton fund complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net asset value calculations. The Board also noted the extent of benefits provided Fund shareholders from being part of the Franklin Templeton family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. Favorable consideration was given to management's continuous efforts and expenditures in establishing back-up systems and recovery procedures to function in the event of a natural disaster, it being noted that such systems and procedures had functioned smoothly during the Florida hurricanes and blackouts experienced in recent years. Among other factors taken into account by the Board were the Manager's best execution trading policies, including a favorable report by an independent portfolio trading analytical firm. Consideration was also given to the experience of each Fund's portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management's determination of a portfolio manager's bonus compensation was the relative investment performance of the funds he or she managed and that a portion of such bonus was required to be invested in a predesignated list of funds within such person's fund management area so as to be aligned with the interests of Fund shareholders. The Board also took into account the quality of transfer agent and shareholder services provided Fund shareholders by an affiliate of the Manager, noting continuing expenditures by management to increase and improve the scope of such services, periodic favorable reports on such service conducted by third parties, and the continuous enhancements to and high industry ranking given the Franklin Templeton website. Particular attention was given to the overall performance and actions taken by the Manager and its affiliates in response to problems arising out of the market turmoil and financial crisis experienced during the past year. In this respect, the Board noted that management's independent credit analysis and diligent risk management procedures had minimized exposure of funds within the Franklin Templeton complex to subprime mortgages and that its continuous monitoring of counterparty credit risk had limited fund exposure to firms experiencing financial difficulties like Bear Stearns and AIG. The same type of conservative approach and attention to risk had also prevented any structured investment products or other volatile instruments from being held in the portfolios of any of the money market funds within the Franklin Templeton complex, including the sweep money fund utilized by many of the funds as part of their cash management. The Board also took into account, among other things, management's efforts in establishing a $725 million global credit facility for the benefit of the funds and other accounts managed by Franklin Templeton Investments to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of the Manager's parent company and its commitment to the mutual fund business. The Board also noted that during the past year Franklin Templeton Investments, like many other fund managers, had announced a hiring freeze and implemented employee reductions, and the Board discussed with management the nature of such reductions and steps being taken to minimize any negative impact on the nature and quality of services being provided the Funds. 130 | Annual Report Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of the Funds in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings throughout the year, particular attention in assessing performance was given to the Lipper reports furnished for the agreement renewals. The Lipper reports prepared for each individual Fund showed the investment performance of its Class A shares for those having multiple share classes in comparison to a performance universe selected by Lipper. Comparative performance for each Fund was shown for the one-year period ended January 31, 2009, and previous periods ended that date of up to 10 years depending on when a particular Fund commenced operations. The following summarizes the performance results for each of these Funds and the Board's view of such performance. FRANKLIN FLEX CAP GROWTH FUND -- The performance universe for this Fund consisted of the Fund and all retail and institutional multi-cap growth funds as selected by Lipper. Consistent with the market sell-off that occurred during the past year, the Fund and most of the funds in the Lipper performance universe experienced losses during such period. The Lipper report showed the Fund's total return to be in the highest quintile of such performance universe for the one-year period and on an annualized basis to be in the highest or second-highest quintile of the performance universe during each of the previous three-, five- and 10-year periods. The Board noted such favorable comparative performance. FRANKLIN FOCUSED CORE EQUITY FUND -- The performance universe for this Fund consisted of all retail and institutional multi-cap core funds as selected by Lipper. Consistent with the market sell-off that occurred during the past year, the Fund and all the other funds in the Lipper performance universe experienced losses during such period. The Fund has been in operation for only one full year and the Lipper report showed its total return for the one-year period to be in the second-lowest quintile of such performance universe. The Board discussed such performance and steps being taken to improve it with management, but did not believe it particularly meaningful in view of the Fund's brief period of operation. FRANKLIN GROWTH OPPORTUNITIES FUND -- The performance universe for this Fund consisted of the Fund and all retail and institutional multi-cap growth funds as selected by Lipper. Consistent with the market sell-off that occurred during the past year, the Fund and most of the funds in the Lipper performance universe experienced losses during such period. The Lipper report comparison showed the Fund's total return for the one-year period to be in the highest quintile of its performance universe, and on an annualized basis to be in the highest or second-highest quintile of such universe during each of the previous three- and five-year periods. The Fund has not been in operation for a full 10-year period. The Board noted such favorable comparative performance. FRANKLIN SMALL-MID CAP GROWTH FUND -- The performance universe for this Fund consisted of all retail and institutional mid-cap growth funds as selected by Lipper. Consistent with the market sell-off that occurred during the past year, the Fund and all the other funds in the Lipper performance universe experienced losses during such period. The Lipper report comparison for the Fund Annual Report | 131 Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) showed its total return during the one-year period to be in the second-highest quintile of such performance universe, and on an annualized basis was in the middle quintile of such universe during each of the previous three- and five-year periods, and the second-highest quintile of such universe during the previous 10-year period. The Board noted such comparative performance to be acceptable. FRANKLIN SMALL CAP GROWTH FUND -- The performance universe for this Fund consisted of the Fund and all retail and institutional small cap growth funds as selected by Lipper. Consistent with the market sell-off that occurred during the past year, the Fund and most of the funds in the Lipper performance universe experienced losses during such period. The Lipper report comparison for the Fund showed its total return to be in the second-highest quintile of such performance universe during the one-year period and to be in the second-lowest quintile of such universe for the previous three- and five-year periods on an annualized basis. The independent Trustees had met separately last year with the Fund's lead portfolio manager and other management representatives to discuss its relatively poor past performance and steps being taken to improve it, and noted the Fund's favorable comparative performance during the past one-year period. COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the management fees and total expense ratios of each Fund compared with those of a group of other funds selected by Lipper as its appropriate Lipper expense group. Lipper expense data is based upon historical information taken from each fund's most recent annual report and, as a result of the severe decline in mutual fund industry assets during the last quarter of 2008, is based on asset levels that are higher than the level currently existing for most funds. While recognizing the limitations inherent in Lipper's methodology and recognizing that current expense ratios may increase as assets decline, the Board believed that the independent analysis conducted by Lipper remained an appropriate measure of comparative expenses. In reviewing comparative costs, Lipper provides information on each Fund's contractual investment management fee in comparison with the investment management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The Lipper contractual investment management fee analysis includes administrative charges as being part of the investment management fee, and actual total expenses, for comparative consistency, are shown by Lipper for Fund Class A shares for those Funds with multiple share classes. The results of such expense comparisons showed the contractual investment management fee rates and actual total expense rates for each of Franklin Flex Cap Growth Fund and Franklin Small Cap Growth Fund were in the least expensive quintile of their respective Lipper expense groups. The contractual investment management fee rate for Franklin Small Mid-Cap Growth Fund was in the least expensive quintile of its Lipper expense group and its actual total expense rate was in the second least expensive quintile of such expense group. The contractual management fee rate for Franklin Growth Opportunities Fund was in the second least expensive quintile of its Lipper expense group and its actual total expense rate was in the second least expensive quintile of such group. The Board was satisfied with the contractual management fees and total expenses of each of these Funds in comparison to their expense group 132 | Annual Report Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) as shown in the Lipper reports. The contractual investment management fee rate for Franklin Focused Core Equity Fund was in the second most expensive quintile of its Lipper expense group, but its actual total expense rate was in the least expensive quintile of such expense group. The Board was satisfied with the expenses of this Fund, noting they were subsidized by management. MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of each Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton's U.S. fund business, as well as its profits in providing management and other services to each of the individual funds during the 12-month period ended September 30, 2008, being the most recent fiscal year end for Franklin Resources, Inc., the Manager's parent. During such period, the assets of the Franklin Templeton U.S. fund business were significantly higher than currently existing, and to such extent the profitability analysis does not reflect current fund operations. While taking this into account in assessing the significance of the Fund profitability analysis, the Board recognized such analysis was made at a given point in time and that the decline in assets and effect on profitability would be reflected in the profitability analysis covering Franklin Resources' 2009 fiscal year period. In reviewing the analysis, attention was given to the methodology followed in allocating costs to each Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that, while being continuously refined and reflecting changes in the Manager's own cost accounting, the allocation methodology was consistent with that followed in profitability report presentations for the Funds made in prior years and that the Funds' independent registered public accounting firm had been engaged by the Manager to perform certain procedures on a biennial basis, specified and approved by the Manager and the Funds' Board solely for their purposes and use in reference to the profitability analysis. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in establishing the infrastructure necessary for the type of mutual fund operations conducted by the Manager and its affiliates may not be fully reflected in the expenses allocated to each Fund in determining its profitability, as well as the fact that the level of profits, to a certain extent, reflected operational cost savings and efficiencies initiated by management. The Board also took into account management's expenditures in improving shareholder services provided the Funds, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act and recent SEC and other regulatory requirements. In addition, the Board considered a third-party study comparing the profitability of the Manager's parent on an overall basis as compared to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including its interest in a joint venture entity that financed up-front commissions paid to brokers/dealers who sold fund Class B shares prior to February 2005 when the offering of such shares was discontinued, as well as potential benefits resulting from allocation of fund brokerage and the use of commission dollars to pay for research. Based upon its consideration of all these Annual Report | 133 Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) factors, the Board determined that the level of profits realized by the Manager and its affiliates from providing services to each Fund was not excessive in view of the nature, quality and extent of services provided. ECONOMIES OF SCALE. The Board also considered whether economies of scale are realized by the Manager as the Funds grow larger and the extent to which this is reflected in the level of management fees charged. While recognizing that any precise determination is inherently subjective, the Board noted that based upon the Fund profitability analysis, it appears that as some funds get larger, at some point economies of scale do result in the Manager realizing a larger profit margin on management services provided such a fund. The Board noted that economies of scale were shared with each Fund and its shareholders through management fee breakpoints so that as a Fund grows in size, its effective management fee rate declines. The fee structure under the investment management agreements for all of the Funds contains breakpoints that continued to asset levels that exceeded their asset size at December 31, 2008. The assets of Franklin Focused Core Equity Fund amounted to approximately $4 million at December 31, 2008 and the Board did not believe such size afforded any economies of scale, noting expenses were subsidized by management. In view of such fee structure and the favorable expense comparisons of the other Funds within their respective expense groups, the Board believed that to the extent economies of scale may be realized by the manager of these Funds and its affiliates, that there was a sharing of benefits with each Fund and its shareholders. PROXY VOTING POLICIES AND PROCEDURES The Trust's investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330. 134 | Annual Report This page intentionally left blank. This page intentionally left blank. Franklin Templeton Funds LITERATURE REQUEST. TO RECEIVE A PROSPECTUS, PLEASE CALL US AT (800) DIAL BEN/(800) 342-5236 OR VISIT franklintempleton.com. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE, WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR BEEPING TONE. VALUE Franklin All Cap Value Fund Franklin Balance Sheet Investment Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund(1) Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Quest Fund Mutual Recovery Fund(2) Mutual Shares Fund BLEND Franklin Focused Core Equity Fund Franklin Large Cap Equity Fund Franklin Rising Dividends Fund GROWTH Franklin Flex Cap Growth Fund Franklin Growth Fund Franklin Growth Opportunities Fund Franklin Small Cap Growth Fund Franklin Small-Mid Cap Growth Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Real Estate Fund Franklin Gold & Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Utilities Fund Mutual Financial Services Fund GLOBAL Mutual Global Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund INTERNATIONAL Franklin India Growth Fund Franklin International Growth Fund Franklin International Small Cap Growth Fund Mutual European Fund Mutual International Fund Templeton BRIC Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Emerging Markets Small Cap Fund Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton Frontier Markets Fund HYBRID Franklin Balanced Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Income Fund Templeton Income Fund ASSET ALLOCATION Franklin Templeton Corefolio(R) Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund Franklin Templeton 2015 Retirement Target Fund Franklin Templeton 2025 Retirement Target Fund Franklin Templeton 2035 Retirement Target Fund Franklin Templeton 2045 Retirement Target Fund FIXED INCOME Franklin Adjustable U.S. Government Securities Fund(3) Franklin Floating Rate Daily Access Fund Franklin High Income Fund Franklin Limited Maturity U.S. Government Securities Fund(3) Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund(3) Templeton Global Bond Fund Templeton Global Total Return Fund Templeton International Bond Fund TAX-FREE INCOME(4) NATIONAL Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(5) LIMITED-/INTERMEDIATE-TERM California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Arizona California(6) Colorado Connecticut Florida Georgia Kentucky Louisiana Maryland Massachusetts(7) Michigan(7) Minnesota(7) Missouri New Jersey New York(6) North Carolina Ohio(7) Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(8) (1.) The fund is closed to new investors. Existing shareholders and select retirement plans can continue adding to their accounts. (2.) The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. (3.) An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. (4.) For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. (5.) The fund invests primarily in insured municipal securities. (6.) These funds are available in four or more variations, including long-term portfolios, intermediate-term portfolios, portfolios of insured securities, a high-yield portfolio (CA only) and money market portfolios. (7.) The Board of Trustees approved the elimination of the non-fundamental policy requiring the fund to invest at least 80% of net assets in insured municipal securities and the removal of the word "Insured" from the fund name. The changes became effective 2/17/09. (8.) The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 04/09 Not part of the annual report (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway San Mateo, CA 94403-1906 SIGN UP FOR EDELIVERY Log onto franklintempleton.com and click "My Profile" ANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN STRATEGIC SERIES INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. (800) DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES (800) 632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. FSS1 A2009 06/09 APRIL 30, 2009 ANNUAL REPORT AND SHAREHOLDER LETTER Franklin Biotechnology Discovery Fund Franklin Natural Resources Fund SIGN UP FOR EDELIVERY Log onto franklintempleton.com and click "My Profile" (GRAPHIC) SECTOR FRANKLIN STRATEGIC SERIES (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) FRANKLIN - Templeton - Mutual Series Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE(R) Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups--Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS (GRAPHIC) Not part of the annual report Contents ANNUAL REPORT SHAREHOLDER LETTER ........................................................ 1 Economic and Market Overview .............................................. 3 Franklin Biotechnology Discovery Fund ..................................... 5 Franklin Natural Resources Fund ........................................... 12 Financial Highlights and Statements of Investments ........................ 22 Financial Statements ...................................................... 32 Notes to Financial Statements ............................................. 36 Report of Independent Registered Public Accounting Firm ................... 49 Tax Designation ........................................................... 50 Board Members and Officers ................................................ 51 Shareholder Information ................................................... 56
Shareholder Letter Dear Shareholder: The 12-month period ended April 30, 2009, was an extraordinary and stressful time for investors and those of us who have worked in financial markets for many years. During this turbulent period, the U.S. recession deepened, the unemployment rate surged and consumer spending fell. Most stocks suffered major losses as investors worried about an uncertain future. With a new president, Barack Obama, the country and the financial markets were eager to see how effectively the government could address these problems. Although this environment is bound to provoke great concern, we think it is important to put short-term market developments in perspective. Keep in mind that as daunting as current conditions may be, we have navigated through other periods of high market volatility, such as the U.S. stock market's severe decline of 1987 and the bursting of the technology bubble in 2000. We remain committed to our long-term perspective and disciplined investment philosophy. Therefore, we view recent declines as potential opportunities to find bargains that we believe may be well positioned to become eventual winners. Although conditions remain challenging, our experience gives us ample reason to be optimistic about future market stabilization and recovery. Franklin Strategic Series' annual report goes into greater detail about prevailing conditions during the year under review. In addition, the portfolio managers discuss investment management decisions and Fund performance for the period. You will also find performance data and financial information. Please remember that all securities markets fluctuate, as do mutual fund share prices. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Not part of the annual report | 1 If you would like more frequent updates, franklintempleton.com provides daily prices, monthly performance figures, portfolio holdings and other information. You can also access your account, buy and sell shares, read timely articles, and find helpful financial planning tools. We hope you will take advantage of these online services. Although market conditions are constantly changing, we remain committed to our disciplined strategy as we manage the Funds, keeping in mind the trust you have placed in us. As always, we recommend investors consult their financial advisors and review their portfolios to design a long-term strategy and portfolio allocation that meet their individual needs, goals and risk tolerance. We firmly believe that most people benefit from professional advice, and that advice is invaluable as investors navigate current market conditions. We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to serving your investment needs in the years ahead. Sincerely, /s/ Rupert H. Johnson, Jr. Rupert H. Johnson, Jr. President and Chief Executive Officer - Investment Management Franklin Strategic Series THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF APRIL 30, 2009. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. 2 | Not part of the annual report Annual Report Economic and Market Overview During the 12-month period ended April 30, 2009, the U.S. economy and stock markets suffered significant declines, but tentative signs of stabilization emerged near period-end. The government's abrupt conservatorship of Fannie Mae and Freddie Mac in early September 2008 and the failure of several blue chip banks and financial institutions roiled equity markets for most of the reporting period. Despite government interventions and massive emergency funding, the nation's economic troubles were exacerbated as manufacturing activity weakened at its fastest pace in nearly 30 years. Although home sales declined for most of the period, they edged higher near period-end. Jobless claims mounted and the unemployment rate rose to 8.9% in April 2009.(1) Reflecting a broad-based contraction in consumer spending, falling corporate profits and slowing exports, economic growth, as measured by gross domestic product (GDP), fell in the third and fourth quarters of 2008 at annualized rates of 0.5% and 6.3% after increasing at a 2.8% annualized rate in the second quarter. In 2009's first quarter, GDP declined at an estimated 5.7% annualized rate. Oil prices stood at $113 per barrel at the beginning of the period, but retreated dramatically to $51 by period-end. Many other commodities such as agricultural products and base metals followed similar trends. Partially as a result of the steep price corrections, inflation declined significantly during the period, and April's inflation rate was an annualized -0.7%.(1) Core inflation, which excludes food and energy costs, rose at a 1.9% annual rate, which was within the Federal Reserve Board's (Fed's) informal target range of 1.5%-2.0%.(1) A slowing economy and decelerating inflation prompted policymakers to further lower interest rates and enact stimulus plans. During the 12 months under review, the Fed lowered the federal funds target rate to a range of 0% to 0.25% from 2.00% at the start of the period. The government introduced various new measures to enhance market liquidity and outlined details of its Public-Private Investment Program, with an objective of removing devalued real estate-related assets from banks' balance sheets. (1.) Source: Bureau of Labor Statistics. Annual Report | 3 Market volatility was high during the reporting period, but near period-end, stock markets began to rebound from severely depressed levels. Overall, however, they declined significantly during the period. For the 12 months under review, the blue chip stocks of the Dow Jones Industrial Average had a total return of - -34.19%, the broader Standard & Poor's 500 Index (S&P 500) a -35.31% total return, and the technology-heavy NASDAQ Composite Index a -28.13% total return.(2) All sectors lost value, and the financials, industrials and energy sectors had the largest declines. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF APRIL 30, 2009. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. (2.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. 4 | Annual Report Franklin Biotechnology Discovery Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Biotechnology Discovery Fund seeks capital appreciation by investing at least 80% of its net assets in securities of biotechnology companies and discovery research firms located in the U.S. and other countries. PORTFOLIO BREAKDOWN Franklin Biotechnology Discovery Fund Based on Total Net Assets as of 4/30/09 (PIE CHART) Biotechnology.............................. 67.5% Pharmaceuticals............................ 16.5% Life Sciences Tools & Services............. 9.0% Short-Term Investments & Other Net Assets.. 7.0%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This annual report for Franklin Biotechnology Discovery Fund covers the fiscal year ended April 30, 2009. PERFORMANCE OVERVIEW Franklin Biotechnology Discovery Fund - Class A had a -9.10% cumulative total return for the 12 months under review. The Fund performed better than its narrow benchmark, the NASDAQ Biotechnology Index, and its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which had -15.59% and -35.31% total returns for the same period.(1) For comparison, the NASDAQ (1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The NASDAQ Biotechnology Index contains companies primarily engaged in using biomedical research for the discovery or development of novel treatments or cures for human disease, which also meet other eligibility criteria. The NASDAQ Biotechnology Index is calculated under a modified capitalization-weighted methodology. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. 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 AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 23. Annual Report | 5 TOP 10 HOLDINGS Franklin Biotechnology Discovery Fund 4/30/09
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------- ---------- Gilead Sciences Inc. 11.7% BIOTECHNOLOGY Celgene Corp. 8.9% BIOTECHNOLOGY Genzyme Corp. 8.4% BIOTECHNOLOGY Amgen Inc. 7.9% BIOTECHNOLOGY Biogen Idec Inc. 5.4% BIOTECHNOLOGY Teva Pharmaceutical Industries Ltd. (Israel) 5.1% PHARMACEUTICALS Life Technologies 4.4% LIFE SCIENCES TOOLS & SERVICES Roche Holding AG (Switzerland) 3.9% PHARMACEUTICALS Cephalon Inc. 3.9% BIOTECHNOLOGY BioMarin Pharmaceutical Inc. 2.7% BIOTECHNOLOGY
Composite Index had a 12-month return of -28.13%.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 8. INVESTMENT STRATEGY The Fund is managed using a bottom-up approach to individual stock selection, with a focus on fundamental analysis and primary research. We look for biotechnology, biopharmaceutical and platform technology companies that possess products with favorable competitive profiles, large market opportunities and strong intellectual property, supported by thoughtful clinical and market development strategies. Our assessment of these products is based on extensive primary research and due diligence and includes, but is not limited to, a thorough review of medical literature, consultation of community and academic physicians, and attendance at scientific meetings and symposia. Additionally, we favor companies with excellent management, strong financial characteristics and attractive valuations. MANAGER'S DISCUSSION The Fund had numerous detractors from absolute performance during an extremely difficult year for stocks of all kinds, including many of those related to the health care sector. Within the Fund's portfolio, these included biotechnology holdings Celgene, Genzyme and Orexigen Therapeuutics; holdings within the life sciences tools and services industry, Helicos Biosciences and Sequenom; and pharmaceuticals industry holdings Somaxon Pharmaceuticals (sold by period-end), XenoPort (sold by period-end), Cardiome Pharma and BioForm Medical. All these positions posted double-digit losses during the year under review and subtracted heavily from overall returns. In contrast, but to a lesser extent, several contributors helped buoy the Fund's absolute results during the fiscal year. The Fund benefited from a wave of mergers in the biotechnology industry as it owned a large position in Genentech, which during March was acquired by strategic partner and Swiss pharmaceutical giant Roche Holding. Kosan Biosciences was another of our positions that appreciated strongly before ultimately being acquired early in the reporting period by drug maker Bristol-Myers Squibb. Myriad Genetics also stood out as a top performer as its predictive medicine products continued to show strong adoption in the marketplace. Genetic analytical tools and services provider (2.) Source: (C) 2009 Morningstar. The NASDAQ Composite Index measures all NASDAQ domestic and international common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 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. 6 | Annual Report Illumina posted solid returns, as did Life Technologies, a global leader in biotechnology reagents and systems that was created from the summer 2008 merger of Applied Biosystems and Invitrogen. Thank you for your continued participation in Franklin Biotechnology Discovery Fund. We look forward to serving your future investment needs. (PHOTO OF EVAN MCCULLOCH) /s/ Evan McCulloch Evan McCulloch, CFA Portfolio Manager Franklin Biotechnology Discovery Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF APRIL 30, 2009, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 7 Performance Summary as of 4/30/09 FRANKLIN BIOTECHNOLOGY DISCOVERY FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graph do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION
CLASS A (SYMBOL: FBDIX) CHANGE 4/30/09 4/30/08 - ----------------------- ------- ------- -------- Net Asset Value (NAV) -$4.99 $49.73 $54.72
PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES THE SALES CHARGE. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE THE MAXIMUM SALES CHARGE. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE.
CLASS A 1-YEAR 5-YEAR 10-YEAR - ------- ------- ------- -------- Cumulative Total Return(1) -9.12% -6.63% +113.51% Average Annual Total Return(2) -14.33% -2.52% +7.24% Value of $10,000 Investment(3) $ 8,567 $8,800 $ 20,121 Avg. Ann. Total Return (3/31/09)(4) -9.92% -1.10% +7.44% Total Annual Operating Expenses(5) 1.27%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. 8 | Annual Report Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes the applicable maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. CLASS A (5/1/99-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN BIOTECHNOLOGY S&P 500 NASDAQ BIOTECHNOLOGY DATE DISCOVERY FUND - CLASS A INDEX INDEX - ---------- ------------------------ ------- -------------------- 5/1/1999 $ 9,424 $10,000 $10,000 5/31/1999 $ 9,496 $ 9,764 $10,769 6/30/1999 $10,435 $10,306 $11,158 7/31/1999 $11,583 $ 9,984 $12,600 8/31/1999 $12,643 $ 9,935 $13,823 9/30/1999 $12,490 $ 9,662 $12,966 10/31/1999 $12,732 $10,274 $13,186 11/30/1999 $14,388 $10,482 $14,892 12/31/1999 $20,150 $11,100 $19,398 1/31/2000 $24,137 $10,542 $22,345 2/29/2000 $37,551 $10,343 $32,476 3/31/2000 $28,491 $11,354 $24,115 4/30/2000 $24,387 $11,013 $20,959 5/31/2000 $23,229 $10,787 $20,373 6/30/2000 $32,588 $11,053 $26,766 7/31/2000 $30,372 $10,880 $24,715 8/31/2000 $36,647 $11,556 $29,983 9/30/2000 $37,455 $10,946 $28,931 10/31/2000 $33,786 $10,899 $26,577 11/30/2000 $27,854 $10,040 $23,073 12/31/2000 $29,537 $10,089 $23,857 1/31/2001 $27,344 $10,447 $22,936 2/28/2001 $24,908 $ 9,495 $21,170 3/31/2001 $20,040 $ 8,893 $16,863 4/30/2001 $23,378 $ 9,584 $20,061 5/31/2001 $24,362 $ 9,648 $21,727 6/30/2001 $25,507 $ 9,414 $22,293 7/31/2001 $22,015 $ 9,321 $19,118 8/31/2001 $22,351 $ 8,737 $19,315 9/30/2001 $19,433 $ 8,032 $16,338 10/31/2001 $21,687 $ 8,185 $19,000 11/30/2001 $23,119 $ 8,813 $20,815 12/31/2001 $23,488 $ 8,890 $19,992 1/31/2002 $20,732 $ 8,760 $17,159 2/28/2002 $19,628 $ 8,591 $16,392 3/31/2002 $20,065 $ 8,915 $17,001 4/30/2002 $17,285 $ 8,374 $14,329 5/31/2002 $16,002 $ 8,312 $12,757 6/30/2002 $14,178 $ 7,720 $11,220 7/31/2002 $14,068 $ 7,118 $11,293 8/31/2002 $13,397 $ 7,165 $10,764 9/30/2002 $12,798 $ 6,386 $10,228 10/31/2002 $13,708 $ 6,949 $11,251 11/30/2002 $14,704 $ 7,358 $12,273 12/31/2002 $13,510 $ 6,925 $10,930 1/31/2003 $13,174 $ 6,744 $10,694 2/28/2003 $13,032 $ 6,643 $10,546 3/31/2003 $13,817 $ 6,707 $11,267 4/30/2003 $15,072 $ 7,260 $12,630 5/31/2003 $17,281 $ 7,642 $15,023 6/30/2003 $16,880 $ 7,740 $14,787 7/31/2003 $18,288 $ 7,876 $16,120 8/31/2003 $18,301 $ 8,030 $16,297 9/30/2003 $18,199 $ 7,944 $15,849 10/31/2003 $18,305 $ 8,394 $15,734 11/30/2003 $18,523 $ 8,468 $15,296 12/31/2003 $19,393 $ 8,912 $15,930 1/31/2004 $20,170 $ 9,075 $17,043 2/29/2004 $20,627 $ 9,202 $17,156 3/31/2004 $20,894 $ 9,063 $17,117 4/30/2004 $21,550 $ 8,920 $17,197 5/31/2004 $21,416 $ 9,043 $16,778 6/30/2004 $21,044 $ 9,219 $16,704 7/31/2004 $19,308 $ 8,914 $15,116 8/31/2004 $19,976 $ 8,950 $15,216 9/30/2004 $20,809 $ 9,047 $15,719 10/31/2004 $20,166 $ 9,185 $15,292 11/30/2004 $20,473 $ 9,556 $15,822 12/31/2004 $21,711 $ 9,882 $16,906 1/31/2005 $20,372 $ 9,641 $15,955 2/28/2005 $18,948 $ 9,844 $15,271 3/31/2005 $18,292 $ 9,669 $14,311 4/30/2005 $18,632 $ 9,486 $14,227 5/31/2005 $19,615 $ 9,788 $14,919 6/30/2005 $20,433 $ 9,802 $15,188 7/31/2005 $22,994 $10,166 $17,004 8/31/2005 $22,840 $10,073 $17,048 9/30/2005 $22,873 $10,155 $17,266 10/31/2005 $21,897 $ 9,986 $16,604 11/30/2005 $22,751 $10,363 $17,229 12/31/2005 $22,917 $10,367 $17,385 1/31/2006 $24,151 $10,642 $18,118 2/28/2006 $25,094 $10,670 $18,915 3/31/2006 $24,499 $10,803 $18,505 4/30/2006 $22,824 $10,948 $17,462 5/31/2006 $21,626 $10,633 $16,528 6/30/2006 $21,388 $10,648 $16,342 7/31/2006 $20,870 $10,713 $16,116 8/31/2006 $21,505 $10,968 $16,593 9/30/2006 $21,736 $11,251 $16,592 10/31/2006 $23,589 $11,617 $17,926 11/30/2006 $24,224 $11,838 $18,089 12/31/2006 $24,070 $12,004 $17,563 1/31/2007 $24,778 $12,186 $17,997 2/28/2007 $24,022 $11,948 $17,389 3/31/2007 $23,755 $12,081 $17,092 4/30/2007 $26,109 $12,616 $18,515 5/31/2007 $26,162 $13,057 $18,373 6/30/2007 $24,710 $12,840 $17,658 7/31/2007 $23,973 $12,442 $17,252 8/31/2007 $24,471 $12,628 $17,899 9/30/2007 $25,640 $13,100 $18,795 10/31/2007 $26,635 $13,309 $19,619 11/30/2007 $25,244 $12,752 $19,057 12/31/2007 $23,686 $12,664 $18,368 1/31/2008 $22,998 $11,904 $17,711 2/29/2008 $22,334 $11,518 $17,247 3/31/2008 $21,942 $11,468 $17,179 4/30/2008 $22,136 $12,026 $17,582 5/31/2008 $23,111 $12,182 $17,992 6/30/2008 $23,310 $11,155 $17,454 7/31/2008 $26,425 $11,061 $20,189 8/31/2008 $26,057 $11,221 $19,490 9/30/2008 $24,281 $10,221 $18,392 10/31/2008 $21,440 $ 8,505 $16,162 11/30/2008 $19,935 $ 7,895 $14,825 12/31/2008 $21,165 $ 7,979 $16,049 1/31/2009 $21,505 $ 7,306 $16,031 2/28/2009 $19,798 $ 6,528 $14,255 3/31/2009 $20,971 $ 7,100 $15,021 4/30/2009 $20,121 $ 7,779 $14,841 Total 101.21% -22.21% 48.41%
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/09 - ------- ------- 1-Year -14.33% 5-Year -2.52% 10-Year +7.24%
ENDNOTES THE FUND IS A NONDIVERSIFIED FUND THAT CONCENTRATES IN A SINGLE SECTOR, WHICH INVOLVES RISKS SUCH AS PATENT CONSIDERATIONS, PRODUCT LIABILITY, GOVERNMENT REGULATORY REQUIREMENTS AND REGULATORY APPROVAL FOR NEW DRUGS AND MEDICAL PRODUCTS. BIOTECHNOLOGY COMPANIES OFTEN ARE SMALL AND/OR RELATIVELY NEW. SMALLER COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGES IN ECONOMIC CONDITIONS AND HAVE LESS CERTAIN GROWTH PROSPECTS THAN LARGER, MORE ESTABLISHED COMPANIES AND CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM. THE FUND MAY ALSO INVEST IN FOREIGN COMPANIES, WHICH INVOLVE SPECIAL RISKS, INCLUDING CURRENCY FLUCTUATIONS AND POLITICAL UNCERTAINTY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. (1.) Cumulative total return represents the change in value of an investment over the periods indicated. (2.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (3.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (4.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (6.) Source: (C) 2009 Morningstar. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The NASDAQ Biotechnology Index contains companies primarily engaged in using biomedical research for the discovery and development of novel treatments or cures for human disease, which also meet other eligibility criteria. The NADSAQ Biotechnology Index is calculated under a modified capitalization-weighted methodology. Annual Report | 9 Your Fund's Expenses FRANKLIN BIOTECHNOLOGY DISCOVERY FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 10 | Annual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 11/1/08 VALUE 4/30/09 PERIOD* 11/1/08-4/30/09 - ------- ----------------- -------------- ----------------------- Actual $1,000 $ 938.50 $6.83 Hypothetical (5% return before expenses) $1,000 $1,017.75 $7.10
* Expenses are calculated using the most recent six-month annualized expense ratio of 1.42%, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. Annual Report | 11 Franklin Natural Resources Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Natural Resources Fund seeks high total return (total return consists of both capital appreciation and current dividend and interest income) by investing at least 80% of its net assets in equity and debt securities of companies that own, produce, refine, process, transport or market natural resources, as well as those that provide related services for natural resources companies. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. GEOGRAPHIC BREAKDOWN Franklin Natural Resources Fund Based on Total Net Assets as of 4/30/09 (BAR CHART) North America 81.2% Europe 4.9% Australia & New Zealand 3.2% Latin America & Caribbean 2.7% Middle East & Africa 2.4% Asia 0.2% Short-Term Investments & Other Net Assets 5.4%
This annual report for Franklin Natural Resources Fund covers the fiscal year ended April 30, 2009. PERFORMANCE OVERVIEW Franklin Natural Resources Fund - Class A had a -46.81% cumulative total return for the 12 months under review. The Fund performed comparably to its narrow benchmark, the Standard & Poor's (S&P) North American Natural Resources Index, which had a -44.06% total return.(1) It underperformed its broad benchmark, the S&P 500 Index (S&P 500), which had a -35.31% total return for the same period.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 16. INVESTMENT STRATEGY We use a fundamental, research-driven approach to identify industries in the natural resources sector that we believe offer the strongest underlying attributes including, but not limited to, favorable supply and demand characteristics, barriers to entry, and pricing power. Within those industries, we seek to identify individual companies that appear to offer the best total return potential. The Fund's holdings are typically concentrated in the energy sector but also include investments in the metals and mining, chemicals, paper and forest products, and other related sectors. (1.) Source: Standard & Poor's. The Standard & Poor's North American Natural Resources Index is a modified capitalization-weighted index that includes companies involved in extractive industries (mining), energy, forestry services, producers of pulp and paper, and owners and operators of timber tracts or plantations. (2.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. 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 AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 28. 12 | Annual Report MANAGER'S DISCUSSION For much of the year under review, the Fund's performance was hindered by sharply subsiding commodity demand as a deepening global recession took hold and the broad-based bear market for equities intensified. This was in stark contrast to the first three months of the Fund's fiscal year, when many commodity prices - -- including those for oil, coal, natural gas, precious metals, and raw materials -- neared or surpassed all-time highs due to increased worldwide demand, limited supplies and investors seeking alternatives to faltering stocks and corporate bonds. In anticipation of some level of weakness and shift in supply and demand, we significantly reduced the Fund's weighting in the exploration and production industry during late spring and early summer of 2008, and redeployed assets into what we considered more conservative investments. Although these actions helped mitigate the commodity downturn's impact and led to some measure of outperformance versus many of our competitors, the speed and magnitude of the decline in the second half of 2008 eventually engulfed most commodity-related industries and negatively influenced the Fund's total return. In short, the severity of the decline turned out to be more extreme than we anticipated, pressuring nearly all investments with the exception of cash and equivalent holdings. During this difficult and volatile environment, our energy sector investments constituted the bulk of the Fund's assets and, moreover, were responsible for a major portion of its negative return during the year under review. Within the sector, many of our holdings from the energy equipment and services industry suffered significant price declines and hurt Fund performance on an absolute basis.(3) Such companies support drilling and development efforts of oil and natural gas explorers and producers around the world and are integral in efforts to provide adequate supplies in the future. This is why we considered many of the leading service providers to be core portfolio holdings. Notable detractors included Smith International, Halliburton, Helix Energy Solutions Group, Transocean and Schlumberger. These companies' share prices fell steeply as a result of concerns related to lower commodity prices and spending by producers. In addition, the credit crisis led to further pressure as many smaller producers that held debt or were outspending their cash flow were forced to reduce spending budgets more deeply and quickly than in previous economic downturns. Lack of available credit also led to significant equity price declines for companies with heretofore modest debt levels as investors grew concerned that even some of the highest quality companies would have difficulty obtaining credit or refinancing debt. (3.) The energy equipment and services industry comprises oil and gas drilling and oil and gas equipment and services in the SOI. PORTFOLIO BREAKDOWN Franklin Natural Resources Fund Based on Total Net Assets as of 4/30/09 Oil & Gas Exploration & Production 30.2% Oil & Gas Equipment & Services 20.8% Integrated Oil & Gas 14.9% Diversified Metals & Mining 8.0% Gold 7.0% Oil & Gas Drilling 3.3% Coal & Consumable Fuels 3.2% Oil & Gas Refining & Marketing 3.0% Precious Metals & Minerals 1.4% Other 2.8% Short-Term Investments & Other Net Assets 5.4%
Annual Report | 13 TOP 10 HOLDINGS Franklin Natural Resources Fund 4/30/09
COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - ------------------------ ---------- Southwestern Energy Co. 4.0% OIL & GAS EXPLORATION & PRODUCTION, U.S. Petrohawk Energy Corp. 3.6% OIL & GAS EXPLORATION & PRODUCTION, U.S. XTO Energy Inc. 3.5% OIL & GAS EXPLORATION & PRODUCTION, U.S. Devon Energy Corp. 3.3% OIL & GAS EXPLORATION & PRODUCTION, U.S. Marathon Oil Corp. 3.1% INTEGRATED OIL & GAS, U.S. Noble Energy Inc. 2.8% OIL & GAS EXPLORATION & PRODUCTION, U.S. Occidental Petroleum Corp. 2.8% INTEGRATED OIL & GAS, U.S. Range Resources Corp. 2.7% OIL & GAS EXPLORATION & PRODUCTION, U.S. Halliburton Co. 2.4% OIL & GAS EQUIPMENT & SERVICES, U.S. EOG Resources Inc. 2.4% OIL & GAS EXPLORATION & PRODUCTION, U.S.
