-----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, D4jDskI4nYYOwIr6k8qRBQoVf6zzJyH63r55cmzZZ74BKiEqCLlufOP+CXEnBKfQ gG3DHm8X79Qr2kNH4c5DBQ== 0000872625-96-000007.txt : 19960315 0000872625-96-000007.hdr.sgml : 19960315 ACCESSION NUMBER: 0000872625-96-000007 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19960314 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN STRATEGIC SERIES CENTRAL INDEX KEY: 0000872625 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-39088 FILM NUMBER: 96534531 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-06243 FILM NUMBER: 96534532 BUSINESS ADDRESS: STREET 1: 777 MARINERS ISLAND BLVD CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: 4155703000 MAIL ADDRESS: STREET 1: 777 MARINERS ISLAND BLVD CITY: SAN MATEO STATE: CA ZIP: 94404 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 485APOS 1 As filed with the Securities and Exchange Commission on March 14, 1996 File Nos. 33-39088 811-6243 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Pre-Effective Amendment No. Post-Effective Amendment No. 18 (X) and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 21 (X) FRANKLIN STRATEGIC SERIES (Exact Name of Registrant as Specified in Charter) 777 MARINERS ISLAND BOULEVARD, SAN MATEO, CA 94404 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (415) 312-2000 Harmon E. Burns, 777 Mariners Island Blvd., San Mateo, CA 94404 (Name and Address of Agent for Service of Process) Approximate Date of Proposed Public Offering: It is proposed that this filing will become effective (check appropriate box) [ ] immediately upon filing pursuant to paragraph (b) [ ] on (date) pursuant to paragraph (b) [ ] 60 days after filing pursuant to paragraph (a)(i) [ ] on (date) pursuant to paragraph (a)(i) [x] 75 days after filing pursuant to paragraph (a)(ii) [ ] on (date) pursuant to paragraph (a)(ii) of rule 485 If appropriate, check the following box: [ ] This post-effective amendment designates a new effective date for a previously filed post-effective amendment. Declaration Pursuant to Rule 24f-2. The issuer has registered an indefinite number or amount of securities under the Securities Act of 1933 pursuant to Section 24f-2 under the Investment Company Act of 1940. The Rule 24f-2 Notice for the issuer's most recent fiscal year was filed on June 27, 1995. FRANKLIN STRATEGIC SERIES CROSS REFERENCE SHEET FORM N-1A Part A: Information Required in the Prospectus (Franklin Blue Chip Fund) N-1A Location in Item No. Item Registration Statement 1. Cover Page Cover Page 2. Synopsis Expense Table 3. Condensed Financial "How Does the Fund Measure Information Performance?" 4. General Description "What Is the Franklin Blue Chip Fund?"; "How Does the Fund Invest Its Assets?"; "What Are the Fund's Potential Risks?"; "General Information" 5. Management of the Fund "Who Manages the Fund?"; 5A. Management's Discussion of Not Applicable Fund Performance 6. Capital Stock and Other "What Distributions Might I Securities Receive From the Fund?"; "How Taxation Affects You and the Fund?"; "How Do I Get More Information About My Investment?"; "General Information" 7. Purchase of Securities Being "How Do I Buy Shares?"; "What Offered Programs and Privileges Are Available to Me as a Shareholder?"; "What If My Investment Outlook Changes?-Exchange Privilege"; "Telephone Transactions"; "How Are Fund Shares Valued?" 8. Redemption or Repurchase "What If My Investment Outlook Changes?-Exchange Privilege"; "How Do I Sell Shares?"; "Telephone Transactions"; "How Do I Get More Information About My Investment?"; "General Information" 9. Pending Legal Proceedings Not Applicable FRANKLIN STRATEGIC SERIES CROSS REFERENCE SHEET FORM N-1A Part B: Information Required in the Statement of Additional Information (Franklin Blue Chip Fund) N-1A Location in Item No. Item Registration Statement 10. Cover Page Cover Page 11. Table of Contents Contents 12. General Information and "General Information" History 13. Investment Objectives and "How Does the Fund Invest Its Policies Assets?"; "Investment Restrictions" 14. Management of the Fund "Officers and Trustees"; "Investment Advisory and Other Services" 15. Control Persons and "Officers and Trustees"; Principal Holders of "Investment Advisory and Other Securities Services"; "General Information" 16. Investment Advisory and "Investment Advisory and Other Other Services Services" 17. Brokerage Allocation "How Does the Fund Purchase Securities for Its Portfolio?" 18. Capital Stock and Other "How Do I Buy and Sell Shares?"; Securities "How Are Fund Shares Valued?" 19. Purchase, Redemption and "How Do I Buy and Sell Shares?" Pricing of Securities 20. Tax Status "Additional Information Regarding Taxation" 21. Underwriters "The Fund's Underwriter" 22. Calculation of Performance "General Information" Data 23. Financial Statements Not Applicable FRANKLIN BLUE CHIP FUND FRANKLIN STRATEGIC SERIES PROSPECTUS MAY 28, 1996 777 MARINERS ISLAND BLVD., P.O. BOX 7777 SAN MATEO, CA 94403-7777 1-800/DIAL BEN The Franklin Blue Chip Fund (the "Fund") is a diversified series of Franklin Strategic Series (the "Trust"), an open-end management investment company. The Fund's investment objective is capital appreciation. In seeking to meet this objective, the Fund primarily invests in equity securities of blue chip companies. Blue chip companies are well-established companies with a long record of revenue growth and profitability. These companies generally dominate their respective markets, and have a reputation for quality management, as well as superior products and services. Blue chip companies also tend to have relatively large capitalization. The Fund may invest in both domestic and foreign securities, as described under "How Does the Fund Invest Its Assets?" The Fund may also seek current income incidental to long-term capital appreciation, although this is not an objective of the Fund. This Prospectus is intended to set forth in a clear and concise manner information about the Fund that you should know before investing. After reading the Prospectus, you should retain it for future reference; it contains information about the purchase and sale of shares and other items which you will find useful. An SAI concerning the Fund, dated May 28, 1996, as may be amended from time to time, provides a further discussion of certain areas in this Prospectus and other matters which may be of interest to you. It has been filed with the SEC and is incorporated herein by reference. A copy is available without charge from the Fund or Distributors, at the address or telephone number shown above. SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY STATE IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM THE UNDERWRITER. CONTENTS PAGE Expense Table What Is the Franklin Blue Chip Fund? How Does the Fund Invest Its Assets? What Are the Fund's Potential Risks? How You Participate in the Results of the Fund's Activities Who Manages the Fund? What Distributions Might I Receive from the Fund? How Taxation Affects You and the Fund How Do I Buy Shares? What Programs and Privileges Are Available to Me as a Shareholder? What If My Investment Outlook Changes? - Exchange Privilege How Do I Sell Shares? Telephone Transactions How Are Fund Shares Valued? How Do I Get More Information About My Investment? How Does the Fund Measure Performance? General Information Registering Your Account Important Notice Regarding Taxpayer IRS Certifications Useful Terms and Definitions EXPENSE TABLE The purpose of this table is to assist you in understanding the various costs and expenses that you will bear directly or indirectly in connection with an investment in the Fund. These figures are based on contractual management and Rule 12b-1 fees and estimates of the other operating expenses of the Fund for the current fiscal year. SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) 4.50% Deferred Sales Charge None+ Exchange Fee (per transaction) $5.00* ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets) Management Fees 0.57%** Rule 12b-1 Fees 0.35%*** Other Expenses: Shareholder servicing costs 0.10% Reports to shareholders 0.12% Other 0.11% ----- Total Other Expenses 0.33% Total Fund Operating Expenses 1.25%** +Investments of $1 million or more are not subject to a front-end sales charge; however, a contingent deferred sales charge of 1% is generally imposed on certain redemptions within a "contingency period" of 12 months of the calendar month of such investments. See "How Do I Sell Shares? - Contingent Deferred Sales Charge." *$5.00 fee imposed only on Market Timers as described under "What If My Investment Outlook Changes? - Exchange Privilege." All other exchanges are processed without a fee. **The Manager has agreed in advance to waive a portion of its management fee and to make certain payments to reduce expenses of the Fund so that the Fund's aggregate annual operating expenses do not exceed 1.25% of the Fund's average net assets for the current fiscal year. Absent this reduction, management fees and total operating expenses would have represented 0.75% and 1.43%, respectively, of the Fund's average net assets. After April 30, 1997, the Manager may terminate this arrangement at any time. ***Consistent with National Association of Securities Dealers, Inc.'s rules, it is possible that the combination of front-end sales charges and Rule 12b-1 fees could cause long-term shareholders to pay more than the economic equivalent of the maximum front-end sales charges permitted under those same rules. You should be aware that the above table is not intended to reflect in precise detail the fees and expenses associated with an investment in the Fund. Rather, the table has been provided only to assist you in gaining a more complete understanding of fees, charges and expenses. For a more detailed discussion of these matters, you should refer to the appropriate sections of this Prospectus. EXAMPLE As required by SEC regulations, the following example illustrates the expenses, including the maximum front-end sales charge, that apply to a $1,000 investment in the Fund over various time periods assuming (1) a 5% annual rate of return and (2) redemption at the end of each time period. ONE YEAR THREE YEARS $57* $83 *Assumes that a contingent deferred sales charge will not apply. THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES SHOWN ABOVE AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The operating expenses are borne by the Fund and only indirectly by you as a result of your investment in the Fund. See "Who Manages the Fund?" for a description of the Fund's expenses. In addition, federal securities regulations require the example to assume an annual return of 5%, but the Fund's actual return may be more or less than 5%. WHAT IS THE FRANKLIN BLUE CHIP FUND? The Fund is a diversified series of the Trust, an open-end management investment company commonly called a "mutual fund." The Trust was organized as a Delaware business trust on January 25, 1991, and registered with the SEC under the 1940 Act. Shares of the Fund may be considered Class I shares, as described under "Useful Terms and Definitions," for redemption, exchange and other purposes. The Fund reserves the right to convert to a master/feeder structure at a future date. Please see "General Information - Conversion to Master/Feeder Structure." HOW DOES THE FUND INVEST ITS ASSETS? THE FUND'S INVESTMENT OBJECTIVE The Fund's investment objective is capital appreciation. The objective is a fundamental policy of the Fund and may not be changed without shareholder approval. Of course, there is no assurance that the Fund's objective will be achieved. The Fund may also seek current income incidental to long-term capital appreciation, although this is not an objective of the Fund. Unless otherwise noted, the Fund's investment policies discussed below are not fundamental policies. This means they may be changed without shareholder approval. TYPES OF SECURITIES THE FUND MAY PURCHASE Blue Chip Equity Securities. Under normal market conditions, the Fund invests at least 80%, and intends to invest up to 100%, of its total assets in a diversified portfolio of equity securities of "blue chip companies." Blue chip companies are well-established companies with a long record of revenue growth and profitability. These companies generally dominate their respective markets, and have a reputation for quality management, as well as superior products and services. Blue chip companies also tend to have relatively large capitalization. When selecting securities for the Fund's portfolio, the Manager tries to identify quality blue chip companies based on a number of criteria. Specifically, the Manager looks for companies that are leaders in their industry with a dominant market position and a sustainable competitive advantage. The Manager also looks for companies that exhibit consistent growth, a strong financial record, and market capitalization of more than $1 billion. The Fund intends to invest in a portfolio that is diversified across a large number of industries. The types of equity securities the Fund may buy include common stock, warrants to buy common stock, and securities convertible into common stock. Although the Fund may invest without limit in any of these types of securities, it intends to invest primarily in common stock. For a description of warrants and convertible securities, please see the discussion below. Foreign Securities. The Fund seeks investment opportunities across all markets in the world. Accordingly, the Fund may invest without limit in the equity securities of blue chip companies located outside the U.S. This may include companies in either developed or emerging markets, as certain companies in emerging markets meet all the criteria of a blue chip company. The amount of the Fund's assets invested in foreign securities may vary over time depending on the Manager's outlook. The Fund may buy foreign securities traded in the U.S. or directly in foreign markets. The Fund may also invest in foreign securities through American Depositary Receipts ("ADRs"). ADRs are certificates issued by U.S. banks. They give their holders the right to receive the securities of a foreign issuer deposited with the bank or a correspondent bank. The Fund may buy both sponsored and unsponsored ADRs. Foreign securities have risks that U.S. securities do not have. For more information about foreign securities and their risks, please see "What Are the Fund's Potential Risks?" Convertible Securities and Warrants. The Fund may invest in convertible securities and warrants without limit. It currently intends, however, to limit these investments to no more than 5% of its net assets. A convertible security is generally a debt obligation or a preferred stock that may be converted within a specified period of time into a certain amount of common stock of the same or a different issuer. A convertible security may also be subject to redemption by the issuer but only after a specified date and under circumstances established at the time the security is issued. Convertible securities provide a fixed-income stream and the opportunity, through their conversion feature, to participate in any capital appreciation resulting from a market price advance in the convertible security's underlying common stock. A warrant gives its holder the right to buy newly created securities of the issuer of the warrant, or a related company, at a set price. The warrant usually allows its holder to buy the new security on a specific date or during a set period of time. If a warrant is not used or sold by its holder, it expires worthless. Futures and Options. The Fund may buy or sell futures contracts for securities and currencies. A futures contract is an obligation to buy or sell a specified security or currency at a set price on a specified future date. The Fund may invest in futures contracts only to hedge against changes in the value of its securities or currencies or those it intends to buy. The Fund will not enter into a futures contract if the amounts paid for its open contracts, including required initial deposits, would exceed 5% of the Fund's net assets. For hedging purposes only, the Fund may buy or write put and call options on securities listed on a national securities exchange. The options themselves may be traded on an exchange or over-the-counter. An option on a security allows its holder to buy a specified security (a call option) or to sell a specified security (a put option) from or to the writer of the option at a set price during the term of the option. All options written by the Fund will be covered, as discussed in the SAI. The Fund will not buy an option if the amounts paid for its open option positions exceed 5% of its net assets. Futures and options are generally considered derivative securities. They may not always be successful hedges. For a further discussion of these securities, including their risks and special tax considerations that may apply, please see the SAI. OTHER INVESTMENT POLICIES OF THE FUND Repurchase Agreements. In a repurchase transaction, the Fund buys a U.S. government security subject to resale to a bank or dealer at an agreed-upon price and date. The seller's obligation is secured by the transfer of securities with an initial market value, including accrued interest, equal to at least 102% of the dollar amount invested by the Fund in each agreement. The value of the underlying securities is marked-to-market daily to maintain coverage of at least 100%. If the seller defaults, the Fund may experience a loss or delay when it tries to sell the securities securing the repurchase agreement and may have to pay disposition costs. The Fund, however, intends to enter into repurchase agreements only with financial institutions, such as broker-dealers and banks, that the Manager believes are creditworthy. A repurchase agreement is considered a loan by the Fund under the 1940 Act. The U.S. government security subject to resale (the collateral) will be held on behalf of the Fund by a custodian approved by the Board and will be held pursuant to a written agreement. Short-Term Investments. Occasionally, pending investment of proceeds from new sales of the Fund or for cash management or temporary defensive purposes, the Fund may hold cash or invest in high quality money market instruments of U.S. and foreign issuers. These include government securities, commercial paper, bank certificates of deposit, bankers' acceptances and repurchase agreements secured by any of these instruments. Any of these securities purchased by the Fund will either be rated "A1" or "A2" by S&P or "P1" or "P2" by Moody's or unrated but of comparable quality. It is impossible to predict when or for how long the Fund would employ these strategies. Loans of Portfolio Securities. Consistent with procedures approved by the Board and subject to the following conditions, the Fund may lend its portfolio securities to qualified securities dealers or other institutional investors, provided these loans do not exceed one-third of the value of the Fund's total assets at the time of the most recent loan. The borrower must deposit with the Fund's custodian bank collateral with an initial market value of at least 102% of the initial market value of the securities loaned, including any accrued interest, with the value of the collateral and loaned securities marked-to-market daily to maintain coverage of at least 100%. This collateral shall consist of cash, securities issued by the U.S. government, its agencies or instrumentalities, or irrevocable letters of credit. The lending of securities is a common practice in the securities industry. The Fund may engage in security loan arrangements with the primary objective of increasing the Fund's income either through investing cash collateral in short-term interest bearing obligations or by receiving a loan premium from the borrower. Under the securities loan agreement, the Fund continues to be entitled to all dividends or interest on any loaned securities. As with any extension of credit, there are risks of delay in recovery and loss of rights in the collateral should the borrower of the security fail financially. Borrowing. As a fundamental policy, the Fund does not borrow money or mortgage or pledge any of its assets, except it may borrow up to 15% of its total assets (including the amount borrowed) to meet redemption requests that might otherwise require the untimely disposition of portfolio securities or for other temporary or emergency purposes and may pledge its assets in connection with these borrowings. The Fund will not make any additional investments while borrowings exceed 5% of its total assets. When-Issued and Standby Commitment Purchases. The Fund may buy equity securities on a "when-issued" or "delayed delivery" basis. These transactions are arrangements whereby the Fund buys securities with payment and delivery scheduled for a future time, generally within 15 to 60 days. The Fund may also buy equity securities under a standby commitment agreement. If the Fund enters into a standby commitment agreement, it will be obligated, for a set period of time, to buy a certain amount of a security that may be issued and sold to the Fund at the option of the issuer. The price and interest rate of the security is set at the time of the agreement. The Fund will receive a commitment fee typically equal to 0.5% of the purchase price of the security. The Fund will receive this fee regardless of whether the security is actually issued. Currency Transactions. In connection with the Fund's investment in foreign securities, it may hold currencies other than the U.S. dollar and enter into forward currency exchange transactions to facilitate settlements and to protect against changes in exchange rates. In a forward currency transaction, the Fund agrees to buy or sell a foreign currency at a set exchange rate. Payment and delivery of the currency occurs on a future date. There is no assurance that these strategies will be successful. The Fund's investment in foreign currencies and forward currency exchange transactions will not exceed 10% of its net assets. The Fund may also enter into futures contracts for currencies as discussed above. Illiquid Investments. The Fund may not invest more than 10% of its net assets, at the time of purchase, in illiquid securities. Illiquid securities are securities that cannot be sold within seven days in the normal course of business at approximately the amount at which the Fund has valued them. Restricted Securities. The Board has authorized the Fund to invest in restricted securities, if consistent with the Fund's investment objective. Restricted securities are not registered with the SEC. If the Manager determines on a daily basis that there is a liquid institutional or other market for these securities, the Board has authorized them to be considered liquid securities and not subject to the Fund's policy on illiquid investments. Notwithstanding the Manager's determination, the Board remains responsible for liquidity determinations and will consider appropriate action if a restricted security becomes illiquid after its purchase. In this regard, if qualified institutional buyers are no longer interested in buying restricted securities that were previously considered liquid or if the market for these securities contracts, they will be redesignated illiquid securities and subject to the Fund's illiquid investment policy. This may reduce the general level of liquidity in the Fund. Portfolio Turnover. The Fund anticipates its annual portfolio turnover rate generally will not exceed 50%, but you should not consider this rate a limiting factor in the operation of the Fund's portfolio. Percentage Restrictions. If a percentage restriction noted above is adhered to at the time of investment, a later increase or decrease in the percentage resulting from a change in value of portfolio securities or the amount of net assets will not be considered a violation of any of the foregoing policies. Other Restrictions. The Fund is subject to a number of additional investment restrictions. Some of these restrictions may be changed only with shareholder approval. For a list of these restrictions and more information about the investment policies discussed above, please see "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the SAI. WHAT ARE THE FUND'S POTENTIAL RISKS? The Fund is designed for long-term investors and not as a trading vehicle. Before investing in the Fund, you should take into account your overall financial plan, as well as how this Fund could aid in achieving your investment objective. Although the Fund invests primarily in quality blue chip securities, the Fund is not restricted geographically in its security selection. The Manager believes this can improve the Fund's ability to meet its objective of capital appreciation, as many of today's quality industry leaders are domiciled outside the U.S. You should consider the risks of foreign securities before buying shares of the Fund. While foreign securities are subject to many of the same influences as U.S. securities, such as general economic conditions and individual company and industry earnings prospects, they involve additional risks that can increase the potential for losses in the Fund. These risks can be significantly greater for investments in emerging markets. Currency fluctuations. The Fund's investments may be denominated in foreign currencies. Fluctuations in foreign exchange rates may significantly increase or decrease the value of the Fund's foreign investments. These fluctuations may increase or offset any return on the underlying investment. Costs. It is more expensive for the Fund to trade in foreign markets than in the U.S. Brokerage and custodial costs are often higher, as are other costs. While the Fund offers an efficient way for you to invest in quality blue chip companies across the world, its overall expense ratio may be higher than funds investing exclusively in U.S. securities. Political and Economic Factors. The political, economic and social structures of some countries in which the Fund invests may not compare favorably with the U.S. and may be less stable and more volatile. The risks of investing in these countries include the possibility of the imposition of exchange controls, expropriation, restrictions on removal of currency or other assets, nationalization of assets, and punitive taxes. Legal, Regulatory and Operational Factors. There may be less publicly available information about a foreign company than about a U.S. company. Certain countries may not have uniform accounting, auditing and financial reporting standards and may have less government supervision of financial markets. Foreign securities markets may have substantially lower trading volumes than U.S. markets, resulting in less liquidity and more volatility than experienced in the U.S., and may have settlement practices that result in delays. Please see "What Are the Fund's Potential Risks?" in the SAI for more information on the risks associated with an investment in the Fund. HOW YOU PARTICIPATE IN THE RESULTS OF THE FUND'S ACTIVITIES The assets of the Fund are invested in portfolio securities. If the securities owned by the Fund increase in value, the value of the shares of the Fund which you own will increase. If the securities owned by the Fund decrease in value, the value of your shares will also decline. In this way, you participate in any change in the value of the securities owned by the Fund. In addition to the factors which affect the value of individual securities, as described in the preceding sections, you may anticipate that the value of Fund shares will fluctuate with movements in the broader equity markets. A decline in the stock market of any country in which the Fund is invested may also be reflected in declines in the Fund's share price. Changes in currency valuations will also affect the price of Fund shares. History reflects both increases and decreases in worldwide stock markets and currency valuations and these may reoccur unpredictably in the future. WHO MANAGES THE FUND? The Board has the primary responsibility for the overall management of the Fund and for electing the officers of the Fund who are responsible for administering its day-to-day operations. Advisers serves as the Fund's investment manager. Advisers is a wholly-owned subsidiary of Resources, a publicly owned holding company, the principal shareholders of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own approximately 20% and 16%, respectively, of Resources' outstanding shares. Resources is engaged in various aspects of the financial services industry through its subsidiaries. Advisers acts as investment manager or administrator to 36 U.S. registered investment companies (118 separate series) with aggregate assets of over $80 billion. The team responsible for the day-to-day management of the Fund's portfolio since its inception is: Suzanne Willoughby Killea and Shan C. Green. Suzanne Willoughby Killea Portfolio Manager of Advisers Ms. Killea holds a Master of Business Administration degree from Stanford University and a Bachelor of Arts degree from Princeton University. She has been with Advisers or an affiliate since earning her MBA degree in 1991. She is a member of several securities industry-related associations. Shan C. Green Portfolio Manager of Advisers Ms. Green holds a Master of Business Administration degree from the University of California at Berkeley. She earned her Bachelor of Science degree from State University of New York at Stony Brook. Ms. Green has been with Advisers or an affiliate since 1994. Pursuant to a management agreement, the Manager supervises and implements the Fund's investment policies and provides certain administrative services and facilities which are necessary to conduct the Fund's business. The Manager performs similar services for other funds and there may be times when the actions taken with respect to the Fund's portfolio will differ from those taken by the Manager on behalf of other funds. Neither the Manager (including its affiliates) nor its officers, directors or employees nor the officers and trustees of the Fund are prohibited from investing in securities held by the Fund or other funds which are managed or administered by the Manager to the extent such transactions comply with the Fund's Code of Ethics. Please see "Investment Advisory and Other Services" and "General Information" in the SAI for further information on securities transactions and a summary of the Fund's Code of Ethics. The Fund is responsible for its own operating expenses including, but not limited to, the Manager's fee; taxes, if any; custodian, legal and auditing fees; fees and expenses of trustees who are not members of, affiliated with, or interested persons of the Manager; salaries of any personnel not affiliated with the Manager; insurance premiums; trade association dues; expenses of obtaining quotations for calculating the value of the Fund's net assets; and printing and other expenses which are not expressly assumed by the Manager. Under the management agreement, the Fund is obligated to pay the Manager a fee computed daily and paid monthly equal to an annual rate of 0.75% of the Fund's average daily net assets up to and including $500 million; 0.625% of the Fund's average daily net assets over $500 million up to and including $1 billion; and 0.50% of the Fund's average daily net assets over $1 billion. During the start-up period of the Fund, Advisers has agreed in advance to waive a portion of its management fees so that the Fund's aggregate annual operating expenses do not exceed 1.25% of the Fund's average net assets for the current fiscal year. After April 30, 1997, Advisers may terminate this arrangement at any time upon notice to the Board. The management agreement specifies that the management fee will be reduced to the extent necessary to comply with the most stringent limits on the expenses which may be borne by the Fund as prescribed by any state in which the Fund's shares are offered for sale. Currently, the most restrictive of such provisions limits a fund's allowable expenses as a percentage of its average net assets for each fiscal year to 2.5% of the first $30 million in assets, 2% of the next $70 million, and 1.5% of assets in excess of $100 million. Among the responsibilities of the Manager under the management agreement is the selection of brokers and dealers through whom transactions in the Fund's portfolio securities will be effected. The Manager tries to obtain the best execution on all such transactions. If it is felt that more than one broker is able to provide the best execution, the Manager will consider the furnishing of quotations and of other market services, research, statistical and other data for the Manager and its affiliates, as well as the sale of shares of the Fund, as factors in selecting a broker. Further information is included under "How Does the Fund Purchase Securities For Its Portfolio?" in the SAI. Shareholder accounting and many of the clerical functions for the Fund are performed by Investor Services, in its capacity as transfer agent and dividend-paying agent. Investor Services is a wholly-owned subsidiary of Resources. PLAN OF DISTRIBUTION A plan of distribution has been approved and adopted for the Fund (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund may reimburse Distributors or others for all expenses incurred by Distributors or others in the promotion and distribution of the Fund's shares. Such expenses may include, but are not limited to, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including a prorated portion of Distributors' overhead expenses attributable to the distribution of Fund shares, as well as any distribution or service fees paid to securities dealers or their firms or others who have executed a servicing agreement with the Fund, Distributors or its affiliates. The amount which the Fund may reimburse Distributors or others for distribution expenses is 0.25% per annum of its average daily net assets, payable on a quarterly basis. The Fund is also permitted to pay Distributors up to an additional 0.10% per annum of its daily net assets for reimbursement of distribution expenses. All expenses of distribution in excess of 0.35% per annum will be borne by Distributors, or others who have incurred them, without reimbursement from the Fund. The Plan also covers any payments to or by the Fund, Advisers, Distributors, or other parties on behalf of the Fund, Advisers or Distributors, to the extent such payments are deemed to be for the financing of any activity primarily intended to result in the sale of shares issued by the Fund within the context of Rule 12b-1. The payments under the Plan are included in the maximum operating expenses which may be borne by the Fund. For more information, please see "The Fund's Underwriter" in the SAI. WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND? You may receive two types of distributions from the Fund: 1. Income dividends. The Fund receives income generally in the form of dividends, interest and other income derived from its investments. This income, less the expenses incurred in the Fund's operations, is its net investment income from which income dividends may be distributed. Thus, the amount of dividends paid per share may vary with each distribution. 2. Capital gain distributions. The Fund may derive capital gains or losses in connection with sales or other dispositions of its portfolio securities. Distributions by the Fund derived from net short-term and net long-term capital gains (after taking into account any net capital loss carryovers) may generally be made once a year in December to reflect any net short-term and net long-term capital gains realized by the Fund as of October 31 of the current fiscal year and any undistributed capital gains from the prior fiscal year. The Fund may make more than one distribution derived from net short-term and net long-term capital gains in any year or adjust the timing of these distributions for operational or other reasons. DISTRIBUTION DATE Although subject to change by the Board without prior notice to or approval by shareholders, the Fund's current policy is to declare income dividends annually in December for shareholders of record on the first business day preceding the 15th of that month, payable on or about the last business day of that month. The amount of income dividend payments by the Fund is dependent upon the amount of net income received by the Fund from its portfolio holdings, is not guaranteed and is subject to the discretion of the Board. Fund shares are quoted ex-dividend on the first business day following the record date (generally the 15th day of the month or prior business day depending on the record date). THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES. In order to be entitled to a dividend, you must have acquired Fund shares prior to the close of business on the record date. If you are considering purchasing Fund shares shortly before the record date of a distribution, you should be aware that because the value of the Fund's shares is based directly on the amount of its net assets, rather than on the principle of supply and demand, any distribution of income or capital gain will result in a decrease in the value of the Fund's shares equal to the amount of the distribution. While a dividend or capital gain distribution received shortly after purchasing shares represents, in effect, a return of a portion of your investment, it may be taxable as dividend income or capital gain. DISTRIBUTION OPTIONS You may choose to receive your distributions from the Fund in any of these ways: 1. Purchase additional shares of the Fund - You may purchase additional shares of the Fund (without a sales charge or imposition of a contingent deferred sales charge) by reinvesting capital gain distributions, or both dividend and capital gain distributions. This is a convenient way to accumulate additional shares and maintain or increase your earnings base. 2. Purchase shares of other Franklin Templeton Funds - You may direct your distributions to purchase the same class of shares of another Franklin Templeton Fund (without a sales charge or imposition of a contingent deferred sales charge). Many shareholders find this a convenient way to diversify their investments. 