FCF P
SUPPLEMENT
TO THE PROSPECTUS OF
FRANKLIN CUSTODIAN FUNDS, INC.
(Income Series, Growth Series, Utilities Series, DynaTech Series
and U.S. Government Securities Series)
dated February 1, 1995
The following revisions are made to certain operating policies of the
Fund, which are effective as of February 1, 1995:
How to Buy Shares of the Fund -
a) Purchases at Net Asset Value
i) Substitute the following for the third sentence of paragraph three
under the section:
While credit will be given for any contingent deferred sales charge
paid on the shares redeemed, a new contingency period will begin.
ii) Each of the remaining paragraphs in the section which defines the
categories of investors who may purchase at net asset value is revised
to reflect that such purchases are without a front-end sales charge
(net asset value) and without the imposition of a contingent deferred
sales charge.
b) Description of Special Net Asset Value Purchases
i) Substitute the following for the first paragraph:
Shares of the Fund may also be purchased at net asset value and without
the imposition of a contingent deferred sales charge by certain
designated retirement plans, including profit sharing, pension, 401(k)
and simplified employee pension plans ("designated plans"), subject to
minimum requirements with respect to number of employees or amount of
purchase, which may be established by Distributors. Currently those
criteria require that the employer establishing the plan have 200 or
more employees or that the amount invested or to be invested during the
subsequent 13-month period in the Fund or in any of the Franklin
Templeton Investments totals at least $1,000,000. Employee benefit
plans not designated above or qualified under Section 401 of the Code
("non-designated plans") may be afforded the same privilege if they
meet the above requirements as well as the uniform criteria for
qualified groups previously described under "Group Purchases" which
enable Distributors to realize economies of scale in its sales efforts
and sales related expenses.
ii) The two paragraphs which follow are revised to reflect that
purchases are without a front-end sales charge and without the
imposition of a contingent deferred sales charge.
How to Sell Shares of the Fund - Contingent Deferred Sales Charge
Substitute the following for paragraph two, which describes waivers:
The contingent deferred sales charge is waived for: exchanges;
distributions to participants in Trust Company retirement plan accounts
due to death, disability or attainment of age 591U2; tax-free returns
of excess contributions to employee benefit plans; distributions from
employee benefit plans, including those due to plan termination or plan
transfer; redemptions through a Systematic Withdrawal Plan set up 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); and redemptions
initiated by the Fund due to a shareholder's account falling below the
minimum specified account size.
09P
SUPPLEMENT
TO THE PROSPECTUS OF
INCOME SERIES
(Franklin Custodian Funds, Inc.)
dated February 1, 1995
The following revisions are made to certain operating policies of the
Fund, which are effective as of February 1, 1995:
How to Buy Shares of the Fund -
a) Purchases at Net Asset Value
i) Substitute the following for the third sentence of paragraph three
under the section:
While credit will be given for any contingent deferred sales charge
paid on the shares redeemed, a new contingency period will begin.
ii) Each of the remaining paragraphs in the section which defines the
categories of investors who may purchase at net asset value is revised
to reflect that such purchases are without a front-end sales charge
(net asset value) and without the imposition of a contingent deferred
sales charge.
b) Description of Special Net Asset Value Purchases
i) Substitute the following for the first paragraph:
Shares of the Fund may also be purchased at net asset value and without
the imposition of a contingent deferred sales charge by certain
designated retirement plans, including profit sharing, pension, 401(k)
and simplified employee pension plans ("designated plans"), subject to
minimum requirements with respect to number of employees or amount of
purchase, which may be established by Distributors. Currently those
criteria require that the employer establishing the plan have 200 or
more employees or that the amount invested or to be invested during the
subsequent 13-month period in the Fund or in any of the Franklin
Templeton Investments totals at least $1,000,000. Employee benefit
plans not designated above or qualified under Section 401 of the Code
("non-designated plans") may be afforded the same privilege if they
meet the above requirements as well as the uniform criteria for
qualified groups previously described under "Group Purchases" which
enable Distributors to realize economies of scale in its sales efforts
and sales related expenses.
ii) The two paragraphs which follow are revised to reflect that
purchases are without a front-end sales charge and without the
imposition of a contingent deferred sales charge.
How to Sell Shares of the Fund - Contingent Deferred Sales Charge
Substitute the following for paragraph two, which describes waivers:
The contingent deferred sales charge is waived for: exchanges;
distributions to participants in Trust Company retirement plan accounts
due to death, disability or attainment of age 591U2; tax-free returns
of excess contributions to employee benefit plans; distributions from
employee benefit plans, including those due to plan termination or plan
transfer; redemptions through a Systematic Withdrawal Plan set up 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); and redemptions
initiated by the Fund due to a shareholder's account falling below the
minimum specified account size.
6
10P
SUPPLEMENT
TO THE PROSPECTUS OF
U.S. GOVERNMENT SECURITIES SERIES
(Franklin Custodian Funds, Inc.)
dated February 1, 1995
The following revisions are made to certain operating policies of the
Fund, which are effective as of February 1, 1995:
How to Buy Shares of the Fund -
a) Purchases at Net Asset Value
i) Substitute the following for the third sentence of paragraph three
under the section:
While credit will be given for any contingent deferred sales charge
paid on the shares redeemed, a new contingency period will begin.
ii) Each of the remaining paragraphs in the section which defines the
categories of investors who may purchase at net asset value is revised
to reflect that such purchases are without a front-end sales charge
(net asset value) and without the imposition of a contingent deferred
sales charge.
b) Description of Special Net Asset Value Purchases
i) Substitute the following for the first paragraph:
Shares of the Fund may also be purchased at net asset value and without
the imposition of a contingent deferred sales charge by certain
designated retirement plans, including profit sharing, pension, 401(k)
and simplified employee pension plans ("designated plans"), subject to
minimum requirements with respect to number of employees or amount of
purchase, which may be established by Distributors. Currently those
criteria require that the employer establishing the plan have 200 or
more employees or that the amount invested or to be invested during the
subsequent 13-month period in the Fund or in any of the Franklin
Templeton Investments totals at least $1,000,000. Employee benefit
plans not designated above or qualified under Section 401 of the Code
("non-designated plans") may be afforded the same privilege if they
meet the above requirements as well as the uniform criteria for
qualified groups previously described under "Group Purchases" which
enable Distributors to realize economies of scale in its sales efforts
and sales related expenses.
ii) The two paragraphs which follow are revised to reflect that
purchases are without a front-end sales charge and without the
imposition of a contingent deferred sales charge.
How to Sell Shares of the Fund - Contingent Deferred Sales Charge
Substitute the following for paragraph two, which describes waivers:
The contingent deferred sales charge is waived for: exchanges;
distributions to participants in Trust Company retirement plan accounts
due to death, disability or attainment of age 591U2; tax-free returns
of excess contributions to employee benefit plans; distributions from
employee benefit plans, including those due to plan termination or plan
transfer; redemptions through a Systematic Withdrawal Plan set up 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); and redemptions
initiated by the Fund due to a shareholder's account falling below the
minimum specified account size.
Franklin
Custodian
Funds, Inc.
Growth Series,
DynaTech Series,
Utilities Series,
Income Series,
U.S. Government Securities Series
PROSPECTUS
February 1, 1995
777 Mariners
Island Blvd., P.O.
Box 7777
San Mateo, CA
94403-7777 1-800/DIAL BEN
- --------------------------------------------------------------------------
Franklin Custodian Funds, Inc. (the "Fund") is an open- end management
investment company consisting of the five separate diversified series
listed above (individually or collectively referred to as the "Series").
Each Series, in effect, represents a separate fund with its own investment
objectives and policies with various possibilities for income or capital
appreciation and subject to varying market risks. Through the five
different Series, the Fund attempts to satisfy a variety of investment
objectives.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund and each Series that a prospective investor
should know before investing. After reading the Prospectus, it should be
retained for future reference; it contains information about the purchase
and sale of shares and other items which a prospective investor will find
useful to have.
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.
The Income Series may invest up to 100% of its assets in bonds rated below
investment grade, commonly known as "junk bonds," by Standard & Poor's
Corporation ("S&P") or Moody's Investors Service ("Moody's"), two
nationally recognized statistical rating organizations ("NRSROs") or in
bonds which have not been rated by any NRSRO. Bonds rated below investment
grade entail greater risk, including price volatility and risk of default,
than investments in higher rated securities. See "Risk Considerations for
High Yield Securities." Investors should carefully consider the risks
associated with an investment in the Series in light of the securities in
which the Series invests.
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.
A Statement of Additional Information (the "SAI") concerning the Fund,
dated February 1, 1995, 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 some investors. It has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated herein by
reference. A copy is available without charge from the Fund or the Fund's
principal underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), at the address or telephone number shown above.
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 3
Financial Highlights 4
About the Fund 6
Investment Objectives
and Policies of
Each Series 6
Risk
Considerations
Relating to High Yield
Securities 17
Management of the
Fund 20
Distributions to
Shareholders 22
Taxation of the Fund
and Its Shareholders 24
How to Buy Shares
of the Fund 25
Purchasing Shares
of the Fund in Connection
with Retirement Plans
Involving Tax-Deferred
Investments 32
Other Programs and
Privileges Available
to Fund Shareholders 33
Exchange Privilege 35
How to Sell Shares
of the Fund 37
Telephone
Transactions 41
Valuation of Fund
Shares 42
How to Get
Information Regarding
an Investment in
the Fund 43
Performance 43
General Information 44
Account
Registrations 46
Important Notice
Regarding Taxpayer IRS
Certifications 47
Portfolio
Operations 47
Appendix 48
<TABLE>
<CAPTION>
Expense Table
- --------------------------------------------------------------------------
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder will bear directly or
indirectly in connection with an investment in each Series of the Fund.
These figures are based on annualized aggregate operating expenses of each
Series for the fiscal year ended September 30, 1994.
U.S.
Government
Growth DynaTech Utilities Income Securities
Series Series Seriesn Series Series
------- --------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge
Imposed on Purchases
(as a percentage of offering price) 4.50% 4.50% 4.25% 4.25% 4.25%
Maximum Sales Charge Imposed on
Reinvested Dividends NONE NONE NONE NONE NONE
Deferred Sales Charge NONE* NONE* NONE* NONE* NONE*
Redemption Fees NONE NONE NONE NONE NONE
Exchange Fee (per transaction) $5.00** $5.00** $5.00** $5.00** $5.00**
Annual Fund Operating Expenses
(as a percentage of net assets)
Management Fees 0.49% 0.62% 0.45% 0.46% 0.45%
12b-1 Fees 0.20%*** 0.20%*** 0.12%*** 0.13%(dagger) 0.07%(dagger)
Other Expenses:
Shareholder Servicing Costs 0.09% 0.10% 0.05% 0.04% 0.03%
Reports to Shareholders 0.07% 0.16% 0.06% 0.04% 0.03%
Other 0.04% 0.05% 0.03% 0.05% 0.01%
------ ----- -------- ------- -----
Total Other Expenses 0.20% 0.31% 0.14% 0.13% 0.07%
------ ----- -------- ------- -----
Total Fund Operating Expenses 0.89%*** 1.13%*** 0.71%*** 0.71%(dagger) 0.59%(dagger)
====== ===== ===== ===== =====
*Investments of $1 million or more are not subject to an initial sales
charge; however, a contingent deferred sales charge of 1% is imposed on
certain redemptions within 12 months of the calendar month following such
investments. See "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."
**5.00 fee is only imposed on Timing Accounts as described under "Exchange
Privilege." All other exchanges are processed without a fee.
***Under the Rule 12b-1 Plan implemented on May 1, 1994 the initial rate as
discussed in "Management of the Fund - Plans of Distribution." Actual 12b-1
fees incurred by the Growth Series, DynaTech Series, and Utilities Series
for the period May 1, 1994 through September 30, 1994 were .08%, .08%, and
.05%, respectively, which represent an annualized rate of .19%, .18%, and
.11%%, respectively. 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.
(dagger)Annualized . Actual 12b-1 fees incurred by the Income Series and
U.S. Government Securities Series for the period May 1, 1994 through
September 30, 1994 were .05% and .03%, respectively. 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.
.Investors should be aware that the above table is not intended to reflect
in precise detail the fees and expenses associated with an individual's own
investment in any Series of the Fund. Rather, the table has been provided
only to assist investors in gaining a more complete understanding of fees,
charges and expenses. For a more detailed discussion of these matters,
investors should refer to the appropriate sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the
expenses, including the initial sales charge, that apply to a $1,000
investment in each Series over various time periods assuming (1) a 5%
annual rate of return and (2) redemption at the end of each time period. As
noted in the preceding table, none of the Series charge a redemption fee:
<CAPTION>
U.S.
Government
Growth DynaTech Utilities Income Securities
Series Series Series Series Series
------ -------- --------- ------ -----------
<S> <C> <C> <C> <C> <C>
1 Year $ 54 $ 56 $ 49 $ 50 $ 48
3 Years $ 72 $ 79 $ 64 $ 65 $ 61
5 Years $ 92 $104 $ 80 $ 81 $ 74
10 Years $150 $176 $127 $129 $113
THIS EXAMPLE IS BASED ON THE ANNUALIZED 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 not separately deducted from a shareholder's account. They are
borne by each Series of the Fund and only indirectly by shareholders as a
result of their investment in the Series. In addition, federal regulations
require the example to assume an annual return of 5%, but the actual return
for each Series may be more or less than 5%.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
- --------------------------------------------------------------------------
Set forth below is a table containing the financial highlights for a share
of each Series of the Fund throughout the ten fiscal years in the period
ended September 30, 1994. The information for each of the five fiscal years
in the period ended September 30, 1994 has been audited by Coopers &
Lybrand L.L.P., independent auditors, whose audit report appears in the
financial statements in the Fund's SAI. The remaining figures, which are
also audited, are not covered by the auditor's current report. See the
discussion "Reports to Shareholders" under "General Information."
Per Share Operating Performance
- --------------------------------------------------------------------------------------------------------------
Net Realized
Net Asset & Unrealized Distribution
Year Value at Net Gain Total From From Net
Ended Beginning Investment (Loss) on Investment Investment
Sep. 30 of Year Income Investments Operations Income
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth Fund:(dagger)
1985 $ 5.51 $0.129 $0.699 $0.828 $(0.130)
1986 6.20 0.157 1.374 1.531 (0.130)
1987 7.51 0.207 2.852 3.059 (0.150)
1988 10.39 0.212 (0.570) (0.358) (0.202)
1989 9.64 0.227 2.332 2.559 (0.221)
1990 11.97 0.314 (1.188) (0.874) (0.206)
1991 10.69 0.325 2.703 3.028 (0.268)
1992 13.45 0.229 0.524 0.753 (0.353)
1993 13.70 0.232 0.575 0.807 (0.189)
1994 14.25 0.190 0.899 1.089 (0.297)
DynaTech Fund:(dagger)
1985 5.00 0.124 (0.186) (0.062) (0.188)
1986 4.75 0.041 0.124 0.165 (0.125)
1987 4.79 0.031 2.292 2.323 (0.033)
1988 7.08 0.040 (1.197) (1.157) (0.033)
1989 5.89 0.060 1.719 1.779 (0.039)
1990 7.63 0.156 (0.352) (0.196) (0.059)
1991 6.77 0.126 1.952 2.078 (0.168)
1992 8.68 0.120 0.522 0.642 (0.112)
1993 9.21 0.102 1.207 1.309 (0.117)
1994 10.29 0.070 0.210 0.280 (0.124)
Utilities Fund:
1985 5.80 0.570 0.620 1.190 (0.520)
1986 6.47 0.530 1.768 2.298 (0.555)
1987 8.21 0.536 (0.455) 0.081 (0.560)
1988 7.72 0.553 (0.243) 0.310 (0.570)
1989 7.46 0.548 0.672 1.220 (0.580)
1990 8.10 0.529 (0.555) (0.026) (0.580)
1991 7.48 0.535 1.385 1.920 (0.590)
1992 8.81 0.530 0.849 1.379 (0.559)
1993 9.63 0.534 1.161 1.695 (0.545)
1994 10.78 0.550 (2.436) (1.886) (0.524)
Income Fund:
1985 1.95 0.210 0.150 0.360 (0.220)
1986 2.06 0.230 0.238 0.468 (0.220)
1987 2.25 0.206 0.004 0.210 (0.220)
1988 2.22 0.228 (0.096) 0.132 (0.220)
1989 2.11 0.222 0.009 0.231 (0.220)
1990 2.11 0.212 (0.324) (0.112) (0.220)
1991 1.76 0.190 0.350 0.540 (0.220)
1992 2.08 0.190 0.194 0.384 (0.205)
1993 2.25 0.180 0.227 0.407 (0.185)
1994 2.46 0.170 (.201) (0.031) (0.180)
<CAPTION>
- ------------------------------------------------------------------------------------------
Distributions Net Asset
Year From Value
Ended Realized Total at End Total
Sep. 30 Capital Gains Distributions of Year Return(dagger)(dagger)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Fund:(dagger)
1985 $(0.008) $(0.138) $ 6.20 14.88%
1986 (0.091) (0.221) 7.51 24.72
1987 (0.029) (0.179) 10.39 41.10
1988 (0.190) (0.392) 9.64 (3.28)
1989 (0.008) (0.229) 11.97 27.02
1990 (0.200) (0.406) 10.69 (7.55)
1991 - (0.268) 13.45 28.65
1992 (0.150) (0.503) 13.70 5.73
1993 (0.068) (0.257) 14.25 5.87
1994 (0.082) (0.379) 14.96 7.63
DynaTech Fund:(dagger)
1985 - (0.188) 4.75 (1.63)
1986 - (0.125) 4.79 3.18
1987 - (0.033) 7.08 48.60
1988 - (0.033) 5.89 (16.41)
1989 - (0.039) 7.63 30.26
1990 (0.605) (0.664) 6.77 (2.71)
1991 - (0.168) 8.68 31.21
1992 - (0.112) 9.21 7.29
1993 (0.112) (0.229) 10.29 14.36
1994 (0.596) (0.720) 9.85 2.89
Utilities Fund:
1985 - (0.520) 6.47 20.40
1986 (0.003) (0.558) 8.21 36.03
1987 (0.011) (0.571) 7.72 0.56
1988 - (0.570) 7.46 4.03
1989 - (0.580) 8.10 16.71
1990 (0.014) (0.594) 7.48 (0.93)
1991 - (0.590) 8.81 26.15
1992 - (0.559) 9.63 15.89
1993 - (0.545) 10.78 17.83
1994 (0.040) (0.564) 8.33 (17.94)
Income Fund:
1985 (0.030) (0.250) 2.06 18.71
1986 (0.058) (0.278) 2.25 24.20
1987 (0.020) (0.240) 2.22 9.08
1988 (0.022) (0.242) 2.11 6.00
1989 (0.011) (0.231) 2.11 11.16
1990 (0.018) (0.238) 1.76 (6.37)
1991 - (0.220) 2.08 32.60
1992 (0.009) (0.214) 2.25 18.80
1993 (0.012) (0.197) 2.46 18.76
1994 (0.029) (0.209) 2.22 (1.52)
<CAPTION>
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------
Ratio of Net
Net Assets Ratio of Investment
Year at End Expenses Income Portfolio
Ended of Year to Average to Average Turnover
Sep. 30 (in 000's) Net Assets Net Assets Rate
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Fund:(dagger)
1985 $ 24,121 0.87% 2.13% 3.86%
1986 42,861 0.87 2.12 1.00
1987 115,845 0.81 2.34 8.73
1988 106,766 0.77 2.27 -
1989 134,523 0.76 1.94 2.24
1990 169,939 0.73 2.74 -
1991 331,392 0.70 2.58 7.98
1992 532,971 0.66 2.06 0.81
1993 560,824 0.64 1.64 1.70
1994 516,620 0.77 1.23 6.52
DynaTech Fund:(dagger)
1985 39,755 0.83 2.47 35.61
1986 31,834 0.87 0.78 14.58
1987 50,417 0.86 0.48 8.27
1988 33,575 0.87 0.68 3.68
1989 37,673 0.83 0.90 -
1990 36,538 0.79 2.09 11.34
1991 48,867 0.93 1.57 7.12
1992 64,595 0.81 1.42 10.70
1993 71,469 0.81 1.03 26.56
1994 67,413 1.00 0.69 9.73
Utilities Fund:
1985 59,614 0.81 8.13 6.61
1986 326,985 0.74 5.95 3.49
1987 632,474 0.65 6.55 -
1988 615,985 0.64 7.36 1.68
1989 652,308 0.62 7.10 4.02
1990 749,386 0.60 6.50 2.07
1991 1,226,118 0.59 6.44 0.89
1992 2,191,095 0.57 5.90 1.39
1993 3,626,774 0.55 5.30 7.81
1994 2,572,508 0.64 5.76 6.34
Income Fund:
1985 105,278 0.76 10.14 24.07
1986 226,418 0.71 9.76 30.76
1987 484,270 0.64 9.20 18.14
1988 726,815 0.61 10.50 10.01
1989 1,189,694 0.57 10.46 12.05
1990 1,299,130 0.55 10.73 12.14
1991 1,673,187 0.56 10.17 33.92
1992 2,483,501 0.55 9.11 23.30
1993 3,935,444 0.54 7.84 25.41
1994 4,891,505 0.64 7.37 23.37
(dagger)Data prior to 1992 has been adjusted to reflect a two-for- one stock
split in the form of a 100% stock dividend to shareholders of record
effective on the beginning of business on June 1, 1992.