Several of the Fund's oil, gas and consumable fuels stocks also fared poorly and generally tracked the precipitous decline in oil and natural gas prices throughout most of the fiscal year, particularly Devon Energy, Mariner Energy and ConocoPhillips.(4) In addition to leading to reduced cash flows, a decline in commodity prices can lead to reductions in spending necessary to maintain and grow production, eventually leading to lower equity valuations. This is one of the reasons we focused the Fund's exploration and production holdings on what we considered to be lower-cost producers with healthy balance sheets and well-funded exploration and development programs. In contrast, several Fund holdings outside of the beleaguered energy sector contributed to absolute performance. These included metals and mining industry stocks such as AngloGold Ashanti, Rio Tinto, Franco Nevada, BHP Billiton and Osisko Mining, many of which benefited from the rise in the price of gold and other metals late in the period.(5) Although most of the Fund's energy-related holdings deteriorated, a few positions supported overall results, particularly oil and natural gas developers such as Petrohawk Energy, Southwestern Energy and Noble Energy. It should be noted that these stocks, similar to several other Fund holdings, contributed positively to performance despite posting share price declines over the past year. This resulted from the fact that we reduced positions in the spring and early summer, as mentioned above, and made incremental purchases at lower valuation levels throughout the downturn. These purchases had a positive impact on the Fund during the first four months of 2009. Although the past year was a trying period, our focus on higher quality companies with strong business models and balance sheets helped the Fund weather the downturn and provided us with conviction to make additional purchases of core holdings at the depths of the crisis during the fall of 2008. We believe this, in turn, positioned the Fund well for the subsequent recovery in equity values. We did not avoid all of the pitfalls created over the past year and it will be impossible to do so in the future. However, we continued to implement our strategy of actively investing in companies that we feel present the best risk-adjusted return potential with a focus on secular growth themes. (4.) The oil, gas and consumable fuels industry comprises coal and consumable fuels, integrated oil and gas, oil and gas exploration and production, oil and gas refining and marketing, and oil and gas storage and transportation in the SOI. (5.) The metals and mining industry comprises aluminum, diversified metals and mining, gold, and precious metals and minerals in the SOI. 14 | Annual Report Thank you for your continued participation in Franklin Natural Resources Fund. We look forward to serving your future investment needs. (PHOTO OF FREDERICK G. FROMM) /s/ Frederick G. Fromm Frederick G. Fromm, CFA Portfolio Manager Franklin Natural Resources Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF APRIL 30, 2009, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 15 Performance Summary as of 4/30/09 FRANKLIN NATURAL RESOURCES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FRNRX) CHANGE 4/30/09 4/30/08 - ----------------------- ------- ------- ------- Net Asset Value (NAV) -$23.23 $22.55 $45.78 DISTRIBUTIONS (5/1/08-4/30/09) Short-Term Capital Gain $0.6640 Long-Term Capital Gain $0.8367 TOTAL $1.5007
CLASS C (SYMBOL: FNCRX) CHANGE 4/30/09 4/30/08 - ----------------------- ------- ------- ------- Net Asset Value (NAV) -$23.20 $22.15 $45.35 DISTRIBUTIONS (5/1/08-4/30/09) Short-Term Capital Gain $0.6640 Long-Term Capital Gain $0.8367 TOTAL $1.5007
ADVISOR CLASS (SYMBOL: FNRAX) CHANGE 4/30/09 4/30/08 - ----------------------------- ------- ------- ------- Net Asset Value (NAV) -$24.33 $23.94 $48.27 DISTRIBUTIONS (5/1/08-4/30/09) Short-Term Capital Gain $0.6640 Long-Term Capital Gain $0.8367 TOTAL $1.5007
16 | Annual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY; ADVISOR CLASS: NO SALES CHARGES.
CLASS A(1) 1-YEAR 5-YEAR 10-YEAR - ---------- ------- ------- -------- Cumulative Total Return(2) -46.81% +55.00% +128.71% Average Annual Total Return(3) -49.87% +7.87% +7.98% Value of $10,000 Investment(4) $ 5,013 $14,606 $ 21,553 Avg. Ann. Total Return (3/31/09)(5) -50.85% +5.16% +8.51% Total Annual Operating Expenses(6) 0.99%
INCEPTION CLASS C 1-YEAR 3-YEAR (9/1/05) - ------- ------- ------- --------- Cumulative Total Return(2) -47.19% -23.41% -10.03% Average Annual Total Return(3) -47.68% -8.51% -2.85% Value of $10,000 Investment(4) $ 5,232 $ 7,659 $ 8,997 Avg. Ann. Total Return (3/31/09)(5) -48.71% -10.41% -6.19% Total Annual Operating Expenses(6) 1.70%
ADVISOR CLASS(1) 1-YEAR 5-YEAR 10-YEAR - ---------------- ------- ------- -------- Cumulative Total Return(2) -46.66% +57.34% +136.74% Average Annual Total Return(3) -46.66% +9.49% +9.00% Value of $10,000 Investment(4) $ 5,334 $15,734 $ 23,674 Avg. Ann. Total Return (3/31/09)(5) -47.71% +6.72% +9.84% Total Annual Operating Expenses(6) 0.70%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. Annual Report | 17 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN
CLASS A(1) 4/30/09 - ---------- ------- 1-Year -49.87% 5-Year +7.87% 10-Year +7.98%
CLASS A (5/1/99-4/30/09)(1) (PERFORMANCE GRAPH)
FRANKLIN NATURAL S&P 500 S&P NORTH AMERICAN DATE RESOURCES FUND - CLASS A INDEX NATURAL RESOURCES INDEX - ---- ------------------------ ------- ----------------------- 5/1/1999 $ 9,424 $10,000 $10,000 5/31/1999 $ 8,976 $ 9,764 $ 9,562 6/30/1999 $ 9,614 $10,306 $10,008 7/31/1999 $ 9,864 $ 9,984 $10,081 8/31/1999 $10,014 $ 9,935 $10,390 9/30/1999 $ 9,778 $ 9,662 $ 9,997 10/31/1999 $ 9,335 $10,274 $ 9,777 11/30/1999 $ 9,392 $10,482 $ 9,855 12/31/1999 $ 9,971 $11,100 $10,092 1/31/2000 $ 9,714 $10,542 $ 9,684 2/29/2000 $ 9,628 $10,343 $ 9,259 3/31/2000 $11,338 $11,354 $10,568 4/30/2000 $11,259 $11,013 $10,373 5/31/2000 $12,196 $10,787 $11,134 6/30/2000 $11,953 $11,053 $10,572 7/31/2000 $11,123 $10,880 $10,217 8/31/2000 $12,690 $11,556 $11,316 9/30/2000 $12,675 $10,946 $11,220 10/31/2000 $11,817 $10,899 $10,881 11/30/2000 $11,059 $10,040 $10,270 12/31/2000 $13,443 $10,089 $11,686 1/31/2001 $12,962 $10,447 $11,390 2/28/2001 $13,041 $ 9,495 $11,302 3/31/2001 $13,019 $ 8,893 $10,959 4/30/2001 $13,910 $ 9,584 $12,127 5/31/2001 $14,220 $ 9,648 $11,963 6/30/2001 $12,566 $ 9,414 $10,812 7/31/2001 $12,099 $ 9,321 $10,756 8/31/2001 $11,294 $ 8,737 $10,382 9/30/2001 $ 9,964 $ 8,032 $ 9,352 10/31/2001 $10,589 $ 8,185 $ 9,727 11/30/2001 $10,445 $ 8,813 $ 9,427 12/31/2001 $11,199 $ 8,890 $ 9,864 1/31/2002 $10,874 $ 8,760 $ 9,652 2/28/2002 $11,486 $ 8,591 $10,072 3/31/2002 $12,451 $ 8,915 $10,810 4/30/2002 $12,503 $ 8,374 $10,480 5/31/2002 $12,473 $ 8,312 $10,410 6/30/2002 $11,884 $ 7,720 $10,014 7/31/2002 $10,005 $ 7,118 $ 8,711 8/31/2002 $10,285 $ 7,165 $ 8,845 9/30/2002 $ 9,674 $ 6,386 $ 7,989 10/31/2002 $ 9,909 $ 6,949 $ 8,142 11/30/2002 $10,462 $ 7,358 $ 8,538 12/31/2002 $10,611 $ 6,925 $ 8,583 1/31/2003 $10,153 $ 6,744 $ 8,376 2/28/2003 $10,198 $ 6,643 $ 8,507 3/31/2003 $ 9,954 $ 6,707 $ 8,434 4/30/2003 $10,050 $ 7,260 $ 8,535 5/31/2003 $11,321 $ 7,642 $ 9,472 6/30/2003 $11,239 $ 7,740 $ 9,488 7/31/2003 $10,693 $ 7,876 $ 9,290 8/31/2003 $11,491 $ 8,030 $ 9,858 9/30/2003 $11,232 $ 7,944 $ 9,695 10/31/2003 $11,483 $ 8,394 $10,017 11/30/2003 $11,786 $ 8,468 $10,248 12/31/2003 $13,262 $ 8,912 $11,535 1/31/2004 $13,210 $ 9,075 $11,310 2/29/2004 $13,846 $ 9,202 $11,938 3/31/2004 $13,972 $ 9,063 $11,938 4/30/2004 $13,905 $ 8,920 $11,699 5/31/2004 $13,905 $ 9,043 $11,803 6/30/2004 $14,874 $ 9,219 $12,475 7/31/2004 $15,200 $ 8,914 $12,716 8/31/2004 $14,948 $ 8,950 $12,565 9/30/2004 $16,302 $ 9,047 $13,709 10/31/2004 $16,302 $ 9,185 $13,771 11/30/2004 $17,729 $ 9,556 $14,739 12/31/2004 $17,404 $ 9,882 $14,372 1/31/2005 $17,596 $ 9,641 $14,536 2/28/2005 $19,963 $ 9,844 $16,514 3/31/2005 $19,268 $ 9,669 $16,151 4/30/2005 $17,988 $ 9,486 $15,180 5/31/2005 $18,558 $ 9,788 $15,569 6/30/2005 $19,756 $ 9,802 $16,751 7/31/2005 $21,568 $10,166 $17,863 8/31/2005 $22,951 $10,073 $19,041 9/30/2005 $24,438 $10,155 $20,226 10/31/2005 $22,611 $ 9,986 $18,554 11/30/2005 $23,195 $10,363 $19,091 12/31/2005 $23,930 $10,367 $19,633 1/31/2006 $27,464 $10,642 $22,451 2/28/2006 $24,658 $10,670 $20,405 3/31/2006 $25,931 $10,803 $21,408 4/30/2006 $27,541 $10,948 $22,809 5/31/2006 $26,368 $10,633 $22,103 6/30/2006 $26,583 $10,648 $22,364 7/31/2006 $26,659 $10,713 $22,821 8/31/2006 $25,946 $10,968 $22,024 9/30/2006 $24,305 $11,251 $20,936 10/31/2006 $25,977 $11,617 $21,885 11/30/2006 $28,124 $11,838 $23,554 12/31/2006 $27,337 $12,004 $22,940 1/31/2007 $27,033 $12,186 $22,821 2/28/2007 $27,476 $11,948 $22,708 3/31/2007 $29,119 $12,081 $23,847 4/30/2007 $31,082 $12,616 $25,089 5/31/2007 $33,341 $13,057 $27,144 6/30/2007 $33,571 $12,840 $27,372 7/31/2007 $33,407 $12,442 $27,424 8/31/2007 $32,848 $12,628 $27,160 9/30/2007 $36,413 $13,100 $29,471 10/31/2007 $38,672 $13,309 $30,725 11/30/2007 $36,044 $12,752 $28,824 12/31/2007 $37,964 $12,664 $30,840 1/31/2008 $34,972 $11,904 $27,998 2/29/2008 $38,158 $11,518 $30,431 3/31/2008 $36,547 $11,468 $29,333 4/30/2008 $40,522 $12,026 $32,135 5/31/2008 $43,735 $12,182 $34,578 6/30/2008 $45,195 $11,155 $35,385 7/31/2008 $38,123 $11,061 $30,134 8/31/2008 $36,751 $11,221 $29,731 9/30/2008 $29,015 $10,221 $24,965 10/31/2008 $20,730 $ 8,505 $18,599 11/30/2008 $18,933 $ 7,895 $18,153 12/31/2008 $18,533 $ 7,979 $17,717 1/31/2009 $18,829 $ 7,306 $17,158 2/28/2009 $17,434 $ 6,528 $15,380 3/31/2009 $19,059 $ 7,100 $16,477 4/30/2009 $21,553 $ 7,779 $17,978 Total Returns 115.53% -22.21% 79.78%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/09 - ------- ------- 1-Year -47.68% 3-Year -8.51% Since Inception (9/1/05) -2.85%
CLASS C (9/1/05-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN NATURAL S&P 500 S&P NORTH AMERICAN DATE RESOURCES FUND - CLASS C INDEX NATURAL RESOURCES INDEX - ---- ------------------------ ------- ----------------------- 9/1/2005 $10,000 $10,000 $10,000 9/30/2005 $10,459 $10,081 $10,622 10/31/2005 $ 9,670 $ 9,913 $ 9,744 11/30/2005 $ 9,918 $10,288 $10,026 12/31/2005 $10,227 $10,291 $10,311 1/31/2006 $11,734 $10,564 $11,791 2/28/2006 $10,529 $10,593 $10,716 3/31/2006 $11,064 $10,724 $11,243 4/30/2006 $11,747 $10,868 $11,979 5/31/2006 $11,238 $10,556 $11,608 6/30/2006 $11,320 $10,570 $11,745 7/31/2006 $11,347 $10,635 $11,985 8/31/2006 $11,038 $10,888 $11,566 9/30/2006 $10,333 $11,169 $10,995 10/31/2006 $11,038 $11,533 $11,494 11/30/2006 $11,938 $11,752 $12,370 12/31/2006 $11,597 $11,917 $12,048 1/31/2007 $11,464 $12,097 $11,985 2/28/2007 $11,643 $11,861 $11,926 3/31/2007 $12,332 $11,993 $12,524 4/30/2007 $13,159 $12,524 $13,176 5/31/2007 $14,107 $12,961 $14,256 6/30/2007 $14,195 $12,746 $14,376 7/31/2007 $14,118 $12,351 $14,402 8/31/2007 $13,873 $12,536 $14,264 9/30/2007 $15,371 $13,005 $15,478 10/31/2007 $16,320 $13,212 $16,136 11/30/2007 $15,199 $12,659 $15,138 12/31/2007 $15,999 $12,572 $16,197 1/31/2008 $14,729 $11,818 $14,704 2/29/2008 $16,060 $11,434 $15,982 3/31/2008 $15,372 $11,384 $15,405 4/30/2008 $17,036 $11,939 $16,877 5/31/2008 $18,378 $12,093 $18,160 6/30/2008 $18,979 $11,074 $18,584 7/31/2008 $16,003 $10,981 $15,826 8/31/2008 $15,413 $11,140 $15,614 9/30/2008 $12,163 $10,147 $13,111 10/31/2008 $ 8,684 $ 8,443 $ 9,768 11/30/2008 $ 7,925 $ 7,837 $ 9,533 12/31/2008 $ 7,754 $ 7,920 $ 9,305 1/31/2009 $ 7,876 $ 7,253 $ 9,011 2/28/2009 $ 7,287 $ 6,481 $ 8,077 3/31/2009 $ 7,957 $ 7,048 $ 8,653 4/30/2009 $ 8,997 $ 7,723 $ 9,442 Total Returns -10.03% -22.77% -5.58%
18 | Annual Report Performance Summary (CONTINUED) ADVISOR CLASS (5/1/99-4/30/09)(1) (PERFORMANCE GRAPH)
FRANKLIN NATURAL RESOURCES S&P 500 S&P NORTH AMERICAN DATE FUND - ADVISOR CLASS INDEX NATURAL RESOURCES INDEX - ---- -------------------------- ------- ----------------------- 5/1/1999 $10,000 $10,000 $10,000 5/31/1999 $ 9,530 $ 9,764 $ 9,562 6/30/1999 $10,212 $10,306 $10,008 7/31/1999 $10,478 $ 9,984 $10,081 8/31/1999 $10,648 $ 9,935 $10,390 9/30/1999 $10,396 $ 9,662 $ 9,997 10/31/1999 $ 9,931 $10,274 $ 9,777 11/30/1999 $ 9,990 $10,482 $ 9,855 12/31/1999 $10,611 $11,100 $10,092 1/31/2000 $10,345 $10,542 $ 9,684 2/29/2000 $10,249 $10,343 $ 9,259 3/31/2000 $12,073 $11,354 $10,568 4/30/2000 $11,991 $11,013 $10,373 5/31/2000 $12,996 $10,787 $11,134 6/30/2000 $12,737 $11,053 $10,572 7/31/2000 $11,851 $10,880 $10,217 8/31/2000 $13,535 $11,556 $11,316 9/30/2000 $13,520 $10,946 $11,220 10/31/2000 $12,604 $10,899 $10,881 11/30/2000 $11,807 $10,040 $10,270 12/31/2000 $14,356 $10,089 $11,686 1/31/2001 $13,843 $10,447 $11,390 2/28/2001 $13,932 $ 9,495 $11,302 3/31/2001 $13,917 $ 8,893 $10,959 4/30/2001 $14,877 $ 9,584 $12,127 5/31/2001 $15,204 $ 9,648 $11,963 6/30/2001 $13,441 $ 9,414 $10,812 7/31/2001 $12,949 $ 9,321 $10,756 8/31/2001 $12,094 $ 8,737 $10,382 9/30/2001 $10,665 $ 8,032 $ 9,352 10/31/2001 $11,342 $ 8,185 $ 9,727 11/30/2001 $11,186 $ 8,813 $ 9,427 12/31/2001 $11,997 $ 8,890 $ 9,864 1/31/2002 $11,654 $ 8,760 $ 9,652 2/28/2002 $12,317 $ 8,591 $10,072 3/31/2002 $13,348 $ 8,915 $10,810 4/30/2002 $13,409 $ 8,374 $10,480 5/31/2002 $13,386 $ 8,312 $10,410 6/30/2002 $12,752 $ 7,720 $10,014 7/31/2002 $10,738 $ 7,118 $ 8,711 8/31/2002 $11,051 $ 7,165 $ 8,845 9/30/2002 $10,387 $ 6,386 $ 7,989 10/31/2002 $10,646 $ 6,949 $ 8,142 11/30/2002 $11,241 $ 7,358 $ 8,538 12/31/2002 $11,406 $ 6,925 $ 8,583 1/31/2003 $10,914 $ 6,744 $ 8,376 2/28/2003 $10,968 $ 6,643 $ 8,507 3/31/2003 $10,722 $ 6,707 $ 8,434 4/30/2003 $10,838 $ 7,260 $ 8,535 5/31/2003 $12,205 $ 7,642 $ 9,472 6/30/2003 $12,120 $ 7,740 $ 9,488 7/31/2003 $11,536 $ 7,876 $ 9,290 8/31/2003 $12,404 $ 8,030 $ 9,858 9/30/2003 $12,128 $ 7,944 $ 9,695 10/31/2003 $12,404 $ 8,394 $10,017 11/30/2003 $12,727 $ 8,468 $10,248 12/31/2003 $14,322 $ 8,912 $11,535 1/31/2004 $14,276 $ 9,075 $11,310 2/29/2004 $14,969 $ 9,202 $11,938 3/31/2004 $15,115 $ 9,063 $11,938 4/30/2004 $15,046 $ 8,920 $11,699 5/31/2004 $15,046 $ 9,043 $11,803 6/30/2004 $16,102 $ 9,219 $12,475 7/31/2004 $16,456 $ 8,914 $12,716 8/31/2004 $16,186 $ 8,950 $12,565 9/30/2004 $17,666 $ 9,047 $13,709 10/31/2004 $17,666 $ 9,185 $13,771 11/30/2004 $19,222 $ 9,556 $14,739 12/31/2004 $18,867 $ 9,882 $14,372 1/31/2005 $19,083 $ 9,641 $14,536 2/28/2005 $21,656 $ 9,844 $16,514 3/31/2005 $20,909 $ 9,669 $16,151 4/30/2005 $19,530 $ 9,486 $15,180 5/31/2005 $20,146 $ 9,788 $15,569 6/30/2005 $21,456 $ 9,802 $16,751 7/31/2005 $23,428 $10,166 $17,863 8/31/2005 $24,946 $10,073 $19,041 9/30/2005 $26,564 $10,155 $20,226 10/31/2005 $24,584 $ 9,986 $18,554 11/30/2005 $25,223 $10,363 $19,091 12/31/2005 $26,030 $10,367 $19,633 1/31/2006 $29,885 $10,642 $22,451 2/28/2006 $26,836 $10,670 $20,405 3/31/2006 $28,233 $10,803 $21,408 4/30/2006 $29,989 $10,948 $22,809 5/31/2006 $28,736 $10,633 $22,103 6/30/2006 $28,967 $10,648 $22,364 7/31/2006 $29,055 $10,713 $22,821 8/31/2006 $28,289 $10,968 $22,024 9/30/2006 $26,501 $11,251 $20,936 10/31/2006 $28,336 $11,617 $21,885 11/30/2006 $30,675 $11,838 $23,554 12/31/2006 $29,828 $12,004 $22,940 1/31/2007 $29,503 $12,186 $22,821 2/28/2007 $29,990 $11,948 $22,708 3/31/2007 $31,785 $12,081 $23,847 4/30/2007 $33,948 $12,616 $25,089 5/31/2007 $36,426 $13,057 $27,144 6/30/2007 $36,682 $12,840 $27,372 7/31/2007 $36,512 $12,442 $27,424 8/31/2007 $35,913 $12,628 $27,160 9/30/2007 $39,819 $13,100 $29,471 10/31/2007 $42,298 $13,309 $30,725 11/30/2007 $39,426 $12,752 $28,824 12/31/2007 $41,542 $12,664 $30,840 1/31/2008 $38,277 $11,904 $27,998 2/29/2008 $41,772 $11,518 $30,431 3/31/2008 $40,015 $11,468 $29,333 4/30/2008 $44,384 $12,026 $32,135 5/31/2008 $47,915 $12,182 $34,578 6/30/2008 $49,534 $11,155 $35,385 7/31/2008 $41,790 $11,061 $30,134 8/31/2008 $40,291 $11,221 $29,731 9/30/2008 $31,830 $10,221 $24,965 10/31/2008 $22,744 $ 8,505 $18,599 11/30/2008 $20,776 $ 7,895 $18,153 12/31/2008 $20,342 $ 7,979 $17,717 1/31/2009 $20,678 $ 7,306 $17,158 2/28/2009 $19,145 $ 6,528 $15,380 3/31/2009 $20,925 $ 7,100 $16,477 4/30/2009 $23,674 $ 7,779 $17,978 Total Returns 136.74% -22.21% 79.78%
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(1) 4/30/09 - ---------------- ------- 1-Year -46.66% 5-Year +9.49% 10-Year +9.00%
ENDNOTES INVESTING IN A FUND CONCENTRATING IN THE NATURAL RESOURCES SECTOR INVOLVES SPECIAL RISKS, INCLUDING INCREASED SUSCEPTIBILITY TO ADVERSE ECONOMIC AND REGULATORY DEVELOPMENTS AFFECTING THE SECTOR. THE FUND MAY ALSO INVEST IN FOREIGN STOCKS, WHICH INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL AND ECONOMIC UNCERTAINTY. SMALLER COMPANIES INVOLVE SPECIAL RISKS ASSOCIATED WITH SMALLER REVENUES AND MARKET SHARE, AND MORE LIMITED PRODUCT LINES. THE PRICES OF SUCH SECURITIES CAN BE VOLATILE, PARTICULARLY OVER THE SHORT TERM. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS C: These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) Past expense reductions by the Fund's manager increased the Fund's total returns. If the manager had not taken this action, the Fund's total returns would have been lower. (2.) Cumulative total return represents the change in value of an investment over the periods indicated. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (4.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (5.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (6.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (7.) Sources: (C) 2009 Morningstar; Standard & Poor's. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The S&P North American Natural Resources Index is a capitalization-weighted index that includes companies involved in extractive industries (mining), energy and forestry services, producers of pulp and paper, and owners and operators of timber tracts or plantations. Annual Report | 19 Your Fund's Expenses FRANKLIN NATURAL RESOURCES FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 20 | Annual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
EXPENSES PAID BEGINNING ACCOUNT ENDING ACCOUNT DURING PERIOD* VALUE 11/1/08 VALUE 4/30/09 11/1/08-4/30/09 ----------------- -------------- --------------- CLASS A Actual $1,000 $1,039.70 $ 6.93 Hypothetical (5% return before expenses) $1,000 $1,018.00 $ 6.85 CLASS C Actual $1,000 $1,036.10 $10.60 Hypothetical (5% return before expenses) $1,000 $1,014.38 $10.49 ADVISOR CLASS Actual $1,000 $1,040.90 $ 5.62 Hypothetical (5% return before expenses) $1,000 $1,019.29 $ 5.56
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 1.37%; C: 2.10%; and Advisor: 1.11%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. Annual Report | 21 Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
YEAR ENDED APRIL 30, ---------------------------------------------------------- CLASS A 2009 2008 2007 2006 2005 - ------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $ 54.72 $ 64.53 $ 56.44 $ 46.05 $ 53.26 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ............. (0.21) (0.59) (0.57) (0.59) (0.58) Net realized and unrealized gains (losses) .. (4.78) (9.22) 8.66 10.98 (6.63) -------- -------- -------- -------- -------- Total from investment operations ............... (4.99) (9.81) 8.09 10.39 (7.21) -------- -------- -------- -------- -------- Redemption fees(c, d) .......................... -- -- -- -- -- -------- -------- -------- -------- -------- Net asset value, end of year ................... $ 49.73 $ 54.72 $ 64.53 $ 56.44 $ 46.05 ======== ======== ======== ======== ======== Total return(e) ................................ (9.12)% (15.22)% 14.39% 22.50% (13.54)% RATIOS TO AVERAGE NET ASSETS Expenses before expense reduction .............. 1.32% 1.24% 1.35% 1.25% 1.29% Expenses net of expense reduction .............. 1.32%(f) 1.23% 1.35%(f) 1.25%(f) 1.29%(f) Net investment income (loss) ................... (0.38)% (0.98)% (1.01)% (1.06)% (1.17)% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $274,324 $318,537 $457,390 $510,700 $485,909 Portfolio turnover rate ........................ 45.57% 31.84% 42.08% 37.38% 34.34%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 22 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND COUNTRY SHARES/WARRANTS VALUE ------------------------------------- -------------- --------------- ------------ COMMON STOCKS AND OTHER EQUITY INTERESTS 90.7% BIOTECHNOLOGY 65.2% (a) 3SBio Inc., ADR ....................................................... China 135,600 $ 960,048 (a) AEterna Zentaris Inc. ................................................. Canada 719,500 798,645 (a) Amgen Inc. ............................................................ United States 447,300 21,680,631 (a) Anadys Pharmaceuticals Inc. ........................................... United States 349,500 870,255 (a) ARIAD Pharmaceuticals Inc. ............................................ United States 845,000 1,267,500 (a) ArQule Inc. ........................................................... United States 609,809 2,713,650 (a) Biogen Idec Inc. ...................................................... United States 304,461 14,717,645 (a) BioMarin Pharmaceutical Inc. .......................................... United States 568,200 7,307,052 (a) Celgene Corp. ......................................................... United States 568,600 24,290,592 (a) Cephalon Inc. ......................................................... United States 161,900 10,622,259 (a) ConjuChem Biotechnologies Inc., wts., 12/31/11 ........................ Canada 2,343,750 -- (a) Cougar Biotechnology Inc. ............................................. United States 15,500 541,260 (a) Curis Inc. ............................................................ United States 967,900 1,132,443 (a) Facet Biotech Corp. ................................................... United States 183,560 1,716,286 (a) Gentium SpA, ADR ...................................................... Italy 851,600 596,120 (a) Genzyme Corp. ......................................................... United States 430,600 22,963,898 (a) Gilead Sciences Inc. .................................................. United States 701,700 32,137,860 (a, b) Indevus Pharmaceuticals Inc., Escrow Account .......................... United States 1,006,900 1,100,743 (a) Myriad Genetics Inc. .................................................. United States 119,600 4,639,284 (a) Neurocrine Biosciences Inc. ........................................... United States 375,300 1,238,490 (a) Onyx Pharmaceuticals Inc. ............................................. United States 103,500 2,680,650 (a) Orexigen Therapeutics Inc. ............................................ United States 476,754 1,353,981 (a) OSI Pharmaceuticals Inc. .............................................. United States 188,800 6,338,016 PDL BioPharma Inc. .................................................... United States 917,800 6,562,270 (a) Pharmasset Inc. ....................................................... United States 178,800 1,609,200 (a) RXi Pharmaceuticals Corp. ............................................. United States 18,744 85,285 (a) United Therapeutics Corp. ............................................. United States 30,800 1,934,548 (a) VaxGen Inc. ........................................................... United States 826,000 355,180 (a) Vertex Pharmaceuticals Inc. ........................................... United States 216,100 6,660,202 ------------ 178,873,993 ------------ LIFE SCIENCES TOOLS & SERVICES 9.0% (a) Helicos BioSciences Corp. ............................................. United States 639,100 364,287 (a) Illumina Inc. ......................................................... United States 171,500 6,405,525 (a) Life Technologies Corp. ............................................... United States 322,200 12,018,060 (a) QIAGEN NV ............................................................. Netherlands 258,900 4,266,672 (a) Sequenom Inc. ......................................................... United States 416,120 1,506,354 ------------ 24,560,898 ------------ PHARMACEUTICALS 16.5% (a) Access Pharmaceuticals Inc. ........................................... United States 121,988 182,982 Allergan Inc. ......................................................... United States 78,300 3,653,478 (a) Ardea Biosciences Inc. ................................................ United States 169,012 2,085,608 (a) Biodel Inc. ........................................................... United States 175,900 844,320 (a) BioForm Medical Inc. .................................................. United States 1,309,000 1,466,080 (a) Cadence Pharmaceuticals Inc. .......................................... United States 199,600 2,019,952 (a) Cardiome Pharma Corp. ................................................. Canada 576,828 2,359,227 (a) Cypress Bioscience Inc. ............................................... United States 175,100 1,260,720
Annual Report | 23 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND COUNTRY SHARES/WARRANTS VALUE ------------------------------------- -------------- --------------- ------------ COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) PHARMACEUTICALS (CONTINUED) (a) Nuvo Research Inc. .................................................... Canada 6,795,800 $ 911,500 (a) Nuvo Research Inc., wts., 7/13/09 ..................................... Canada 3,443,000 -- (a) Oculus Innovative Sciences Inc. ....................................... United States 210,900 229,881 (a) Penwest Pharmaceuticals Co. ........................................... United States 369,400 605,816 Roche Holding AG ...................................................... Switzerland 84,300 10,671,353 Shire PLC, ADR ........................................................ United Kingdom 134,900 5,027,723 Teva Pharmaceutical Industries Ltd., ADR .............................. Israel 319,200 14,009,688 ------------ 45,328,328 ------------ TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS (COST $256,969,341) ................................................ 248,763,219 ------------ PREFERRED STOCKS (COST $5,065,937) 2.0% BIOTECHNOLOGY 2.0% (a, c) Fibrogen Inc., pfd., E ................................................ United States 1,128,271 5,686,486 ------------ PRINCIPAL AMOUNT(d) ----------- CONVERTIBLE BONDS (COST $1,480,677) 0.3% BIOTECHNOLOGY 0.3% (c) ConjuChem Biotechnologies Inc., cvt., sub. note, 144A, 8.00%, 12/31/10 ........................................................... Canada 1,500,000 CAD 785,900 ------------ TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $263,515,955) ................................................ 255,235,605 ------------ SHARES ----------- SHORT TERM INVESTMENTS (COST $19,628,804) 7.2% MONEY MARKET FUNDS 7.2% (e) Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.04% .. United States 19,628,804 19,628,804 ------------ TOTAL INVESTMENTS (COST $283,144,759) 100.2% .......................... 274,864,409 OTHER ASSETS, LESS LIABILITIES (0.2)% ................................. (540,790) ------------ NET ASSETS 100.0% ..................................................... $274,323,619 ============
See Abbreviations on page 48. (a) Non-income producing. (b) Security has been deemed illiquid because it may not be able to be sold within seven days. At April 30, 2009, the value of this security was $1,100,743, representing 0.40% of net assets. (c) See Note 8 regarding restricted and illiquid securities. (d) The principal amount is stated in U.S. dollars unless otherwise indicated. (e) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. 24 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN NATURAL RESOURCES FUND
YEAR ENDED APRIL 30, ---------------------------------------------------- CLASS A 2009 2008 2007 2006 2005 - ------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......... $ 45.78 $ 37.84 $ 35.92 $ 24.32 $ 18.80 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ................. 0.05 0.05 0.09 0.13 0.04 Net realized and unrealized gains (losses) .............................. (21.78) 11.11 4.29 12.64 5.48 -------- -------- -------- -------- -------- Total from investment operations ............ (21.73) 11.16 4.38 12.77 5.52 -------- -------- -------- -------- -------- Less distributions from: Net investment income .................... -- (0.52) (0.25) (0.09) -- Net realized gains ....................... (1.50) (2.70) (2.21) (1.08) -- -------- -------- -------- -------- -------- Total distributions ......................... (1.50) (3.22) (2.46) (1.17) -- -------- -------- -------- -------- -------- Redemption fees(c, d) ....................... -- -- -- -- -- -------- -------- -------- -------- -------- Net asset value, end of year ................ $ 22.55 $ 45.78 $ 37.84 $ 35.92 $ 24.32 ======== ======== ======== ======== ======== Total return(e) ............................. (46.81)% 30.37% 12.86% 53.11% 29.36% RATIOS TO AVERAGE NET ASSETS Expenses(f) ................................. 1.09% 0.97% 1.03% 1.02% 1.08% Net investment income ....................... 0.18% 0.13% 0.26% 0.44% 0.17% SUPPLEMENTAL DATA Net assets, end of year (000's) ............. $393,713 $752,051 $475,912 $440,475 $211,327 Portfolio turnover rate ..................... 46.97% 37.93% 51.51% 56.08% 29.89%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 25 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN NATURAL RESOURCES FUND
YEAR ENDED APRIL 30, ------------------------------------- CLASS C 2009 2008 2007 2006(a) - ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......... $ 45.35 $ 37.58 $ 35.79 $ 31.56 ------- ------- ------- ------- Income from investment operations(b): Net investment income (loss)(c) .......... (0.16) (0.25) (0.17) (0.01) Net realized and unrealized gains (losses) .............................. (21.54) 11.04 4.25 5.39 ------- ------- ------- ------- Total from investment operations ............ (21.70) 10.79 4.08 5.38 ------- ------- ------- ------- Less distributions from: Net investment income .................... -- (0.32) (0.08) (0.07) Net realized gains ....................... (1.50) (2.70) (2.21) (1.08) ------- ------- ------- ------- Total distributions ......................... (1.50) (3.02) (2.29) (1.15) ------- ------- ------- ------- Redemption fees(d, e) ....................... -- -- -- -- ------- ------- ------- ------- Net asset value, end of year ................ $ 22.15 $ 45.35 $ 37.58 $ 35.79 ======= ======= ======= ======= Total return(f) ............................. (47.19)% 29.47% 12.01% 17.47% RATIOS TO AVERAGE NET ASSETS(g) Expenses(h) ................................. 1.82% 1.68% 1.76% 1.67% Net investment income (loss) ................ (0.55)% (0.58)% (0.47)% (0.21)% SUPPLEMENTAL DATA Net assets, end of year (000's) ............. $61,360 $85,387 $33,723 $18,485 Portfolio turnover rate ..................... 46.97% 37.93% 51.51% 56.08%
(a) For the period September 1, 2005 (effective date) to April 30, 2006. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Amount rounds to less than $0.01 per share. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (g) Ratios are annualized for periods less than one year. (h) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 26 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN NATURAL RESOURCES FUND
YEAR ENDED APRIL 30, ----------------------------------------------- ADVISOR CLASS 2009 2008 2007 2006 2005 - ------------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........ $ 48.27 $ 39.71 $ 37.57 $ 25.35 $ 19.53 ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income(b) ................. 0.14 0.19 0.18 0.25 0.13 Net realized and unrealized gains (losses) .............................. (22.97) 11.69 4.52 13.18 5.69 ------- ------- ------- ------- ------- Total from investment operations ............ (22.83) 11.88 4.70 13.43 5.82 ------- ------- ------- ------- ------- Less distributions from: Net investment income .................... -- (0.62) (0.35) (0.13) -- Net realized gains ....................... (1.50) (2.70) (2.21) (1.08) -- ------- ------- ------- ------- ------- Total distributions ......................... (1.50) (3.32) (2.56) (1.21) -- ------- ------- ------- ------- ------- Redemption fees(c, d) ....................... -- -- -- -- -- ------- ------- ------- ------- ------- Net asset value, end of year ................ $ 23.94 $ 48.27 $ 39.71 $ 37.57 $ 25.35 ======= ======= ======= ======= ======= Total return ................................ (46.66)% 30.74% 13.20% 53.55% 29.80% RATIOS TO AVERAGE NET ASSETS Expenses(e) ................................. 0.82% 0.68% 0.76% 0.69% 0.73% Net investment income ....................... 0.45% 0.42% 0.53% 0.77% 0.52% SUPPLEMENTAL DATA Net assets, end of year (000's) ............. $52,402 $77,361 $52,103 $43,874 $33,048 Portfolio turnover rate ..................... 46.97% 37.93% 51.51% 56.08% 29.89%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 27 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES/WARRANTS VALUE ------------------------------- -------------- --------------- ------------ COMMON STOCKS AND OTHER EQUITY INTERESTS 91.5% AGRICULTURAL PRODUCTS 0.7% Bunge Ltd. ......................................... United States 77,000 $ 3,696,770 ------------ ALUMINUM 0.4% Alcoa Inc. ......................................... United States 200,000 1,814,000 ------------ COAL & CONSUMABLE FUELS 3.2% (a) Alpha Natural Resources Inc. ....................... United States 130,000 2,662,400 (a, b) Energy Coal Resources, 144A ........................ United States 199,375 221,306 (a) Patriot Coal Corp. ................................. United States 216,000 1,360,800 Peabody Energy Corp. ............................... United States 270,000 7,125,300 (a) Uranium One Inc. ................................... Canada 1,690,000 4,675,162 ------------ 16,044,968 ------------ CONSTRUCTION & ENGINEERING 0.1% Boart Longyear Group ............................... Australia 5,703,000 497,119 ------------ CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS 0.4% (a) Terex Corp. ........................................ United States 160,000 2,208,000 ------------ DIVERSIFIED CHEMICALS 0.0%(c) (a, d) Solutia Inc. ....................................... United States 789 2,966 (a, d) Solutia Inc., wts., 2/28/13 ........................ United States 5,878 588 ------------ 3,554 ------------ DIVERSIFIED METALS & MINING 7.2% (a) African Copper PLC ................................. United Kingdom 2,400,000 120,714 BHP Billiton PLC, ADR .............................. United Kingdom 197,000 8,242,480 (a) First Uranium Corp. ................................ South Africa 390,000 2,098,918 (a, e) First Uranium Corp., 144A .......................... Canada 205,200 1,104,354 Freeport-McMoRan Copper & Gold Inc., B ............. United States 65,000 2,772,250 (a) Ivanhoe Australia Ltd. ............................. Australia 300,000 411,869 (a) Ivanhoe Mines Ltd. ................................. Canada 400,000 2,564,000 (a) Mineral Deposits Ltd. .............................. Australia 3,000,000 1,612,608 (a) Mirabela Nickel Ltd. ............................... Australia 380,000 500,126 (a, e) Mirabela Nickel Ltd., 144A ......................... Australia 845,850 1,113,240 (a) Nautilus Minerals Inc. ............................. Canada 817,000 787,618 (a, e) Nautilus Minerals Inc., 144A ....................... Canada 474,000 456,954 OZ Minerals Ltd. ................................... Australia 2,700,000 1,470,960 (a) PanAust Ltd. ....................................... Australia 5,663,435 1,378,163 (a, e) PanAust Ltd., 144A ................................. Australia 4,180,000 1,017,178 Rio Tinto PLC, ADR ................................. United Kingdom 24,000 3,910,800 Southern Copper Corp. .............................. United States 132,000 2,451,240 Xstrata PLC ........................................ Switzerland 486,000 4,364,607 ------------ 36,378,079 ------------ ELECTRICAL COMPONENTS & EQUIPMENT 0.1% (a) JA Solar Holdings Co. Ltd., ADR .................... China 90,000 315,900 ------------ GOLD 7.0% AngloGold Ashanti Ltd., ADR ........................ South Africa 130,000 4,004,000 Barrick Gold Corp. ................................. Canada 125,000 3,637,500
28 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES/WARRANTS VALUE ------------------------------- -------------- --------------- ------------ COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) GOLD (CONTINUED) (a, e) Centamin Egypt Ltd., 144A .......................... Australia 2,000,000 $ 1,626,289 (e) Franco-Nevada Corp., 144A .......................... Canada 90,000 1,915,584 (a) Gammon Gold Inc. ................................... Canada 425,000 2,825,258 Gold Fields Ltd., ADR .............................. South Africa 260,000 2,704,000 (a) Great Basin Gold Ltd. .............................. Canada 2,000,000 2,464,582 (a) Great Basin Gold Ltd., wts., 10/15/10 .............. Canada 1,000,000 301,786 IAMGOLD Corp. ...................................... Canada 301,000 2,404,990 (a) Jinshan Gold Mines Inc. ............................ Canada 378,300 215,646 (a, e) Jinshan Gold Mines Inc., 144A ...................... Canada 1,241,000 707,419 Newcrest Mining Ltd. ............................... Australia 300,000 6,524,525 Newmont Mining Corp. ............................... United States 55,000 2,213,200 (a) Osisko Mining Corp. ................................ Canada 642,200 3,014,771 (a) Osisko Mining Corp., wts., 11/17/09 ................ Canada 321,100 296,093 (a, e) Real Gold Mining Ltd., 144A ........................ Mongolia 744,000 549,116 ------------ 35,404,759 ------------ INTEGRATED OIL & GAS 13.5% Chevron Corp. ...................................... United States 124,003 8,196,598 ConocoPhillips ..................................... United States 147,000 6,027,000 Exxon Mobil Corp. .................................. United States 95,000 6,333,650 Hess Corp. ......................................... United States 110,000 6,026,900 Marathon Oil Corp. ................................. United States 537,000 15,948,900 Murphy Oil Corp. ................................... United States 125,000 5,963,750 Occidental Petroleum Corp. ......................... United States 250,000 14,072,500 Petroleo Brasileiro SA, ADR ........................ Brazil 68,000 2,282,760 Total SA, B, ADR ................................... France 69,000 3,430,680 ------------ 68,282,738 ------------ MARINE 0.4% Aries Maritime Transport Ltd. ...................... Bermuda 387,850 240,467 Genco Shipping & Trading Ltd. ...................... United States 103,000 1,967,300 ------------ 2,207,767 ------------ OIL & GAS DRILLING 3.3% (a) Nabors Industries Ltd. ............................. Bermuda 230,000 3,498,300 Noble Corp. ........................................ United States 60,000 1,639,800 Rowan Cos. Inc. .................................... United States 114,000 1,779,540 (a) Transocean Ltd. .................................... United States 145,000 9,784,600 ------------ 16,702,240 ------------ OIL & GAS EQUIPMENT & SERVICES 20.8% Baker Hughes Inc. .................................. United States 71,000 2,526,180 (a) Cal Dive International Inc. ........................ United States 235,000 1,861,200 (a) Cameron International Corp. ........................ United States 275,000 7,034,500 (a) Dresser-Rand Group Inc. ............................ United States 112,000 2,758,560 (a) Dril-Quip Inc. ..................................... United States 251,000 8,629,380 (a) FMC Technologies Inc. .............................. United States 260,000 8,899,800 (a) Global Industries Ltd. ............................. United States 600,000 3,882,000