3. Receive distributions in cash - You may choose to receive dividends, or both dividend and capital gain distributions in cash. You may have the money sent directly to you, to another person, or to a checking account. If you choose to send the money to a checking account, please see "Electronic Fund Transfers" under "What Programs and Privileges Are Available to Me as a Shareholder?" TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT REPRESENTATIVE WHICH OPTION YOU PREFER. IF NO OPTION IS SELECTED, DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS WILL BE AUTOMATICALLY REINVESTED IN THE FUND. You may change the distribution option selected at any time by notifying the Fund by mail or by telephone. Please allow at least seven days prior to the record date for the Fund to process the new option. HOW TAXATION AFFECTS YOU AND THE FUND The following discussion reflects some of the tax considerations that affect mutual funds and their shareholders. For additional information on tax matters relating to the Fund and its shareholders, see "Additional Information Regarding Taxation" in the SAI. The Fund intends to qualify and elect to be treated as a regulated investment company under Subchapter M of the Code. By distributing all of its income and meeting certain other requirements relating to the sources of its income and diversification of its assets, the Fund will not be liable for federal income or excise taxes. Foreign securities that meet the Code's definition of a passive foreign investment company ("PFIC") may subject the Fund to an income tax and interest charge with respect to those investments. To the extent possible, the Fund will avoid that treatment by not investing in PFIC securities or by adopting other tax strategies for any PFIC securities it does buy. For federal income tax purposes, any income dividends that your receive from the Fund, as well as any distributions derived from the excess of net short-term capital gain over net long-term capital loss, are treated as ordinary income whether you have elected to receive them in cash or in additional shares. Distributions derived from the excess of net long-term capital gain over net short-term capital loss are treated as long-term capital gain regardless of the length of time you have owned shares of the Fund and whether the distributions are received in cash or additional shares. Sales and exchanges of Fund shares are taxable events on which you may realize a gain or loss. Any loss you incur on the sale or exchange of Fund shares, held for six months or less, will be treated as a long-term capital loss to the extent of capital gain dividends you received with respect to those shares. The Fund will inform you of the source of your dividends and distributions at the time they are paid and will promptly after the close of each calendar year advise you of the tax status for federal income tax purposes of those dividends and distributions. If you are not a U.S. person for purposes of federal income taxation, you should consult with your financial or tax advisor regarding the applicability of U.S. withholding or other taxes on distributions you receive from the Fund and the application of foreign tax laws to those distributions. You should consult your tax advisor with respect to the applicability of state and local intangible property or income taxes to your shares in the Fund and distributions and sale proceeds you receive from the Fund. HOW DO I BUY SHARES? You may buy shares to open a Fund account with as little as $100 and make additional investments at any time with as little as $25. These minimums may be waived when shares are purchased by retirement plans. To open your account, contact your investment representative or complete and sign the enclosed Shareholder Application and return it to the Fund with your check. PURCHASE PRICE OF FUND SHARES You may buy shares at the public offering price, unless you qualify to purchase shares at a discount or without a sales charge as discussed below. The offering price will be calculated to two decimal places using standard rounding criteria. QUANTITY DISCOUNTS IN SALES CHARGES The sales charge you pay when you buy shares may be reduced based upon the size of your purchase, as shown in the table below. TOTAL SALES CHARGE AS A PERCENTAGE OF AMOUNT ALLOWED TO DEALER AS A SIZE OF TRANSACTION NET AMOUNT PERCENTAGE OF AT OFFERING PRICE OFFERING PRICE INVESTED OFFERING PRICE* Under $100,000 4.50% 4.71% 4.00% $100,000 but less than 3.75% 3.90% 3.25% $250,000 $250,000 but less than 2.75% 2.83% 2.50% $500,000 $500,000 but less than 2.25% 2.30% 2.00% $1,000,000 $1,000,000 or more None** None None*** *Financial institutions or their affiliated brokers may receive an agency transaction fee in the percentages indicated. Distributors may at times reallow the entire sales charge to the securities dealer. A securities dealer who receives 90% or more of the sales commission may be deemed an underwriter under the Securities Act of 1933, as amended. **A contingent deferred sales charge of 1% may be imposed on certain redemptions of all or a part of an investment of $1 million or more. See "How Do I Sell Shares? - Contingent Deferred Sales Charge." ***Please see "General - Other Payments to Securities Dealers" below for a discussion of payments Distributors may make to securities dealers out of its own resources. Rights of Accumulation. To determine if you may pay a reduced sales charge, you may add the cost or current value, whichever is higher, of your Class I and Class II shares in other Franklin Templeton Funds, as well as those of your spouse, children under the age of 21 and grandchildren under the age of 21, to the amount of your current purchase. To receive the reduction, you or your investment representative must notify Distributors that your investment qualifies for a discount. Letter of Intent. You may purchase shares at a reduced sales charge by completing the Letter of Intent section of the Shareholder Application. A Letter of Intent is a commitment by you to invest a specified dollar amount during a 13 month period. The amount you agree to invest determines the sales charge you pay. You or your investment representative must inform us that the Letter is in effect each time you purchase shares. BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU ACKNOWLEDGE AND AGREE TO THE FOLLOWING: You authorize Distributors to reserve five percent (5%) of the amount of the total intended purchase in Fund shares registered in your name. You grant Distributors a security interest in these shares and appoint Distributors as attorney-in-fact with full power of substitution to redeem any or all of these reserved shares to pay any unpaid sales charge if you do not fulfill the terms of the Letter. We will include the reserved shares in the total shares you own as reflected on your periodic statements. You will receive dividend and capital gain distributions on the reserved shares; we will pay or reinvest these distributions as you direct. Although you may exchange your shares, you may not liquidate reserved shares until you complete the Letter or pay the higher sales charge. Our policy of reserving shares does not apply to certain benefit plans described under "Purchases at Net Asset Value." If you would like more information about the Letter of Intent privilege, please see "How Do I Buy and Sell Shares? - Letter of Intent" in the SAI or call our Shareholder Services Department. Group Purchases. If you are a member of a qualified group, you may purchase Fund shares at the reduced sales charge applicable to the group as a whole. The sales charge is based on the combined dollar value of the group members' existing investments, plus the amount of the current purchase. For example, if group members previously invested and still hold $80,000 of Fund shares and invest $25,000, the sales charge will be 3.75%. We define a qualified group as one which (i) has been in existence for more than six months, (ii) has a purpose other than acquiring Fund shares at a discount and (iii) satisfies uniform criteria which enable Distributors to realize economies of scale in its costs of distributing shares. In addition, a qualified group must have more than 10 members, and be available to arrange for meetings between our representatives and group members. It must also agree to include sales and other materials related to the Franklin Templeton Funds in publications and mailings to its members at reduced or no cost to Distributors, and arrange for payroll deduction or other bulk transmission of investments to the Fund. If you select a payroll deduction plan, your investments will continue automatically until you notify the Fund and your employer to discontinue further investments. Due to the varying procedures used by employers to handle payroll deductions, there may be a delay between the time of the payroll deduction and the time the money reaches the Fund. We invest your purchase at the applicable offering price per share determined on the day that the Fund receives both the check and the payroll deduction data in required form. PURCHASES AT NET ASSET VALUE You may invest money from the following sources in shares of the Fund without paying front-end or contingent deferred sales charges: (i) a distribution that you have received from a Franklin Templeton Fund or a real estate investment trust ("REIT") sponsored or advised by Franklin Properties, Inc., if the distribution is returned within 365 days of its payment date. You may reinvest Class II distributions in either Class I or Class II shares, but Class I distributions may only be invested in Class I shares under this privilege. For more information, see "Distribution Options" under "What Distributions Might I Receive from the Fund?" or call Shareholder Services at 1-800/632-2301; (ii) a redemption from a mutual fund with investment objectives similar to those of the Fund, if (a) your investment in that fund was subject to either a front-end or contingent deferred sales charge at the time of purchase, (b) the fund is not part of the Franklin Templeton Funds, and (c) your redemption occurred within the past 60 days; (iii) a distribution from an existing retirement plan already invested in the Franklin Templeton Funds (including the Franklin Templeton Profit Sharing 401(k) plan), up to the total amount of the distribution. The distribution must be returned to the Fund within 365 days of the distribution date; or (iv) a redemption from Templeton Institutional Funds, Inc., if you then reinvest the redemption proceeds under an employee benefit plan qualified under Section 401 of the Code, in shares of the Fund. You may also reinvest the proceeds from a redemption of any of the Franklin Templeton Funds at net asset value. To do so, you must (a) have paid a sales charge on the purchase or sale of the original shares, (b) reinvest the redemption money in the same class of shares, and (c) request the reinvestment of the money within 365 days of the redemption date. You may reinvest up to the total amount of the redemption proceeds under this privilege. IF A DIFFERENT CLASS OF SHARES IS PURCHASED, THE FULL FRONT-END SALES CHARGE MUST BE PAID AT THE TIME OF PURCHASE OF THE NEW SHARES. While you will receive credit for any contingent deferred sales charge paid on the shares redeemed, a new contingency period will begin. Shares that were no longer subject to a contingent deferred sales charge will be reinvested at net asset value and will not be subject to a new contingent deferred sales charge. Shares exchanged into other Franklin Templeton Funds are not considered "redeemed" for this privilege (see "What If My Investment Outlook Changes? - Exchange Privilege"). If you immediately reinvested your redemption proceeds in a Franklin Bank Certificate of Deposit ("CD") but you would like to reinvest them back into the Franklin Templeton Funds as described above, you will have 365 days from the date the CD (including any rollover) matures to do so. If your securities dealer or another financial institution reinvests your money in the Fund at net asset value for you, that person or institution may charge you a fee for this service. A redemption is a taxable transaction, but reinvestment without a sales charge may affect the amount of gain or loss you recognize and the tax basis of the shares reinvested. If you have a loss on the redemption, the loss may be disallowed if you reinvest in the same fund within a 30-day period. If you would like more information regarding the possible tax consequences of such a reinvestment, please see the tax section of this Prospectus and the SAI. Certain categories of investors also qualify to purchase shares of the Fund at net asset value regardless of the source of the investment proceeds. If you or your account is included in one of the categories below, none of the shares of the Fund you purchase will be subject to front-end or contingent deferred sales charges: (i) companies exchanging shares or selling assets pursuant to a merger, acquisition or exchange offer; (ii) accounts managed by the Franklin Templeton Group; (iii) certain unit investment trusts and unit holders of these trusts reinvesting distributions from the trusts in the Fund; (iv) registered securities dealers and their affiliates, for their investment accounts only; (v) current employees of securities dealers and their affiliates and their family members, in accordance with the internal policies and procedures of the employing securities dealer and affiliate; (vi) broker-dealers who have entered into a supplemental agreement with Distributors, or registered investment advisors affiliated with such broker-dealers, on behalf of their clients who are participating in a comprehensive fee program (sometimes known as a wrap fee program); (vii) any state, county, or city, or any instrumentality, department, authority or agency thereof which has determined that the Fund is a legally permissible investment and which is prohibited by applicable investment laws from paying a sales charge or commission in connection with the purchase of shares of any registered management investment company ("an eligible governmental authority"). IF YOU ARE SUCH AN INVESTOR, PLEASE CONSULT YOUR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS. Municipal investors considering investment of proceeds of bond offerings into the Fund should consult with expert counsel to determine the effect, if any, of various payments made by the Fund or the Manager on arbitrage rebate calculations. If you are a securities dealer who has executed a dealer agreement with Distributors and, through your services, an eligible governmental authority invests in the Fund at net asset value, Distributors or one of its affiliates may make a payment, out of its own resources, to you in an amount not to exceed 0.25% of the amount invested. Please contact the Franklin Templeton Institutional Services Department for additional information; (viii) officers, trustees, directors and full-time employees of the Franklin Templeton Funds, or of the Franklin Templeton Group, and their family members. Although you may pay sales charges on investments in accounts opened after your association with us has ended, you may continue to invest in accounts opened while you were with us without paying sales charges; (ix) trust companies and bank trust departments that exercise exclusive discretionary investment authority over funds held in a fiduciary, agency, advisory, custodial or similar capacity and agree to invest at least $1 million in Franklin Templeton Funds over a 13 month period. We will accept orders for such accounts by mail accompanied by a check or by telephone or other means of electronic data transfer directly from the bank or trust company, with payment by federal funds received by the close of business on the next business day following such order; (x) group annuity separate accounts offered to retirement plans; (xi) trustees or other fiduciaries purchasing securities for certain retirement plans of organizations with collective retirement plan assets of $1 million or more, without regard to where such assets are currently invested; or (xii) Designated Retirement Plans. Non-Designated Retirement Plans may also qualify to purchase shares of the Fund under this privilege if they meet the requirements for Designated Retirement Plans and those described under "Group Purchases," above. IF YOU QUALIFY TO BUY SHARES AT NET ASSET VALUE AS DISCUSSED IN THIS SECTION, PLEASE SPECIFY IN WRITING THE PRIVILEGE THAT APPLIES TO YOUR PURCHASE AND INCLUDE THAT WRITTEN STATEMENT WITH YOUR PURCHASE ORDER. WE WILL NOT BE RESPONSIBLE FOR PURCHASES THAT ARE NOT MADE AT NET ASSET VALUE IF THIS WRITTEN STATEMENT IS NOT INCLUDED WITH YOUR ORDER. If you would like more information, please see "How Do I Buy and Sell Shares?" in the SAI. HOW DO I BUY SHARES IN CONNECTION WITH TAX-DEFERRED RETIREMENT PLANS? Your individual or employer-sponsored tax-deferred retirement plans may invest in the Fund. You may use the Fund for an existing retirement plan, or, because Trust Company can serve as custodian or trustee for retirement plans, you may ask Trust Company to provide the plan documents and serve as custodian or trustee. A plan document must be adopted in order for a retirement plan to be in existence. Brochures for Trust Company plans contain important information regarding eligibility, contribution and deferral limits and distribution requirements. Please note that you must use an application other than the one contained in this Prospectus to establish a retirement plan account with Trust Company. To obtain a retirement plan brochure or application, please call 1-800/DIAL BEN (1-800/342-5236). Please see "How Do I Sell Shares?" for information regarding redemptions from retirement plan accounts. You must complete specific forms in order to receive distributions from Trust Company retirement plans. Individuals and plan sponsors should consult with legal, tax or benefits and pension plan consultants before choosing a retirement plan. In addition, if you are a retirement plan investor, you should consider consulting your investment representatives or advisors about investment decisions within your plans. GENERAL The Fund continuously offers its shares through securities dealers who have an agreement with Distributors. The Fund and Distributors may refuse any order for the purchase of shares. Securities laws of states in which the Fund offers its shares may differ from federal law. Banks and financial institutions that sell shares of the Fund may be required to register as securities dealers pursuant to state law. Other Payments to Securities Dealers. Distributors will pay the following commissions, out of its own resources, to securities dealers who initiate and are responsible for purchases of $1 million or more: 1% on sales of $1 million but less than $2 million, plus 0.80% on sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million but less than $50 million, plus 0.25% on sales of $50 million but less than $100 million, plus 0.15% on sales of $100 million or more. These breakpoints are reset every 12 months for purposes of additional purchases. Distributors or one of its affiliates may also pay up to 1% of the purchase price to securities dealers who initiate and are responsible for purchases made at net asset value by any of the entities described in paragraphs (ix), (xi) or (xii) under "Purchases at Net Asset Value" above. These payments may not be made to securities dealers or others in connection with the sale of Fund shares if the payments might be used to offset administration or recordkeeping costs for retirement plans or circumstances suggest that plan sponsors or administrators might use or otherwise allow the use of Rule 12b-1 fees to offset such costs. Please see "How Do I Buy and Sell Shares?" in the SAI for the breakpoints applicable to these purchases. Either Distributors or one of its affiliates, out of its own resources, may also provide additional compensation to securities dealers in connection with the sale of shares of the Franklin Templeton Funds. In some cases, this compensation may be available only to securities dealers whose representatives have sold or are expected to sell significant amounts of shares of the Franklin Templeton Funds. Compensation may include financial assistance and payments made in connection with conferences, sales or training programs for employees of the securities dealer, seminars for the public, advertising, sales campaigns and/or shareholder services, programs regarding one or more of the Franklin Templeton Funds and other programs or events sponsored by securities dealers, and payment for travel expenses of invited registered representatives and their families, including lodging, in connection with business meetings or seminars located within or outside the U.S. Securities dealers may not use sales of the Fund's shares to qualify for this compensation if prohibited by the laws of any state or self-regulatory agency, such as the National Association of Securities Dealers, Inc. None of this compensation is paid for by the Fund or its shareholders. For additional information about shares of the Fund, please see "How Do I Buy and Sell Shares?" in the SAI. The SAI also includes a listing of the officers and trustees of the Fund who are affiliated with Distributors. See "Officers and Trustees." WHAT PROGRAMS AND PRIVILEGES ARE AVAILABLE TO ME AS A SHAREHOLDER? CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE AVAILABLE DIRECTLY FROM THE FUND IF YOUR SHARES ARE HELD, OF RECORD, BY A FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT OR NETWORKED ACCOUNT THROUGH THE NATIONAL SECURITIES CLEARING CORPORATION ("NSCC") (SEE "REGISTERING YOUR ACCOUNT" IN THIS PROSPECTUS). SHARE CERTIFICATES Shares from an initial investment, as well as subsequent investments, including the reinvestment of dividends and capital gain distributions, are generally credited to an account in the name of an investor on the books of the Fund, without the issuance of a share certificate. Maintaining shares in uncertificated form (also known as "plan balance") minimizes the risk of loss or theft of a share certificate. A lost, stolen or destroyed certificate cannot be replaced without obtaining a sufficient indemnity bond. The cost of such a bond, which is generally borne by you, can be 2% or more of the value of the lost, stolen or destroyed certificate. A certificate will be issued if requested by you or your securities dealer. CONFIRMATIONS A confirmation statement will be sent to you annually to reflect the dividends reinvested during the period and after each other transaction which affects your account. This statement will also show the total number of shares you own, including the number of shares in "plan balance" for your account. AUTOMATIC INVESTMENT PLAN The Automatic Investment Plan offers a convenient way to invest in the Fund. Under the plan, you can arrange to have money transferred automatically from your checking account to the Fund each month to buy additional shares. If you are interested in this program, please refer to the Automatic Investment Plan Application at the back of this Prospectus for the requirements of the program or contact your investment representative. Of course, the market value of the Fund's shares may fluctuate and a systematic investment plan such as this will not assure a profit or protect against a loss. You may terminate the program at any time by notifying Investor Services by mail or by phone. SYSTEMATIC WITHDRAWAL PLAN The Systematic Withdrawal Plan allows you to receive regular payments from your account on a monthly, quarterly, semiannual or annual basis. To establish a Systematic Withdrawal Plan, the value of your account must be at least $5,000 and the minimum payment amount for each withdrawal must be at least $50. Please keep in mind that $50 is merely the minimum amount and is not a recommended amount. For retirement plans subject to mandatory distribution requirements, the $50 minimum will not apply. If you would like to establish a Systematic Withdrawal Plan, please complete the Systematic Withdrawal Plan section of the Shareholder Application included with this Prospectus and indicate how you would like to receive your payments. You may choose to receive your payments in any of the following ways: 1. Purchase shares of other Franklin Templeton Funds - You may direct your payments to purchase the same class of shares of another Franklin Templeton Fund. 2. Receive payments in cash - You may choose to receive your payments in cash. You may have the money sent directly to you, to another person, or to a checking account. If you choose to have the money sent to a checking account, please see "Electronic Fund Transfers" below. There are no service charges for establishing or maintaining a Systematic Withdrawal Plan. Once your plan is established, any distributions paid by the Fund will be automatically reinvested in your account. Payments under the plan will be made from the redemption of an equivalent amount of shares in your account, generally on the first business day of the month in which a payment is scheduled. You will generally receive your payments within three to five days after the shares are redeemed. Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the shares in your account if payments exceed distributions received from the Fund. This is especially likely to occur if there is a market decline. If a withdrawal amount exceeds the value of your account, your account will be closed and the remaining balance in your account will be sent to you. Redemptions under a Systematic Withdrawal Plan are considered a sale for federal income tax purposes. Because the amount withdrawn under the plan may be more than your actual yield or income, part of the payment may be a return of your investment. While a Systematic Withdrawal Plan is in effect, shares must be held either in plan balance or, where share certificates are outstanding, deposited with the Fund. You should ordinarily not make additional investments in the Fund of less than $5,000 or three times the amount of annual withdrawals under the plan because of the sales charge on additional purchases. Shares redeemed under the plan may also be subject to a contingent deferred sales charge. Please see "Contingent Deferred Sales Charge" under "How Do I Sell Shares?" You may terminate a Systematic Withdrawal Plan, change the amount and schedule of withdrawal payments, or suspend one payment by notifying Investor Services in writing at least seven business days prior to the end of the month preceding a scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by notifying you in writing and will automatically terminate a Systematic Withdrawal Plan if all shares in your account are withdrawn or if the Fund receives notification of the shareholder's death or incapacity. ELECTRONIC FUND TRANSFERS You may choose to have distributions from the Fund or payments under a Systematic Withdrawal Plan sent directly to a checking account. If the checking account is maintained at a bank that is a member of the Automated Clearing House, the payments may be made automatically by electronic funds transfer. If you choose this option, please allow at least fifteen days for initial processing. Any payments made during that time will be sent to the address of record on your account. INSTITUTIONAL ACCOUNTS There may be additional methods of buying, selling or exchanging shares of the Fund available to institutional accounts. For further information, contact the Franklin Templeton Institutional Services Department at 1-800/321-8563. WHAT IF MY INVESTMENT OUTLOOK CHANGES? - EXCHANGE PRIVILEGE The Franklin Templeton Funds consist of a number of mutual funds with various investment objectives and policies. The shares of most of these funds are offered to the public with a sales charge. If your investment objective or outlook for the securities markets changes, Fund shares may be exchanged for the same class of shares of another Franklin Templeton Fund eligible for sale in your state of residence and in conformity with that fund's stated eligibility requirements and investment minimums. No exchanges between different classes of shares will be allowed. You may choose to sell your shares of the Fund and buy Class II shares of another Franklin Templeton Fund but such purchase will be subject to that fund's Class II front-end and contingent deferred sales charges. Although there are no exchanges between different classes of shares, Class II shareholders of a Franklin Templeton Fund may elect to direct their dividends and capital gain distributions to the Fund at net asset value. A contingent deferred sales charge will not be imposed on exchanges. If, however, the exchanged shares were subject to a contingent deferred sales charge in the original fund purchased and shares are subsequently redeemed within the contingency period, a contingent deferred sales charge will be imposed. Before making an exchange, you should review the prospectus of the fund you wish to exchange from and the fund you wish to exchange into for all specific requirements or limitations on exercising the exchange privilege, for example, limitations on a fund's sale of its shares, minimum holding periods for exchanges at net asset value, or applicable sales charges. You may exchange shares in any of the following ways: BY MAIL Send written instructions signed by all account owners and accompanied by any outstanding share certificates properly endorsed. The transaction will be effective upon receipt of the written instructions together with any outstanding share certificates. BY TELEPHONE You or your investment representative of record, if any, may exchange shares of the Fund by calling Investor Services at 1-800/632-2301 or the automated TeleFACTS(R) system (day or night) at 1-800/247-1753. IF YOU DO NOT WISH THIS PRIVILEGE EXTENDED TO A PARTICULAR ACCOUNT, YOU SHOULD NOTIFY THE FUND OR INVESTOR SERVICES. The telephone exchange privilege allows you to effect exchanges from the Fund into an identically registered account of the same class of shares in one of the other available Franklin Templeton Funds. The telephone exchange privilege is available only for uncertificated shares or those which have previously been deposited in your account. The Fund and Investor Services will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. Please see "Telephone Transactions - Verification Procedures." During periods of drastic economic or market changes, it is possible that the telephone exchange privilege may be difficult to implement and the TeleFACTS option may not be available. In this event, you should follow the other exchange procedures discussed in this section, including the procedures for processing exchanges through securities dealers. THROUGH SECURITIES DEALERS As is the case with all purchases and redemptions of the Fund's shares, Investor Services will accept exchange orders from securities dealers who execute a dealer or similar agreement with Distributors. See also "By Telephone" above. Such a dealer-ordered exchange will be effective only for uncertificated shares on deposit in your account or for which certificates have previously been deposited. A securities dealer may charge a fee for handling an exchange. ADDITIONAL INFORMATION REGARDING EXCHANGES Exchanges are made on the basis of the net asset value of the funds involved, except as set forth below. Exchanges of shares of the Fund which were purchased without a sales charge will be charged a sales charge in accordance with the terms of the prospectus of the fund being purchased, unless the original investment in the Franklin Templeton Funds was made pursuant to the privilege permitting purchases at net asset value, as discussed under "How Do I Buy Shares?" Exchanges of shares of the Fund which were purchased with a lower sales charge into a fund which has a higher sales charge will be charged the difference, unless the shares were held in the Fund for at least six months prior to executing the exchange. The contingency period during which a contingent deferred sales charge may be assessed will be tolled (or stopped) for the period shares are exchanged into and held in a Franklin or Templeton money market fund. If your account has shares subject to a contingent deferred sales charge, shares will be exchanged into the new account on a "first-in, first-out" basis. See "How Do I Sell Shares? - Contingent Deferred Sales Charge" for a discussion of investments subject to a contingent deferred sales charge. If you request the exchange of the total value of your account, declared but unpaid income dividends and capital gain distributions will be transferred to the fund being exchanged into and will be invested at net asset value. Because the exchange is considered a redemption and purchase of shares, you may realize a gain or loss for federal income tax purposes. Backup withholding and information reporting may also apply. Information regarding the possible tax consequences of such an exchange is included in the tax section in this Prospectus and under "Additional Information Regarding Taxation" in the SAI. If a substantial portion of the Fund's shareholders should, within a short period, elect to redeem their shares of the Fund pursuant to the exchange privilege, the Fund might have to liquidate portfolio securities it might otherwise hold and incur the additional costs related to such transactions. On the other hand, increased use of the exchange privilege may result in periodic large inflows of money. If this should occur, it is the general policy of the Fund to initially invest this money in short-term, interest-bearing money market instruments, unless it is felt that attractive investment opportunities consistent with the Fund's investment objective exist immediately. Subsequently, this money will be withdrawn from such short-term money market instruments and invested in portfolio securities in as orderly a manner as is possible when attractive investment opportunities arise. The exchange privilege may be modified or discontinued by the Fund at any time upon 60 days' written notice to shareholders. RETIREMENT PLAN ACCOUNTS Franklin Templeton IRA and 403(b) retirement plan accounts may exchange shares directly. Certain restrictions may apply, however, to other types of retirement plans. See "Restricted Accounts" under "Telephone Transactions." MARKET TIMERS Market Timers will be charged a $5.00 administrative service fee for each exchange. All other exchanges are without charge. RESTRICTIONS ON EXCHANGES In accordance with the terms of their respective prospectuses, certain funds do not accept or may place differing limitations than those below on exchanges by Market Timers. The Fund reserves the right to temporarily or permanently terminate the exchange privilege or reject any specific purchase order for any Market Timer, group or person whose transactions seem to follow a timing pattern who: (i) makes an exchange request out of the Fund within two weeks of an earlier exchange request out of the Fund, (ii) makes more than two exchanges out of the Fund per calendar quarter, or (iii) exchanges shares equal in value to at least $5 million, or more than 1% of the Fund's net assets. Accounts under common ownership or control, including accounts administered by Market Timers, will be aggregated for purposes of the exchange limits. The Fund also reserves the right to refuse the purchase side of an exchange request by any Market Timer, person, or group if, in the Manager's judgment, the Fund would be unable to invest effectively in accordance with its investment objective and policies, or would otherwise potentially be adversely affected. The purchase side of an exchange may be restricted or refused if the Fund receives or anticipates simultaneous orders affecting significant portions of the Fund's assets. In particular, a pattern of exchanges that coincide with a "market timing" strategy may be disruptive to the Fund and therefore may be refused. The Fund and Distributors, as indicated in "How Do I Buy Shares?", reserve the right to refuse any order for the purchase of shares. HOW DO I SELL SHARES? You may sell (redeem) your shares at any time and receive from the Fund the value of the shares. You may sell shares in any of the following ways: BY MAIL Send a written request signed by all registered owners to Investor Services, at the address shown on the back cover of this Prospectus, and any share certificates which have been issued for the shares being redeemed, properly endorsed and in order for transfer. You will then receive from the Fund the value of the shares redeemed based upon the net asset value per share (less a contingent deferred sales charge, if applicable) next computed after the written request in proper form is received by Investor Services. Redemption requests received after the time at which the net asset value is calculated will receive the price calculated on the following business day. The net asset value per share is determined as of the scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each day that the Exchange is open for trading. You are requested to provide a telephone number where you may be reached during business hours, or in the evening if preferred. Investor Services' ability to contact you promptly when necessary will speed the processing of the redemption. TO BE CONSIDERED IN PROPER FORM, SIGNATURES MUST BE GUARANTEED IF THE REDEMPTION REQUEST INVOLVES ANY OF THE FOLLOWING: (1) the proceeds of the redemption are over $50,000; (2) the proceeds (in any amount) are to be paid to someone other than the registered owners of the account; (3) the proceeds (in any amount) are to be sent to any address other than the address of record, preauthorized bank account or brokerage firm account; (4) share certificates, if the redemption proceeds are in excess of $50,000; or (5) the Fund or Investor Services believes that a signature guarantee would protect against potential claims based on the transfer instructions, including, for example, when (a) the current address of one or more joint owners of an account cannot be confirmed, (b) multiple owners have a dispute or give inconsistent instructions to the Fund, (c) the Fund has been notified of an adverse claim, (d) the instructions received by the Fund are given by an agent, not the actual registered owner, (e) the Fund determines that joint owners who are married to each other are separated or may be the subject of divorce proceedings, or (f) the authority of a representative of a corporation, partnership, association, or other entity has not been established to the satisfaction of the Fund. Signatures must be guaranteed by an "eligible guarantor institution" as defined under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally, eligible guarantor institutions include (1) national or state banks, savings associations, savings and loan associations, trust companies, savings banks, industrial loan companies and credit unions; (2) national securities exchanges, registered securities associations and clearing agencies; (3) securities dealers that are members of a national securities exchange or a clearing agency or that have minimum net capital of $100,000; or (4) institutions that participate in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized signature guarantee medallion program. A notarized signature will not be sufficient for the request to be in proper form. When shares to be redeemed are represented by share certificates, the request for redemption must be accompanied by the share certificate and a share assignment form signed by the registered owners exactly as the account is registered, with the signatures guaranteed as referenced above. You are advised, for your protection, to send the share certificate and assignment form in separate envelopes if they are being mailed in for redemption. Liquidation requests of corporate, partnership, trust and custodianship accounts, and accounts under court jurisdiction require the following documentation to be in proper form: Corporation - (1) Signature guaranteed letter of instruction from the authorized officers of the corporation and (2) a corporate resolution. Partnership - (1) Signature guaranteed letter of instruction from a general partner and (2) pertinent pages from the partnership agreement identifying the general partners or a certification for a partnership agreement. Trust - (1) Signature guaranteed letter of instruction from the trustees and (2) a copy of the pertinent pages of the trust document listing the trustees or a Certification for Trust if the trustees are not listed on the account registration. Custodial (other than a retirement account) - Signature guaranteed letter of instruction from the custodian. Accounts under court jurisdiction - Check court documents and applicable state law since these accounts have varying requirements, depending upon the state of residence. Payment for redeemed shares will be sent to you within seven days after receipt of the request in proper form. BY TELEPHONE If you complete the Franklin Templeton Telephone Redemption Authorization Agreement (the "Agreement"), included with this Prospectus, you may redeem shares of the Fund by telephone, subject to the Restricted Account exception noted under "Telephone Transactions - Restricted Accounts". You may obtain additional information about telephone redemptions by writing to the Fund or Investor Services at the address shown on the cover or by calling 1-800/632-2301. The Fund and Investor Services will employ reasonable procedures to confirm that instructions given by telephone are genuine. You, however, bear the risk of loss in certain cases as described under "Telephone Transactions - Verification Procedures." If your account has a completed Agreement on file, redemptions of uncertificated shares or shares which have previously been deposited with the Fund or Investor Services may be made for up to $50,000 per day per Fund account. Telephone redemption requests received before the scheduled close of the Exchange (generally 1:00 p.m. Pacific time) on any business day will be processed that same day. The redemption check will be sent within seven days, made payable to all the registered owners on the account, and will be sent only to the address of record. Redemption requests by telephone will not be accepted within 30 days following an address change by telephone. In that case, you should follow the other redemption procedures set forth in this Prospectus. Institutional accounts (certain corporations, bank trust departments, qualified retirement plans and government entities that qualify to purchase shares at net asset value pursuant to the terms of this Prospectus) that wish to execute redemptions in excess of $50,000 must complete an Institutional Telephone Privileges Agreement which is available from the Franklin Templeton Institutional Services Department by calling 1-800/321-8563. THROUGH SECURITIES DEALERS The Fund will accept redemption orders from securities dealers who have entered into an agreement with Distributors. This is known as a repurchase. The only difference between a normal redemption and a repurchase is that if you redeem shares through a dealer, the redemption price will be the net asset value next calculated after your dealer receives the order which is promptly transmitted to the Fund, rather than on the day the Fund receives your written request in proper form. The documents described under "By Mail" above, as well as a signed letter of instruction, are required regardless of whether you redeem shares directly or submit such shares to a securities dealer for repurchase. Your letter should reference the Fund, the account number, the fact that the repurchase was ordered by a dealer and the dealer's name. Details of the dealer-ordered trade, such as trade date, confirmation number, and the amount of shares