(dagger)(dagger)Total return measures the change in value of an investment
over the periods indicated. It does not include the maximum initial sales
charge and assumes reinvestment of dividends at the offering price and
capital gains, if any, at net asset value. Effective May 1, 1994, with the
implementation of the Rule 12b-1 distribution plan, the existing sales
charge on reinvested dividends has been eliminated.
<CAPTION>
Per Share Operating Performance
- --------------------------------------------------------------------------------------------------------------
Net Realized
Net Asset & Unrealized Distribution
Year Value at Net Gain Total From From Net
Ended Beginning Investment (Loss) on Investment Investment
Sep. 30 of Year Income Investments Operations Income
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Government Securities Fund:*
1985 $6.85 $0.880 $0.500 $1.380 $(0.900)
1986 7.33 0.790 0.165 0.955 (0.875)
1987 7.41 0.698 (0.500) 0.198 (0.724)
1988 6.87 0.691 0.115 0.806 (0.696)
1989 6.98 0.688 (0.072) 0.616 (0.696)
1990 6.90 0.668 (0.020) 0.648 (0.688)
1991 6.86 0.653 0.287 0.940 (0.660)
1992 7.14 0.609 0.106 0.715 (0.595)
1993 7.26 0.557 (0.056) 0.501 (0.561)
1994 7.20 0.500 (0.678) (0.178) (0.512)
<CAPTION>
- ------------------------------------------------------------------------------------------
Distributions Net Asset
Year From Value
Ended Realized Total at End Total
Sep. 30 Capital Gains Distributions of Year Return(dagger)(dagger)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Securities Fund:*
1985 $ - $(0.900) $7.33 20.83%
1986 - (0.875) 7.41 13.25
1987 (0.014) (0.738) 6.87 2.22
1988 - (0.696) 6.98 11.77
1989 - (0.696) 6.90 8.95
1990 - (0.688) 6.86 9.47
1991 - (0.660) 7.14 13.97
1992 - (0.595) 7.26 10.14
1993 - (0.561) 7.20 6.86
1994 - (0.512) 6.51 (2.75)
<CAPTION>
Ratios/Supplemental Data
- -------------------------------------------------------------------------------------------
Ratio of Net
Net Assets Ratio of Investment
Year at End Expenses Income Portfolio
Ended of Year to Average to Average Turnover
Sep. 30 (in 000's) Net Assets Net Assets Rate
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Securities Fund:*
1985 $ 6,512,982 0.57% 11.06% 9.27%
1986 14,361,682 0.54 9.93 36.02
1987 13,024,437 0.52 9.49 52.92
1988 12,112,775 0.53 9.85 34.14
1989 11,260,310 0.52 9.99 25.70
1990 11,143,333 0.52 9.72 18.23
1991 12,426,910 0.52 9.26 22.14
1992 13,617,157 0.53 8.46 38.75
1993 14,268,516 0.52 7.71 43.10
1994 11,668,747 0.55 7.37 18.28
*Maturity of U.S. government issues and the reinvestment of the proceeds
thereof are considered as purchases and sales of securities in computing
the portfolio turnover rate of the U.S. Government Securities Series.
(dagger)(dagger)Total return measures the change in value of an investment
over the periods indicated. It does not include the maximum initial sales
charge and assumes reinvestment of dividends at the offering price and
capital gains, if any, at net asset value. Effective May 1, 1994, with the
implementation of the Rule 12b-1 distribution plan, the existing sales
charge on reinvested dividends has been eliminated.
</TABLE>
About the Fund
- --------------------------------------------------------------------------
The Fund, which was incorporated under the laws of Delaware in 1947 and
reincorporated under the laws of Maryland in 1979, is an open-end
management investment company commonly called a "mutual fund" and is
registered with the SEC under the Investment Company Act of 1940, as
amended ("1940 Act"). The Fund has only one class of capital stock which is
issued in five separate diversified series: Growth Series, DynaTech Series,
Utilities Series, Income Series, and U.S. Government Securities Series.
Shares of each Series may be purchased (minimum investment of $100
initially and $25 thereafter) at the current public offering price which is
equal to each Series' net asset value (see "Valuation of Fund Shares") plus
a sales charge not exceeding 4.5% or 4.25% of the offering price depending
upon the Series. (See "How to Buy Shares of the Fund.")
Investment Objectives and Policies of Each Series
- --------------------------------------------------------------------------
The investment objectives of all Series are fundamental policies and may
not be changed without shareholder approval.
Growth Series
The primary investment objective of this Series is capital appreciation.
The Series is primarily invested in common stocks or convertible securities
believed to offer favorable possibilities of capital appreciation, but some
of which may yield little or no current income. Current income is only a
secondary consideration in selecting portfolio securities. The assets of
the Series may be held only in cash or cash equivalents, or invested in
shares of common or capital stock traded on any national securities
exchange, or issued by a corporation, association or similar legal entity
having gross assets valued by it at not less than $1,000,000 as shown by
its latest published annual report, or in bonds or preferred stock
convertible into shares of common or capital stock listed for trading on a
national securities exchange. The Series may also write covered call
options. Concentration of investments in a single industry may not exceed
25% of its total assets; this is a fundamental policy of the Series which
may not be changed without shareholder approval.
DynaTech Series
The investment objective of this Series is capital appreciation. The Series
is designed for investors who understand and are willing to accept the risk
of loss involved in seeking capital appreciation. Investments are made
primarily in companies emphasizing technological development, in
fast-growing industries or in situations which management considers
undervalued. The assets of this Series may be held only in cash or cash
equivalents, or invested in securities traded on any national securities
exchange, the NASDAQ National Market System or over-the-counter market, or
issued by a corporation, association or similar legal entity having gross
assets valued by it at not less than $1,000,000 as shown by its latest
published annual report. It is contemplated that the bulk of this Series'
assets will be invested in common stocks, including securities convertible
into common stocks. When the investment manager believes that no attractive
investment opportunities exist, the Series may maintain a significant
portion of its assets in cash. Investments in debt securities or preferred
stocks which management believes will further the investment objective of
the Series may also be made. This Series may not concentrate more than 25%
of its assets in any one industry at the time of purchase. From time to
time, through market appreciation of certain issues, concentration in a few
issues may develop. Investments tend to be of a more speculative nature,
and there can be greater emphasis on short- term trading profits.
Investments in certain instances may be based upon market fluctuations
precipitated by excessive optimism or pessimism of investors with little or
no basis in fundamental economic conditions.
Utilities Series
The investment objectives of this Series are both capital appreciation and
current income. As a fundamental policy, the assets of the Series may be
held in cash or cash equivalents, or invested in securities of an issuer
actually engaged in the public utilities industry. "Public Utilities
Industry" includes the manufacture, production, generation, transmission
and sale of gas, water, and electricity energy. The term also includes
issuers engaged in the communications field including entities such as
telephone, telegraph, satellite, microwave and other companies providing
communication facilities for the public benefit, but not those in public
broadcasting.
To achieve its investment objective, this Series invests primarily in
common stocks, including, from time to time, non- dividend paying common
stocks if, in the opinion of the investment manager, such securities appear
to offer attractive opportunities for capital appreciation. This Series may
also invest in preferred stocks and bonds issued by public utility issuers.
In selecting its investment, the Series seeks to invest in whatever type of
security that best permits it to achieve its investment objective without
excessive risk at the time of purchase. When purchasing fixed- income debt
securities, the Series may invest in investment grade or lower grade
securities, depending upon prevailing market and economic conditions. The
Series may invest in fixed-income debt securities regardless of their
rating (including securities in the lowest rating categories) or in
securities which are not rated. Although most of the Series' investments
are rated at least BBB by Moody's or S&P (see the Appendix to this
Prospectus for a discussion of the ratings), it is the Series' intent not
to purchase fixed- income debt securities rated below B by an NRSRO. With
respect to unrated securities, it is also the Series' intent to purchase
securities which, in the view of the Series' investment manager would be
comparable to securities rated B or above by an NRSRO or, if no specific
equivalent rating has been assigned by an NRSRO, securities which have been
determined to be consistent with the Series' objectives without exposing
the Series to excessive risk. The Series will not purchase issues that are
in default nor will the Series invest in securities which are felt by
management to involve excessive risk. As of September 30, 1994, 12.4% of
the Utilities Series' assets were invested in debt securities, all of the
rated securities were rated at least Baa by Moody's and BBB by S&P.
Securities rated B are regarded, on balance, as predominantly speculative
with respect to the capacity to pay interest and repay principal in
accordance with the terms of the obligation. These ratings, which represent
the opinions of the NRSROs with respect to the securities and are not
absolute standards of quality, will be considered in connection with the
investments of the Series' assets but will not be a determining or limiting
factor.
Like all bonds, the value of the Series' fixed- income debt investments
generally shares an inverse relationship with market interest rates. For
example, when interest rates rise, the value of the Series' debt
investments tends to fall. Conversely, when market interest rates decline,
the value of these securities tends to rise. Because securities issued by
utility companies are particularly sensitive to movement in interest rates,
the equity securities of such companies are more affected by movement in
interest rates than are the equity securities of other issuers.
The Series has substantial investments in the gas and electric public
utilities industries which have certain characteristics and risks of which
investors should be aware. Such characteristics include: the difficulty of
obtaining adequate returns on invested capital in spite of frequent rate
increases; the difficulty of financing large construction programs during
inflationary periods; restrictions on operations and increased costs and
delays attributable to environmental considerations; difficulties of the
capital markets in absorbing utility debts and equity securities;
difficulties in obtaining fuel for electric generation at reasonable
prices; difficulty in obtaining natural gas for resale; risks associated
with the construction and operation of nuclear power plants; and general
effects of energy conservation. Historically, this Series' investments in
the Public Utilities Industry have been predominantly in dividend-yielding
common stocks.
Income Series
The investment objective of this Series is to maximize income while
maintaining prospects for capital appreciation. The Series invests in a
diversified portfolio of securities selected with particular consideration
of current income production. The underlying assets of the Series may be
held in cash or cash equivalents, or invested in securities traded on any
national securities exchange or in securities issued by a corporation,
association or similar legal entity having gross assets valued by it at not
less than $1,000,000 as shown by its latest published annual report. This
Series may also invest in preferred stocks. There are no restrictions as to
the proportion of investments which may be made in a particular type of
security and such determination is entirely within management's discretion.
As of September 30, 1994, approximately 35.6% of this Series' assets were
invested in lower rated or comparable quality unrated bonds (those having a
rating [or comparable to] below the four highest grades assigned by Moody's
or S&P), which securities are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations. A breakdown of
the ratings for the bonds in the Series' portfolio is included under "Asset
Composition Table" below. (See Appendix to this Prospectus for a discussion
of the ratings.) Various NRSROs publish ratings of some of the types of
securities in which the Series may invest. Higher yields are ordinarily
available from securities in the lower-rated categories of the NRSROs (that
is, securities rated Baa or lower by Moody's, or BBB or lower by S&P) or
from unrated securities of comparable quality. These ratings, which
represent the opinions of the NRSROs with respect to the issuer's ability
to pay interest and repay principal, although they do not purport to
reflect the risk of fluctuations in market value and are not absolute
standards of quality, will be considered in connection with the investment
of the Series' assets, but will not be a determining or limiting factor.
The Series may invest in securities regardless of their rating or in
securities which are not rated, including up to 5% of its assets in
securities which are in default at the time of purchase.
In the event the rating on an issue held in the Series' portfolio is
changed by an NRSRO such event will be considered by the Series in its
evaluation of the overall investment merits of that security but will not
generally result in an automatic sale of the security.
Rather than relying principally on the ratings assigned by the NRSROs, the
investment analysis of securities being considered for the Series'
portfolio may also include, among other things, consideration of relative
values, based on such factors as anticipated cash flow, interest or
dividend coverage, asset coverage, earnings prospects, the experience and
managerial strength of the issuer, responsiveness to changes in interest
rates and business conditions, debt maturity schedules and borrowing
requirements and the issuer's changing financial condition and public
recognition thereof. Since a substantial portion of the Series' portfolio
at any particular time may consist of debt securities, changes in the level
of interest rates, among other things, will likely affect the value of the
Series' holdings and thus the value of a shareholder's investment.
As market conditions change, it is conceivable that all of the assets of
this Series could be invested in common stocks or, conversely, in debt
securities. It is a fundamental policy of this Series that concentration of
investment in a single industry may not exceed 25% of its total assets.
The Income Series may invest up to 5% of its assets in loan participations
and other related direct or indirect bank obligations ("Loan
Participations"). These instruments are interests in floating or variable
rate senior loans to U.S. corporations, partnerships and other entities.
While Loan Participations generally trade at par value the Income Series
will be able to acquire Loan Participations, including those which sell at
a discount because of the borrower's credit problems. To the extent the
borrower's credit problems are resolved, the Loan Participation may
appreciate in value. The investment manager may acquire Loan Participations
for the Series when it believes that over the long term, appreciation will
take place. An investment in such securities, however, carries
substantially the same risk as that for defaulted debt securities and may
cause the loss of the entire investment to the Series. Most Loan
Participations are illiquid and, to that extent, will be included in the
10% limitation described under "Illiquid Investments."
The Series may purchase debt obligations on a "when-issued" or
"delayed-delivery" basis. Such securities are subject to market fluctuation
prior to delivery to the Fund and generally do not earn interest until
their scheduled delivery date. Therefore, the value or yields at delivery
may be more or less than the value or the yields available when the
transaction was entered into. When the Series is the buyer in such a
transaction, it will maintain, in a segregated account with its custodian,
cash or high-grade marketable securities having an aggregate value equal to
the amount of such purchase commitments until payment is made. To the
extent the Income Series engages in when- issued and delayed delivery
transactions, it will do so only for the purpose of acquiring portfolio
securities consistent with the Series' investment objectives and policies,
and not for the purpose of investment leverage. (See the Fund's SAI for a
more complete discussion regarding when- issued and delayed- delivery
transactions.)
The Series may also purchase certain bonds issued at discount which defer
the payment of interest or which pay no interest until maturity, known as
zero coupon bonds, or which pay interest through issuance of additional
bonds, known as pay-in-kind bonds. See "Risk Considerations Relating to
High Yield Securities" for more information regarding these types of bonds.
The Series' total return, as calculated pursuant to the formula prescribed
by the SEC, for the one-, five- and ten-year periods ended on September 30,
1994 was -5.58%, 10.98% and 12.49%, respectively. See "Performance."
Asset Composition Table
During fiscal year ended September 30, 1994, the Income Series had an
average of 28.19% of its assets invested in bonds rated below investment
grade (Ba or lower) by Moody's or BB or lower by S&P) and 12.89% in bonds
which had not been rated by any NRSRO. A total of 55.55% of the Series'
assets were invested in bonds. A credit rating by an NRSRO evaluates only
the safety of principal and interest of the bond, and does not consider the
market value risk associated with an investment in such a bond. The table
below shows the percentage invested in each of the specific rating
categories by Moody's and S&P and those that are not rated. The information
was prepared based on a dollar weighted average of the Series' portfolio
composition based on month-end assets for each of the 12 months in the
fiscal year ended September 30, 1994. A description of each rating category
by Moody's and S&P is included in the Appendix.