Annual Report | 29 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES/WARRANTS VALUE ------------------------------- -------------- --------------- ------------ COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) OIL & GAS EQUIPMENT & SERVICES (CONTINUED) Halliburton Co. .................................... United States 610,000 $ 12,334,200 (a) Helix Energy Solutions Group Inc. .................. United States 437,000 3,972,330 (a) Hornbeck Offshore Services Inc. .................... United States 126,000 2,926,980 (a) National Oilwell Varco Inc. ........................ United States 270,000 8,175,600 (a) North American Energy Partners ..................... Canada 255,000 1,007,250 (a) Oil States International Inc. ...................... United States 150,000 2,835,000 (a) PHI Inc., non-voting ............................... United States 74,000 837,680 Schlumberger Ltd. .................................. United States 185,000 9,063,150 Smith International Inc. ........................... United States 455,000 11,761,750 (a) Superior Energy Services Inc. ...................... United States 200,000 3,842,000 (a) T-3 Energy Services Inc. ........................... United States 239,000 3,209,770 (a) Tesco Corp. ........................................ Canada 270,000 2,713,500 (a) Weatherford International Ltd. ..................... United States 430,000 7,150,900 ------------ 105,421,730 ------------ OIL & GAS EXPLORATION & PRODUCTION 29.3% Addax Petroleum Corp. .............................. Canada 215,000 5,918,853 (e) Addax Petroleum Corp., 144A ........................ Canada 150,000 4,129,433 (a) Bill Barrett Corp. ................................. United States 200,000 5,196,000 (a) Continental Resources Inc. ......................... United States 230,000 5,370,500 Devon Energy Corp. ................................. United States 320,000 16,592,000 EOG Resources Inc. ................................. United States 190,000 12,061,200 (a) Mariner Energy Inc. ................................ United States 670,000 7,624,600 (a) McMoRan Exploration Co. ............................ United States 1,094,000 6,006,060 Noble Energy Inc. .................................. United States 251,000 14,244,250 (a) Northern Oil & Gas Inc. ............................ United States 317,000 1,810,070 (a) Petrohawk Energy Corp. ............................. United States 781,300 18,438,680 Range Resources Corp. .............................. United States 340,000 13,589,800 (a) Southwestern Energy Co. ............................ United States 565,000 20,260,900 XTO Energy Inc. .................................... United States 510,000 17,676,600 ------------ 148,918,946 ------------ OIL & GAS REFINING & MARKETING 3.0% Aegean Marine Petroleum Network Inc. ............... United States 135,000 2,045,250 (a) CVR Energy Inc. .................................... United States 317,000 2,333,120 Holly Corp. ........................................ United States 130,000 2,724,800 Petroplus Holdings AG .............................. Switzerland 94,000 1,622,251 Valero Energy Corp. ................................ United States 330,000 6,547,200 ------------ 15,272,621 ------------ OIL & GAS STORAGE & TRANSPORTATION 0.6% DHT Maritime Inc. .................................. Jersey Islands 370,600 1,560,226 General Maritime Corp. ............................. United States 177,000 1,757,610 ------------ 3,317,836 ------------ PRECIOUS METALS & MINERALS 1.4% (e) Fresnillo PLC, 144A ................................ United Kingdom 427,400 3,380,266 Impala Platinum Holdings Ltd. ...................... South Africa 190,000 3,679,303 ------------ 7,059,569 ------------
30 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES/WARRANTS VALUE ------------------------------- -------------- --------------- ------------ COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) SPECIALTY CHEMICALS 0.1% (a) Flotek Industries Inc. ............................. United States 293,000 $ 606,510 ------------ TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS (COST $540,295,200) ............................. 464,153,106 ------------ CONVERTIBLE PREFERRED STOCKS (COST $3,801,600) 0.9% OIL & GAS EXPLORATION & PRODUCTION 0.9% (e) Sandridge Energy Inc., 8.50%, cvt., pfd., 144A ..... United States 40,000 4,614,400 ------------ PREFERRED STOCKS 2.2% COAL & CONSUMABLE FUELS 0.0%(c) (a, b) Energy Coal Resources, 144A, pfd. .................. United States 29,847 177,888 ------------ DIVERSIFIED METALS & MINING 0.8% Companhia Vale do Rio Doce, ADR, pfd., A ........... Brazil 298,000 4,091,540 ------------ INTEGRATED OIL & GAS 1.4% Petroleo Brasileiro SA, ADR, pfd. .................. Brazil 260,000 7,014,800 ------------ TOTAL PREFERRED STOCKS (COST $11,456,542) .......... 11,284,228 ------------ TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $555,553,342) ............................. 480,051,734 ------------ SHORT TERM INVESTMENTS (COST $28,954,356) 5.7% MONEY MARKET FUNDS 5.7% (f) Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.04% ................................ United States 28,954,356 28,954,356 ------------ TOTAL INVESTMENTS (COST $584,507,698) 100.3% ....... 509,006,090 OTHER ASSETS, LESS LIABILITIES (0.3)% .............. (1,531,705) ------------ NET ASSETS 100.0% .................................. $507,474,385 ============
See Abbreviations on page 48. (a) Non-income producing. (b) See Note 8 regarding restricted and illiquid securities. (c) Rounds to less than 0.1% of net assets. (d) See Note 10 regarding other considerations. (e) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust's Board of Trustees. At April 30, 2009, the aggregate value of these securities was $20,614,233, representing 4.06% of net assets. (f) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. Annual Report | 31 Franklin Strategic Series FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES April 30, 2009
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------- ---------------- Assets: Investments in securities: Cost - Unaffiliated issuers .............. $ 263,515,955 $555,553,342 Cost - Sweep Money Fund (Note 7) ......... 19,628,804 28,954,356 ------------- ------------ Total cost of investments ................ $ 283,144,759 $584,507,698 ============= ============ Value - Unaffiliated issuers ............. $ 255,235,605 $480,051,734 Value - Sweep Money Fund (Note 7) ........ 19,628,804 28,954,356 ------------- ------------ Total value of investments ............... 274,864,409 509,006,090 Foreign currency, at value (cost $4,963) .... -- 3,394 Receivables: Investment securities sold ............... -- 2,201,968 Capital shares sold ...................... 391,976 1,661,581 Dividends and interest ................... 105,993 425,976 Other assets ................................ 528 760 ------------- ------------ Total assets .......................... 275,362,906 513,299,769 ------------- ------------ Liabilities: Payables: Investment securities purchased .......... -- 4,475,294 Capital shares redeemed .................. 659,495 541,650 Affiliates ............................... 261,774 396,073 Unaffiliated transfer agent fees ......... 66,966 93,536 Accrued expenses and other liabilities ...... 51,052 318,831 ------------- ------------ Total liabilities ..................... 1,039,287 5,825,384 ------------- ------------ Net assets, at value ............... $ 274,323,619 $507,474,385 ============= ============ Net assets consist of: Paid-in capital ............................. $ 542,351,590 $653,168,883 Undistributed net investment income (loss) .. (789,307) (2,911,204) Net unrealized appreciation (depreciation) .. (8,277,552) (75,505,288) Accumulated net realized gain (loss) ........ (258,961,112) (67,278,006) ------------- ------------ Net assets, at value ............... $ 274,323,619 $507,474,385 ============= ============
The accompanying notes are an integral part of these financial statements. 32 | Annual Report Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) April 30, 2009
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------- ---------------- CLASS A: Net assets, at value ..................................... $274,323,619 $393,713,073 ============ ============ Shares outstanding ....................................... 5,515,726 17,458,472 ============ ============ Net asset value per share(a) ............................. $ 49.73 $ 22.55 ============ ============ Maximum offering price per share (net asset value per share / 94.25%) ................................... $ 52.76 $ 23.93 ============ ============ CLASS C: Net assets, at value ..................................... -- $ 61,359,501 ============ ============ Shares outstanding ....................................... -- 2,770,052 ============ ============ Net asset value and maximum offering price per share(a) .. -- $ 22.15 ============ ============ ADVISOR CLASS: Net assets, at value ..................................... -- $ 52,401,811 ============ ============ Shares outstanding ....................................... -- 2,188,578 ============ ============ Net asset value and maximum offering price per share ..... -- $ 23.94 ============ ============
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable. The accompanying notes are an integral part of these financial statements. Annual Report | 33 Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the year ended April 30, 2009
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------- ---------------- Investment income: Dividends: Unaffiliated issuers .............................................. $ 2,545,986 $ 7,745,670 Sweep Money Fund (Note 7) ......................................... 315,042 295,121 Interest ............................................................. 105,665 2,693 Income from securities loaned ........................................ 473 6,370 ------------ ------------- Total investment income ..................................... 2,967,166 8,049,854 ------------ ------------- Expenses: Management fees (Note 3a) ............................................ 1,583,109 3,033,087 Administrative fees (Note 3b) ........................................ 451,919 -- Distribution fees: (Note 3c) Class A ........................................................... 793,506 1,399,081 Class C ........................................................... -- 663,239 Transfer agent fees (Note 3e) ........................................ 1,078,953 1,546,670 Custodian fees (Note 4) .............................................. 5,322 30,161 Reports to shareholders .............................................. 106,045 168,904 Registration and filing fees ......................................... 32,275 77,488 Professional fees .................................................... 27,619 37,468 Trustees' fees and expenses .......................................... -- 15,044 Other ................................................................ 67,074 290,141 ------------ ------------- Total expenses .............................................. 4,145,822 7,261,283 Expense reductions (Note 4) ................................. (616) (807) ------------ ------------- Net expenses ............................................. 4,145,206 7,260,476 ------------ ------------- Net investment income (loss) .......................... (1,178,040) 789,378 ------------ ------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments: Unaffiliated issuers ........................................... 15,152,955 (63,592,694) Non-controlled affiliated issuers (Note 9) ..................... 9 -- Foreign currency transactions ..................................... (61,589) (80,376) ------------ ------------- Net realized gain (loss) .............................. 15,091,375 (63,673,070) ------------ ------------- Net change in unrealized appreciation (depreciation) on: Investments ....................................................... (43,156,516) (381,786,813) Translation of other assets and liabilities denominated in foreign currencies ............................................. 2,798 (4,837) ------------ ------------- Net change in unrealized appreciation (depreciation) .. (43,153,718) (381,791,650) ------------ ------------- Net realized and unrealized gain (loss) ................................. (28,062,343) (445,464,720) ------------ ------------- Net increase (decrease) in net assets resulting from operations ......... $(29,240,383) $(444,675,342) ============ =============
The accompanying notes are an integral part of these financial statements. 34 | Annual Report Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN FRANKLIN BIOTECHNOLOGY DISCOVERY FUND NATURAL RESOURCES FUND ---------------------------- ---------------------------- YEAR ENDED APRIL 30, YEAR ENDED APRIL 30, ---------------------------- ---------------------------- 2009 2008 2009 2008 ------------ ------------- ------------- ------------ Increase (decrease) in net assets: Operations: Net investment income (loss) ........................ $ (1,178,040) $ (3,785,400) $ 789,378 $ 697,403 Net realized gain (loss) from investments and foreign currency transactions .................... 15,091,375 61,299,961 (63,673,070) 59,973,030 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies .... (43,153,718) (120,313,325) (381,791,650) 125,867,182 ------------ ------------- ------------- ------------ Net increase (decrease) in net assets resulting from operations ............................ (29,240,383) (62,798,764) (444,675,342) 186,537,615 ------------ ------------- ------------- ------------ Distributions to shareholders from: Net investment income: Class A .......................................... -- -- -- (7,483,274) Class C .......................................... -- -- -- (442,758) Advisor Class .................................... -- -- -- (774,756) Net realized gains: Class A .......................................... -- -- (23,435,904) (39,049,422) Class C .......................................... -- -- (3,211,358) (3,708,208) Advisor Class .................................... -- -- (2,857,267) (3,364,045) ------------ ------------- ------------- ------------ Total distributions to shareholders .................... -- -- (29,504,529) (54,822,463) ------------ ------------- ------------- ------------ Capital share transactions: (Note 2) Class A .......................................... (14,973,617) (76,055,391) 24,773,813 166,229,180 Class C .......................................... -- -- 26,255,441 42,076,375 Advisor Class .................................... -- -- 15,817,345 13,022,154 ------------ ------------- ------------- ------------ Total capital share transactions ....................... (14,973,617) (76,055,391) 66,846,599 221,327,709 ------------ ------------- ------------- ------------ Redemption fees ........................................ 245 1,096 9,119 18,227 ------------ ------------- ------------- ------------ Net increase (decrease) in net assets ......... (44,213,755) (138,853,059) (407,324,153) 353,061,088 Net assets: Beginning of year ...................................... 318,537,374 457,390,433 914,798,538 561,737,450 ------------ ------------- ------------- ------------ End of year ............................................ $274,323,619 $ 318,537,374 $ 507,474,385 $914,798,538 ============ ============= ============= ============ Undistributed net investment income (loss) included in net assets: End of year ............................................ $ (789,307) $ (417,755) $ (2,911,204) $ -- ============ ============= ============= ============ Distributions in excess of net investment income included in net assets, end of year .................... $ -- $ -- $ -- $ (4,465,240) ============ ============= ============= ============
The accompanying notes are an integral part of these financial statements. Annual Report | 35 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Strategic Series (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of eight separate funds, two of which are included in this report (Funds). The financial statements of the remaining funds in the Trust are presented separately. The classes of shares offered within each of the Funds are indicated below. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege.
CLASS A CLASS A, CLASS C & ADVISOR CLASS - ------- -------------------------------- Franklin Biotechnology Discovery Fund Franklin Natural Resources Fund
The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Trust has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be 36 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Trust's 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, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Trust's Board of Trustees. 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 on the Statement of Operations. 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. FOREIGN CURRENCY CONTRACTS When the Funds purchase or sell foreign securities they may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate at a future date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. D. SECURITIES LENDING The Funds participate in a principal based security lending program. The fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less Annual Report | 37 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. SECURITIES LENDING (CONTINUED) than 100% of the market value of loaned securities, as determined at the close of fund business each day, any additional collateral required due to changes in security values is delivered to the fund on the next business day. The collateral is invested in a non-registered money market fund managed by the fund's custodian on the fund's behalf and/or repurchase agreements. The fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the principal may default on its obligations to the fund. At April 30, 2009, the Funds had no securities on loan. E. INCOME TAXES No provision has been made for U.S. income taxes because it is each fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. The Funds have reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of April 30, 2009, and have determined that no provision for income tax is required in the Funds' financial statements. 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 is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Funds are notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. 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 of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses. 38 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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 expenses during the reporting period. Actual results could differ from those estimates. H. REDEMPTION FEES A short term trading redemption fee was imposed, with some exceptions, on any fund shares that were redeemed or exchanged within seven calendar days following their purchase date. The redemption fee was 2% of the amount redeemed. Such fees were retained by the funds and accounted for as an addition to paid-in capital. Effective September 1, 2008, the redemption fee was eliminated. I. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST At April 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Funds' shares were as follows:
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT ---------- ------------- ---------- ------------- CLASS A SHARES: Year ended April 30, 2009 Shares sold .................... 1,476,331 $ 83,768,453 8,382,323 $ 262,904,772 Shares issued in reinvestment of distributions ............... -- -- 1,158,432 21,778,628 Shares redeemed ................ (1,782,280) (98,742,070) (8,508,133) (259,909,587) ---------- ------------- ---------- ------------- Net increase (decrease) ........ (305,949) $ (14,973,617) 1,032,622 $ 24,773,813 ========== ============= ========== ============= Year ended April 30, 2008 Shares sold .................... 560,747 $ 33,649,664 6,527,523 $ 277,675,020 Shares issued in reinvestment of distributions ............... -- -- 1,025,717 42,536,277 Shares redeemed ................ (1,827,474) (109,705,055) (3,705,099) (153,982,117) ---------- ------------- ---------- ------------- Net increase (decrease) ........ (1,266,727) $ (76,055,391) 3,848,141 $ 166,229,180 ========== ============= ========== =============
Annual Report | 39 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND ------------------------- SHARES AMOUNT ---------- ------------ CLASS C SHARES: Year ended April 30, 2009 Shares sold .................... 1,939,748 $ 58,744,336 Shares issued in reinvestment of distributions ............... 163,334 3,024,942 Shares redeemed ................ (1,216,090) (35,513,837) ---------- ------------ Net increase (decrease) ........ 886,992 $ 26,255,441 ========== ============ Year ended April 30, 2008 Shares sold .................... 1,293,711 $ 54,788,982 Shares issued in reinvestment of distributions ............... 95,855 3,947,327 Shares redeemed ................ (403,775) (16,659,934) ---------- ------------ Net increase (decrease) ........ 985,791 $ 42,076,375 ========== ============ ADVISOR CLASS SHARES: Year ended April 30, 2009 Shares sold .................... 816,508 $ 23,561,850 Shares issued in reinvestment of distributions ............... 141,651 2,824,521 Shares redeemed ................ (372,382) (10,569,026) ---------- ------------ Net increase (decrease) ........ 585,777 $ 15,817,345 ========== ============ Year ended April 30, 2008 Shares sold .................... 471,275 $ 20,778,690 Shares issued in reinvestment of distributions ............... 89,583 3,912,111 Shares redeemed ................ (270,031) (11,668,647) ---------- ------------ Net increase (decrease) ........ 290,827 $ 13,022,154 ========== ============
3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
SUBSIDIARY AFFILIATION - ---------- ---------------------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
40 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. MANAGEMENT FEES The Funds pay an investment management fee to Advisers based on the average daily net assets of each of the Funds as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- --------------------------------------------------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $7.5 billion 0.440% Over $7.5 billion, up to and including $10 billion 0.430% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% In excess of $15 billion
B ADMINISTRATIVE FEES The Franklin Biotechnology Discovery Fund pays an administrative fee to FT Services based on the fund's average daily net assets as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- --------------------------------------------------- 0.150% Up to and including $200 million 0.135% Over $200 million, up to and including $700 million 0.100% Over $700 million, up to and including $1.2 billion 0.075% In excess of $1.2 billion
Under an agreement with Advisers, FT Services provides administrative services to the Franklin Natural Resources Fund. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the fund. C. DISTRIBUTION FEES The Trust's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds' Class A reimbursement distribution plans, the Funds reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of each Funds' shares up to the maximum annual plan rate for each class. Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Franklin Natural Resources Fund's Class C compensation distribution plan, the fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the fund's shares up to the maximum annual plan rate. Annual Report | 41 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) C. DISTRIBUTION FEES (CONTINUED) The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------- ---------------- Reimbursement Plans: Class A ......... 0.35% 0.35% Compensation Plans: Class C ......... -- 1.00%
Effective February 1, 2009, the Board of Trustees has set the current rate at 0.30% per year for Class A shares until further notice and approval by the Board. D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the year:
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------- ---------------- Sales charges retained net of commissions paid to unaffiliated broker/dealers ..................... $89,583 $517,771 Contingent deferred sales charges retained ......... $10,654 $ 82,407
E. TRANSFER AGENT FEES For the year ended April 30, 2009, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------- ---------------- Transfer agent fees .. $705,834 $971,579
4. EXPENSE OFFSET ARRANGEMENT The Funds have entered into an arrangement with their custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds' custodian expenses. During the year ended April 30, 2009, the custodian fees were reduced as noted in the Statements of Operations. 42 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES For tax purposes, capital losses may be carried over to offset future capital gains, if any. At April 30, 2009, the capital loss carryforwards were as follows:
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------- ---------------- Capital loss carryforwards expiring in: 2011 ............................... $206,823,704 -- 2012 ............................... 49,603,386 -- 2017 ............................... -- 2,454,781 ------------ ---------- $256,427,090 $2,454,781 ============ ==========
During the year ended April 30, 2009, the Franklin Biotechnology Discovery Fund utilized $15,069,761 of capital loss carryforwards. For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At April 30, 2009, the Franklin Biotechnology Discovery Fund deferred realized currency losses of $62,641 and the Franklin Natural Resources Fund deferred realized capital losses and realized currency losses of $48,401,953, and $130,978, respectively. The tax character of distributions paid during the years ended April 30, 2009 and 2008, was as follows:
FRANKLIN NATURAL RESOURCES FUND ------------------------- 2009 2008 ----------- ----------- Distributions paid from: Ordinary income ......... $13,054,755 $19,676,445 Long term capital gain .. 16,449,774 35,146,018 ----------- ----------- $29,504,529 $54,822,463 =========== ===========
At April 30, 2009, the cost of investments, net unrealized appreciation (depreciation) and undistributed ordinary income for income tax purposes were as follows:
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------- ---------------- Cost of investments ............... $286,405,448 $ 604,894,423 ============ ============= Unrealized appreciation ........... $ 48,585,195 $ 61,425,952 Unrealized depreciation ........... (60,126,234) (157,314,285) ------------ ------------- Net unrealized appreciation (depreciation) ................. $(11,541,039) $ (95,888,333) ============ ============= Distributable earnings - undistributed ordinary income .. $ -- $ 1,185,228 ============ =============
Annual Report | 43 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, passive foreign investment company shares, corporate actions and non-deductible expenses. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, passive foreign investment company shares and corporate actions. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended April 30, 2009, were as follows:
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------- ---------------- Purchases .. $151,618,772 $362,746,482 Sales ...... $133,677,714 $296,323,044
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Funds are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 8. RESTRICTED SECURITIES The Funds may invest in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Funds may have registration rights for restricted securities. The issuer generally incurs all registration costs. 44 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. RESTRICTED SECURITIES (CONTINUED) At April 30, 2009, the Funds held investments in restricted securities, excluding 144A securities deemed to be liquid, valued in accordance with procedures approved by the Trust's Board of Trustees as reflecting fair value, as follows:
SHARES/ ACQUISITION PRINCIPAL AMOUNT ISSUER DATES COST VALUE - ---------------- ------ ---------------- ---------- ---------- FRANKLIN BIOTECHNOLOGY DISCOVERY FUND 1,500,000 CAD ConjuChem Biotechnologies Inc., cvt., sub. note, 144A, 8.00%, 12/31/10 ............................................. 12/12/07 $1,480,677 $ 785,900 1,128,271 Fibrogen Inc., pfd., E .................................. 5/19/00 5,065,937 5,686,486 ---------- TOTAL RESTRICTED SECURITIES (2.36% of Net Assets) .... $6,472,386 ========== FRANKLIN NATURAL RESOURCES FUND 199,375 Energy Coal Resources, 144A ............................. 11/16/05-5/05/06 $ 741,939 $ 221,306 29,847 Energy Coal Resources, 144A, pfd. ....................... 3/17/09 2,376,164 177,888 ---------- TOTAL RESTRICTED SECURITIES (0.08% of Net Assets) .... $ 399,194 ==========
See Abbreviations on page 48. 9. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES The 1940 Act defines "affiliated companies" to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in "affiliated companies" for the Franklin Biotechnology Discovery Fund for the year ended April 30, 2009, were as shown below.
NUMBER NUMBER OF SHARES OF SHARES HELD AT HELD REALIZED BEGINNING GROSS GROSS AT END VALUE AT INVESTMENT CAPITAL NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR END OF YEAR INCOME GAIN (LOSS) - -------------- --------- --------- ---------- --------- ----------- ---------- ----------- FRANKLIN BIOTECHNOLOGY DISCOVERY FUND NON-CONTROLLED AFFILIATES Access Pharmaceuticals Inc. (MacroChem Corp.) .................... 2,250,000 -- -- 121,988(a) $--(b) $-- $-- MacroChem Corp., wts., PIPES, 144A, 2/01/49 .............................. 675,000 -- 675,000 -- -- -- 9 --- --- --- TOTAL AFFILIATED SECURITIES (0.00% of Net Assets) .............................. $-- $-- $ 9 === === ===
(a) Reflects the merger of MacroChem Corp. into Access Pharmaceuticals Inc. as of March 2, 2009. (b) As of April 30, 2009, no longer an affiliate. 10. OTHER CONSIDERATIONS From time to time officers, directors or employees of the Franklin Natural Resources Fund's Investment Manager may be provided material, non-public information relating to a company which, pursuant to the fund's policies and requirements of applicable securities laws, could Annual Report | 45 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. OTHER CONSIDERATIONS (CONTINUED) prevent the fund from trading in the securities of such company for limited or extended periods of time. 11. CREDIT FACILITY Effective January 23, 2009, the Funds, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, "Borrower"; collectively "Borrowers"), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. Under the terms of the Global Credit Facility, the Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Funds incurred commitment fees of $453 of their pro rata portion of the Global Credit Facility, which is reflected in Other expenses on the Statements of Operations. During the year ended April 30, 2009, the Funds did not utilize the Global Credit Facility. 12. FAIR VALUE MEASUREMENTS The Funds adopted Financial Accounting Standards Board (FASB) Statement No. 157, "Fair Value Measurement" (SFAS 157), on May 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Funds have determined that the implementation of SFAS 157 did not have a material impact on the Funds' financial statements. SFAS 157 establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Trust's own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds' investments and are summarized in the following fair value hierarchy: - Level 1 - quoted prices in active markets for identical securities - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) - Level 3 - significant unobservable inputs (including the Funds' own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. 46 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 12. FAIR VALUE MEASUREMENTS (CONTINUED) The following is a summary of the inputs used as of April 30, 2009, in valuing the Funds' assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL ------------ ---------- ---------- ------------ FRANKLIN BIOTECHNOLOGY DISCOVERY FUND ASSETS: Investments in Securities $267,291,280 $ -- $7,573,129 $274,864,409 FRANKLIN NATURAL RESOURCES FUND ASSETS: Investments in Securities $503,992,496 $4,614,400 $ 399,194 $509,006,090
At April 30, 2009, the reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining the Funds' fair value, were as follows:
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------- ---------------- INVESTMENTS INVESTMENTS IN SECURITIES IN SECURITIES -------------- ---------------- Beginning Balance - May 1, 2008 .......................... $6,679,166 $ 3,339,531 Net realized gain (loss) .............................. 2,796 -- Net change in unrealized appreciation (depreciation) .. (961,034) (2,940,337) Net purchases (sales) ................................. (2,796) -- Transfers in and/or out of Level 3 .................... 1,854,997 -- ---------- ----------- Ending Balance ........................................... $7,573,129 $ 399,194 ---------- ----------- Net change in unrealized appreciation (depreciation) attributable to assets still held at end of year ...... $ (938,667) $(2,940,337) ========== ===========
13. NEW ACCOUNTING PRONOUNCEMENTS In March 2008, the FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which expands disclosures about derivative investments and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Trust believes applying the various provisions of SFAS 161 will not have a material impact on its financial statements. In April 2009, FASB issued FASB Staff Position FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" (FSP FAS 157-4), which provides additional guidance when the volume and level of activity for the asset or liability measured at fair value Annual Report | 47 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 13. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED) have significantly decreased. Additionally, FSP FAS 157-4 amends SFAS 157, expanding disclosure requirements by reporting entities surrounding the major categories of assets and liabilities carried at fair value. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009. The Trust is currently evaluating the impact, if any, of applying FSP FAS 157-4. In May 2009, FASB issued Statement No. 165, "Subsequent Events", which is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before the statements are issued or are available to be issued. FASB 165 is effective for interim or annual financial periods ending after June 15, 2009, the adoption of FASB 165 will not have a material impact on the financial statements. ABBREVIATIONS
CURRENCY SELECTED PORTFOLIO - -------- ------------------ CAD - Canadian Dollar ADR - American Depository Receipt
48 | Annual Report Franklin Strategic Series REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN STRATEGIC SERIES In our opinion, the accompanying statements of assets and liabilities, including the statements of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Biotechnology Discovery Fund and Franklin Natural Resources Fund (separate portfolios of Franklin Strategic Series, hereafter referred to as the "Funds") at April 30, 2009, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at April 30, 2009 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California June 19, 2009 Annual Report | 49 Franklin Strategic Series TAX DESIGNATION (UNAUDITED) Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Franklin Natural Resources Fund designates the maximum amount allowable but no less than $16,449,774 as a long term capital gain dividend for the fiscal year ended April 30, 2009. Under Section 871(k)(2)(C) of the Code, the Franklin Natural Resources Fund designates the maximum amount allowable but no less than $13,053,706 as a short term capital gain dividend for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended April 30, 2009. Under Section 854(b)(2) of the Code, the Franklin Natural Resources Fund designates 34.94% of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended April 30, 2009. Under Section 854(b)(2) of the Code, the Funds designate the maximum amount allowable but no less than the following amounts as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended April 30, 2009:
FRANKLIN FRANKLIN BIOTECHNOLOGY NATURAL DISCOVERY FUND RESOURCES FUND - -------------- -------------- $3,416,021 $7,346,044
Distributions, including qualified dividend income, paid during calendar year 2009 will be reported to shareholders on Form 1099-DIV in January 2010. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Under Section 871(k)(1)(C) of the Code, the Franklin Natural Resources Fund designates the maximum amount allowable but no less than $42,393 as interest related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended April 30, 2009. 50 | Annual Report Franklin Strategic Series BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member serves a three-year term until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, YEAR OF BIRTH LENGTH OF OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- -------------- ---------------- ---------------- ------------------------------------ HARRIS J. ASHTON (1932) Trustee Since 1991 135 Bar-S Foods (meat packing company). One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). ROBERT F. CARLSON (1928) Trustee Since 2007 112 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Retired; and FORMERLY, Vice President, senior member and President, Board of Administration, California Public Employees Retirement Systems (CALPERS) (1971-2008); member and Chairman of the Board, Sutter Community Hospitals; member, Corporate Board, Blue Shield of California; and Chief Counsel, California Department of Transportation. SAM GINN (1937) Trustee Since 2007 112 Chevron Corporation (global energy One Franklin Parkway company) and ICO Global San Mateo, CA 94403-1906 Communications (Holdings) Limited (satellite company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding company) (1988-1994). EDITH E. HOLIDAY (1952) Trustee Since 1998 135 Hess Corporation (exploration and One Franklin Parkway refining of oil and gas), H.J. Heinz San Mateo, CA 94403-1906 Company (processed foods and allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison - United States Treasury Department (1988-1989).
Annual Report | 51
NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, YEAR OF BIRTH LENGTH OF OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- -------------- ---------------- ---------------- ------------------------------------ FRANK W.T. LAHAYE (1929) Trustee Since 1991 112 Center for Creative Land Recycling One Franklin Parkway (brownfield redevelopment). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital). FRANK A. OLSON (1932) Trustee Since 2007 135 Hess Corporation (exploration and One Franklin Parkway refining of oil and gas) and San Mateo, CA 94403-1906 Sentient Jet (private jet service). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). LARRY D. THOMPSON (1945) Trustee Since 2007 143 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). JOHN B. WILSON (1959) Lead Trustee since 112 None One Franklin Parkway Independent 2006 and Lead San Mateo, CA 94403-1906 Trustee Independent Trustee since 2008 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Senior Vice President - Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting firm) (1986-1990).
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, YEAR OF BIRTH LENGTH OF OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- -------------- ---------------- ---------------- ------------------------------------ **CHARLES B. JOHNSON (1933) Trustee and Trustee since 135 None One Franklin Parkway Chairman of 1991 and San Mateo, CA 94403-1906 the Board Chairman of the Board since 1993 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments.
52 | Annual Report
NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, YEAR OF BIRTH LENGTH OF OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- -------------- ---------------- ---------------- ------------------------------------ **RUPERT H. JOHNSON, JR. (1940) Trustee, Trustee since 52 None One Franklin Parkway President and 1991 and San Mateo, CA 94403-1906 Chief President and Executive Chief Executive Officer - Officer - Investment Investment Management Management since 2002 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments. JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable One Franklin Parkway Compliance Officer since San Mateo, CA 94403-1906 Officer and 2004 and Vice Vice President President - AML - AML Compliance since Compliance 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). LAURA F. FERGERSON (1962) Chief Since March 2009 Not Applicable Not Applicable One Franklin Parkway Executive San Mateo, CA 94403-1906 Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003). GASTON GARDEY (1967) Treasurer, Since March 2009 Not Applicable Not Applicable One Franklin Parkway Chief Financial San Mateo, CA 94403-1906 Officer and Chief Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Fund Accounting, Franklin Templeton Investments; and officer of 28 of the investment companies in Franklin Templeton Investments. EDWARD L. GEARY (1962) Vice President Since March 2009 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; director of some of the other subsidiaries of Franklin Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
Annual Report | 53
NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, YEAR OF BIRTH LENGTH OF OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- -------------- ---------------- ---------------- ------------------------------------ ALIYA S. GORDON (1973) Vice President Since March 2009 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel, Franklin Templeton Investments; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Litigation Associate, Steefel, Levitt & Weiss, LLP (2000-2004). DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. EDWARD B. JAMIESON (1948) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Chief Investment Officer and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC; officer and/or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of four of the investment companies in Franklin Templeton Investments. CHRISTOPHER J. MOLUMPHY (1962) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director and Executive Vice President, Franklin Advisers, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments. KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable One Franklin Parkway and Secretary San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin Templeton Investments.