or dollars, will help speed processing of the redemption. The seven-day period within which the proceeds of your redemption will be sent will begin when the Fund receives all documents required to complete ("settle") the repurchase in proper form. The redemption proceeds will not earn dividends or interest during the time between receipt of the dealer's repurchase order and the date the redemption is processed upon receipt of all documents necessary to settle the repurchase. Thus, it is in your best interest to have the required documentation completed and forwarded to the Fund as soon as possible. Your dealer may charge a fee for handling the order. See "How Do I Buy and Sell Shares?" in the SAI for more information on the redemption of shares. CONTINGENT DEFERRED SALES CHARGE In order to recover commissions paid to securities dealers, all or a portion of investments of $1 million or more redeemed within the contingency period of 12 months of the calendar month of such investment will be assessed a contingent deferred sales charge, unless one of the exceptions described below applies. The charge is 1% of the lesser of the value of the shares redeemed (exclusive of reinvested dividends and capital gain distributions) or the net asset value at the time of purchase of such shares, and is retained by Distributors. The contingent deferred sales charge is waived in certain instances. In determining whether a contingent deferred sales charge applies, shares not subject to a contingent deferred sales charge are deemed to be redeemed first, in the following order: (i) a calculated number of shares representing amounts attributable to capital appreciation on shares held less than the contingency period; (ii) shares purchased with reinvested dividends and capital gain distributions; and (iii) other shares held longer than the contingency period. Shares subject to a contingent deferred sales charge will then be redeemed on a "first-in, first-out" basis. For tax purposes, a contingent deferred sales charge is treated as either a reduction in redemption proceeds or an adjustment to the cost basis of the shares redeemed. The contingent deferred sales charge is waived, as applicable, for: specified net asset value purchases discussed under "How Do I Buy Shares? - Purchases at Net Asset Value"; exchanges; any account fees; distributions from an individual retirement plan account due to death or disability or upon periodic distributions based on life expectancy; tax-free returns of excess contributions from employee benefit plans; distributions from employee benefit plans, including those due to termination or plan transfer; redemptions initiated by the Fund due to an account falling below the minimum specified account size; redemptions following the death of the shareholder or beneficial owner; and redemptions through a Systematic Withdrawal Plan set up for shares prior to February 1, 1995, and for Systematic Withdrawal Plans set up thereafter, redemptions of up to 1% monthly of an account's net asset value (3% quarterly, 6% semiannually or 12% annually). For example, if an account maintained an annual balance of $1,000,000, only $120,000 could be withdrawn through a once-yearly Systematic Withdrawal Plan free of charge. Any amount over that $120,000 would be assessed a 1% contingent deferred sales charge. All investments made during a calendar month, regardless of when during the month the investment occurred, will age one month on the last day of that month and each subsequent month. Unless otherwise specified, requests for redemptions of a SPECIFIED DOLLAR amount will result in additional shares being redeemed to cover any applicable contingent deferred sales charge, while requests for redemption of a SPECIFIC NUMBER of shares will result in the applicable contingent deferred sales charge being deducted from the total dollar amount redeemed. ADDITIONAL INFORMATION REGARDING REDEMPTIONS The Fund may delay the mailing of the redemption check, or a portion thereof, until the clearance of the check used to purchase Fund shares, which may take up to 15 days or more. Although the use of a certified or cashier's check will generally reduce this delay, shares purchased with these checks will also be held pending clearance. Shares purchased by federal funds wire are available for immediate redemption. The right of redemption may be suspended or the date of payment postponed if the Exchange is closed (other than customary closing) or upon the determination of the SEC that trading on the Exchange is restricted or an emergency exists, or if the SEC permits it, by order, for the protection of shareholders. Of course, the amount received may be more or less than the amount you invested, depending on fluctuations in the market value of securities owned by the Fund. RETIREMENT PLAN ACCOUNTS Retirement plan account liquidations require the completion of certain additional forms to ensure compliance with IRS regulations. To liquidate a retirement plan account, you or your securities dealer may call Franklin's Retirement Plans Department to obtain the necessary forms. Tax penalties will generally apply to any distribution from such plans to a participant under age 59 1/2, unless the distribution meets one of the exceptions set forth in the Code. OTHER INFORMATION Distribution or redemption checks sent to you do not earn interest or any other income during the time such checks remain uncashed and neither the Fund nor its affiliates will be liable for any loss caused by your failure to cash such checks. "Cash" payments to or from the Fund may be made by check, draft or wire. The Fund has no facility to receive, or pay out, cash in the form of currency. For any information required about a proposed liquidation, you may call Franklin's Shareholder Services Department. Securities dealers may call Franklin's Dealer Services Department. TELEPHONE TRANSACTIONS By calling Investor Services at 1-800/632-2301, you or your investment representative of record, if any, may be able to execute various telephone transactions, including to: (i) effect a change in address, (ii) change a dividend option (see "Restricted Accounts" below), (iii) transfer Fund shares in one account to another identically registered account in the Fund, (iv) request the issuance of certificates (to be sent to the address of record only) and (v) exchange Fund shares as described in this Prospectus by telephone. In addition, if you complete and file an Agreement as described under "How Do I Sell Shares? - By Telephone" you will be able to redeem shares of the Fund. VERIFICATION PROCEDURES The Fund and Investor Services will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. These will include: recording all telephone calls requesting account activity by telephone, requiring that the caller provide certain personal and/or account information requested by the telephone service agent at the time of the call for the purpose of establishing the caller's identification, and sending a confirmation statement on redemptions to the address of record each time account activity is initiated by telephone. So long as the Fund and Investor Services follow instructions communicated by telephone which were reasonably believed to be genuine at the time of their receipt, neither they nor their affiliates will be liable for any loss to you caused by an unauthorized transaction. The Fund and Investor Services may be liable for any losses due to unauthorized or fraudulent instructions in the event such reasonable procedures are not followed. You are, of course, under no obligation to apply for or accept telephone transaction privileges. In any instance where the Fund or Investor Services is not reasonably satisfied that instructions received by telephone are genuine, the requested transaction will not be executed, and neither the Fund nor Investor Services will be liable for any losses which may occur because of a delay in implementing a transaction. RESTRICTED ACCOUNTS Telephone redemptions and dividend option changes may not be accepted on Franklin Templeton retirement accounts. To assure compliance with all applicable regulations, special forms are required for any redemption, distribution or dividend payment changes. While the telephone exchange privilege is extended to Franklin Templeton IRA and 403(b) retirement accounts, certain restrictions may apply to other types of retirement plans. To obtain further information regarding distribution or transfer procedures, including any required forms, retirement account shareholders may call to speak to a Retirement Plan Specialist at 1-800/527-2020. GENERAL During periods of drastic economic or market changes, it is possible that the telephone transaction privilege will be difficult to execute because of heavy telephone volume. In these situations, you may wish to contact your investment representative for assistance or send written instructions to the Fund as detailed elsewhere in this Prospectus. Neither the Fund nor Investor Services will be liable for any losses resulting from your inability to execute a telephone transaction. HOW ARE FUND SHARES VALUED? The net asset value per share of the Fund is determined as of the scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each day that the Exchange is open for trading. Many newspapers carry daily quotations of the prior trading day's closing "bid" (net asset value) and "ask" (offering price). The net asset value per share of the Fund is determined by deducting the aggregate gross value of all liabilities from the aggregate gross value of all assets, and then dividing the difference by the number of shares outstanding. Assets in the Fund's portfolio are valued as described under "How Are Fund Shares Valued?" in the SAI. HOW DO I GET MORE INFORMATION ABOUT MY INVESTMENT? Any questions or communications regarding your account should be directed to Investor Services at the address shown on the back cover of this Prospectus. From a touch-tone phone, you may access TeleFACTS(R). By calling the TeleFACTS system (day or night) at 1-800/247-1753, you may obtain account information, current price and, if available, yield or other performance information specific to the Fund or any Franklin Templeton Fund. In addition, you may process an exchange, within the same class, into an identically registered Franklin account and request duplicate confirmation or year-end statements and deposit slips. The Fund code, which will be needed to access system information, is []. The system's automated operator will prompt you with easy to follow step-by-step instructions from the main menu. Other features may be added in the future. To assist you and securities dealers wishing to speak directly with a representative, the following list of Franklin departments, telephone numbers and hours of operation is provided. HOURS OF OPERATION (PACIFIC TIME) DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY) Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m. Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m. Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m. 8:30 a.m. to 5:00 p.m. (Saturday) Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m. TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m. In order to ensure that the highest quality of service is being provided, telephone calls placed to or by representatives in Franklin's service departments may be accessed, recorded and monitored. These calls can be determined by the presence of a regular beeping tone. HOW DOES THE FUND MEASURE PERFORMANCE? Advertisements, sales literature and communications to you may contain several measures of the Fund's performance, including current yield, various expressions of total return and current distribution rate. They may also occasionally cite statistics to reflect the Fund's volatility or risk. Average annual total return figures as prescribed by the SEC represent the average annual percentage change in value of $1,000 invested at the maximum public offering price for one-, five- and ten-year periods, or portion thereof, to the extent applicable, through the end of the most recent calendar quarter, assuming reinvestment of all distributions. The Fund may also furnish total return quotations for other periods or based on investments at various sales charge levels or at net asset value. For such purposes, total return equals the total of all income and capital gain paid to shareholders, assuming reinvestment of all distributions, plus (or minus) the change in the value of the original investment, expressed as a percentage of the purchase price. Current yield reflects the income per share earned by the Fund's portfolio investments. It is calculated by dividing the Fund's net investment income per share during a recent 30-day period by the maximum public offering price on the last day of that period and annualizing the result. Current yield for the Fund, which is calculated according to a formula prescribed by the SEC (see "General Information" in the SAI), is not indicative of the dividends or distributions which were or will be paid to the Fund's shareholders. Dividends or distributions paid to shareholders of the Fund are reflected in the current distribution rate, which may be quoted to you. The current distribution rate is computed by dividing the total amount of dividends per share paid by the Fund during the past 12 months by a current maximum offering price. Under certain circumstances, such as when there has been a change in the amount of dividend payout or a fundamental change in investment policies, it might be appropriate to annualize the dividends paid during the period such policies were in effect, rather than using the dividends during the past 12 months. The current distribution rate differs from the current yield computation because it may include distributions to shareholders from sources other than dividends and interest, such as short-term capital gain, and is calculated over a different period of time. In each case, performance figures are based upon past performance, reflect all recurring charges against Fund income and will assume the payment of the maximum sales charge on the purchase of shares. When there has been a change in the sales charge structure, the historical performance figures will be restated to reflect the new rate. The investment results of the Fund, like all other investment companies, will fluctuate over time; thus, performance figures should not be considered to represent what an investment may earn in the future or what the Fund's performance may be in any future period. GENERAL INFORMATION REPORTS TO SHAREHOLDERS The Fund's fiscal year ends April 30. Annual Reports containing audited financial statements of the Fund, including the auditors' report, and Semi-Annual Reports containing unaudited financial statements are automatically sent to shareholders. To reduce the volume of mail sent to each household, as well as to reduce Fund expenses, Investor Services will attempt to identify related shareholders within a household and send only one copy of the report. Additional copies may be obtained, without charge, upon request to the Fund at the telephone number or address set forth on the cover page of this Prospectus. Additional information on Fund performance is included in the Trust's Annual Report to Shareholders and under "General Information" in the SAI. ORGANIZATION AND VOTING RIGHTS The Agreement and Declaration of Trust permits the trustees to issue an unlimited number of full and fractional shares of beneficial interest of $.01 par value, which may be issued in any number of series and classes. Shares issued will be fully paid and non-assessable and will have no preemptive, conversion, or sinking rights. Shares of each series have equal and exclusive rights as to dividends and distributions as declared by such series and the net assets of such series upon liquidation or dissolution. Additional series or classes may be added in the future by the Board. Voting rights are noncumulative, so that in any election of trustees, the holders of more than 50% of the shares voting can elect all of the trustees, if they choose to do so, and in such event the holders of the remaining shares voting will not be able to elect any person or persons to the Board. The Trust does not intend to hold annual shareholder meetings. The Trust may, however, hold a special shareholders' meeting of a series for such purposes as changing fundamental investment restrictions, approving a new management agreement or any other matters which are required to be acted on by shareholders under the 1940 Act. A meeting may also be called by the trustees in their discretion or by shareholders holding at least ten percent of the outstanding shares of the Trust. Shareholders will receive assistance in communicating with other shareholders in connection with the election or removal of trustees such as that provided in Section 16(c) of the 1940 Act. CONVERSION TO MASTER/FEEDER STRUCTURE The Board reserves the right to convert the Fund to a master/feeder structure at a future date. Currently, the Fund invests directly in a portfolio of securities. Certain funds administered by the Manager participate as feeder funds in master/feeder fund structures. Under a master/feeder structure, one or more feeder funds, such as the Fund, invests its assets in a master fund which, in turn, invests its assets directly in the securities. Various state governments have adopted the North American Securities Administrators Association Guidelines for registration of master/feeder funds. If required by those guidelines, as then in effect, the Fund will seek shareholder approval prior to converting the Fund to a master/feeder structure, subject to there not being adopted a superseding contrary provision or ruling under federal law. If it is determined by the requisite regulatory authorities that such approval is not required, you will be deemed to have consented to such conversion by your purchase of Fund shares and no further shareholder approval will be sought or needed. You will, however, be informed in writing in advance of the conversion. The determination to convert the Fund to a master/feeder fund structure will not result in an increase in the fees or expenses paid by you or the Fund. The investment objective and other fundamental policies of the Fund, which can be changed only with shareholder approval, are structured so as to permit the Fund to invest directly in securities or indirectly in securities through a master/feeder fund structure. REDEMPTIONS BY THE FUND The Fund reserves the right to redeem your shares, at net asset value, if your account has a value of less than $50, but only where the value of your account has been reduced by the prior voluntary redemption of shares and has been inactive (except for the reinvestment of distributions) for a period of at least six months, provided you are given advance notice. For more information, see "How Do I Buy and Sell Shares?" in the SAI. REGISTERING YOUR ACCOUNT An account registration should reflect your intentions as to ownership. Where there are two co-owners on the account, the account will be registered as "Owner 1" and "Owner 2"; the "or" designation is not used except for money market fund accounts. If co-owners wish to have the ability to redeem or convert on the signature of only one owner, a limited power of attorney may be used. Accounts should not be registered in the name of a minor, either as sole or co-owner of the account. Transfer or redemption for such an account may require court action to obtain release of the funds until the minor reaches the legal age of majority. The account should be registered in the name of one "Adult" as custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to Minors Act. A trust designation such as "trustee" or "in trust for" should only be used if the account is being established pursuant to a legal, valid trust document. Use of such a designation in the absence of a legal trust document may cause difficulties and require court action for transfer or redemption of the funds. Shares, whether in certificate form or not, registered as joint tenants or "Jt Ten" shall mean "as joint tenants with rights of survivorship" and not "as tenants in common." Except as indicated, you may transfer an account in the Fund carried in "street" or "nominee" name by your securities dealer to a comparably registered Fund account maintained by another securities dealer. Both the delivering and receiving securities dealers must have executed dealer agreements on file with Distributors. Unless a dealer agreement has been executed and is on file with Distributors, the Fund will not process the transfer and will so inform your delivering securities dealer. To effect the transfer, you should instruct the securities dealer to transfer the account to a receiving securities dealer and sign any documents required by the securities dealers to evidence consent to the transfer. Under current procedures, the account transfer may be processed by the delivering securities dealer and the Fund after the Fund receives authorization in proper form from your delivering securities dealer. Account transfers may be effected electronically through the services of the NSCC. The Fund may conclusively accept instructions from you or your nominee listed in publicly available nominee lists, regardless of whether the account was initially registered in the name of or by you, your nominee, or both. If a securities dealer or other representative is of record on your account, you will be deemed to have authorized the use of electronic instructions on the account, including, without limitation, those initiated through the services of the NSCC, to have adopted as instruction and signature any such electronic instructions received by the Fund and Investor Services, and to have authorized them to execute the instructions without further inquiry. At the present time, such services which are available include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems. Any questions regarding an intended registration should be answered by the securities dealer handling the investment or by calling Franklin's Fund Information Department. IMPORTANT NOTICE REGARDING TAXPAYER IRS CERTIFICATIONS Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to report to the IRS any taxable dividend, capital gain distribution, or other reportable payment (including share redemption proceeds) and withhold 31% of any such payments made to individuals and other non-exempt shareholders who have not provided a correct taxpayer identification number ("TIN") and made certain required certifications that appear in the Shareholder Application. You may also be subject to backup withholding if the IRS or a securities dealer notifies the Fund that the number furnished by you is incorrect or that you are subject to backup withholding for previous under-reporting of interest or dividend income. The Fund reserves the right to (1) refuse to open an account for any person failing to provide a TIN along with the required certifications and (2) close an account by redeeming its shares in full at the then-current net asset value upon receipt of notice from the IRS that the TIN certified as correct by you is in fact incorrect or upon the failure of a shareholder who has completed an "awaiting TIN" certification to provide the Fund with a certified TIN within 60 days after opening the account. USEFUL TERMS AND DEFINITIONS 1940 Act - Investment Company Act of 1940, as amended Advisers - Franklin Advisers, Inc., the Fund's investment manager Board - The Board of Trustees of the Trust Class I and Class II - "Classes" of shares represent proportionate interests in the same portfolio of investment securities but with different rights, privileges and attributes, as determined by the trustees. Certain funds in the Franklin Templeton Funds currently offer their shares in two classes, designated "Class I" and "Class II." Because the Fund's sales charge structure and plan of distribution are similar to those of Class I shares, shares of the Fund may be considered Class I shares for redemption, exchange and other purposes. Code - Internal Revenue Code of 1986, as amended Designated Retirement Plans - certain retirement plans, including profit-sharing, pension, 401(k) and simplified employee pension plans, that: (i) are sponsored by an employer with at least 200 employees; (ii) have aggregate plan assets of at least $1 million; or (iii) agree to invest at least $1 million in any of the Franklin Templeton Funds over a 13 month period. Distributors determines the qualifications for Designated Retirement Plans. Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal underwriter Exchange - New York Stock Exchange Franklin Funds - the mutual funds in the Franklin Group of Funds(R) except Franklin Valuemark Funds and the Franklin Government Securities Trust Franklin Templeton Funds - the Franklin Funds and the Templeton Funds Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding company, and its various subsidiaries Investor Services - Franklin/Templeton Investor Services, Inc. Letter - Letter of Intent Manager - Franklin Advisers, Inc., the Fund's investment manager Market Timer(s) - Market Timers generally include market timing or allocation services, accounts administered so as to buy, sell or exchange shares based on predetermined market indicators, or any person or group whose transactions seem to follow a timing pattern. Net asset value (NAV) - the value of a mutual fund is determined by deducting the fund's liabilities from the total assets of the portfolio. The net asset value per share is determined by dividing the net asset value of the fund by the number of shares outstanding. When you buy, sell or exchange shares, we will use the NAV per share next calculated after we receive your request in proper form. Non-Designated Retirement Plans - employee benefit plans not included as "Designated Retirement Plans" and not qualified under Section 401 of the Code Offering price - The public offering price is equal to the net asset value per share plus the 4.50% sales charge. Proper Form (Purchases) - generally, the Fund must receive a completed Shareholder Application accompanied by a negotiable check. Resources - Franklin Resources, Inc. SAI - Statement of Additional Information SEC - Securities and Exchange Commission Securities Dealer - financial institutions which, either directly or through affiliates, have an agreement with Distributors to handle customer orders and accounts with the Fund. This reference is for convenience only and does not indicate a legal conclusion of capacity. TeleFACTS(R) - Franklin Templeton's automated customer servicing system Templeton Funds - the U.S. registered mutual funds in the Templeton Group of Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series Fund Trust Company - Franklin Templeton Trust Company. Trust Company is an affiliate of Distributors and both are wholly-owned subsidiaries of Resources. U.S. - United States FRANKLIN BLUE CHIP FUND 777 Mariners Island Blvd. P.O. Box 7777 San Mateo, California 94403-7777 INVESTMENT MANAGER Franklin Advisers, Inc. 777 Mariners Island Blvd. P.O. Box 7777 San Mateo, California 94403-7777 PRINCIPAL UNDERWRITER Franklin/Templeton Distributors, Inc. 777 Mariners Island Blvd. P.O. Box 7777 San Mateo, California 94403-7777 SHAREHOLDER SERVICES AGENT Franklin/Templeton Investor Services, Inc. 777 Mariners Island Blvd. P.O. Box 7777 San Mateo, California 94403-7777 CUSTODIAN The Bank of New York Mutual Funds Division 90 Washington Street New York, New York 10286 INDEPENDENT AUDITORS Coopers & Lybrand L.L.P. 333 Market Street San Francisco, California 94105 LEGAL COUNSEL Stradley, Ronon, Stevens & Young, LLP 2600 One Commerce Square Philadelphia, Pennsylvania 19103-7098 For an enlarged version of this prospectus please call 1-800/DIAL BEN. Your Representative Is: []P 05/96 FRANKLIN BLUE CHIP FUND FRANKLIN STRATEGIC SERIES STATEMENT OF ADDITIONAL INFORMATION MAY 28, 1996 777 MARINERS ISLAND BLVD., P.O. BOX 7777 SAN MATEO, CA 94403-7777 1-800/DIAL BEN CONTENTS PAGE How Does the Fund Invest Its Assets? What Are the Fund's Potential Risks? Investment Restrictions Officers and Trustees Investment Advisory and Other Services How Does the Fund Purchase Securities For Its Portfolio? How Do I Buy and Sell Shares? How Are Fund Shares Valued? Additional Information Regarding Taxation The Fund's Underwriter General Information Useful Terms and Definitions Appendix The Franklin Blue Chip Fund (the "Fund") is a diversified series of Franklin Strategic Series (the "Trust"), an open-end management investment company. The Fund's investment objective is capital appreciation. In seeking to meet this objective, the Fund invests primarily in equity securities of blue chip companies. The Fund may also seek current income incidental to long-term capital appreciation, although this is not an objective of the Fund. A prospectus for the Fund, dated May 28, 1996, as may be amended from time to time, provides the basic information you should know before investing in the Fund and may be obtained without charge from the Fund or Distributors, at the address or telephone number shown above. THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE DETAIL THAN SET FORTH IN THE FUND'S PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE FUND'S PROSPECTUS. HOW DOES THE FUND INVEST ITS ASSETS? The following provides more detailed information about some of the securities the Fund may buy and its investment policies. You should read it together with the section in the Fund's prospectus entitled "How Does the Fund Invest Its Assets?" American Depositary Receipts. The Fund may buy sponsored or unsponsored American Depositary Receipts ("ADRs"). With a sponsored ADR, the issuing facility is established by the participation of the issuer and the depositary institution under a deposit agreement that sets out the rights and responsibilities of the issuer, the depositary and the ADR holder. Under the terms of most sponsored arrangements, depositaries agree to distribute notices of shareholder meetings and voting instructions. This ensures ADR holders will be able to exercise voting rights through the depositary with respect to the deposited securities. An unsponsored ADR has no sponsorship by the issuing facility and more than one depositary institution may be involved in its issuance. An unsponsored ADR typically clears through a depositary, such as the Depository Trust Company, so there should be no additional delays in selling the security or in obtaining dividends. Although not required, the depositary normally requests a letter of non-objection from the issuer and is not required to distribute notices of shareholder meetings or financial information to the ADR holder. Forward Currency Exchange Transactions. The Fund may enter into forward currency exchange transactions in order to (i) "lock-in" the U.S. dollar price of a security in its portfolio denominated in a foreign currency; (ii) sell an amount of a foreign currency approximating the value of some or all of its portfolio securities denominated in that foreign currency when Advisers believes the foreign currency may decline substantially against the U.S. dollar; or (iii) buy a foreign currency for a fixed dollar amount when Advisers believes the U.S. dollar may substantially decline against that foreign currency. The value of securities denominated in a foreign currency may change during the time between when a forward transaction is entered into and the time it settles. It is therefore generally not possible to match precisely the forward transaction amount and the value of the securities in the Fund's portfolio denominated in the currency involved. Using a forward currency transaction to protect the value of the Fund's portfolio securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange that the Fund can achieve at some future time. The precise projection of short-term currency market movements is not possible and short-term hedging provides a way to fix the dollar value of only a portion of the Fund's foreign securities. To limit the potential risks of buying currency under forward currency transactions, the Fund will keep cash, cash equivalents or readily marketable high-grade debt securities equal to the amount of the purchase in a segregated account with its custodian bank to be used to pay for the commitment. The Fund will cover any commitments under these transactions to sell currency by owning the underlying currency or an absolute right to acquire the underlying currency. The segregated account will be marked-to-market daily. Convertible Securities. A convertible security is usually issued either by an operating company or an investment bank. If it's issued by an operating company, it tends to be senior to common stock, but subordinate to other types of fixed-income securities issued by that company. When a convertible security issued by an operating company is "converted," the operating company often issues new stock to the holder of the convertible security. If the parity price of the convertible security is less than the call price, however, the operating company may pay out cash instead of common stock. If the convertible security is issued by an investment bank, the security is an obligation of that bank and is convertible through the bank. The holder of a convertible security has recourse only to the issuer. Therefore, the issuer may be important in determining the security's true value. The Fund uses the same criteria to rate a convertible debt security that it uses to rate a more conventional debt security and treats a convertible preferred stock as a preferred stock for the Fund's financial reporting, credit rating, and investment limitation purposes. A preferred stock is subordinated to all debt obligations in the event of an issuer's insolvency. An issuer's failure to make a dividend payment is generally not an event of default entitling the holder of preferred stock to take action. A preferred stock generally has no maturity date, so its market value is dependent on the issuer's business prospects for an indefinite period of time. Distributions from preferred stock are dividends, not interest payments, and are usually treated as dividends for corporate tax purposes. Options. The Fund may buy or write put and call options on securities listed on a national securities exchange for portfolio hedging purposes. All options written by the Fund will be covered. This means so long as the Fund is obligated as the writer of a call option, it will own the underlying security subject to the call or an absolute right to acquire the security without additional cash consideration (or for additional cash consideration if the amount is held in a segregated account with its custodian bank) upon conversion of other securities in its portfolio. A call option is also covered if the Fund holds a call on the same security and in the same principal amount as the call written where the exercise price of the call held is (a) equal to or less than the exercise price of the call written or (b) greater than the exercise price of the call written if the difference is held in cash or high-grade debt securities in a segregated account with the Fund's custodian bank. A put option written by the Fund is covered if the Fund maintains cash or high-grade debt securities with a value equal to the exercise price of the written put in a segregated account with its custodian bank. A put is also covered if the Fund holds a put on the same security and in the same principal amount as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written. The premium paid by the buyer of an option will reflect, among other things, the relationship of the exercise price to the market price and volatility of the underlying security, the remaining term of the option, supply and demand, and interest rates. The writer of an option may have no control over when the underlying securities must be sold, in the case of a call option, or purchased, in the case of a put option, since the writer may be assigned an exercise notice at any time prior to the termination of the obligation. Whether or not an option expires unexercised, the writer retains the amount of the premium. This amount may, in the case of a covered call option, be offset by a decline in the market value of the underlying security during the option period. If a call option is exercised, the writer experiences a profit or loss from the sale of the underlying security. If a put option is exercised, the writer must fulfill the obligation to buy the underlying security at the exercise price, which will usually exceed the market value of the underlying security at that time. If the writer of an option wants to terminate its obligation, the writer may effect a "closing purchase transaction." This is done by buying an option of the same series as the option previously written. The effect of the purchase is that the writer's position will be canceled by the clearing corporation. However, a writer may not effect a closing purchase transaction after being notified of the exercise of an option. Likewise, the holder of an option may liquidate its position by effecting a "closing sale transaction." This is done by selling an option of the same series as the option previously purchased. There is no guarantee that either a closing purchase or a closing sale transaction may be made at the time desired by the Fund. Effecting a closing transaction in the case of a written call option allows the Fund to write another call option on the underlying security with a different exercise price, expiration date or both. In the case of a written put option, a closing transaction allows the Fund to write another covered put option. Effecting a closing transaction also allows the cash or proceeds from the sale of any securities subject to the option to be used for other Fund investments. If the Fund wants to sell a particular security from its portfolio on which it has written a call option, it will effect a closing transaction prior to or at the same time as the sale of the security. The Fund will realize a profit from a closing transaction if the price of the transaction is less than the premium received from writing the option or is more than the premium paid to buy the option. Likewise, the Fund will realize a loss from a closing transaction if the price of the transaction is more than the premium received from writing the option or is less than the premium paid to buy the option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, any loss resulting from the repurchase of a call option is likely to be offset in whole or in part by appreciation of the underlying security owned by the Fund. The writing of covered put options involves certain risks. For example, if the market price of the underlying security rises or otherwise is above the exercise price, the put option will expire worthless and the Fund's gain will be limited to the premium received. If the market price of the underlying security declines or otherwise is below the exercise price, the Fund may elect to close the position or take delivery of the security at the exercise price and the Fund's return will be the premium received from the put option minus the amount by which the market price of the security is below the exercise price. The Fund may buy call options on securities it intends to buy in order to limit the risk of a substantial increase in the market price of the security before the purchase is effected. The Fund may also buy call options on securities held in its portfolio and on which it has written call options. Prior to its expiration, a call option may be sold in a closing sale transaction. Profit or loss from the sale will depend on whether the amount received is more or less than the premium paid for the call option plus any related transaction costs. The Fund may buy put options on securities to protect against a decline in the market value of the underlying security below the exercise price less the premium paid for the option. The ability to buy put options allows the Fund to protect the unrealized gain in an appreciated security in its portfolio without actually selling the security. In addition, the Fund continues to receive interest or dividend income on the security. The Fund may sell a put option it has previously purchased prior to the sale of the security underlying the option. The sale of the option will result in a net gain or loss depending on whether the amount received on the sale is more or less than the premium and other transaction costs paid for the put option. Any gain or loss may be wholly or partially offset by a change in the value of the underlying security that the Fund owns or has the right to acquire. The Fund may write covered put and call options and buy put and call options that trade in the over-the-counter ("OTC") market to the same extent that it may engage in exchange traded options. Like exchange traded options, OTC options give the holder the right to buy, in the case of OTC call options, or sell, in the case of OTC put options, an underlying