<TABLE>
<CAPTION>
Average Weighted
Moody's or S&P Rating Percentage of Assets
- ------------------------- ----------------------
<S> <C>
Aaa or AAA 12.74%
Aa or AA 0.00%
A 0.01%
Baa or BBB 1.72%
Ba or BB 3.93%
B 18.75%
Caa or CCC 4.09%
Ca or CC 0.94%
C 0.00%
D 0.48%
Not Rated 12.89%
</TABLE>
U.S. Government Securities Series
The investment objective of the U.S. Government Securities Series is income
through investment in a portfolio limited to securities which are
obligations of the U.S. government or its instrumentalities. U.S.
government securities include, but are not limited to, U.S. Treasury bonds,
notes and bills, Treasury Certificates of Indebtedness and securities
issued by instrumentalities of the U.S. government. Other than investments
in short-term U.S. Treasury securities, the assets of this Series are
currently invested solely in obligations of the Government National
Mortgage Association (popularly called GNMAs or Ginnie Maes).
The U.S. Government Series believes that its investment policies, as stated
in this Prospectus and the SAI, make the Series a permissible investment
for federal credit unions, based on the Series' understanding of the laws
and regulations governing credit union regulations as of September 30,
1994. CREDIT UNION INVESTORS ARE ADVISED TO CONSULT THEIR OWN LEGAL
ADVISERS TO DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND
CONSTITUTE LEGAL INVESTMENTS FOR THEM. Please see the SAI ("The Fund's
Investment Objectives and Restrictions"-- "Credit Union Regulations") for
details.
Information about GNMAs
GNMAs are mortgage backed securities representing part ownership of a pool
of mortgage loans. GNMA Certificates differ from bonds in that principal is
scheduled to be paid back by the borrower over the length of the loan
rather than returned in a lump sum at maturity. The U.S. Government
Securities Series purchases GNMA Certificates for which principal and
interest are guaranteed. The Series also purchases "variable rate" GNMA
Certificates and may also purchase other types which may be issued with
GNMA's guarantee.
The GNMA guarantee of principal and interest on GNMA Certificates is backed
by the full faith and credit of the United States government. GNMA may
borrow U.S. Treasury funds to the extent needed to make payments under its
guarantee.
GNMA Certificates are created by an "issuer," which is a Federal Housing
Administration ("FHA") approved lender, such as mortgage bankers,
commercial banks and savings and loan associations, which also meet
criteria imposed by GNMA. The issuer assembles a specific pool of mortgages
insured by either the FHA or the Farmers Home Administration or guaranteed
by the Veterans Administration. Upon application by the issuer, and after
approval by GNMA of the pool, GNMA provides its commitment for the
guarantee of principal and interest on the GNMA Certificates secured by the
mortgages included in the pool. The GNMA Certificates, endorsed by GNMA,
are then sold by the issuer through securities dealers.
When mortgages in the pool underlying a GNMA Certificate are prepaid by
mortgagees or as a result of foreclosure, such principal payments are
passed through to the Certificate holders (such as the Series).
Accordingly, the life of the GNMA Certificate is likely to be substantially
shorter than the stated maturity of the mortgages in the underlying pool.
Because of such variation in prepayment, it is not possible to accurately
predict the life of a particular GNMA Certificate.
Generally, GNMA Certificates bear a "coupon rate," which represents the
effect of FHA- Veterans Administration mortgage rates for the underlying
pool of mortgages, less 0.5% which constitutes the GNMA and issuer's fees.
For providing its guarantee, GNMA currently receives an annual fee of 0.06%
of the outstanding principal on Certificates backed by single- family
dwelling mortgages, and the issuer currently receives an annual fee of
0.44% for assembling the pool and for passing through monthly payments of
interest and principal.
Payments to holders of GNMA Certificates consist of the monthly
distributions of interest and principal less the GNMA and issuer's fees.
The portion of the monthly payment which represents a return of principal
will be reinvested by the Series in then- available GNMA obligations which
may bear interest at a rate higher or lower than the obligation from which
the payment was received. The actual yield to be earned by the holder of a
GNMA Certificate is calculated by dividing such payments by the purchase
price paid for the GNMA Certificate (which may be at a premium or a
discount from the face value of the Certificate). Unpredictable prepayments
of principal, however, can greatly change realized yields. In a period of
declining interest rates it is more likely that mortgages contained in GNMA
pools will be prepaid thus reducing the effective yield. Moreover, any
premium paid on the purchase of a GNMA Certificate will be lost if the
obligation is prepaid. In periods of falling interest rates this potential
for pre-payment may reduce the general upward price increase of GNMA
Certificates that might otherwise occur. As with other debt instruments,
the price of GNMA Certificates is likely to decrease in times of rising
interest rates. Price changes of the GNMA Certificates held by the Fund
have a direct impact on the net asset value per share of the Fund.
The Series' investments are continually monitored and changes are made as
market conditions warrant. However, the Series does not engage in the
trading of securities for the purpose of realizing short- term profits.
When interest rates rise, the value of a GNMA Certificate will generally
decline. Conversely, when rates fall, the GNMA Certificate value may rise
although not as much as other debt issues due to the prepayment feature.
Although the securities in the Series' portfolio are guaranteed as to
principal and interest by the U.S. government or its instrumentalities, the
market value of these securities upon which daily net asset value is based
may fluctuate based upon such factors as changing interest rates. As a
result, the price per share the shareholder receives on redemption may be
more or less than the price paid for the shares. The dividends per share
paid by the Series may also vary.
The Series may purchase and sell GNMA Certificates on a To Be Announced
("TBA") basis. These transactions are arrangements under which the Series
may purchase securities with payment and delivery scheduled for a future
time, up to 60 days. The transactions are subject to market fluctuation and
are subject to the risk that the value or yields at delivery may be more or
less than the purchase price or the yields available when the transaction
was entered into. In TBA and delayed delivery transactions, the Series
relies on the seller to complete the transaction. The other party's failure
to do so may cause the Series to miss a price or yield considered
advantageous. Securities purchased on a TBA or delayed delivery basis do
not generally earn interest until their scheduled delivery date. The Series
is not subject to any percentage limit on the amount of its assets which
may be invested in delayed delivery and TBA purchase obligations. More
information concerning these transactions is included in the SAI.
Other Investment Policies of the Fund
Options. Each Series, except the U.S. Government Securities Series, may
write covered call options which are listed for trading on a national
securities exchange. This means that the Series will only write options on
securities which it actually owns. A call option gives the person who buys
it the right to buy the security on which the option is written for a
specified period of time for a price agreed to at the time the Series sells
the option, even though that price may be less than the value of the
security at the time the option is exercised. When the Series sells covered
call options, it will receive a cash premium which can be used in whatever
way is felt to be most beneficial to the Series. The risks associated with
covered call writing are that in the event of a price rise on the
underlying security which would likely trigger the exercise of the call
option, the Series will not participate in the increase in price beyond the
exercise price. If the Series determines that it does not wish to deliver
the underlying securities from its portfolio, it would have to enter into a
"closing purchase transaction" the premium on which may be higher or lower
than that received by the Series for writing the option. There is no
assurance that a closing purchase transaction will be available in every
instance. The U.S. Government Securities Series does not engage in option
transactions.
Loans of Portfolio Securities. Consistent with procedures approved by the
Board of Directors and subject to the following conditions, each Series,
except the U.S. Government Securities Series, may lend its portfolio
securities to qualified securities dealers or other institutional
investors, provided that such loans do not exceed 10% of the value of a
Series' total assets at the time of the most recent loan. The borrower must
deposit with the Fund's custodian 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 collateral coverage of at
least 100%. Such 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 Series engage in security loan arrangements with the primary
objective of increasing a Series' income either through investing of the
cash collateral in short-term interest bearing obligations or by receiving
a loan premium from the borrower, but will do so only to the extent that
the Series will not lose the tax treatment available to regulated
investment companies. Under the securities loan agreement, a Series
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. The Fund's Income and Utilities Series loaned
securities to certain brokers during the fiscal year ended September 30,
1994.
Convertible Securities. The Series may invest in securities including
corporate bonds, notes and preferred stocks that are convertible into
common stock or other securities which provide an opportunity for equity
participation. These securities are convertible at a stated price within a
specified period of time and are generally senior to common stocks in a
corporation's capital structure, although they are usually subordinated to
similar nonconvertible securities. Convertible securities provide a
fixed-income stream and the opportunity, through their conversion feature,
to participate in the capital appreciation resulting from a market price
advance in the convertible security's underlying common stock. As with a
fixed-income security, a convertible security tends to increase in market
value when interest rates decline and tends to decrease in value when
interest rates rise. The price of a convertible security is also influenced
by the market value of the security's underlying common stock and tends to
increase as the market value of the underlying stock rises, whereas it
tends to decrease as the market value of the underlying stock declines. As
a result of the Series' investment in convertible securities and other
equity securities, the value of the Series' shares and the dividends per
share paid by the Series may fluctuate.
The Income Series may also invest in convertible preferred stocks that
offer enhanced yield features, such as Preferred Equity Redemption
Cumulative Stock ("PERCS"), which provide an investor, such as the Series,
with the opportunity to earn higher dividend income than is available on a
company's common stock. A PERCS is a preferred stock which generally
features a mandatory conversion date, as well as a capital appreciation
limit which is usually expressed in terms of a stated price. Most PERCS
expire three years from the date of issue, at which time they are
exchangeable for the issuer's common stock or cash, at the option of the
issuer. Under a typical arrangement, if after three years the issuer's
common stock is trading at a price below that set by the capital
appreciation limit, each PERCS would convert to one share of common stock.
If, however, the issuer's common stock is trading at a price above that set
by the capital appreciation limit, the holder of the PERCS would receive
less than one full share of common stock. The amount of that fractional
share of common stock received by the PERCS' holder is determined by
dividing the price set by the capital appreciation limit of the PERCS by
the market price of the issuer's common stock. Some PERCS provide that they
can be called immediately if the issuer's common stock is trading at or
above a specified level.
An investment in PERCS or other similar convertible securities may involve
additional risks. The Series may have difficulty disposing of such
securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the Series' ability to dispose of particular securities,
when necessary, to meet the Series' liquidity needs or in response to a
specific economic event, such as the deterioration in the creditworthiness
of the issuer. Reduced liquidity in the secondary market for certain
securities may also make it more difficult for the Series to obtain market
quotations based on actual trades for purposes of valuing the Series'
portfolio. The Series, however, intends to acquire securities believed by
the investment manager to be liquid although, as with any investment, there
are no assurances that this will be achieved.
There are other convertible securities, including, but not limited to,
Dividend Enhancement Convertible Stock, Perpetual Equity Participation
Shares and Automatically Convertible Equity Securities, in which the Series
invests, which are similar to the foregoing described convertible
securities. There may be additional types of convertible securities, which
are also similar to the foregoing described convertible securities, in
which the Series may invest in the future to the extent such investments
are consistent with the Series' investment objective and policies.
Repurchase Agreements. All Series of the Fund, except for the U.S.
Government Securities Series, may engage in repurchase transactions in
which a Series purchases a U.S. government security subject to resale to a
bank or dealer at an agreed-upon price and date. The transaction requires
the collateralization of the seller's obligation 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 Series in each
agreement, with the value of the underlying security marked to market daily
to maintain coverage of at least 100%. A default by the seller might cause
the Series to experience a loss or delay in the liquidation of the
collateral securing the repurchase agreement. The Series might also incur
disposition costs in liquidating the collateral. The Series, however,
intend to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks which are deemed creditworthy by the
Fund's investment manager. A repurchase agreement is deemed to be a loan of
money by the Series under the 1940 Act. The U.S. government security
subject to resale (the collateral) will be held on behalf of a Series by a
custodian approved by the Fund's Board and will be held pursuant to a
written agreement.
Borrowing. The Series do not borrow money or mortgage or pledge any of
their assets, except that each Series may borrow for temporary or emergency
purposes in an amount up to 5% of total asset value.
Illiquid Investments. It is the policy of all Series that illiquid
securities (securities that cannot be disposed of within seven days in the
normal course of business at approximately the amount at which the Series
has valued the securities) may not constitute, at the time of purchase,
more than 10% of the value of the total net assets of the Series. Subject
to this limitation, the Fund's Board of Directors has authorized each
Series, except the U.S. Government Securities Series, to invest in
restricted securities where such investment is consistent with the Series'
investment objective and has authorized such securities to be considered to
be liquid to the extent the investment manager determines on a daily basis
that there is a liquid institutional or other market for such securities.
Notwithstanding the investment manager's determinations in this regard, the
Fund's Board of Directors will remain responsible for such determinations
and will consider appropriate action, consistent with the objective and
policies of the Series holding such security, if the security should become
illiquid subsequent to its purchase. To the extent a Series invests in
restricted securities that are deemed liquid, the general level of
illiquidity in the Series may be increased if qualified institutional
buyers become uninterested in purchasing these securities or the market for
these securities contracts. See "Investment Objective and Restrictions of
the Fund" in the SAI.
Foreign Securities. Securities of foreign issuers cannot be purchased for
the U.S. Government Securities Series. There are no restrictions on
investment of the assets of the other Series in foreign securities,
providing such investments are consistent with the objectives and comply
with the concentration and diversification policies of such Series.
The Series will ordinarily purchase foreign securities which are traded in
the United States or purchase American Depositary Receipts ("ADRs"), which
are certificates issued by U.S. banks representing the right to receive
securities of a foreign issuer deposited with that bank or a correspondent
bank. However, the Series may purchase the securities of foreign issuers
directly in foreign markets.
Investments in foreign securities where delivery takes place outside the
U.S. will have to be made in compliance with any applicable U.S. and
foreign currency restrictions and other tax laws and laws limiting the
amount and types of foreign investments. Changes of governmental
administrations or of economic or monetary policies, in the U.S. or abroad,
or changed circumstances in dealings between nations or currency
convertibility or exchange rates could result in investment losses for such
Series.
Investment in the shares of foreign issuers requires consideration of
certain factors that are not normally involved in investments solely in
U.S. issuers. Among other things, the financial and economic policies of
some foreign countries in which the Fund may invest are not as stable as in
the U.S. Furthermore, foreign issuers are not generally subject to uniform
accounting, auditing and financial standards and requirements comparable to
those applicable to U.S. corporate issuers. There may also be less
government supervision and regulation of foreign securities exchanges,
brokers and issuers than exist in the U.S. Restrictions and controls on
investment in the securities markets of some countries may have an adverse
effect on the availability and costs to the Series of investments in those
countries. In addition, there may be the possibility of expropriations,
foreign withholding taxes, confiscatory taxation, political, economic or
social instability or diplomatic developments which could affect assets of
the Series invested in issuers in foreign countries.
There may be less publicly available information about foreign issuers than
is contained in reports and reflected in ratings published for U.S.
issuers. Some foreign securities markets have substantially less volume
than the New York Stock Exchange (the "Exchange") and some foreign
government securities may be less liquid and more volatile than U.S.
government securities. Transaction costs on foreign securities exchanges
may be higher than in the U.S., and foreign securities settlements may, in
some instances, be subject to delays and related administrative
uncertainties.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Securities which are acquired by a Series outside the U.S. and which are
publicly traded in the U.S. or on a foreign securities exchange or in a
foreign securities market are not considered by the Series to be an
illiquid asset so long as the Series acquires and holds the security with
the intention of reselling the security in the foreign trading market, the
Series reasonably believes it can readily dispose of the security for cash
in the U.S. or foreign market and current market quotations are readily
available. Foreign exchange gains and losses realized by a Series in
connection with transactions involving foreign currencies, foreign currency
payables or receivables, and foreign currency- denominated debt securities
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 Series income or loss
from such transactions and in turn its distributions to shareholders. These
rules are discussed in the SAI. The Series, other than the Income Series,
presently have no intention of investing more than 10% of the net assets of
any Series in foreign securities not publicly traded in the United States.
The holding of foreign securities, however, may be limited by the Series to
avoid investment in certain Passive Foreign Investment Companies ("PFIC")
and the imposition of a PFIC tax on the Fund resulting from such
investments.
All Series are subject to a number of additional investment restrictions,
some of which may be changed only with the approval of the affected Series'
shareholders, which limits its activities to some extent. For a list of
these restrictions and more information concerning the policies discussed
herein, please see the SAI. There is, of course, no assurance that the
Series' investment objectives described above will be met.
How Shareholders Participate in the Results of the Fund's Activities
The assets of each Series are invested in portfolio securities. If the
securities owned by that Series increase in value, the value of the shares
of the Series which the shareholder owns will increase. If the securities
owned by a Series decrease in value, the value of the shareholder's shares
will also decline. In this way, shareholders participate in any change in
the value of the securities owned by the Series.
In addition to the factors which affect the value of individual securities,
as described in the preceding sections, a shareholder may anticipate that
the value of Series shares will fluctuate with movements in the broader
equity and bond markets, as well.
To the extent a Series' investments consist of debt securities, changes in
interest rates will affect the value of a Series' portfolio and thus its
share price. Increased rates of interest which frequently accompany higher
inflation and/or a growing economy are likely to have a negative effect on
the value of a Series shares. To the extent the Series' investments consist
of common stocks, a decline in the market, expressed for example by a drop
in the Dow Jones Industrials or the Standard & Poor's 500 average or any
other equity based index, may also be reflected in declines in that Series'
share price. History reflects both increases and decreases in the
prevailing rate of interest and in the valuation of the market, and these
may reoccur unpredictably in the future.
A decline in the stock market of any country in which a Series is invested
may also be reflected in declines in the Series' share price. Changes in
currency valuations will also affect the price of a Series shares. History
reflects both decreases and increases in worldwide stock markets and
currency valuations, and these may reoccur unpredictably in the future.
Risk Considerations Relating to High Yield Securities
- --------------------------------------------------------------------------
As previously indicated, the Income Series intends to invest a substantial
portion of its assets in lower rated, fixed- income securities and unrated
securities of comparable quality.