54 | Annual Report
NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, YEAR OF BIRTH LENGTH OF OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- -------------- ---------------- ---------------- ------------------------------------ CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers. ** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be interested persons of the Trust under the federal securities laws due to their positions as officers and directors and major shareholders of Franklin Resources, Inc., which is the parent company of the Fund's investment manager and distributor. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE 2006. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON HAS ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. WILSON IS AN INDEPENDENT BOARD MEMBER AS THAT TERM IS DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI. Annual Report | 55 Franklin Strategic Series SHAREHOLDER INFORMATION BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT At a meeting held April 14, 2009, the Board of Trustees (Board), including a majority of non-interested or independent Trustees, approved renewal of the investment management agreement for each of the separate funds within the Trust (Fund(s)). In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included investment performance reports and related financial information for each Fund, as well as periodic reports on shareholder services, legal, compliance, pricing, brokerage commissions and execution and other services provided by the Investment Manager (Manager) and its affiliates. Information furnished specifically in connection with the renewal process included a report for each Fund prepared by Lipper, Inc. (Lipper), an independent organization, as well as additional material, including a Fund profitability analysis report prepared by management. The Lipper reports compared each Fund's investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper. The Fund profitability analysis report discussed the profitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Included with such profitability analysis report was information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager and its affiliates including management's explanation of differences where relevant and a three-year expense analysis with an explanation for any increase in expense ratios. Additional material accompanying such report was a memorandum prepared by management describing project initiatives and capital investments relating to the services provided to the Funds by the Franklin Templeton Investments organization, as well as a memorandum relating to economies of scale and a comparative analysis concerning transfer agent fees charged each Fund. Such material also discussed some of the actions taken by management in coping with problems arising out of the past year's financial upheaval. In considering such materials, the independent Trustees received assistance and advice from and met separately with independent counsel. While the investment management agreements for all Funds were considered at the same Board meeting, the Board dealt with each Fund separately. In approving continuance of the investment management agreement for each Fund, the Board, including a majority of independent Trustees, determined that the existing management fee structure was fair and reasonable and that continuance of the investment management agreement was in the best interests of each Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board's decision. NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature and quality of the overall services provided by the Manager and its affiliates to the Funds and their shareholders. In addition to investment performance and expenses discussed later, the Board's opinion was based, in part, upon periodic reports furnished it showing that the investment policies 56 | Annual Report Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) and restrictions for each Fund were consistently complied with as well as other reports periodically furnished the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics adopted throughout the Franklin Templeton fund complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net asset value calculations. The Board also noted the extent of benefits provided Fund shareholders from being part of the Franklin Templeton family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. Favorable consideration was given to management's continuous efforts and expenditures in establishing back-up systems and recovery procedures to function in the event of a natural disaster, it being noted that such systems and procedures had functioned smoothly during the Florida hurricanes and blackouts experienced in recent years. Among other factors taken into account by the Board were the Manager's best execution trading policies, including a favorable report by an independent portfolio trading analytical firm. Consideration was also given to the experience of each Fund's portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management's determination of a portfolio manager's bonus compensation was the relative investment performance of the funds he or she managed and that a portion of such bonus was required to be invested in a predesignated list of funds within such person's fund management area so as to be aligned with the interests of Fund shareholders. The Board also took into account the quality of transfer agent and shareholder services provided Fund shareholders by an affiliate of the Manager, noting continuing expenditures by management to increase and improve the scope of such services, periodic favorable reports on such service conducted by third parties, and the continuous enhancements to and high industry ranking given the Franklin Templeton website. Particular attention was given to the overall performance and actions taken by the Manager and its affiliates in response to problems arising out of the market turmoil and financial crisis experienced during the past year. In this respect, the Board noted that management's independent credit analysis and diligent risk management procedures had minimized exposure of funds within the Franklin Templeton complex to subprime mortgages and that its continuous monitoring of counterparty credit risk had limited fund exposure to firms experiencing financial difficulties like Bear Stearns and AIG. The same type of conservative approach and attention to risk had also prevented any structured investment products or other volatile instruments from being held in the portfolios of any of the money market funds within the Franklin Templeton complex, including the sweep money fund utilized by many of the funds as part of their cash management. The Board also took into account, among other things, management's efforts in establishing a $725 million global credit facility for the benefit of the funds and other accounts managed by Franklin Templeton Investments to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of the Manager's parent company and its commitment to the mutual fund business. The Annual Report | 57 Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) Board also noted that during the past year Franklin Templeton Investments, like many other fund managers, had announced a hiring freeze and implemented employee reductions, and the Board discussed with management the nature of such reductions and steps being taken to minimize any negative impact on the nature and quality of services being provided the Funds. INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of the Funds in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings throughout the year, particular attention in assessing performance was given to the Lipper reports furnished for the agreement renewals. The Lipper reports prepared for each individual Fund showed the investment performance of its Class A shares for those having multiple share classes in comparison to a performance universe selected by Lipper. Comparative performance for each Fund was shown for the one-year period ended January 31, 2009, and previous periods ended that date of up to 10 years depending on when a particular Fund commenced operations. The following summarizes the performance results for each of these Funds and the Board's view of such performance. FRANKLIN BIOTECHNOLOGY DISCOVERY FUND - The performance universe for this Fund consisted of the Fund and all retail and institutional health/biotechnology funds as selected by Lipper. Consistent with the market sell-off that occurred during the past year, the Fund and most of the funds in the Lipper performance universe experienced losses during such period. The Lipper report showed the Fund's total return for the one-year period to be in the second-highest quintile of its performance universe and to be in either the highest or second-highest quintile of such universe during each of the previous three-, five- and 10-year periods on an annualized basis. The Board noted such favorable comparative performance. FRANKLIN NATURAL RESOURCES FUND - The performance universe for this Fund consisted of the Fund and all retail and institutional global natural resources funds as selected by Lipper. Consistent with the market sell-off that occurred during the past year, the Fund and all the other funds in the Lipper performance universe experienced losses during such period. The Lipper report comparison for the Fund showed its total return for the one-year period to be in the middle quintile of its performance universe and on an annualized basis to be in the middle quintile of the performance universe for the previous three- and five-year periods, and the second-lowest quintile of such universe for the previous 10-year period. The Board did not believe such comparative performance warranted any change in portfolio management, noting that the Lipper report showed the Fund's annualized return for the 10-year period exceeded 10 percent. COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the management fees and total expense ratios of each Fund compared with those of a group of other funds selected by Lipper as its appropriate Lipper expense group. Lipper expense data is based upon historical information taken from each fund's most recent annual report and, as a result of the severe 58 | Annual Report Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) decline in mutual fund industry assets during the last quarter of 2008, is based on asset levels that are higher than the level currently existing for most funds. While recognizing the limitations inherent in Lipper's methodology and recognizing that current expense ratios may increase as assets decline, the Board believed that the independent analysis conducted by Lipper remained an appropriate measure of comparative expenses. In reviewing comparative costs, Lipper provides information on each Fund's contractual investment management fee in comparison with the investment management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The Lipper contractual investment management fee analysis includes administrative charges as being part of the investment management fee, and actual total expenses, for comparative consistency, are shown by Lipper for Fund Class A shares for those Funds with multiple share classes. The results of such expense comparisons showed the contractual investment management fee rates and actual total expense rates for each of Franklin Biotechnology Discovery Fund and Franklin Natural Resources Fund were in the least expensive quintile of their respective Lipper expense groups. The Board was satisfied with the contractual management fees and total expenses of each of these Funds in comparison to their expense groups as shown in the Lipper reports. MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of each Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton's U.S. fund business, as well as its profits in providing management and other services to each of the individual funds during the 12-month period ended September 30, 2008, being the most recent fiscal year end for Franklin Resources, Inc., the Manager's parent. During such period, the assets of the Franklin Templeton U.S. fund business were significantly higher than currently existing, and to such extent the profitability analysis does not reflect current fund operations. While taking this into account in assessing the significance of the Fund profitability analysis, the Board recognized such analysis was made at a given point in time and that the decline in assets and effect on profitability would be reflected in the profitability analysis covering Franklin Resources' 2009 fiscal year period. In reviewing the analysis, attention was given to the methodology followed in allocating costs to each Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that, while being continuously refined and reflecting changes in the Manager's own cost accounting, the allocation methodology was consistent with that followed in profitability report presentations for the Funds made in prior years and that the Funds' independent registered public accounting firm had been engaged by the Manager to perform certain procedures on a biennial basis, specified and approved by the Manager and the Funds' Board solely for their purposes and use in reference to the profitability analysis. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in establishing the Annual Report | 59 Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) infrastructure necessary for the type of mutual fund operations conducted by the Manager and its affiliates may not be fully reflected in the expenses allocated to each Fund in determining its profitability, as well as the fact that the level of profits, to a certain extent, reflected operational cost savings and efficiencies initiated by management. The Board also took into account management's expenditures in improving shareholder services provided the Funds, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act and recent SEC and other regulatory requirements. In addition, the Board considered a third-party study comparing the profitability of the Manager's parent on an overall basis as compared to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including its interest in a joint venture entity that financed up-front commissions paid to brokers/dealers who sold fund Class B shares prior to February 2005 when the offering of such shares was discontinued, as well as potential benefits resulting from allocation of fund brokerage and the use of commission dollars to pay for research. Based upon its consideration of all these factors, the Board determined that the level of profits realized by the Manager and its affiliates from providing services to each Fund was not excessive in view of the nature, quality and extent of services provided. ECONOMIES OF SCALE. The Board also considered whether economies of scale are realized by the Manager as the Funds grow larger and the extent to which this is reflected in the level of management fees charged. While recognizing that any precise determination is inherently subjective, the Board noted that based upon the Fund profitability analysis, it appears that as some funds get larger, at some point economies of scale do result in the Manager realizing a larger profit margin on management services provided such a fund. The Board noted that economies of scale were shared with each Fund and its shareholders through management fee breakpoints so that as a Fund grows in size, its effective management fee rate declines. The fee structure under the investment management agreements for all of the Funds contains breakpoints that continued to asset levels that exceeded their asset size at December 31, 2008. In view of such fee structure and the favorable expense comparisons of the Funds within their respective expense groups, the Board believed that to the extent economies of scale may be realized by the manager of these Funds and its affiliates, that there was a sharing of benefits with each Fund and its shareholders. 60 | Annual Report Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) PROXY VOTING POLICIES AND PROCEDURES The Trust's investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330. Annual Report | 61 This page intentionally left blank. This page intentionally left blank. This page intentionally left blank. Franklin Templeton Funds LITERATURE REQUEST. TO RECEIVE A PROSPECTUS, PLEASE CALL US AT (800) DIAL BEN/(800) 342-5236 OR VISIT franklintempleton.com. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE, WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR BEEPING TONE. VALUE Franklin All Cap Value Fund Franklin Balance Sheet Investment Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund(1) Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Quest Fund Mutual Recovery Fund(2) Mutual Shares Fund BLEND Franklin Focused Core Equity Fund Franklin Large Cap Equity Fund Franklin Rising Dividends Fund GROWTH Franklin Flex Cap Growth Fund Franklin Growth Fund Franklin Growth Opportunities Fund Franklin Small Cap Growth Fund Franklin Small-Mid Cap Growth Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Real Estate Fund Franklin Gold & Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Utilities Fund Mutual Financial Services Fund GLOBAL Mutual Global Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund INTERNATIONAL Franklin India Growth Fund Franklin International Growth Fund Franklin International Small Cap Growth Fund Mutual European Fund Mutual International Fund Templeton BRIC Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Emerging Markets Small Cap Fund Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton Frontier Markets Fund HYBRID Franklin Balanced Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Income Fund Templeton Income Fund ASSET ALLOCATION Franklin Templeton Corefolio(R) Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund Franklin Templeton 2015 Retirement Target Fund Franklin Templeton 2025 Retirement Target Fund Franklin Templeton 2035 Retirement Target Fund Franklin Templeton 2045 Retirement Target Fund FIXED INCOME Franklin Adjustable U.S. Government Securities Fund(3) Franklin Floating Rate Daily Access Fund Franklin High Income Fund Franklin Limited Maturity U.S. Government Securities Fund(3) Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund(3) Templeton Global Bond Fund Templeton Global Total Return Fund Templeton International Bond Fund TAX-FREE INCOME(4) NATIONAL Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(5) LIMITED-/INTERMEDIATE-TERM California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Arizona California(6) Colorado Connecticut Florida Georgia Kentucky Louisiana Maryland Massachusetts(7) Michigan(7) Minnesota(7) Missouri New Jersey New York(6) North Carolina Ohio(7) Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(8) (1.) The fund is closed to new investors. Existing shareholders and select retirement plans can continue adding to their accounts. (2.) The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. (3.) An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. (4.) For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. (5.) The fund invests primarily in insured municipal securities. (6.) These funds are available in four or more variations, including long-term portfolios, intermediate-term portfolios, portfolios of insured securities, a high-yield portfolio (CA only) and money market portfolios. (7.) The Board of Trustees approved the elimination of the non-fundamental policy requiring the fund to invest at least 80% of net assets in insured municipal securities and the removal of the word "Insured" from the fund name. The changes became effective 2/17/09. (8.) The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 04/09 Not part of the annual report (FRANKLIN TEMPLETON INVESTMENTS (R) LOGO) One Franklin Parkway San Mateo, CA 94403-1906 SIGN UP FOR EDELIVERY Log onto franklintempleton.com and click "My Profile" ANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN STRATEGIC SERIES INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. (800) DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES (800) 632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. FSS2 A2009 06/09 APRIL 30, 2009 ANNUAL REPORT AND SHAREHOLDER LETTER A series of Franklin Strategic Series SIGN UP FOR EDELIVERY Log onto franklintempleton.com and click "My Profile" (GRAPHIC) FIXED INCOME FRANKLIN STRATEGIC INCOME FUND (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) FRANKLIN - Templeton - Mutual Series Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE(R) Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups-- Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS (GRAPHIC) Not part of the annual report Contents SHAREHOLDER LETTER ........................................ 1 ANNUAL REPORT Franklin Strategic Income Fund ............................ 3 Performance Summary ....................................... 9 Your Fund's Expenses ...................................... 15 Financial Highlights and Statement of Investments ......... 17 Financial Statements ...................................... 40 Notes to Financial Statements ............................. 44 Report of Independent Registered Public Accounting Firm ... 59 Tax Designation ........................................... 60 Board Members and Officers ................................ 61 Shareholder Information ................................... 66
Shareholder Letter Dear Shareholder: The 12-month period ended April 30, 2009, was an extraordinary and stressful time for investors and those of us who have worked in financial markets for many years. During this turbulent period, the U.S. recession deepened, the unemployment rate surged and consumer spending fell. Most stocks suffered major losses as investors worried about an uncertain future. With a new president, Barack Obama, the country and the financial markets were eager to see how effectively the government could address these problems. Although this environment is bound to provoke great concern, we think it is important to put short-term market developments in perspective. Keep in mind that as daunting as current conditions may be, we have navigated through other periods of high market volatility, such as the U.S. stock market's severe decline of 1987 and the bursting of the technology bubble in 2000. We remain committed to our long-term perspective and disciplined investment philosophy. Therefore, we view recent declines as potential opportunities to find bargains that we believe may be well positioned to become eventual winners. Although conditions remain challenging, our experience gives us ample reason to be optimistic about future market stabilization and recovery. Franklin Strategic Income Fund's annual report goes into greater detail about prevailing conditions during the period under review. In addition, you will find performance data, financial information and a discussion about investment management decisions. Please remember that all securities markets fluctuate, as do mutual fund share prices. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Not part of the annual report | 1 If you would like more frequent updates, franklintempleton.com provides daily prices, monthly performance figures, portfolio holdings and other information. You can also access your account, buy and sell shares, read timely articles, and find helpful financial planning tools. We hope you will take advantage of these online services. Although market conditions are constantly changing, we remain committed to our disciplined strategy as we manage the Fund, keeping in mind the trust you have placed in us. As always, we recommend investors consult their financial advisors and review their portfolios to design a long-term strategy and portfolio allocation that meet their individual needs, goals and risk tolerance. We firmly believe that most people benefit from professional advice, and that advice is invaluable as investors navigate current market conditions. We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to serving your investment needs in the years ahead. Sincerely, /s/ Rupert H. Johnson, Jr. Rupert H. Johnson, Jr. President and Chief Executive Officer - Investment Management Franklin Strategic Series THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF APRIL 30, 2009. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. 2 | Not part of the annual report Annual Report Franklin Strategic Income Fund YOUR FUND'S GOALS AND MAIN INVESTMENTS: 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 under normal market conditions invests at least 65% of its assets in U.S. and foreign debt securities, including those in emerging markets, which include all varieties of fixed and floating rate income securities, including bonds, mortgage securities and other asset-backed securities, and convertible securities. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This annual report for Franklin Strategic Income Fund covers the fiscal year ended April 30, 2009. PERFORMANCE OVERVIEW Franklin Strategic Income Fund - Class A had a -6.32% cumulative total return for the 12 months under review. The Fund underperformed its benchmark, the Barclays Capital (BC) U.S. Aggregate Index, which had a +3.84% total return for the same period.(1) During the same period, the Fund performed better than its peers as measured by the Lipper Multi-Sector Income Funds Classification Average's -10.07% total return.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 9. (1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The BC U.S. Aggregate Index is a market-capitalization weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC-registered, taxable, dollar denominated, nonconvertible, must have at least one year to final maturity, and must be rated investment grade (Baa3/BBB-/BBB- or above) using the middle rating of Moody's, Standard & Poor's and Fitch, respectively. The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. (2.) Source: Lipper Inc. The Lipper Multi-Sector Income Funds Classification Average is calculated by averaging the total returns of all funds within the Lipper Multi-Sector Income Funds classification in the Lipper Open-End underlying funds universe. Lipper Multi-Sector Income Funds are defined as funds that seek current income by allocating assets among different fixed income securities sectors (not primarily in one sector except for defensive purposes), including U.S. and foreign governments, with a significant portion rated below investment grade. For the 12-month period ended 4/30/09, there were 147 funds in this category. Lipper calculations do not include sales charges or expense subsidization by a fund's manager. Fund performance relative to the average may have differed if these or other factors had been considered. The Lipper average includes reinvestment of any income or distributions. One cannot invest directly in a Lipper average, nor is the average representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 22. Annual Report | 3 ECONOMIC AND MARKET OVERVIEW During the 12 months ended April 30, 2009, economic conditions deteriorated. In February 2009, the Conference Board's Consumer Confidence Index fell to an all-time low since it began in 1967 as the U.S. economy faltered and as stock markets declined. Despite far-reaching government interventions, the nation's economic troubles worsened as manufacturing activity weakened at its fastest pace in nearly 30 years and as home prices fell at an accelerated rate. Jobless claims mounted and the unemployment rate rose to 8.9% by period-end.(3) Economic growth, as measured by gross domestic product (GDP), rose in 2008's second and third quarters at annualized rates of 2.1% and 0.7% before falling in 2008's fourth quarter and 2009's first quarter at annualized rates of 6.3% and an estimated 5.7%. The decline in GDP reflected a broad-based slowdown in consumer spending, corporate profits and export growth. Oil prices retreated from $113 per barrel in April 2008 to $51 per barrel at period-end. Many other commodities and many industrial metals followed similar trends. Partially as a result of the price corrections, April's inflation rate was an annualized -0.7%.(3) Core inflation, which excludes food and energy costs, rose at a 1.9% annualized rate, which was within the Federal Reserve Board's (Fed's) informal target range of 1.5%-2.0%.(3) The core personal consumption expenditures price index reported a 12-month increase of 1.9%.(4) A slowing economy and decelerating inflation prompted policymakers to lower interest rates and enact stimulus plans. During the 12 months under review, the Fed lowered the federal funds target rate to a range of 0% to 0.25% from 2.00% at the start of the reporting period. Congress passed a $787 billion fiscal stimulus package (American Recovery and Reinvestment Act) that included tax breaks, money for ailing state governments, aid to the poor and unemployed, and spending on infrastructure, renewable energy, health care and education. The Fed and U.S. Treasury Department also introduced new programs designed to shore up beleaguered banks' capital, enable freer lending to businesses and consumers and help struggling home buyers avoid foreclosure. Treasury prices declined early in the period, then rose through 2008 before declining again in early 2009. During the fiscal year, investors drove the yield on the three-month Treasury bill to a multi-decade low. Fixed income spreads were generally wide relative to Treasury yields over the period due to heightened market turbulence and risk aversion. The spread between two-year and 10-year Treasury yields rose to 225 basis points (100 basis points equal one percentage point) at the end of April from 148 basis points at the beginning of the reporting (3.) Source: Bureau of Labor Statistics. (4.) Source: Bureau of Economic Analysis. 4 | Annual Report period. The two-year Treasury bill yield fell from 2.29% to 0.91% over the 12-month period. Over the same period, the 10-year Treasury note yield fell from 3.77% to 3.16%. Other regions also experienced challenging economic environments. In the eurozone, fourth quarter 2008 and first quarter 2009 GDP contracted 1.4% and 4.6% compared with the same quarters a year earlier, and labor markets weakened.(5) Eurozone governments proposed various fiscal stimulus packages; however, authorities remained hesitant to implement aggressive fiscal spending given the European Monetary Union's institutional constraints, concerns about the euro's integrity and possible effects on medium-term inflation. During the 12 months under review, the European Central Bank reduced its key interest rate from 4.00% at the beginning of the period to 1.25% at period-end in an effort to boost economic growth, while the Bank of England reduced its interest rate from 5.00% to 0.50%. In Asia, signs began to emerge that the economic slowdown could be bottoming and headed toward a recovery. Fiscal stimuli in larger developing countries, especially China, seemed to help other Asian economies. Recent increases in Chinese purchasing manager indexes, South Korean industrial production figures and Asian exports were consistent with an early-stage recovery pattern. In addition, many Asian countries' current accounts improved in the period's latter half, especially oil importers such as South Korea, India and Thailand. INVESTMENT STRATEGY The Fund uses an active asset allocation strategy, investing across the fixed income market in sectors including high yield and investment grade corporate bonds, international developed and emerging market bonds, U.S. government and agency securities, mortgage and other asset-backed securities, corporate bank loans, convertible securities and preferred stocks. In addition to our bottom-up fundamental analysis of market sectors, industries and issuers, we evaluate country risk, business cycles, yield curves, and values between and within markets as part of our portfolio construction process. MANAGER'S DISCUSSION For the fiscal year under review, financial markets exhibited significant volatility. Nearly all asset classes were pressured as risk aversion increased in late 2008, followed by some rebound in several sectors during early 2009. The global (5.) Source: Eurostat. Annual Report | 5 DIVIDEND DISTRIBUTIONS* 5/1/08-4/30/09
DIVIDEND PER SHARE --------------------------------------------------------------------- MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS - ----- ----------- ----------- ----------- ----------- ------------- May 5.00 cents 4.66 cents 4.68 cents 4.79 cents 5.21 cents June 5.00 cents 4.66 cents 4.66 cents 4.79 cents 5.21 cents July 5.00 cents 4.66 cents 4.66 cents 4.79 cents 5.21 cents August 5.00 cents 4.66 cents 4.66 cents 4.79 cents 5.21 cents September 5.00 cents 4.67 cents 4.69 cents 4.81 cents 5.20 cents October 5.00 cents 4.67 cents 4.69 cents 4.81 cents 5.20 cents November 5.00 cents 4.67 cents 4.69 cents 4.81 cents 5.20 cents December** 25.00 cents 24.72 cents 24.73 cents 24.83 cents 25.16 cents January 5.00 cents 4.72 cents 4.73 cents 4.83 cents 5.16 cents February 3.80 cents 3.52 cents 3.53 cents 3.63 cents 3.96 cents March 3.80 cents 3.52 cents 3.52 cents 3.63 cents 3.98 cents April 3.80 cents 3.52 cents 3.52 cents 3.63 cents 3.98 cents ----------- ----------- ----------- ----------- ----------- TOTAL 76.40 CENTS 72.65 CENTS 72.76 CENTS 74.14 CENTS 78.68 CENTS
* All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. ** Includes an additional 20 cent per share distribution to meet excise tax requirements. economic recession and a credit market breakdown negatively affected most fixed income spread sectors, with U.S. Treasury and other government securities providing some of the few safe havens. However, although the economic backdrop remained uncertain going into 2009, historically cheap valuations drew many investors from government bonds into several depressed spread sectors, reversing a portion of earlier declines. In this environment, the Fund underperformed the BC U.S. Aggregate Index and performed better than the Lipper Multi-Sector Income Funds Classification Average. The Fund's lower exposure to more U.S. interest-rate sensitive fixed income sectors (i.e., U.S. Treasury securities, agency bonds and mortgage-backed securities) constrained performance compared with the index given the stronger performance of such securities during a period of financial market volatility. The Fund's exposure to certain non-U.S. dollar government bonds and diversified exposure to investment-grade and noninvestment-grade sectors helped performance relative to the Fund's peers. Although most fixed income sectors' performance varied significantly between 2008 and early 2009, high-quality U.S. government securities were some of the best performing assets during the Fund's fiscal year. Consequently, U.S. Treasuries, agency debentures and agency mortgage-backed securities delivered positive returns. In addition, Treasury Inflation Protected Securities (TIPS) provided particularly strong performance thus far in 2009. Although the Fund's exposure to these sectors varied throughout the fiscal year, in general we added to the Fund's TIPS position and maintained a heavier weighting in agency 6 | Annual Report PORTFOLIO BREAKDOWN Based on Total Net Assets
4/30/09 4/30/08 ------- ------- High Yield Corporate Bonds & Preferred Stocks 22.1% 22.8% Investment Grade Corporate Bonds 18.2% 9.4% Mortgages & Other Asset-Backed Bonds 17.8% 16.7% Floating Rate Bank Loans 9.6% 16.1% U.S. Government & Agency Bonds* 8.9% 4.9% Other International Bonds (non-$US) 8.3% 11.8% Emerging Market Bonds ($US) 6.0% 1.5% Municipal Bonds 2.8% 1.9% International Developed Country Bonds (non-$US) 2.2% 9.6% Convertible Securities 0.4% 2.7% Common Stocks & Warrants -- 0.0%** Short-Term Investments & Other Net Assets 3.7% 2.6%
* Includes 2.9% Treasury Inflation Protected Securities as of 4/30/09 and 0.6% as of 4/30/08. Also includes agency preferred stock. ** Rounds to less than 0.1% of net assets. mortgage-backed securities relative to U.S. Treasuries. Our exposure to asset-backed and commercial asset-backed securities, while generally in AAA-rated tranches, hurt Fund performance during the period given increasing concerns about rising delinquencies for these securitized issuers. However, both sectors rebounded significantly from their lows in early 2009 through period-end. Given these securities' seniority in the corporate structure, we maintained our holdings following their partial price rebound. The Fund also added municipal, tax-free bonds in states such as California given their unusually cheap yield valuations relative to taxable government bonds. The corporate credit sector experienced a dramatic reversal in performance between 2008 and early 2009. After reaching the cheapest valuations in terms of yield spreads over government bonds in decades, credit sectors such as investment-grade bonds, high yield securities and leveraged bank loans rallied during the first four months of 2009. Although the fundamental outlook for the rest of 2009 remained challenging given the weak economic and corporate earnings outlooks combined with less than ideal credit availability and cost, valuations in early 2009 appeared to price in expectations of higher defaults and ratings downgrades. We found what we considered value particularly in investment-grade corporate bonds, where we believed yield spreads provided attractive risk-adjusted return potential given these issuers' generally better quality. At the same time, we maintained exposure to the noninvestment-grade sector including corporate bonds and bank loans. Overall, the corporate sector detracted from Fund performance during the fiscal year given widening yield spreads, but the Fund maintained significant exposure to the sector at period-end given what we believed were still attractive valuations. The Fund held only Annual Report | 7 a very small weighting in convertible securities given our assessment of more promising investment opportunities in straight corporate debt markets. During 2008, many investors' flight to quality contributed to the U.S. dollar's appreciation versus many other currencies, as did negative fundamental outlooks for certain other countries whose economies began to follow the U.S. downturn. The Fund's non-U.S. dollar bond and currency positions had mixed performances during the fiscal year. Our long exposure to the Japanese yen (sold by period-end) contributed to performance, as did our short position in the euro, which helped to hedge certain of the Fund's other European currency holdings. The Fund's exposure to currencies such as the Polish zloty, Brazilian real and Mexican peso, however, negatively impacted results. We added to the Fund's hard currency U.S. dollar-denominated emerging market sovereign debt positions, in countries such as Russia and Indonesia, as valuations declined materially during 2008's fourth quarter. Thank you for your continued participation in Franklin Strategic Income Fund. We look forward to serving your future investment needs. (PHOTO OF CHRISTOPHER J. MOLUMPHY) /s/ Christopher J. Molumphy Christopher J. Molumphy, CFA (PHOTO OF ERIC G. TAKAHA) /s/ Eric G. Takaha Eric G. Takaha, CFA Portfolio Management Team Franklin Strategic Income Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF APRIL 30, 2009, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 8 | Annual Report Performance Summary as of 4/30/09 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FRSTX) CHANGE 4/30/09 4/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$1.45 $8.83 $10.28 DISTRIBUTIONS (5/1/08-4/30/09) Dividend Income $0.7640
CLASS B (SYMBOL: FKSBX) CHANGE 4/30/09 4/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$1.45 $8.87 $10.32 DISTRIBUTIONS (5/1/08-4/30/09) Dividend Income $0.7265
CLASS C (SYMBOL: FSGCX) CHANGE 4/30/09 4/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$1.44 $8.83 $10.27 DISTRIBUTIONS (5/1/08-4/30/09) Dividend Income $0.7276
CLASS R (SYMBOL: FKSRX) CHANGE 4/30/09 4/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$1.44 $8.81 $10.25 DISTRIBUTIONS (5/1/08-4/30/09) Dividend Income $0.7414
ADVISOR CLASS (SYMBOL: FKSAX) CHANGE 4/30/09 4/30/08 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) -$1.44 $8.84 $10.28 DISTRIBUTIONS (5/1/08-4/30/09) Dividend Income $0.7868
Annual Report | 9 Performance Summary (CONTINUED) PERFORMANCE(1) CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR 10-YEAR - ------- ------ ------ ------- Cumulative Total Return(2) -6.32% +22.36% +67.69% Average Annual Total Return(3) -10.33% +3.21% +4.85% Avg. Ann. Total Return (3/31/09)(4) -12.93% +1.73% +4.62% Distribution Rate(5) 4.95% 30-Day Standardized Yield(6) 6.79% Total Annual Operating Expenses(7) 0.91%
CLASS B 1-YEAR 5-YEAR 10-YEAR - ------- ------ ------ ------- Cumulative Total Return(2) -6.68% +19.94% +62.52% Average Annual Total Return(3) -10.12% +3.40% +4.98% Avg. Ann. Total Return (3/31/09)(4) -12.74% +1.92% +4.75% Distribution Rate(5) 4.76% 30-Day Standardized Yield(6) 6.72% Total Annual Operating Expenses(7) 1.31%
CLASS C 1-YEAR 5-YEAR 10-YEAR - ------- ------ ------ ------- Cumulative Total Return(2) -6.60% +19.97% +61.18% Average Annual Total Return(3) -7.46% +3.71% +4.89% Avg. Ann. Total Return (3/31/09)(4) -10.18% +2.21% +4.66% Distribution Rate(5) 4.78% 30-Day Standardized Yield(6) 6.69% Total Annual Operating Expenses(7) 1.31%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------- ------ ------ ------------------ Cumulative Total Return(2) -6.47% +20.92% +53.17% Average Annual Total Return(3) -6.47% +3.87% +6.00% Avg. Ann. Total Return (3/31/09)(4) -9.22% +2.37% +5.36% Distribution Rate(5) 4.94% 30-Day Standardized Yield(6) 6.83% Total Annual Operating Expenses(7) 1.16%
ADVISOR CLASS(8) 1-YEAR 5-YEAR 10-YEAR - ---------------- ------ ------ ------- Cumulative Total Return(2) -5.98% +24.00% +71.91% Average Annual Total Return(3) -5.98% +4.40% +5.57% Avg. Ann. Total Return (3/31/09)(4) -8.74% +2.89% +5.34% Distribution Rate(5) 5.40% 30-Day Standardized Yield(6) 7.33% Total Annual Operating Expenses(7) 0.66%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. 10 | Annual Report Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT(1) Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. CLASS A (5/1/99-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN STRATEGIC BARCLAYS CAPITAL U.S. LIPPER MULTI-SECTOR INCOME DATE INCOME FUND - CLASS A AGGREGATE INDEX CLASSIFICATION AVERAGE - ------------- --------------------- --------------------- -------------------------- 5/1/1999 $ 9,576 $10,000 $10,000 5/31/1999 $ 9,352 $ 9,912 $ 9,800 6/30/1999 $ 9,368 $ 9,881 $ 9,813 7/31/1999 $ 9,303 $ 9,839 $ 9,785 8/31/1999 $ 9,220 $ 9,834 $ 9,717 9/30/1999 $ 9,227 $ 9,948 $ 9,762 10/31/1999 $ 9,271 $ 9,985 $ 9,790 11/30/1999 $ 9,353 $ 9,984 $ 9,886 12/31/1999 $ 9,481 $ 9,936 $ 9,991 1/31/2000 $ 9,326 $ 9,903 $ 9,909 2/29/2000 $ 9,443 $10,023 $10,068 3/31/2000 $ 9,466 $10,155 $10,077 4/30/2000 $ 9,403 $10,126 $ 9,962 5/31/2000 $ 9,282 $10,121 $ 9,838 6/30/2000 $ 9,556 $10,332 $10,090 7/31/2000 $ 9,618 $10,426 $10,127 8/31/2000 $ 9,769 $10,577 $10,212 9/30/2000 $ 9,706 $10,643 $10,107 10/31/2000 $ 9,513 $10,714 $ 9,908 11/30/2000 $ 9,319 $10,889 $ 9,759 12/31/2000 $ 9,728 $11,091 $10,039 1/31/2001 $10,120 $11,272 $10,407 2/28/2001 $10,085 $11,371 $10,419 3/31/2001 $ 9,926 $11,428 $10,224 4/30/2001 $ 9,932 $11,380 $10,147 5/31/2001 $ 9,991 $11,449 $10,221 6/30/2001 $ 9,913 $11,492 $10,135 7/31/2001 $10,035 $11,749 $10,217 8/31/2001 $10,159 $11,884 $10,355 9/30/2001 $ 9,747 $12,022 $10,029 10/31/2001 $10,045 $12,274 $10,274 11/30/2001 $10,302 $12,104 $10,400 12/31/2001 $10,254 $12,028 $10,368 1/31/2002 $10,271 $12,125 $10,425 2/28/2002 $10,293 $12,243 $10,453 3/31/2002 $10,393 $12,039 $10,480 4/30/2002 $10,528 $12,272 $10,645 5/31/2002 $10,483 $12,377 $10,674 6/30/2002 $10,039 $12,484 $10,454 7/31/2002 $ 9,821 $12,634 $10,286 8/31/2002 $10,075 $12,848 $10,503 9/30/2002 $10,051 $13,056 $10,481 10/31/2002 $10,110 $12,996 $10,526 11/30/2002 $10,534 $12,993 $10,810 12/31/2002 $10,736 $13,261 $11,028 1/31/2003 $10,927 $13,273 $11,194 2/28/2003 $11,120 $13,456 $11,372 3/31/2003 $11,270 $13,446 $11,492 4/30/2003 $11,749 $13,557 $11,891 5/31/2003 $12,097 $13,810 $12,189 6/30/2003 $12,250 $13,782 $12,303 7/31/2003 $11,920 $13,319 $12,043 8/31/2003 $12,038 $13,407 $12,168 9/30/2003 $12,481 $13,762 $12,514 10/31/2003 $12,561 $13,634 $12,611 11/30/2003 $12,744 $13,667 $12,757 12/31/2003 $13,107 $13,806 $13,058 1/31/2004 $13,278 $13,917 $13,186 2/29/2004 $13,347 $14,067 $13,218 3/31/2004 $13,443 $14,173 $13,321 4/30/2004 $13,123 $13,804 $13,029 5/31/2004 $13,011 $13,749 $12,909 6/30/2004 $13,121 $13,826 $13,029 7/31/2004 $13,272 $13,964 $13,152 8/31/2004 $13,569 $14,230 $13,413 9/30/2004 $13,735 $14,268 $13,581 10/31/2004 $14,009 $14,388 $13,815 11/30/2004 $14,190 $14,273 $13,996 12/31/2004 $14,399 $14,405 $14,201 1/31/2005 $14,364 $14,495 $14,190 2/28/2005 $14,547 $14,410 $14,289 3/31/2005 $14,209 $14,336 $14,048 4/30/2005 $14,186 $14,530 $14,070 5/31/2005 $14,303 $14,687 $14,205 6/30/2005 $14,415 $14,767 $14,353 7/31/2005 $14,486 $14,633 $14,408 8/31/2005 $14,584 $14,820 $14,540 9/30/2005 $14,485 $14,667 $14,491 10/31/2005 $14,385 $14,551 $14,342 11/30/2005 $14,485 $14,616 $14,423 12/31/2005 $14,615 $14,755 $14,560 1/31/2006 $14,832 $14,755 $14,704 2/28/2006 $14,919 $14,804 $14,809 3/31/2006 $14,861 $14,659 $14,726 4/30/2006 $14,993 $14,633 $14,810 5/31/2006 $14,964 $14,617 $14,739 6/30/2006 $14,889 $14,648 $14,699 7/31/2006 $15,053 $14,846 $14,883 8/31/2006 $15,233 $15,073 $15,090 9/30/2006 $15,354 $15,206 $15,186 10/31/2006 $15,550 $15,306 $15,356 11/30/2006 $15,763 $15,484 $15,560 12/31/2006 $15,814 $15,394 $15,598 1/31/2007 $15,844 $15,388 $15,663 2/28/2007 $16,030 $15,625 $15,867 3/31/2007 $16,123 $15,625 $15,924 4/30/2007 $16,357 $15,710 $16,096 5/31/2007 $16,419 $15,591 $16,098 6/30/2007 $16,293 $15,545 $15,969 7/31/2007 $16,151 $15,674 $15,833 8/31/2007 $16,215 $15,866 $15,925 9/30/2007 $16,646 $15,987 $16,228 10/31/2007 $16,838 $16,130 $16,380 11/30/2007 $16,693 $16,420 $16,331 12/31/2007 $16,742 $16,466 $16,367 1/31/2008 $16,807 $16,743 $16,398 2/29/2008 $16,807 $16,766 $16,336 3/31/2008 $16,824 $16,823 $16,262 4/30/2008 $17,141 $16,788 $16,495 5/31/2008 $17,057 $16,665 $16,460 6/30/2008 $16,771 $16,652 $16,225 7/31/2008 $16,754 $16,638 $16,105 8/31/2008 $16,737 $16,796 $16,089 9/30/2008 $15,814 $16,571 $15,305 10/31/2008 $14,456 $16,180 $13,895 11/30/2008 $14,231 $16,706 $13,483 12/31/2008 $14,910 $17,329 $14,003 1/31/2009 $15,322 $17,176 $14,187 2/28/2009 $15,012 $17,112 $13,957 3/31/2009 $15,298 $17,350 $14,183 4/30/2009 $16,058 $17,432 $14,859 Total Returns 60.58% 74.32% 48.59%