security from or to the writer at a stated exercise price. However, OTC options differ from exchange traded options in certain material respects. OTC options are arranged directly with dealers and not with a clearing corporation. Thus, there is a risk of non-performance by the dealer. Because there is no exchange, pricing is typically done based on information from market makers. OTC options are available for a greater variety of securities and in a wider range of expiration dates and exercise prices, however, than exchange traded options and the writer of an OTC option is paid the premium in advance by the dealer. Futures. The Fund may buy and sell futures contracts for securities and currencies. The Fund may also enter into closing purchase and sale transactions with respect to these futures contracts. The Fund will engage in futures transactions only for bona fide hedging or other appropriate risk management purposes. All futures contracts entered into by the Fund are traded on U.S. exchanges or boards of trade licensed and regulated by the Commodities Futures Trading Commission ("CFTC") or on foreign exchanges. When securities prices are falling, the Fund may offset a decline in the value of its current portfolio securities through the sale of futures contracts. When prices are rising, the Fund can attempt to secure better prices than might be available when it intends to buy securities through the purchase of futures contracts. Similarly, the Fund can sell futures contracts on a specified currency to protect against a decline in the value of that currency and its portfolio securities denominated in that currency. The Fund can buy futures contracts on a foreign currency to fix the price in U.S. dollars of a security denominated in that currency that the Fund has purchased or expects to buy. Although futures contracts by their terms generally call for the actual delivery or acquisition of underlying securities or currency, in most cases the contractual obligation is fulfilled before the date of the contract without having to make or take delivery. The contractual obligation is offset by buying (or selling, as the case may be) on a commodities exchange an identical futures contract calling for delivery in the same month. This transaction, which is effected through a member of an exchange, cancels the obligation to make or take delivery of the securities or currency underlying the contractual obligation. The Fund may incur brokerage fees when it buys or sells futures contracts. Positions taken in the futures markets are not normally held to maturity, but are liquidated through offsetting transactions that may result in a profit or a loss. While the Fund's futures contracts on securities and currencies will usually be liquidated in this manner, the Fund may instead make or take delivery of the underlying securities or currencies whenever it appears economically advantageous for it to do so. A clearing corporation associated with the exchange on which futures on securities or currencies are traded guarantees that, if still open, the sale or purchase will be performed on the settlement date. To the extent the Fund enters into a futures contract, it will deposit in a segregated account with its custodian cash or U.S. Treasury obligations equal to a specified percentage of the value of the futures contract (the "initial margin"), as required by the relevant contract market and futures commission merchant. The futures contract will be marked-to-market daily. Should the value of the futures contract decline relative to the Fund's position, the Fund will be required to pay the futures commission merchant an amount equal to the change in value. When-Issued or Delayed Delivery Transactions. If the Fund buys securities on a when-issued basis, it will do so for the purpose of acquiring securities consistent with its investment objective and polices and not for investment leverage. The Fund may sell securities purchased on a when-issued basis before the settlement date, however, if Advisers believes it is advisable to do so. When the Fund is the buyer in one of these transactions, it relies on the seller to complete the transaction. If the seller fails to do so, the Fund may miss an advantageous price or yield for the underlying security. When the Fund is the buyer, it will keep cash or high-grade marketable securities in a segregated account with its custodian bank until payment is made. The amount held in the account will equal the amount the Fund must pay for the securities at delivery. Standby Commitment Agreements. The Fund may enter into a standby commitment agreement to invest in the security underlying the commitment at a yield or price that Advisers believes is advantageous to the Fund. The Fund will not enter into a standby commitment if the remaining term of the commitment is more than 45 days. If the Fund enters into a standby commitment, it will keep cash or high-grade marketable securities in a segregated account with its custodian bank in an amount equal to the purchase price of the securities underlying the commitment. The purchase of a security subject to a standby commitment agreement and the related commitment fee will be recorded on the Fund's books on the date the security can reasonably be expected to be issued. The value of the security will then be reflected in the calculation of the Fund's net asset value. The cost basis of the security will be adjusted by the amount of the commitment fee. If the security is not issued, the commitment fee will be recorded as income on the expiration date of the standby commitment. Restricted Securities. The Board has authorized the Fund to invest in restricted securities, if consistent with the Fund's investment objective. If Advisers determines on a daily basis that there is a liquid institutional or other market for these securities, the Board has authorized them to be considered liquid securities and not subject to the Fund's policy on illiquid investments. When determining whether a restricted security is properly considered a liquid security, Advisers and the Board will consider: (i) the frequency of trades and quotes for the security; (ii) the number of dealers willing to buy or sell the security and the number of other potential buyers; (iii) dealer undertaking to make a market in the security; and (iv) the nature of the security and the marketplace trades, for example the time needed to sell the security, the method of soliciting offers, and the mechanics of transfer. WHAT ARE THE FUND'S POTENTIAL RISKS? Forward Currency Exchange Transactions. While the Fund may enter into forward currency transactions to reduce currency exchange rate risks, these transactions involve certain other risks. Forward currency exchange transactions may limit the potential gain to the Fund from a positive change in the relationship between the U.S. dollar and foreign currencies or between foreign currencies. Unanticipated changes in currency exchange rates may result in poorer overall performance for the Fund than if it had not entered into these transactions. Furthermore, there may be imperfect correlation between the Fund's portfolio securities denominated in a particular currency and forward currency transactions entered into by the Fund. This may cause the Fund to sustain losses that will prevent the Fund from achieving a complete hedge or expose the Fund to the risk of foreign exchange loss. Convertible Securities. The value of a convertible debt security may be influenced by both interest rate and market movements. Like a regular debt security, it tends to increase in market value when interest rates decline and decrease in value when interest rates rise. Like a common stock, it also tends to increase as the market value of the underlying stock rises and decrease as the market value of the underlying stock declines. Because its value is influenced by both these factors, a convertible security is not as sensitive to interest rates as a similar fixed-income security, nor is it as sensitive to changes in share price as its underlying stock. Options and Futures. The Fund's options and futures investments involve certain risks. These risks include, among others, the risk that the effectiveness of an options and futures strategy depends on the degree that price movements in the underlying securities or currency, in the case of the Fund's futures transactions, correlate with price movements in the relevant portion of the Fund's portfolio. The Fund bears the risk that the prices of its portfolio securities will not move in the same amount as the option or future it has purchased, or that there may be a negative correlation that would result in a loss on both the securities and the option or futures contract. There is also the risk of loss by the Fund of margin deposits in the event of bankruptcy of a broker with whom the Fund has an open position in a futures contract or option. Positions in exchange traded options and futures may be closed out only on an exchange that provides a secondary market. There can be no assurance that a liquid secondary market will exist for any particular option or futures contract at any specific time. Thus, it may not be possible to close an option or futures position. The inability to close options or futures positions may have an adverse impact on the Fund's ability to effectively hedge its securities. Furthermore, if the Fund is unable to close out a futures or options position and if prices move adversely, the Fund will have to continue to make daily cash payments to maintain its required margin. If the Fund does not have sufficient cash to do this, it may have to sell portfolio securities at a disadvantageous time. Of course, the Fund will enter into an option or futures position only if there appears to be a liquid secondary market for those options or futures. Similarly, there can be no assurance that a continuous liquid secondary market will exist for any particular OTC option at any specific time. Consequently, the Fund may be able to realize the value of an OTC option it has purchased only by exercising it or by entering into a closing sale transaction with the dealer that issued it. When the Fund writes an OTC option, it generally can close out that option prior to its expiration only by entering into a closing purchase transaction with the dealer to which the Fund originally wrote it. When-Issued or Delayed Delivery Transactions. The securities underlying these transactions are subject to market fluctuation prior to delivery and generally do not earn interest until their scheduled delivery date. There is the risk that the value or yield of the security at the time of delivery may be more or less than the price paid for the security or the yield available when the transaction was entered into. Standby Commitment Agreements. There can be no assurance that the securities underlying a standby commitment agreement will be issued. If issued, the value of the security may be more or less than its purchase price. Since the issuance of the security is at the option of the issuer, the Fund may bear the risk of a decline in value of the security and may not benefit if the security appreciates in value during the commitment period. INVESTMENT RESTRICTIONS The Fund has adopted the following restrictions as fundamental policies, which means that they may not be changed without the approval of a majority of the outstanding voting securities of the Fund. Under the 1940 Act, a "vote of a majority of the outstanding voting securities" of the Fund means the affirmative vote of the lesser of (i) more than 50% of the outstanding shares of the Fund or (ii) 67% or more of the shares of the Fund present at a shareholder meeting if more than 50% of the outstanding shares of the Fund are represented at the meeting in person or by proxy. The Fund MAY NOT: 1. Borrow money or mortgage or pledge any of its assets, except it may borrow up to 15% of its total assets (including the amount borrowed) to meet redemption requests that might otherwise require the untimely disposition of portfolio securities or for other temporary or emergency purposes and may pledge its assets in connection with these borrowings. The Fund may borrow from banks, other Franklin Templeton Funds or other persons to the extent permitted by applicable law. The Fund will not make any additional investments while borrowings exceed 5% of its total assets. 2. Underwrite securities of other issuers, except insofar as the Fund may be technically deemed an underwriter under the federal securities laws in connection with the disposition of portfolio securities. This does not preclude the Fund from obtaining short-term credit necessary for the clearance of purchases and sales of its portfolio securities. 3. Invest directly in interests in real estate, oil, gas or other mineral leases, exploration or development programs, including limited partnership interests. This restriction does not preclude investments in marketable securities of issuers engaged in these activities. 4. Loan money, except as is consistent with the Fund's investment objective, and except that the Fund may (a) buy a portion of an issue of publicly distributed bonds, debentures, notes and other evidences of indebtedness, (b) enter into repurchase agreements, (c) lend its portfolio securities, and (d) participate in an interfund lending program with other Franklin Templeton Funds to the extent permitted by the 1940 Act and any rules or orders thereunder. 5. Buy or sell commodities or commodity contracts, except that the Fund may enter into financial futures contracts, options thereon, and forward contracts. 6. Invest more than 25% of the Fund's assets (at the time of the most recent investment) in any single industry. 7. Issue securities senior to the Fund's presently authorized shares of beneficial interest. Additional Restrictions. The Fund has adopted the following additional restrictions. These restrictions are not fundamental and may be changed without shareholder approval, to the extent permitted by applicable law, regulation or regulatory policy. Under these restrictions, the Fund MAY NOT: 1. Invest in any company for the purpose of exercising control or management, except that all or substantially all of the assets of the Fund may be invested in another registered investment company having the same investment objective and policies as the Fund. 2. Buy securities on margin, except that the Fund may make margin payments in connection with futures, options and currency transactions. 3. Buy or retain securities of any company in which officers, trustees or directors of the Fund or its investment manager individually own more than one-half of 1% of the securities of such company, and in the aggregate own more than 5% of the securities of such company. 4. Buy securities of open-end or closed-end investment companies, except in compliance with the 1940 Act, and except that the Fund may invest all or substantially all of its assets in another registered investment company having the same investment objective and policies as the Fund. 5. Invest more than 5% of its assets in securities of issuers with less than three years continuous operation, including the operations of any predecessor companies. 6. Hold or purchase the securities of any issuer if, as a result, in the aggregate, more than 10% of the value of the Fund's net assets would be invested in (i) securities that are not readily marketable or (ii) repurchase agreements maturing in more than seven days. The Fund may, however, invest all or substantially all of its assets in another registered investment company having the same investment objective and policies as the Fund. 7. Invest directly in warrants (valued at the lower of cost or market) in excess of 5% of the value of the Fund's net assets. No more than 2% of the value of the Fund's net assets may be invested in warrants (valued at the lower of cost or market) that are not listed on the New York or American Stock Exchange. If a percentage restriction contained herein is adhered to at the time of investment, a later increase or decrease in the percentage resulting from a change in the value of portfolio securities or amount of net assets will not be considered a violation of any of the foregoing restrictions. OFFICERS AND TRUSTEES The Board has the responsibility for the overall management of the Fund, including general supervision and review of its investment activities. The trustees, in turn, elect the officers of the Trust who are responsible for administering day-to-day operations of the Fund. The affiliations of the officers and trustees and their principal occupations for the past five years are listed below. Trustees who are deemed to be "interested persons" of the Fund, as defined in the 1940 Act, are indicated by an asterisk (*). POSITIONS AND OFFICES PRINCIPAL OCCUPATION NAME, AGE AND ADDRESS WITH THE TRUST DURING PAST FIVE YEARS Frank H. Abbott, III (75) 1045 Sansome St. San Francisco, CA 94111 Trustee President and Director, Abbott Corporation (an investment company); and director, trustee or managing general partner, as the case may be, of 31 of the investment companies in the Franklin Group of Funds. Harris J. Ashton (63) General Host Corporation Metro Center, 1 Station Place Stamford, CT 06904-2045 Trustee President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods; and director, trustee or managing general partner, as the case may be, of 56 of the investment companies in the Franklin Templeton Group of Funds. *Harmon E. Burns (51) 777 Mariners Island Blvd. San Mateo, CA 94404 Vice President and Trustee Executive Vice President, Secretary and Director, Franklin Resources, Inc.; Executive Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton Investor Services, Inc.; officer and/or director, as the case may be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee of 61 of the investment companies in the Franklin Templeton Group of Funds. S. Joseph Fortunato (63) Park Avenue at Morris County P. O. Box 1945 Morristown, NJ 07962-1945 Trustee Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host Corporation; director, trustee or managing general partner, as the case may be, of 58 of the investment companies in the Franklin Templeton Group of Funds. David W. Garbellano (81) 111 New Montgomery St., #402 San Francisco, CA 94105 Trustee Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science Corporation (a venture capital company); and director, trustee or managing general partner, as the case may be, of 30 of the investment companies in the Franklin Group of Funds. *Charles B. Johnson (63) 777 Mariners Island Blvd. San Mateo, CA 94404 Chairman of the Board and Trustee President and Director, Franklin Resources, Inc.; Chairman of the Board and Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services, Inc. and General Host Corporation; and officer and/or director, trustee or managing general partner, as the case may be, of most other subsidiaries of Franklin Resources, Inc. and of 57 of the investment companies in the Franklin Templeton Group of Funds. *Rupert H. Johnson, Jr. (55) 777 Mariners Island Blvd. San Mateo, CA 94404 President and Trustee Executive Vice President and Director, Franklin Resources, Inc. and Franklin Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.; Director, Franklin/Templeton Investor Services, Inc.; and officer and/or director, trustee or managing general partner, as the case may be, of most other subsidiaries of Franklin Resources, Inc. and of 61 of the investment companies in the Franklin Templeton Group of Funds. Frank W. T. LaHaye (67) 20833 Stevens Creek Blvd. Suite 102 Cupertino, CA 95014 Trustee General Partner, Peregrine Associates and Miller & LaHaye, which are General Partners of Peregrine Ventures and Peregrine Ventures II (venture capital firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.; Director, FischerImaging Corporation; and director or trustee, as the case may be, of 26 of the investment companies in the Franklin Group of Funds. Gordon S. Macklin (68) 8212 Burning Tree Road Bethesda, MD 20817 Trustee Chairman, White River Corporation (information services); Director, Fund American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest Corporation (information services), and Fusion Systems Corporation (industrial technology); and director, trustee or managing general partner, as the case may be, of 53 of the investment companies in the Franklin Templeton Group of Funds; and formerly held the following positions: Chairman, Hambrecht and Quist Group; Director, H & Q Healthcare Investors; and President, National Association of Securities Dealers, Inc.. Kenneth V. Domingues (63) 777 Mariners Island Blvd. San Mateo, CA 94404 Vice President - Financial Reporting and Accounting Standards Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and Franklin Templeton Distributors, Inc.; officer and/or director, as the case may be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or managing general partner, as the case may be, of 37 of the investment companies in the Franklin Group of Funds. Martin L. Flanagan (35) 777 Mariners Island Blvd. San Mateo, CA 94404 Vice President and Chief Financial Officer Senior Vice President, Chief Financial Officer and Treasurer, Franklin Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services, Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee, as the case may be, of 61 of the investment companies in the Franklin Templeton Group of Funds. Deborah R. Gatzek (47) 777 Mariners Island Blvd. San Mateo, CA 94404 Vice President and Secretary Senior Vice President and General Counsel - Legal, Franklin Resources, Inc. and Franklin Templeton Distributors, Inc.; Vice President, Franklin Advisers, Inc. and officer of 61 of the investment companies in the Franklin Templeton Group of Funds. Charles E. Johnson (39) 500 East Broward Blvd. Fort Lauderdale, FL 33394-3091 Vice President Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President and Director, Templeton Worldwide, Inc. and Franklin Institutional Services Corporation; officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc.; and officer and/or director, trustee or managing general partner, as the case may be, of 40 of the investment companies in the Franklin Templeton Group of Funds. Diomedes Loo-Tam (57) 777 Mariners Island Blvd. San Mateo, CA 94404 Treasurer and Principal Accounting Officer Employee of Franklin Advisers, Inc.; and officer of 37 of the investment companies in the Franklin Group of Funds. Edward V. McVey (58) 777 Mariners Island Blvd. San Mateo, CA 94404 Vice President Senior Vice President/National Sales Manager, Franklin Templeton Distributors, Inc.; and officer of 32 of the investment companies in the Franklin Group of Funds. The preceding table indicates those officers and trustees who are also affiliated persons of Distributors and Advisers. Nonaffiliated trustees are currently paid fees of $300 for each regularly scheduled meeting and $300 per meeting attended. As indicated above, certain of the Trust's nonaffiliated trustees also serve as directors, trustees or managing general partners of other investment companies in the Franklin Templeton Group of Funds from which they may receive fees for their services. The following table indicates the total fees paid to nonaffiliated trustees by the Trust and by other funds in the Franklin Templeton Group of Funds. NUMBER OF BOARDS TOTAL FEES IN THE FRANKLIN RECEIVED FROM TEMPLETON GROUP OF TOTAL FEES THE FRANKLIN FUNDS ON WHICH RECEIVED FROM TEMPLETON GROUP EACH SERVES*** THE TRUST* OF FUNDS** NAME Frank H. Abbott, III $162,420 31 Harris J. Ashton 327,925 56 S. Joseph Fortunato 344,745 58 David Garbellano 146,100 30 Frank W.T. LaHaye 143,200 26 Gordon S. Macklin 321,525 53 *For the fiscal year ended April 30, 1996. **For the calendar year ended December 31, 1995. ***The number of boards is based on the number of registered investment companies in the Franklin Templeton Group of Funds and does not include the total number of series or funds within each investment company for which the trustees are responsible. The Franklin Templeton Group of Funds currently includes 61 registered investment companies, consisting of approximately 162 U.S. based funds or series. Nonaffiliated trustees are reimbursed for expenses incurred in connection with attending board meetings, paid pro rata by each fund in the Franklin Templeton Group of Funds for which they serve as director, trustee or managing general partner. No officer or trustee received any other compensation directly from the Trust. Certain officers or trustees who are shareholders of Resources may be deemed to receive indirect remuneration by virtue of their participation, if any, in the fees paid to its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of Charles E. Johnson. From time to time, the number of Fund shares held in the "street name" accounts of various securities dealers for the benefit of their clients or in centralized securities depositories may exceed 5% of the total shares outstanding. As of the date of this SAI, Resources owned substantially all of the outstanding shares of the Fund as a result of having provided the Fund's initial capitalization. INVESTMENT ADVISORY AND OTHER SERVICES The investment manager of the Fund is Advisers. Advisers is a wholly owned subsidiary of Resources, a publicly owned holding company whose shares are listed on the Exchange. Resources owns several other subsidiaries involved in investment management and shareholder services. Pursuant to the management agreement, the Manager provides investment research and portfolio management services, including the selection of securities for the Fund to purchase, hold or sell and the selection of brokers through whom the Fund's portfolio transactions are executed. The Manager's activities are subject to the review and supervision of the Board to whom the Manager renders periodic reports of the Fund's investment activities. Under the terms of the management agreement, the Manager provides office space and office furnishings, facilities and equipment required for managing the business affairs of the Fund; maintains all internal bookkeeping, clerical, secretarial and administrative personnel and services; and provides certain telephone and other mechanical services. The Manager is covered by fidelity insurance on its officers, directors and employees for the protection of the Fund. The Manager also provides management services to numerous other investment companies or funds pursuant to management agreements with each fund. The Manager may give advice and take action with respect to any of the other funds it manages, or for its own account, which may differ from action taken by the Manager on behalf of the Fund. Similarly, with respect to the Fund, the Manager is not obligated to recommend, purchase or sell, or to refrain from recommending, purchasing or selling any security that the Manager and access persons, as defined by the 1940 Act, may purchase or sell for its or their own account or for the accounts of any other fund. Furthermore, the Manager is not obligated to refrain from investing in securities held by the Fund or other funds which it manages or administers. Of course, any transactions for the accounts of the Manager and other access persons will be made in compliance with the Fund's Code of Ethics. The management agreement is in effect until February 13, 1998. Thereafter, it may continue in effect for successive annual periods providing such continuance is specifically approved at least annually by a vote of the Board or by a vote of the holders of a majority of the Fund's outstanding voting securities, and in either event by a majority vote of the Trust's trustees who are not parties to the management agreement or interested persons of any such party (other than as trustees of the Trust), cast in person at a meeting called for that purpose. The management agreement may be terminated without penalty at any time by the Board or by a vote of the holders of a majority of the Fund's outstanding voting securities, or by the Manager on 60 days' written notice and will automatically terminate in the event of its assignment, as defined in the 1940 Act. Investor Services, a wholly owned subsidiary of Resources, is the shareholder servicing agent for the Fund and acts as the Fund's transfer agent and dividend-paying agent. Investor Services is compensated on the basis of a fixed fee per account. Bank of New York, Mutual Funds Division, 90 Washington Street, New York, New York, 10286, acts as custodian of the securities and other assets of the Fund. Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco, California 94104, acts as custodian for cash received in connection with the purchase of Fund shares. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as custodian in connection with transfer services through bank automated clearing houses. The custodians do not participate in decisions relating to the purchase and sale of portfolio securities. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California 94105, are the Fund's independent auditors. HOW DOES THE FUND PURCHASE SECURITIES FOR ITS PORTFOLIO? Under the current management agreement, the selection of brokers and dealers to execute transactions in the Fund's portfolio is made by the Manager in accordance with criteria set forth in the management agreement and any directions which the Board may give. When placing a portfolio transaction, the Manager attempts to obtain the best net price and execution of the transaction. On portfolio transactions done on a securities exchange, the amount of commission paid by the Fund is negotiated between the Manager and the broker executing the transaction. The Manager seeks to obtain the lowest commission rate available from brokers that are felt to be capable of efficient execution of the transactions. The determination and evaluation of the reasonableness of the brokerage commissions paid in connection with portfolio transactions are based to a large degree on the professional opinions of the persons responsible for the placement and review of such transactions. These opinions are formed on the basis of, among other things, the experience of these individuals in the securities industry and information available to them concerning the level of commissions being paid by other institutional investors of comparable size. The Manager will ordinarily place orders for the purchase and sale of over-the-counter securities on a principal rather than agency basis with a principal market maker unless, in the opinion of the Manager, a better price and execution can otherwise be obtained. Purchases of portfolio securities from underwriters will include a commission or concession paid by the issuer to the underwriter, and purchases from dealers will include a spread between the bid and ask price. The Fund seeks to obtain prompt execution of orders at the most favorable net price. The amount of commission is not the only relevant factor to be considered in the selection of a broker to execute a trade. If it is felt to be in the Fund's best interest, the Manager may place portfolio transactions with brokers who provide the types of services described below, even if it means the Fund will pay a higher commission than if no weight were given to the broker's furnishing of these services. This will be done only if, in the opinion of the Manager, the amount of any additional commission is reasonable in relation to the value of the services. Higher commissions will be paid only when the brokerage and research services received are bona fide and produce a direct benefit to the Fund or assist the Manager in carrying out its responsibilities to the Fund, or when it is otherwise in the best interest of the Fund to do so, whether or not such services may also be useful to the Manager in advising other clients. When it is felt that several brokers are equally able to provide the best net price and execution, the Manager may decide to execute transactions through brokers who provide quotations and other services to the Fund, specifically including the quotations necessary to determine the value of the Fund's net assets, in such amount of total brokerage as may reasonably be required in light of such services, and through brokers who supply research, statistical and other data to the Fund and Manager in such amount of total brokerage as may reasonably be required. It is not possible to place a dollar value on the special executions or on the research services received by the Manager from dealers effecting transactions in portfolio securities. The allocation of transactions in order to obtain additional research services permits the Manager to supplement its own research and analysis activities and to receive the views and information of individuals and research staff of other securities firms. As long as it is lawful and appropriate to do so, the Manager and its affiliates may use this research and data in their investment advisory capacities with other clients. Provided that the Fund's officers are satisfied that the best execution is obtained, the sale of Fund shares may also be considered as a factor in the selection of broker-dealers to execute the Fund's portfolio transactions. Because Distributors is a member of the National Association of Securities Dealers, it is sometimes entitled to obtain certain fees when the Fund tenders portfolio securities pursuant to a tender-offer solicitation. As a means of recapturing brokerage for the benefit of the Fund, any portfolio securities tendered by the Fund will be tendered through Distributors if it is legally permissible to do so. In turn, the next management fee payable to Advisers under the management agreement will be reduced by the amount of any fees received by Distributors in cash, less any costs and expenses incurred in connection therewith. If purchases or sales of securities of the Fund and one or more other investment companies or clients supervised by the Manager are considered at or about the same time, transactions in such securities will be allocated among the several investment companies and clients in a manner deemed equitable to all by the Manager, taking into account the respective sizes of the funds and the amount of securities to be purchased or sold. It is recognized that in some cases this procedure could possibly have a detrimental effect on the price or volume of the security so far as the Fund is concerned. In other cases it is possible that the ability to participate in volume transactions and to negotiate lower brokerage commissions will be beneficial to the Fund. HOW DO I BUY AND SELL SHARES? All checks, drafts, wires and other payment mediums used for purchasing or redeeming shares of the Fund must be denominated in U.S. dollars. The Fund reserves the right, in its sole discretion, to either (a) reject any order for the purchase or sale of shares denominated in any other currency or (b) honor the transaction or make adjustments to your account for the transaction as of a date and with a foreign currency exchange factor determined by the drawee bank. In connection with exchanges, it should be noted that since the proceeds from the sale of shares of an investment company are generally not available until the fifth business day following the redemption, the funds into which you are seeking to exchange reserve the right to delay issuing shares pursuant to an exchange until said fifth business day. The redemption of shares of the Fund to complete an exchange will be effected at the close of business on the day the request for exchange is received in proper form at the net asset value then effective. Please see "What If My Investment Outlook Changes? - Exchange Privilege" in the Prospectus. If, in connection with the purchase of Fund shares, you submit a check or a draft that is returned unpaid to the Fund, the Fund may impose a $10 charge against your account for each returned item. Dividend checks returned to the Fund marked "unable to forward" by the postal service will be deemed to be a request to change your dividend option to reinvest all distributions and the proceeds will be reinvested in additional shares at net asset value until new instructions are received. The Fund may deduct from your account the costs of its efforts to locate you if mail is returned as undeliverable or the Fund is otherwise unable to locate you or verify your current mailing address. These costs may include a percentage of the account when a search company charges a percentage fee in exchange for its location services. Under agreements with certain banks in Taiwan, Republic of China, the Fund's shares are available to such banks' discretionary trust funds at net asset value. The banks may charge service fees to their customers who participate in the discretionary trusts. Pursuant to agreements, a portion of such service fees may be paid to Distributors or one of its affiliates to help defray expenses of maintaining a service office in Taiwan, including expenses related to local literature fulfillment and communication facilities. Shares of the Fund may be offered to investors in Taiwan through securities firms known locally as Securities Investment Consulting Enterprises. In conformity with local business practices in Taiwan, shares of the Fund will be offered with the following schedule of sales charges: SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE Up to $100,000 3% $100,000 to $1,000,000 2% Over $1,000,000 1% PURCHASES AND REDEMPTIONS THROUGH SECURITIES DEALERS Orders for the purchase of shares of the Fund received in proper form prior to the scheduled close of the Exchange (generally 1:00 p.m. Pacific time) any business day that the Exchange is open for trading and promptly transmitted to the Fund will be based upon the public offering price determined that day. Purchase orders received by securities dealers or other financial institutions after the scheduled close of the Exchange will be effected at the Fund's public offering price on the day it is next calculated. Orders for the redemption of shares are effected at net asset value subject to the same conditions concerning time of receipt in proper form. It is the securities dealer's responsibility to transmit the order in a timely fashion and any loss to you resulting from the failure to do so must be settled between you and the securities dealer. OTHER PAYMENTS TO SECURITIES DEALERS As discussed in the Prospectus under "How Do I Buy Shares? - General," either Distributors or one of its affiliates may make payments, out of its own resources, to securities dealers who initiate and are responsible for purchases made at net asset value by certain trust companies and trust departments of banks, certain designated retirement plans (excluding IRA and IRA Rollovers), certain non-designated plans, and certain retirement plans of organizations with collective retirement plan assets of $1 million or more, as described below. Distributors may make these payments in the form of contingent advance payments, which may be recovered from the securities dealer or set off against other payments due to the securities dealer in the event shares are redeemed within 12 months of the calendar month of purchase. Other conditions may apply. All terms and conditions may be imposed by an agreement between Distributors, or one of its affiliates, and the securities dealer. Either Distributors or one of its affiliates may pay the following amounts, out of its own resources, to securities dealers who initiate and are responsible for purchases made at net asset value by certain designated retirement plans (excluding IRA and IRA rollovers): 1% on sales of $1 million but less than $2 million, plus 0.80% on sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million but less than $50 million, plus 0.25% on sales of $50 million but less than $100 million, plus 0.15% on sales of $100 million or more. These payment breakpoints are reset every 12 months for purposes of additional purchases. With respect to purchases made at net asset value by certain trust companies and trust departments of banks and certain retirement plans of organizations with collective retirement plan assets of $1 million or more, either Distributors or one of its affiliates, out of its own resources, may pay up to 1% of the amount invested. LETTER OF INTENT You may qualify for a reduced sales charge on the purchase of shares of the Fund, as described in the Prospectus. At any time within 90 days after the first investment which you want to qualify for a reduced sales charge, you may file with the Fund a signed Shareholder Application with the Letter of Intent section completed. After the Letter is filed, each additional investment will be entitled to the sales charge applicable to the level of investment indicated on the Letter. Sales charge reductions based upon purchases in more than one of the Franklin Templeton Funds will be effective only after notification to Distributors that the investment qualifies for a discount. Your holdings in the Franklin Templeton Funds, including Class II shares, acquired more than 90 days before the Letter is