Corporate debt securities are subject to the risk of an issuer's inability
to meet principal and interest payments on the obligations (credit risk)
and may also be subject to price volatility due to such factors as interest
rate sensitivity, market perception of the creditworthiness of the issuer
and general market liquidity (market risk). Lower rated or unrated
securities are more likely to react to developments affecting market and
credit risk than are more highly rated securities, which react primarily to
movements in the general level of interest rates. The investment manager
will consider both credit risk and market risk in making investment
decisions as to corporate debt obligations for the Fund.
Bonds rated BB or below by S&P or Ba or below by Moody's (or comparable
unrated securities) are considered by S&P and Moody's, on balance, to be
speculative and questionable as to payment of principal and interest
thereon. They will generally involve more credit risk than securities in
the higher rating categories. The market values of such securities tend to
reflect individual corporate developments to a greater extent than do
higher rated securities, which react primarily to fluctuations in the
general level of interest rates. Such lower rated securities also tend to
be more sensitive to economic conditions than higher rated securities. Even
securities rated BBB or Baa by S&P and Moody's, ratings which are
considered investment grade, possess some speculative characteristics.
Companies that issue high yielding, fixed- income securities are often
highly leveraged and may not have more traditional methods of financing
available to them. Therefore, the risk associated with acquiring the
securities of such issuers is generally greater than is the case with
higher rated securities. For example, during an economic downturn or a
sustained period of rising interest rates, highly leveraged issuers of high
yielding securities may experience financial stress. During these periods,
such issuers may not have sufficient cash flow to meet their interest
payment obligations. The issuer's ability to service its debt obligations
may also be adversely affected by specific corporate developments, the
issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by
the issuer may be significantly greater for the holders of high yielding
securities because such securities are generally unsecured and are often
subordinated to other creditors of the issuer. The Income Series may also
purchase debt obligations of issuers not currently paying interest as well
as issuers who are in default and may retain an issue which has defaulted.
Defaulted securities will be purchased or retained if, in the opinion of
the investment manager, it may present an opportunity for subsequent price
recovery, the issuer may resume payments or other advantageous developments
appear likely, in the near term. In general, securities which default lose
much of their value in the time period prior to the actual default so that
the Series' net asset value would be impacted prior to the default.
High yielding, fixed-income securities frequently have call or buy-back
features which permit an issuer to call or repurchase the securities from
the Income Series. Although such securities are typically not callable for
a period from three to five years after their issuance, when calls are
exercised by the issuer during periods of declining interest rates, the
Income Series must replace such called securities with lower yielding
securities, thus decreasing the net investment income to the Income Series
and dividends to shareholders. The premature disposition of a high yielding
security due to a call or buy-back feature, the deterioration of the
issuer's creditworthiness, or a default may also make it more difficult for
the Income Series to manage the timing of its receipt of income, which may
have tax implications. Further information is included under "Taxation of
the Fund and Its Shareholders."
The Income Series may have difficulty disposing of certain high yielding
securities because there may be a thin trading market for a particular
security at any given time. The market for lower rated fixed-income
securities generally tends to be concentrated among a smaller number of
dealers than is the case for securities which trade in a broader secondary
retail market. Generally, purchasers of these securities are predominantly
dealers and other institutional buyers, rather than individuals. To the
extent the secondary trading market for a particular high yielding, fixed-
income security does exist, it is generally not as liquid as the secondary
market for higher rated securities. Reduced liquidity in the secondary
market may have an adverse impact on market price and the Series' ability
to dispose of particular issues, when necessary, to meet its liquidity
needs or in response to a specific economic event, such as the
deterioration in the creditworthiness of the issuer. Reduced liquidity in
the secondary market for certain securities may also make it more difficult
for the Series to obtain market quotations based on actual trades for
purposes of valuing its portfolio. Current values for these high yield
issues are obtained from pricing services and/or a limited number of
dealers and may be based upon factors other than actual sales. (See
"Valuation of Fund Shares.")
The Series may acquire such securities that are sold without registration
under the federal securities laws and therefore carry restrictions on
resale. While many recent high yielding securities have been sold with
registration rights, covenants and penalty provisions for delayed
registration, if the Series is required to sell such restricted securities
before the securities have been registered, it may be deemed an underwriter
of such securities as defined in the Securities Act of 1933, which entails
special responsibilities and liabilities. The Income Series may incur
special costs in disposing of such securities; however, the Series will
generally incur no costs when the issuer is responsible for registering the
securities.
The Series may acquire such securities during an initial underwriting. Such
securities involve special risks because they are new issues. The Series
has no arrangement with its underwriters or any other person concerning the
acquisition of such securities, and the investment manager will carefully
review the credit and other characteristics pertinent to such new issues.
Factors adversely impacting the market value of high yielding securities
will adversely impact the Income Series' net asset value. In addition, the
Income Series may incur additional expenses to the extent it is required to
seek recovery upon a default in the payment of principal or interest on its
portfolio holdings. The Income Series will rely on the investment manager's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer. In this evaluation, the investment manager will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. The default by
an issuer of securities held by the Income Series will generally adversely
affect the Series and lower its net asset value (as the fair value of a
security generally declines prior to and at default). A default will also
decrease the amount of income available to the Series from which dividends
may be paid. In addition, if an issuer defaults after the Income Series has
paid out dividends based upon accrued income, reversal of such accrual may
result in the Income Series having a return of capital to its shareholders.
The recent recession disrupted the market for high yield securities and
adversely affected the value of outstanding securities and the ability of
issuers of such securities to meet their obligations. Those adverse effects
may continue even as the economy recovers. The Income Series may also
purchase debt obligations of issuers not currently paying interest as well
as issuers who are in default and may retain an issue which has defaulted.
Defaulted securities will be purchased or retained if, in the opinion of
the investment manager, it may present an opportunity for subsequent price
recovery, the issuer may resume payments or other advantageous developments
appear likely, in the near term. In general, securities which default lose
much of their value in the time period prior to the actual default so that
the Series' net asset value would be impacted prior to the default. As of
September 30, 1994, five out of 214 issues (excluding short- term
securities and cash equivalents) in the Fund's portfolio were in default.
No issues defaulted in the past fiscal year and a total of 12 issues have
defaulted over the prior three fiscal years. Currently, defaulted issues
represent 0.53% of the net assets of the Series. The Series may have
unrealized losses on such defaulted securities which are reflected in the
price of the Series' shares.
The credit risk factors pertaining to lower-rated securities also apply to
lower- rated zero coupon, deferred interest and pay-in-kind bonds. Such
bonds carry an additional risk in that, unlike bonds which pay interest
throughout the period to maturity, the Series will realize no cash until
the cash payment date and, if the issuer defaults, the Series may obtain no
return at all on its investment. Zero coupon, deferred interest and
pay-in-kind bonds involve additional special considerations.
Zero coupon or deferred interest securities are debt obligations which do
not entitle the holder to any periodic payments of interest prior to
maturity or a specified date when the securities begin paying current
interest (the "cash payment date") and therefore are generally issued and
traded at a discount from their face amounts or par value. The discount
varies depending on the time remaining until maturity or cash payment date,
prevailing interest rates, liquidity of the security and the perceived
credit quality of the issuer. The discount, in the absence of financial
difficulties of the issuer, typically decreases as the final maturity or
cash payment date of the security approaches. The market prices of zero
coupon securities are generally more volatile than the market prices of
securities that pay interest periodically and are likely to respond to
changes in interest rates to a greater degree than do non- zero coupon or
deferred interest securities having similar maturities and credit quality.
Current federal income tax law requires that a holder of a zero coupon
security report as income each year the portion of the original issue
discount on such security that accrues that year, even though the holder
receives no cash payments of interest during the year.
Pay-in-kind bonds are securities which pay interest through the issuance of
additional bonds. The Series will be deemed to receive interest over the
life of such bonds and be taxed as if interest were paid on a current
basis, although no cash interest payments are received by the Series until
the cash payment date or until the bonds mature.
The Series' investment in zero coupon and delayed interest bonds, or bonds
that provide for payment of interest in kind may cause the Series to
recognize income and make distributions to shareholders prior to the
receipt of cash payments. For example, with respect to zero coupon and
delayed interest bonds, the Series will be required to accrue as income a
portion of the discount (or deemed discount) at which the securities were
issued and to distribute such income each year in order to maintain its
qualification as a regulated investment company and to avoid income and
excise taxes. Payment-in- kind obligations are subject to special tax rules
concerning the amount, character and timing of income required to be
accrued by the Series.
Because of the Income Series' policy of investing in higher yielding,
higher risk securities, an investment in the Series is accompanied by a
higher degree of risk than is present with an investment in higher rated,
lower yielding securities. Accordingly, an investment in the Series should
be carefully evaluated for its appropriateness in light of the investor's
overall investment needs and goals. Persons on fixed incomes, such as
retired persons, should also consider the increased risk of loss of
principal which is present with an investment in higher risk securities. As
with any other investment, there is no assurance that the Series'
objectives will be achieved.
Management of the Fund
- --------------------------------------------------------------------------
The Board of Directors has the primary responsibility for the overall
management of the Fund and for electing the officers of the Fund who are
responsible for administering the day-to-day operations of each Series.
Franklin Advisers, Inc. ("Advisers" or "Manager"), serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin
Resources, Inc. ("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 10%, respectively, of
Resources' outstanding shares. Resources is engaged in various aspects of
the financial services industry through its various subsidiaries (the
"Franklin Templeton Group"). Advisers acts as investment manager or
administrator to 33 U.S. registered investment companies (111 separate
series) with aggregate assets of over $73 billion.
Pursuant to the management agreement, the Manager supervises and implements
each Series' investment activities and provides certain administrative
services and facilities which are necessary to conduct the Series'
business. The management fees and total operating expenses of each Series,
expressed as a percentage of average monthly net assets, for the fiscal
year ended September 30, 1994 were as follows:
<TABLE>
<CAPTION>
U.S.
Government
Growth DynaTech Utilities Income Securities
Fiscal Year 9/30/94 Series Series Series Series Series
- ------------------------- ---------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Management Fees 0.49% 0.62% 0.45% 0.46% 0.45%
Total Operating Expenses 0.77% 1.00% 0.64% 0.64% 0.55%
</TABLE>
Among the responsibilities of the Manager under the management agreement is
the selection of brokers and dealers through whom transactions for each
Series' 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 "The Fund's Policies Regarding Brokers Used
on Portfolio Transactions" in the SAI.
Shareholder accounting and many of the clerical functions for each Series
are performed by Franklin/Templeton Investor Services, Inc. ("Investor
Services" or "Shareholder Services Agent") in its capacity as transfer
agent and dividend-paying agent. Investor Services is a wholly-owned
subsidiary of Resources.
Plans of Distribution
Each Series has adopted a distribution plan (the "Plans") pursuant to Rule
12b-1 under the 1940 Act. Under the Plan, each Series may reimburse
Distributors or others for all expenses incurred by Distributors or others
in the promotion and distribution of each Series' 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 shares of each Series, 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 on
behalf of a Series, Distributors or its affiliates. The maximum amount
which a Series may pay to Distributors or others for such distribution
expenses, an annual fee based on the average daily net assets of the
Series, is 0.25% for the Growth and DynaTech Series and 0.15% for the
Income, Utilities and U.S. Government Securities Series, payable on a
quarterly basis. All expenses of distribution and marketing in excess of
the maximum allowable under the Plans will be borne by Distributors, or
others who have incurred them, without reimbursement from such Series. The
Plans also cover any payments to or by each Series, Advisers, Distributors,
or other parties on behalf of a Series, 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 a Series
within the context of Rule 12b-1. The payments under the Plans are included
in the maximum operating expenses which may be borne by each Series.
In implementing such Plans, the Board has determined that initially, the
annual fees payable thereunder with respect to the Growth and DynaTech
Series, will be equal to the sum of: (i) the amount obtained by multiplying
0.25% by the average daily net assets represented by shares of the Series
that were acquired by investors on or after the Effective Date of the Plan
("New Assets") of such Series, and (ii) the amount obtained by multiplying
0.15% by the average daily net assets represented by shares of the Series
that were acquired before the Effective Date of the Plan ("Old Assets") of
such Series. Such fees will be paid to the current securities dealer of
record on the shareholder's account. In addition, until such time as the
maximum payment is reached on a yearly basis, up to an additional 0.05%
will be paid to Distributors under the Plans for the Growth and DynaTech
Series. With respect to the Income and Utilities Series, the annual fees
payable thereunder will be equal to the sum of: (i) the amount obtained by
multiplying 0.15% by the average daily net assets represented by the New
Assets of such Series, and (ii) the amount obtained by multiplying 0.10% by
the average daily net assets represented by the Old Assets of such Series.
With respect to the U.S. Government Securities Series, the annual fees
payable thereunder will be equal to the sum of: (i) the amount obtained by
multiplying 0.15% by the New Assets of such Series, and (ii) the amount
obtained by multiplying 0.05% by the Old Assets of such Series. Such fees
will be paid to the current securities dealer of record on the
shareholder's account. In addition, until such time as the maximum payment
of 0.15% with respect to the Income, Utilities and U.S. Government
Securities Series is reached on a yearly basis, up to an additional 0.02%
will be paid to Distributors under the Plan. The payments to be made to
Distributors will be used by Distributors to defray other marketing
expenses that have been incurred in accordance with the Plans, such as
advertising.
While this is the currently anticipated method for calculating the 12b-1
fees to be paid by each Series, the fee is a Series expense so that all
shareholders, regardless of when they purchased their shares, will bear
12b-1 expenses at the same rate. That rate initially will be at least 0.20%
(0.15% plus 0.05%) for the Growth and DynaTech Series; 0.12% (0.10% plus
0.02%) for the Income and Utilities Series; and 0.07% (0.05% plus 0.02%)
for the U.S. Government Securities Series of such average daily net assets
and, as each Series' shares are sold on or after the Effective Date, will
increase over time. Thus, as the proportion of a Series' shares purchased
on or after the Effective Date to outstanding Series shares increases, the
expenses attributable to payments under the Plan will also increase (but
will not exceed the maximum allowable under each Plan). While this is the
currently anticipated calculation for fees payable under the Plans, the
Plans permit the Fund's Directors to allow the Growth and DynaTech Series
to pay a full 0.25% and the Income, Utilities, and U.S. Government
Securities Series to pay a full 0.15% on all assets both Old and New at any
time.
For more information, please see the SAI.
Distributions to Shareholders
- --------------------------------------------------------------------------
There are two types of distributions which each Series may make to its
shareholders:
1. Income dividends. Each Series receives income in the form of dividends,
interest and other income derived from its investments. This income, less
the expenses incurred in the Series' 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. Each Series may derive capital gains or
losses in connection with sales or other dispositions of its portfolio
securities. Distributions by a Series 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 Series as of
October 31 of the current fiscal year and any undistributed net capital
gains from the prior fiscal year. These distributions, when made, will
generally be fully taxable to a Series' shareholders. A Series 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 of Directors, without prior notice
to or approval by shareholders, the Fund's current policy is to declare
income dividends monthly in the U.S. Government Securities Series and
Income Series for shareholders of record on the last business day of the
month, payable on or about the 15th day of the following month. Each of the
foregoing Series may determine to defer the December 31 record date to a
date shortly thereafter in January for tax or other operational reasons.
Dividends on the Utilities Series are generally declared quarterly and
those for Growth and DynaTech are generally declared annually.
The amount of income dividend payments by any Series is dependent upon the
amount of net income received by the Series from its portfolio holdings, is
not guaranteed and is subject to the discretion of the Board of Directors.
Fund shares are quoted ex-dividend on the first business day following the
record date. None of the Series pays "interest" or guarantees any fixed
rate of return on an investment in its shares.
In order to be entitled to a dividend, an investor must have acquired the
shares of a Series prior to the close of business on the record date. An
investor considering purchasing shares of a Series shortly before the
record date of a distribution should be aware that because the value of a
Series' 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 shares of the
Series 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 the shareholder's investment, it may be
taxable as dividend income or capital gain.
Dividend Reinvestment
Unless requested otherwise in writing or on the Shareholder Application,
income dividends and capital gain distributions, if any, will be
automatically reinvested in the shareholder's account in the form of
additional shares, valued at the closing net asset value (without sales
charge) on the dividend reinvestment date. Shareholders have the right to
change their election with respect to the receipt of distributions by
notifying the Fund, but any such change will be effective only as to
distributions for which the record date is seven or more business days
after the Series has been notified. See the SAI for more information.
Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares
and maintain or increase the shareholder's earnings base. Of course, any
shares so acquired remain at market risk.
Distributions in Cash
A shareholder may elect to receive income dividends, or both income
dividends and capital gain distributions, in cash. By completing the
"Special Payment Instructions for Distributions" section of the Shareholder
Application included with this Prospectus, a shareholder may direct the
selected distributions to another fund in the Franklin Group of
Funds(registered trademark) or the Templeton Funds, to another person, or
directly to a checking account. If the bank at which the account is
maintained is a member of the Automated Clearing House, the payments may be
made automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for initial
processing. Dividends which may be paid in the interim will be sent to the
address of record. Additional information regarding automated fund
transfers may be obtained from Franklin's Shareholder Services Department.
Dividend and capital gain distributions are eligible for investment in
another fund in the Franklin Group of Funds or the Templeton Funds at Net
Asset Value. See "How to Buy Shares of the Fund - Purchases at Net Asset
Value."
Taxation of the Fund and Its Shareholders
- --------------------------------------------------------------------------
The following discussion reflects some of the tax considerations that
affect mutual funds and their shareholders. Additional information on tax
matters relating to the Fund and its shareholders is included in the
section entitled "Additional Information Regarding Taxation" in the SAI.
Each Series is treated as a separate entity for federal income tax
purposes. Each Series has elected to be treated as a regulated investment
company under Subchapter M of the Code, qualified as such, and intends to
continue to so qualify.
By distributing all of its income and by meeting certain other requirements
relating to the sources of its income and diversification of its assets,
each Series will not be liable for federal income or excise taxes.
For federal income tax purposes, any income dividends which the shareholder
receives from any of the Series, 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 the shareholder has 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 the shareholder has owned shares of the
Series and regardless of whether such distributions are received in cash or
in additional shares.