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/09 - ------- ------- 1-Year -10.33% 5-Year +3.21% 10-Year +4.85%
CLASS B (5/1/99-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN STRATEGIC BARCLAYS CAPITAL U.S. LIPPER MULTI-SECTOR INCOME DATE INCOME FUND - CLASS B AGGREGATE INDEX CLASSIFICATION AVERAGE - ------------- --------------------- --------------------- -------------------------- 5/1/1999 $10,000 $10,000 $10,000 5/31/1999 $ 9,772 $ 9,912 $ 9,800 6/30/1999 $ 9,786 $ 9,881 $ 9,813 7/31/1999 $ 9,706 $ 9,839 $ 9,785 8/31/1999 $ 9,616 $ 9,834 $ 9,717 9/30/1999 $ 9,631 $ 9,948 $ 9,762 10/31/1999 $ 9,664 $ 9,985 $ 9,790 11/30/1999 $ 9,746 $ 9,984 $ 9,886 12/31/1999 $ 9,877 $ 9,936 $ 9,991 1/31/2000 $ 9,722 $ 9,903 $ 9,909 2/29/2000 $ 9,831 $10,023 $10,068 3/31/2000 $ 9,851 $10,155 $10,077 4/30/2000 $ 9,782 $10,126 $ 9,962 5/31/2000 $ 9,652 $10,121 $ 9,838 6/30/2000 $ 9,934 $10,332 $10,090 7/31/2000 $ 9,995 $10,426 $10,127 8/31/2000 $10,148 $10,577 $10,212 9/30/2000 $10,089 $10,643 $10,107 10/31/2000 $ 9,886 $10,714 $ 9,908 11/30/2000 $ 9,681 $10,889 $ 9,759 12/31/2000 $10,101 $11,091 $10,039 1/31/2001 $10,493 $11,272 $10,407 2/28/2001 $10,464 $11,371 $10,419 3/31/2001 $10,297 $11,428 $10,224 4/30/2001 $10,289 $11,380 $10,147 5/31/2001 $10,356 $11,449 $10,221 6/30/2001 $10,262 $11,492 $10,135 7/31/2001 $10,385 $11,749 $10,217 8/31/2001 $10,509 $11,884 $10,355 9/30/2001 $10,081 $12,022 $10,029 10/31/2001 $10,385 $12,274 $10,274 11/30/2001 $10,646 $12,104 $10,400 12/31/2001 $10,604 $12,028 $10,368 1/31/2002 $10,607 $12,125 $10,425 2/28/2002 $10,638 $12,243 $10,453 3/31/2002 $10,738 $12,039 $10,480 4/30/2002 $10,862 $12,272 $10,645 5/31/2002 $10,824 $12,377 $10,674 6/30/2002 $10,351 $12,484 $10,454 7/31/2002 $10,124 $12,634 $10,286 8/31/2002 $10,381 $12,848 $10,503 9/30/2002 $10,366 $13,056 $10,481 10/31/2002 $10,411 $12,996 $10,526 11/30/2002 $10,856 $12,993 $10,810 12/31/2002 $11,047 $13,261 $11,028 1/31/2003 $11,240 $13,273 $11,194 2/28/2003 $11,434 $13,456 $11,372 3/31/2003 $11,596 $13,446 $11,492 4/30/2003 $12,072 $13,557 $11,891 5/31/2003 $12,437 $13,810 $12,189 6/30/2003 $12,589 $13,782 $12,303 7/31/2003 $12,235 $13,319 $12,043 8/31/2003 $12,364 $13,407 $12,168 9/30/2003 $12,813 $13,762 $12,514 10/31/2003 $12,891 $13,634 $12,611 11/30/2003 $13,060 $13,667 $12,757 12/31/2003 $13,440 $13,806 $13,058 1/31/2004 $13,611 $13,917 $13,186 2/29/2004 $13,678 $14,067 $13,218 3/31/2004 $13,771 $14,173 $13,321 4/30/2004 $13,440 $13,804 $13,029 5/31/2004 $13,320 $13,749 $12,909 6/30/2004 $13,429 $13,826 $13,029 7/31/2004 $13,578 $13,964 $13,152 8/31/2004 $13,877 $14,230 $13,413 9/30/2004 $14,041 $14,268 $13,581 10/31/2004 $14,316 $14,388 $13,815 11/30/2004 $14,509 $14,273 $13,996 12/31/2004 $14,717 $14,405 $14,201 1/31/2005 $14,677 $14,495 $14,190 2/28/2005 $14,845 $14,410 $14,289 3/31/2005 $14,495 $14,336 $14,048 4/30/2005 $14,468 $14,530 $14,070 5/31/2005 $14,595 $14,687 $14,205 6/30/2005 $14,704 $14,767 $14,353 7/31/2005 $14,771 $14,633 $14,408 8/31/2005 $14,852 $14,820 $14,540 9/30/2005 $14,761 $14,667 $14,491 10/31/2005 $14,640 $14,551 $14,342 11/30/2005 $14,737 $14,616 $14,423 12/31/2005 $14,878 $14,755 $14,560 1/31/2006 $15,092 $14,755 $14,704 2/28/2006 $15,161 $14,804 $14,809 3/31/2006 $15,097 $14,659 $14,726 4/30/2006 $15,240 $14,633 $14,810 5/31/2006 $15,190 $14,617 $14,739 6/30/2006 $15,125 $14,648 $14,699 7/31/2006 $15,286 $14,846 $14,883 8/31/2006 $15,463 $15,073 $15,090 9/30/2006 $15,579 $15,206 $15,186 10/31/2006 $15,758 $15,306 $15,356 11/30/2006 $15,983 $15,484 $15,560 12/31/2006 $16,013 $15,394 $15,598 1/31/2007 $16,054 $15,388 $15,663 2/28/2007 $16,236 $15,625 $15,867 3/31/2007 $16,324 $15,625 $15,924 4/30/2007 $16,554 $15,710 $16,096 5/31/2007 $16,617 $15,591 $16,098 6/30/2007 $16,489 $15,545 $15,969 7/31/2007 $16,344 $15,674 $15,833 8/31/2007 $16,409 $15,866 $15,925 9/30/2007 $16,846 $15,987 $16,228 10/31/2007 $17,041 $16,130 $16,380 11/30/2007 $16,895 $16,420 $16,331 12/31/2007 $16,944 $16,466 $16,367 1/31/2008 $17,010 $16,743 $16,398 2/29/2008 $17,010 $16,766 $16,336 3/31/2008 $17,027 $16,823 $16,262 4/30/2008 $17,347 $16,788 $16,495 5/31/2008 $17,262 $16,665 $16,460 6/30/2008 $16,972 $16,652 $16,225 7/31/2008 $16,955 $16,638 $16,105 8/31/2008 $16,938 $16,796 $16,089 9/30/2008 $16,003 $16,571 $15,305 10/31/2008 $14,628 $16,180 $13,895 11/30/2008 $14,400 $16,706 $13,483 12/31/2008 $15,087 $17,329 $14,003 1/31/2009 $15,503 $17,176 $14,187 2/28/2009 $15,190 $17,112 $13,957 3/31/2009 $15,480 $17,350 $14,183 4/30/2009 $16,252 $17,432 $14,859 Total Returns 62.52% 74.32% 48.59%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/09 - ------- ------- 1-Year -10.12% 5-Year +3.40% 10-Year +4.98%
Annual Report | 11 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/09 - ------- ------- 1-Year -7.46% 5-Year +3.71% 10-Year +4.89%
CLASS C (5/1/99-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN STRATEGIC BARCLAYS CAPITAL U.S. LIPPER MULTI-SECTOR INCOME DATE INCOME FUND - CLASS C AGGREGATE INDEX CLASSIFICATION AVERAGE - ------------- --------------------- --------------------- -------------------------- 5/1/1999 $10,000 $10,000 $10,000 5/31/1999 $ 9,762 $ 9,912 $ 9,800 6/30/1999 $ 9,776 $ 9,881 $ 9,813 7/31/1999 $ 9,705 $ 9,839 $ 9,785 8/31/1999 $ 9,605 $ 9,834 $ 9,717 9/30/1999 $ 9,619 $ 9,948 $ 9,762 10/31/1999 $ 9,662 $ 9,985 $ 9,790 11/30/1999 $ 9,744 $ 9,984 $ 9,886 12/31/1999 $ 9,875 $ 9,936 $ 9,991 1/31/2000 $ 9,710 $ 9,903 $ 9,909 2/29/2000 $ 9,828 $10,023 $10,068 3/31/2000 $ 9,848 $10,155 $10,077 4/30/2000 $ 9,780 $10,126 $ 9,962 5/31/2000 $ 9,650 $10,121 $ 9,838 6/30/2000 $ 9,932 $10,332 $10,090 7/31/2000 $ 9,994 $10,426 $10,127 8/31/2000 $10,147 $10,577 $10,212 9/30/2000 $10,078 $10,643 $10,107 10/31/2000 $ 9,874 $10,714 $ 9,908 11/30/2000 $ 9,679 $10,889 $ 9,759 12/31/2000 $10,090 $11,091 $10,039 1/31/2001 $10,493 $11,272 $10,407 2/28/2001 $10,464 $11,371 $10,419 3/31/2001 $10,286 $11,428 $10,224 4/30/2001 $10,289 $11,380 $10,147 5/31/2001 $10,346 $11,449 $10,221 6/30/2001 $10,262 $11,492 $10,135 7/31/2001 $10,386 $11,749 $10,217 8/31/2001 $10,510 $11,884 $10,355 9/30/2001 $10,081 $12,022 $10,029 10/31/2001 $10,386 $12,274 $10,274 11/30/2001 $10,647 $12,104 $10,400 12/31/2001 $10,594 $12,028 $10,368 1/31/2002 $10,608 $12,125 $10,425 2/28/2002 $10,628 $12,243 $10,453 3/31/2002 $10,728 $12,039 $10,480 4/30/2002 $10,852 $12,272 $10,645 5/31/2002 $10,814 $12,377 $10,674 6/30/2002 $10,352 $12,484 $10,454 7/31/2002 $10,123 $12,634 $10,286 8/31/2002 $10,381 $12,848 $10,503 9/30/2002 $10,354 $13,056 $10,481 10/31/2002 $10,411 $12,996 $10,526 11/30/2002 $10,845 $12,993 $10,810 12/31/2002 $11,050 $13,261 $11,028 1/31/2003 $11,243 $13,273 $11,194 2/28/2003 $11,438 $13,456 $11,372 3/31/2003 $11,588 $13,446 $11,492 4/30/2003 $12,065 $13,557 $11,891 5/31/2003 $12,431 $13,810 $12,189 6/30/2003 $12,583 $13,782 $12,303 7/31/2003 $12,228 $13,319 $12,043 8/31/2003 $12,357 $13,407 $12,168 9/30/2003 $12,807 $13,762 $12,514 10/31/2003 $12,885 $13,634 $12,611 11/30/2003 $13,067 $13,667 $12,757 12/31/2003 $13,435 $13,806 $13,058 1/31/2004 $13,607 $13,917 $13,186 2/29/2004 $13,674 $14,067 $13,218 3/31/2004 $13,768 $14,173 $13,321 4/30/2004 $13,435 $13,804 $13,029 5/31/2004 $13,316 $13,749 $12,909 6/30/2004 $13,425 $13,826 $13,029 7/31/2004 $13,574 $13,964 $13,152 8/31/2004 $13,860 $14,230 $13,413 9/30/2004 $14,039 $14,268 $13,581 10/31/2004 $14,314 $14,388 $13,815 11/30/2004 $14,495 $14,273 $13,996 12/31/2004 $14,703 $14,405 $14,201 1/31/2005 $14,662 $14,495 $14,190 2/28/2005 $14,845 $14,410 $14,289 3/31/2005 $14,494 $14,336 $14,048 4/30/2005 $14,466 $14,530 $14,070 5/31/2005 $14,581 $14,687 $14,205 6/30/2005 $14,690 $14,767 $14,353 7/31/2005 $14,757 $14,633 $14,408 8/31/2005 $14,839 $14,820 $14,540 9/30/2005 $14,747 $14,667 $14,491 10/31/2005 $14,640 $14,551 $14,342 11/30/2005 $14,723 $14,616 $14,423 12/31/2005 $14,865 $14,755 $14,560 1/31/2006 $15,080 $14,755 $14,704 2/28/2006 $15,164 $14,804 $14,809 3/31/2006 $15,085 $14,659 $14,726 4/30/2006 $15,229 $14,633 $14,810 5/31/2006 $15,193 $14,617 $14,739 6/30/2006 $15,113 $14,648 $14,699 7/31/2006 $15,275 $14,846 $14,883 8/31/2006 $15,453 $15,073 $15,090 9/30/2006 $15,570 $15,206 $15,186 10/31/2006 $15,764 $15,306 $15,356 11/30/2006 $15,975 $15,484 $15,560 12/31/2006 $16,021 $15,394 $15,598 1/31/2007 $16,046 $15,388 $15,663 2/28/2007 $16,228 $15,625 $15,867 3/31/2007 $16,317 $15,625 $15,924 4/30/2007 $16,548 $15,710 $16,096 5/31/2007 $16,606 $15,591 $16,098 6/30/2007 $16,474 $15,545 $15,969 7/31/2007 $16,324 $15,674 $15,833 8/31/2007 $16,383 $15,866 $15,925 9/30/2007 $16,814 $15,987 $16,228 10/31/2007 $17,003 $16,130 $16,380 11/30/2007 $16,851 $16,420 $16,331 12/31/2007 $16,878 $16,466 $16,367 1/31/2008 $16,938 $16,743 $16,398 2/29/2008 $16,949 $16,766 $16,336 3/31/2008 $16,943 $16,823 $16,262 4/30/2008 $17,257 $16,788 $16,495 5/31/2008 $17,184 $16,665 $16,460 6/30/2008 $16,890 $16,652 $16,225 7/31/2008 $16,850 $16,638 $16,105 8/31/2008 $16,844 $16,796 $16,089 9/30/2008 $15,910 $16,571 $15,305 10/31/2008 $14,539 $16,180 $13,895 11/30/2008 $14,307 $16,706 $13,483 12/31/2008 $14,985 $17,329 $14,003 1/31/2009 $15,394 $17,176 $14,187 2/28/2009 $15,060 $17,112 $13,957 3/31/2009 $15,360 $17,350 $14,183 4/30/2009 $16,118 $17,432 $14,859 Total Returns 61.18% 74.32% 48.59%
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/09 - ------- ------- 1-Year -6.47% 5-Year +3.87% Since Inception (1/1/02) +6.00%
CLASS R (1/1/02-4/30/09) (PERFORMANCE GRAPH)
FRANKLIN STRATEGIC BARCLAYS CAPITAL U.S. LIPPER MULTI-SECTOR INCOME DATE INCOME FUND - CLASS R AGGREGATE INDEX CLASSIFICATION AVERAGE - ------------- --------------------- --------------------- -------------------------- 1/1/2002 $10,000 $10,000 $10,000 1/31/2002 $ 9,974 $10,081 $10,055 2/28/2002 $ 9,982 $10,179 $10,081 3/31/2002 $10,078 $10,009 $10,107 4/30/2002 $10,207 $10,204 $10,267 5/31/2002 $10,172 $10,290 $10,295 6/30/2002 $ 9,739 $10,379 $10,083 7/31/2002 $ 9,513 $10,505 $ 9,920 8/31/2002 $ 9,758 $10,682 $10,130 9/30/2002 $ 9,745 $10,855 $10,108 10/31/2002 $ 9,788 $10,806 $10,152 11/30/2002 $10,209 $10,803 $10,426 12/31/2002 $10,403 $11,026 $10,637 1/31/2003 $10,575 $11,035 $10,796 2/28/2003 $10,759 $11,188 $10,968 3/31/2003 $10,915 $11,179 $11,084 4/30/2003 $11,366 $11,272 $11,469 5/31/2003 $11,711 $11,482 $11,755 6/30/2003 $11,857 $11,459 $11,866 7/31/2003 $11,524 $11,074 $11,616 8/31/2003 $11,647 $11,147 $11,735 9/30/2003 $12,061 $11,442 $12,070 10/31/2003 $12,149 $11,336 $12,163 11/30/2003 $12,312 $11,363 $12,304 12/31/2003 $12,660 $11,478 $12,594 1/31/2004 $12,836 $11,571 $12,717 2/29/2004 $12,901 $11,696 $12,748 3/31/2004 $12,978 $11,784 $12,847 4/30/2004 $12,666 $11,477 $12,566 5/31/2004 $12,568 $11,431 $12,450 6/30/2004 $12,659 $11,496 $12,566 7/31/2004 $12,803 $11,610 $12,684 8/31/2004 $13,088 $11,831 $12,937 9/30/2004 $13,246 $11,863 $13,098 10/31/2004 $13,508 $11,963 $13,324 11/30/2004 $13,680 $11,867 $13,498 12/31/2004 $13,878 $11,976 $13,697 1/31/2005 $13,842 $12,052 $13,686 2/28/2005 $14,016 $11,981 $13,782 3/31/2005 $13,686 $11,919 $13,549 4/30/2005 $13,662 $12,080 $13,570 5/31/2005 $13,772 $12,211 $13,701 6/30/2005 $13,876 $12,278 $13,843 7/31/2005 $13,942 $12,166 $13,896 8/31/2005 $14,034 $12,322 $14,024 9/30/2005 $13,935 $12,195 $13,976 10/31/2005 $13,837 $12,098 $13,832 11/30/2005 $13,930 $12,152 $13,911 12/31/2005 $14,052 $12,267 $14,043 1/31/2006 $14,258 $12,268 $14,182 2/28/2006 $14,340 $12,309 $14,283 3/31/2006 $14,280 $12,188 $14,203 4/30/2006 $14,405 $12,166 $14,284 5/31/2006 $14,373 $12,153 $14,215 6/30/2006 $14,299 $12,179 $14,177 7/31/2006 $14,454 $12,343 $14,354 8/31/2006 $14,624 $12,532 $14,553 9/30/2006 $14,737 $12,642 $14,646 10/31/2006 $14,923 $12,726 $14,811 11/30/2006 $15,124 $12,874 $15,008 12/31/2006 $15,155 $12,799 $15,044 1/31/2007 $15,196 $12,794 $15,107 2/28/2007 $15,371 $12,991 $15,303 3/31/2007 $15,457 $12,991 $15,358 4/30/2007 $15,664 $13,061 $15,524 5/31/2007 $15,736 $12,962 $15,526 6/30/2007 $15,612 $12,924 $15,401 7/31/2007 $15,457 $13,032 $15,271 8/31/2007 $15,530 $13,192 $15,359 9/30/2007 $15,941 $13,292 $15,651 10/31/2007 $16,122 $13,411 $15,798 11/30/2007 $15,980 $13,652 $15,751 12/31/2007 $16,008 $13,691 $15,785 1/31/2008 $16,066 $13,921 $15,815 2/29/2008 $16,063 $13,940 $15,755 3/31/2008 $16,076 $13,987 $15,684 4/30/2008 $16,376 $13,958 $15,909 5/31/2008 $16,309 $13,856 $15,875 6/30/2008 $16,032 $13,845 $15,648 7/31/2008 $15,996 $13,833 $15,532 8/31/2008 $15,976 $13,965 $15,517 9/30/2008 $15,106 $13,777 $14,761 10/31/2008 $13,803 $13,452 $13,402 11/30/2008 $13,583 $13,890 $13,004 12/31/2008 $14,230 $14,408 $13,506 1/31/2009 $14,622 $14,281 $13,682 2/28/2009 $14,322 $14,227 $13,461 3/31/2009 $14,593 $14,425 $13,679 4/30/2009 $15,317 $14,494 $14,331 Total Returns 53.17% 44.94% 43.31%
12 | Annual Report Performance Summary (CONTINUED) ADVISOR CLASS (5/1/99-4/30/09)(8) (PERFORMANCE GRAPH)
FRANKLIN STRATEGIC INCOME BARCLAYS CAPITAL U.S. LIPPER MULTI-SECTOR INCOME DATE FUND - ADVISOR CLASS AGGREGATE INDEX CLASSIFICATION AVERAGE - ------------- ------------------------- --------------------- -------------------------- 5/1/1999 $10,000 $10,000 $10,000 5/31/1999 $ 9,766 $ 9,912 $ 9,800 6/30/1999 $ 9,783 $ 9,881 $ 9,813 7/31/1999 $ 9,715 $ 9,839 $ 9,785 8/31/1999 $ 9,628 $ 9,834 $ 9,717 9/30/1999 $ 9,647 $ 9,948 $ 9,762 10/31/1999 $ 9,686 $ 9,985 $ 9,790 11/30/1999 $ 9,773 $ 9,984 $ 9,886 12/31/1999 $ 9,909 $ 9,936 $ 9,991 1/31/2000 $ 9,759 $ 9,903 $ 9,909 2/29/2000 $ 9,874 $10,023 $10,068 3/31/2000 $ 9,899 $10,155 $10,077 4/30/2000 $ 9,836 $10,126 $ 9,962 5/31/2000 $ 9,711 $10,121 $ 9,838 6/30/2000 $10,000 $10,332 $10,090 7/31/2000 $10,067 $10,426 $10,127 8/31/2000 $10,227 $10,577 $10,212 9/30/2000 $10,173 $10,643 $10,107 10/31/2000 $ 9,974 $10,714 $ 9,908 11/30/2000 $9,772 $10,889 $ 9,759 12/31/2000 $10,203 $11,091 $10,039 1/31/2001 $10,605 $11,272 $10,407 2/28/2001 $10,581 $11,371 $10,419 3/31/2001 $10,417 $11,428 $10,224 4/30/2001 $10,415 $11,380 $10,147 5/31/2001 $10,479 $11,449 $10,221 6/30/2001 $10,399 $11,492 $10,135 7/31/2001 $10,530 $11,749 $10,217 8/31/2001 $10,662 $11,884 $10,355 9/30/2001 $10,232 $12,022 $10,029 10/31/2001 $10,547 $12,274 $10,274 11/30/2001 $10,818 $12,104 $10,400 12/31/2001 $10,782 $12,028 $10,368 1/31/2002 $10,790 $12,125 $10,425 2/28/2002 $10,816 $12,243 $10,453 3/31/2002 $10,935 $12,039 $10,480 4/30/2002 $11,068 $12,272 $10,645 5/31/2002 $11,023 $12,377 $10,674 6/30/2002 $10,558 $12,484 $10,454 7/31/2002 $10,331 $12,634 $10,286 8/31/2002 $10,600 $12,848 $10,503 9/30/2002 $10,590 $13,056 $10,481 10/31/2002 $10,641 $12,996 $10,526 11/30/2002 $11,090 $12,993 $10,810 12/31/2002 $11,305 $13,261 $11,028 1/31/2003 $11,509 $13,273 $11,194 2/28/2003 $11,714 $13,456 $11,372 3/31/2003 $11,874 $13,446 $11,492 4/30/2003 $12,382 $13,557 $11,891 5/31/2003 $12,764 $13,810 $12,189 6/30/2003 $12,914 $13,782 $12,303 7/31/2003 $12,569 $13,319 $12,043 8/31/2003 $12,696 $13,407 $12,168 9/30/2003 $13,166 $13,762 $12,514 10/31/2003 $13,254 $13,634 $12,611 11/30/2003 $13,449 $13,667 $12,757 12/31/2003 $13,835 $13,806 $13,058 1/31/2004 $14,019 $13,917 $13,186 2/29/2004 $14,109 $14,067 $13,218 3/31/2004 $14,199 $14,173 $13,321 4/30/2004 $13,864 $13,804 $13,029 5/31/2004 $13,761 $13,749 $12,909 6/30/2004 $13,881 $13,826 $13,029 7/31/2004 $14,029 $13,964 $13,152 8/31/2004 $14,347 $14,230 $13,413 9/30/2004 $14,539 $14,268 $13,581 10/31/2004 $14,818 $14,388 $13,815 11/30/2004 $15,027 $14,273 $13,996 12/31/2004 $15,251 $14,405 $14,201 1/31/2005 $15,217 $14,495 $14,190 2/28/2005 $15,400 $14,410 $14,289 3/31/2005 $15,058 $14,336 $14,048 4/30/2005 $15,024 $14,530 $14,070 5/31/2005 $15,165 $14,687 $14,205 6/30/2005 $15,287 $14,767 $14,353 7/31/2005 $15,365 $14,633 $14,408 8/31/2005 $15,458 $14,820 $14,540 9/30/2005 $15,370 $14,667 $14,491 10/31/2005 $15,253 $14,551 $14,342 11/30/2005 $15,362 $14,616 $14,423 12/31/2005 $15,518 $14,755 $14,560 1/31/2006 $15,751 $14,755 $14,704 2/28/2006 $15,832 $14,804 $14,809 3/31/2006 $15,773 $14,659 $14,726 4/30/2006 $15,932 $14,633 $14,810 5/31/2006 $15,889 $14,617 $14,739 6/30/2006 $15,829 $14,648 $14,699 7/31/2006 $16,006 $14,846 $14,883 8/31/2006 $16,201 $15,073 $15,090 9/30/2006 $16,332 $15,206 $15,186 10/31/2006 $16,529 $15,306 $15,356 11/30/2006 $16,774 $15,484 $15,560 12/31/2006 $16,815 $15,394 $15,598 1/31/2007 $16,868 $15,388 $15,663 2/28/2007 $17,068 $15,625 $15,867 3/31/2007 $17,171 $15,625 $15,924 4/30/2007 $17,406 $15,710 $16,096 5/31/2007 $17,493 $15,591 $16,098 6/30/2007 $17,363 $15,545 $15,969 7/31/2007 $17,198 $15,674 $15,833 8/31/2007 $17,286 $15,866 $15,925 9/30/2007 $17,749 $15,987 $16,228 10/31/2007 $17,958 $16,130 $16,380 11/30/2007 $17,807 $16,420 $16,331 12/31/2007 $17,845 $16,466 $16,367 1/31/2008 $17,918 $16,743 $16,398 2/29/2008 $17,922 $16,766 $16,336 3/31/2008 $17,943 $16,823 $16,262 4/30/2008 $18,285 $16,788 $16,495 5/31/2008 $18,217 $16,665 $16,460 6/30/2008 $17,915 $16,652 $16,225 7/31/2008 $17,883 $16,638 $16,105 8/31/2008 $17,887 $16,796 $16,089 9/30/2008 $16,905 $16,571 $15,305 10/31/2008 $15,458 $16,180 $13,895 11/30/2008 $15,203 $16,706 $13,483 12/31/2008 $15,950 $17,329 $14,003 1/31/2009 $16,393 $17,176 $14,187 2/28/2009 $16,046 $17,112 $13,957 3/31/2009 $16,374 $17,350 $14,183 4/30/2009 $17,191 $17,432 $14,859 Total Returns 71.91% 74.32% 48.59%
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(8) 4/30/09 - ---------------- ------- 1-Year -5.98% 5-Year +4.40% 10-Year +5.57%
Annual Report | 13 Performance Summary (CONTINUED) ENDNOTES BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. HIGH YIELDS REFLECT THE HIGHER CREDIT RISKS ASSOCIATED WITH CERTAIN LOWER RATED SECURITIES HELD IN THE PORTFOLIO. FLOATING-RATE LOANS AND HIGH YIELD CORPORATE BONDS ARE RATED BELOW INVESTMENT GRADE AND ARE SUBJECT TO GREATER RISK OF DEFAULT, WHICH COULD RESULT IN LOSS OF PRINCIPAL -- A RISK THAT MAY BE HEIGHTENED IN A SLOWING ECONOMY. THE RISKS OF FOREIGN SECURITIES INCLUDE CURRENCY FLUCTUATIONS AND POLITICAL UNCERTAINTY. INVESTMENTS IN DEVELOPING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. INVESTING IN DERIVATIVE SECURITIES AND THE USE OF FOREIGN CURRENCY TECHNIQUES INVOLVE SPECIAL RISKS AS SUCH MAY NOT ACHIEVE THE ANTICIPATED BENEFITS AND/OR RESULT IN LOSSES TO THE FUND. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) Past expense reductions by the Fund's manager increased the Fund's total returns. Without these reductions, the Fund's total returns would have been lower. (2.) Cumulative total return represents the change in value of an investment over the periods indicated. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (4.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (5.) Distribution rate is based on an annualization of the respective class's April dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 4/30/09. (6.) Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 4/30/09. (7.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (8.) Effective 9/1/99, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 8/12/99, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 8/11/99, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 9/1/99 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +79.61% and +6.21%. (9.) Sources: (C) 2009 Morningstar; Lipper Inc. The BC U.S. Aggregate Index is a market-capitalization weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC-registered, taxable, dollar denominated, nonconvertible, must have at least one year to final maturity, and must be rated investment grade (Baa3/BBB-/BBB- or above) using the middle rating of Moody's, Standard & Poor's and Fitch, respectively. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The Lipper Multi-Sector Income Funds Classification Average is calculated by averaging the total returns of all funds within the Lipper Multi-Sector Income Funds classification in the Lipper Open-End underlying funds universe. Lipper Multi-Sector Income Funds are defined as funds that seek current income by allocating assets among different fixed income securities sectors (not primarily in one sector except for defensive purposes), including U.S. and foreign governments, with a significant portion rated below investment grade. For the 12-month period ended 4/30/09, there were 147 funds in this category. Lipper calculations do not include sales charges, but include reinvestment of any income or distributions. Fund performance relative to the average may have differed if these and other factors had been considered. 14 | Annual Report Your Fund's Expenses As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 15 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 11/1/08 VALUE 4/30/09 PERIOD* 11/1/08-4/30/09 ----------------- -------------- ----------------------- CLASS A Actual $1,000 $1,110.80 $4.76 Hypothetical (5% return before expenses) $1,000 $1,020.28 $4.56 CLASS B Actual $1,000 $1,108.00 $6.85 Hypothetical (5% return before expenses) $1,000 $1,018.30 $6.56 CLASS C Actual $1,000 $1,108.60 $6.85 Hypothetical (5% return before expenses) $1,000 $1,018.30 $6.56 CLASS R Actual $1,000 $1,109.70 $6.07 Hypothetical (5% return before expenses) $1,000 $1,019.04 $5.81 ADVISOR CLASS Actual $1,000 $1,112.10 $3.46 Hypothetical (5% return before expenses) $1,000 $1,021.52 $3.31
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.91%; B: 1.31%; C: 1.31%; R: 1.16%; and Advisor: 0.66%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. 16 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30, ----------------------------------------------------------- 2009 2008 2007 2006 2005 ---------- ---------- ---------- -------- -------- CLASS A PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................... $ 10.28 $ 10.48 $ 10.20 $ 10.24 $ 10.09 ---------- ---------- ---------- -------- -------- Income from investment operations(a): Net investment income(b) .................................. 0.51 0.56 0.53 0.51 0.53 Net realized and unrealized gains (losses) ................ (1.20) (0.07) 0.35 0.05 0.27 ---------- ---------- ---------- -------- -------- Total from investment operations ............................. (0.69) 0.49 0.88 0.56 0.80 ---------- ---------- ---------- -------- -------- Less distributions from net investment income and net foreign currency gains ............................................ (0.76) (0.69) (0.60) (0.60) (0.65) ---------- ---------- ---------- -------- -------- Redemption fees(c, d) ........................................ -- -- -- -- -- ---------- ---------- ---------- -------- -------- Net asset value, end of year ................................. $ 8.83 $ 10.28 $ 10.48 $ 10.20 $ 10.24 ========== ========== ========== ======== ======== Total return(e) .............................................. (6.32)% 4.80% 9.09% 5.69% 8.10% RATIOS TO AVERAGE NET ASSETS Expenses(f) .................................................. 0.89% 0.89% 0.92% 0.91% 0.91%(g) Net investment income ........................................ 5.67% 5.44% 5.22% 5.05% 5.18% SUPPLEMENTAL DATA Net assets, end of year (000's) .............................. $2,060,179 $2,123,947 $1,521,459 $998,182 $696,198 Portfolio turnover rate ...................................... 49.48% 31.71% 42.24% 34.10% 48.57% Portfolio turnover rate excluding mortgage dollar rolls(h) ... 49.48% 31.71% 41.50% 33.59% 39.91%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Ratio of expenses to average net assets before waiver and payments by affiliates was 0.92%. (h) See Note 1(e) regarding mortgage dollar rolls. The accompanying notes are an integral part of these financial statements. Annual Report | 17 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30, ---------------------------------------------------- 2009 2008 2007 2006 2005 ------- -------- -------- -------- -------- CLASS B PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................... $ 10.32 $ 10.52 $ 10.24 $ 10.27 $ 10.12 ------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) .................................. 0.48 0.52 0.49 0.47 0.49 Net realized and unrealized gains (losses) ................ (1.20) (0.07) 0.35 0.06 0.27 ------- -------- -------- -------- -------- Total from investment operations ............................. (0.72) 0.45 0.84 0.53 0.76 ------- -------- -------- -------- -------- Less distributions from net investment income and net foreign currency gains ............................................ (0.73) (0.65) (0.56) (0.56) (0.61) ------- -------- -------- -------- -------- Redemption fees(c, d) ........................................ -- -- -- -- -- ------- -------- -------- -------- -------- Net asset value, end of year ................................. $ 8.87 $ 10.32 $ 10.52 $ 10.24 $ 10.27 ======= ======== ======== ======== ======== Total return(e) .............................................. (6.68)% 4.35% 8.62% 5.34% 7.65% RATIOS TO AVERAGE NET ASSETS Expenses(f) .................................................. 1.29% 1.29% 1.32% 1.31% 1.31%(g) Net investment income ........................................ 5.27% 5.04% 4.82% 4.65% 4.78% SUPPLEMENTAL DATA Net assets, end of year (000's) .............................. $79,959 $105,620 $104,523 $104,477 $110,502 Portfolio turnover rate ...................................... 49.48% 31.71% 42.24% 34.10% 48.57% Portfolio turnover rate excluding mortgage dollar rolls(h) ... 49.48% 31.71% 41.50% 33.59% 39.91%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Ratio of expenses to average net assets before waiver and payments by affiliates was 1.32%. (h) See Note 1(e) regarding mortgage dollar rolls. The accompanying notes are an integral part of these financial statements. 18 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30, ----------------------------------------------------- 2009 2008 2007 2006 2005 -------- -------- -------- -------- -------- CLASS C PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................... $ 10.27 $ 10.48 $ 10.20 $ 10.24 $ 10.09 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) .................................. 0.48 0.52 0.49 0.47 0.49 Net realized and unrealized gains (losses) ................ (1.19) (0.08) 0.35 0.05 0.27 -------- -------- -------- -------- -------- Total from investment operations ............................. (0.71) 0.44 0.84 0.52 0.76 -------- -------- -------- -------- -------- Less distributions from net investment income and net foreign currency gains ............................................ (0.73) (0.65) (0.56) (0.56) (0.61) -------- -------- -------- -------- -------- Redemption fees(c, d) ........................................ -- -- -- -- -- -------- -------- -------- -------- -------- Net asset value, end of year ................................. $ 8.83 $ 10.27 $ 10.48 $ 10.20 $ 10.24 ======== ======== ======== ======== ======== Total return(e) .............................................. (6.60)% 4.28% 8.67% 5.27% 7.67% RATIOS TO AVERAGE NET ASSETS Expenses(f) .................................................. 1.29% 1.29% 1.32% 1.31% 1.31%(g) Net investment income ........................................ 5.27% 5.04% 4.82% 4.65% 4.78% SUPPLEMENTAL DATA Net assets, end of year (000's) .............................. $773,337 $733,071 $437,026 $294,412 $213,741 Portfolio turnover rate ...................................... 49.48% 31.71% 42.24% 34.10% 48.57% Portfolio turnover rate excluding mortgage dollar rolls(h) ... 49.48% 31.71% 41.50% 33.59% 39.91%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Ratio of expenses to average net assets before waiver and payments by affiliates was 1.32%. (h) See Note 1(e) regarding mortgage dollar rolls. The accompanying notes are an integral part of these financial statements. Annual Report | 19 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30, -------------------------------------------------- 2009 2008 2007 2006 2005 -------- -------- ------- ------- ------- CLASS R PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................... $ 10.25 $ 10.46 $ 10.18 $ 10.22 $ 10.07 -------- -------- ------- ------- ------- Income from investment operations(a): Net investment income(b) .................................. 0.49 0.53 0.51 0.49 0.51 Net realized and unrealized gains (losses) ................ (1.19) (0.08) 0.35 0.05 0.26 -------- -------- ------- ------- ------- Total from investment operations ............................. (0.70) 0.45 0.86 0.54 0.77 -------- -------- ------- ------- ------- Less distributions from net investment income and net foreign currency gains ............................................ (0.74) (0.66) (0.58) (0.58) (0.62) -------- -------- ------- ------- ------- Redemption fees(c, d) ........................................ -- -- -- -- -- -------- -------- ------- ------- ------- Net asset value, end of year ................................. $ 8.81 $ 10.25 $ 10.46 $ 10.18 $ 10.22 ======== ======== ======= ======= ======= Total return(e) .............................................. (6.47)% 4.55% 8.74% 5.44% 7.86% RATIOS TO AVERAGE NET ASSETS Expenses(f) .................................................. 1.14% 1.14% 1.17% 1.16% 1.16%(g) Net investment income ........................................ 5.42% 5.19% 4.97% 4.80% 4.93% SUPPLEMENTAL DATA Net assets, end of year (000's) .............................. $115,811 $108,020 $65,527 $32,971 $17,859 Portfolio turnover rate ...................................... 49.48% 31.71% 42.24% 34.10% 48.57% Portfolio turnover rate excluding mortgage dollar rolls(h) ... 49.48% 31.71% 41.50% 33.59% 39.91%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Ratio of expenses to average net assets before waiver and payments by affiliates was 1.17%. (h) See Note 1(e) regarding mortgage dollar rolls. The accompanying notes are an integral part of these financial statements. 20 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30, -------------------------------------------------- 2009 2008 2007 2006 2005 -------- -------- ------- ------- ------- ADVISOR CLASS PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................... $ 10.28 $ 10.49 $ 10.21 $ 10.24 $ 10.09 -------- -------- ------- ------- ------- Income from investment operations(a): Net investment income(b) .................................. 0.53 0.58 0.56 0.54 0.56 Net realized and unrealized gains (losses) ................ (1.18) (0.07) 0.35 0.06 0.26 -------- -------- ------- ------- ------- Total from investment operations ............................. (0.65) 0.51 0.91 0.60 0.82 -------- -------- ------- ------- ------- Less distributions from net investment income and net foreign currency gains ............................................ (0.79) (0.72) (0.63) (0.63) (0.67) -------- -------- ------- ------- ------- Redemption fees(c, d) ........................................ -- -- -- -- -- -------- -------- ------- ------- ------- Net asset value, end of year ................................. $ 8.84 $ 10.28 $ 10.49 $ 10.21 $ 10.24 ======== ======== ======= ======= ======= Total return ................................................. (5.98)% 5.05% 9.25% 6.05% 8.37% RATIOS TO AVERAGE NET ASSETS Expenses(e) .................................................. 0.64% 0.64% 0.67% 0.66% 0.66%(f) Net investment income ........................................ 5.92% 5.69% 5.47% 5.30% 5.43% SUPPLEMENTAL DATA Net assets, end of year (000's) .............................. $166,821 $111,346 $66,745 $57,367 $60,489 Portfolio turnover rate ...................................... 49.48% 31.71% 42.24% 34.10% 48.57% Portfolio turnover rate excluding mortgage dollar rolls(g) ... 49.48% 31.71% 41.50% 33.59% 39.91%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Benefit of expense reduction rounds to less than 0.01%. (f) Ratio of expenses to average net assets before waiver and payments by affiliates was 0.67%. (g) See Note 1(e) regarding mortgage dollar rolls. The accompanying notes are an integral part of these financial statements. Annual Report | 21 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION SHARES VALUE ------------------------------ ---------------- ------------------- -------------- COMMON STOCKS 0.0% AUTOMOBILES & COMPONENTS 0.0% (a, b) Cambridge Industries Liquidating Trust Interest ............... United States 516,372 $ -- -------------- COMMERCIAL & PROFESSIONAL SERVICES 0.0% (a, b) VS Holdings Inc. .............................................. United States 64,666 -- -------------- TOTAL COMMON STOCKS (COST $64,666) ............................ -- -------------- CONVERTIBLE PREFERRED STOCKS 0.2% BANKS 0.0%(c) (a) Fannie Mae, 8.75%, cvt. pfd. .................................. United States 121,200 140,592 -------------- DIVERSIFIED FINANCIALS 0.2% Affiliated Managers Group Inc., 5.10%, cvt. pfd. .............. United States 174,000 4,654,500 -------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $15,362,548) ......................................... 4,795,092 -------------- PREFERRED STOCKS 0.0%(c) BANKS 0.0%(c) (a) Freddie Mac, 8.375%, pfd., Z .................................. United States 200,000 102,000 -------------- DIVERSIFIED FINANCIALS 0.0%(c) (d) Preferred Blocker Inc., 7.00%, pfd., 144A ..................... United States 2,081 624,430 -------------- TOTAL PREFERRED STOCKS (COST $5,738,755) ...................... 726,430 -------------- PRINCIPAL AMOUNT(e) ------------------- (f, g) SENIOR FLOATING RATE INTERESTS 9.6% AUTOMOBILES & COMPONENTS 0.0%(c) (h) Dayco Products LLC (Mark IV), Replacement Term Loan, 6.06% - 6.75%, 6/23/11 ..................................... United States 2,042,544 312,509 (h) Key Safety Systems Inc., Term Loan B, 2.685% - 3.482%, 3/10/14 .................................................... United States 1,161,809 423,093 -------------- 735,602 -------------- CAPITAL GOODS 0.3% RBS Global Inc. (Rexnord Corp.), Incremental Tranche B-2, 2.437%, 7/22/13 ................... United States 1,075,652 851,109 Term Loan, 3.00% - 3.625%, 7/22/13 ......................... United States 6,910,454 5,502,449 TransDigm Inc., Term Loan B, 3.227%, 6/23/13 .................. United States 3,230,676 2,974,913 -------------- 9,328,471 -------------- COMMERCIAL & PROFESSIONAL SERVICES 0.6% ARAMARK Corp., Synthetic L/C, 2.336%, 1/26/14 ............................. United States 1,007,512 921,874 Term Loan B, 3.095%, 1/26/14 ............................... United States 15,723,649 14,387,139 (h) Duratek Inc. (EnergySolutions), Term Loan B, 4.15%, 6/07/13 ... United States 984,205 925,153 (h) EnergySolutions LLC, Synthetic L/C, 2.69%, 6/07/13 .............................. United States 136,307 128,128 Term Loan B, 4.15%, 6/07/13 ................................ United States 2,051,388 1,928,304 (i) EnviroSolutions Inc., Initial Term Loan, PIK, 10.50%, 7/07/12 .................................................... United States 4,064,970 2,017,241 -------------- 20,307,839 --------------
22 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE ------------------------------ ---------------- ------------------- -------------- (f, g) SENIOR FLOATING RATE INTERESTS (CONTINUED) CONSUMER DURABLES & APPAREL 0.5% Jarden Corp., (h) Term Loan B1, 2.97%, 1/24/12 ............................... United States 6,731,733 $ 6,465,829 Term Loan B2, 2.97%, 1/24/12 ............................... United States 6,561,333 6,302,161 Jostens IH Corp. (Visant Holding Corp.), Term Loan C, 2.495%, 12/21/11 ........................................... United States 4,558,727 4,273,807 -------------- 17,041,797 -------------- CONSUMER SERVICES 1.0% Education Management LLC, Term Loan C, 3.00%, 6/01/13 ......... United States 11,973,249 10,788,747 (h, i) Kuilima Resort Co. (Turtle Bay), First Lien Term Loan, PIK, 9.00%, 9/30/10 ............................................. United States 34,394,534 8,598,634 (h) Penn National Gaming Inc., Term Loan B, 2.18% - 2.99%, 10/03/12 ................................................... United States 11,690,280 10,969,375 -------------- 30,356,756 -------------- DIVERSIFIED FINANCIALS 0.2% TD Ameritrade Holding Corp., Term Loan B, 1.95%, 12/31/12 ..... United States 5,308,980 5,036,895 -------------- FOOD, BEVERAGE & TOBACCO 0.5% Constellation Brands Inc., Term Loan B, 2.00% - 2.813%, 6/05/13 .................................................... United States 4,761,162 4,548,609 Dean Foods Co., Term Loan B, 1.93% - 2.72%, 4/02/14 ........... United States 11,332,852 10,588,352 -------------- 15,136,961 -------------- HEALTH CARE EQUIPMENT & SERVICES 1.9% (h) Bausch and Lomb Inc., (j) Delayed Draw Term Loan, 3.678% - 4.47%, 4/28/15 ............ United States 543,867 326,635 Parent Term Loan B, 4.47%, 4/28/15 ......................... United States 2,864,364 2,489,849 Community Health Systems Inc., Delayed Draw Term Loan, 2.678%, 7/25/14 .................... United States 1,040,823 942,064 Term Loan, 2.678% - 3.506%, 7/25/14 ........................ United States 20,398,595 18,463,054 DaVita Inc., Term Loan B-1, 1.93% - 2.74%, 10/05/12 ........... United States 6,927,000 6,535,195 (h) DJO Finance LLC, Term Loan B, 3.428% - 4.22%, 5/20/14 ......... United States 7,336,971 6,533,573 Fresenius Medical Care Holdings Inc., Term Loan B, 2.514% - 2.674%, 3/31/13 ................................... Germany 7,897,011 7,545,349 HCA Inc., Term Loan A-1, 3.22%, 11/19/12 ............................. United States 4,613,123 4,186,432 Term Loan B-1, 3.47%, 11/18/13 ............................. United States 9,211,321 8,336,245 LifePoint Hospitals Inc., Term Loan B, 3.88%, 4/15/12 ......... United States 6,152,932 5,844,184 -------------- 61,202,580 -------------- INSURANCE 0.1% (h) Conseco Inc., Term Loan, 6.50%, 10/10/13 ...................... United States 2,700,000 1,134,000 -------------- MATERIALS 1.4% (h) Celanese U.S. Holdings LLC, Dollar Term Loan, 2.942%, 4/02/14 .................................................... United States 13,984,162 12,449,079 Georgia-Pacific LLC, (h) Additional Term Loan, 2.428% - 3.293%, 12/20/12 ............ United States 3,003,676 2,809,377 Term Loan B, 2.428% - 3.293%, 12/20/12 ..................... United States 12,061,614 11,281,384
Annual Report | 23 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE ------------------------------ ---------------- ------------------- -------------- (f, g) SENIOR FLOATING RATE INTERESTS (CONTINUED) MATERIALS (CONTINUED) Nalco Co., Term Loan B, 2.188% - 4.188%, 11/04/10 ............. United States 4,318,089 $ 4,276,260 Novelis Corp., US Term Loan, 3.22%, 7/07/14 ................... United States 7,101,997 5,109,887 (h) Rockwood Specialties Group Inc., Term Loan E, 2.178%, 7/30/12 .................................................... United States 10,965,564 9,892,507 -------------- 45,818,494 -------------- MEDIA 1.5% (h) Cinemark USA Inc., Term Loan, 2.19% - 2.99%, 10/05/13 ......... United States 1,866,018 1,745,505 (h) CSC Holdings Inc. (Cablevision), Incremental Term Loan, 2.198%, 3/29/13 ............................................ United States 10,641,539 9,873,358 (h) DIRECTV Holdings LLC, Term Loan B, 1.928%, 4/13/13 ............ United States 6,880,100 6,562,679 (h) Discovery Communications Inc., Term Loan B, 4.25%, 5/14/14 .................................................... United States 6,167,347 5,794,222 Metro-Goldwyn-Mayer Inc., Term Loan B, 3.678%, 4/08/12 ........ United States 5,664,418 2,777,927 Regal Cinemas Corp., Term Loan, 4.97%, 10/27/13 ............... United States 8,231,853 7,955,312 (k) Tribune Co., Incremental Term Loan, 5.25%, 5/14/14 ............ United States 10,984,928 2,833,200 UPC Financing Partnership, Term Loan N, 2.315%, 12/31/14 ...... Netherlands 12,387,944 11,474,333 -------------- 49,016,536 -------------- SOFTWARE & SERVICES 0.6% Affiliated Computer Services Inc., Additional Term Loan, 2.428% - 2.495%, 3/20/13 ................................... United States 8,961,619 8,471,222 Lender Processing Services Inc., Term Loan B, 2.928%, 7/02/14 .................................................... United States 1,090,068 1,061,454 SunGard Data Systems Inc., New U.S. Term Loan, 2.21% - 2.99%, 2/28/14 ..................................... United States 11,067,514 9,989,969 -------------- 19,522,645 -------------- TELECOMMUNICATION SERVICES 0.7% Hawaiian Telecom Communications Inc., Term Loan C, 2.989%, 6/01/14 .................................................... United States 4,004,841 2,005,756 Intelsat Corp. (Panamsat), Incremental Term Loan B-2-A, 2.989%, 1/03/14 ............... United States 276,325 252,991 Incremental Term Loan B-2-B, 2.989%, 1/03/14 ............... United States 276,241 252,914 Incremental Term Loan B-2-C, 2.989%, 1/03/14 ............... United States 276,241 252,914 (h) Tranche B-2-A, 2.989%, 1/03/14 ............................. United States 2,527,805 2,314,347 (h) Tranche B-2-B, 2.989%, 1/03/14 ............................. United States 2,527,038 2,313,644 (h) Tranche B-2-C, 2.989%, 1/03/14 ............................. United States 2,527,038 2,313,644 NTELOS Inc., Term Loan B-1, 2.68%, 8/24/11 .................... United States 2,278,272 2,172,334 (h) Windstream Corp., Tranche B-1, 1.95% - 2.62%, 7/17/13 ......... United States 11,452,896 10,746,035 -------------- 22,624,579 -------------- UTILITIES 0.3% NRG Energy Inc., Credit Link, 1.12%, 2/01/13 ................................ United States 3,737,393 3,487,844 Term Loan, 2.72%, 2/01/13 .................................. United States 6,998,863 6,531,542 -------------- 10,019,386 -------------- TOTAL SENIOR FLOATING RATE INTERESTS (COST $326,581,712) ........................................ 307,282,541 --------------