filed, will be counted towards completion of the Letter but will not be entitled to a retroactive downward adjustment in the sales charge. Any redemptions you make, unless by a designated retirement plan, during the 13-month period will be subtracted from the amount of the purchases for purposes of determining whether the terms of the Letter have been completed. If the Letter is not completed within the 13-month period, there will be an upward adjustment of the sales charge, depending upon the amount actually purchased (less redemptions) during the period. The upward adjustment does not apply to designated retirement plans. If you execute a Letter prior to a change in the sales charge structure for the Fund, you will be entitled to complete the Letter at the lower of the new sales charge structure or the sales charge structure in effect at the time the Letter was filed. As mentioned in the Prospectus, five percent (5%) of the amount of the total intended purchase will be reserved in shares of the Fund registered in your name. This policy of reserving shares does not apply to a designated retirement plan. If the total purchases, less redemptions, equal the amount specified under the Letter, the reserved shares will be deposited to an account in your name or delivered to you or as you direct. If the total purchases, less redemptions, exceed the amount specified under the Letter and is an amount which would qualify for a further quantity discount, a retroactive price adjustment will be made by Distributors and the securities dealer through whom purchases were made pursuant to the Letter (to reflect such further quantity discount) on purchases made within 90 days before and on those made after filing the Letter. The resulting difference in offering price will be applied to the purchase of additional shares at the offering price applicable to a single purchase or the dollar amount of the total purchases. If the total purchases, less redemptions, are less than the amount specified under the Letter, you will remit to Distributors an amount equal to the difference in the dollar amount of sales charge actually paid and the amount of sales charge that would have applied to the aggregate purchases if the total of such purchases had been made at a single time. Upon such remittance, the reserved shares held for your account will be deposited to an account in your name or delivered to you or as you direct. If within 20 days after written request the difference in sales charge is not paid, the redemption of an appropriate number of reserved shares to realize the difference will be made. In the event of a total redemption of the account prior to fulfillment of the Letter, the additional sales charge due will be deducted from the proceeds of the redemption, and the balance will be forwarded to you. If a Letter is executed on behalf of a designated retirement plan, the level and any reduction in sales charge for these plans will be based on actual plan participation and the projected investments in the Franklin Templeton Funds under the Letter. These plans are not subject to the requirement to reserve 5% of the total intended purchase, or to any penalty as a result of the early termination of a plan, nor are these plans entitled to receive retroactive adjustments in price for investments made before executing the Letter. REDEMPTIONS IN KIND The Fund has committed itself to pay in cash (by check) all requests for redemption by any shareholder of record, limited in amount, however, during any 90-day period to the lesser of $250,000 or 1% of the value of the Fund's net assets at the beginning of the 90-day period. This commitment is irrevocable without the prior approval of the SEC. In the case of redemption requests in excess of these amounts, the trustees reserve the right to make payments in whole or in part in securities or other assets of the Fund, in case of an emergency, or if the payment of such a redemption in cash would be detrimental to the existing shareholders of the Fund. In such circumstances, the securities distributed would be valued at the price used to compute the Fund's net assets. Should the Fund do so, you may incur brokerage fees in converting the securities to cash. The Fund does not intend to redeem illiquid securities in kind. Should it happen, however, you may not be able to recover your investment in a timely manner and you may incur brokerage costs in selling the securities. REDEMPTIONS BY THE FUND Due to the relatively high cost of handling small investments, the Fund reserves the right to involuntarily redeem your shares at net asset value if your account has a value of less than one-half of your initial required minimum investment, but only where the value of your account has been reduced by the prior voluntary redemption of shares. Until further notice, it is the present policy of the Fund not to exercise this right if your account has a value of $50 or more. In any event, before the Fund redeems your shares and sends you the proceeds, it will notify you that the value of the shares in your account is less than the minimum amount and allow you 30 days to make an additional investment in an amount which will increase the value of your account to at least $100. REINVESTMENT DATE Shares acquired through the reinvestment of dividends will be purchased at the net asset value determined on the business day following the dividend record date (sometimes known as the "ex-dividend date"). The processing date for the reinvestment of dividends may vary from month to month and does not affect the amount or value of the shares acquired. REPORTS TO SHAREHOLDERS The Fund sends annual and semiannual reports regarding its performance and portfolio holdings to shareholders. If you would like to receive an interim quarterly report, you may phone Fund Information at 1-800/DIAL BEN. SPECIAL SERVICES The Franklin Templeton Institutional Services Department provides specialized services, including recordkeeping, for institutional investors of the Fund. The cost of these services is not borne by the Fund. Investor Services may pay certain financial institutions that maintain omnibus accounts with the Fund on behalf of numerous beneficial owners for recordkeeping operations performed with respect to such owners. For each beneficial owner in the omnibus account, the Fund may reimburse Investor Services an amount not to exceed the per account fee which the Fund normally pays Investor Services. These financial institutions may also charge a fee for their services directly to their clients. HOW ARE FUND SHARES VALUED? As noted in the Prospectus, the Fund calculates net asset value as of the scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each day that the Exchange is open for trading. As of the date of this SAI, the Fund is informed that the Exchange observes the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. For the purpose of determining the aggregate net assets of the Fund, cash and receivables are valued at their realizable amounts. Interest is recorded as accrued and dividends are recorded on the ex-dividend date. Portfolio securities listed on a securities exchange or on the NASDAQ National Market System for which market quotations are readily available are valued at the last quoted sale price of the day or, if there is no such reported sale, within the range of the most recent quoted bid and ask prices. Over-the-counter portfolio securities are valued within the range of the most recent quoted bid and ask prices. Portfolio securities which are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market as determined by the Manager. Portfolio securities underlying actively traded call options are valued at their market price as determined above. The current market value of any option held by the Fund is its last sale price on the relevant exchange prior to the time when assets are valued. Lacking any sales that day or if the last sale price is outside the bid and ask prices, the options are valued within the range of the current closing bid and ask prices if such valuation is believed to fairly reflect the contract's market value. The value of a foreign security is determined as of the close of trading on the foreign exchange on which it is traded or as of the scheduled close of trading on the Exchange, if that is earlier, and that value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York time, on the day the value of the foreign security is determined. If no sale is reported at that time, the mean between the current bid and ask prices is used. Occasionally events which affect the values of foreign securities and foreign exchange rates may occur between the times at which they are determined and the close of the exchange and will, therefore, not be reflected in the computation of the Fund's net asset value. If events which materially affect the values of these foreign securities occur during such period, then these securities will be valued in accordance with procedures established by the Board. Generally, trading in corporate bonds, U.S. government securities and money market instruments is substantially completed each day at various times prior to the scheduled close of the Exchange. The value of these securities used in computing the net asset value of the Fund's shares is determined as of such times. Occasionally, events affecting the values of such securities may occur between the times at which they are determined and the scheduled close of the Exchange which will not be reflected in the computation of the Fund's net asset value. If events materially affecting the values of these securities occur during such period, then the securities will be valued at their fair value as determined in good faith by the Board. Other securities for which market quotations are readily available are valued at the current market price, which may be obtained from a pricing service, based on a variety of factors including recent trades, institutional size trading in similar types of securities (considering yield, risk and maturity) and/or developments related to specific issues. Securities and other assets for which market prices are not readily available are valued at fair value as determined following procedures approved by the Board. With the approval of trustees, the Fund may utilize a pricing service, bank or securities dealer to perform any of the above described functions. ADDITIONAL INFORMATION REGARDING TAXATION As stated in the Prospectus, the Fund intends to qualify and elect to be treated as a regulated investment company under Subchapter M of the Code. The trustees reserve the right not to maintain the qualification of the Fund as a regulated investment company if they determine such course of action to be beneficial to shareholders. In such case, the Fund will be subject to federal and possibly state corporate taxes on its taxable income and gains, and distributions to shareholders will be taxable to the extent of the Fund's available earnings and profits. Subject to the limitations discussed below, all or a portion of the income distributions paid by the Fund may be treated by corporate shareholders as qualifying dividends for purposes of the dividends-received deduction under federal income tax law. If the aggregate qualifying dividends received by the Fund (generally, dividends from U.S. domestic corporations, the stock in which is not debt-financed by the Fund and is held for at least a minimum holding period) is less than 100% of its distributable income, then the amount of the Fund's dividends paid to corporate shareholders that may be designated as eligible for such deduction will not exceed the aggregate qualifying dividends received by the Fund for the taxable year. The amount or percentage of income qualifying for the corporate dividends-received deduction will be provided by the Fund annually in a notice to shareholders mailed shortly after the end of the Fund's fiscal year. Corporate shareholders should note that dividends paid by the Fund from sources other than the qualifying dividends it receives will not qualify for the dividend-received deduction. For example, any interest income and net short-term capital gain (in excess of any net long-term capital loss or capital loss carryover) included in investment company taxable income and distributed by the Fund as a dividend will not qualify for the dividends-received deduction. Corporate shareholders should also note that the availability of the corporate dividends-received deduction is subject to certain restrictions. For example, the deduction is eliminated unless Fund shares have been held (or deemed held) for at least 46 days in a substantially unhedged manner. The dividends-received deduction may also be reduced to the extent interest paid or accrued by a corporate shareholder is directly attributable to its investment in Fund shares. The entire dividend, including the portion which is treated as a deduction, is includable in the tax base on which the federal alternative minimum tax is computed and may also result in a reduction in the shareholder's tax basis in its Fund shares, under certain circumstances, if the shares have been held for less than two years. Corporate shareholders whose investment in the Fund is "debt financed" for these tax purposes should consult with their tax advisors concerning the availability of the dividends-received deduction. The Code requires all funds to distribute at least 98% of their taxable ordinary income earned during the calendar year and at least 98% of their capital gain net income earned during the twelve month period ending October 31 of each year (in addition to amounts from the prior year that were neither distributed nor taxed to the Fund) to shareholders by December 31 of each year in order to avoid the imposition of a federal excise tax. Under these rules, certain distributions which are declared in October, November or December but which, for operational reasons, may not be paid to you until the following January, will be treated for tax purposes as if paid by the Fund and received by you on December 31 of the calendar year in which they are declared. The Fund intends as a matter of policy to declare such dividends, if any, in December and to pay these dividends in December or January to avoid the imposition of this tax, but does not guarantee that its distributions will be sufficient to avoid any or all federal excise taxes. Redemptions and exchanges of Fund shares are taxable transactions for federal and state income tax purposes. For most shareholders, gain or loss will be recognized in an amount equal to the difference between your basis in the shares and the amount received, subject to the rules described below. If such shares are a capital asset in your hands, gain or loss will be capital gain or loss and will be long-term for federal income tax purposes if the shares have been held for more than one year. All or a portion of a loss realized upon a redemption of shares will be disallowed to the extent other shares of the Fund are purchased (through reinvestment of dividends or otherwise) within 30 days before or after such redemption. Any loss disallowed under these rules will be added to the tax basis of the shares purchased. Any loss realized upon the redemption of shares within six months from the date of their purchase will be treated as long-term capital loss to the extent of amounts treated as distributions of net long-term capital gain during such six-month period. All or a portion of the sales charge incurred in purchasing shares of the Fund will not be included in the federal tax basis of such shares sold or exchanged within 90 days of their purchase (for purposes of determining gain or loss with respect to such shares) if the sales proceeds are reinvested in the Fund or in another fund in the Franklin Templeton Funds and a sales charge which would otherwise apply to the reinvestment is reduced or eliminated. Any portion of such sales charge excluded from the tax basis of the shares sold will be added to the tax basis of the shares acquired in the reinvestment. You should consult with your tax advisor concerning the tax rules applicable to the redemption or exchange of Fund shares. The Fund's investment in options, futures contracts and forward contracts, including transactions involving actual or deemed short sales, or foreign exchange gains or losses are subject to many complex and special tax rules. For example, OTC options on debt securities and equity options, including options on stock and on narrow-based stock indexes, will be subject to tax under Section 1234 of the Code, generally producing a long-term or short-term capital gain or loss upon exercise, lapse, or closing out of the option or sale of the underlying stock or security. By contrast, the Fund's treatment of certain other options, futures and forward contracts entered into by the Fund is generally governed by Section 1256 of the Code. These "Section 1256" positions generally include listed options on debt securities, options on broad-based stock indexes, options on securities indexes, options on futures contracts, regulated futures contracts and certain foreign currency contracts and options thereon. Absent a tax election to the contrary, each such Section 1256 position held by the Fund will be marked-to-market (i.e., treated as if it were sold for fair market value) on the last business day of the Fund's fiscal year, and all gain or loss associated with fiscal year transactions and mark-to-market positions at fiscal year end (except certain foreign currency gain or loss covered by Section 988 of the Code) will generally be treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss. The effect of Section 1256 mark-to-market rules may be to accelerate income or to convert what otherwise would have been long-term capital gains into short-term capital gains or short-term capital losses into long-term capital losses within the Fund. The acceleration of income on Section 1256 positions may require the Fund to accrue taxable income without the corresponding receipt of cash. In order to generate cash to satisfy the distribution requirements of the Code, the Fund may be required to dispose of portfolio securities that it otherwise would have continued to hold or to use cash flows from other sources such as the sale of Fund shares. In these ways, any or all of these rules may affect the amount, character and time of income distributed to shareholders by the Fund. When the Fund holds an option or contract which substantially diminishes the Fund's risk of loss with respect to another position of the Fund (as might occur in some hedging transactions), this combination of positions could be treated as a "straddle" for tax purposes, resulting in possible deferral of losses, adjustments in the holding periods of Fund securities and conversion of short-term capital losses into long-term capital losses. As a regulated investment company, the Fund is also subject to the requirement that less than 30% of its annual gross income be derived from the sale or other disposition of securities and certain other investments held for less than three months ("short-short income"). This requirement may limit the Fund's ability to engage in options and hedging transactions because these transactions are often consummated in less than three months, may require the sale of portfolio securities held less than three months and may, as in the case of short sales of portfolio securities, reduce the holding periods of certain securities within the Fund, resulting in additional short-short income for the Fund. The Fund will monitor its transactions in such options and contracts and may make certain other tax elections in order to mitigate the effect of the above rules and prevent disqualification of the Fund as a regulated investment company under Subchapter M of the Code. Gain realized by the Fund from transactions that are deemed to constitute "conversion transactions" under the Code and which would otherwise produce capital gain may be recharacterized as ordinary income to the extent that such gain does not exceed an amount defined by the Code as the "applicable imputed income amount." A conversion transaction is any transaction in which substantially all of the Fund's expected return is attributable to the time value of the Fund's net investment in such transaction and any one of the following criteria are met: 1) there is an acquisition of property with a substantially contemporaneous agreement to sell the same or substantially identical property in the future; 2) the transaction is an applicable straddle; 3) the transaction was marketed or sold to the Fund on the basis that it would have the economic characteristics of a loan but would be taxed as capital gain; or 4) the transaction is specified in Treasury regulations to be promulgated in the future. The applicable imputed income amount, which represents the deemed return on the conversion transaction based upon the time value of money, is computed using a yield equal to 120 percent of the applicable federal rate, reduced by any prior recharacterizations under this provision or Section 263(g) of the Code concerning capitalized carrying costs. Foreign exchange gains and losses realized by the Fund in connection with certain transactions involving foreign currencies, foreign currency payables or receivables, or foreign currency-denominated debt securities, foreign currency forward contracts, and options or futures contracts on foreign currencies are subject to special tax rules which may cause such gains and losses to be treated as ordinary income and losses rather than capital gains and losses and may affect the amount and timing of the Fund's income or loss from such transactions and, in turn, its distributions to shareholders. In order for the Fund to qualify as a regulated investment company, at least 90% of the Fund's annual gross income must consist of dividends, interest and certain other types of qualifying income, and no more than 30% of its annual gross income may be derived from the sale or other disposition of securities or certain other instruments held for less than three months. Foreign exchange gains are presently treated as qualifying income for purposes of this 90% limitation. Foreign exchange gains derived by the Fund with respect to the Fund's business of investing in stock or securities or options or futures with respect to such stock or securities is qualifying income for purposes of this 90% limitation. If the Fund owns shares in a foreign corporation that constitutes a "passive foreign investment company" (a "PFIC") for federal income tax purposes and the Fund does not elect to treat the foreign corporation as a "qualified electing fund" within the meaning of the Code, the Fund may be subject to U.S. federal income taxation on a portion of any "excess distribution" it receives from the PFIC or any gain it derives from the disposition of such shares, even if such income is distributed as a taxable dividend by the Fund to its U.S. shareholders. The Fund may be also subject to additional interest charges in respect of deferred taxes arising from such distributions or gains. Any tax paid by a Fund as a result of its ownership of shares in a PFIC will not give rise to a deduction or credit to the Fund or to any shareholder. A PFIC means any foreign corporation if, for the taxable year involved, either (i) it derives at least 75 percent of its gross income from "passive income" (including, but not limited to, interest, dividends, royalties, rents and annuities), or (ii) on average, at least 50 percent of the value (or adjusted basis, if elected) of the assets held by the corporation produce "passive income." On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a special mark-to-market election for regulated investment companies. Under these regulations, the annual mark-to-market gain, if any, on shares held by a Fund in a PFIC would be treated as an excess distribution received by the Fund in the current year, eliminating the deferral and the related interest charge. Such excess distribution amounts are treated as ordinary income, which the Fund will be required to distribute to shareholders even though the Fund has not received any cash to satisfy this distribution requirement. These regulations would be effective for taxable years ending after the promulgation of the proposed regulations as final regulations. THE FUND'S UNDERWRITER Pursuant to an underwriting agreement in effect until April 30, 1996, Distributors acts as principal underwriter in a continuous public offering for shares of the Fund. The underwriting agreement will continue in effect for successive annual periods provided that its continuance is specifically approved at least annually by a vote of the Board or by a vote of the holders of a majority of the Fund's outstanding voting securities, and in either event by a majority vote of the Trust's trustees who are not parties to the underwriting agreement or interested persons of any such party (other than as trustees of the Trust), cast in person at a meeting called for that purpose. The underwriting agreement terminates automatically in the event of its assignment and may be terminated by either party on 90 days' written notice. Distributors pays the expenses of the distribution of Fund shares, including advertising expenses and the costs of printing sales material and prospectuses used to offer shares to the public. The Fund pays the expenses of preparing and printing amendments to its registration statements and prospectuses (other than those necessitated by the activities of Distributors) and of sending prospectuses to existing shareholders. DISTRIBUTION PLAN The Fund has adopted a distribution plan pursuant to Rule 12b-1 under the 1940 Act (the "Plan") whereby the Fund may pay up to a maximum of 0.25% per annum of its average daily net assets, payable quarterly, for expenses incurred in the promotion and distribution of its shares. In addition, the Fund is permitted to pay Distributors up to an additional 0.10% per annum of its average daily net assets for reimbursement of such distribution expenses. Pursuant to the Plan, Distributors or others will be entitled to be reimbursed each quarter (up to the maximum stated above) for actual expenses incurred in the distribution and promotion of the Fund's shares, including, but not limited to, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including a prorated portion of Distributors' overhead expenses attributable to the distribution of Fund shares, as well as any distribution or service fees paid to securities dealers or their firms or others who have executed a servicing agreement with the Fund, Distributors or its affiliates. In addition to the payments to which Distributors or others are entitled under the Plan, the Plan also provides that to the extent the Fund, the Manager or Distributors or other parties on behalf of the Fund, the Manager or Distributors, make payments that are deemed to be payments for the financing of any activity primarily intended to result in the sale of shares of the Fund within the context of Rule 12b-1 under the 1940 Act, then such payments shall be deemed to have been made pursuant to the Plan. In no event shall the aggregate asset-based sales charges, which include payments made under the Plan, plus any other payments deemed to be made pursuant to the Plan, exceed the amount permitted to be paid pursuant to the Rules of Fair Practice of the National Association of Securities Dealers, Inc., Article III, Section 26(d)4. The terms and provisions of the Plan relating to required reports, term, and approval are consistent with Rule 12b-1. To the extent fees are for distribution or marketing functions, as distinguished from administrative servicing or agency transactions, certain banks will not be entitled to participate in the Plan as a result of applicable federal law prohibiting certain banks from engaging in the distribution of mutual fund shares. Such banking institutions, however, are permitted to receive fees under the Plan for administrative servicing or for agency transactions. If you are a customer of a bank that is prohibited from providing such services, you would be permitted to remain a shareholder of the Fund, and alternate means for continuing the servicing would be sought. In such an event, changes in the services provided might occur and you might no longer be able to avail yourself of any automatic investment or other services then being provided by the bank. It is not expected that you would suffer any adverse financial consequences as a result of any of these changes. The Plan has been approved in accordance with the provisions of Rule 12b-1. The Plan is effective through [] and renewable annually by a vote of the Board, including a majority vote of the trustees who are non-interested persons of the Fund and who have no direct or indirect financial interest in the operation of the Plan, cast in person at a meeting called for that purpose. It is also required that the selection and nomination of such trustees be done by the non-interested trustees. The Plan and any related agreement may be terminated at any time, without penalty, by vote of a majority of the non-interested trustees on not more than 60 days' written notice, by Distributors on not more than 60 days' written notice, by any act that constitutes an assignment of the management agreement with the Manager, or by vote of a majority of the Fund's outstanding shares. Distributors or any dealer or other firm may also terminate their respective distribution or service agreement at any time upon written notice. The Plan and any related agreements may not be amended to increase materially the amount to be spent for distribution expenses without approval by a majority of the Fund's outstanding shares, and all material amendments to the Plan or any related agreements shall be approved by a vote of the non-interested trustees, cast in person at a meeting called for the purpose of voting on any such amendment. Distributors is required to report in writing to the Board at least quarterly on the amounts and purpose of any payment made under the Plan and any related agreements, as well as to furnish the Board with such other information as may reasonably be requested in order to enable the Board to make an informed determination of whether the Plan should be continued. GENERAL INFORMATION PERFORMANCE As noted in the Prospectus, the Fund may from time to time quote various performance figures to illustrate the Fund's past performance and may occasionally cite statistics to reflect its volatility or risk. Performance quotations by investment companies are subject to rules adopted by the SEC. These rules require the use of standardized performance quotations or, alternatively, that every non-standardized performance quotation furnished by the Fund be accompanied by certain standardized performance information computed as required by the SEC. Current yield and average annual compounded total return quotations used by the Fund are based on the standardized methods of computing performance mandated by the SEC. An explanation of those and other methods used by the Fund to compute or express performance follows. TOTAL RETURN The average annual total return is determined by finding the average annual compounded rates of return over one-, five- and ten-year periods, or fractional portion thereof, that would equate an initial hypothetical $1,000 investment to its ending redeemable value. The calculation assumes the maximum front-end sales charge is deducted from the initial $1,000 purchase order, and income dividends and capital gains are reinvested at net asset value. The quotation assumes the account was completely redeemed at the end of each one-, five- and ten-year period and the deduction of all applicable charges and fees. If a change is made on the sales charge structure, historical performance information will be restated to reflect the maximum front-end sales charge currently in effect. The average annual compounded rates of return for the Fund will be calculated according to the SEC formula: n P(1+T) = ERV where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the one-, five- or ten-year periods at the end of the one-, five- or ten- year periods (or fractional portion thereof) As discussed in the Prospectus, the Fund may quote total rates of return in addition to its average annual total return. These quotations are computed in the same manner as the Fund's average annual compounded rate, except they will be based on the Fund's actual return for a specified period rather than on its average return over one-, five- and ten-year periods, or fractional portion thereof. CURRENT YIELD Current yield reflects the income per share earned by the Fund's portfolio investments and is determined by dividing the net investment income per share earned during a 30-day base period by the maximum offering price per share on the last day of the period and annualizing the result. Expenses accrued for the period include any fees charged to all shareholders during the base period. Current yield figures will be obtained using the following SEC formula: 6 Yield = 2 [(a-b + 1) - 1] --- cd where: a = dividends and interest earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive dividends d = the maximum offering price per share on the last day of the period CURRENT DISTRIBUTION RATE Current yield, which is calculated according to a formula prescribed by the SEC, is not indicative of the amounts which were or will be paid to shareholders of the Fund. Amounts paid to shareholders are reflected in the quoted current distribution rate. The current distribution rate is computed by dividing the total amount of dividends per share paid by the Fund during the past 12 months by a current maximum offering price. Under certain circumstances, such as when there has been a change in the amount of dividend payout or a fundamental change in investment policies, it might be appropriate to annualize the dividends paid over the period such policies were in effect, rather than using the dividends during the past 12 months. The current distribution rate differs from the current yield computation because it may include distributions to shareholders from sources other than dividends and interest, such as premium income from option writing and short-term capital gains and is calculated over a different period of time. VOLATILITY Occasionally statistics may be used to specify Fund volatility or risk. Measures of volatility or risk are generally used to compare Fund net asset value or performance relative to a market index. One measure of volatility is beta. Beta is the volatility of a fund relative to the total market, as represented by an index considered representative of the types of securities in which the fund invests. A beta of more than 1.00 indicates volatility greater than the market and a beta of less than 1.00 indicates volatility less than the market. Another measure of volatility or risk is standard deviation. Standard deviation is used to measure variability of net asset value or total return around an average over a specified period of time. The idea is that greater volatility means greater risk undertaken in achieving performance. OTHER PERFORMANCE QUOTATIONS For investors who are permitted to purchase shares of the Fund at net asset value, sales literature pertaining to the Fund may quote a current distribution rate, yield, total return, average annual total return and other measures of performance as described elsewhere in this SAI with the substitution of net asset value for the public offering price. Sales literature referring to the use of the Fund as a potential investment for Individual Retirement Accounts (IRAs), Business Retirement Plans, and other tax-advantaged retirement plans may quote a total return based upon compounding of dividends on which it is presumed no federal income tax applies. Regardless of the method used, past performance is not necessarily indicative of future results, but is an indication of the return to shareholders only for the limited historical period used. The Fund may include in its advertising or sales material information relating to investment objectives and performance results of funds belonging to the Templeton Group of Funds. Resources is the parent company of the advisors and underwriter of both the Franklin Group of Funds and Templeton Group of Funds. COMPARISONS To help you better evaluate how an investment in the Fund may satisfy your investment objective, advertisements and other materials regarding the Fund may discuss certain measures of Fund performance as reported by various financial publications. Materials may also compare performance (as calculated above) to performance as reported by other investments, indices, and averages. Such comparisons may include, but are not limited to, the following examples: a) Dow Jones Composite Average or its component averages - an unmanaged index composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20 transportation company stocks. Comparisons of performance assume reinvestment of dividends. b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged index composed of 400 industrial stocks, 40 financial stocks, 40 utilities stocks, and 20 transportation stocks. Comparisons of performance assume reinvestment of dividends. c) The New York Stock Exchange composite or component indices - an unmanaged index of all industrial, utilities, transportation, and finance stocks listed on the New York Stock Exchange. d) Wilshire 5000 Equity Index - represents the return on the market value of all common equity securities for which daily pricing is available. Comparisons of performance assume reinvestment of dividends. e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund Performance Analysis - measure total return and average current yield for the mutual fund industry and rank individual mutual fund performance over specified time periods, assuming reinvestment of all distributions, exclusive of any applicable sales charges. f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. - analyzes price, current yield, risk, total return, and average rate of return (average annual compounded growth rate) over specified time periods for the mutual fund industry. g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price, yield, risk, and total return for equity funds. h) Financial publications: The Wall Street Journal, Business Week, Changing Times, Financial World, Forbes, Fortune, and Money magazines - provide performance statistics over specified time periods. i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau of Labor Statistics - a statistical measure of change, over time, in the price of goods and services in major expenditure groups. j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates - historical measure of yield, price, and total return for common and small company stock, long-term government bonds, Treasury bills, and inflation. k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings & Loan League Fact Book. l) Historical data supplied by the research departments of First Boston Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman Brothers and Bloomberg L.P. m) Standard & Poor's 100 Stock Index - an unmanaged index based on the prices of 100 blue-chip stocks, including 92 industrials, one utility, two transportation companies, and 5 financial institutions. The S&P 100 Stock Index is a smaller more flexible index for options trading. From time to time, advertisements or information for the Fund may include a discussion of certain attributes or benefits to be derived by an investment in the Fund. Such advertisements or information may include symbols, headlines, or other material which highlights or summarizes the information discussed in more detail in the communication. Advertisements or information may also compare the Fund's performance to the return on certificates of deposit or other investments. You should be aware, however, that an investment in the Fund involves the risk of fluctuation of principal value, a risk generally not present in an investment in a certificate of deposit issued by a bank. For example, as the general level of interest rates rise, the value of the Fund's fixed-income investments, as well as the value of its shares which are based upon the value of such portfolio investments, can be expected to decrease. Conversely, when interest rates decrease, the value of the Fund's shares can be expected to increase. Certificates of deposit are frequently insured by an agency of the U.S. government. An investment in the Fund is not insured by any federal, state or private entity. In assessing comparisons of performance, you should keep in mind that the composition of the investments in the reported indices and averages is not identical to the Fund's portfolio, the indices and averages are generally unmanaged, and the items included in the calculations of the averages may not be identical to the formula used by the Fund to calculate its figures. In addition, there can be no assurance that the Fund will continue its performance