For the fiscal year ended September 30, 1994, the following amounts of
income dividends may qualify for the federal corporate dividends-received
deduction:
<TABLE>
<CAPTION>
Income Dividend
Fund Qualifying
- ---------------------------------
<S> <C>
Growth Series 100.00%
DynaTech Series 64.64%
Utilities Series 89.08%
Income Series 31.87%
</TABLE>
The above percentages are subject to certain holding period and
debt-financing restrictions imposed under the Code on the corporation
claiming the deduction. These restrictions are discussed in the SAI. None
of the distributions paid by the U.S. Government Securities Series for the
fiscal year ended September 30, 1994, qualified for the corporate
dividends-received deduction and it is not anticipated that any of the
current year's dividends will qualify.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to
the shareholder until the following January, will be treated for tax
purposes as if received by the shareholder on December 31 of the calendar
year in which they are declared.
Redemptions and exchanges of the shares for a Series are taxable events on
which a shareholder may realize a gain or loss. Any loss incurred on sale
or exchange of a Series' shares, held for six months or less, will be
treated as a long-term capital loss to the extent of capital gain dividends
received with respect to such shares.
Many states grant tax-free status to dividends paid to shareholders of
mutual funds from interest income earned by a fund from direct obligations
of the U.S. government, subject in some states to minimum investment
requirements that must be met by each Series. Investments in GNMA
securities do not generally qualify for tax- free treatment. At the end of
each calendar year, each Series will provide shareholders with the
percentage of any dividends paid which may qualify for such tax-free
treatment. Shareholders should consult with their own tax advisers with
respect to the application of their state and local income tax laws to
these distributions.
The Series will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close
of each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions.
Shareholders who are not U.S. persons for purposes of federal income
taxation should consult with their financial or tax advisors regarding the
applicability of U.S. withholding or other taxes to distributions received
by them from a Series and the application of foreign tax laws to these
distributions.
Shareholders should also consult their tax advisors with respect to the
applicability of any state and local intangible property or income taxes to
their shares of a Series and distributions and redemption proceeds received
from such Series.
How to Buy Shares of the Fund
- --------------------------------------------------------------------------
Shares of each Series of the Fund are continuously offered through
securities dealers which execute an agreement with Distributors, the
principal underwriter of the Fund's shares. The use of the term "securities
dealer" shall include other financial institutions which, pursuant to an
agreement with Distributors (directly or through affiliates), handle
customer orders and accounts with each Series of the Fund. Such reference
however is for convenience only and does not indicate a legal conclusion of
capacity. The minimum initial investment in each Series is $100 and
subsequent investments must be $25 or more. These minimums may be waived
when the shares are purchased through plans established by the Franklin
Templeton Group. The Fund and Distributors reserve the right to refuse any
order for the purchase of shares. The DynaTech and Growth Series currently
do not permit investment by market timing or allocation services ("Timing
Accounts"), which generally include accounts administered so as to redeem
or purchase shares based upon certain predetermined market indicators.
The Fund may impose a $10 charge for each returned item, against any
shareholder account which, in connection with the purchase of Fund shares,
submits a check or a draft which is returned unpaid to the Fund.
Purchase Price of Fund Shares
Shares of each Series of the Fund are offered at their respective public
offering price, which is the net asset value per share plus a sales charge,
next computed (1) after the shareholder's securities dealer receives the
order which is promptly transmitted to the Series or (2) after receipt of
an order by mail from the shareholder directly in proper form (which
generally means a completed Shareholder Application accompanied by a
negotiable check). The sales charge is a variable percentage of the
offering price depending upon the amount of the sale. On orders for 100,000
shares or more, the offering price will be calculated to four decimal
places. On orders for less than 100,000 shares, the offering price will be
calculated to two decimal places using standard rounding criteria. A
description of the method of calculating net asset value per share is
included under the caption "Valuation of Fund Shares."
Set forth below are tables showing total sales charges or underwriting
commissions and dealer concessions for each series.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Total Sales Charge
----------------------------------------------------------
Growth and DynaTech Series As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more none none (see below)**
- ----------------------------------------------------------------------------------------------------
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors to dealers who
initiate and are responsible for purchases of $1 million or more: 1.00% on
sales of $1 million but less $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. Dealer concession breakpoints
are reset every 12 months for purposes of additional purchases.
</TABLE>
Distributors, or one of its affiliates, may make payments, out of its own
resources, of up to 1% of the amount purchased 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),
certain trust company and trust departments of banks and certain retirement
plans of organizations with collective retirement plan assets of $10
million or more in the Growth Series and DynaTech Series. See "Special Net
Asset Value Purchases" as described under "Purchases at Net Asset Value"
and as set forth in the SAI.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Total Sales Charge
----------------------------------------------------------
Growth and DynaTech Series As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more none none (see below)**
- ---------------------------------------------------------------------------------------------------
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors to dealers who
initiate and are responsible for purchases of $1 million or more: 0.75% on
sales of $1 million but less $2 million, plus 0.60% 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. Dealer concession breakpoints
are reset every 12 months for purposes of additional purchases.
</TABLE>
Distributors, or one of its affiliates, may make payments, out of its own
resources, of up to 0.75% of the amount purchased to securities dealers who
initiate and are responsible for purchases made at net asset value by
non-designated retirement plans, and up to 1% of the amount purchased 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), certain trust company and trust departments of banks and
certain retirement plans of organizations with collective retirement plan
assets of $10 million or more in the Utilities Series, Income Series, and
U.S.G.S. Series. See "Special Net Asset Value Purchases" as described under
"Purchases at Net Asset Value" and as set forth in the SAI.
No initial sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions
within 12 months of the calendar month of the purchase. See "How to Sell
Shares of the Fund - Contingent Deferred Sales Charge."
At the discretion of Distributors, all sales charges may at times be
allowed to the securities dealer. If 90% or more of the sales commission is
allowed, such dealer may be deemed to be an underwriter as that term is
defined in the Securities Act of 1933, as amended.
The size of a transaction which determines the applicable sales charge on
the purchase of Fund shares is determined by adding the amount of the
shareholder's current purchase plus the cost or current value (whichever is
higher) of a shareholder's existing investment in one or more of the funds
in the Franklin Group of Fund(registered trademark) and the Templeton Group
of Funds. Included for these aggregation purposes are (a) the mutual funds
in the Franklin Group of Funds except Franklin Valuemark Funds and Franklin
Government Securities Trust (the "Franklin Funds"), (b) other investment
products underwritten by Distributors or its affiliates (although certain
investments may not have the same schedule of sales charges and/or may not
be subject to reduction) and (c) the U.S. mutual funds in the Templeton
Group of Funds except Templeton American Trust, Inc., Templeton Capital
Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund (the "Templeton Funds"). (Franklin Funds and
Templeton Funds are collectively referred to as the "Franklin Templeton
Funds.") Sales charge reductions based upon aggregate holdings of (a), (b)
and (c) above ("Franklin Templeton Investments") may be effective only
after notification to Distributors that the investment qualifies for a
discount.
Distributors, or one of its affiliates, out of its own resources, may also
provide additional compensation to dealers in connection with sales of
shares in the Franklin Templeton Funds. Compensation may include financial
assistance to dealers in connection with conferences, sales or training
programs for their employees, seminars for the public, advertising, sales
campaigns and/or shareholder services and programs regarding the Franklin
Templeton Funds and other dealer- sponsored programs or events. In some
instances, this compensation may be made available only to certain
securities dealers whose representatives have sold or are expected to sell
significant amounts of such shares. Compensation may include payment for
travel expenses, including lodging, incurred in connection with trips taken
by invited registered representatives and members of their families to
locations within or outside of the United States for meetings or seminars
of a business nature. Dealers may not use sales of the Fund's shares to
qualify for this compensation to the extent such may be prohibited by the
laws of any state or any self- regulatory agency, such as the National
Association of Securities Dealers, Inc. None of the aforementioned
additional compensation is paid for by any Series of the Fund or its
shareholders.
Certain officers and directors of the Fund are also affiliated with
Distributors. A detailed description is included in the SAI.
Quantity Discounts in Sales Charges
Shares may be purchased under a variety of plans which provide for a
reduced sales charge. To be certain to obtain the reduction of the sales
charge, the investor or the dealer should notify Distributors at the time
of each purchase of shares which qualifies for the reduction. In
determining whether a purchase qualifies for any of the discounts, any
Franklin Templeton Investments may be combined with those of the investor's
spouse and children under the age of 21. In addition, the aggregate
investments of a trustee or other fiduciary account (for an account under
exclusive investment authority) may be considered in determining whether a
reduced sales charge is available, even though there may be a number of
beneficiaries of the account.
In addition, an investment in any Series of the Fund may qualify for a
reduction in the sales charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is higher)
of existing Franklin Templeton Investments may be combined with the amount
of the current purchase in determining the sales charge to be paid.
2. Letter of Intent. An investor may immediately qualify for a reduced
sales charge on a purchase of shares of the Fund by completing the Letter
of Intent section of the Shareholder Application (the "Letter of Intent" or
the "Letter"). By completing the Letter, the investor expresses an
intention to invest during the next 13 months a specified amount which, if
made at one time, would qualify for a reduced sales charge and grants to
Distributors a security interest in the reserved shares and irrevocably
appoints Distributors as attorney-in-fact with full power of substitution
to surrender for redemption any or all shares for the purpose of paying any
additional sales charge due. Purchases under the Letter will conform with
the requirements of Rule 22d-1 under the 1940 Act. The investor or the
investor's securities dealer must inform Investor Services or Distributors
that this Letter is in effect each time a purchase is made.
An investor (except for certain employee benefit plans described below)
acknowledges and agrees to the following provisions by completing the
Letter of Intent section of the Shareholder Application: Five percent (5%)
of the amount of the total intended purchase will be reserved in shares of
the Fund registered in the investor's name, to assure that the full
applicable sales charge will be paid if the intended purchase is not
completed. The reserved shares will be included in the total shares owned
as reflected on periodic statements; income and capital gain distributions
on the reserved shares will be paid as directed by the investor. The
reserved shares will not be available for disposal by the investor until
the Letter of Intent has been completed or the higher sales charge paid.
For more information, see "Additional Information Regarding Purchases" in
the SAI.
Group Purchases
An individual who is a member of a qualified group may also purchase shares
of a Series at the reduced sales charge applicable to the group as a whole.
The sales charge is based upon the aggregate dollar value of shares
previously purchased and still owned by the group, plus the amount of the
current purchase. For example, if members of the group had previously
invested and still held $80,000 of shares in a Series and now were
investing $25,000, the sales charge would be 3.75% for the Growth and
DynaTech Series and 3.50% for the Income, Utilities and U.S. Government
Securities Series. Information concerning the current sales charge
applicable to a group may be obtained by contacting Distributors.
A "qualified group" is 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. A qualified
group must have more than 10 members, be available to arrange for group
meetings between representatives of the Fund or Distributors and the
members, agree to include sales and other materials related to the Fund in
its publications and mailings to members at reduced or no cost to
Distributors, and seek to arrange for payroll deduction or other bulk
transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent investments
will be automatic and will continue until such time as the investor
notifies the Fund and the investor's employer to discontinue further
investments. Due to the varying procedures used to prepare, process and
forward the payroll deduction information to the Fund, there may be a delay
between the time of the payroll deduction and the time the money reaches
the Fund. The investment in a Series of the Fund will be made at the
offering price per share determined on the day that both the check and
payroll deduction data are received in required form by the Fund.
Purchases at Net Asset Value
Shares of the Fund may be purchased at net asset value (without the
imposition of a front and/or contingent deferred sales charge) by (1)
officers, directors, and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group, and by their
spouses and family members; (2) companies exchanging shares with or selling
assets pursuant to a merger, acquisition or exchange offer; (3) insurance
company separate accounts for pension plan contracts; (4) accounts managed
by the Franklin Templeton Group; (5) shareholders of Templeton
Institutional Funds, Inc. reinvesting redemption proceeds from that fund
under an employee benefit plan qualified under Section 401 of the Internal
Revenue Code of 1986, as amended, in shares of the Fund; (6) certain unit
investment trusts and unit holders of such trusts reinvesting their
distributions from the trusts in the Fund; (7) registered securities
dealers and their affiliates, for their investment account only, and (8)
registered personnel and employees of securities dealers, which have
directly or through affiliates, signed an agreement with Distributors, and
by their spouses and family members, in accordance with the internal
policies and procedures of the employing securities dealer.
Shares of each Series may be purchased at net asset value by persons who
have redeemed, within the previous 120 days, their shares of the Series or
another of the Franklin Templeton Funds which were purchased with a sales
charge or assessed a contingent deferred sales charge on redemption. An
investor may reinvest an amount not exceeding the redemption proceeds.
Credit will be given for any contingent deferred sales charge paid on the
shares redeemed. Shares of a Series redeemed in connection with an exchange
into another fund (see "Exchange Privilege") are not considered "redeemed"
for this privilege. In order to exercise this privilege, a written order
for the purchase of shares of a Series must be received by the Series or
the Series' Shareholder Services Agent within 120 days after the
redemption. The 120 days, however, do not begin to run on redemption
proceeds placed immediately after redemption in a Franklin Bank Certificate
of Deposit ("CD") until the CD (including any rollover) matures.
Reinvestment at net asset value may also be handled by a securities dealer
or other financial institution, who may charge the shareholder a fee for
this service. The redemption is a taxable transaction but reinvestment
without a sales charge may affect the amount of gain or loss recognized and
the tax basis of the shares reinvested. If there has been a loss on the
redemption, the loss may be disallowed if a reinvestment in the same fund
is made within a 30- day period. Information regarding the possible tax
consequences of such a reinvestment is included in the tax section of this
Prospectus and the SAI.
Dividends and capital gains received in cash by the shareholder may also be
used to purchase shares of the Fund or another of the Franklin Templeton
Funds at net asset value within 120 days of the payment date of such
distribution. To exercise this privilege, a written request to reinvest the
distribution must accompany the purchase order. Additional information may
be obtained from Shareholder Services at 1-800/632-2301. See "Distributions
to Shareholders - Distributions in Cash."
Shares of a Series may be purchased at net asset value by investors who
have, within the past 60 days, redeemed an investment in an unaffiliated
mutual fund which charged the investor a contingent deferred sales charge
and upon redemption and which has investment objectives similar to those of
the Series.
Shares of the Fund may be purchased at net asset value by registered
investment advisors and/or their affiliated broker-dealers, who have
entered into a supplemental agreement with Distributors, on behalf of their
clients who are participating in a comprehensive fee program (also known as
a wrap fee program).
Shares of a Series may be purchased at net asset value by anyone who has
taken a distribution from an existing retirement plan already invested in
the Franklin Group of Funds(registered trademark) or the Templeton Group
(including former participants of the Franklin Templeton Profit Sharing
401(k) plan) to the extent of such distribution. In order to exercise this
privilege, a written order for the purchase of shares of the Series must be
received by Franklin Templeton Trust Company (the "Trust Company"), the
Series or Investor Services, within 120 days after the plan distribution. A
prospectus outlining the investment objectives and policies of a fund in
which the shareholder wishes to invest may be obtained by calling toll free
at 1-800/DIAL BEN (1-800/342-5236).
Shares of each Series may also be purchased at net asset value by any
state, county, or city, or any instrumentality, department, authority or
agency thereof which has determined that the Series 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"). SUCH INVESTORS SHOULD CONSULT THEIR OWN
LEGAL ADVISORS TO DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES OF A
SERIES CONSTITUTE LEGAL INVESTMENTS FOR THEM. Municipal investors
considering investment of proceeds of bond offerings into any Series of the
Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Series or its investment manager on arbitrage
rebate calculations. If an investment by an eligible governmental authority
at net asset value is made through a dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make
a payment, out of their own resources, to such dealer in an amount not to
exceed 0.25% of the amount invested. Contact Franklin's Institutional Sales
Department for additional information.
Description of Special Net Asset Value Purchases
Shares of the Fund may also be purchased at net asset value by certain
designated retirement plans, including, profit sharing, pension, 401(k) and
simplified employee pension plans, subject to minimum requirements with
respect to number of employees or amount of purchase, which may be
established by Distributors. Currently those criteria require that the
employer establishing the plan have 200 or more employees or that the
amount invested or to be invested during the subsequent 13- month period in
the Fund or in any of the Franklin Templeton Investments totals at least
$1,000,000. Employee benefit plans not designated above or qualified under
Section 401 of the Code may be afforded the same privilege if they meet the
above requirements as well as the uniform criteria for qualified groups
previously described under Group Purchases which enable Distributors to
realize economies of scale in its sales efforts and sales related expenses.
Shares of the Fund may be purchased at net asset value by trust companies
and bank trust departments for funds over which they exercise exclusive
discretionary investment authority and which are held in a fiduciary,
agency, advisory, custodial or similar capacity. Such purchases are subject
to minimum requirements with respect to amount of purchase, which may be
established by Distributors. Currently, those criteria require that the
amount invested or to be invested during the subsequent 13- month period in
this Fund or any of the Franklin Templeton Investments must total at least
$1,000,000. Orders for such accounts will be accepted 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.
Shares of the Fund may be purchased at net asset value by trustees or other
fiduciaries purchasing securities for certain retirement plans of
organizations with collective retirement plan assets of $10 million or
more, without regard to where such assets are currently invested.
Refer to the SAI for further information.
General
Securities laws of states in which each Series' shares are offered for sale
may differ from the interpretations of federal law, and banks and financial
institutions selling shares of any Series may be required to register as
dealers pursuant to state law.
Purchasing Shares of the Fund in Connection with Retirement Plans Involving
Tax- Deferred Investments
- --------------------------------------------------------------------------
Shares of each Series may be used for retirement programs providing for
tax-deferred investments for both individuals and businesses. Each Series
may be used as an investment vehicle for an existing retirement plan, or
the Trust Company may provide the plan documents and trustee or custodian
services. A plan document must be adopted in order for a plan to be in
existence.
The Trust Company, an affiliate of Distributors, can serve as custodian or
trustee for various types of retirement plans. Brochures for each of the
plans sponsored by Franklin contain important information regarding
eligibility, contribution limits and IRS requirements. Please note that the
separate applications other than the one contained in this Prospectus must
be used to establish a Trust Company retirement account. To obtain a
retirement plan brochure or application, call toll free 1-800/DIAL BEN (1-
800/342-5236).