24 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE ------------------------------ ---------------- ------------------- -------------- CORPORATE BONDS 40.2% AUTOMOBILES & COMPONENTS 0.6% Ford Motor Credit Co. LLC, senior note, 9.75%, 9/15/10 ............................................ United States 5,000,000 $ 4,501,570 9.875%, 8/10/11 ........................................... United States 11,000,000 9,630,940 (d) TRW Automotive Inc., senior note, 144A, 7.25%, 3/15/17 ........ United States 8,000,000 4,320,000 -------------- 18,452,510 -------------- BANKS 1.6% BB&T Capital Trust IV, junior sub. bond, 6.82%, 6/12/77 ....... United States 9,600,000 5,800,301 (h) BB&T Corp., senior note, 6.85%, 4/30/19 ....................... United States 2,500,000 2,439,347 (d, l) BNP Paribas, 144A, 7.195%, Perpetual .......................... France 10,000,000 6,502,700 HSBC Holdings PLC, sub. note, 6.50%, 9/15/37 .................. United Kingdom 10,000,000 8,557,430 Svensk Exportkredit AB, senior note, 7.625%, 6/30/14 .......... Sweden 3,780,000 NZD 2,204,751 UBS AG Stamford, senior note, 5.875%, 12/20/17 ................ United States 10,000,000 8,785,430 Wells Fargo & Co., senior note, 5.625%, 12/11/17 .............. United States 5,000,000 4,669,335 (l) Wells Fargo Capital XIII, pfd., 7.70%, Perpetual .............. United States 8,000,000 5,240,000 (l) Wells Fargo Capital XV, pfd., 9.75%, Perpetual ................ United States 6,700,000 5,661,500 -------------- 49,860,794 -------------- CAPITAL GOODS 1.2% (d) Allison Transmission Inc., senior note, 144A, 11.00%, 11/01/15 ................................................... United States 9,000,000 5,445,000 Case New Holland Inc., senior note, 7.125%, 3/01/14 ........... United States 8,500,000 7,480,000 Ingersoll-Rand Global Holding Co. Ltd., senior note, 9.50%, 4/15/14 ............................................. United States 4,900,000 5,132,530 L-3 Communications Corp., senior sub. note, 5.875%, 1/15/15 ........................................... United States 4,500,000 4,140,000 6.375%, 10/15/15 .......................................... United States 4,000,000 3,810,000 Nortek Inc., senior note, 10.00%, 12/01/13 .................... United States 900,000 580,500 RBS Global & Rexnord Corp., senior note, 9.50%, 8/01/14 ....... United States 9,000,000 7,402,500 RSC Equipment Rental Inc., senior note, 9.50%, 12/01/14 ....... United States 9,000,000 5,827,500 -------------- 39,818,030 -------------- COMMERCIAL & PROFESSIONAL SERVICES 0.6% ARAMARK Corp., senior note, 8.50%, 2/01/15 .................... United States 10,000,000 9,600,000 Iron Mountain Inc., senior sub. note, 8.75%, 7/15/18 .......... United States 2,600,000 2,652,000 JohnsonDiversey Holdings Inc., senior disc. note, 10.67%, 5/15/13 .................................................... United States 5,000,000 4,000,000 JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 .... United States 4,000,000 3,810,000 -------------- 20,062,000 -------------- CONSUMER DURABLES & APPAREL 0.9% D.R. Horton Inc., senior note, 6.50%, 4/15/16 ................. United States 7,500,000 6,375,000 Jarden Corp., senior sub. note, 7.50%, 5/01/17 ................ United States 9,000,000 8,010,000 Jostens IH Corp., senior sub. note, 7.625%, 10/01/12 .......... United States 7,500,000 7,312,500 KB Home, senior note, 6.25%, 6/15/15 ............................................. United States 6,000,000 5,160,000 7.25%, 6/15/18 ............................................. United States 1,000,000 830,000 -------------- 27,687,500 --------------
Annual Report | 25 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE ------------------------------ ---------------- ------------------- -------------- CORPORATE BONDS (CONTINUED) CONSUMER SERVICES 1.3% (d, k) Fontainebleau Las Vegas, 144A, 10.25%, 6/15/15 ................ United States 8,000,000 $ 320,000 Host Hotels & Resorts LP, senior note, 6.875%, 11/01/14 ........................................... United States 1,000,000 920,000 K, 7.125%, 11/01/13 ........................................ United States 6,900,000 6,520,500 M, 7.00%, 8/15/12 .......................................... United States 2,000,000 1,910,000 MGM MIRAGE, senior note, 6.625%, 7/15/15 ............................................ United States 13,000,000 7,458,750 7.50%, 6/01/16 ............................................. United States 1,000,000 565,000 Pinnacle Entertainment Inc., senior sub. note, 8.25%, 3/15/12 ............................................. United States 3,300,000 3,234,000 8.75%, 10/01/13 ............................................ United States 4,200,000 4,074,000 Royal Caribbean Cruises Ltd., senior deb., 7.25%, 3/15/18 ..... United States 10,000,000 6,400,000 Starwood Hotels & Resorts Worldwide Inc., senior note, 6.75%, 5/15/18 ............................................. United States 10,000,000 8,665,400 (k) Station Casinos Inc., senior note, 6.00%, 4/01/12 ................................ United States 1,200,000 423,000 senior note, 7.75%, 8/15/16 ................................ United States 3,800,000 1,311,000 senior sub. note, 6.50%, 2/01/14 ........................... United States 500,000 20,000 senior sub. note, 6.875%, 3/01/16 .......................... United States 3,800,000 142,500 -------------- 41,964,150 -------------- DIVERSIFIED FINANCIALS 3.8% American Express Co., senior note, 7.00%, 3/19/18 ............. United States 8,000,000 7,599,904 American Express Credit Corp., senior note, C, 7.30%, 8/20/13 .................................................... United States 4,000,000 4,012,316 Bank of America Corp., (l) pfd., sub. bond, M, 8.125%, Perpetual ...................... United States 15,000,000 8,537,550 senior note, 5.65%, 5/01/18 ................................ United States 5,000,000 4,077,125 Citigroup Inc., senior note, 6.125%, 11/21/17 .............................. United States 5,000,000 4,128,850 sub. note, 5.00%, 9/15/14 .................................. United States 13,500,000 9,262,458 The Export-Import Bank of Korea, senior note, 8.125%, 1/21/14 .................................................... South Korea 7,905,000 8,303,412 General Electric Capital Corp., senior bond, 5.875%, 1/14/38 ............................... United States 5,000,000 3,464,305 senior note, A, 8.50%, 4/06/18 ............................. United States 170,000,000 MXN 10,588,202 (d) GMAC LLC, senior note, 144A, 7.25%, 3/02/11 ............................................. United States 2,849,000 2,508,545 6.875%, 9/15/11 ............................................ United States 8,000,000 6,920,000 6.875%, 8/28/12 ............................................ United States 2,532,000 2,002,331 The Goldman Sachs Group Inc., (h) senior note, 6.00%, 5/01/14 ................................ United States 900,000 897,873 sub. note, 6.75%, 10/01/37 ................................. United States 12,500,000 9,449,279 JPMorgan Chase & Co., 6.00%, 1/15/18 ............................................. United States 5,000,000 4,869,265 (l) junior sub. note, 1, 7.90%, Perpetual ...................... United States 5,000,000 3,750,000
26 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE ------------------------------ ---------------- ------------------- -------------- CORPORATE BONDS (CONTINUED) DIVERSIFIED FINANCIALS (CONTINUED) JPMorgan Chase Capital XXII, sub. bond, 6.45%, 2/02/37 ........ United States 14,000,000 $ 10,129,923 (k) Lehman Brothers Holdings Inc., senior note, 6.20%, 9/26/14 .... United States 16,000,000 2,360,000 Merrill Lynch & Co. Inc., senior note, 6.40%, 8/28/17 ......... United States 10,000,000 8,107,689 Morgan Stanley, senior note, 6.00%, 4/28/15 ................... United States 12,000,000 11,348,091 -------------- 122,317,118 -------------- ENERGY 6.0% Baker Hughes Inc., senior note, 7.50%, 11/15/18 ............... United States 8,000,000 9,018,952 Canadian Natural Resources Ltd., 5.90%, 2/01/18 ............... Canada 10,000,000 9,356,810 Chesapeake Energy Corp., senior note, 7.625%, 7/15/13 ............................................ United States 1,500,000 1,440,000 9.50%, 2/15/15 ............................................. United States 1,000,000 1,015,000 6.625%, 1/15/16 ............................................ United States 3,500,000 3,132,500 6.25%, 1/15/18 ............................................. United States 6,000,000 5,085,000 7.25%, 12/15/18 ............................................ United States 1,000,000 880,000 Compagnie Generale de Geophysique-Veritas, senior note, 7.50%, 5/15/15 ............................................. France 7,000,000 5,810,000 7.75%, 5/15/17 ............................................. France 1,800,000 1,449,000 ConocoPhillips, 5.75%, 2/01/19 ................................ United States 12,000,000 12,272,724 Copano Energy LLC, senior note, 8.125%, 3/01/16 ............................................ United States 7,000,000 6,405,000 (d) 144A, 7.75%, 6/01/18 ....................................... United States 2,000,000 1,760,000 El Paso Corp., senior note, 12.00%, 12/12/13 .................. United States 7,200,000 7,848,000 (d) Kazmunaigaz Finance Sub BV, 144A, 9.125%, 7/02/18 ............. Kazakhstan 6,500,000 5,655,000 Mariner Energy Inc., senior note, 7.50%, 4/15/13 .............. United States 9,000,000 7,335,000 MarkWest Energy Partners LP, senior note, 6.875%, 11/01/14 ........................................... United States 8,000,000 6,600,000 8.75%, 4/15/18 ............................................. United States 800,000 668,000 Peabody Energy Corp., senior note, B, 6.875%, 3/15/13 ......... United States 8,000,000 7,880,000 (d) Petrohawk Energy Corp., senior note, 144A, 10.50%, 8/01/14 .... United States 9,000,000 9,090,000 (d) Petroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14 ..... Switzerland 10,000,000 8,200,000 Plains Exploration & Production Co., senior note, 10.00%, 3/01/16 ............................................ United States 1,000,000 980,000 7.625%, 6/01/18 ............................................ United States 9,000,000 7,852,500 Quicksilver Resources Inc., senior note, 8.25%, 8/01/15 ....... United States 9,000,000 7,380,000 (d) SandRidge Energy Inc., senior note, 144A, 8.00%, 6/01/18 ...... United States 9,000,000 7,920,000 Smith International Inc., senior note, 9.75%, 3/15/19 ......... United States 10,000,000 10,585,600 Tesoro Corp., senior note, 6.25%, 11/01/12 ............................................ United States 500,000 457,500 6.50%, 6/01/17 ............................................. United States 10,000,000 8,175,000 Valero Energy Corp., senior note, 10.50%, 3/15/39 ............. United States 9,500,000 10,522,504 Weatherford International Ltd., senior note, 6.00%, 3/15/18 ............................................. United States 8,000,000 6,707,576 9.625%, 3/01/19 ............................................ United States 2,000,000 2,161,926
Annual Report | 27 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE ------------------------------ ---------------- ------------------- -------------- CORPORATE BONDS (CONTINUED) ENERGY (CONTINUED) The Williams Cos. Inc., senior note, 7.625%, 7/15/19 ............................................ United States 4,000,000 $ 3,946,876 7.875%, 9/01/21 ............................................ United States 4,400,000 4,353,448 8.75%, 3/15/32 ............................................. United States 1,300,000 1,224,895 (d) Woodside Finance Ltd., 144A, 8.75%, 3/01/19 ................... Australia 10,000,000 9,939,600 -------------- 193,108,411 -------------- FOOD & STAPLES RETAILING 0.7% CVS Caremark Corp., 6.60%, 3/15/19 ............................ United States 6,100,000 6,524,983 The Kroger Co., 6.15%, 1/15/20 ............................................. United States 7,500,000 7,679,220 senior note, 7.50%, 1/15/14 ................................ United States 2,500,000 2,788,788 Supervalu Inc., senior note, 8.00%, 5/01/16 ................... United States 5,900,000 5,723,000 -------------- 22,715,991 -------------- FOOD, BEVERAGE & TOBACCO 2.9% Altria Group Inc., senior bond, 9.25%, 8/06/19 ................................ United States 3,300,000 3,785,242 senior note, 9.70%, 11/10/18 ............................... United States 8,000,000 9,363,392 (d) Anheuser-Busch InBev NV, senior note, 144A, 7.75%, 1/15/19 .................................................... United States 12,000,000 12,585,096 (d) BAT International Finance PLC, senior note, 144A, 9.50%, 11/15/18 ................................................... United Kingdom 5,000,000 5,693,945 (d) Cargill Inc., 144A, 5.20%, 1/22/13 ....................................... United States 500,000 486,778 144A, 6.00%, 11/27/17 ...................................... United States 7,000,000 6,409,018 senior note, 144A, 7.35%, 3/06/19 .......................... United States 3,000,000 2,969,661 ConAgra Foods Inc., 5.875%, 4/15/14 ........................... United States 5,800,000 6,031,257 Dean Foods Inc., senior note, 7.00%, 6/01/16 .................. United States 9,000,000 8,820,000 Diageo Capital PLC, senior note, 7.375%, 1/15/14 .............. United Kingdom 3,100,000 3,447,200 (d) Dole Food Co. Inc, senior note, 144A, 13.875%, 3/15/14 ........ United States 9,000,000 9,517,500 (d) JBS USA LLC, senior note, 144A, 11.625%, 5/01/14 .............. United States 9,000,000 8,640,000 Reynolds American Inc., senior secured note, 7.625%, 6/01/16 .................................................... United States 7,500,000 6,693,750 Smithfield Foods Inc., senior note, 7.75%, 5/15/13 .................................................... United States 1,700,000 1,207,000 7/01/17 .................................................... United States 3,300,000 2,145,000 (d) Tyson Foods Inc., senior note, 144A, 10.50%, 3/01/14 .......... United States 5,100,000 5,355,000 -------------- 93,149,839 -------------- HEALTH CARE EQUIPMENT & SERVICES 3.0% Coventry Health Care Inc., senior note, 6.30%, 8/15/14 ............................................. United States 5,200,000 3,828,058 5.95%, 3/15/17 ............................................. United States 2,800,000 1,795,066 DaVita Inc., senior sub. note, 7.25%, 3/15/15 ................. United States 9,500,000 9,333,750 FMC Finance III SA, senior note, 6.875%, 7/15/17 .............. Germany 7,500,000 7,387,500 Fresenius Medical Care Capital Trust IV, 7.875%, 6/15/11 ...... Germany 2,000,000 2,050,000 (d) Fresenius US Finance II, senior note, 144A, 9.00%, 7/15/15 .... Germany 5,000,000 5,300,000
28 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE ------------------------------ ---------------- ------------------- -------------- CORPORATE BONDS (CONTINUED) HEALTH CARE EQUIPMENT & SERVICES (CONTINUED) HCA Inc., senior note, 6.50%, 2/15/16 ................................ United States 3,000,000 $ 2,325,000 senior secured note, 9.125%, 11/15/14 ...................... United States 10,000,000 9,925,000 (i) senior secured note, PIK, 9.625%, 11/15/16 ................. United States 4,000,000 3,720,000 Medco Health Solutions Inc., 7.125%, 3/15/18 .................. United States 10,000,000 9,908,420 Quest Diagnostics Inc., 6.40%, 7/01/17 ........................ United States 8,500,000 8,239,849 Tenet Healthcare Corp., senior note, 9.875%, 7/01/14 ............................................ United States 4,500,000 4,207,500 (d) 144A, 9.00%, 5/01/15 ....................................... United States 2,500,000 2,537,500 (d) 144A, 10.00%, 5/01/18 ...................................... United States 3,000,000 3,135,000 (i) United Surgical Partners International Inc., senior sub. note, PIK, 9.25%, 5/01/17 ............................. United States 9,000,000 6,750,000 (f, i) U.S. Oncology Holdings Inc., senior note, PIK, FRN, 6.904%, 3/15/12 ............................................ United States 9,434,000 5,577,852 Vanguard Health Holding Co. II LLC, senior sub. note, 9.00%, 10/01/14 ................................................... United States 9,000,000 8,617,500 -------------- 94,637,995 -------------- INSURANCE 0.3% (d, f) MetLife Capital Trust X, secured bond, 144A, FRN, 9.25%, 4/08/68 .................................................... United States 1,900,000 1,218,113 MetLife Inc., 7.717%, 2/15/19 ............................................ United States 3,000,000 3,014,151 (f) junior sub. note, FRN, 6.40%, 12/15/66 ..................... United States 8,000,000 4,371,129 senior note, A, 6.817%, 8/15/18 ............................ United States 2,000,000 1,891,062 -------------- 10,494,455 -------------- MATERIALS 2.4% (d) Anglo American Capital PLC, senior note, 144A, 9.375%, 4/08/14 .................................................... United Kingdom 8,200,000 8,359,213 Crown Americas Inc., senior note, 7.75%, 11/15/15 ............. United States 9,000,000 9,180,000 Freeport-McMoRan Copper & Gold Inc., senior note, 8.375%, 4/01/17 .................................................... United States 8,000,000 7,851,120 Huntsman International LLC, senior sub. note, 7.875%, 11/15/14 ................................................... United States 9,000,000 5,985,000 (d) Ineos Group Holdings PLC, senior secured note, 144A, 8.50%, 2/15/16 .................................................... United Kingdom 11,000,000 1,705,000 (d) MacDermid Inc., senior sub. note, 144A, 9.50%, 4/15/17 ........ United States 8,500,000 4,250,000 Nalco Co., senior sub. note, 8.875%, 11/15/13 ................. United States 9,000,000 9,090,000 NewPage Corp., senior secured note, 10.00%, 5/01/12 ........... United States 9,000,000 4,275,000 Novelis Inc., senior note, 7.25%, 2/15/15 ..................... Canada 100,000 52,500 Owens-Brockway Glass Container Inc., senior note, 6.75%, 12/01/14 ................................................... United States 8,000,000 7,820,000 Owens-Illinois Inc., senior note, 7.80%, 5/15/18 .............. United States 1,000,000 977,500 RPM International Inc., 6.50%, 2/15/18 ........................ United States 7,500,000 6,543,990 Smurfit Kappa Funding PLC, senior sub. note, 7.75%, 4/01/15 ... Ireland 500,000 300,000
Annual Report | 29 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE ------------------------------ ---------------- ------------------- -------------- CORPORATE BONDS (CONTINUED) MATERIALS (CONTINUED) Solo Cup Co., senior sub. note, 8.50%, 2/15/14 ................ United States 1,500,000 $ 1,267,500 (d) Xstrata Finance Canada Ltd., 144A, 5.80%, 11/15/16 ............ United Kingdom 10,000,000 7,505,390 -------------- 75,162,213 -------------- MEDIA 4.1% (d) British Sky Broadcasting Group PLC, senior note, 144A, 6.10%, 2/15/18 ............................................. United Kingdom 10,000,000 9,116,050 (k) CanWest Media Inc., senior sub. note, 8.00%, 9/15/12 .......... Canada 7,500,000 1,987,500 (k) CCH I LLC, senior secured note, 11.00%, 10/01/15 .............. United States 4,000,000 330,000 (k) CCH II LLC, senior note, 10.25%, 9/15/10 ...................... United States 10,000,000 9,150,000 (k) CCO Holdings LLC, senior note, 8.75%, 11/15/13 ................ United States 1,000,000 872,500 Comcast Corp., senior note, 6.30%, 11/15/17 ................... United States 10,000,000 10,204,420 CSC Holdings Inc., senior deb., 7.625%, 7/15/18 ............................... United States 6,000,000 5,790,000 senior note, 6.75%, 4/15/12 ................................ United States 600,000 589,500 (d) senior note, 144A, 8.50%, 4/15/14 .......................... United States 2,000,000 2,050,000 (k, m) Dex Media Inc., senior disc. note, 9.00%, 11/15/13 ......................... United States 2,000,000 250,000 senior note, B, 8.00%, 11/15/13 ............................ United States 6,000,000 750,000 (k, m) Dex Media West Finance, senior sub. note, 9.875%, 8/15/13 ..... United States 4,000,000 1,150,000 DIRECTV Holdings LLC, senior note, 7.625%, 5/15/16 ............ United States 7,500,000 7,462,500 EchoStar DBS Corp., senior note, 6.375%, 10/01/11 ........................................... United States 5,500,000 5,348,750 7.125%, 2/01/16 ............................................ United States 5,000,000 4,700,000 (k) Idearc Inc., senior note, 8.00%, 11/15/16 ..................... United States 9,000,000 191,250 Lamar Media Corp., (d) senior note, 144A, 9.75%, 4/01/14 .......................... United States 1,000,000 1,010,000 senior sub. note, 7.25%, 1/01/13 ........................... United States 7,500,000 6,750,000 senior sub. note, B, 6.625%, 8/15/15 ....................... United States 1,500,000 1,155,000 Liberty Media Corp., senior note, 5.70%, 5/15/13 .............. United States 9,000,000 7,608,960 LIN Television Corp., senior sub. note, 6.50%, 5/15/13 ........ United States 8,500,000 4,972,500 Quebecor Media Inc., senior note, 7.75%, 3/15/16 .............. Canada 9,000,000 7,560,000 Radio One Inc., senior sub. note, 6.375%, 2/15/13 ............. United States 8,000,000 1,490,000 Reed Elsevier PLC, senior note, 8.625%, 1/15/19 ............... United Kingdom 10,000,000 10,486,200 Time Warner Cable Inc., senior note, 8.25%, 2/14/14 ............................................. United States 3,000,000 3,295,647 6.75%, 7/01/18 ............................................. United States 9,000,000 9,127,620 Time Warner Inc., 7.625%, 4/15/31 ............................. United States 9,000,000 8,166,717 (d, i) Univision Communications Inc., senior note, 144A, PIK, 9.75%, 3/15/15 ............................................. United States 7,500,000 1,200,000 Viacom Inc., senior note, 6.875%, 4/30/36 ..................... United States 12,000,000 9,822,840 -------------- 132,587,954 -------------- PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.9% Pfizer Inc., senior note, 6.20%, 3/15/19 ...................... United States 12,000,000 12,920,880 (d) Roche Holdings Inc., 144A, 6.00%, 3/01/19 ..................... United States 14,000,000 14,583,562 -------------- 27,504,442 --------------
30 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE ------------------------------ ---------------- ------------------- -------------- CORPORATE BONDS (CONTINUED) REAL ESTATE 0.5% Forest City Enterprises Inc., senior note, 7.625%, 6/01/15 .... United States 6,600,000 $ 3,201,000 Simon Property Group LP, senior note, 10.35%, 4/01/19 ......... United States 12,000,000 12,544,680 -------------- 15,745,680 -------------- RETAILING 0.4% Dollar General Corp., senior note, 10.625%, 7/15/15 ........... United States 8,000,000 8,360,000 Michaels Stores Inc., senior note, 10.00%, 11/01/14 ........... United States 8,500,000 5,185,000 -------------- 13,545,000 -------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.1% Freescale Semiconductor Inc., senior note, 8.875%, 12/15/14 ... United States 7,000,000 2,415,000 -------------- SOFTWARE & SERVICES 0.4% SunGard Data Systems Inc., senior note, 9.125%, 8/15/13 ............................... United States 6,000,000 5,760,000 senior sub. note, 10.25%, 8/15/15 .......................... United States 7,000,000 6,125,000 -------------- 11,885,000 -------------- TECHNOLOGY HARDWARE & EQUIPMENT 0.4% Celestica Inc., senior sub. note, 7.625%, 7/01/13 ............. Canada 5,400,000 5,157,000 (d, k) Nortel Networks Ltd., senior note, 144A, 10.75%, 7/15/16 ...... Canada 8,000,000 2,160,000 Sanmina-SCI Corp., (d, f) senior note, 144A, FRN, 4.07%, 6/15/14 ..................... United States 2,000,000 1,390,000 senior sub. note, 6.75%, 3/01/13 ........................... United States 4,300,000 2,451,000 senior sub. note, 8.125%, 3/01/16 .......................... United States 2,000,000 1,020,000 -------------- 12,178,000 -------------- TELECOMMUNICATION SERVICES 3.9% AT&T Corp., senior note, 6.70%, 11/15/13 ...................... United States 10,000,000 11,181,995 AT&T Inc., 5.80%, 2/15/19 ..................................... United States 2,000,000 2,038,658 (d) CC Holdings GS V LLC, senior secured note, 144A, 7.75%, 5/01/17 .................................................... United States 1,400,000 1,421,000 Crown Castle International Corp., senior note, 9.00%, 1/15/15 .................................................... United States 8,000,000 8,200,000 (d) Digicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 ........ Jamaica 9,000,000 6,570,000 Embarq Corp., senior note, 7.082%, 6/01/16 .................... United States 7,000,000 6,729,149 Inmarsat Finance PLC, senior note, 10.375%, 11/15/12 .......... United Kingdom 9,000,000 9,270,000 Intelsat Bermuda Ltd., senior note, 11.25%, 6/15/16 ........... Bermuda 3,500,000 3,596,250 (d) Intelsat Subsidiary Holding Co. Ltd., senior note, 144A, 8.50%, 1/15/13 .................................................... Bermuda 10,000,000 9,950,000 MetroPCS Wireless Inc., senior note, 9.25%, 11/01/14 .......... United States 9,000,000 9,056,250 Millicom International Cellular SA, senior note, 10.00%, 12/01/13 ................................................... Luxembourg 8,000,000 8,040,000 Qwest Communications International Inc., senior note, 7.50%, 2/15/14 .................................................... United States 7,500,000 6,993,750 (d) Qwest Corp., senior note, 144A, 8.375%, 5/01/16 ............... United States 3,900,000 3,900,000
Annual Report | 31 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE ------------------------------ ---------------- ------------------- -------------- CORPORATE BONDS (CONTINUED) TELECOMMUNICATION SERVICES (CONTINUED) Telecom Italia Capital, senior note, 4.95%, 9/30/14 ............................................. Italy 9,000,000 $ 8,333,280 6.999%, 6/04/18 ............................................ Italy 1,500,000 1,414,362 Verizon Communications Inc., 6.10%, 4/15/18 ................... United States 4,000,000 4,099,476 Verizon New York Inc., senior deb., A, 6.875%, 4/01/12 ......................................... United States 5,000,000 5,215,860 B, 7.375%, 4/01/32 ......................................... United States 1,500,000 1,384,874 (d) Verizon Wireless Capital LLC, 144A, 7.375%, 11/15/13 ........................................... United States 5,000,000 5,571,805 5.55%, 2/01/14 ............................................. United States 3,000,000 3,152,319 (d) Wind Acquisition Finance SA, senior note, 144A, 10.75%, 12/01/15 ................................................... Italy 9,000,000 9,405,000 -------------- 125,524,028 -------------- TRANSPORTATION 0.1% (d) Ceva Group PLC, senior note, 144A, 10.00%, 9/01/14 ............ United Kingdom 9,000,000 4,500,000 -------------- UTILITIES 4.1% The AES Corp., senior note, 8.00%, 10/15/17 ............................................ United States 8,000,000 7,360,000 (d) 144A, 8.00%, 6/01/20 ....................................... United States 2,000,000 1,760,000 CenterPoint Energy Inc., senior note, 6.125%, 11/01/17 ........................................... United States 7,500,000 6,607,350 6.50%, 5/01/18 ............................................. United States 1,500,000 1,285,377 Dominion Resources Inc., 6.40%, 6/15/18 ....................... United States 8,000,000 8,283,880 Duke Energy Corp., senior note, 6.30%, 2/01/14 ................ United States 10,000,000 10,562,690 Dynegy Holdings Inc., senior note, 8.375%, 5/01/16 ............ United States 10,000,000 8,050,000 (d) E.ON International Finance BV, 144A, 5.80%, 4/30/18 ........... Germany 8,000,000 7,977,784 Edison Mission Energy, senior note, 7.00%, 5/15/17 ............ United States 8,000,000 6,080,000 (d) Electricite De France, 144A, 6.50%, 1/26/19 ................... France 10,000,000 10,791,290 (d) Enel Finance International, senior bond, 144A, 6.25%, 9/15/17 .................................................... Luxembourg 3,300,000 3,048,718 (d) Intergen NV, senior secured note, 144A, 9.00%, 6/30/17 ........ Netherlands 9,000,000 8,595,000 Mirant North America LLC, senior note, 7.375%, 12/31/13 ....... United States 9,000,000 8,707,500 NRG Energy Inc., senior note, 7.25%, 2/01/14 ............................................. United States 2,500,000 2,418,750 7.375%, 2/01/16 ............................................ United States 6,000,000 5,790,000 7.375%, 1/15/17 ............................................ United States 2,500,000 2,393,750 PG&E Corp., senior note, 5.75%, 4/01/14 ....................... United States 10,000,000 10,221,023 Sempra Energy, senior note, 9.80%, 2/15/19 .................... United States 9,450,000 10,800,934 Texas Competitive Electric Holdings Co. LLC, senior note, A, 10.25%, 11/01/15 ........................................... United States 16,000,000 9,160,000 -------------- 129,894,046 -------------- TOTAL CORPORATE BONDS (COST $1,433,459,035) ................... 1,285,210,156 -------------- CONVERTIBLE BONDS (COST $5,233,927) 0.2% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.2% Mylan Inc., cvt., senior note, 1.25%, 3/15/12 ................. United States 6,000,000 5,332,500 --------------
32 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE ------------------------------ ---------------- ------------------- -------------- ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES 6.4% BANKS 3.8% (f) Banc of America Commercial Mortgage Inc., 2005-6, A4, FRN, 5.179%, 9/10/47 ............................................ United States 8,000,000 $ 6,957,150 (f) Citibank Credit Card Issuance Trust, 2005-A3, A3, FRN, 0.51%, 4/24/14 .................................................... United States 13,000,000 11,925,793 Citigroup/Deutsche Bank Commercial Mortgage Trust, (f) 2005-CD1, A4, FRN, 5.399%, 7/15/44 ......................... United States 5,440,000 4,756,138 2006-CD3, A5, 5.617%, 10/15/48 ............................. United States 22,000,000 18,293,284 Countrywide Asset-Backed Certificates, 2004-7, AF4, 4.774%, 8/25/32 ............................... United States 186,030 184,841 2005-11, AF4, 5.21%, 3/25/34 ............................... United States 2,800,000 1,163,684 GE Capital Commercial Mortgage Corp., 2003-C1, A4, 4.819%, 1/10/38 .................................................... United States 1,827,831 1,706,180 Greenwich Capital Commercial Funding Corp., 2004-GG1, A7, 5.317%, 6/10/36 .............................. United States 10,714,000 9,902,487 2005-GG5, A5, 5.224%, 4/10/37 .............................. United States 20,380,000 17,571,149 (f) 2006-GG7, A4, FRN, 5.916%, 7/10/38 ......................... United States 12,000,000 10,065,368 GS Mortgage Securities Corp. II, 2003-C1, A3, 4.608%, 1/10/40 ............................... United States 3,965,000 3,782,336 (f) 2006-GG6, A4, FRN, 5.553%, 4/10/38 ......................... United States 10,000,000 8,474,719 2006-GG8, A4, 5.56%, 11/10/39 .............................. United States 5,000,000 4,120,963 LB-UBS Commercial Mortgage Trust, (f) 2002-C2, A4, FRN, 5.594%, 6/15/31 .......................... United States 5,000,000 4,899,353 2006-C1, A4, 5.156%, 2/15/31 ............................... United States 13,250,000 10,982,565 (f) Morgan Stanley Capital I Trust, 2004-IQ7, A4, FRN, 5.538%, 6/15/38 .................................................... United States 7,000,000 6,551,909 -------------- 121,337,919 -------------- DIVERSIFIED FINANCIALS 2.6% (f) American Express Credit Account Master Trust, 2004-4, A, FRN, 0.541%, 3/15/12 ............................ United States 3,000,000 2,975,962 2008-1, A, FRN, 0.901%, 8/15/13 ............................ United States 8,200,000 7,800,328 (f) Chase Issuance Trust, . 2005-A9, A9, FRN, 0.471%, 11/15/11 ......................... United States 2,000,000 1,994,879 2007-A9, A9, FRN, 0.481%, 6/16/14 .......................... United States 12,000,000 11,111,153 sub. note, 2006-A7, A, FRN, 0.461%, 2/15/13 ................ United States 4,000,000 3,879,560 Citigroup Commercial Mortgage Trust, 2008-C7, A4, 6.095%, 12/10/49 ................................................... United States 19,150,000 15,550,784 JPMorgan Chase Commercial Mortgage Securities Corp., (f) 2004-CB9, A4, FRN, 5.369%, 6/12/41 ......................... United States 8,871,306 7,909,049 2004-LN2, A2, 5.115%, 7/15/41 .............................. United States 807,292 716,605 (f) 2005-LDP5, A4, FRN, 5.344%, 12/15/44 ....................... United States 11,700,000 10,122,646 (d) Keystone Owner Trust, 1997-P3, M2, 144A, 7.98%, 12/25/24 ................................................... United States 6,342 6,314 (f) MBNA Credit Card Master Note Trust, 2005-A4, A4, FRN, 0.491%, 11/15/12 ........................................... United States 6,000,000 5,901,013
Annual Report | 33 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE ------------------------------ ---------------- ------------------- -------------- ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES (CONTINUED) DIVERSIFIED FINANCIALS (CONTINUED) (f) MBNA Master Credit Card Trust II, 1997-B, A, FRN, 0.611%, 8/15/14 .................................................... United States 15,000,000 $ 14,025,430 Residential Asset Securities Corp., 2004-KS1, AI4, 4.213%, 4/25/32 .................................................... United States 232,877 187,899 -------------- 82,181,622 -------------- TOTAL ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES (COST $225,556,918) ............. 203,519,541 -------------- MORTGAGE-BACKED SECURITIES 11.4% (f) FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE 0.0%(c) FHLMC, 4.073%, 1/01/33 ........................................ United States 294,388 293,604 -------------- FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 4.3% FHLMC Gold 15 Year, 4.50%, 10/01/18 - 9/01/19 ................. United States 5,153,547 5,321,447 FHLMC Gold 15 Year, 5.00%, 12/01/17 - 7/01/22 ................. United States 11,167,283 11,586,432 FHLMC Gold 15 Year, 5.50%, 7/01/17 - 2/01/19 .................. United States 841,599 879,351 FHLMC Gold 15 Year, 6.50%, 4/01/11 ............................ United States 317 335 FHLMC Gold 15 Year, 7.00%, 9/01/11 ............................ United States 407 425 FHLMC Gold 30 Year, 5.00%, 3/01/34 - 9/01/38 .................. United States 33,543,055 34,531,697 FHLMC Gold 30 Year, 5.50%, 6/01/33 - 7/01/38 .................. United States 27,101,979 28,079,919 FHLMC Gold 30 Year, 6.00%, 6/01/33 - 6/01/38 .................. United States 30,272,792 31,669,696 FHLMC Gold 30 Year, 6.50%, 10/01/21 - 8/01/38 ................. United States 23,559,399 24,994,344 FHLMC Gold 30 Year, 7.00%, 9/01/21 - 8/01/32 .................. United States 210,875 226,903 FHLMC Gold 30 Year, 7.50%, 4/01/24 - 1/01/31 .................. United States 36,799 40,115 FHLMC Gold 30 Year, 8.00%, 11/01/25 - 1/01/26 ................. United States 797 877 FHLMC Gold 30 Year, 9.00%, 12/01/24 ........................... United States 336 376 -------------- 137,331,917 -------------- (f) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE 0.1% FNMA, 4.571%, 4/01/20 ......................................... United States 271,888 275,420 FNMA, 4.634%, 12/01/34 ........................................ United States 1,307,590 1,318,845 -------------- 1,594,265 -------------- FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 6.7% FNMA 15 Year, 4.50%, 3/01/20 .................................. United States 1,147,698 1,183,743 FNMA 15 Year, 5.00%, 1/01/18 - 6/01/18 ........................ United States 1,471,370 1,534,621 FNMA 15 Year, 5.50%, 3/01/14 - 4/01/21 ........................ United States 5,256,808 5,483,155 FNMA 15 Year, 6.00%, 4/01/13 - 10/01/16 ....................... United States 182,877 193,027 FNMA 15 Year, 6.50%, 4/01/11 - 6/01/13 ........................ United States 13,065 13,833 FNMA 15 Year, 7.50%, 10/01/14 ................................. United States 14,325 15,185 FNMA 30 Year, 4.50%, 4/01/39 .................................. United States 22,500,000 22,885,425 FNMA 30 Year, 5.00%, 4/01/34 - 6/01/38 ........................ United States 55,313,967 56,963,969 FNMA 30 Year, 5.50%, 9/01/33 - 6/01/37 ........................ United States 46,215,608 47,995,800 FNMA 30 Year, 6.00%, 6/01/34 - 11/01/37 ....................... United States 47,195,807 49,486,773 FNMA 30 Year, 6.50%, 1/01/24 - 10/01/37 ....................... United States 28,136,937 29,871,611 FNMA 30 Year, 7.50%, 12/01/28 - 10/01/29 ...................... United States 34,374 37,489 FNMA 30 Year, 8.00%, 1/01/25 - 6/01/26 ........................ United States 17,689 19,371 FNMA 30 Year, 8.50%, 7/01/25 .................................. United States 725 795 -------------- 215,684,797 --------------
34 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE ------------------------------ ---------------- ------------------- -------------- MORTGAGE-BACKED SECURITIES (CONTINUED) GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 0.3% GNMA I SF 30 Year, 5.00%, 6/15/34 - 7/15/34 ................... United States 1,285,453 $ 1,335,686 GNMA I SF 30 Year, 5.50%, 2/15/33 - 6/15/36 ................... United States 4,041,312 4,215,044 GNMA I SF 30 Year, 6.00%, 8/15/36 ............................. United States 610,989 638,375 GNMA I SF 30 Year, 6.50%, 3/15/24 - 3/15/32 ................... United States 269,340 287,425 GNMA I SF 30 Year, 7.00%, 11/15/27 - 5/15/28 .................. United States 52,583 56,404 GNMA I SF 30 Year, 7.50%, 9/15/23 - 5/15/27 ................... United States 15,202 16,439 GNMA I SF 30 Year, 8.00%, 2/15/25 - 9/15/27 ................... United States 13,193 14,643 GNMA I SF 30 Year, 8.50%, 8/15/24 ............................. United States 135 146 GNMA I SF 30 Year, 9.00%, 1/15/25 ............................. United States 472 514 GNMA I SF 30 Year, 9.50%, 6/15/25 ............................. United States 707 802 GNMA II SF 30 Year, 5.00%, 9/20/33 - 11/20/33 ................. United States 1,806,451 1,873,204 GNMA II SF 30 Year, 5.50%, 6/20/34 ............................ United States 941,470 979,071 GNMA II SF 30 Year, 6.00%, 11/20/34 ........................... United States 819,207 854,850 GNMA II SF 30 Year, 6.50%, 7/20/28 - 12/20/31 ................. United States 353,308 377,270 GNMA II SF 30 Year, 7.50%, 8/20/16 - 4/20/32 .................. United States 190,735 203,214 -------------- 10,853,087 -------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $350,397,614) ........................................ 365,757,670 -------------- U.S. GOVERNMENT AND AGENCY SECURITIES 8.9% FHLMC, 2.125%, 3/23/12 ............................................ United States 11,000,000 11,122,716 5.00%, 2/16/17 ............................................. United States 11,000,000 12,074,447 5.625%, 3/15/11 ............................................ United States 15,700,000 16,953,457 senior note, 4.75%, 3/05/12 ................................ United States 22,000,000 23,871,166 FNMA, 1.375%, 4/28/11 ............................................ United States 15,500,000 15,543,353 4.125%, 4/15/14 ............................................ United States 2,000,000 2,150,216 U.S. Treasury Bond, 4.50%, 2/15/16 ............................................. United States 13,100,000 14,708,850 4.50%, 5/15/17 ............................................. United States 5,000,000 5,587,110 5.25%, 2/15/29 ............................................. United States 1,750,000 2,021,798 6.25%, 8/15/23 ............................................. United States 6,800,000 8,519,128 6.88%, 8/15/25 ............................................. United States 1,000,000 1,355,313 7.125%, 2/15/23 ............................................ United States 10,200,000 13,703,068 7.875%, 2/15/21 ............................................ United States 7,200,000 10,058,630 (n) Index Linked, 2.375%, 1/15/25 .............................. United States 18,008,421 17,884,613 U.S. Treasury Note, 3.375%, 10/15/09 ........................................... United States 500,000 507,208 3.375%, 6/30/13 ............................................ United States 4,000,000 4,266,876 3.50%, 12/15/09 ............................................ United States 4,500,000 4,589,649 4.00%, 8/31/09 ............................................. United States 7,000,000 7,090,510 4.00%, 4/15/10 ............................................. United States 1,100,000 1,137,598 4.00%, 11/15/12 ............................................ United States 1,850,000 2,007,685 4.125%, 8/15/10 ............................................ United States 2,900,000 3,032,428 4.25%, 8/15/13 ............................................. United States 1,000,000 1,103,751 4.25%, 11/15/14 ............................................ United States 700,000 778,094 4.375%, 8/15/12 ............................................ United States 1,000,000 1,093,438
Annual Report | 35 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE ------------------------------ ---------------- ------------------- -------------- U.S. GOVERNMENT AND AGENCY SECURITIES (CONTINUED) U.S. Treasury Note, (continued) 4.50%, 9/30/11 ............................................. United States 2,500,000 $ 2,700,002 4.625%, 2/15/17 ............................................ United States 9,400,000 10,594,834 4.75%, 8/15/17 ............................................. United States 7,000,000 7,937,895 4.875%, 7/31/11 ............................................ United States 7,250,000 7,867,388 5.00%, 8/15/11 ............................................. United States 2,100,000 2,292,119 (n) Index Linked, 1.625%, 1/15/15 .............................. United States 3,333,282 3,318,699 (n) Index Linked, 2.00%, 1/15/14 ............................... United States 23,423,310 23,877,137 (n) Index Linked, 2.00%, 7/15/14 ............................... United States 12,155,680 12,417,781 (n) Index Linked, 2.00%, 1/15/16 ............................... United States 11,758,204 11,978,670 (n) Index Linked, 2.50%, 7/15/16 ............................... United States 20,485,506 21,612,209 -------------- TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $274,667,699) ........................................ 285,757,836 -------------- FOREIGN GOVERNMENT AND AGENCY SECURITIES 15.8% (d) Emirate of Abu Dhabi, 144A, 6.75%, 4/08/19 .................... United Arab Emirates 9,640,000 9,824,182 European Investment Bank, senior note, 1612/37, 6.50%, 9/10/14 .................................................... Supranational(o) 12,905,000 NZD 7,573,765 (f, p) Government of Argentina, senior bond, FRN, 1.683%, 8/03/12 .................................................... Argentina 106,878,000 28,295,950 Government of Indonesia, FR10, 13.15%, 3/15/10 ...................................... Indonesia 7,125,000,000 IDR 698,365 FR17, 13.15%, 1/15/12 ...................................... Indonesia 17,300,000,000 IDR 1,754,924 FR19, 14.25%, 6/15/13 ...................................... Indonesia 63,035,000,000 IDR 6,610,190 FR20, 14.275%, 12/15/13 .................................... Indonesia 28,415,000,000 IDR 3,006,594 FR26, 11.00%, 10/15/14 ..................................... Indonesia 4,500,000,000 IDR 420,879 FR28, 10.00%, 7/15/17 ...................................... Indonesia 10,200,000,000 IDR 869,674 FR34, 12.80%, 6/15/21 ...................................... Indonesia 108,710,000,000 IDR 10,578,298 FR39, 11.75%, 8/15/23 ...................................... Indonesia 29,150,000,000 IDR 2,629,971 FR42, 10.25%, 7/15/27 ...................................... Indonesia 86,000,000,000 IDR 6,784,127 FR47, 10.00%, 2/15/28 ...................................... Indonesia 28,000,000,000 IDR 2,155,880 (d) senior bond, 144A, 6.625%, 2/17/37 ......................... Indonesia 940,000 723,800 (d) senior bond, 144A, 7.75%, 1/17/38 .......................... Indonesia 11,270,000 9,736,716 (d) senior bond, 144A, 8.50%, 10/12/35 ......................... Indonesia 945,000 862,312 (d) senior note, 144A, 11.625%, 3/04/19 ........................ Indonesia 2,655,000 3,239,100 (q) Government of Iraq, Reg S, 5.80%, 1/15/28 ..................... Iraq 3,620,000 1,963,850 Government of Korea, senior note, 7.125%, 4/16/19 ............. South Korea 11,970,000 12,277,677 Government of Malaysia, 3.461%, 7/31/13 ............................................ Malaysia 28,900,000 MYR 8,041,255 3.756%, 4/28/11 ............................................ Malaysia 53,580,000 MYR 15,442,403 3.833%, 9/28/11 ............................................ Malaysia 6,150,000 MYR 1,774,413 4.24%, 2/07/18 ............................................. Malaysia 64,800,000 MYR 18,515,526 Government of Mexico, 8.00%, 12/17/15 ............................................ Mexico 725,000(r) MXN 5,427,432 10.00%, 12/05/24 ........................................... Mexico 4,035,000(r) MXN 34,680,458 Government of Poland, 5.75%, 9/23/22 ............................................. Poland 38,200,000 PLN 10,930,538 6.25%, 10/24/15 ............................................ Poland 44,475,000 PLN 13,569,301 0414, 5.75%, 4/25/14 ....................................... Poland 24,040,000 PLN 7,173,423