as compared to such other averages. OTHER FEATURES AND BENEFITS The Fund may help you achieve various investment goals such as accumulating money for retirement, saving for a down payment on a home, college costs and/or other long-term goals. The Franklin College Costs Planner may assist you in determining how much money must be invested on a monthly basis in order to have a projected amount available in the future to fund a child's college education. (Projected college cost estimates are based upon current costs published by the College Board.) The Franklin Retirement Planning Guide leads you through the steps to start a retirement savings program. Of course, an investment in the Fund cannot guarantee that such goals will be met. MISCELLANEOUS INFORMATION The Fund is a member of the Franklin Templeton Group of Funds, one of the largest mutual fund organizations in the United States, and may be considered in a program for diversification of assets. Founded in 1947, Franklin, one of the oldest mutual fund organizations, has managed mutual funds for over 48 years and now services more than 2.5 million shareholder accounts. In 1992, Franklin, a leader in managing fixed-income mutual funds and an innovator in creating domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer in international investing. Together, the Franklin Templeton Group has over $135 billion in assets under management for more than 3.9 million U.S. based mutual fund shareholder and other accounts. The Franklin Group of Funds and the Templeton Group of Funds offers to the public 114 U.S. based mutual funds. The Fund may identify itself by its NASDAQ symbol or CUSIP number. The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in service quality for five of the past seven years. Employees of Resources or its subsidiaries who are access persons under the 1940 Act are permitted to engage in personal securities transactions subject to the following general restrictions and procedures: (i) the trade must receive advance clearance from a compliance officer and must be completed within 24 hours after clearance; (ii) copies of all brokerage confirmations must be sent to a compliance officer and, within 10 days after the end of each calendar quarter, a report of all securities transactions must be provided to the compliance officer; and (iii) access persons involved in preparing and making investment decisions must, in addition to (i) and (ii) above, file annual reports of their securities holdings each January and inform the compliance officer (or other designated personnel) if they own a security that is being considered for a fund or other client transaction or if they are recommending a security in which they have an ownership interest for purchase or sale by a fund or other client. OWNERSHIP AND AUTHORITY DISPUTES In the event of disputes involving multiple claims of ownership or authority to control your account, the Fund has the right (but has no obligation) to: (a) freeze the account and require the written agreement of all persons deemed by the Fund to have a potential property interest in the account, prior to executing instructions regarding the account; (b) interplead disputed funds or accounts with a court of competent jurisdiction; or (c) surrender ownership of all or a portion of the account to the Internal Revenue Service in response to a Notice of Levy. USEFUL TERMS AND DEFINITIONS 1940 Act - Investment Company Act of 1940, as amended Advisers - Franklin Advisers, Inc., the Fund's investment manager Board - The Board of Trustees of the Trust Code - Internal Revenue Code of 1986, as amended Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal underwriter Exchange - New York Stock Exchange Franklin Funds - the mutual funds in the Franklin Group of FundsAE except Franklin Valuemark Funds and the Franklin Government Securities Trust Franklin Templeton Funds - the Franklin Funds and the Templeton Funds Franklin Templeton Group of Funds - The funds in the Franklin Group of Funds(R) and the Templeton Group of Funds Investor Services - Franklin/Templeton Investor Services, Inc. Letter - Letter of Intent Manager - Franklin Advisers, Inc., the Fund's investment manager Nonaffiliated Trustees - Trustees not affiliated with Advisers Resources - Franklin Resources, Inc. SAI - Statement of Additional Information SEC - Securities and Exchange Commission Securities Dealer - financial institutions that, either directly or through affiliates, have an agreement with Distributors to handle customer orders and accounts with the Fund. This reference is for convenience only and does not indicate a legal conclusion of capacity. Templeton Funds - the U.S. registered mutual funds in the Templeton Group of Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series Fund U.S. - United States APPENDIX DESCRIPTION OF COMMERCIAL PAPER RATINGS Moody's Moody's commercial paper ratings, which are also applicable to municipal paper investments permitted to be made by the Fund, are opinions of the ability of issuers to repay punctually their promissory obligations not having an original maturity in excess of nine months. Moody's employs the following designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: P-1 (Prime-1): Superior capacity for repayment. P-2 (Prime-2): Strong capacity for repayment. S&P S&P's ratings are a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into four categories, ranging from "A" for the highest quality obligations to "D" for the lowest. Issues within the "A" category are delineated with the numbers 1, 2 and 3 to indicate the relative degree of safety, as follows: A-1: This designation indicates the degree of safety regarding timely payment is very strong. A "plus" (+) designation indicates an even stronger likelihood of timely payment. A-2: Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as overwhelming as for issues designated A-1. A-3: Issues carrying this designation have a satisfactory capacity for timely payment. They are, however, somewhat more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. FRANKLIN STRATEGIC SERIES File Nos. 33-39088 811-6243 FORM N-1A PART C Other Information Item 24 Financial Statements and Exhibits a) To be filed by Amendment. b) Exhibits: The following exhibits are incorporated by reference to the filings noted, with the exception of exhibits 5(vii), 8(iii) and 8(iv) which are attached. (1) copies of the charter as now in effect; (i) Agreement and Declaration of Trust of Franklin California 250 Growth Index Fund as of January 22, 1991: Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (ii) Certificate of Trust of Franklin California 250 Growth Index Fund dated January 22, 1991: Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (iii)Certificate of Amendment to the Certificate of Trust of Franklin California 250 Growth Index Fund dated November 19, 1991: Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (iv) Certificate of Amendment to the Certificate of Trust of Franklin Strategic Series dated May 14, 1992: Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (2) copies of the existing By-Laws or instruments corresponding thereto; (i) Amended and Restated By-Laws of Franklin California 250 Growth Index Fund as of April 25, 1991: Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (ii) Amendment to By-Laws dated October 27, 1994: Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (3) copies of any voting trust agreement with respect to more than five percent of any class of equity securities of the Registrant; Not Applicable (4) specimens or copies of each security issued by the Registrant, including copies of all constituent instruments, defining the rights of the holders of such securities, and copies of each security being registered; Not Applicable (5) copies of all investment advisory contracts relating to the management of the assets of the Registrant; (i) Management Agreement between the Registrant on behalf of Franklin Small Cap Growth Fund, Franklin Global Health Care Fund, Franklin Global Utilities Fund and Franklin Advisers, Inc. dated February 24, 1992: Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (ii) Administration Agreement between the Registrant on behalf of Franklin MidCap Growth Fund and Franklin Advisers, Inc. dated April 12, 1993: Registrant: Franklin Strategic Series Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (iii)Administration Agreement between the Registrant on behalf of FISCO MidCap Growth Fund and Franklin Advisers, Inc. dated August 17, 1993: Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (iv) Management Agreement between the Registrant on behalf of Franklin Strategic Income Fund and Franklin Advisers, Inc. effective May 24, 1994: Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (v) Subadvisory Agreement between Franklin Advisers, Inc. and Templeton Investment Counsel, Inc., providing for services to Franklin Strategic Income Fund dated May 24, 1994: Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (vi) Amended and Restated Management Agreement between Franklin Advisers, Inc. and the Registrant on behalf of Franklin California Growth Fund effective July 12, 1993: Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (vii)Management Agreement between Registrant on behalf of Franklin Blue Chip Fund and Franklin Advisers, Inc. effective February 13, 1996. (6) copies of each underwriting or distribution contract between the Registrant and a principal underwriter, and specimens or copies of all agreements between principal underwriters and dealers; (i) Amended and Restated Distribution Agreement between the Registrant on behalf of all Series except Franklin Strategic Income Series and Franklin/Templeton Distributors, Inc. dated April 23, 1995: Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (ii) Amended and Restated Distribution Agreement between the Registrant on behalf of Franklin Strategic Income Series and Franklin/Templeton Distributors, Inc. dated March 29, 1995: Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (iii) Form of Dealer Agreement between Franklin/Templeton Distributors, Inc. and Dealers Filing: Post-Effective Amendment No. 16 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: September 12, 1995 (7) copies of all bonus, profit sharing, pension or other similar contracts or arrangements wholly or partly for the benefit of Trustees or officers of the Registrant in their capacity as such; any such plan that is not set forth in a formal document, furnish a reasonably detailed description thereof; Not Applicable (8) copies of all custodian agreements and depository contracts under Section 17(f) of the Investment Company Act of 1940 (the "1940 Act"), with respect to securities and similar investments of the Registrant, including the schedule of remuneration; (i) Custodian Agreement between Registrant and Bank of America NT&SA dated May 24, 1994 Filing: Post-Effective Amendment No. 14 to Registration Statement on form N-1A File No. 33-39088 Filing Date: June 1, 1995 (ii) Custodian Agreements between Registrant and Citibank Delaware 1. Citicash Management ACH Customer Agreement 2. Citibank Cash Management Services Master Agreement 3. Short Form Bank Agreement - Deposits and Disbursements of Funds Registrant: Franklin Premier Return Fund Filing: Post-Effective Amendment No. 55 to Registration Statement on Form N-1A File No. 2-12647 Filing Date: March 1, 1996 (iii) Master Custody Agreement between Registrant and Bank of New York dated February 16, 1996 (iv) Terminal Link Agreement between Registrant and Bank of New York dated February 16, 1996 (9) copies of all other material contracts not made in the ordinary course of business which are to be performed in whole or in part at or after the date of filing the Registration Statement; Not Applicable (10) an opinion and consent of counsel as to the legality of the securities being registered, indicating whether they will when sold be legally issued, fully paid and nonassessable; Not Applicable (11) Copies of any other opinions, appraisals or rulings and consents to the use thereof relied on in the preparation of this registration statement and required by Section 7 of the 1933 Act; Not Applicable (12) all financial statements omitted from Item 23; Not Applicable (13) copies of any agreements or understandings made in consideration for providing the initial capital between or among the Registrant, the underwriter, adviser, promoter or initial stockholders and written assurances from promoters or initial stockholders that their purchases were made for investment purposes without any present intention of redeeming or reselling; (i) Letter of Understanding dated August 20, 1991. Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (ii) Letter of Understanding dated April 12, 1995. Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (iii)Letter of Understanding dated June 5, 1995 Filing: Post-Effective Amendment No. 17 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: December 5, 1995 (14) copies of the model plan used in the establishment of any retirement plan in conjunction with which Registrant offers its securities, any instructions thereto and any other documents making up the model plan. Such form(s) should disclose the costs and fees charged in connection therewith; Not Applicable (15) copies of any plan entered into by Registrant pursuant to Rule 12b-l under the 1940 Act, which describes all material aspects of the financing of distribution of Registrant's shares, and any agreements with any person relating to implementation of such plan. (i) Amended and Restated Distribution Plan between Franklin Strategic Series on behalf of Franklin California Growth Fund, Franklin Small Cap Growth Fund, Franklin Global Health Care Fund and Franklin Global Utilities Fund and Franklin Distributors, Inc. dated July 1, 1993: Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (ii) Distribution Plan between Franklin Strategic Series on behalf of Franklin Global Utilities Fund - Class II and Franklin/Templeton Distributors, Inc. dated March 30, 1995: Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (iii)Distribution Plan pursuant to Rule 12b-1 between the Registrant on behalf of the Franklin Strategic Income Fund and Franklin Distributors, Inc. dated May 24, 1994 is Incorporated herein by reference to: Registrant: Franklin Strategic Series Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (iv) Distribution Plan pursuant to Rule 12b-1 between the Registrant on behalf of the Franklin Natural Resources Fund and Franklin/Templeton Distributors, Inc. dated June 1, 1995 is Incorporated herein by reference to: Registrant: Franklin Strategic Series Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (16) schedule for computation of each performance quotation provided in the registration statement in response to Item 22 (which need not be audited). (i) Schedule for Computation of Performance and Quotations Registrant: Franklin Tax-Advantaged U.S. Government Securities Fund Filing: Post-Effective Amendment No. 8 to Registration Statement on Form N-1A File No. 33-11963 Filing Date: March 1, 1995 (17) Powers of Attorney (i) Power of Attorney for Franklin Strategic Series dated February 16, 1995 Registrant: Franklin Strategic Series Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (ii) Power of Attorney for MidCap Growth Portfolio dated June 29, 1995: Filing: Post-Effective Amendment No. 15 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: July 3, 1995 (iii)Certificate of Secretary for Franklin Strategic Series dated February 16, 1995: Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (iv) Certificate of Secretary for MidCap Growth Portfolio dated June 29, 1995: Filing: Post-Effective Amendment No. 15 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: July 3, 1995 (18) Copies of any plan entered into by Registrant pursuant to Rule 18f-3 under the 1940 Act (i) Form of Multiple Class Plan: Filing: Post-Effective Amendment No. 15 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: July 3, 1995 (27) Financial Data Schedule Computation Not Applicable Item 25 Persons Controlled by or under Common Control with Registrant None Item 26 Number of Holders of Securities As of February 29, 1996 the number of record holders of the only classes of securities of the Registrant was as follows: Title of Class Number of Record Holders Shares of Beneficial Interest Class I Class II Franklin Blue Chip Fund 0 N/A Franklin California Growth Fund 7,637 N/A Franklin Global Health Care Fund 5,718 N/A Franklin Global Utilities Fund 13,467 209 Franklin Small Cap Growth Fund 32,804 1,358 FISCO Midcap Growth Fund 1 N/A Franklin MidCap Growth Fund 1 N/A Franklin Strategic Income Fund 390 N/A Franklin Natural Resources Fund 519 N/A Item 27 Indemnification Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to Trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a Trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such Trustee, officer or controlling person in connection with securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court or appropriate jurisdiction the question whether such indemnification is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Item 28 Business and Other Connections of Investment Adviser a) Franklin Advisers, Inc. The officers and Directors of the Registrant's manager also serve as officers and/or directors for (1) the manager's corporate parent, Franklin Resources, Inc., and/or (2) other investment companies in the Franklin Group of Funds (Registered Trademark). In addition, Mr. Charles B. Johnson is a director of General Host Corporation. For additional information please see Part B and Schedules A and D of Form ADV of the Funds' Investment Manager (SEC File 801-26292), incorporated herein by reference, which sets forth the officers and directors of the Investment Manager and information as to any business, profession, vocation or employment of a substantial nature engaged in by those officers and directors during the past two years. b) Templeton Investment Counsel, Inc. Templeton Investment Counsel, Inc. ("TICI"), an indirect, wholly owned subsidiary of Franklin Resources, Inc., serves as the Franklin Strategic Income Fund's Sub-adviser, furnishing to Franklin Advisers, Inc. in that capacity, portfolio management services and investment research. For additional information please see Part B and Schedules A and D of Form ADV of the Franklin Strategic Income Fund's Sub-adviser (SEC File 801-15125), incorporated herein by reference, which sets forth the officers and directors of the Sub-adviser and information as to any business, profession, vocation or employment of a substantial nature engaged in by those officers and directors during the past two years. Item 29 Principal Underwriters a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as principal underwriter of shares of AGE High Income Fund, Inc., Franklin California Tax-Free Income Fund, Inc., Franklin California Tax-Free Trust, Franklin Custodian Funds, Inc., Franklin Equity Fund, Franklin Federal Money Fund, Franklin Federal Tax-Free Income Fund, Franklin Gold Fund, Franklin Templeton International Trust, Franklin Investors Securities Trust, Franklin Managed Trust, Franklin Money Fund, Franklin Municipal Securities Trust, Franklin New York Tax-Free Income Fund, Inc., Franklin New York Tax-Free Trust, Franklin Premier Return Fund, Franklin Real Estate Securities Trust, Franklin Strategic Mortgage Portfolio, Franklin Tax-Exempt Money Fund, Franklin Tax-Advantaged High Yield Securities Fund, Franklin Tax-Advantaged International Bond Fund, Franklin Tax-Advantaged U.S. Government Securities Fund, Franklin Tax-Free Trust, Franklin Value Investors Trust, Institutional Fiduciary Trust, Templeton American Trust, Inc., Franklin Templeton Japan Fund, Franklin Templeton Money Fund Trust, Templeton Capital Accumulator Fund, Inc., Templeton Developing Markets Trust, Templeton Funds, Inc., Templeton Global Investment Trust, Templeton Global Opportunities Trust, Templeton Growth Fund, Inc., Templeton Income Trust, Templeton Institutional Funds, Inc., Templeton Real Estate Securities Fund, Templeton Smaller Companies Growth Fund, Inc., Templeton Variable Products Series Fund. b) The information required by this Item 29 with respect to each director and officer of Distributors is incorporated by reference to Part B of this N-1A and Schedule A of Form BD filed by Distributors with the Securities and Exchange Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889) c) Not Applicable. Registrant's principal underwriter is an affiliated person of an affiliated person of the Registrant. Item 30 Location of Accounts and Records The accounts, books or other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 are kept by the Registrant or its shareholder services agent, Franklin/Templeton Investor Services, Inc., both of whose address is 777 Mariners Island Blvd., San Mateo, CA 94404. Item 31 Management Services There are no management-related service contracts not discussed in Part A or Part B. Item 32 Undertakings a) The Registrant hereby undertakes to promptly call a meeting of shareholders for the purpose of voting upon the question of removal of any trustee or trustees when requested in writing to do so by the record holders of not less than 10 per cent of the Registrant's outstanding shares to assist its shareholders in the communicating with other shareholders in accordance with the requirements of Section 16(c) of the Investment Company Act of 1940. b) The Registrant hereby undertakes to comply with the information requirement in Item 5A of the Form N-1A by including the required information in the Trust's annual report and to furnish each person to whom a prospectus is delivered a copy of the annual report upon request and without charge. c) The Registrant hereby undertakes to file a Post-Effective Amendment on behalf of Franklin Blue Chip Fund using Financial Statements which need not be certified, within four to six months from the effective date of Registrant's Registration Statement under the Securities Act of 1933. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, as amended, the Registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Mateo and the State of California, on the 14th day of March 1996. Franklin Strategic Series (Registrant) By: Rupert H. Johnson, Jr., President Rupert H. Johnson, Jr., President Pursuant to the requirements of the Securities Act of 1933, this Amendment to its Registration Amendment has been signed below by the following persons in the capacities and on the dates indicated: Rupert H. Johnson, Jr.* Principal Executive Officer and Rupert H. Johnson, Jr. Trustee Dated: March 14, 1995 Martin L. Flanagan* Principal Financial Officer Martin L. Flanagan Dated: March 14, 1996 Diomedes Loo-Tam* Principal Accounting Officer Diomedes Loo-Tam Dated: March 14, 1996 Frank H. Abbott, III* Trustee Frank H. Abbott, III Dated: March 14, 1996 Harris J. Ashton* Trustee Harris J. Ashton Dated: March 14, 1996 Harmon E. Burns* Trustee Harmon E. Burns Dated: March 14, 1996 S. Joseph Fortunato* Trustee S. Joseph Fortunato Dated: March 14, 1996 David W. Garbellano* Trustee David W. Garbellano Dated: March 14, 1996 Charles B. Johnson* Trustee Charles B. Johnson Dated: March 14, 1996 Frank W.T. LaHaye* Trustee Frank W.T. LaHaye Dated: March 14, 1996 Gordon S. Macklin* Trustee Gordon S. Macklin Dated: March 14, 1996 *By /S/ Larry L. Greene, Attorney-in-Fact (Pursuant to Power of Attorney previously filed) FRANKLIN STRATEGIC SERIES REGISTRATION STATEMENT EXHIBITS INDEX EXHIBIT NO. DESCRIPTION LOCATION EX-99.B1(i) Agreement and Declaration of * Trust of Franklin California 250 Growth Index Fund as of January 22, 1991 EX-99.B1(ii) Certificate of Trust of Franklin * California 250 Growth Index Fund dated January 22, 1991 EX-99.B1(iii) Certificate of Amendment of Certificate * of Trust to the Franklin California 250 Growth Index Fund dated November 19, 1991 EX-99.B1(iv) Certificate of Amendment to the * Certificate of Trust of Franklin Strategic Series dated May 14, 1992 EX-99.B2(i) Amended and Restated By-Laws of * Franklin California 250 Growth Index Fund as of April 25, 1991 EX-99.B2(ii) Amendment to By-Laws dated * October 27, 1994 EX-99.B5(i) Management Agreement between Registrant * on behalf of Franklin Small Cap Growth Fund, Franklin Global Healthcare Fund, Franklin Global Utilities Fund and Franklin Advisers, Inc. dated February 24, 1992 EX-99.B5(ii) Administration Agreement between * Registrant on behalf of Franklin MidCap Growth Fund and Franklin Advisers, Inc. dated April 12, 1993 EX-99.B5(iii) Administration Agreement between * Registrant on behalf of FISCO MidCap Growth Fund and Franklin Advisers, Inc. dated August 17, 1993 EX-99.B5(iv) Management Agreement between Registrant * on behalf of Franklin Strategic Income Fund and Franklin Advisers, Inc. effective May 24, 1994 EX-99.B5(v) Subadvisory Agreement between Franklin * Advisers, Inc. and Templeton Investment Counsel, Inc., providing for services to Franklin Strategic Income Fund dated May 24, 1994 EX-99.B5(vi) Amended and Restated Management Agreement * between Franklin Advisers, Inc. and the Registrant, on behalf of Franklin California Growth Fund effective July 12, 1993 EX-99.B5(vii) Management Agreement between Attached Registrant on behalf of Franklin Blue Chip Fund and Franklin Advisers, Inc. dated February 13, 1996 EX-99.B6(i) Amended and Restated Distribution * Agreement between Registrant and Franklin/Templeton Distributors, Inc. on behalf of all Series except Franklin Strategic Income Series dated April 23, 1995 EX-99.B6(ii) Amended and Restated Distribution * Agreements between Registrant and Franklin/Templeton Distributors, Inc. on behalf of Franklin Strategic Income Series dated March 29, 1995 Ex-99.B6(iii) Forms of Dealer Agreement between * Franklin/Templeton Distributors, Inc. and dealers EX-99.B8(i) Custodian Agreement between Registrant * and Bank of America NT&SA (Franklin Small Cap Growth Fund) dated May 24, 1994 EX-99.B8(ii) Custodian Agreements between Registrant * and Citibank Delaware EX-99.B8(iii) Master Custody Agreement between Attached Registrant and Bank of New York dated February 16, 1996 EX-99.B8(iv) Terminal Link Agreement between Attached Registrant and Bank of New York dated February 16, 1996 EX-99.B13(i) Letter of Understanding dated August 20, * 1991 EX-99.B13(ii) Letter of Understanding dated April 12, * 1995 EX-99.B13(iii) Letter of Understanding for Franklin * Natural Resources Fund dated June 5, 1995 EX-99.B15(i) Amended and Restated Distribution Plan * between Franklin Strategic Series and Franklin Templeton Distributors, Inc. on behalf of Franklin California Growth Fund, Franklin Small Cap Growth Fund, Franklin Global Health Care Fund and Franklin Global Utilities Fund dated July 1, 1993 EX-99.B15(ii) Distribution Plan between Franklin * Strategic Series and Franklin Templeton Distributors, Inc. on behalf of Franklin Global Utilities Fund-Class II dated March 30, 1995 EX-99.B15(iii) Distribution Plan pursuant to Rule 12b-1 * between Registrant, on behalf of the Franklin Strategic Income Fund, and Franklin Distributors, Inc. dated May 24, 1994 EX-99.B15(iv) Distribution Plan pursuant to Rule 12b-1 * between the Registrant on behalf of the Franklin Natural Resources Fund and Franklin/Templeton Distributors, Inc. dated June 1, 1995 EX-99.B16(i) Schedule for Computation of Performance * Quotations EX-99.B17(i) Power of Attorney for Franklin Strategic * Series dated February 16, 1995 EX-99.B17(ii) Power of Attorney for MidCap Growth * Portfolio dated June 29, 1995 EX-99.B17(iii) Certificate of Secretary for Franklin * Strategic Series dated February 16, 1995 EX-99.B17(iv) Certificate of Secretary for MidCap * Growth Portfolio dated June 29, 1995 EX-99.B18(i) Form of Multiple Class Plan * * Incorporated by reference EX-99.B5(VII) 2 FRANKLIN STRATEGIC SERIES on behalf of the FRANKLIN BLUE CHIP FUND MANAGEMENT AGREEMENT THIS MANAGEMENT AGREEMENT made between FRANKLIN STRATEGIC SERIES, a Delaware business trust (the "Trust"), on behalf of FRANKLIN BLUE CHIP FUND (the "Fund"), a series of the Trust, and FRANKLIN ADVISERS, INC., a California corporation, (the "Manager"). WHEREAS, the Trust has been organized and intends to operate as an investment company registered under the Investment Company Act of 1940 (the "1940 Act") for the purpose of investing and reinvesting its assets in securities, as set forth in its Agreement and Declaration of Trust, its By-Laws and its Registration Statements under the 1940 Act and the Securities Act of 1933, all as heretofore and hereafter amended and supplemented; and the Trust desires to avail itself of the services, information, advice, assistance and facilities of an investment manager and to have an investment manager perform various management, statistical, research, investment advisory and other services for the Fund; and, WHEREAS, the Manager is registered as an investment adviser under the Investment Advisers Act of 1940, is engaged in the business of rendering management, investment advisory, counseling and supervisory services to investment companies and other investment counseling clients, and desires to provide these services to the Fund. NOW THEREFORE, in consideration of the terms and conditions hereinafter set forth, it is mutually agreed as follows: l. Employment of the Manager. The Trust hereby employs the Manager to manage the investment and reinvestment of the Fund's assets and to administer its affairs, subject to the direction of the Board of Trustees and the officers of the Trust, for the period and on the terms hereinafter set forth. The Manager hereby accepts such employment and agrees during such period to render the services and to assume the obligations herein set forth for the compensation herein provided. The Manager shall for all purposes herein be deemed to be an independent contractor and shall, except as expressly provided or authorized (whether herein or otherwise), have no authority to act for or represent the Fund or the Trust in any way or otherwise be deemed an agent of the Fund or the Trust. 2. Obligations of and Services to be Provided by the Manager. The Manager undertakes to provide the services hereinafter set forth and to assume the following obligations: A. Administrative Services. The Manager shall furnish to the Fund adequate (i) office space, which may be space within the offices of the Manager or in such other place as may be agreed upon from time to time, (ii) office furnishings, facilities and equipment as may be reasonably required for managing the affairs and conducting the business of the Fund, including conducting correspondence and other communications with the shareholders of the Fund, maintaining all internal bookkeeping, accounting and auditing services and records in connection with the Fund's investment and business activities. The Manager shall employ or provide and compensate the executive, secretarial and clerical personnel necessary to provide such services. The Manager shall also compensate all officers and employees of the Trust who are officers or employees of the Manager or its affiliates. B. Investment Management Services. (a) The Manager shall manage the Fund's assets subject to and in accordance with the investment objectives and policies of the Fund and any directions which the Trust's Board of Trustees may issue from time to time. In pursuance of the foregoing, the Manager shall make all determinations with respect to the investment of the Fund's assets and the purchase and sale of its investment securities, and shall take such steps as may be necessary to implement the same. Such determinations and services shall include determining the manner in which any voting rights, rights to consent to corporate action and any other rights pertaining to the Fund's investment securities shall be exercised. The Manager shall render or cause to be rendered regular reports to the Trust, at regular meetings of its Board of Trustees and at such other times as may be reasonably requested by the Trust's Board of Trustees, of (i) the decisions made with respect to the investment of the Fund's assets and the purchase and sale of its investment securities, (ii) the reasons for such decisions and (iii) the extent to which those decisions have been implemented. (b) The Manager, subject to and in accordance with any directions which the Trust's Board of Trustees may issue from time to time, shall place, in the name of the Fund, orders for the execution of the Fund's securities transactions. When placing such orders, the Manager shall seek to obtain the best net price and execution for the Fund, but this requirement shall not be deemed to obligate the Manager to place any order solely on the basis of obtaining the lowest commission rate if the other standards set forth in this section have been satisfied. The parties recognize that there are likely to be many cases in which different brokers are equally able to provide such best price and execution and that, in selecting among such brokers with respect to particular trades, it is desirable to choose those brokers who furnish research, statistical, quotations and other information to the Fund and the Manager in accordance with the standards set forth below. Moreover, to the extent that it continues to be lawful to do so and so long as the Board of Trustees determines that the Fund will benefit, directly or indirectly, by doing so, the Manager may place orders with a broker who charges a commission for that transaction which is in excess of the amount of commission that another broker would have charged for effecting that transaction, provided that the excess commission is reasonable in relation to the value of "brokerage and research services" (as defined in Section 28(e) (3) of the Securities Exchange Act of 1934) provided by that broker. Accordingly, the Trust and the Manager agree that the Manager shall select brokers for the execution of the Fund's transactions from among: (i) Those brokers and dealers who provide quotations and other services to the Fund, specifically including the quotations necessary to determine the Fund's net assets, in such amount of total brokerage as may reasonably be required in light of such services; and (ii) Those brokers and dealers who supply research, statistical and other data to the Manager or its affiliates which the Manager or its affiliates may lawfully and appropriately use in their investment advisory capacities, which relate directly to securities, actual or potential, of the Fund, or which place the Manager in a better position to make decisions in connection with the management of the Fund's assets and securities, whether or not such data may also be useful to the Manager and its affiliates in managing other portfolios or advising other clients, in such amount of total brokerage as may reasonably be required. Provided that the Trust's officers are satisfied that the best execution is obtained, the sale of shares of the Fund may also be considered as a factor in the selection of broker-dealers to execute the Fund's portfolio transactions. (c) When the Manager has determined that the Fund should tender securities pursuant to a "tender offer solicitation," Franklin/Templeton Distributors, Inc. ("Distributors") shall be designated as the "tendering dealer" so long as it is legally permitted to act in such capacity under the federal securities laws and rules thereunder and the rules of any securities exchange or association of which Distributors may be a member. Neither the Manager nor Distributors shall be obligated to make any additional commitments of capital, expense or personnel beyond that already committed (other than normal periodic fees or payments necessary to maintain its corporate existence and membership in the National Association of Securities Dealers, Inc.) as of the date of this Agreement. This Agreement shall not obligate the Manager or Distributors (i) to act pursuant to the foregoing requirement under any circumstances in which they might reasonably believe that liability might be imposed upon them as a result of so acting, or (ii) to institute legal or other proceedings to collect fees which may be considered to be due from others to it as a result of such a tender, unless the Trust on behalf of the Fund shall enter into an agreement with the Manager and/or Distributors to reimburse them for all such expenses connected with attempting to collect such fees, including legal fees and expenses and that portion of the compensation due to their employees which is attributable to the time involved in attempting to collect such fees. (d) The Manager shall render regular reports to the Trust, not more frequently than quarterly, of how much total brokerage business has been placed by the Manager, on behalf of the Fund, with brokers falling into each of the categories referred to above and the manner in which the allocation has been accomplished. (e) The Manager agrees that no investment decision will be made or influenced by a desire to provide brokerage for allocation in accordance with the foregoing, and that the right to make such allocation of brokerage shall not interfere with the Manager's paramount duty to obtain the best net price and execution for the Fund. C. Provision of Information Necessary for Preparation of Securities Registration Statements, Amendments and Other Materials. The Manager, its officers and employees will make available and provide accounting and statistical information required by the Fund in the preparation of registration statements, reports and other documents required by federal and state securities laws and with such information as the Fund may reasonably request for use in the preparation of such documents or of other materials necessary or helpful for the underwriting and distribution of the Fund's shares. D. Other Obligations and Services. The Manager shall make its officers and employees available to the Board of Trustees and officers of the Trust for consultation and discussions regarding the administration and management of the Fund and its investment activities. 3. Expenses of the Fund. It is understood that the Fund will pay all of its own expenses other than those expressly assumed by the Manager herein, which expenses payable by the Fund shall include: A. Fees and expenses paid to the Manager as provided herein; B. Expenses of all audits by independent public accountants; C. Expenses of transfer agent, registrar, custodian, dividend disbursing agent and shareholder record-keeping services, including the expenses of issue, repurchase or redemption of its shares; D. Expenses of obtaining quotations for calculating the value of the Fund's net assets; E. Salaries and other compensations of executive officers of the Trust who are not officers, directors, stockholders or employees of the Manager or its affiliates; F. Taxes levied against the Fund; G. Brokerage fees and commissions in connection with the purchase and sale of securities for the Fund; H. Costs, including the interest expense, of borrowing money; I. Costs incident to meetings of the Board of Trustees and shareholders of the Fund, reports to the Fund's shareholders, the filing of reports with regulatory bodies and the maintenance of the Fund's and the Trust's legal existence; J. Legal fees, including the legal fees related to the registration and continued qualification of the Fund's shares for sale; K. Trustees' fees and expenses to trustees who are not directors, officers, employees or stockholders of the Manager or any of its affiliates; L. Costs and expense of registering and maintaining the registration of the Fund and its shares under federal and any applicable state laws; including the printing and mailing of prospectuses to its shareholders; M. Trade association dues; and N. The Fund's pro rata portion of fidelity bond, errors and omissions, and trustees and officer liability insurance premiums. 4. Compensation of the Manager. The Fund shall pay a management fee in cash to the Manager based upon a percentage of the value of the Fund's net assets, calculated as set forth below, as compensation for the services rendered and obligations assumed by the Manager, during the preceding month, on the first business day of the month in each year. A. For purposes of calculating such fee, the value of the net assets of the Fund shall be determined in the same manner as that Fund uses to compute the value of its net assets in connection with the determination of the net asset value of its shares, all as set forth more fully in the Fund's current prospectus and statement of additional information. The rate of the management fee payable by the Fund shall be calculated daily at the following annual rates: 0.75% of the average daily net assets up to and including $500 million; 0.625% of the average daily net assets over $500 million up to and including $1 billion; and 0.50% of the average daily net assets over $1 billion. B. The management fee payable by the Fund shall be reduced or eliminated to the extent that Distributors has actually received cash payments of tender offer solicitation fees less certain costs and expenses incurred in connection therewith and to the extent necessary to comply with the limitations on expenses which may be borne by the Fund as set forth in the laws, regulations and administrative interpretations of those states in which the Fund's shares are registered. The Manager may waive all or a portion of its fees provided for hereunder and such waiver shall be treated as a reduction in purchase price of its services. The Manager shall be contractually bound hereunder by the terms of any publicly announced waiver of its fee, or any limitation of the Fund's expenses, as if such waiver or limitation were full set forth herein. C. If this Agreement is terminated prior to the end of any month, the accrued management fee shall be paid to the date of termination. 