The Franklin Templeton IRA is an individual retirement account in which the
contributions, annually limited to the lesser of $2,000 or 100% of an
individual's earned compensation*, accumulate on a tax-deferred basis until
withdrawn. Under the current tax law, individuals who (or whose spouses)
are covered by a company retirement plan (termed "active participants") may
be restricted in the amount they may claim as an IRA deduction on their
returns. The IRA deduction is gradually reduced to the extent that a
taxpayer's adjusted gross income exceeds certain specified limits.
Two IRAs, with a combined limit of $2,250 or 100% of earned compensation*,
may be established by a married couple in which only one spouse is a wage
earner. The $2,250 may be split between the two IRAs, so long as no more
than $2,000 is contributed to either one for a given tax year.
A Franklin Rollover IRA account is designed to maintain the tax- deferred
status of a qualifying distribution from an employer- sponsored retirement
plan, such as a 401(k) plan or qualified pension plan. Additionally, if the
eligible distribution is directly transferred to a rollover IRA account,
the distribution will be exempt from 20% mandatory federal withholding.
The Franklin Simplified Employee Pension Plan (SEP-IRA) and Salary
Reduction Simplified Employee Pension Plan (SAR-SEP) are for use by small
businesses (generally 25 or fewer employees) to provide a retirement plan
for their employees and, at the same time, provide for a tax- deduction to
the employer. SEP-IRA contributions are made to an employee's IRA, at the
discretion of the employer, up to the lesser of $30,000 or 15% of
compensation* per employee. The SAR- SEP allows employees to contribute a
portion of their salary to an IRA on a pre-tax basis through salary
deferrals. The maximum annual salary deferral limit for a SAR-SEP is the
lesser of 15% of compensation (adjusted for deferrals) or $9,240 (1995
limit; indexed for inflation).
The Franklin Templeton 403(b) Retirement Plan is a salary deferral plan for
employees of certain non- profit and educational institutions
[(section)501(c)(3 ) organizations and public schools]. The 403(b) Plan
allows participants to determine the annual amount of salary they wish to
defer. The maximum annual salary deferral amount is generally the lesser of
25% of compensation (adjusted for deferrals) or $9,500.
The Franklin Business Retirement Plans provide employers with additional
retirement plan options and may be used individually, in combination, or
with custom designed features. The Profit Sharing Plan allows an employer
to make contributions, at its discretion, of up to the lesser of $30,000 or
15% of compensation* per employee each year. The Money Purchase Pension
Plan allows the employer to contribute up to the lesser of $30,000 or 25%
of compensation* per employee; however, contributions are required annually
at the rate (percentage) elected by the employer at the outset of the plan.
In order to achieve a combined contribution rate of 25% while maintaining a
certain degree of flexibility, employers may establish both a Profit
Sharing Plan and a Money Purchase Pension Plan (with a fixed contribution
rate of 10%).
The Trust Company can add optional provisions to the Profit Sharing and
Money Purchase Pension Plans described above and provide a Defined Benefit,
Target Benefit, and 401(k) Plans on a custom designed basis. Business
Retirement Plans, whether standard or custom designed, may require an
annual report (Form 5500) to be filed with the IRS.
Redemptions from any Franklin retirement plan accounts require the
completion of specific distribution forms to comply with IRS regulations.
Please see "How to Sell Shares of the Fund."
Individuals and employers should consult with a competent tax or financial
advisor before choosing a retirement plan.
*The limit on compensation for determining SEP and qualified plan
contributions was reduced from $235,840 in 1993 to $150,000 for 1994 and
1995. The $150,000 limit will be adjusted for inflation, but only in
$10,000 increments.
Other Programs and Privileges Available to Fund Shareholders
- --------------------------------------------------------------------------
Certain of the programs and privileges described in this section may not be
available directly from each Series to shareholders whose 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 the section captioned "Account Registrations" in this
Prospectus).
Share Certificates
Shares for 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
each Series 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 the
shareholder, can be 2% or more of the value of the lost, stolen or
destroyed certificate. A certificate will be issued if requested in writing
by the shareholder or by the securities dealer.
Confirmations
A confirmation statement will be sent to each shareholder quarterly for a
Series paying dividends on a quarterly or more frequent basis to reflect
the dividends reinvested during that period and after each dividend for a
Series paying dividends less frequently than quarterly or after each other
transaction which affects the shareholder's account. This statement will
also show the total number of shares owned by the shareholder, including
the number of shares in "plan balance" for the account of the shareholder.
Automatic Investment Plan
Under the Automatic Investment Plan, a shareholder may be able to arrange
to make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which
maintains the account is a member of the Automated Clearing House, or by
preauthorized checks drawn on the shareholder's bank account. A shareholder
may, of course, terminate the program at any time. The Shareholder
Application included with this Prospectus contains the requirements
applicable to this program. In addition, shareholders may obtain more
information concerning this program from their securities dealers or from
Distributors.
The market value of each Series' shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should keep in
mind that such a program does not assure a profit or protect against a
loss.
Systematic Withdrawal Plan
A shareholder may establish a Systematic Withdrawal Plan and receive
regular periodic payments from the account, provided that the net asset
value of the shares held by the shareholder is at least $5,000. There are
no service charges for establishing or maintaining a Systematic Withdrawal
Plan. The minimum amount which the shareholder may withdraw is $50 per
withdrawal transaction although this is merely the minimum amount allowed
under the plan and should not be mistaken for a recommended amount. The
plan may be established on a monthly, quarterly, semiannual or annual
basis. If the shareholder establishes a plan, any capital gain
distributions and income dividends paid by the Series will be reinvested
for the shareholder's account in additional shares at net asset value.
Payments will then be made from the liquidation of shares at net asset
value on the day of the transaction (which is generally the first business
day of the month in which the payment is scheduled) with payment generally
received by the shareholder three to five days after the date of
liquidation. By completing the "Special Payment Instructions for
Distributions" section of the Shareholder Application included with this
Prospectus, a shareholder may direct the selected withdrawals to another
fund in the Franklin Templeton Funds, to another person, or directly to a
checking account. If the bank at which the account is maintained is a
member of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for initial
processing. Withdrawals which may be paid in the interim will be sent to
the address of record. Liquidation of shares may reduce or possibly exhaust
the shares in the shareholder's account, to the extent withdrawals exceed
shares earned through dividends and distributions, particularly in the
event of a market decline. If the withdrawal amount exceeds the total plan
balance, the account will be closed and the remaining balance will be sent
to the shareholder. As with other redemptions, a liquidation to make a
withdrawal payment is a sale for federal income tax purposes. Because the
amount withdrawn under the plan may be more than the shareholder's actual
yield or income, part of the payment may be a return of the shareholder's
investment.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases
of additional shares of the Series would be disadvantageous because of the
sales charge on the additional purchases. The shareholder should ordinarily
not make additional investments of less than $5,000 or three times the
annual withdrawals under the plan during the time such a plan is in effect.
A Systematic Withdrawal Plan may be terminated on written notice by the
shareholder or the Series, and it will terminate automatically if all
shares are liquidated or withdrawn from the account, or upon the Series'
receipt of notification of the death or incapacity of the shareholder.
Shareholders may change the amount (but not below the specified minimum)
and schedule of withdrawal payments, or suspend one such payment by giving
written notice to Investor Services at least seven business days prior to
the end of the month preceding a scheduled payment. Share certificates may
not be issued while a Systematic Withdrawal Plan is in effect.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging
shares of the Series available to institutional accounts. For further
information, contact Franklin's Institutional Services Department at 1-
800/321-8563.
Exchange Privilege
- --------------------------------------------------------------------------
The Franklin Templeton Funds consist of a number of mutual funds with
various investment objectives or policies. The shares of most of these
mutual funds are offered to the public with a sales charge. If a
shareholder's investment objective or outlook for the securities markets
changes, a Series' shares may be exchanged for shares of other Franklin
Templeton Funds which are eligible for sale in the shareholder's state of
residence and in conformity with such fund's stated eligibility
requirements and investment minimums. Investors should review the
prospectus of the fund they wish to exchange from and the fund they wish to
exchange into for all specific requirements or limitations on exercising
the exchange privilege, for example, minimum holding periods or applicable
sales charges. Exchanges may be made in any of the following ways:
Exchanges 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.
Exchanges By Telephone
Shareholders, or their investment representative of record, if any, may
exchange shares of a Series by telephone by calling Investor Services at
1-800/632-2301 or the automated Franklin TeleFACTS(register ed trademark)
system (day or night) at 1- 800/247-1753. If the shareholder does not wish
this privilege extended to a particular account, the Fund or Investor
Services should be notified.
The Telephone Exchange Privilege allows a shareholder to effect exchanges
from the Series into an identically registered account 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 the shareholder's account. The Fund and Investor Services
will employ reasonable procedures to confirm that instructions communicated
by telephone are genuine. Please refer to "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, shareholders should
follow the other exchange procedures discussed in this section, including
the procedures for processing exchanges through securities dealers.
Exchanges Through Securities Dealers
As is the case with all purchases and redemptions of a Series' shares,
Investor Services will accept exchange orders by telephone or by other
means of electronic transmission from securities dealers who execute a
dealer or similar agreement with Distributors. See also "Exchanges By
Telephone" above. Such a dealer- ordered exchange will be effective only
for uncertificated shares on deposit in the shareholder's 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 values of the funds
involved, except as set forth below. Exchanges of shares of a Series 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 investment on which no sales charge was paid was transferred in
from a fund on which the investor paid a sales charge. Exchanges of shares
of a Series which were purchased with a lower sales charge to a fund which
has a higher sales charge will be charged the difference, unless the shares
were held in the Series for at least six months prior to executing the
exchange.
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 12 months of the calendar month of the original purchase date, a
contingent deferred sales charge will be imposed. The 12- month period will
be tolled (or stopped) for the period such shares are exchanged into and
held in a Franklin or Templeton money market fund. See also "Contingent
Deferred Sales Charge" under "How to Sell Shares of the Fund."
When an investor requests the exchange of the total value of a Series
account, declared but unpaid income and capital gain dividends 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, the shareholder 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 of this Prospectus and in the SAI.
There are differences among the Franklin Templeton Funds. Before making an
exchange, a shareholder should obtain and review a current prospectus of
the fund into which the shareholder wishes to transfer.
If a substantial portion of a Series' shareholders should, within a short
period, elect to redeem their shares of that Series pursuant to the
exchange privilege, the Series 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 each Series to initially invest this money in
short-term, interest-bearing money market instruments, unless it is felt
that attractive investment opportunities consistent with the Series'
investment objectives 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 Series at any
time upon 60 days' written notice to shareholders.
Retirement Accounts
Franklin Templeton IRA and 403(b) retirement accounts may accomplish
exchanges directly. Certain restrictions may apply, however, to other types
of retirement plans. See "Restricted Accounts" under "Telephone
Transactions."
Timing Accounts
Accounts which are administered by allocation or market timing services to
purchase or redeem shares based on predetermined market indicators ("Timing
Accounts") will be charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge.
The Growth Series and DynaTech Series currently will not accept investments
from Timing Accounts.
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 Timing Accounts.
The Board of Directors has determined to prohibit new investments from
Timing Accounts which intend to use the DynaTech and Growth Series. Except
for these two Series, the Fund reserves the right to temporarily or
permanently terminate the exchange privilege or reject any specific
purchase order for any Timing Account or any person whose transactions seem
to follow a timing pattern who: (i) make an exchange request out of a
Series within two weeks of an earlier exchange request out of that Series,
or (ii) make more than two exchanges out of a Series per calendar quarter,
or (iii) exchange shares equal in value to at least $5 million dollars, or
more than 1% of the Series' net assets. Accounts under common ownership or
control, including accounts administered so as to redeem or purchase shares
based upon certain predetermined market indicators, will be aggregated for
purposes of the exchange limits.
Each Series reserves the right to refuse the purchase side of exchange
requests by any Timing Account, person, or group if, in the Manager's
judgment, the Series would be unable to invest effectively in accordance
with its investment objectives and policies, or would otherwise potentially
be adversely affected. A shareholder's purchase exchanges may be restricted
or refused if the Series receives or anticipates simultaneous orders
affecting significant portions of the Series' assets. In particular, a
pattern of exchanges that coincide with a "market timing" strategy may be
disruptive to the Series and therefore may be refused.
The Fund and Distributors also, as indicated in "How to Buy Shares of the
Fund," reserve the right to refuse any order for the purchase of shares.
How to Sell Shares of the Fund
- --------------------------------------------------------------------------
A shareholder may at any time liquidate shares owned and receive from the
Series the value of the shares. Shares may be redeemed in any of the
following ways:
Redemptions 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. The shareholder will
then receive from the Series the value of the shares based upon the net
asset value per share 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 (at 1:00 p.m. Pacific
time) each day that the New York Stock Exchange (the "Exchange") is open
for business will receive the price calculated on the following business
day. Shareholders are requested to provide a telephone number(s) where they
may be reached during business hours, or in the evening if preferred.
Investor Services' ability to contact a shareholder promptly when necessary
will speed the processing of the redemption.
To be considered in proper form, signature(s) 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 owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than
the shareholder's 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
representativ e of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signature(s) 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 which are members of a national
securities exchange or a clearing agency or which 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.
Where 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 shareholders exactly as the
account is registered, with the signature(s) guaranteed as referenced
above. Shareholders are advised, for their own 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 officer(s) 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 trustee(s)
and (2) a copy of the pertinent pages of the trust document listing the
trustee(s) or a Certification for Trust if the trustee(s) 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 the
applicable state law since these accounts have varying requirements,
depending upon the state of residence.
Payment for redeemed shares will be sent to the shareholder within seven
days after receipt of the request in proper form.
Redemptions by Telephone
Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus
may redeem shares of the Fund by telephone, subject to the Restricted
Account exception noted under "Telephone Transactions - Restricted
Accounts." Information may also be obtained 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.
Shareholders, however, bear the risk of loss in certain cases as described
under "Telephone Transactions - Verification Procedures."
For shareholder accounts with the completed Agreement on file, redemptions
of uncertificated shares or shares which have previously been deposited
with a Series or Investor Services may be made for up to $50,000 per day
per Series account. Telephone redemption requests received before 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, a shareholder
should follow the other redemption procedures set forth in this Prospectus.
Institutional accounts (certain corporations, bank trust departments,
government entities, and qualified retirement plans which qualify to
purchase shares at net asset value pursuant to the terms of this
Prospectus) which wish to execute redemptions in excess of $50,000 must
complete an Institutional Telephone Privileges Agreement which is available
from Franklin's Institutional Services Department by telephoning
1-800/321-8563.
Redeeming Shares Through Securities Dealers
Each Series will accept redemption orders by telephone or other means of
electronic transmission from securities dealers who have entered into a
dealer or similar agreement with Distributors. This is known as a
repurchase. The only difference between a normal redemption and a
repurchase is that if the shareholder redeems shares through a dealer, the
redemption price will be the net asset value next calculated after the
shareholder's dealer receives the order which is promptly transmitted to a
Series, rather than on the day the Series receives the shareholder's
written request in proper form. These documents, as described in the
preceding section, are required even if the shareholder's securities dealer
has placed the repurchase order. After receipt of a repurchase order from
the dealer, the Series will still require a signed letter of instruction
and all other documents set forth above. A shareholder's letter should
reference the Series, 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 the shareholder's redemption will be sent will
begin when the Series 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 a
shareholder's best interest to have the required documentation completed
and forwarded to the Series as soon as possible. The shareholder's dealer
may charge a fee for handling the order. The SAI contains more information
on the redemption of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers on qualified
investments of $1 million or more, a contingent deferred sales charge of 1%
applies to redemptions of those investments within 12 months of the
calendar month of their purchase. The charge is 1% of the lesser of the
value of the shares redeemed (exclusive of reinvested dividends and capital
gain distributions) or the total cost of such shares, and is retained by
Distributors. In determining if a charge applies, shares not subject to a
contingent deferred sales charge are deemed to be redeemed first, in the
following order: (i) Shares representing amounts attributable to capital
appreciation of those shares held less than 12 months; (ii) shares
purchased with reinvested dividends and capital gain distributions; and
(iii) other shares held longer than 12 months; and followed by any shares
held less than 12 months, on a "first in, first out" basis.
The contingent deferred sales charge is waived for: exchanges;
distributions to Trust Company participants in qualified retirement plans
due to death, disability or attainment of age 591+2; tax-free returns of
excess contributions to employee benefit plans, including those due to plan
termination or plan transfer; distributions from employee benefit plans;
redemptions through a Systematic Withdrawal Plan set up 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); and redemptions initiated by the Fund due to
a shareholder's account falling below the minimum specified account size.
Requests for redemptions for 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
Each Series may delay the mailing of the redemption check, or a portion
thereof, until the clearance of the check used to purchase shares of a
Series, 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. In
addition, 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 invested by the shareholder, depending on fluctuations in the
market value of securities owned by a Series.
Retirement Accounts
Retirement account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement account, a shareholder or securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Other
For any information required about a proposed liquidation, a shareholder
may call Franklin's Shareholder Services Department or the securities
dealer may call Franklin's Dealer Services Department.
Telephone Transactions
- --------------------------------------------------------------------------
Shareholders of each Series and their investment representative of record,
if any, may be able to execute various transactions by calling Investor
Services at 1- 800/632-2301.
All shareholders will be able to: (i) effect a change in address, (ii)
change a dividend option (see "Restricted Accounts" below), (iii) transfer
shares of a Series in one account to another identically registered account
in the Series, and (iv) exchange shares of a Series as described in this
Prospectus by telephone. In addition, shareholders who complete and file an
Application as described under "How to Sell Shares of the Fund -
Redemptions by Telephone" will be able to redeem shares of a Series.
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
by 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 the
shareholder caused by an unauthorized transaction. Shareholders 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 distribution,
redemption, or dividend payment. 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. Changes to
dividend options must also be made in writing.
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 for
Franklin accounts or 1-800/354-9191 (press "2" when prompted to do so) for
Templeton accounts.
General
During periods of drastic economic or market changes, it is possible that
the telephone transaction privileges will be difficult to execute because
of heavy telephone volume. In such situations, shareholders may wish to
contact their investment representative for assistance, or to 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 the inability of a shareholder to execute a telephone
transaction.
The telephone transaction privilege may be modified or discontinued by a
Series at any time upon 60 days' written notice to shareholders.