36 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE ------------------------------ ---------------- ------------------- -------------- FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONTINUED) (d) Government of Qatar, senior note, 144A, 6.55%, 4/09/19 ........ Qatar 9,810,000 $ 10,177,875 Government of Russia, (d) 144A, 7.50%, 3/31/30 ....................................... Russia 14,110,080 13,757,328 (q) senior bond, Reg S, 7.50%, 3/31/30 ......................... Russia 56,736,000 55,317,600 Government of South Africa, senior note, 5.875%, 5/30/22 ...... South Africa 13,645,000 12,610,300 Government of Sweden, 4.00%, 12/01/09 ............................................ Sweden 196,050,000 SEK 24,861,032 5.50%, 10/08/12 ............................................ Sweden 24,960,000 SEK 3,463,375 Government of Venezuela, 10.75%, 9/19/13 ............................................ Venezuela 6,450,000 5,192,250 (q) senior bond, Reg S, 5.375%, 8/07/10 ........................ Venezuela 7,755,000 6,902,338 KfW Bankengruppe, senior note, 6.50%, 11/15/11 ................ Germany 10,164,000 NZD 5,988,683 Korea Development Bank, senior note, 8.00%, 1/23/14 ........... South Korea 11,695,000 12,298,871 Korea Treasury Bond, (h) 0475-1112, 4.75%, 12/10/11 ................................. South Korea 19,030,723,000 KRW 15,349,186 0525-1209, 5.25%, 9/10/12 .................................. South Korea 15,100,000,000 KRW 12,344,718 0525-2703, 5.25%, 3/10/27 .................................. South Korea 11,439,641,000 KRW 9,001,048 0550-1709, 5.50%, 9/10/17 .................................. South Korea 23,470,000,000 KRW 19,510,815 0575-1809, 5.75%, 9/10/18 .................................. South Korea 3,500,000,000 KRW 2,984,164 New South Wales Treasury Corp., senior note, 5.50%, 3/01/17 .................................................... Australia 12,025,000 AUD 8,729,273 Nota Do Tesouro Nacional, 10.082%, 1/01/12 ........................................... Brazil 15,300(s) BRL 6,766,635 10.082%, 1/01/14 ........................................... Brazil 5,200(s) BRL 2,170,646 10.082%, 1/01/17 ........................................... Brazil 60,650(s) BRL 23,805,284 (t) Index Linked, 6.00%, 5/15/15 ............................... Brazil 8,700(s) BRL 6,797,682 (t) Index Linked, 6.00%, 5/15/45 ............................... Brazil 3,570(s) BRL 2,560,230 Province of Manitoba, 6.375%, 9/01/15 ......................... Canada 3,000,000 NZD 1,673,970 Province of Ontario, 6.25%, 6/16/15 ........................... Canada 2,826,000 NZD 1,608,498 Queensland Treasury Corp., 13, 6.00%, 8/14/13 ......................................... Australia 2,045,000 AUD 1,552,893 17, 6.00%, 9/14/17 ......................................... Australia 4,090,000 AUD 3,055,649 (d) 144A, 7.125%, 9/18/17 ...................................... Australia 15,990,000 NZD 9,709,671 -------------- TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $558,647,016) ........................................ 503,751,017 -------------- MUNICIPAL BONDS 2.8% Bay Area Toll Authority Toll Bridge Revenue, San Francisco Bay Area, Refunding, Series F1, 5.00%, 4/01/39 ................. United States 880,000 866,527 California State GO, 6.00%, 4/01/38 ............................................. United States 20,000,000 20,693,000 Refunding, 5.00%, 4/01/38 .................................. United States 35,000,000 31,829,000 Chicago Board of Education GO, Refunding, Series C, Assured Guaranty, 5.25%, 12/01/26 .......................... United States 2,625,000 2,759,977 Chicago GO, Project and Refunding, Series A, FSA Insured, 5.00%, 1/01/25 ............................................. United States 690,000 706,822 District of Columbia University Revenue, Georgetown University, Refunding, Series D, BHAC Insured, 5.50%, 4/01/36 ............................................. United States 2,240,000 2,321,402 Energy Northwest Electric Revenue, Columbia Generating Station, Refunding, Series A, 5.00%, 7/01/24 ............... United States 2,240,000 2,320,214
Annual Report | 37 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE ------------------------------ ---------------- ------------------- -------------- MUNICIPAL BONDS (CONTINUED) Kentucky State Municipal Power Agency Power System Revenue, Prairie State Project, Series A, BHAC Insured, 5.25%, 9/01/42 .................................................... United States 3,470,000 $ 3,551,927 Las Vegas Valley Water District GO, Refunding, Series A, MBIA Insured, 5.00%, 6/01/26 ............................... United States 570,000 574,725 Lewisville ISD, GO, School Building, 5.00%, 8/15/26 ........... United States 790,000 830,495 Los Angeles USD, GO, Series I, 5.00%, 7/01/26 .................................................... United States 265,000 266,240 7/01/27 .................................................... United States 280,000 278,659 Matanuska-Susitna Borough Lease Revenue, Goose Greek Correctional Center, Assured Guaranty, 5.50%, 9/01/23 ............................................. United States 2,320,000 2,578,587 6.00%, 9/01/28 ............................................. United States 2,900,000 3,175,500 MTA Revenue, Series B, Assured Guaranty, 5.25%, 11/15/20 ................ United States 1,120,000 1,229,805 Transportation, Series A, FSA Insured, 5.50%, 11/15/21 ..... United States 1,060,000 1,198,690 Metropolitan Water District of Southern California Waterworks Revenue, Series A, 5.00%, 7/01/37 .......................... United States 2,140,000 2,149,823 Palomar Pomerado Health GO, Election of 2004, Series A, MBIA Insured, 5.125%, 8/01/37 .............................. United States 3,015,000 2,841,246 Philadelphia GO, Series B, Assured Guaranty, 7.125%, 7/15/38 .................................................... United States 1,285,000 1,382,274 Placentia-Yorba Linda USD, GO, 2008 Election, Series A, 5.25%, 8/01/32 .................................................... United States 3,480,000 3,520,333 Poway USD, GO, Election of 2008, ID 07-1-A, zero cpn., 8/01/27 .................................................... United States 1,025,000 341,971 8/01/30 .................................................... United States 1,025,000 272,271 8/01/32 .................................................... United States 1,280,000 292,762 8/01/33 .................................................... United States 675,000 143,876 Regional Transportation District Sales Tax Revenue, Fastracks Project, Series A, AMBAC Insured, 5.00%, 11/01/27 .......... United States 850,000 878,943 San Bernardino Community College District GO, Election of 2002, Series A, 6.38%, 8/01/26 ............................................. United States 580,000 654,866 6.50%, 8/01/27 ............................................. United States 840,000 949,494 6.50%, 8/01/28 ............................................. United States 350,000 393,393 6.25%, 8/01/33 ............................................. United States 870,000 940,905 San Mateo County Community College District GO, Election of 2001, Series C, MBIA Insured, zero cpn., 9/01/30 .................................................... United States 2,475,000 711,959 3/01/31 .................................................... United States 675,000 184,221 -------------- TOTAL MUNICIPAL BONDS (COST $91,301,006) ...................... 90,839,907 -------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $3,287,010,896) ...................................... 3,052,972,690 --------------
38 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE ------------------------------ ---------------- ------------------- -------------- SHORT TERM INVESTMENTS 3.1% FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $25,884,094) 0.8% (u) Egypt Treasury Bills, 6/09/09 - 9/22/09 ....................... Egypt 141,875,000 EGP $ 24,685,500 -------------- TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS (COST $3,312,894,990) 3,077,658,190 -------------- SHARES ---------------- MONEY MARKET FUNDS (COST $73,334,951) 2.3% (v) Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.04% ........................................... United States 73,334,951 73,334,951 -------------- TOTAL INVESTMENTS (COST $3,386,229,941) 98.6% ................. 3,150,993,141 NET UNREALIZED APPRECIATION (DEPRECIATION) ON FORWARD EXCHANGE CONTRACTS 0.7% .................................... 21,604,489 OTHER ASSETS, LESS LIABILITIES 0.7% ........................... 23,509,650 -------------- NET ASSETS 100.0% ............................................. $3,196,107,280 ==============
See abbreviations on page 58. (a) Non-income producing. (b) See Note 10 regarding restricted and illiquid securities. (c) Rounds to less than 0.1% of net assets. (d) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust's Board of Trustees. At April 30, 2009, the aggregate value of these securities was $323,064,646, representing 10.11% of net assets. (e) The principal amount is stated in U.S. dollars unless otherwise indicated. (f) The coupon rate shown represents the rate at period end. (g) See Note 1(f) regarding senior floating rate interests. (h) A portion or all of the security purchased on a delayed delivery basis. See Note 1(c). (i) Income may be received in additional securities and/or cash. (j) See Note 11 regarding unfunded loan commitments. (k) See Note 9 regarding defaulted securities. (l) Perpetual security with no stated maturity date. (m) See Note 12 regarding other considerations. (n) Principal amount of security is adjusted for inflation. See Note 1(h). (o) A supranational organization is an entity formed by two or more central governments through international treaties. (p) The principal amount is stated in original face, and scheduled paydowns are reflected in the market price on ex-date. (q) Security was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States. Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. These securities have been deemed liquid under guidelines approved by the Trust's Board of Trustees. At April 30, 2009, the aggregate value of these securities was $64,183,788, representing 2.01% of net assets. (r) Principal amount is stated in 100 Mexican Peso Units. (s) Principal amount is stated in 1000 Brazilian Real Units. (t) Redemption price at maturity is adjusted for inflation. See Note 1(h). (u) The security is traded on a discount basis with no stated coupon rate. (v) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. Annual Report | 39 Franklin Strategic Series FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES April 30, 2009
FRANKLIN STRATEGIC INCOME FUND -------------- Assets: Investments in securities: Cost - Unaffiliated issuers .................................. $3,312,894,990 Cost - Sweep Money Fund (Note 7) ............................. 73,334,951 -------------- Total cost of investments .................................... $3,386,229,941 ============== Value - Unaffiliated issuers ................................. $3,077,658,190 Value - Sweep Money Fund (Note 7) ............................ 73,334,951 -------------- Total value of investments ................................... 3,150,993,141 Cash ............................................................ 226,040 Foreign currency, at value (cost $3,447,310) .................... 3,449,580 Receivables: Investment securities sold ................................... 45,758,276 Capital shares sold .......................................... 14,168,928 Dividends and interest ....................................... 44,992,688 Unrealized appreciation on forward exchange contracts (Note 8) .. 29,334,991 Other assets .................................................... 5,064 -------------- Total assets .............................................. 3,288,928,708 -------------- Liabilities: Payables: Investment securities purchased .............................. 75,979,330 Capital shares redeemed ...................................... 6,286,643 Affiliates ................................................... 2,276,885 Unrealized depreciation on forward exchange contracts (Note 8) .. 7,730,502 Unrealized depreciation on unfunded loan commitments (Note 11) .. 3,597 Accrued expenses and other liabilities .......................... 544,471 -------------- Total liabilities ......................................... 92,821,428 -------------- Net assets, at value ................................... $3,196,107,280 ============== Net assets consist of: Paid-in capital ................................................. $3,659,930,937 Distributions in excess of net investment income ................ (11,458,487) Net unrealized appreciation (depreciation) ...................... (213,430,198) Accumulated net realized gain (loss) ............................ (238,934,972) -------------- Net assets, at value ................................... $3,196,107,280 ==============
The accompanying notes are an integral part of these financial statements. 40 | Annual Report Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) April 30, 2009
FRANKLIN STRATEGIC INCOME FUND -------------- CLASS A: Net assets, at value ..................... $2,060,178,962 -------------- Shares outstanding ....................... 233,260,459 -------------- Net asset value per share(a) ............. $ 8.83 -------------- Maximum offering price per share (net asset value per share / 95.75%) .. $ 9.22 -------------- CLASS B: Net assets, at value ..................... $ 79,959,260 -------------- Shares outstanding ....................... 9,012,771 -------------- Net asset value and maximum offering price per share(a) .................... $ 8.87 -------------- CLASS C: Net assets, at value ..................... $ 773,337,044 -------------- Shares outstanding ....................... 87,581,641 -------------- Net asset value and maximum offering price per share(a) .................... $ 8.83 -------------- CLASS R: Net assets, at value ..................... $ 115,811,450 -------------- Shares outstanding ....................... 13,146,051 -------------- Net asset value and maximum offering price per share ....................... $ 8.81 -------------- ADVISOR CLASS: Net assets, at value ..................... $ 166,820,564 -------------- Shares outstanding ....................... 18,872,368 -------------- Net asset value and maximum offering price per share ....................... $ 8.84 --------------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable. The accompanying notes are an integral part of these financial statements. Annual Report | 41 Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the year ended April 30, 2009
FRANKLIN STRATEGIC INCOME FUND ------------- Investment income: Dividends: Unaffiliated issuers ........................................ $ 2,474,848 Sweep Money Fund (Note 7) ................................... 1,079,752 Interest ....................................................... 195,112,518 ------------- Total investment income .................................. 198,667,118 ------------- Expenses: Management fees (Note 3a) ...................................... 13,559,353 Distribution fees: (Note 3c) Class A ..................................................... 4,944,346 Class B ..................................................... 584,130 Class C ..................................................... 4,678,977 Class R ..................................................... 534,987 Transfer agent fees (Note 3e) .................................. 4,602,919 Custodian fees (Note 4) ........................................ 514,552 Reports to shareholders ........................................ 314,026 Registration and filing fees ................................... 172,615 Professional fees .............................................. 116,498 Trustees' fees and expenses .................................... 63,434 Other .......................................................... 143,467 ------------- Total expenses ........................................... 30,229,304 Expense reductions (Note 4) .............................. (23,430) ------------- Net expenses .......................................... 30,205,874 ------------- Net investment income .............................. 168,461,244 ------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ................................................. (213,853,495) Foreign currency transactions ............................... 43,831,125 ------------- Net realized gain (loss) ........................... (170,022,370) ------------- Net change in unrealized appreciation (depreciation) on: Investments ................................................. (239,237,004) Translation of other assets and liabilities denominated in foreign currencies .................................... 20,051,122 ------------- Net change in unrealized appreciation (depreciation) .................................. (219,185,882) ------------- Net realized and unrealized gain (loss) ........................... (389,208,252) ------------- Net increase (decrease) in net assets resulting from operations ... $(220,747,008) =============
The accompanying notes are an integral part of these financial statements. 42 | Annual Report Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN STRATEGIC INCOME FUND YEAR ENDED APRIL 30, ------------------------------- 2009 2008 -------------- -------------- Increase (decrease) in net assets: Operations: Net investment income ................................... $ 168,461,244 $ 142,246,377 Net realized gain (loss) from investments and foreign currency transactions ........................ (170,022,370) 45,899,679 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies .... (219,185,882) (56,027,125) -------------- -------------- Net increase (decrease) in net assets resulting from operations ........................................ (220,747,008) 132,118,931 -------------- -------------- Distributions to shareholders from net investment income and net foreign currency gains: Class A ................................................. (164,958,880) (121,244,242) Class B ................................................. (7,067,919) (6,404,920) Class C ................................................. (57,173,330) (35,256,134) Class R ................................................. (8,712,653) (5,569,720) Advisor Class ........................................... (10,950,834) (6,366,080) -------------- -------------- Total distributions to shareholders ........................ (248,863,616) (174,841,096) -------------- -------------- Capital share transactions: (Note 2) Class A ................................................. 247,701,680 632,530,329 Class B ................................................. (10,236,429) 3,048,823 Class C ................................................. 151,132,374 304,040,457 Class R ................................................. 23,995,492 43,785,438 Advisor Class ........................................... 71,110,577 46,009,389 -------------- -------------- Total capital share transactions ........................... 483,703,694 1,029,414,436 -------------- -------------- Redemption fees ............................................ 9,563 32,113 -------------- -------------- Net increase (decrease) in net assets ................ 14,102,633 986,724,384 Net assets: Beginning of year .......................................... 3,182,004,647 2,195,280,263 -------------- -------------- End of year ................................................ $3,196,107,280 $3,182,004,647 ============== ============== Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of year ................................................ $ (11,458,487) $ 11,698,413 ============== ==============
The accompanying notes are an integral part of these financial statements. Annual Report | 43 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS FRANKLIN STRATEGIC INCOME FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Strategic Series (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of eight separate funds. The Franklin Strategic Income Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. The Fund offers five classes of shares: Class A, Class B, Class C, Class R, and Advisor Class. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. Corporate debt securities, government securities, municipal securities, mortgage pass-through securities, other mortgage-backed securities, collateralized mortgage obligations and asset-backed securities generally trade in the over-the-counter market rather than on a securities exchange. The Trust may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Trust's pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Senior secured corporate loans with floating or variable interest rates generally trade in the over-the-counter market rather than on a securities exchange. The Trust may utilize independent pricing services, quotations from loan dealers and other financial institutions, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Trust's pricing services use independent market quotations from loan dealers or financial institutions and may incorporate valuation methodologies that consider multiple bond characteristics such as dealer quotes, issuer type, coupon, maturity, weighted average maturity, interest rate spreads and yield curves, cash flow and credit risk/quality analysis, to determine current value. 44 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Trust has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Trust's 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, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Trust's Board of Trustees. 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 on the Statement of Operations. 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. Annual Report | 45 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. SECURITIES PURCHASED ON A DELAYED DELIVERY AND TBA BASIS The Fund may purchase securities on a delayed delivery and to-be-announced (TBA) basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. D. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate at a future date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund may also enter into forward exchange contracts to hedge against fluctuations in foreign exchange rates or to gain exposure to certain foreign currencies. These contracts are valued daily by the Fund and the unrealized appreciation or depreciation on the contracts, as measured by the difference between the contractual forward foreign exchange rates and the forward rates at the reporting date, are included in the Statement of Assets and Liabilities. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. E. MORTGAGE DOLLAR ROLLS The Fund may enter into mortgage dollar rolls, typically on a TBA basis. Mortgage dollar rolls are agreements between the Fund and a financial institution to simultaneously sell and repurchase mortgage-backed securities at a future date. Gains or losses are realized on the initial sale, and the difference between the repurchase price and the sale price is recorded as an unrealized gain or loss to the fund upon entering into the mortgage dollar roll. In addition, the Fund may invest the cash proceeds that are received from the initial sale. During the period between the sale and repurchase, the Fund is not entitled to principal and interest paid on the mortgage backed securities. The risks of mortgage dollar roll transactions include the potential inability of the counterparty to fulfill its obligations. 46 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) F. SENIOR FLOATING RATE INTERESTS Senior secured corporate loans pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity. Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to some restrictions on resale. G. INCOME TAXES No provision has been made for U.S. income taxes because it is the Fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of April 30, 2009, and has determined that no provision for income tax is required in the Fund's financial statements. H. 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. Amortization of premium and accretion of discount on debt securities are included in interest income. Facility fees are recognized as income over the expected term of the loan. Dividend income is recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. 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 of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. Annual Report | 47 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses. Inflation-indexed bonds provide an inflation hedge through periodic increases or decreases in the security's interest accruals and principal redemption value, by amounts corresponding to the current rate of inflation. Any such adjustments, including adjustments to principal redemption value, are recorded as interest income. I. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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 expenses during the reporting period. Actual results could differ from those estimates. J. REDEMPTION FEES A short term trading redemption fee was imposed, with some exceptions, on any fund shares that were redeemed or exchanged within seven calendar days following their purchase date. The redemption fee was 2% of the amount redeemed. Such fees were retained by the Fund and accounted for as an addition to paid-in capital. Effective September 1, 2008, the redemption fee was eliminated. K. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. 48 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 2. SHARES OF BENEFICIAL INTEREST At April 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund's shares were as follows:
YEAR ENDED APRIL 30, --------------------------------------------------------- 2009 2008 --------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------- ----------- ------------- CLASS A SHARES: Shares sold .................... 89,966,491 $ 809,736,545 91,217,409 $ 936,036,841 Shares issued in reinvestment of distributions ............... 14,281,669 124,892,924 8,915,352 91,352,929 Shares redeemed ................ (77,662,451) (686,927,789) (38,572,698) (394,859,441) =========== ============= =========== ============= Net increase (decrease) ........ 26,585,709 $ 247,701,680 61,560,063 $ 632,530,329 =========== ============= =========== ============= CLASS B SHARES: Shares sold .................... 3,223,884 $ 29,661,456 2,874,628 $ 29,428,423 Shares issued in reinvestment of distributions ............... 540,736 4,759,007 408,776 4,208,385 Shares redeemed ................ (4,987,063) (44,656,892) (2,980,058) (30,587,985) ----------- ------------- ----------- ------------- Net increase (decrease) ........ (1,222,443) $ (10,236,429) 303,346 $ 3,048,823 =========== ============= =========== ============= CLASS C SHARES: Shares sold .................... 38,790,729 $ 351,484,801 37,244,007 $ 381,547,354 Shares issued in reinvestment of distributions ............... 4,622,193 40,270,851 2,345,925 24,029,491 Shares redeemed ................ (27,181,977) (240,623,278) (9,929,608) (101,536,388) ----------- ------------- ----------- ------------- Net increase (decrease) ........ 16,230,945 $ 151,132,374 29,660,324 $ 304,040,457 =========== ============= =========== ============= CLASS R SHARES: Shares sold .................... 5,861,272 $ 52,624,182 6,278,677 $ 64,256,553 Shares issued in reinvestment of distributions ............... 927,934 8,059,242 505,060 5,161,628 Shares redeemed ................ (4,178,690) (36,687,932) (2,511,917) (25,632,743) ----------- ------------- ----------- ------------- Net increase (decrease) ........ 2,610,516 $ 23,995,492 4,271,820 $ 43,785,438 =========== ============= =========== ============= ADVISOR CLASS SHARES: Shares sold .................... 10,210,308 $ 89,961,976 5,446,481 $ 56,078,457 Shares issued in reinvestment of distributions ............... 1,093,583 9,458,220 515,703 5,286,545 Shares redeemed ................ (3,258,282) (28,309,619) (1,497,484) (15,355,613) ----------- ------------- ----------- ------------- Net increase (decrease) ........ 8,045,609 $ 71,110,577 4,464,700 $ 46,009,389 =========== ============= =========== =============
Annual Report | 49 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
SUBSIDIARY AFFILIATION - ---------- ---------------------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- --------------------------------------------------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $7.5 billion 0.440% Over $7.5 billion, up to and including $10 billion 0.430% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% Over $15 billion, up to and including $17.5 billion 0.380% Over $17.5 billion, up to and including $20 billion 0.360% Over $20 billion, up to and including $35 billion 0.355% Over $35 billion, up to and including $50 billion 0.350% In excess of $50 billion
B. ADMINISTRATIVE FEES 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. C. DISTRIBUTION FEES The Trust's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund's Class A reimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund's shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. 50 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) C. DISTRIBUTION FEES (CONTINUED) In addition, under the Fund's Class B, C, and R compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund's shares up to the maximum annual plan rate for each class. The maximum annual plan rates, based on the average daily net assets, for each class, are as follows: Class A ... 0.25% Class B ... 0.65% Class C ... 0.65% Class R ... 0.50%
D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund's shares for the year: Sales charges retained net of commissions paid to unaffiliated broker/dealers ................................................. $1,086,109 Contingent deferred sales charges retained ........................ $ 449,538
E. TRANSFER AGENT FEES For the year ended April 30, 2009, the Fund paid transfer agent fees of $4,602,919, of which $2,756,005 was retained by Investor Services. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the year ended April 30, 2009, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES For tax purposes, capital losses may be carried over to offset future capital gains, if any. At April 30, 2009, the capital loss carryforwards were as follows: Capital loss carryforwards expiring in: 2011 ... $ 10,885,854 2017 ... 104,722,915 ------------ $115,608,769 ============
Annual Report | 51 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 5. INCOME TAXES (CONTINUED) For tax purposes, realized capital losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At April 30, 2009, the Fund deferred realized capital losses of $121,826,010. The tax character of distributions paid during the years ended April 30, 2009 and 2008, was as follows:
2009 2008 ------------ ------------ Distributions paid from ordinary income .... $248,863,616 $174,841,096
At April 30, 2009, the cost of investments, net unrealized appreciation (depreciation), and undistributed ordinary income for income tax purposes were as follows: Cost of investments ........................................ $3,394,816,588 ============== Unrealized appreciation .................................... $ 85,188,969 Unrealized depreciation .................................... (329,012,416) -------------- Net unrealized appreciation (depreciation) ................. $ (243,823,447) ============== Distributable earnings - undistributed ordinary income ..... $ 12,449,226 ==============
Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, foreign currency transactions, mortgage dollar rolls, paydown losses, payments-in-kind, bond discounts and premiums, and inflation related adjustments on foreign securities. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, mortgage dollar rolls, paydown losses, bond discounts and premiums, and inflation related adjustments on foreign securities. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended April 30, 2009, aggregated $1,861,419,355 and $1,413,974,314, respectively. 7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 52 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 8. FORWARD EXCHANGE CONTRACTS At April 30, 2009, the Fund had the following forward exchange contracts outstanding:
CONTRACT SETTLEMENT UNREALIZED UNREALIZED AMOUNT(a) DATE APPRECIATION DEPRECIATION ------------- ---------- ------------ ------------ CONTRACTS TO BUY 88,338,174 Indian Rupee ........ 22,688,628 MXN 5/15/09 $ 134,362 $ -- 9,550,000 Euro ................ 13,847,978 5/29/09 -- (1,221,875) 8,600,000 Euro ................ 11,090,130 5/29/09 279,974 -- 187,895,953 Russian Ruble ....... 85,260,441 MXN 7/01/09 -- (542,752) 5,000,000 U.S. Dollar ......... 3,251,356 EUR 7/10/09 702,252 -- 98,105,572 Russian Ruble ....... 5,846,578 NZD 8/12/09 -- (414,129) 97,208,161 Russian Ruble ....... 5,808,327 NZD 8/14/09 -- (420,307) 48,366,965 Russian Ruble ....... 2,908,311 NZD 9/15/09 -- (230,467) 20,000,000 U.S. Dollar ......... 14,359,254 EUR 9/17/09 1,022,537 -- 102,616,000 Chinese Yuan ........ 14,958,601 9/23/09 181,341 -- 85,937,019 Russian Ruble ....... 4,088,221 AUD 9/24/09 -- (461,310) 132,105,686 Russian Ruble ....... 6,349,870 AUD 9/28/09 -- (759,812) 32,917,966,021 Vietnamese Dong ..... 2,673,084 AUD 10/07/09 -- (117,758) 10,867,913 Chinese Yuan ........ 2,348,144 AUD 10/13/09 -- (83,886) 11,141,998 Chinese Yuan ........ 2,365,951 AUD 10/19/09 -- (55,177) 19,992,188 Chinese Yuan ........ 2,890,297 10/23/09 63,704 -- 33,924,068 Chinese Yuan ........ 4,878,259 10/26/09 135,026 -- 20,270,115 Chinese Yuan ........ 2,893,664 10/27/09 101,994 -- 59,919,000 Indian Rupee ........ 1,157,989 4/09/10 20,629 -- 128,487,000 Indian Rupee ........ 2,481,402 4/12/10 45,597 -- 86,303,000 Indian Rupee ........ 1,654,265 4/13/10 43,005 -- 84,715,000 Indian Rupee ........ 1,654,267 4/15/10 11,613 -- 72,103,000 Indian Rupee ........ 1,410,043 4/19/10 7,555 -- 60,176,000 Indian Rupee ........ 1,161,219 4/26/10 21,488 -- 937,202,000 Chilean Peso ........ 1,601,644 4/27/10 -- (789) 940,566,000 Chilean Peso ........ 1,601,645 4/27/10 4,956 -- 8,585,000 Indian Rupee ........ 165,894 4/27/10 2,829 -- 1,699,825,000 Chilean Peso ........ 2,882,960 4/28/10 20,453 -- 42,592,000 Indian Rupee ........ 829,445 4/28/10 7,583 -- 42,633,000 Indian Rupee ........ 829,436 4/30/10 8,318 -- CONTRACTS TO SELL 24,100,000 Euro ................ 37,073,512 5/29/09 5,210,778 -- 31,565,500,000 Indonesian Rupiah ... 2,875,725 5/29/09 -- (86,758) 12,522,000 Mexican Peso ........ 897,956 5/29/09 -- (4,428) 5,745,983 New Zealand Dollar .. 3,198,606 5/29/09 -- (43,291) 95,141,931 Mexican Peso ........ 4,303,650,105 CLP 6/12/09 550,623 -- 13,542,000 Euro ................ 20,710,912 6/15/09 2,808,533 --
Annual Report | 53 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 8. FORWARD EXCHANGE CONTRACTS (CONTINUED)
CONTRACT SETTLEMENT UNREALIZED UNREALIZED AMOUNT(a) DATE APPRECIATION DEPRECIATION --------------- ---------- ------------ ------------ CONTRACTS TO SELL (CONTINUED) 12,642,000 Mexican Peso ........ 897,939 7/31/09 $ -- $ (4,119) 3,664,583 New Zealand Dollar .. 2,035,477 7/31/09 -- (25,118) 2,601,679 New Zealand Dollar .. 1,453,912 8/03/09 -- (8,778) 1,018,449 New Zealand Dollar .. 581,565 8/03/09 8,983 -- 11,270,000 Brazilian Real ...... 4,997,561 8/04/09 -- (36,034) 4,640,756 New Zealand Dollar .. 2,612,574 8/04/09 -- (21,414) 30,299,970 New Zealand Dollar .. 204,079,388,412 IDR 8/04/09 1,806,963 -- 5,487,492 New Zealand Dollar .. 66,500,169,499 VND 8/14/09 590,476 -- 35,638,464 Mexican Peso ........ 85,218,696 RUB 9/17/09 -- (57,414) 7,289,000 Euro ................ 9,902,107 1/12/10 269,661 -- 45,187,500 Singapore Dollar .... 30,000,000 2/17/10 -- (533,202) 3,797,000 Singapore Dollar .... 2,499,918 3/23/10 -- (65,853) Unrealized appreciation (depreciation) on offsetting forward exchange contracts ......................... 15,273,758 (2,535,831) ----------- ----------- Unrealized appreciation (depreciation) on forward exchange contracts ..... 29,334,991 (7,730,502) ----------- ----------- Net unrealized appreciation (depreciation) on forward exchange contracts ............. $21,604,489 ===========
(a) In U.S. dollars unless otherwise indicated. See Abbreviations on page 58. 9. CREDIT RISK AND DEFAULTED SECURITIES At April 30, 2009, the Fund had 37.29% of its portfolio invested in high yield, senior secured floating rate notes, or other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities. The Fund held defaulted securities and/or other securities for which the income has been deemed uncollectible. At April 30, 2009, the aggregate value of these securities was $24,250,950, representing 0.76% of the Fund's net assets. The Fund discontinues accruing income on securities for which income has been deemed uncollectible and provides an estimate for losses on interest receivable. The securities have been identified on the accompanying Statement of Investments. 10. RESTRICTED SECURITIES The Fund may invest in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of 54 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 10. RESTRICTED SECURITIES (CONTINUED) these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Fund may have registration rights for restricted securities. The issuer generally incurs all registration costs. At April 30, 2009, the Fund held investments in restricted securities, excluding 144A securities deemed to be liquid, valued in accordance with procedures approved by the Trust's Board of Trustees as reflecting fair value, as follows:
ACQUISITION SHARES ISSUER DATE COST VALUE ------ -------------------------------------------------- ----------- ------- ----- 516,372 Cambridge Industries Liquidating Trust Interest .. 1/09/02 $ -- $-- 64,666 VS Holdings Inc. ................................. 12/06/01 64,666 -- --- TOTAL RESTRICTED SECURITIES(0.0% of Net Assets) .. $-- ===
11. UNFUNDED LOAN COMMITMENTS The Fund may enter into certain credit agreements, all or a portion of which may be unfunded. The Fund is obligated to fund these loan commitments at the borrowers' discretion. Funded portions of credit agreements are presented on the Statement of Investments. At April 30, 2009, unfunded commitments were as follows:
UNFUNDED BORROWER COMMITMENTS - -------- ----------- Bausch & Lomb Inc., Delayed Draw Term Loan .. $304,334 --------
Unfunded loan commitments and funded portions of credit agreements are marked to market daily and any unrealized appreciation or depreciation is included in the Statement of Assets and Liabilities and Statement of Operations. 12. OTHER CONSIDERATIONS From time to time officers, directors or employees of the Fund's Investment Manager may be provided material, non-public information relating to a company which, pursuant to the Fund's policies and requirements of applicable securities laws, could prevent the Fund from trading in the securities of such company for limited or extended periods of time. Annual Report | 55 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 13. CREDIT FACILITY Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, "Borrower"; collectively "Borrowers"), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Fund incurred commitment fees of $1,885 of its pro rata portion of the Global Credit Facility, which is reflected in Other expenses on the Statement of Operations. During the year ended April 30, 2009, the Fund did not utilize the Global Credit Facility. 14. FAIR VALUE MEASUREMENTS The Fund adopted Financial Accounting Standards Board (FASB) Statement No. 157, "Fair Value Measurement" (SFAS 157), on May 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Fund has determined that the implementation of SFAS 157 did not have a material impact on the Fund's financial statements. SFAS 157 establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund's own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund's investments and are summarized in the following fair value hierarchy: - Level 1 - quoted prices in active markets for identical securities - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) - Level 3 - significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. 56 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 14. FAIR VALUE MEASUREMENTS (CONTINUED) The following is a summary of the inputs used as of April 30, 2009, in valuing the Fund's assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL ----------- -------------- ------- -------------- ASSETS: Investments in Securities $84,401,849 $3,066,591,292 $-- $3,150,993,141 Other Financial Instruments(a) -- 29,334,991 -- 29,334,991 LIABILITIES: Other Financial Instruments(a) -- 7,734,099 -- 7,734,099
(a) Other financial instruments include net unrealized appreciation or depreciation on forward exchange contracts and unfunded loan commitments. At April 30, 2009, the reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value, is as follows:
INVESTMENTS IN SECURITIES ------------- Beginning Balance - May 1, 2008 ............................. $ 3,873 Net realized gain (loss) ................................. -- Net change in unrealized appreciation (depreciation) ..... (3,873) Net purchases (sales) .................................... -- Transfers in and/or out of Level 3 ....................... -- ------- Ending Balance .............................................. $ -- ======= Net change in unrealized appreciation (depreciation) attributable to assets still held at end of year ......... $(3,873) =======
15. NEW ACCOUNTING PRONOUNCEMENTS In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which expands disclosures about derivative investments and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Fund believes applying the various provisions of SFAS 161 will not have a material impact on its financial statements. Annual Report | 57 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 15. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED) In April 2009, FASB issued FASB Staff Position FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" (FSP FAS 157-4), which provides additional guidance when the volume and level of activity for the asset or liability measured at fair value have significantly decreased. Additionally, FSP FAS 157-4 amends SFAS 157, expanding disclosure requirements by reporting entities surrounding the major categories of assets and liabilities carried at fair value. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009. The Fund is currently evaluating the impact, if any, of applying FSP FAS 157-4. In May 2009, FASB issued Statement No. 165, "Subsequent Events", which is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before the statements are issued or are available to be issued. FASB 165 is effective for interim or annual financial periods ending after June 15, 2009, the adoption of FASB 165 will not have a material impact on the financial statements. ABBREVIATIONS CURRENCY AUD - Australian Dollar BRL - Brazilian Real CHF - Swiss Franc CLP - Chilean Peso EGP - Egyptian Pound EUR - Euro IDR - Indonesian Rupiah KRW - South Korean Won MXN - Mexican Peso MYR - Malaysian Ringgit NZD - New Zealand Dollar PLN - Polish Zloty RUB - Russian Ruble SEK - Swedish Krona VND - Vietnamese Dong SELECTED PORTFOLIO AMBAC - American Municipal Bond Assurance Corp. BHAC - Berkshire Hathaway Assurance Corp. FHLMC - Federal Home Loan Mortgage Corp. FNMA - Federal National Mortgage Association FRN - Floating Rate Note FSA - Financial Security Assurance Inc. GNMA - Government National Mortgage Association GO - General Obligation ISD - Independent School District L/C - Letter of Credit MBIA - Municipal Bond Investors Assurance Corp. MTA - Metropolitan Transit Authority PIK - Payment-In-Kind SF - Single Family USD - Unified/Union School District 58 | Annual Report Franklin Strategic Series REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FRANKLIN STRATEGIC INCOME FUND TO THE BOARD OF TRUSTEES OF FRANKLIN STRATEGIC SERIES AND SHAREHOLDERS OF THE FRANKLIN STRATEGIC INCOME FUND In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Franklin Strategic Income Fund (one of the funds constituting the Franklin Strategic Series, hereafter referred to as the "Fund") at April 30, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at April 30, 2009 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California June 19, 2009 Annual Report | 59 Franklin Strategic Series TAX DESIGNATION (UNAUDITED) FRANKLIN STRATEGIC INCOME FUND Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund designates the maximum amount allowable but no less than $1,564,361 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended April 30, 2009. Distributions, including qualified dividend income, paid during calendar year 2009 will be reported to shareholders on Form 1099-DIV in January 2010. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. 60 | Annual Report Franklin Strategic Series BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member serves until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- ---------------- ---------------- -------------- ------------------------------------------- HARRIS J. ASHTON (1932) Trustee Since 1991 135 Bar-S Foods (meat packing company). One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). ROBERT F. CARLSON (1928) Trustee Since 2007 112 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Retired; and FORMERLY, Vice President, senior member and President, Board of Administration, California Public Employees Retirement Systems (CALPERS) (1971-2008); member and Chairman of the Board, Sutter Community Hospitals; member, Corporate Board, Blue Shield of California; and Chief Counsel, California Department of Transportation. SAM GINN (1937) Trustee Since 2007 112 Chevron Corporation (global energy company) One Franklin Parkway and ICO Global Communications (Holdings) San Mateo, CA 94403-1906 Limited (satellite company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding company) (1988-1994). EDITH E. HOLIDAY (1952) Trustee Since 1998 135 Hess Corporation (exploration and refining One Franklin Parkway of oil and gas), H.J. Heinz Company San Mateo, CA 94403-1906 (processed foods and allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison - United States Treasury Department (1988-1989).