5. Activities of the Manager. The services of the Manager to the Fund hereunder are not to be deemed exclusive, and the Manager and any of its affiliates shall be free to render similar services to others. Subject to and in accordance with the Agreement and Declaration of Trust and By-Laws of the Trust and Section 10(a) of the 1940 Act, it is understood that trustees, officers, agents and shareholders of the Trust are or may be interested in the Manager or its affiliates as directors, officers, agents or stockholders; that directors, officers, agents or stockholders of the Manager or its affiliates are or may be interested in the Trust as trustees, officers, agents, shareholders or otherwise; that the Manager or its affiliates may be interested in the Fund as shareholders or otherwise; and that the effect of any such interests shall be governed by said Agreement and Declaration of Trust, By-Laws and the 1940 Act. 6. Liabilities of the Manager. A. In the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of obligations or duties hereunder on the part of the Manager, the Manager shall not be subject to liability to the Trust or the Fund or to any shareholder of the Fund for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security by the Fund. B. Notwithstanding the foregoing, the Manager agrees to reimburse the Trust for any and all costs, expenses, and counsel and trustees' fees reasonably incurred by the Trust in the preparation, printing and distribution of proxy statements, amendments to its Registration Statement, holdings of meetings of its shareholders or trustees, the conduct of factual investigations, any legal or administrative proceedings (including any applications for exemptions or determinations by the Securities and Exchange Commission) which the Trust incurs as the result of action or inaction of the Manager or any of its affiliates or any of their officers, directors, employees or stockholders where the action or inaction necessitating such expenditures (i) is directly or indirectly related to any transactions or proposed transaction in the stock or control of the Manager or its affiliates (or litigation related to any pending or proposed or future transaction in such shares or control) which shall have been undertaken without the prior, express approval of the Trust's Board of Trustees; or, (ii) is within the control of the Manager or any of its affiliates or any of their officers, directors, employees or stockholders. The Manager shall not be obligated pursuant to the provisions of this Subparagraph 6(B), to reimburse the Trust for any expenditures related to the institution of an administrative proceeding or civil litigation by the Trust or a shareholder seeking to recover all or a portion of the proceeds derived by any stockholder of the Manager or any of its affiliates from the sale of his shares of the Manager, or similar matters. So long as this Agreement is in effect, the Manager shall pay to the Trust the amount due for expenses subject to this Subparagraph 6(B) within 30 days after a bill or statement has been received by the Manager therefor. This provision shall not be deemed to be a waiver of any claim the Trust may have or may assert against the Manager or others for costs, expenses or damages heretofore incurred by the Trust or for costs, expenses or damages the Trust may hereafter incur which are not reimbursable to it hereunder. C. No provision of this Agreement shall be construed to protect any trustee or officer of the Trust, or director or officer of the Manager, from liability in violation of Sections 17(h) and (i) of the 1940 Act. 7. Renewal and Termination. A. This Agreement shall become effective on the date written below and shall continue in effect for two (2) years thereafter, unless sooner terminated as hereinafter provided and shall continue in effect thereafter for periods not exceeding one (1) year so long as such continuation is approved at least annually (i) by a vote of a majority of the outstanding voting securities of each Fund or by a vote of the Board of Trustees of the Trust, and (ii) by a vote of a majority of the Trustees of the Trust who are not parties to the Agreement (other than as Trustees of the Trust), cast in person at a meeting called for the purpose of voting on the Agreement. B. This Agreement: (i) may at any time be terminated without the payment of any penalty either by vote of the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Fund on 60 days' written notice to the Manager; (ii) shall immediately terminate with respect to the Fund in the event of its assignment; and (iii) may be terminated by the Manager on 60 days' written notice to the Fund. C. As used in this Paragraph the terms "assignment," "interested person" and "vote of a majority of the outstanding voting securities" shall have the meanings set forth for any such terms in the 1940 Act. D. Any notice under this Agreement shall be given in writing addressed and delivered, or mailed post-paid, to the other party at any office of such party. 8. Severability. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. 9. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and effective on the 13th day of February, 1996. FRANKLIN STRATEGIC SERIES By: /s/ Deborah R. Gatzek Deborah R. Gatzek Vice President & Secretary FRANKLIN ADVISERS, INC. By: /s/ Harmon E. Burns Harmon E. Burns Executive Vice President EX-99.B8(III) 3 MASTER CUSTODY AGREEMENT THIS CUSTODY AGREEMENT ("Agreement") is made and entered into as of February 16, 1996, by and between each Investment Company listed on Exhibit A, for itself and for each of its Series listed on Exhibit A, and BANK OF NEW YORK, a New York corporation authorized to do a banking business (the "Custodian"). RECITALS A. Each Investment Company is an investment company registered under the Investment Company Act of 1940, as amended (the "Investment Company Act") that invests and reinvests, for itself or on behalf of its Series, in Domestic Securities and Foreign Securities. B. The Custodian is, and has represented to each Investment Company that the Custodian is, a "bank" as that term is defined in Section 2(a)(5) of the Investment Company Act of 1940, as amended, and is eligible to receive and maintain custody of investment company assets pursuant to Section 17(f) and Rule 17f-2 thereunder. C. The Custodian and each Investment Company, for itself and for each of its Series, desire to provide for the retention of the Custodian as a custodian of the assets of each Investment Company and each Series, on the terms and subject to the provisions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: Section 1.0 FORM OF AGREEMENT Although the parties have executed this Agreement in the form of a Master Custody Agreement for administrative convenience, this Agreement shall create a separate custody agreement for each Investment Company and for each Series designated on Exhibit A, as though each Investment Company had separately executed an identical custody agreement for itself and for each of its Series. No rights, responsibilities or liabilities of any Investment Company or Series shall be attributed to any other Investment Company or Series. Section 1.1 DEFINITIONS For purposes of this Agreement, the following terms shall have the respective meanings specified below: "Agreement" shall mean this Custody Agreement. "Board" shall mean the Board of Trustees, Directors or Managing General Partners, as applicable, of an Investment Company. "Business Day" with respect to any Domestic Security means any day, other than a Saturday or Sunday, that is not a day on which banking institutions are authorized or required by law to be closed in The City of New York and, with respect to Foreign Securities, a London Business Day. "London Business Day" shall mean any day on which dealings and deposits in U.S. dollars are transacted in the London interbank market. "Custodian" shall mean Bank of New York. "Domestic Securities" shall have the meaning provided in Subsection 2.1 hereof. "Executive Committee" shall mean the executive committee of a Board. "Foreign Custodian" shall have the meaning provided in Section 4.1 hereof. "Foreign Securities" shall have the meaning provided in Section 2.1 hereof. "Foreign Securities Depository" shall have the meaning provided in Section 4.1 hereof. "Fund" shall mean an entity identified on Exhibit A as an Investment Company, if the Investment Company has no series, or a Series. "Investment Company" shall mean an entity identified on Exhibit A under the heading "Investment Company." "Investment Company Act" shall mean the Investment Company Act of 1940, as amended. "Securities" shall have the meaning provided in Section 2.1 hereof. "Securities System" shall have the meaning provided in Section 3.1 hereof. "Securities System Account" shall have the meaning provided in Subsection 3.8(a) hereof. "Series" shall mean a series of an Investment Company which is identified as such on Exhibit A. "Shares" shall mean shares of beneficial interest of the Investment Company. "Subcustodian" shall have the meaning provided in Subsection 3.7 hereof, but shall not include any Foreign Custodian. "Transfer Agent" shall mean the duly appointed and acting transfer agent for each Investment Company. "Writing" shall mean a communication in writing, a communication by telex, facsimile transmission, bankwire or other teleprocess or electronic instruction system acceptable to the Custodian. Section 2. APPOINTMENT OF CUSTODIAN; DELIVERY OF ASSETS 2.1 Appointment of Custodian. Each Investment Company hereby appoints and designates the Custodian as a custodian of the assets of each Fund, including cash denominated in U.S. dollars or foreign currency ("cash"), securities the Fund desires to be held within the United States ("Domestic Securities") and securities it desires to be held outside the United States ("Foreign Securities"). Domestic Securities and Foreign Securities are sometimes referred to herein, collectively, as "Securities." The Custodian hereby accepts such appointment and designation and agrees that it shall maintain custody of the assets of each Fund delivered to it hereunder in the manner provided for herein. 2.2 Delivery of Assets. Each Investment Company may deliver to the Custodian Securities and cash owned by the Funds, payments of income, principal or capital distributions received by the Funds with respect to Securities owned by the Funds from time to time, and the consideration received by the Funds for such Shares or other securities of the Funds as may be issued and sold from time to time. The Custodian shall have no responsibility whatsoever for any property or assets of the Funds held or received by the Funds and not delivered to the Custodian pursuant to and in accordance with the terms hereof. All Securities accepted by the Custodian on behalf of the Funds under the terms of this Agreement shall be in "street name" or other good delivery form as determined by the Custodian. 2.3 Subcustodians. The Custodian may appoint BNY Western Trust Company as a Subcustodian to hold assets of the Funds in accordance with the provisions of this Agreement. In addition, upon receipt of Proper Instructions and a certified copy of a resolution of the Board or of the Executive Committee, and certified by the Secretary or an Assistant Secretary, of an Investment Company, the Custodian may from time to time appoint one or more other Subcustodians or Foreign Custodians to hold assets of the affected Funds in accordance with the provisions of this Agreement. 2.4 No Duty to Manage. The Custodian, a Subcustodian or a Foreign Custodian shall not have any duty or responsibility to manage or recommend investments of the assets of any Fund held by them or to initiate any purchase, sale or other investment transaction in the absence of Proper Instructions or except as otherwise specifically provided herein. Section 3. DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE FUNDS HELD BY THE CUSTODIAN 3.1 Holding Securities. The Custodian shall hold and physically segregate from any property owned by the Custodian, for the account of each Fund, all non-cash property delivered by each Fund to the Custodian hereunder other than Securities which, pursuant to Subsection 3.8 hereof, are held through a registered clearing agency, a registered securities depository, the Federal Reserve's book-entry securities system (referred to herein, individually, as a "Securities System"), or held by a Subcustodian, Foreign Custodian or in a Foreign Securities Depository. 3.2 Delivery of Securities. Except as otherwise provided in Subsection 3.5 hereof, the Custodian, upon receipt of Proper Instructions, shall release and deliver Securities owned by a Fund and held by the Custodian in the following cases or as otherwise directed in Proper Instructions: (a) except as otherwise provided herein, upon sale of such Securities for the account of the Fund and receipt by the Custodian, a Subcustodian or a Foreign Custodian of payment therefor; (b) upon the receipt of payment by the Custodian, a Subcustodian or a Foreign Custodian in connection with any repurchase agreement related to such Securities entered into by the Fund; (c) in the case of a sale effected through a Securities System, in accordance with the provisions of Subsection 3.8 hereof; (d) to a tender agent or other authorized agent in connection with (i) a tender or other similar offer for Securities owned by the Fund, or (ii) a tender offer or repurchase by the Fund of its own Shares; (e) to the issuer thereof or its agent when such Securities are called, redeemed, retired or otherwise become payable; provided, that in any such case, the cash or other consideration is to be delivered to the Custodian, a Subcustodian or a Foreign Custodian; (f) to the issuer thereof, or its agent, for transfer into the name or nominee name of the Fund, the name or nominee name of the Custodian, the name or nominee name of any Subcustodian or Foreign Custodian; or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; provided that, in any such case, the new Securities are to be delivered to the Custodian, a Subcustodian or Foreign Custodian; (g) to the broker selling the same for examination in accordance with the "street delivery" custom; (h) for exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, or reorganization of the issuer of such Securities, or pursuant to a conversion of such Securities; provided that, in any such case, the new Securities and cash, if any, are to be delivered to the Custodian or a Subcustodian; (i) in the case of warrants, rights or similar securities, the surrender thereof in connection with the exercise of such warrants, rights or similar Securities or the surrender of interim receipts or temporary Securities for definitive Securities; provided that, in any such case, the new Securities and cash, if any, are to be delivered to the Custodian, a subcustodian or a Foreign Custodian; (j) for delivery in connection with any loans of Securities made by the Fund, but only against receipt by the Custodian, a Subcustodian or a Foreign Custodian of adequate collateral as determined by the Fund (and identified in Proper Instructions communicated to the Custodian), which may be in the form of cash or obligations issued by the United States government, its agencies or instrumentalities, except that in connection with any loans for which collateral is to be credited to the account of the Custodian, a Subcustodian or a Foreign Custodian in the Federal Reserve's book-entry securities system, the Custodian will not be held liable or responsible for the delivery of Securities owned by the Fund prior to the receipt of such collateral; (k) for delivery as security in connection with any borrowings by the Fund requiring a pledge of assets by the Fund, but only against receipt by the Custodian, a Subcustodian or a Foreign Custodian of amounts borrowed; (l) for delivery in accordance with the provisions of any agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian and a broker-dealer relating to compliance with the rules of registered clearing corporations and of any registered national securities exchange, or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund; (m) for delivery in accordance with the provisions of any agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian and a futures commission merchant, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any contract market, or any similar organization or organizations, regarding account deposits in connection with transactions by the Fund; (n) upon the receipt of instructions from the Transfer Agent for delivery to the Transfer Agent or to the holders of Shares in connection with distributions in kind in satisfaction of requests by holders of Shares for repurchase or redemption; and (o) for any other proper purpose, but only upon receipt of Proper Instructions, and a certified copy of a resolution of the Board or of the Executive Committee certified by the Secretary or an Assistant Secretary of the Fund, specifying the securities to be delivered, setting forth the purpose for which such delivery is to be made, declaring such purpose to be a proper purpose, and naming the person or persons to whom delivery of such securities shall be made. 3.3 Registration of Securities. Securities held by the Custodian, a Subcustodian or a Foreign Custodian (other than bearer Securities) shall be registered in the name or nominee name of the appropriate Fund, in the name or nominee name of the Custodian or in the name or nominee name of any Subcustodian or Foreign Custodian. Each Fund agrees to hold the Custodian, any such nominee, Subcustodian or Foreign Custodian harmless from any liability as a holder of record of such Securities. 3.4 Bank Accounts. The Custodian shall open and maintain a separate bank account or accounts for each Fund, subject only to draft or order by the Custodian acting pursuant to the terms of this Agreement, and shall hold in such account or accounts, subject to the provisions hereof, all cash received by it hereunder from or for the account of each Fund, other than cash maintained by a Fund in a bank account established and used in accordance with Rule 17f-3 under the Fund Act. Funds held by the Custodian for a Fund may be deposited by it to its credit as Custodian in the banking departments of the Custodian, a Subcustodian or a Foreign Custodian. Such funds shall be deposited by the Custodian in its capacity as Custodian and shall be withdrawable by the Custodian only in that capacity. In the event a Fund's account for any reason becomes overdrawn, or in the event an action requested in Proper Instructions would cause such an account to become overdrawn, the Custodian shall immediately notify the affected Fund. 3.5 Collection of Income; Trade Settlement; Crediting of Accounts. The Custodian shall collect income payable with respect to Securities owned by each Fund, settle Securities trades for the account of each Fund and credit and debit each Fund's account with the Custodian in connection therewith as stated in this Subsection 3.5. This Subsection shall not apply to repurchase agreements, which are treated in Subsection 3.2(b), above. (a) Upon receipt of Proper Instructions, the Custodian shall effect the purchase of a Security by charging the account of the Fund on the contractual settlement date, and by making payment against delivery. If the seller or selling broker fails to deliver the Security within a reasonable period of time, the Custodian shall notify the Fund and credit the transaction amount to the account of the Fund, but the Custodian shall have no further liability or responsibility for the transaction. (b) Upon receipt of Proper Instructions, the Custodian shall effect the sale of a Security by withdrawing a certificate or other indicia of ownership from the account of the Fund and by making delivery against payment, and shall credit the account of the Fund with the amount of such proceeds on the contractual settlement date. If the purchaser or the purchasing broker fails to make payment within a reasonable period of time, the Custodian shall notify the Fund, debit the Fund's account for any amounts previously credited to it by the Custodian as proceeds of the transaction and, if delivery has not been made, redeposit the Security into the account of the Fund. (c) The Fund is responsible for ensuring that the Custodian receives timely and accurate Proper Instructions to enable the Custodian to effect settlement of any purchase or sale. If the Custodian does not receive such instructions within the required time period, the Custodian shall have no liability of any kind to any person, including the Fund, for failing to effect settlement on the contractual settlement date. However, the Custodian shall use its best reasonable efforts to effect settlement as soon as possible after receipt of Proper Instructions. (d) The Custodian shall credit the account of the Fund with interest income payable on interest bearing Securities on payable date. Dividends and other amounts payable with respect to Domestic Securities and Foreign Securities shall be credited to the account of the Fund when received by the Custodian. The Custodian shall not be required to commence suit or collection proceedings or resort to any extraordinary means to collect such income and other amounts payable with respect to Securities owned by the Fund. The collection of income due the Fund on Domestic Securities loaned pursuant to the provisions of Subsection 3.2(j) shall be the responsibility of the Fund. The Custodian will have no duty or responsibility in connection therewith, other than to provide the Fund with such information or data as may be necessary to assist the Fund in arranging for the timely delivery to the Custodian of the income to which the Fund is entitled. The Custodian shall have no liability to any person, including the Fund, if the Custodian credits the account of the Fund with such income or other amounts payable with respect to Securities owned by the Fund (other than Securities loaned by the Fund pursuant to Subsection 3.2(j) hereof) and the Custodian subsequently is unable to collect such income or other amounts from the payors thereof within a reasonable time period, as determined by the Custodian in its sole discretion. In such event, the Custodian shall be entitled to reimbursement of the amount so credited to the account of the Fund. 3.6 Payment of Fund Monies. Upon receipt of Proper Instructions the Custodian shall pay out monies of a Fund in the following cases or as otherwise directed in Proper Instructions: (a) upon the purchase of Securities, futures contracts or options on futures contracts for the account of the Fund but only, except as otherwise provided herein, (i) against the delivery of such securities, or evidence of title to futures contracts or options on futures contracts, to the Custodian or a Subcustodian registered pursuant to Subsection 3.3 hereof or in proper form for transfer; (ii) in the case of a purchase effected through a Securities System, in accordance with the conditions set forth in Subsection 3.8 hereof; or (iii) in the case of repurchase agreements entered into between the Fund and the Custodian, another bank or a broker-dealer (A) against delivery of the Securities either in certificated form to the Custodian or a Subcustodian or through an entry crediting the Custodian's account at the appropriate Federal Reserve Bank with such Securities or (B) against delivery of the confirmation evidencing purchase by the Fund of Securities owned by the Custodian or such broker-dealer or other bank along with written evidence of the agreement by the Custodian or such broker-dealer or other bank to repurchase such Securities from the Fund; (b) in connection with conversion, exchange or surrender of Securities owned by the Fund as set forth in Subsection 3.2 hereof; (c) for the redemption or repurchase of Shares issued by the Fund; (d) for the payment of any expense or liability incurred by the Fund, including but not limited to the following payments for the account of the Fund: custodian fees, interest, taxes, management, accounting, transfer agent and legal fees and operating expenses of the Fund whether or not such expenses are to be in whole or part capitalized or treated as deferred expenses; and (e) for the payment of any dividends or distributions declared by the Board with respect to the Shares. 3.7 Appointment of Subcustodians. The Custodian may appoint BNY Western Trust Company or, upon receipt of Proper Instructions, another bank or trust company, which is itself qualified under the Investment Company Act to act as a custodian (a "Subcustodian"), as the agent of the Custodian to carry out such of the duties of the Custodian hereunder as a Custodian may from time to time direct; provided, however, that the appointment of any Subcustodian shall not relieve the Custodian of its responsibilities or liabilities hereunder. 3.8 Deposit of Securities in Securities Systems. The Custodian may deposit and/or maintain Domestic Securities owned by a Fund in a Securities System in accordance with applicable Federal Reserve Board and Securities and Exchange Commission rules and regulations, if any, and subject to the following provisions: (a) the Custodian may hold Domestic Securities of the Fund in the Depository Trust Company or the Federal Reserve's book entry system or, upon receipt of Proper Instructions, in another Securities System provided that such securities are held in an account of the Custodian in the Securities System ("Securities System Account") which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers; (b) the records of the Custodian with respect to Domestic Securities of the Fund which are maintained in a Securities System shall identify by book-entry those Domestic Securities belonging to the Fund; (c) the Custodian shall pay for Domestic Securities purchased for the account of the Fund upon (i) receipt of advice from the Securities System that such securities have been transferred to the Securities System Account, and (ii) the making of an entry on the records of the Custodian to reflect such payment and transfer for the account of the Fund. The Custodian shall transfer Domestic Securities sold for the account of the Fund upon (A) receipt of advice from the Securities System that payment for such securities has been transferred to the Securities System Account, and (B) the making of an entry on the records of the Custodian to reflect such transfer and payment for the account of the Fund. Copies of all advices from the Securities System of transfers of Domestic Securities for the account of the Fund shall be maintained for the Fund by the Custodian and be provided to the Fund at its request. Upon request, the Custodian shall furnish the Fund confirmation of the transfer to or from the account of the Fund in the form of a written advice or notice; and (d) upon request, the Custodian shall provide the Fund with any report obtained by the Custodian on the Securities System's accounting system, internal accounting control and procedures for safeguarding domestic securities deposited in the Securities System. 3.9 Segregated Account. The Custodian shall upon receipt of Proper Instructions establish and maintain a segregated account or accounts for and on behalf of a Fund, into which account or accounts may be transferred cash and/or Securities, including Securities maintained in an account by the Custodian pursuant to Section 3.8 hereof, (i) in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer or futures commission merchant, relating to compliance with the rules of registered clearing corporations and of any national securities exchange (or the Commodity Futures Trading Commission or any registered contract market), or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund, (ii) for purposes of segregating cash or securities in connection with options purchased, sold or written by the Fund or commodity futures contracts or options thereon purchased or sold by the Fund, and (iii) for other proper corporate purposes, but only, in the case of this clause (iii), upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board or of the Executive Committee certified by the Secretary or an Assistant Secretary, setting forth the purpose or purposes of such segregated account and declaring such purposes to be proper corporate purposes. 3.10 Ownership Certificates for Tax Purposes. The Custodian shall execute ownership and other certificates and affidavits for all federal and state tax purposes in connection with receipt of income or other payments with respect to domestic securities of each Fund held by it and in connection with transfers of such securities. 3.11 Proxies. The Custodian shall, with respect to the Securities held hereunder, promptly deliver to each Fund all proxies, all proxy soliciting materials and all notices relating to such Securities. If the Securities are registered otherwise than in the name of a Fund or a nominee of a Fund, the Custodian shall use its best reasonable efforts, consistent with applicable law, to cause all proxies to be promptly executed by the registered holder of such Securities in accordance with Proper Instructions. 3.12 Communications Relating to Fund Portfolio Securities. The Custodian shall transmit promptly to each Fund all written information (including, without limitation, pendency of calls and maturities of Securities and expirations of rights in connection therewith and notices of exercise of put and call options written by the Fund and the maturity of futures contracts purchased or sold by the Fund) received by the Custodian from issuers of Securities being held for the Fund. With respect to tender or exchange offers, the Custodian shall transmit promptly to each Fund all written information received by the Custodian from issuers of the Securities whose tender or exchange is sought and from the party (or its agents) making the tender or exchange offer. If a Fund desires to take action with respect to any tender offer, exchange offer or any other similar transaction, the Fund shall notify the Custodian at least three Business Days prior to the date of which the Custodian is to take such action. 3.13 Reports by Custodian. The Custodian shall each business day furnish each Fund with a statement summarizing all transactions and entries for the account of the Fund for the preceding day. At the end of every month, the Custodian shall furnish each Fund with a list of the cash and portfolio securities showing the quantity of the issue owned, the cost of each issue and the market value of each issue at the end of each month. Such monthly report shall also contain separate listings of (a) unsettled trades and (b) when-issued securities. The Custodian shall furnish such other reports as may be mutually agreed upon from time-to-time. Section 4. CERTAIN DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE FUNDS HELD OUTSIDE THE UNITED STATES 4.1 Custody Outside the United States. Each Fund authorizes the Custodian to hold Foreign Securities and cash in custody accounts which have been established by the Custodian with (i) its foreign branches, (ii) foreign banking institutions, foreign branches of United States banks and subsidiaries of United States banks or bank holding companies (each a "Foreign Custodian") and (iii) Foreign Securities depositories or clearing agencies (each a "Foreign Securities Depository"); provided, however, that the appropriate Board or Executive Committee has approved in advance the use of each such Foreign Custodian and Foreign Securities Depository and the contract between the Custodian and each Foreign Custodian and that such approval is set forth in Proper Instructions and a certified copy of a resolution of the Board or of the Executive Committee certified by the Secretary or an Assistant Secretary of the appropriate Investment Company. Unless expressly provided to the contrary in this Section 4, custody of Foreign Securities and assets held outside the United States by the Custodian, a Foreign Custodian or through a Foreign Securities Depository shall be governed by this Agreement, including Section 3 hereof. 4.2 Assets to be Held. The Custodian shall limit the securities and other assets maintained in the custody of its foreign branches, Foreign Custodians and Foreign Securities Depositories to: (i) "foreign securities", as defined in paragraph (c) (1) of Rule 17f-5 under the Fund Act, and (ii) cash and cash equivalents in such amounts as the Custodian or an affected Fund may determine to be reasonably necessary to effect the Fund's Foreign Securities transactions. 4.3 Omitted. 4.4 Segregation of Securities. The Custodian shall identify on its books and records as belonging to the appropriate Fund, the Foreign Securities of each Fund held by each Foreign Custodian. 4.5 Agreements with Foreign Custodians. Each agreement between the Custodian and a Foreign Custodian shall be substantially in the form as delivered to the Investment Companies for their Boards' review, and shall not be amended in a way that materially adversely affects any Fund without the prior written consent of the Fund. Upon request, the Custodian shall certify to the Funds that an agreement between the Custodian and a Foreign Custodian meets the requirements of Rule 17f-5 under the 1940 Act. 4.6 Access of Independent Accountants of the Funds. Upon request of a Fund, the Custodian will use its best reasonable efforts to arrange for the independent accountants or auditors of the Fund to be afforded access to the books and records of any Foreign Custodian insofar as such books and records relate to the custody by any such Foreign Custodian of assets of the Fund. 4.7 Transactions in Foreign Custody Accounts. Upon receipt of Proper Instructions, the Custodian shall instruct the appropriate Foreign Custodian to transfer, exchange or deliver Foreign Securities owned by a Fund, but, except to the extent explicitly provided herein, only in any of the cases specified in Subsection 3.2. Upon receipt of Proper Instructions, the Custodian shall pay out or instruct the appropriate Foreign Custodian to pay out monies of a Fund in any of the cases specified in Subsection 3.6. Notwithstanding anything herein to the contrary, settlement and payment for Foreign Securities received for the account of a Fund and delivery of Foreign Securities maintained for the account of a Fund may be effected in accordance with the customary or established securities trading or securities processing practices and procedures in the jurisdiction or market in which the transaction occurs, including, without limitation, delivering securities to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) against a receipt with the expectation of receiving later payment for such securities from such purchaser or dealer. Foreign Securities maintained in the custody of a Foreign Custodian may be maintained in the name of such entity or its nominee name to the same extent as set forth in Section 3.3 of this Agreement and each Fund agrees to hold any Foreign Custodian and its nominee harmless from any liability as a holder of record of such securities. 