Valuation of Fund Shares
- --------------------------------------------------------------------------
The net asset value per share of each Series is determined separately as of
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, which includes the maximum
sales charge of each Series).
The net asset value per share of each Series is determined in the following
manner: The aggregate of all liabilities, including without limitation the
current market value of any outstanding options written by the Series,
accrued expenses and taxes and any necessary reserves are deducted from the
aggregate gross value of all assets, and the difference is divided by the
number of shares of the Series outstanding at the time. For the purpose of
determining the aggregate net assets of the Series, 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 for which market quotations are readily available are
valued within the range of the most recent bid and ask prices as obtained
from one or more dealers that make markets in the securities. 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 Series is its
last sales 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. 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 of Directors. All money market instruments
with a maturity of more than 60 days are valued at current market, as
discussed above. All money market instruments with a maturity of 60 days or
less are valued at their amortized cost, which the Board of Directors has
determined in good faith constitutes fair value for purposes of complying
with the 1940 Act. This valuation method will continue to be used until
such time as the directors determine that it does not constitute fair value
for such purposes. With the approval of directors, the Fund may utilize a
pricing service, bank or securities dealer to perform any of the above
described functions.
How to Get Information Regarding an Investment in the Fund
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of
this Prospectus.
From a touch-tone phone, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Funds by calling
the automated Franklin TeleFACTS(register ed trademark) system (day or
night) at 1- 800/247-1753. Information about any Series may be accessed by
entering Code 06 for the Growth Series, 07 for the Utilities Series, 08 for
the DynaTech Series, 09 for the Income Series and 10 for the U.S.
Government Series, each followed by the # sign, when requested to do so by
the automated operator. The TeleFACTS system is also available for
processing exchanges. See "Exchange Privilege."
To assist shareholders and securities dealers wishing to speak directly
with a representative, the following is a list of the various Franklin
departments, telephone numbers and hours of operation to call. The same
numbers may be used when calling from a rotary phone:
Hours of Operation (Pacific time)
Department Name Telephone Number (Monday through Friday)
- -------------------- ----------------- ---------------------------------
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 6:00 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.
Performance
- --------------------------------------------------------------------------
Advertisements, sales literature and communications to shareholders may
contain various measures of a Series' performance, including current yield,
various expressions of total return, and current distribution rate. They
may occasionally cite statistics to reflect its 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 (offering price includes sales charge) 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 Series 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 Series' portfolio
investments; it is calculated by dividing the Series' 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.
Yield which is calculated according to a formula prescribed by the SEC (see
the SAI) is not indicative of the dividends or distributions which were or
will be paid to shareholders of any Series. Dividends or distributions paid
to shareholders are reflected in the current distribution rate, which may
be quoted to shareholders. The current distribution rate is computed by
dividing the total amount of dividends per share paid by the Series 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 premium income from
option writing and 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 Series 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 a
Series, 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 Series' yield, distribution
rate or total return may be in any future period.
General Information
- --------------------------------------------------------------------------
Reports to Shareholders
The Fund's fiscal year ends September 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. 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 Fund's Annual
Report to Shareholders and the SAI.
Organization
The Fund's authorized capital stock consists of ten billion shares of
Capital Stock of $0.01 par value, 9,900,000,000 of which have been
authorized by the Board of Directors to be issued in five separate Series:
500,000,000 shares designated as Growth Series shares, 5,000,000,000 shares
as U.S. Government Securities Series shares, 3,100,000,000 shares as Income
Series shares, 800,000,000 shares as Utilities Series shares and
500,000,000 as DynaTech Series shares. The Board of Directors is empowered
by the Charter to issue other Series of Capital Stock and to increase or
decrease the number, but not below that at the time outstanding.
The assets of the Fund received for the issue or sale of each Series of the
Capital Stock and all income, earnings, profits and proceeds thereof,
subject only to the rights of creditors, are especially allocated to such
Series, and constitute the underlying assets of such Series. The underlying
assets of each Series are required to be segregated on the books of account
and are to be charged with the liabilities in respect to such Series and
with a share of the general liabilities of the Fund. Liabilities in respect
to any two or more Series are to be allocated in proportion to the asset
value of the respective Series except where direct expenses can otherwise
be fairly allocated. The Board of Directors has the right to determine
which liabilities are allocable to a given Series and which are general or
allocable to two or more Series. In the event of the dissolution or
liquidation of the Fund, the registered holders of the Capital Stock of any
Series are entitled to receive as a class the underlying assets of such
Series available for distribution to shareholders.
Voting Rights
Shares of Capital Stock entitle their holders to one vote per share;
however, votes are made by Series on matters affecting an individual
Series. Shares of the Fund have noncumulative voting rights which means
that in all elections of directors, the holders of more than 50% of the
shares voting can elect 100% of the directors 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 of Directors. Shares have no
preemptive or subscription rights, and are fully transferable. There are no
conversion rights; however, holders of shares of any series may reinvest
all or any portion of the proceeds from the redemption or repurchase of
such shares into shares of any other series as described under "Exchange
Privilege."
Meetings of Shareholders
Maryland General Corporation Law does not require corporations registered
as management investment companies under the 1940 Act to hold routine
annual meetings of shareholders and the Fund does not intend to hold such
routine annual meetings. The Fund may, however, hold a meeting 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 shareholders holding at least 10% of the
shares entitled to vote at the meeting for the purpose of voting upon the
removal of directors, in which case shareholders may receive assistance in
communicating with other shareholders in connection with the election or
removal of directors such as that provided in Section 16(c) of the 1940
Act. In addition, Maryland General Corporation Law provides that a special
meeting may be called by a majority of the Board of Directors or by the
written request of shareholders holding at least 25% of the shares entitled
to vote at the meeting.
Redemptions by the Fund
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account in any Series of the Fund has a value of less
than $50, but only where the value of such account has been reduced by the
shareholder's prior voluntary redemption of shares and has been inactive
(except for the reinvestment of distributions) for a period of at least six
months, provided advance notice is given to the shareholder. More
information is included in the SAI.
Other Information
Distribution or redemption checks sent to shareholders 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 to the shareholder
caused by the shareholder's failure to cash such check(s).
The Fund believes that the U.S. Government Securities Series is generally a
permissible investment for national banks, federally chartered savings and
loan associations, federally chartered credit unions and the Fishing Vessel
Capital Construction Fund. Such investors should confirm the permissibility
of proposed investments in this Series with their counsel.
"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.
Account Registrations
- --------------------------------------------------------------------------
An account registration should reflect the investor's 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, a shareholder may transfer an account in the Fund
carried in "street" or "nominee" name by the shareholder's 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 the shareholder's
delivering securities dealer. To effect the transfer, a shareholder should
instruct the securities dealer to transfer the account to a receiving
securities dealer and sign any documents required by the securities
dealer(s) 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 the
shareholder's delivering securities dealer. In the future it may be
possible to effect such transfers electronically through the services of
the NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether
the account was initially registered in the name of or by the owner, the
nominee, or both. If a securities dealer or other representative is of
record on an investor's account, the investor 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 the Shareholder Services Agent, and to have
authorized them to execute the instructions without further inquiry. At the
present time, such services which are available, or which are anticipated
to be made available in the near future, 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 Internal Revenue Service ("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. A shareholder
may also be subject to backup withholding if the IRS or a securities dealer
notifies the Fund that the number furnished by the shareholder is incorrect
or that the shareholder is 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 the shareholder 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.
Portfolio Operations
- --------------------------------------------------------------------------
The following persons are primarily responsible for the day-to-day
portfolio management of each Series of the Fund:
Growth Series: Vivian J. Palmieri since 1965 and Conrad B. Herrmann since
1991.
Vivian J. Palmieri, Vice President of Advisers, holds a Bachelor of Arts
degree in economics from Williams College. He has been with Advisers since
1965. Mr. Palmieri is a member of several securities industry associations.
Conrad B. Herrmann, Portfolio Manager of Advisers, holds a Bachelor of Arts
degree from Brown University and a Master's degree in business
administration from Harvard University. Mr. Herrmann, a Chartered Financial
Analyst, has been with Advisers since 1989 and prior thereto was vice
president and general manager of Aquila Management. He is a member of
several securities industry associations.
Utilities Series: Greg Johnson since 1987; Charles B. Johnson since 1957
and Sally Edwards Haff since 1990.
Greg Johnson, Vice President of Advisers, holds a Bachelor of Science
degree in accounting and business administration from Washington and Lee
University. He has been with Advisers since 1986. Mr. Johnson is a member
of several securities industry associations.
Charles B. Johnson, Chairman of the Board of Advisers, holds a Bachelor of
Arts degree in economics and political science from Yale University. He has
been with Advisers since 1957. Mr. Johnson is a member of several
securities industry associations.
Sally Edwards Haff, Portfolio Manager of Advisers, holds a Bachelor of Arts
degree in economics from the University of California at Santa Barbara and
is also a Chartered Financial Analyst. She has been with Franklin since
1986. Ms. Haff is a member of several securities industry-related
committees and associations.
DynaTech Series: Rupert H. Johnson, Jr. since inception and Lisa Costa
since 1983.
Rupert H. Johnson, Jr., President of Advisers, is a graduate from
Washington and Lee University. He has been with Advisers since 1965 and
prior thereto he served as an officer in the United States Marine Corps.
Mr. Johnson is a member of several securities industry associations.
Lisa Costa, Portfolio Manager of Advisers, holds a Bachelor of Science
degree in finance from California State University at Hayward and a
Master's degree in business administration and finance from Golden Gate
University, San Francisco. She has been with Advisers since 1980. Ms. Costa
is a member of several securities industry associations.
Income Series: Charles B. Johnson since 1957; Matt Avery since 1989; and
Ian Link since 1989.
Charles B. Johnson, Chairman of the Board of Advisers holds a Bachelor of
Arts degree in economics and political science from Yale University. He has
been with Advisers since 1957. Mr. Johnson is a member of several
securities industry associations.
Matt Avery, Portfolio Manager of Advisers has a Bachelor of Science degree
in industrial engineering from Stanford University and a Master's degree
from U.C.L.A. Graduate School of Management. He has been in the securities
industry since 1982 and with Advisers since 1987.
Ian Link, Portfolio Manager of Advisers, has a Bachelor of Arts degree in
economics from the University of California at Davis and recently became a
Chartered Financial Analyst. He is a member of several securities industry
associations.
The U.S. Government Securities Series: Jack Lemein since 1984; Tony Coffey
since 1989; and Roger Bayston since 1993.
Jack Lemein, Senior Vice President of Advisers, holds a Bachelor of Science
degree in finance from the University of Illinois. He has been in the
securities industry since 1967 and with Advisers since 1984. He is a member
of several securities industry associations.
Tony Coffey, Portfolio Manager of Advisers, holds a Master's in Business
Administration degree from the University of California at Los Angeles and
a Bachelor of Arts degree from Harvard University. He has been with
Advisers since 1989. From 1985 to 1987 Mr. Coffey was an associate with
Analysis Group. He is a member of several securities industry associations.
Roger Bayston, Portfolio Manager of Advisers, holds a Bachelor of Science
degree in business administration from the University of California at Los
Angeles. He has been with the Franklin organization since 1991 (following
completion of his MBA program) and was an Assistant Treasurer for Bankers
Trust Company from 1986 to 1989.
Appendix
- --------------------------------------------------------------------------
Description of Moody's corporate bond ratings:
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
Description of S&P corporate bond ratings:
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for
bonds in this category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Income Series
Franklin Custodian Funds, Inc.
FRANKLIN LOGO
PROSPECTUS February 1, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
The Income Series (the "Fund") is a diversified series of Franklin
Custodian Funds, Inc. (the "Custodian Funds"), an open-end management
investment company. The investment objective of the Fund is to maximize
income while maintaining prospects for capital appreciation.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know
before investing. After reading the Prospectus, it should be retained
for future reference; it contains information about the purchase and
sale of shares and other items which a prospective investor will find
useful to have.
This Prospectus pertains only to the Income Series. A separate
Prospectus, also dated February 1, 1995 as may be amended from time to
time, describes all five series of Custodian Funds and is incorporated
herein by reference. A Statement of Additional Information ("SAI")
concerning Custodian Funds, dated February 1, 1995, 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 some
investors. It has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated herein by reference. A copy is
available without charge from the Fund or the Fund's principal
underwriter, Franklin/Templeton Distributors, Inc. ("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.
THE FUND MAY INVEST UP TO 100% OF ITS ASSETS IN BONDS RATED BELOW
INVESTMENT GRADE, COMMONLY KNOWN AS "JUNK BONDS", BY STANDARD & POOR'S
CORPORATION ("S&P") OR MOODY'S INVESTORS SERVICE ("MOODY'S"), TWO
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATIONS ("NRSROS") OR IN
BONDS WHICH HAVE NOT BEEN RATED BY ANY NRSRO. BONDS RATED BELOW
INVESTMENT GRADE ENTAIL GREATER RISK, INCLUDING PRICE VOLATILITY AND
RISK OF DEFAULT, THAN INVESTMENTS IN HIGHER RATED SECURITIES. SEE "RISK
FACTORS." INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS ASSOCIATED WITH
AN INVESTMENT IN THE FUND IN LIGHT OF THE SECURITIES IN WHICH THE FUND
INVESTS.
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 2
Financial Highlights 4
About the Fund 4
Investment Objective and
Policies of the Fund 4
Risk Factors 11
Management of the Fund 14
Distributions to Shareholders 15
Taxation of the Fund
and Its Shareholders 17
How to Buy Shares of the Fund 18
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments 24
Other Programs and Privileges
Available to Fund Shareholders 25
Exchange Privilege 27
How to Sell Shares of the Fund 29
Telephone Transactions 33
Valuation of Fund Shares 34
How to Get Information Regarding
an Investment in the Fund 35
Performance 35
General Information 36
Account Registrations 38
Important Notice Regarding
Taxpayer IRS Certifications 39
Portfolio Operations 39
Appendix 39
Expense Table
- ---------------------------------------------------------------------------
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder will bear directly or
indirectly in connection with an investment in the Fund. These figures
are based on the operating expenses of the Fund for the fiscal year
ended September 30, 1994.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.25%
Deferred Sales Charge NONE*
Exchange Fee (per transaction) $5.00**
<CAPTION>
Annual Fund Operating Expenses
(as a percentage of average net assets)
<S> <C>
Management Fees 0.46%
12b-1 Fees 0.13%(dagger)***
Other Expenses 0.13%
Total Fund Operating Expenses 0.72%
----------------
</TABLE>
*Investments of $1 million or more are not subject to front-end sales
charge; however, a contingent deferred sales charge of 1% is imposed on
certain redemptions within 12 months of the calendar month following
such investments. See "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge."
**$5.00 fee only imposed on Timing Accounts as described under
"Exchange Privilege." All other exchanges are processed without a fee.
***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 Plan 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. See "Plan of Distribution" under
"Management of the Fund" in this Prospectus.
(dagger)The Rule 12b-1 Plan was implemented on May 1, 1994; therefore,
this figure was annualized for the fiscal year ended September 30,
1994. Actual Rule 12b-1 fees incurred by the Fund for the period May 1,
1994 through September 30, 1994 represented 0.05% of average net
assets.
Investors should be aware that the above table is not intended to
reflect in precise detail the fees and expenses associated with an
individual's own investment in the Fund. Rather the table has been
provided only to assist investors in gaining a more complete
understanding of fees, charges and expenses. For a more detailed
discussion of these matters, investors should refer to the appropriate
sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the
expenses, including the initial 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:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
$50 $65 $81 $129
</TABLE>
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES SHOWN
ABOVE AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES,
WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The operating expenses are
borne by the Fund and only indirectly by shareholders as a result of
their investment in the Fund. In addition, federal regulations require
the example to assume an annual return of 5%, but the Fund's actual
return may be more or less than 5%.
Financial Highlights
- ---------------------------------------------------------------------------
Set forth below is a table containing the financial highlights for a
share of the Fund throughout the ten fiscal years in the period ended
September 30, 1994. The information for each of the five fiscal years
in the period ended September 30, 1994 has been audited by Coopers &
Lybrand L.L.P., independent auditors, whose audit report appears in the
financial statements in the Fund's SAI. The remaining figures, which
are also audited, are not covered by the auditor's current report. See
the discussion "Reports to Shareholders" under "General Information."
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Net Net
Asset Realized & Dividends Distributions
Year Value Net Unrealized Total From From Net from
Ended Beginning Investment Gain (Loss) Investment Investment Capital Total
Sep. 30 of Year Income on Securities Operations Income Gains Distribution
- --------------------- ------------- ------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Fund:
1985 $1.95 $0.210 $0.150 $0.360 $(0.220) $(0.030) $(0.250)
1986 2.06 0.230 0.238 0.468 (0.220) (0.058) (0.278)
1987 2.25 0.206 0.004 0.210 (0.220) (0.020) (0.240)
1988 2.22 0.228 (0.096) 0.132 (0.220) (0.022) (0.242)
1989 2.11 0.222 0.009 0.231 (0.220) (0.011) (0.231)
1990 2.11 0.212 (0.324) (0.112) (0.220) (0.018) (0.238)
1991 1.76 0.190 0.350 0.540 (0.220) -- (0.220)
1992 2.08 0.190 0.194 0.384 (0.205) (0.009) (0.214)
1993 2.25 0.180 0.227 0.407 (0.185) (0.012) (0.197)
1994 2.46 0.170 (0.201) (0.031) (0.180) (0.029) (0.209)
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------
Net Asset Net Assets Ratio of Ratio of
Year Value at End Expenses Net Income Portfolio
Ended at End Total of Year to Average to Average Turnover
Sep. 30 of Year Return+ (in 000's) Net Assets Net Assets Rate
- --------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <c
Income Fund:
1985 2.06% 18.71% $ 105,278 0.76% 10.14% 24.07%
1986 2.25 24.20 226,418 0.71 9.76 30.76
1987 2.22 9.08 484,270 0.64 9.20 18.14
1988 2.11 6.00 726,815 0.61 10.50 10.01
1989 2.11 11.16 1,189,694 0.57 10.46 12.05
1990 1.76 (6.37) 1,299,130 0.55 10.73 12.14
1991 2.08 32.60 1,673,187 0.56 10.17 33.92
1992 2.25 18.80 2,483,501 0.55 9.11 23.30
1993 2.46 18.76 3,935,444 0.54 7.84 25.41
1994 2.22 (1.52) 4,891,505 0.64 7.37 23.37
- ------------------------------------------------------------------------------------------------
</TABLE>
+Total return measures the change in value of an investment over the
periods indicated. It does not include the maximum initial sales charge
and assumes reinvestment of dividends at the offering price (prior to
May 1, 1994, and at net asset value thereafter) and capital gains at
net asset value.