Annual Report | 61
NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- ---------------- ---------------- -------------- ------------------------------------------- FRANK W.T. LAHAYE (1929) Trustee Since 1991 112 Center for Creative Land Recycling One Franklin Parkway (brownfield redevelopment). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital). FRANK A. OLSON (1932) Trustee Since 2007 135 Hess Corporation (exploration and refining One Franklin Parkway of oil and gas) and Sentient Jet (private San Mateo, CA 94403-1906 jet service). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). LARRY D. THOMPSON (1945) Trustee Since 2007 143 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). JOHN B. WILSON (1959) Lead Trustee since 112 None One Franklin Parkway Independent 2006 and Lead San Mateo, CA 94403-1906 Trustee Independent Trustee since 2008 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Senior Vice President - Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting firm) (1986-1990).
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- ---------------- ---------------- -------------- ------------------------------------------- **CHARLES B. JOHNSON (1933) Trustee and Trustee since 135 None One Franklin Parkway Chairman of 1991 and San Mateo, CA 94403-1906 the Board Chairman of the Board since 1993 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments.
62 | Annual Report
NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- ---------------- ---------------- -------------- ------------------------------------------- **RUPERT H. JOHNSON, JR. (1940) Trustee, Trustee since 52 None One Franklin Parkway President and 1991 and San Mateo, CA 94403-1906 Chief President and Executive Chief Executive Officer - Officer - Investment Investment Management Management since 2002 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments. JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable One Franklin Parkway Compliance Officer since San Mateo, CA 94403-1906 Officer and 2004 and Vice Vice President President - AML - AML Compliance since Compliance 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). LAURA F. FERGERSON (1962) Chief Since March 2009 Not Applicable Not Applicable One Franklin Parkway Executive San Mateo, CA 94403-1906 Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003). GASTON GARDEY (1967) Treasurer, Since March 2009 Not Applicable Not Applicable One Franklin Parkway Chief Financial San Mateo, CA 94403-1906 Officer and Chief Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Fund Accounting, Franklin Templeton Investments; and officer of 28 of the investment companies in Franklin Templeton Investments. EDWARD L. GEARY (1962) Vice President Since March 2009 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; director of some of the other subsidiaries of Franklin Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
Annual Report | 63
NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- ---------------- ---------------- -------------- ------------------------------------------- ALIYA S. GORDON (1973) Vice President Since March 2009 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel, Franklin Templeton Investments; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Litigation Associate, Steefel, Levitt & Weiss, LLP (2000-2004). DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. EDWARD B. JAMIESON (1948) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Chief Investment Officer and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC; officer and/or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of four of the investment companies in Franklin Templeton Investments. CHRISTOPHER J. MOLUMPHY (1962) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director and Executive Vice President, Franklin Advisers, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments. KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable One Franklin Parkway and Secretary San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin Templeton Investments.
64 | Annual Report
NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- ---------------- ---------------- -------------- ------------------------------------------- CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers. ** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be interested persons of the Trust under the federal securities laws due to their positions as officers and directors and major shareholders of Franklin Resources, Inc., which is the parent company of the Fund's investment manager and distributor. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE 2007. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON HAS ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. WILSON IS AN INDEPENDENT BOARD MEMBER AS THAT TERM IS DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI. Annual Report | 65 Franklin Strategic Series SHAREHOLDER INFORMATION FRANKLIN STRATEGIC INCOME FUND BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT At a meeting held April 14, 2009, the Board of Trustees (Board), including a majority of non-interested or independent Trustees, approved renewal of the investment management agreement for Franklin Strategic Income Fund, one of the separate funds within the Trust (Fund(s)). In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included investment performance reports and related financial information for each Fund, as well as periodic reports on shareholder services, legal, compliance, pricing, brokerage commissions and execution and other services provided by the Investment Manager (Manager) and its affiliates. Information furnished specifically in connection with the renewal process included a report for each Fund prepared by Lipper, Inc. (Lipper), an independent organization, as well as additional material, including a Fund profitability analysis report prepared by management. The Lipper reports compared each Fund's investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper. The Fund profitability analysis report discussed the profitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Included with such profitability analysis report was information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager and its affiliates including management's explanation of differences where relevant and a three-year expense analysis with an explanation for any increase in expense ratios. Additional material accompanying such report was a memorandum prepared by management describing project initiatives and capital investments relating to the services provided to the Funds by the Franklin Templeton Investments organization, as well as a memorandum relating to economies of scale and a comparative analysis concerning transfer agent fees charged each Fund. Such material also discussed some of the actions taken by management in coping with problems arising out of the past year's financial upheaval. In considering such materials, the independent Trustees received assistance and advice from and met separately with independent counsel. While the investment management agreements for all Funds were considered at the same Board meeting, the Board dealt with each Fund separately. In approving continuance of the investment management agreement for each Fund, the Board, including a majority of independent Trustees, determined that the existing management fee structure was fair and reasonable and that continuance of the investment management agreement was in the best interests of each Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board's decision. NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature and quality of the overall services provided by the Manager and its affiliates to the Fund and its shareholders. In addition to investment performance and expenses discussed later, the Board's opinion was based, in part, upon periodic reports furnished it showing that the investment policies and restrictions for the Fund were consistently complied with as well as other reports periodically 66 | Annual Report Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) FRANKLIN STRATEGIC INCOME FUND BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) furnished the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics adopted throughout the Franklin Templeton fund complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net asset value calculations. The Board also noted the extent of benefits provided Fund shareholders from being part of the Franklin Templeton family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. Favorable consideration was given to management's continuous efforts and expenditures in establishing back-up systems and recovery procedures to function in the event of a natural disaster, it being noted that such systems and procedures had functioned smoothly during the Florida hurricanes and blackouts experienced in recent years. Among other factors taken into account by the Board were the Manager's best execution trading policies, including a favorable report by an independent portfolio trading analytical firm. Consideration was also given to the experience of the Fund's portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management's determination of a portfolio manager's bonus compensation was the relative investment performance of the funds he or she managed and that a portion of such bonus was required to be invested in a predesignated list of funds within such person's fund management area so as to be aligned with the interests of Fund shareholders. The Board also took into account the quality of transfer agent and shareholder services provided Fund shareholders by an affiliate of the Manager, noting continuing expenditures by management to increase and improve the scope of such services, periodic favorable reports on such service conducted by third parties, and the continuous enhancements to and high industry ranking given the Franklin Templeton website. Particular attention was given to the overall performance and actions taken by the Manager and its affiliates in response to problems arising out of the market turmoil and financial crisis experienced during the past year. In this respect, the Board noted that management's independent credit analysis and diligent risk management procedures had minimized exposure of funds within the Franklin Templeton complex to subprime mortgages and that its continuous monitoring of counterparty credit risk had limited fund exposure to firms experiencing financial difficulties like Bear Stearns and AIG. The same type of conservative approach and attention to risk had also prevented any structured investment products or other volatile instruments from being held in the portfolios of any of the money market funds within the Franklin Templeton complex, including the sweep money fund utilized by many of the funds as part of their cash management. The Board also took into account, among other things, management's efforts in establishing a $725 million global credit facility for the benefit of the funds and other accounts managed by Franklin Templeton Investments to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of the Manager's parent company and its commitment to the mutual fund business. The Board also noted that during the past year Franklin Templeton Investments, like many other fund managers, had announced a hiring freeze and implemented employee reductions, and the Board Annual Report | 67 Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) FRANKLIN STRATEGIC INCOME FUND BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) discussed with management the nature of such reductions and steps being taken to minimize any negative impact on the nature and quality of services being provided the Fund. INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of the Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings throughout the year, particular attention in assessing performance was given to the Lipper reports furnished for the agreement renewals. The Lipper reports prepared for the Fund showed the investment performance of its Class A shares in comparison to a performance universe selected by Lipper. Comparative performance for the Fund was shown for the one-year period ended January 31, 2009, and previous periods ended that date of up to 10 years. The following summarizes the performance results for the Fund and the Board's view of such performance. The performance universe for the Fund consisted of the Fund and all retail and institutional multisector income funds as selected by Lipper. The Lipper report comparison showed that for the one-year period the Fund's income return was in the highest quintile of such performance universe, and that on an annualized basis the Fund's income return was in the highest or second-highest quintile of such universe during each of the previous three-, five- and 10-year periods. The Board was satisfied with such income performance. Consistent with the market sell-off that occurred during the past year, the Fund and most of the funds in the Lipper performance universe experienced losses during such period. On a comparative basis, however, the Lipper report further showed the Fund's total return to be in the second-highest quintile of the performance universe for the one-year period and during the previous three-, five- and 10-year periods on an annualized basis to be in the highest quintile of such performance universe. The Board noted such favorable comparative performance. COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the management fees and total expense ratios of the Fund compared with those of a group of other funds selected by Lipper as its appropriate Lipper expense group. Lipper expense data is based upon historical information taken from each fund's most recent annual report and, as a result of the severe decline in mutual fund industry assets during the last quarter of 2008, is based on asset levels that are higher than the level currently existing for most funds. While recognizing the limitations inherent in Lipper's methodology and recognizing that current expense ratios may increase as assets decline, the Board believed that the independent analysis conducted by Lipper remained an appropriate measure of comparative expenses. In reviewing comparative costs, Lipper provides information on the Fund's contractual investment management fee in comparison with the investment management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The Lipper contractual investment management fee analysis includes administrative charges as being part of the investment management fee, 68 | Annual Report Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) FRANKLIN STRATEGIC INCOME FUND BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) and actual total expenses, for comparative consistency, are shown by Lipper for Fund Class A shares. The results of such expense comparisons showed the contractual investment management fee rates and actual total expense rates for Franklin Strategic Income Fund were in the least expensive quintile of its Lipper expense group. The Board was satisfied with the contractual management fees and total expenses of the Fund in comparison to its expense group as shown in the Lipper report. MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of the Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton's U.S. fund business, as well as its profits in providing management and other services to the Fund during the 12-month period ended September 30, 2008, being the most recent fiscal year end for Franklin Resources, Inc., the Manager's parent. During such period, the assets of the Franklin Templeton U.S. fund business were significantly higher than currently existing, and to such extent the profitability analysis does not reflect current fund operations. While taking this into account in assessing the significance of the Fund profitability analysis, the Board recognized such analysis was made at a given point in time and that the decline in assets and effect on profitability would be reflected in the profitability analysis covering Franklin Resources' 2009 fiscal year period. In reviewing the analysis, attention was given to the methodology followed in allocating costs to the Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that, while being continuously refined and reflecting changes in the Manager's own cost accounting, the allocation methodology was consistent with that followed in profitability report presentations for the Fund made in prior years and that the Fund's independent registered public accounting firm had been engaged by the Manager to perform certain procedures on a biennial basis, specified and approved by the Manager and the Fund's Board solely for their purposes and use in reference to the profitability analysis. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in establishing the infrastructure necessary for the type of mutual fund operations conducted by the Manager and its affiliates may not be fully reflected in the expenses allocated to the Fund in determining its profitability, as well as the fact that the level of profits, to a certain extent, reflected operational cost savings and efficiencies initiated by management. The Board also took into account management's expenditures in improving shareholder services provided the Fund, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act and recent SEC and other regulatory requirements. In addition, the Board considered a third-party study comparing the profitability of the Manager's parent on an overall basis as compared to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including its interest in a joint venture entity that financed up-front commissions paid to brokers/dealers who sold Annual Report | 69 Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) FRANKLIN STRATEGIC INCOME FUND BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) fund Class B shares prior to February 2005 when the offering of such shares was discontinued, as well as potential benefits resulting from allocation of fund brokerage and the use of commission dollars to pay for research. Based upon its consideration of all these factors, the Board determined that the level of profits realized by the Manager and its affiliates from providing services to the Fund was not excessive in view of the nature, quality and extent of services provided. ECONOMIES OF SCALE. The Board also considered whether economies of scale are realized by the Manager as the Fund grows larger and the extent to which this is reflected in the level of management fees charged. While recognizing that any precise determination is inherently subjective, the Board noted that based upon the Fund profitability analysis, it appears that as some funds get larger, at some point economies of scale do result in the Manager realizing a larger profit margin on management services provided such a fund. The Board noted that economies of scale were shared with the Fund and its shareholders through management fee breakpoints so that as the Fund grows in size, its effective management fee rate declines. The fee structure under the investment management agreement for the Fund contains breakpoints that continued to asset levels that exceeded its asset size at December 31, 2008. In view of such fee structure and the favorable expense comparisons of the Fund within its expense group, the Board believed that to the extent economies of scale may be realized by the manager of the Fund and its affiliates, that there was a sharing of benefits with the Fund and its shareholders. PROXY VOTING POLICIES AND PROCEDURES The Trust's investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330. 70 | Annual Report This page intentionally left blank. This page intentionally left blank. Franklin Templeton Funds LITERATURE REQUEST. TO RECEIVE A PROSPECTUS, PLEASE CALL US AT (800) DIAL BEN/(800) 342-5236 OR VISIT franklintempleton.com. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE, WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR BEEPING TONE. VALUE Franklin All Cap Value Fund Franklin Balance Sheet Investment Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund(1) Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Quest Fund Mutual Recovery Fund(2) Mutual Shares Fund BLEND Franklin Focused Core Equity Fund Franklin Large Cap Equity Fund Franklin Rising Dividends Fund GROWTH Franklin Flex Cap Growth Fund Franklin Growth Fund Franklin Growth Opportunities Fund Franklin Small Cap Growth Fund Franklin Small-Mid Cap Growth Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Real Estate Fund Franklin Gold & Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Utilities Fund Mutual Financial Services Fund GLOBAL Mutual Global Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund INTERNATIONAL Franklin India Growth Fund Franklin International Growth Fund Franklin International Small Cap Growth Fund Mutual European Fund Mutual International Fund Templeton BRIC Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Emerging Markets Small Cap Fund Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton Frontier Markets Fund HYBRID Franklin Balanced Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Income Fund Templeton Income Fund ASSET ALLOCATION Franklin Templeton Corefolio(R) Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund Franklin Templeton 2015 Retirement Target Fund Franklin Templeton 2025 Retirement Target Fund Franklin Templeton 2035 Retirement Target Fund Franklin Templeton 2045 Retirement Target Fund FIXED INCOME Franklin Adjustable U.S. Government Securities Fund(3) Franklin Floating Rate Daily Access Fund Franklin High Income Fund Franklin Limited Maturity U.S. Government Securities Fund(3) Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund(3) Templeton Global Bond Fund Templeton Global Total Return Fund Templeton International Bond Fund TAX-FREE INCOME(4) NATIONAL Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(5) LIMITED-/INTERMEDIATE-TERM California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Arizona California(6) Colorado Connecticut Florida Georgia Kentucky Louisiana Maryland Massachusetts(7) Michigan(7) Minnesota(7) Missouri New Jersey New York(6) North Carolina Ohio(7) Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(8) (1.) The fund is closed to new investors. Existing shareholders and select retirement plans can continue adding to their accounts. (2.) The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. (3.) An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. (4.) For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. (5.) The fund invests primarily in insured municipal securities. (6.) These funds are available in four or more variations, including long-term portfolios, intermediate-term portfolios, portfolios of insured securities, a high-yield portfolio (CA only) and money market portfolios. (7.) The Board of Trustees approved the elimination of the non-fundamental policy requiring the fund to invest at least 80% of net assets in insured municipal securities and the removal of the word "Insured" from the fund name. The changes became effective 2/17/09. (8.) The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 04/09 Not part of the annual report (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway San Mateo, CA 94403-1906 SIGN UP FOR EDELIVERY Log onto franklintempleton.com and click "My Profile" ANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN STRATEGIC INCOME FUND INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. (800) DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES (800) 632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. 194 A2009 06/09 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial expert is John B. Wilson and he is "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) Audit Fees The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $292,534 for the fiscal year ended April 30, 2009 and $325,694 for the fiscal year ended April 30, 2008. (b) Audit-Related Fees There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of Item 4. There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of their financial statements. (c) Tax Fees There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning. The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning were $6,000 for the fiscal year ended April 30, 2009 and $0 for the fiscal year ended April 30, 2008. The services for which these fees were paid included tax compliance and advice. (d) All Other Fees The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4 were $10,704 for the fiscal year ended April 30, 2009 and $0 for the fiscal year ended April 30, 2008. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process. The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant other than services reported in paragraphs (a)-(c) of Item 4 were $273,373 for the fiscal year ended April 30, 2009 and $0 for the fiscal year ended April 30, 2008. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process. (e) (1) The registrant's audit committee is directly responsible for approving the services to be provided by the auditors, including: (i) pre-approval of all audit and audit related services; (ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors; (iii) pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant's investment adviser or to any entity that controls, is controlled by or is under common control with the registrant's investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and (iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules. (e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X. (f) No disclosures are required by this Item 4(f). (g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $290,077 for the fiscal year ended April 30, 2009 and $0 for the fiscal year ended April 30, 2008. (h) The registrant's audit committee of the board has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 6. SCHEDULE OF INVESTMENTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein. ITEM 11. CONTROLS AND PROCEDURES. (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (b) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 12. EXHIBITS. (a)(1) Code of Ethics (a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN STRATEGIC SERIES By /s/Laura F. Fergerson ------------------ Laura F. Fergerson Chief Executive Officer - Finance and Administration Date June 25, 2009 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/Laura F. Fergerson ------------------ Laura F. Fergerson Chief Executive Officer - Finance and Administration Date June 25, 2009 By /s/Gaston Gardey --------------------- Gaston Gardey Chief Financial Officer and Chief Accounting Officer Date June 25, 2009 EX-99.CODE ETH 2 ncsr_code1208.txt Exhibit 12(a)(1) CODE OF ETHICS FOR PRINCIPAL EXECUTIVES & SENIOR FINANCIAL OFFICERS - ------------------------------------------------------------------------------ PROCEDURES Revised December 22, 2008 - ------------------------------------------------------------------------------- FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. Covered Officers and Purpose of the Code This code of ethics (the "Code") applies to the Principal Executive Officers, Principal Financial Officer and Principal Accounting Officer (the "Covered Officers," each of whom is set forth in Exhibit A) of each investment company advised by a Franklin Resources subsidiary and that is registered with the United States Securities & Exchange Commission ("SEC") (collectively, "FT Funds") for the purpose of promoting: o Honest and ethical conduct, including the ethical resolution of actual or apparent conflicts of interest between personal and professional relationships; o Full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the SEC and in other public communications made by or on behalf of the FT Funds; o Compliance with applicable laws and governmental rules and regulations; o The prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o Accountability for adherence to the Code. Each Covered Officer will be expected to adhere to a high standard of business ethics and must be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Franklin Resources, Inc. has separately adopted the CODE OF ETHICS AND BUSINESS CONDUCT ("Business Conduct"), which is applicable to all officers, directors and employees of Franklin Resources, Inc., including Covered Officers. It summarizes the values, principles and business practices that guide the employee's business conduct and also provides a set of basic principles to guide officers, directors and employees regarding the minimum ethical requirements expected of them. It supplements the values, principles and business conduct identified in the Code and other existing employee policies. Additionally, the Franklin Templeton Funds have separately adopted the CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING governing personal securities trading and other related matters. The Code for Insider Trading provides for separate requirements that apply to the Covered Officers and others, and therefore is not part of this Code. Insofar as other policies or procedures of Franklin Resources, Inc., the Funds, the Funds' adviser, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superceded by this Code to the extent that they overlap or conflict with the provisions of this Code. Please review these other documents or consult with the Legal Department if have questions regarding the applicability of these policies to you. III. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his or her service to, the FT Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of apposition with the FT Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the FT Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the FT Funds because of their status as "affiliated persons" of the FT Funds. The FT Funds' and the investment advisers' compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the FT Funds, the investment advisers and the fund administrator of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the FT Funds, for the adviser, the administrator, or for all three), be involved in establishing policies and implementing decisions that will have different effects on the adviser, administrator and the FT Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the FT Funds, the adviser, and the administrator and is consistent with the performance by the Covered Officers of their duties as officers of the FT Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the FT Funds' Boards of Directors ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the FT Funds. Each Covered Officer must: o Not use his or her personal influence or personal relationships improperly to influence investment decisions orfinancial reporting by the FT Funds whereby the Covered Officer would benefit personally to the detriment of the FT Funds; o Not cause the FT Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the FT Funds; o Not retaliate against any other Covered Officer or any employee of the FT Funds or their affiliated persons for reports of potential violations that are made in good faith; o Report at least annually the following affiliations or other relationships:/ 1 o all directorships for public companies and all companies that are required to file reports with the SEC; o any direct or indirect business relationship with any independent directors of the FT Funds; o any direct or indirect business relationship with any independent public accounting firm (which are not related to the routine issues related to the firm's service as the Covered Persons accountant); and o any direct or indirect interest in any transaction with any FT Fund that will benefit the officer (not including benefits derived from the advisory, sub-advisory, distribution or service agreements with affiliates of Franklin Resources). These reports will be reviewed by the Legal Department for compliance with the Code. There are some conflict of interest situations that should always be approved in writing by Franklin Resources General Counsel or Deputy General Counsel, if material. Examples of these include/2: o Service as a director on the board of any public or private Company; o The receipt of any gifts in excess of $100 from any person, from any corporation or association o The receipt of any entertainment from any Company with which the FT Funds has current or prospective business dealings unless such entertainment is business related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety. Notwithstanding the foregoing, the Covered Officers must obtain prior approval from the Franklin Resources General Counsel for any entertainment with a value in excess of $1000. o Any ownership interest in, or any consulting or employment relationship with, any of the FT Fund's service providers, other than an investment adviser, principal underwriter, administrator or any affiliated person thereof; o A direct or indirect financial interest in commissions, transaction charges or spreads paid by the FT Funds for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. Franklin Resources General Counsel or Deputy General Counsel will provide a report to the FT Funds Audit Committee of any approvals granted at the next regularly scheduled meeting. IV. Disclosure and Compliance o Each Covered Officer should familiarize himself with the disclosure requirements generally applicable to the FT Funds; o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the FT Funds to others, whether within or outside the FT Funds, including to the FT Funds' directors and auditors, and to governmental regulators and self-regulatory organizations; o Each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the FT Funds, the FT Fund's adviser and the administrator with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the FT Funds file with, or submit to, the SEC and in other public communications made by the FT Funds; and o It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. V. Reporting and Accountability Each Covered Officer must: o Upon becoming a covered officer affirm in writing to the Board that he or she has received, read, and understands the Code (see Exhibit B); o Annually thereafter affirm to the Board that he has complied with the requirements of the Code; and o Notify Franklin Resources' General Counsel or Deputy General Counsel promptly if he or she knows of any violation of this Code. Failure to do so is itself is a violation of this Code. Franklin Resources' General Counsel and Deputy General Counsel are responsible for applying this Code to specific situations in which questions are presented under it and have the authority to interpret this Code in any particular situation./3 However, the Independent Directors of the respective FT Funds will consider any approvals or waivers/4 sought by any Chief Executive Officers of the Funds. The FT Funds will follow these procedures in investigating and enforcing this Code: o Franklin Resources General Counsel or Deputy General Counsel will take all appropriate action to investigate any potential violations reported to the Legal Department; o If, after such investigation, the General Counsel or Deputy General Counsel believes that no violation has occurred, The General Counsel is not required to take any further action; o Any matter that the General Counsel or Deputy General Counsel believes is a violation will be reported to the Independent Directors of the appropriate FT Fund; o If the Independent Directors concur that a violation has occurred, it will inform and make a recommendation to the Board of the appropriate FT Fund or Funds, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Independent Directors will be responsible for granting waivers, as appropriate; and o Any changes to or waivers of this Code will, to the extent required, are disclosed as provided by SEC rules./5 VI. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the FT Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the FT Funds, the FT Funds' advisers, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The FT Code of Ethics and Policy Statement On Insider Trading, adopted by the FT Funds, FT investment advisers and FT Fund's principal underwriter pursuant to Rule 17j-1 under the Investment Company Act, the Code of Ethics and Business Conduct and more detailed policies and procedures set forth in FT's Employee Handbook are separate requirements applying to the Covered Officers and others, and are not part of this Code. VII. Amendments Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the FT Funds' Board including a majority of independent directors. VIII. Confidentiality All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the FT Funds' Board and their counsel. IX. Internal Use The Code is intended solely for the internal use by the FT Funds and does not constitute an admission, by or on behalf of any FT Funds, as to any fact, circumstance, or legal conclusion. X. Disclosure on Form N-CSR Item 2 of Form N-CSR requires a registered management investment company to disclose annually whether, as of the end of the period covered by the report, it has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these officers are employed by the registrant or a third party. If the registrant has not adopted such a code of ethics, it must explain why it has not done so. The registrant must also: (1) file with the SEC a copy of the code as an exhibit to its annual report; (2) post the text of the code on its Internet website and disclose, in its most recent report on Form N-CSR, its Internet address and the fact that it has posted the code on its Internet website; or (3) undertake in its most recent report on Form N-CSR to provide to any person without charge, upon request, a copy of the code and explain the manner in which such request may be made. Disclosure is also required of amendments to, or waivers (including implicit waivers) from, a provision of the code in the registrant's annual report on Form N-CSR or on its website. If the registrant intends to satisfy the requirement to disclose amendments and waivers by posting such information on its website, it will be required to disclose its Internet address and this intention. The Legal Department shall be responsible for ensuring that: o a copy of the Code is filed with the SEC as an exhibit to each Fund's annual report; and o any amendments to, or waivers (including implicit waivers) from, a provision of the Code is disclosed in the registrant's annual report on Form N-CSR. In the event that the foregoing disclosure is omitted or is determined to be incorrect, the Legal Department shall promptly file such information with the SEC as an amendment to Form N-CSR. In such an event, the Fund Chief Compliance Officer shall review the Code and propose such changes to the Code as are necessary or appropriate to prevent reoccurrences. EXHIBIT A Persons Covered by the Franklin Templeton Funds Code of Ethics December 2008 FRANKLIN GROUP OF FUNDS Edward B. Jamieson President and Chief Executive Officer - Investment Management Charles B. Johnson President and Chief Executive Officer - Investment Management Rupert H. Johnson, Jr. President and Chief Executive Officer - Investment Management William J. Lippman President and Chief Executive Officer - Investment Management Christopher Molumphy President and Chief Executive Officer - Investment Management Jennifer J. Bolt Chief Executive Officer - Finance and Administration Laura Fergerson Chief Financial Officer and Chief Accounting Officer FRANKLIN MUTUAL SERIES FUNDS Peter Langerman Chief Executive Officer-Investment Management Jennifer J. Bolt Chief Executive Officer - Finance and Administration Laura Fergerson Chief Financial Officer and Chief Accounting Officer TEMPLETON GROUP OF FUNDS Mark Mobius President and Chief Executive Officer - Investment Management Christopher J. Molumphy President and Chief Executive Officer - Investment Management Gary P. Motyl President and Chief Executive Officer - Investment Management Donald F. Reed President and Chief Executive Officer - Investment Management Jennifer J. Bolt Chief Executive Officer - Finance and Administration Laura Fergerson Chief Financial Officer and Chief Accounting Officer EXHIBIT B ACKNOWLEDGMENT FORM DECEMBER FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS INSTRUCTIONS: 1. Complete all sections of this form. 2. Print the completed form, sign, and date. 3. Submit completed form to FT's General Counsel c/o Code of Ethics Administration within 10 days of becoming a Covered Officer and by January 30th of each subsequent year. INTER-OFFICE MAIL: Code of Ethics Administration, Global Compliance SM-920/2 TELEPHONE: (650) 312-5698 Fax: (650) 312-5646 E-MAIL: Preclear-Code of Ethics (internal address); lpreclear@frk.com (external address) - ------------------------------------------------------------------------------ COVERED OFFICER'S NAME: - ------------------------------------------------------------------------------ TITLE: - ------------------------------------------------------------------------------ DEPARTMENT: - ------------------------------------------------------------------------------ LOCATION: - ------------------------------------------------------------------------------ CERTIFICATION FOR YEAR ENDING: - ------------------------------------------------------------------------------ TO: Franklin Resources General Counsel, Legal Department I hereby acknowledge receipt of a copy of Franklin Templeton Fund's code of ethics for Principal Executive Officers and Senior Financial Officers (the "Code") that I have read and understand. I will comply fully with all provisions of the Code to the extent they apply to me during the period of my employment. I further understand and acknowledge that any violation of the Code may subject me to disciplinary action, including termination of employment. ---------------------------- ---------------------- Signature Date signed - ----------------------------- 1. Reporting of these affiliations or other relationships shall be made by completing the annual Directors and Officers Questionnaire and returning the questionnaire to Franklin Resources Inc, General Counsel or Deputy General Counsel. 2. Any activity or relationship that would present a conflict for a Covered Officer may also present a conflict for the Covered Officer if a member of the Covered Officer's immediate family engages in such an activity or has such a relationship. The Cover Person should also obtain written approval by FT's General Counsel in such situations. 3. Franklin Resources General Counsel and Deputy General Counsel are authorized to consult, as appropriate, with members of the Audit Committee, counsel to the FT Funds and counsel to the Independent Directors, and are encouraged to do so. 4. Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics" and "implicit waiver," which must also be disclosed, as "the registrant's failure to take action within a reasonable period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer" of the registrant. See Part X. 5. See Part X. EX-99.CERT 3 fss302cert.txt Exhibit 12(a)(2) I, Laura F. Fergerson, certify that: 1. I have reviewed this report on Form N-CSR of FRANKLIN STRATEGIC SERIES; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 6/25/2009 S\LAURA F. FERGERSON Laura F. Fergerson Chief Executive Officer - Finance and Administration I, Gaston Gardey, certify that: 1. I have reviewed this report on Form N-CSR of FRANKLIN STRATEGIC SERIES; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 6/25/2009 S\GASTON GARDEY Gaston Gardey Chief Financial Officer and Chief Accounting Officer EX-99.906CERT 4 fss906cert.txt Exhibit 12(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Laura F. Fergerson, Chief Executive Officer of the FRANKLIN STRATEGIC SERIES (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 4/30/2009 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: 6/25/2009 S\LAURA F. FERGERSON Laura F. Fergerson Chief Executive Officer - Finance and Administration CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Gaston Gardey, Chief Financial Officer of the FRANKLIN STRATEGIC SERIES (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 4/30/2009 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: 6/25/2009 S\GASTON GARDEY Gaston Gardey Chief Financial Officer and Chief Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----