4.8 Liability of Foreign Custodian. Each agreement between the Custodian and a Foreign Custodian shall, unless otherwise mutually agreed to by the Custodian and a Fund, require the Foreign Custodian to exercise reasonable care or, alternatively, impose a contractual liability for breach of contract without an exception based upon a standard of care in the performance of its duties and to indemnify and hold harmless the Custodian from and against any loss, damage, cost, expense, liability or claim arising out of or in connection with the Foreign Custodian's performance of such obligations, excepting, however, Citibank, N.A., and its subsidiaries and branches, where the indemnification is limited to direct money damages and requires that the claim be promptly asserted. At the election of a Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claims against a Foreign Custodian as a consequence of any such loss, damage, cost, expense, liability or claim if and to the extent that the Fund has not been made whole for any such loss, damage, cost, expense, liability or claim, unless such subrogation is prohibited by local law. 4.9 Monitoring Responsibilities. (a) The Custodian will promptly inform each Fund in the event that the Custodian learns of a material adverse change in the financial condition of a Foreign Custodian or learns that a Foreign Custodian's financial condition has declined or is likely to decline below the minimum levels required by Rule 17f-5 of the 1940 Act. (b) The custodian will furnish such information as may be reasonably necessary to assist each Investment Company's Board in its annual review and approval of the continuance of all contracts or arrangements with Foreign Subcustodians. Section 5. PROPER INSTRUCTIONS As used in this Agreement, the term "Proper Instructions" means instructions of a Fund received by the Custodian via telephone or in Writing which the Custodian believes in good faith to have been given by Authorized Persons (as defined below) or which are transmitted with proper testing or authentication pursuant to terms and conditions which the Custodian may specify. Any Proper Instructions delivered to the Custodian by telephone shall promptly thereafter be confirmed in accordance with procedures, and limited in subject matter, as mutually agreed upon by the parties. Unless otherwise expressly provided, all Proper Instructions shall continue in full force and effect until canceled or superseded. If the Custodian requires test arrangements, authentication methods or other security devices to be used with respect to Proper Instructions, any Proper Instructions given by the Funds thereafter shall be given and processed in accordance with such terms and conditions for the use of such arrangements, methods or devices as the Custodian may put into effect and modify from time to time. The Funds shall safeguard any testkeys, identification codes or other security devices which the Custodian shall make available to them. The Custodian may electronically record any Proper Instructions given by telephone, and any other telephone discussions, with respect to its activities hereunder. As used in this Agreement, the term "Authorized Persons" means such officers or such agents of a Fund as have been properly appointed pursuant to a resolution of the appropriate Board or Executive Committee, a certified copy of which has been provided to the Custodian, to act on behalf of the Fund under this Agreement. Each of such persons shall continue to be an Authorized Person until such time as the Custodian receives Proper Instructions that any such officer or agent is no longer an Authorized Person. Section 6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY The Custodian may in its discretion, without express authority from a Fund: (a) make payments to itself or others for minor expenses of handling Securities or other similar items relating to its duties under this Agreement, provided that all such payments shall be accounted for to the Fund; (b) endorse for collection, in the name of the Fund, checks, drafts and other negotiable instruments; and (c) in general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the Securities and property of the Fund except as otherwise provided in Proper Instructions. Section 7. EVIDENCE OF AUTHORITY The Custodian shall be protected in acting upon any instructions (conveyed by telephone or in Writing), notice, request, consent, certificate or other instrument or paper believed by it to be genuine and to have been properly given or executed by or on behalf of a Fund. The Custodian may receive and accept a certified copy of a resolution of a Board or Executive Committee as conclusive evidence (a) of the authority of any person to act in accordance with such resolution or (b) of any determination or of any action by the Board or Executive Committee as described in such resolution, and such resolution may be considered as in full force and effect until receipt by the Custodian of written notice by an Authorized Person to the contrary. Section 8. DUTY OF CUSTODIAN TO SUPPLY INFORMATION The Custodian shall cooperate with and supply necessary information in its possession (to the extent permissible under applicable law) to the entity or entities appointed by the appropriate Board to keep the books of account of a Fund and/or compute the net asset value per Share of the outstanding Shares of a Fund. Section 9. RECORDS The Custodian shall create and maintain all records relating to its activities under this Agreement which are required with respect to such activities under Section 31 of the Investment Company Act and Rules 31a-1 and 31a-2 thereunder. All such records shall be the property of the appropriate Investment Company and shall at all times during the regular business hours of the Custodian be open for inspection by duly authorized officers, employees or agents of the Investment Company and employees and agents of the Securities and Exchange Commission. The Custodian shall, at a Fund's request, supply the Fund with a tabulation of Securities and Cash owned by the Fund and held by the Custodian and shall, when requested to do so by the Fund and for such compensation as shall be agreed upon between the Fund and the Custodian, include certificate numbers in such tabulations. Section 10. COMPENSATION OF CUSTODIAN The Custodian shall be entitled to reasonable compensation for its services and expenses as Custodian, as agreed upon from time to time between each Investment Company, on behalf of each Fund, and the Custodian. In addition, should the Custodian in its discretion advance funds (to include overdrafts) to or on behalf of a Fund pursuant to Proper Instructions, the Custodian shall be entitled to prompt reimbursement of any amounts advanced. In the event of such an advance, and to the extent permitted by the 1940 Act and the Fund's policies, the Custodian shall have a continuing lien and security interest in and to the property of the Fund in the possession or control of the Custodian or of a third party acting in the Custodian's behalf, until the advance is reimbursed. Nothing in this Agreement shall obligate the Custodian to advance funds to or on behalf of a Fund, or to permit any borrowing by a Fund except for borrowings for temporary purposes, to the extent permitted by the Fund's policies. Section 11. RESPONSIBILITY OF CUSTODIAN The Custodian shall be responsible for the performance of only such duties as are set forth herein or contained in Proper Instructions and shall use reasonable care in carrying out such duties. The Custodian shall be liable to a Fund for any loss which shall occur as the result of the failure of a Foreign Custodian engaged directly or indirectly by the Custodian to exercise reasonable care with respect to the safekeeping of securities and other assets of the Fund to the same extent that the Custodian would be liable to the Fund if the Custodian itself were holding such securities and other assets. Nothing in this Agreement shall be read to limit the responsibility or liability of the Custodian or a Foreign Custodian for their failure to exercise reasonable care with regard to any decision or recommendation made by the Custodian or Subcustodian regarding the use or continued use of a Foreign Securities Depository. In the event of any loss to a Fund by reason of the failure of the Custodian or a Foreign Custodian engaged by such Foreign Custodian or the Custodian to utilize reasonable care, the Custodian shall be liable to the Fund to the extent of the Fund's damages, to be determined based on the market value of the property which is the subject of the loss at the date of discovery of such loss and without reference to any special conditions or circumstances. The Custodian shall be held to the exercise of reasonable care in carrying out this Agreement, and shall not be liable for acts or omissions unless the same constitute negligence or willful misconduct on the part of the Custodian or any Foreign Custodian engaged directly or indirectly by the Custodian. Each Fund agrees to indemnify and hold harmless the Custodian and its nominees from all taxes, charges, expenses, assessments, claims and liabilities (including legal fees and expenses) incurred by the Custodian or its nominess in connection with the performance of this Agreement with respect to such Fund, except such as may arise from any negligent action, negligent failure to act or willful misconduct on the part of the indemnified entity or any Foreign Custodian. The Custodian shall be entitled to rely, and may act, on advice of counsel (who may be counsel for a Fund) on all matters and shall be without liability for any action reasonably taken or omitted pursuant to such advice. The Custodian need not maintain any insurance for the benefit of any Fund. All collections of funds or other property paid or distributed in respect of Securities held by the Custodian, agent, Subcustodian or Foreign Custodian hereunder shall be made at the risk of the Funds. The Custodian shall have no liability for any loss occasioned by delay in the actual receipt of notice by the Custodian, agent, Subcustodian or by a Foreign Custodian of any payment, redemption or other transaction regarding securities in respect of which the Custodian has agreed to take action as provided in Section 3 hereof. The Custodian shall not be liable for any action taken in good faith upon Proper Instructions or upon any certified copy of any resolution of the Board and may rely on the genuineness of any such documents which it may in good faith believe to be validly executed. Notwithstanding the foregoing, the Custodian shall not be liable for any loss resulting from, or caused by, the direction of a Fund to maintain custody of any Securities or cash in a foreign country including, but not limited to, losses resulting from nationalization, expropriation, currency restrictions, civil disturbance, acts of war or terrorism, insurrection, revolution, nuclear fusion, fission or radiation or other similar occurrences, or events beyond the control of the Custodian. Finally, the Custodian shall not be liable for any taxes, including interest and penalties with respect thereto, that may be levied or assessed upon or in respect of any assets of any Fund held by the Custodian. Section 12. LIMITED LIABILITY OF EACH INVESTMENT COMPANY The Custodian acknowledges that it has received notice of and accepts the limitations of liability as set forth in each Investment Company's Agreement and Declaration of Trust, Articles of Incorporation, or Agreement of Limited Partnership. The Custodian agrees that each Fund's obligation hereunder shall be limited to the assets of the Fund, and that the Custodian shall not seek satisfaction of any such obligation from the shareholders of the Fund nor from any Board Member, officer, employee, or agent of the Fund or the Investment Company on behalf of the Fund. Section 13. EFFECTIVE PERIOD; TERMINATION This Agreement shall become effective as of the date of its execution and shall continue in full force and effect until terminated as hereinafter provided. This Agreement may be terminated by each Investment Company, on behalf of a Fund, or by the Custodian by 90 days notice in Writing to the other provided that any termination by an Investment Company shall be authorized by a resolution of the Board, a certified copy of which shall accompany such notice of termination, and provided further, that such resolution shall specify the names of the persons to whom the Custodian shall deliver the assets of the affected Funds held by the Custodian. If notice of termination is given by the Custodian, the affected Investment Companies shall, within 90 days following the giving of such notice, deliver to the Custodian a certified copy of a resolution of the Boards specifying the names of the persons to whom the Custodian shall deliver assets of the affected Funds held by the Custodian. In either case the Custodian will deliver such assets to the persons so specified, after deducting therefrom any amounts which the Custodian determines to be owed to it hereunder (including all costs and expenses of delivery or transfer of Fund assets to the persons so specified). If within 90 days following the giving of a notice of termination by the Custodian, the Custodian does not receive from the affected Investment Companies certified copies of resolutions of the Boards specifying the names of the persons to whom the Custodian shall deliver the assets of the Funds held by the Custodian, the Custodian, at its election, may deliver such assets to a bank or trust company doing business in the State of California to be held and disposed of pursuant to the provisions of this Agreement or may continue to hold such assets until a certified copy of one or more resolutions as aforesaid is delivered to the Custodian. The obligations of the parties hereto regarding the use of reasonable care, indemnities and payment of fees and expenses shall survive the termination of this Agreement. Section 14. MISCELLANEOUS 14.1 Relationship. Nothing contained in this Agreement shall (i) create any fiduciary, joint venture or partnership relationship between the Custodian and any Fund or (ii) be construed as or constitute a prohibition against the provision by the Custodian or any of its affiliates to any Fund of investment banking, securities dealing or brokerages services or any other banking or financial services. 14.2 Further Assurances. Each party hereto shall furnish to the other party hereto such instruments and other documents as such other party may reasonably request for the purpose of carrying out or evidencing the transactions contemplated by this Agreement. 14.3 Attorneys' Fees. If any lawsuit or other action or proceeding relating to this Agreement is brought by a party hereto against the other party hereto, the prevailing party shall be entitled to recover reasonable attorneys' fees, costs and disbursements (including allocated costs and disbursements of in-house counsel), in addition to any other relief to which the prevailing party may be entitled. 14.4 Notices. Except as otherwise specified herein, each notice or other communication hereunder shall be in Writing and shall be delivered to the intended recipient at the following address (or at such other address as the intended recipient shall have specified in a written notice given to the other parties hereto): if to a Fund or Investment Company: if to the Custodian: [Fund or Investment Company] The Bank of New York c/o Franklin Resources, Inc. Mutual Fund Custody Manager 777 Mariners Island Blvd. BNY Western Trust Co. San Mateo, CA 94404 550 Kearney St., Suite 60 Attention: Chief Legal Officer San Francisco, CA 94108 14.5 Headings. The underlined headings contained herein are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the interpretation hereof. 14.6 Counterparts. This Agreement may be executed in counterparts, each of which shall constitute an original and both of which, when taken together, shall constitute one agreement. 14.7 Governing Law. This Agreement shall be construed in accordance with, and governed in all respects by, the laws of the State of New York (without giving effect to principles of conflict of laws). 14.8 Force Majeure. Notwithstanding the provisions of Section 11 hereof regarding the Custodian's general standard of care, no failure, delay or default in performance of any obligation hereunder shall constitute an event of default or a breach of this agreement, or give rise to any liability whatsoever on the part of one party hereto to the other, to the extent that such failure to perform, delay or default arises out of a cause beyond the control and without negligence of the party otherwise chargeable with failure, delay or default; including, but not limited to: action or inaction of governmental, civil or military authority; fire; strike; lockout or other labor dispute; flood; war; riot; theft; earthquake; natural disaster; breakdown of public or common carrier communications facilities; computer malfunction; or act, negligence or default of the other party. This paragraph shall in no way limit the right of either party to this Agreement to make any claim against third parties for any damages suffered due to such causes. 14.9 Successors and Assigns. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns, if any. 14.10 Waiver. No failure on the part of any person to exercise any power, right, privilege or remedy hereunder, and no delay on the part of any person in the exercise of any power, right, privilege or remedy hereunder, shall operate as a waiver thereof; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. 14.11 Amendments. This Agreement may not be amended, modified, altered or supplemented other than by means of an agreement or instrument executed on behalf of each of the parties hereto. 14.12 Severability. In the event that any provision of this Agreement, or the application of any such provision to any person or set of circumstances, shall be determined to be invalid, unlawful, void or unenforceable to any extent, the remainder of this Agreement, and the application of such provision to persons or circumstances other than those as to which it is determined to be invalid, unlawful, void or unenforceable, shall not be impaired or otherwise affected and shall continue to be valid and enforceable to the fullest extent permitted by law. 14.13 Parties in Interest. None of the provisions of this Agreement is intended to provide any rights or remedies to any person other than the Investment Companies, for themselves and for the Funds, and the Custodian and their respective successors and assigns, if any. 14.14 Pre-Emption of Other Agreements. In the event of any conflict between this Agreement, including without limitation any amendments hereto, and any other agreement which may now or in the future exist between the parties, the provisions of this Agreement shall prevail. 14.15 Variations of Pronouns. Whenever required by the context hereof, the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; and the neuter gender shall include the masculine and feminine genders. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. THE BANK OF NEW YORK By: _____________________________ Its: _____________________________ THE INVESTMENT COMPANIES LISTED ON EXHIBIT A By: ______________________________ Harmon E. Burns Their: Vice President By: ______________________________ Deborah R. Gatzek Their: Vice President & Secretary THE BANK OF NEW YORK MASTER CUSTODY AGREEMENT EXHIBIT A The following is a list of the Investment Companies and their respective Series for which the Custodian shall serve under the Master Custody Agreement dated as of February 16, 1996.
- ------------------------------------------------------------------------------------------------------------- INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE) - ------------------------------------------------------------------------------------------------------------- Adjustable Rate Securities Delaware Business Trust U.S. Government Adjustable Rate Mortgage Portfolios Portfolio Adjustable Rate Securities Portfolio AGE High Income Fund, Inc. Colorado Corporation Franklin California Tax-Free Income Maryland Corporation Fund, Inc. Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income Trust Fund Franklin California Tax-Exempt Money Fund Franklin California Intermediate-Term Tax-Free Income Fund Franklin Custodian Funds, Inc. Maryland Corporation Growth Series Utilities Series Dynatech Series Income Series U.S. Government Securities Series - ------------------------------------------------------------------------------------------------------------- INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE) - ------------------------------------------------------------------------------------------------------------- Franklin Equity Fund California Corporation Franklin Federal Money Fund California Corporation Franklin Federal Tax- Free Income California Corporation Fund Franklin Gold Fund California Corporation Franklin Government Securities Trust Massachusetts Business Trust Franklin Templeton International Delaware Business Trust Templeton Pacific Growth Fund Trust Franklin International Equity Fund Franklin Investors Securities Trust Massachusetts Business Franklin Global Government Income Fund Trust Franklin Short-Intermediate U.S. Gov't Securities Fund Franklin Convertible Securities Fund Franklin Adjustable U.S. Government Securities Fund Franklin Equity Income Fund Franklin Adjustable Rate Securities Fund - ------------------------------------------------------------------------------------------------------------- INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE) - ------------------------------------------------------------------------------------------------------------- Franklin Managed Trust Massachusetts Business Franklin Corporate Qualified Dividend Fund Trust Franklin Rising Dividends Fund Franklin Investment Grade Income Fund Franklin Institutional Rising Dividends Fund Franklin Money Fund California Corporation Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund Franklin California High Yield Municipal Fund Franklin Washington Municipal Bond Fund Franklin Tennessee Municipal Bond Fund Franklin Arkansas Municipal Bond Fund Franklin New York Tax-Free Income New York Corporation Fund, Inc. Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund Trust Franklin New York Intermediate-Term Tax-Free Income Fund Franklin New York Insured Tax-Free Income Fund - ------------------------------------------------------------------------------------------------------------- INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE) - ------------------------------------------------------------------------------------------------------------- Franklin Tax-Advantaged California Limited International Bond Fund Partnership Franklin Tax-Advantaged U.S. California Limited Government Securities Fund Partnership Franklin Tax-Advantaged High Yield California Limited Securities Fund. Partnership Franklin Premier Return Fund California Corporation Franklin Real Estate Securities Delaware Business Trust Franklin Real Estate Securities Fund Trust Franklin Strategic Mortgage Delaware Business Trust Portfolio Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund Franklin Strategic Income Fund Franklin MidCap Growth Fund Franklin Institutional MidCap Growth Fund Franklin Global Utilities Fund Franklin Small Cap Growth Fund Franklin Global Health Care Fund Franklin Natural Resources Fund Franklin Tax-Exempt Money Fund California Corporation - ------------------------------------------------------------------------------------------------------------- INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE) - ------------------------------------------------------------------------------------------------------------- Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income Fund Franklin Michigan Insured Tax-Free Income Fund Franklin Minnesota Insured Tax-Free Income Fund Franklin Insured Tax-Free Income Fund Franklin Ohio Insured Tax-Free Income Fund Franklin Puerto Rico Tax-Free Income Fund Franklin Arizona Tax-Free Income Fund Franklin Colorado Tax-Free Income Fund Franklin Georgia Tax-Free Income Fund Franklin Pennsylvania Tax-Free Income Fund Franklin High Yield Tax-Free Income Fund Franklin Missouri Tax-Free Income Fund Franklin Oregon Tax-Free Income Fund Franklin Texas Tax-Free Income Fund Franklin Virginia Tax-Free Income Fund Franklin Alabama Tax-Free Income Fund Franklin Florida Tax-Free Income Fund Franklin Connecticut Tax-Free Income Fund Franklin Indiana Tax-Free Income Fund Franklin Louisiana Tax-Free Income Fund Franklin Maryland Tax-Free Income Fund - ------------------------------------------------------------------------------------------------------------- INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE) - ------------------------------------------------------------------------------------------------------------- Franklin Tax-Free Trust Massachusetts Business Franklin North Carolina Tax-Free Income Fund (cont.) Trust Franklin New Jersey Tax-Free Income Fund Franklin Kentucky Tax-Free Income Fund Franklin Federal Intermediate-Term Tax-Free Income Fund Franklin Arizona Insured Tax-Free Income Fund Franklin Florida Insured Tax-Free Income fund Franklin Templeton Global Trust Massachusetts Business Franklin Templeton German Government Bond Fund Trust Franklin Templeton Global Currency Fund Franklin Templeton Hard Currency Fund Franklin Templeton High Income Currency Fund Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund Trust Franklin MicroCap Value Fund Franklin Value Fund - ------------------------------------------------------------------------------------------------------------- INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE) - ------------------------------------------------------------------------------------------------------------- Franklin Valuemark Funds Massachusetts Business Money Market Fund Trust Growth and Income Fund Precious Metals Fund Real Estate Securities Fund Utility Equity Fund High Income Fund Templeton Global Income Securities Fund Investment Grade Intermediate Bond Fund Income Securities Fund U.S. Government Securities Fund Zero Coupon Fund - 2000 Zero Coupon Fund - 2005 Zero Coupon Fund - 2010 Adjustable U.S. Government Fund Rising Dividends Fund Templeton Pacific Growth Fund Templeton International Equity Fund Templeton Developing Markets Equity Fund Templeton Global Growth Fund Templeton Global Asset Allocation Fund Small Cap Fund - ------------------------------------------------------------------------------------------------------------- INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE) - ------------------------------------------------------------------------------------------------------------- Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio Trust Franklin Late Day Money Market Portfolio Franklin U.S. Government Securities Money Market Portfolio Franklin U.S. Treasury Money Market Portfolio Franklin Institutional Adjustable U.S. Government Securities Fund Franklin Institutional Adjustable Rate Securities Fund Franklin U.S. Government Agency Money Market Fund Franklin Cash Reserves Fund MidCap Growth Portfolio Delaware Business Trust The Money Market Portfolios Delaware Business Trust The Money Market Portfolio The U.S. Government Securities Money Market Portfolio CLOSED END FUNDS: Franklin Multi-Income Trust Massachusetts Business Trust Franklin Principal Maturity Trust Massachusetts Business Trust Franklin Universal Trust Massachusetts Business Trust - ------------------------------------------------------------------------------------------------------------
EX-99.B8(IV) 4 TERMINAL LINK AGREEMENT AGREEMENT made as of February 16, 1996 between The Bank of New York as custodian (the "Custodian") and each Investment Company listed on Exhibit A, for itself and for each of Series listed on Exhibit A (each, a "Fund"). WHEREAS, the parties have entered into a Master Custody Agreement dated as of February 16, 1996; WHEREAS, the parties desire to provide for the electronic transmission of instructions from each Fund to the Custodian, as and to the extent permitted by the Master Custody Agreement; and WHEREAS, the Board of Directors, Trustees or Managing General Partners, as applicable, of each Investment Company have previously authorized each Investment Company to enter into the Master Custody Agreement; NOW, THEREFORE, in consideration for the mutual promises set forth, the parties agree as follows: A. Except as otherwise provided herein, all terms shall have the same meaning as in the Master Custody Agreement. B. The term "Certificate" shall mean any Proper Instruction by a Fund to the Custodian communicated by the Terminal Link. C . The term "Officer" shall mean an Authorized Person as defined in section 5 of the Master Custody Agreement. D. The term "Terminal Link" shall mean an electronic data transmission link between a Fund, Franklin Templeton Investor Services, Inc. acting as agent for the Fund ("FTISI"), and the Custodian requiring in connection with each use of the Terminal Link by or on behalf of the Fund use of an authorization code provided by the Custodian and at least two access codes established by the Fund. Each Fund represents that FTISI will maintain a transmission line to the Custodian and has been selected by the Fund to receive electronic data transmissions from the Custodian or the Fund and forward the same to the Fund or the Custodian, respectively. E. Terminal Link 1. The Terminal Link shall be utilized by a Fund only for the purpose of the Fund providing Certificates to the Custodian with respect to transactions involving Securities or for the transfer of money to be applied to the payment of dividends, distributions or redemptions of Fund Shares, and shall be utilized by the Custodian only for the purpose of providing notices to the Fund. Such use shall commence only after a Fund shall have established access codes and safekeeping procedures to safeguard and protect the confidentiality and availability of such access codes, and shall have reviewed the safekeeping procedures established by FTISI to assure that transmissions inputted by the Fund, and only such transmissions, are forwarded by FTISI to the Custodian without any alteration or omission. Each use of the Terminal Link by a Fund shall constitute a representation and warranty that the Terminal Link is being used only for the purposes permitted hereby, that at least two Officers have each utilized an access code, that such safekeeping procedures have been established by the Fund, that FTISI has safekeeping procedures reviewed by the Fund to assure that all transmissions inputted by the Fund, and only such transmissions, are forwarded by FTISI to the Custodian without any alteration or omission by FTISI, and that such use does not, to the Fund's knowledge, contravene the Investment Company Act of 1940, as amended, or the rules or regulations thereunder. 2. Each Fund shall obtain and maintain at its own cost and expense all equipment and services, including, but not limited to communications services, necessary for it to utilize the Terminal Link, and the Custodian shall not be responsible for the reliability or availability of any such equipment or services. 3. Each Fund acknowledges that any data bases made available as part of, or through the Terminal Link and any proprietary data, software, processes, information and documentation (other than which are or become part of the public domain or are legally required to be made available to the public) (collectively, the "Information"), are the exclusive and confidential property of the Custodian. Each Fund shall, and shall cause others to which it discloses the Information, including without limitation FTISI, to keep the Information confidential, by using the same care and discretion it uses with respect to its own confidential property and trade secrets, and shall neither make nor permit any disclosure without the express prior written consent of the Custodian. 4. Upon termination of this Agreement for any reason, the Fund shall return to the Custodian any and all copies of the Information which are in the Fund's possession or under its control, or which the Fund distributed to third parties, including without limitation FTISI. The provisions of this Article shall not affect the copyright status of any of the Information which may be copyrighted and shall apply to all information whether or not copyrighted. 5. The Custodian reserves the right to modify the Terminal Link from time to time without notice to the Funds or FTISI, except that the Custodian shall give the Funds notice not less than 75 days in advance of any modification which would materially adversely affect the Funds' operation. The Funds agree that neither the Funds nor FTISI shall modify or attempt to modify the Terminal Link without the Custodian's prior written consent. Each Fund acknowledges that any software or procedures provided the Fund or FTISI as part of the Terminal Link are the property of the Custodian and, accordingly, agrees that any modifications to the Terminal Link, whether by the Fund, FTISI or the Custodian and whether with or without the Custodian's consent, shall become the property of the Custodian. 6. The Custodian, the Funds, FTISI and any manufacturers and suppliers utilized by the Custodian, the Funds or FTISI in connection with the Terminal Link, make no warranties or representations to any other party, express or implied, in fact or in law, including but not limited to warranties of merchantability and fitness for a particular purpose. 7. Each Fund will cause its officers and employees to treat the authorization codes and the access codes applicable to Terminal Link with extreme care, and irrevocably authorizes the Custodian to act in accordance with and rely on Certificates received by it through the Terminal Link. Each Fund acknowledges that it is its responsibility to assure that only its officers and authorized persons of FTISI use the Terminal Link on its behalf, and that the Custodian shall not be responsible nor liable for any action taken in good faith in reliance upon a Certificate, nor for any alteration, omission, or failure to promptly forward by FTISI. 8. (a) Except as otherwise specifically provided in Section 8(b) of this Article, the Custodian shall have no liability for any losses, damages, injuries, claims, costs or expenses arising out of or in connection with any failure, malfunction or other problem relating to the Terminal Link except for money damages suffered as the result of the negligence of the Custodian, provided however, that the Custodian shall have no liability under this Section 8 if the Fund fails to comply with the provisions of section 10. (b) The Custodian's liability for its negligence in executing or failing to act in accordance with a Certificate received through Terminal Link shall be only with respect to a transfer of funds or assets which is not made in accordance with such Certificate, and shall be subject to Section 11 of this Article and contingent upon the Fund complying with the provisions of Section 10 of this Article, and shall be limited to the extent of the Fund's damages, without reference to any special conditions or circumstances. 9. Without limiting the generality of the foregoing, in no event shall the Custodian or any manufacturer or supplier of its computer equipment, software or services relating to the Terminal Link be responsible for any special, indirect, incidental or consequential damages which a Fund or FTISI may incur or experience by reason of any malfunction of such equipment or software, even if the Custodian or any manufacturer or supplier has been advised of the possibility of such damages, nor with respect to the use of the Terminal Link shall the Custodian or any such manufacturer or supplier be liable for acts of God, or with respect to the following to the extent beyond such person's reasonable control: machine or computer breakdown or malfunction, interruption or malfunction of communication facilities, labor difficulties or any other similar or dissimilar cause. 10. Each Fund shall notify the Custodian of any errors, omissions or interruptions in, or delay or unavailability of, the Terminal Link as promptly as practicable, and in any event within 24 hours after the earliest of (i) discovery thereof, or (ii) the business day on which discovery should have occurred through the exercise of reasonable care. The Custodian shall promptly advise the Fund or FTISI whenever the Custodian learns of any errors, omissions or interruption in, or delay or unavailability of, the Terminal Link. 11. The Custodian shall acknowledge to each affected Fund or to FTISI, by use of the Terminal Link, receipt of each Certificate the Custodian receives through the Terminal Link, and in the absence of such acknowledgment the Custodian shall not be liable for any failure to act in accordance with such Certificate and the Funds may not claim that such Certificate was received by the Custodian. Such acknowledgment, which may occur after the Custodian has acted upon such Certificate, shall be given on the same day on which such Certificate is received. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers, thereunto duly authorized and their respective seals to be hereto affixed as of the day and year first above written. THE BANK OF NEW YORK By: ______________________ Title: ______________________ THE INVESTMENT COMPANIES LISTED ON EXHIBIT A By: ______________________ Harmon E. Burns Title: Vice President By: ______________________ Deborah R. Garzek Title: Vice President & Secretary
THE BANK OF NEW YORK MASTER CUSTODY AGREEMENT EXHIBIT A The following is a list of the Investment Companies and their respective Series for which the Custodian shall serve under the Master Custody Agreement dated as of February 16, 1996. - -------------------------------------------- ---------------------------- --------------------------------------------------------- INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE) - -------------------------------------------- ---------------------------- --------------------------------------------------------- Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage Portfolio Adjustable Rate Securities Portfolio AGE High Income Fund, Inc. Colorado Corporation Franklin California Tax-Free Income Maryland Corporation Fund, Inc. Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income Fund Trust Franklin California Tax-Exempt Money Fund Franklin California Intermediate-Term Tax-Free Income Fund Franklin Custodian Funds, Inc. Maryland Corporation Growth Series Utilities Series Dynatech Series Income Series U.S. Government Securities Series - -------------------------------------------- ---------------------------- --------------------------------------------------------- INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE) - -------------------------------------------- ---------------------------- --------------------------------------------------------- Franklin Equity Fund California Corporation Franklin Federal Money Fund California Corporation Franklin Federal Tax- Free Income Fund California Corporation Franklin Gold Fund California Corporation Franklin Government Securities Trust Massachusetts Business Trust Franklin Templeton International Trust Delaware Business Trust Templeton Pacific Growth Fund Franklin International Equity Fund Franklin Investors Securities Trust Massachusetts Business Franklin Global Government Income Fund Trust Franklin Short-Intermediate U.S. Gov't Securities Fund Franklin Convertible Securities Fund Franklin Adjustable U.S. Government Securities Fund Franklin Equity Income Fund Franklin Adjustable Rate Securities Fund - -------------------------------------------- ---------------------------- --------------------------------------------------------- INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE) - -------------------------------------------- ---------------------------- --------------------------------------------------------- Franklin Managed Trust Massachusetts Business Franklin Corporate Qualified Dividend Fund Trust Franklin Rising Dividends Fund Franklin Investment Grade Income Fund Franklin Institutional Rising Dividends Fund Franklin Money Fund California Corporation Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund Franklin California High Yield Municipal Fund Franklin Washington Municipal Bond Fund Franklin Tennessee Municipal Bond Fund Franklin Arkansas Municipal Bond Fund Franklin New York Tax-Free Income Fund, New York Corporation Inc. Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund Trust Franklin New York Intermediate-Term Tax-Free Income Fund Franklin New York Insured Tax-Free Income Fund - -------------------------------------------- ---------------------------- --------------------------------------------------------- INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE) - -------------------------------------------- ---------------------------- --------------------------------------------------------- Franklin Tax-Advantaged International Bond California Limited Fund Partnership Franklin Tax-Advantaged U.S. Government California Limited Securities Fund Partnership Franklin Tax-Advantaged High Yield California Limited Securities Fund. Partnership Franklin Premier Return Fund California Corporation Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund Franklin Strategic Mortgage Portfolio Delaware Business Trust Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund Franklin Strategic Income Fund Franklin MidCap Growth Fund Franklin Institutional MidCap Growth Fund Franklin Global Utilities Fund Franklin Small Cap Growth Fund Franklin Global Health Care Fund Franklin Natural Resources Fund Franklin Tax-Exempt Money Fund California Corporation - -------------------------------------------- ---------------------------- --------------------------------------------------------- INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE) - -------------------------------------------- ---------------------------- --------------------------------------------------------- Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income Fund Trust Franklin Michigan Insured Tax-Free Income Fund Franklin Minnesota Insured Tax-Free Income Fund Franklin Insured Tax-Free Income Fund Franklin Ohio Insured Tax-Free Income Fund Franklin Puerto Rico Tax-Free Income Fund Franklin Arizona Tax-Free Income Fund Franklin Colorado Tax-Free Income Fund Franklin Georgia Tax-Free Income Fund Franklin Pennsylvania Tax-Free Income Fund Franklin High Yield Tax-Free Income Fund Franklin Missouri Tax-Free Income Fund Franklin Oregon Tax-Free Income Fund Franklin Texas Tax-Free Income Fund Franklin Virginia Tax-Free Income Fund Franklin Alabama Tax-Free Income Fund Franklin Florida Tax-Free Income Fund Franklin Connecticut Tax-Free Income Fund Franklin Indiana Tax-Free Income Fund Franklin Louisiana Tax-Free Income Fund Franklin Maryland Tax-Free Income Fund - -------------------------------------------- ---------------------------- --------------------------------------------------------- INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE) - -------------------------------------------- ---------------------------- --------------------------------------------------------- Franklin Tax-Free Trust Massachusetts Business Franklin North Carolina Tax-Free Income Fund (cont.) Trust Franklin New Jersey Tax-Free Income Fund Franklin Kentucky Tax-Free Income Fund Franklin Federal Intermediate-Term Tax-Free Income Fund Franklin Arizona Insured Tax-Free Income Fund Franklin Florida Insured Tax-Free Income fund Franklin Templeton Global Trust Massachusetts Business Franklin Templeton German Government Bond Fund Trust Franklin Templeton Global Currency Fund Franklin Templeton Hard Currency Fund Franklin Templeton High Income Currency Fund Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund Trust Franklin MicroCap Value Fund Franklin Value Fund - -------------------------------------------- ---------------------------- --------------------------------------------------------- INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE) - -------------------------------------------- ---------------------------- --------------------------------------------------------- Franklin Valuemark Funds Massachusetts Business Money Market Fund Trust Growth and Income Fund Precious Metals Fund Real Estate Securities Fund Utility Equity Fund High Income Fund Templeton Global Income Securities Fund Investment Grade Intermediate Bond Fund Income Securities Fund U.S. Government Securities Fund Zero Coupon Fund -2000 Zero Coupon Fund -2005 Zero Coupon Fund -2010 Adjustable U.S. Government Fund Rising Dividends Fund Templeton Pacific Growth Fund Templeton International Equity Fund Templeton Developing Markets Equity Fund Templeton Global Growth Fund Global Asset Allocation Fund Small Cap Fund - -------------------------------------------- ---------------------------- --------------------------------------------------------- INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE) - -------------------------------------------- ---------------------------- --------------------------------------------------------- Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio Trust Franklin Late Day Money Market Portfolio Franklin U.S. Government Securities Money Market Portfolio Franklin U.S. Treasury Money Market Portfolio Franklin Institutional Adjustable U.S. Government Securities Fund Franklin Institutional Adjustable Rate Securities Fund Franklin U.S. Government Agency Money Market Fund Franklin Cash Reserves Fund MidCap Growth Portfolio Delaware Business Trust The Money Market Portfolios Delaware Business Trust The Money Market Portfolio The U.S. Government Securities Money Market Portfolio CLOSED END FUNDS: Franklin Multi-Income Trust Massachusetts Business Trust Franklin Principal Maturity Trust Massachusetts Business Trust Franklin Universal Trust Massachusetts Business Trust - -------------------------------------------- ---------------------------- ---------------------------------------------------------
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