About the Fund
- ---------------------------------------------------------------------------
The Fund is a diversified series of Custodian Funds, an open-end
management investment company commonly called a "mutual fund",
registered under the Investment Company Act of 1940 (the "1940 Act").
Custodian Funds was organized under the laws of Delaware in 1947 and
reincorporated under the laws of Maryland in 1979. Custodian Funds has
only one class of capital stock which is issued in five separate
series: Growth Series, DynaTech Series, Utilities Series, Income
Series, and U.S. Government Securities Series.
Shares of the Fund may be purchased (minimum investment of $100
initially and $25 thereafter) at the current public offering price,
which is equal to the Fund's net asset value (see "Valuation of Fund
Shares") plus a sales charge not exceeding 4.25% of the offering price.
(See "How to Buy Shares of the Fund.")
Investment Objective and
Policies of the Fund
- ---------------------------------------------------------------------------
The Fund's principal investment objective is to maximize income while
maintaining prospects for capital appreciation. The objective is a
fundamental policy of the Fund and may not be changed without
shareholder approval.
The Fund invests in a diversified portfolio of securities selected with
particular consideration of current income production. The underlying
assets of the Fund may be held in cash or cash equivalents, or invested
in securities traded on any national securities exchange or in
securities issued by a corporation, association or similar legal entity
having gross assets valued at not less than $1,000,000 as shown by its
latest published annual report. The Fund may also invest in preferred
stocks. There are no restrictions as to the proportion of investments
which may be made in a particular type of security and such
determination is entirely within management's discretion. A breakdown
of the ratings for the bonds in the Fund's portfolio is included under
"Asset Composition Table." Various NRSROs publish ratings of some of
the types of securities in which the Fund may invest. Higher yields are
ordinarily available from securities in the lower-rated categories of
the recognized rating services (that is, securities rated Ba or lower
by Moody's or BB or lower by S&P) or from unrated securities of
comparable quality. These ratings, which represent the opinions of the
NRSROs with respect to the issuer's ability to pay interest and repay
principal, although they do not purport to reflect the risk of
fluctuations in market value and are not absolute standards of quality,
will be considered in connection with the investment of the Fund's
assets, but will not be a determining or limiting factor. The Fund may
invest in securities regardless of their rating or in securities which
are not rated, including up to 5% of its assets in securities which are
in default at the time of purchase. As an operating policy, however,
the Fund will generally invest in securities that are rated at least
Caa by Moody's or CCC by S&P, except for defaulted securities as noted
below or, if unrated, are at least of comparable quality as determined
by the investment manager. Unrated debt securities are not necessarily
of lower quality than rated securities but they may not be attractive
to as many buyers. (See the Appendix for a discussion of ratings.) The
Fund may also purchase debt obligations of issuers not currently paying
interest as well as issuers who are in default and may retain an issue
which has defaulted. Defaulted debt securities will be purchased if, in
the opinion of the investment manager, it may present an opportunity
for subsequent price recovery, the issuer may resume interest payments
or other advantageous developments appear likely in the near term. In
general securities which default lose much of their value in the time
period prior to the actual default so that the security, and thus the
Fund's net asset value, would be impacted prior to the default.
Defaulted debt securities may be illiquid and, as such, will be part of
the 10% limit discussed under "Illiquid Investments." See "Risk
Factors."
In the event the rating on an issue held in the Fund's portfolio is
changed by the NRSRO, such event will be considered by the Fund in its
evaluation of the overall investment merits of that security but will
not generally result in an automatic sale of the security.
Rather than relying principally on the ratings assigned by an NRSRO,
the investment analysis of securities being considered for the Fund's
portfolio may also include, among other things, consideration of
relative values, based on such factors as anticipated cash flow,
interest or dividend coverage, asset coverage, earnings prospects, the
experience and managerial strength of the issuer, responsiveness to
changes in interest rates and business conditions, debt maturity
schedules and borrowing requirements and the issuer's changing
financial condition and public recognition thereof. Since a substantial
portion of the Fund's portfolio at any particular time may consist of
debt securities, changes in the level of interest rates, among other
things, will likely affect the value of the Fund's holdings and thus
the value of a shareholder's investment.
Certain of the high yielding fixed-income securities in which the Fund
may invest may be purchased at a discount. Such securities, when held
to maturity or retired, may include an element of capital gain. Capital
losses may be realized when securities purchased at a premium, that is,
in excess of their stated or par value, are held to maturity or are
called or redeemed at a price lower than their purchase price. Capital
gains or losses also may be realized upon the sale of securities.
As market conditions change, it is conceivable that all of the assets
of the Fund could be invested in common stocks or, conversely, in debt
securities. It is a fundamental policy of the Fund that concentration
of investment in a single industry may not exceed 25% of the total
assets of the Fund.
The Fund may invest up to 5% of its assets in loan participations and
other related direct or indirect bank obligations ("Loan
Participations"). These instruments are interests in floating or
variable rate senior loans to U.S. corporations, partnerships and other
entities. While Loan Participations generally trade at par value, the
Fund will be able to acquire Loan Participations, including those which
sell at a discount because of the borrower's credit problems. To the
extent the borrower's credit problems are resolved, the Loan
Participation may appreciate in value. The investment manager may
acquire Loan Participations for the Fund when it believes that over the
long term, appreciation will take place. An investment in such
securities, however, carries substantially the same risk as that for
defaulted debt securities and may cause the loss of the entire
investment to the Fund. Most Loan Participations are illiquid and, to
that extent, will be included in the 10% limitation described under
"Illiquid Investments".
The Fund may purchase debt obligations on a "when-issued" or "delayed-
delivery" basis. Such securities are subject to market fluctuation
prior to delivery to the Fund and generally do not earn interest until
their scheduled delivery date. Therefore, the value or yields at
delivery may be more or less than the value or the yields available
when the transaction was entered into. When the Fund is the buyer in
such a transaction, it will maintain, in a segregated account with its
custodian, cash or high-grade marketable securities having an aggregate
value equal to the amount of such purchase commitments until payment is
made. To the extent the Fund engages in when-issued and delayed
delivery transactions, it will do so only for the purpose of acquiring
portfolio securities consistent with the Fund's investment objectives
and policies, and not for the purpose of investment leverage.(See "When-
Issued, Delayed Delivery and TBA Transactions" in the Fund's SAI for a
more complete discussion regarding when-issued and delayed-delivery
transactions.)
The Fund may also purchase certain bonds issued at discount which defer
the payment of interest or which pay no interest until maturity, known
as zero coupon bonds, or which pay interest through issuance of
additional bonds, known as pay-in-kind bonds. For federal tax purposes,
holders of such bonds, such as the Fund, are deemed to receive interest
over the life of such bonds and are taxed as if interest were paid on a
current basis although no cash interest payments are in fact received
by the holder until the bonds mature. See "Risk Factors" below for more
information regarding these types of bonds.
The Fund's total return, as calculated pursuant to the formula
prescribed by the SEC, for the one-, five- and ten-year periods ended
on September 30, 1994 was -5.58%, 10.98% and 12.49% respectively. See
"Performance."
Some of the Fund's Other Investment Policies
Options. The Fund may write covered call options which are listed for
trading on a national securities exchange. This means that the Fund
will only write options on securities which it actually owns. A call
option gives the person who buys it the right to buy the security on
which the option is written for a specified period of time for a price
agreed to at the time the Fund sells the option, even though that price
may be less than the value of the security at the time the option is
exercised. When the Fund sells covered call options, it will receive a
cash premium which can be used in whatever way is felt to be most
beneficial to the Fund. The risks associated with covered call writing
are that in the event of a price rise on the underlying security which
would likely trigger the exercise of the call option, the Fund will not
participate in the increase in price beyond the exercise price. If the
Fund determines that it does not wish to deliver the underlying
securities from its portfolio, it would have to enter into a "closing
purchase transaction," the premium on which may be higher or lower than
that received by the Fund for writing the option. There is no assurance
that a closing purchase transaction will be available in every
instance. Transactions in options are generally considered "derivative
securities."
Loans of Portfolio Securities. Consistent with procedures approved by
the Board of Directors and subject to the following conditions, the
Fund may lend its portfolio securities to qualified securities dealers
or other institutional investors, provided that such loans do not
exceed 10% 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
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 collateral coverage of at least 100%. Such 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 engages in security loan arrangements with the primary
objective of increasing the Fund's income through investment of the
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.
Convertible Securities. The Fund may invest in securities including
corporate bonds, notes and preferred stocks that are convertible into
common stock or other securities which provide an opportunity for
equity participation. These securities are convertible at a stated
price within a specified period of time and are generally senior to
common stocks in a corporation's capital structure, although they are
usually subordinated to similar nonconvertible securities. Convertible
securities provide a fixed-income stream and the opportunity, through
their conversion feature, to participate in the capital appreciation
resulting from a market price advance in the convertible security's
underlying common stock. As with a fixed-income security, a convertible
security tends to increase in market value when interest rates decline
and tends to decrease in value when interest rates rise. The price of a
convertible security is also influenced by the market value of the
security's underlying common stock and tends to increase as the market
value of the underlying stock rises, whereas it tends to decrease as
the market value of the underlying stock declines. As a result of the
Fund's investment in convertible securities and other equity
securities, the value of the Fund's shares and the dividends per share
paid by the Fund may fluctuate.
The Fund may also invest in convertible preferred stocks that offer
enhanced yield features, such as Preferred Equity Redemption Cumulative
Stock ("PERCS"), which provide an investor, such as the Fund, with the
opportunity to earn higher dividend income than is available on a
company's common stock. A PERCS is a preferred stock which generally
features a mandatory conversion date, as well as a capital appreciation
limit which is usually expressed in terms of a stated price. Most PERCS
expire three years from the date of issue, at which time they are
exchangeable for the issuer's common stock or cash, at the option of
the issuer. Under a typical arrangement, if after three years the
issuer's common stock is trading at a price below that set by the
capital appreciation limit, each PERCS would convert to one share of
common stock. If, however, the issuer's common stock is trading at a
price above that set by the capital appreciation limit, the holder of
the PERCS would receive less than one full share of common stock. The
amount of that fractional share of common stock received by the PERCS'
holder is determined by dividing the price set by the capital
appreciation limit of the PERCS by the market price of the issuer's
common stock. Some PERCS provide that they can be called immediately if
the issuer's common stock is trading at or above a specified level.
An investment in PERCS or other similar convertible securities may
involve additional risks. The Fund may have difficulty disposing of
such securities because there may be a thin trading market for a
particular security at any given time. Reduced liquidity may have an
adverse impact on market price and the Fund's ability to dispose of
particular securities, when necessary, to meet the Fund's liquidity
needs or in response to a specific economic event, such as the
deterioration in the creditworthiness of the issuer. Reduced liquidity
in the secondary market for certain securities may also make it more
difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the Fund's portfolio. The Fund, however,
intends to acquire securities believed by the investment manager to be
liquid although, as with any investment, there are no assurances that
this will be achieved.
There are other convertible securities, including, but not limited to,
Dividend Enhancement Convertible Stock, Perpetual Equity Participation
Shares and Automatically Convertible Equity Securities in which the
Fund invests, which are similar to the foregoing described convertible
securities. There may be additional types of convertible securities
which are also similar to the foregoing described convertible
securities, in which the Fund may invest in the future to the extent
such investments are consistent with the Fund's investment objective
and policies.
Repurchase Agreements. The Fund may engage in repurchase transactions,
in which the Fund purchases a U.S. government security subject to
resale to a bank or dealer at an agreed-upon price and date. The
transaction requires the collateralization of the seller's obligation
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, with the value of the underlying
security marked to market daily to maintain coverage of at least 100%.
A default by the seller might cause the Fund to experience a loss or
delay in the liquidation of the collateral securing the repurchase
agreement. The Fund might also incur disposition costs in liquidating
the collateral. The Fund, however, intends to enter into repurchase
agreements only with financial institutions such as broker-dealers and
banks which are deemed creditworthy by the Fund's investment manager. A
repurchase agreement is deemed to be 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
Fund's Board and will be held pursuant to a written agreement.
Borrowing. The Fund does not borrow money or mortgage or pledge any of
the assets of the Fund, except that it may borrow for temporary or
emergency purposes in an amount up to 5% of its total asset value.
Illiquid Investments. It is the policy of the Fund that illiquid
securities (securities that cannot be disposed of within seven days in
the normal course of business at approximately the amount at which the
Fund has valued the securities) may not constitute, at the time of
purchase more than 10% of the value of the total net assets of the
Fund. Subject to this limitation, the Fund's Board of Directors has
authorized the Fund to invest in restricted securities where such
investment is consistent with the Fund's investment objective and has
authorized such securities to be considered to be liquid to the extent
the investment manager determines on a daily basis that there is a
liquid institutional or other market for such securities.
Notwithstanding the investment manager's determinations in this regard,
the Fund's Board of Directors will remain responsible for such
determinations and will consider appropriate action, consistent with
the objective and policies of the Fund, if the security should become
illiquid subsequent to its purchase. To the extent the Fund invests in
restricted securities that are deemed liquid, the general level of
illiquidity in the Fund may be increased if qualified institutional
buyers become uninterested in purchasing these securities or the market
for these securities contracts. See "Investment Objectives and Policies
of the Fund" in the SAI.
Foreign Securities. There are no restrictions on investment of assets
of the Fund in foreign securities, providing such investments are
consistent with its objective and comply with its concentration and
diversification policies.
The Fund will ordinarily purchase foreign securities which are traded
in the U.S. or purchase American Depositary Receipts ("ADRs"), which
are certificates issued by U.S. banks representing the right to receive
securities of a foreign issuer deposited with that bank or a
correspondent bank. However, the Fund may also purchase the securities
of foreign issuers directly in foreign markets.
Investments in foreign securities where delivery takes place outside
the U.S. will be made in compliance with any applicable U.S. and
foreign currency restrictions and other tax laws and laws limiting the
amount and types of foreign investments. Changes of governmental
administrations or of economic or monetary policies, in the U.S. or
abroad, or changed circumstances in dealings between nations, or
currency convertibility or exchange rates could result in investment
losses for the Fund.
Investment in the shares of foreign issuers requires consideration of
certain factors that are not normally involved in investments solely in
U.S. issuers. Among other things, the financial and economic policies
of some foreign countries in which the Fund may invest are not as
stable as in the U.S. Furthermore, foreign issuers are not generally
subject to uniform accounting, auditing and financial standards and
requirements comparable to those applicable to U.S. corporate issuers.
There may also be less government supervision and regulation of foreign
securities exchanges, brokers and issuers than exist in the U.S.
Restrictions and controls on investment in the securities markets of
some countries may have an adverse effect on the availability and costs
to the Fund of investments in those countries. In addition, there may
be the possibility of expropriations, foreign withholding taxes,
confiscatory taxation, political, economic or social instability or
diplomatic developments which could affect assets of the Fund invested
in issuers in foreign countries.
There may be less publicly available information about foreign issuers
than is contained in reports and reflected in ratings published for
U.S. issuers. Some foreign securities markets have substantially less
volume than the New York Stock Exchange (the "Exchange") and some
foreign government securities may be less liquid and more volatile than
U.S. government securities. Transaction costs on foreign securities
exchanges may be higher than in the U.S., and foreign securities
settlements may, in some instances, be subject to delays and related
administrative uncertainties.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in
any securities issued without stock certificates or comparable stock
documents.
Securities which are acquired by the Fund outside the U.S. and which
are publicly traded in the U.S. or on a foreign securities exchange or
in a foreign securities market are not considered by the Fund to be
illiquid assets so long as the Fund acquires and holds the securities
with the intention of reselling them in the foreign trading market, the
Fund reasonably believes it can readily dispose of the securities for
cash in the U.S. or foreign market and current market quotations are
readily available.
Foreign exchange gains and losses realized by the Fund in connection
with transactions involving foreign currencies, foreign currency
payables or receivables, and foreign currency-denominated debt
securities 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. These rules are discussed in the SAI.
The holding of foreign securities, however, may be limited by the Fund
to avoid investment in certain Passive Foreign Investment Companies
("PFIC") and the imposition of a PFIC tax on the Fund resulting from
such investments.
The Fund is subject to a number of additional investment restrictions,
some of which may be changed only with the approval of shareholders,
which limit its activities to some extent. For a list of these
restrictions and more information concerning the policies discussed
herein, please see the SAI. There is, of course, no assurance that the
Fund's investment objectives described above will be met.
How Shareholders 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 the shareholder owns will increase. If the securities
owned by the Fund decrease in value, the value of the shareholder's
shares will also decline. In this way, shareholders 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, a shareholder may
anticipate that the value of Fund shares will fluctuate with movements
in the broader equity and bond markets, as well. In particular, changes
in interest rates will affect the value of the Fund's portfolio and
thus its share price. Increased rates of interest which frequently
accompany inflation and/or a growing economy are likely to have a
negative effect on the value of Fund shares. A decline in the stock
market of any country in which the Fund is invested may also be
reflected in a decline in the Fund's share price. Changes in currency
valuations will also affect the price of the Fund's shares. History
reflects both increases and decreases in the prevailing rate of
interest and in worldwide stock markets and currency valuations, and
these may occur unpredictably in the future. See also "Risk Factors"
below.
Risk Factors
- ---------------------------------------------------------------------------
Corporate debt securities are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations
(credit risk) and may also be subject to price volatility due to such
factors as interest rate sensitivity, market perception of the
creditworthiness of the issuer and general market liquidity (market
risk). Lower rated or unrated securities are more likely to react to
developments affecting market and credit risk than are more highly
rated securities, which react primarily to movements in the general
level of interest rates. The investment manager will consider both
credit risk and market risk in making investment decisions as to
corporate debt obligations for the Fund.
Bonds rated BB or below by S&P or Ba or below by Moody's (or comparable
unrated securities) are considered by S&P and Moody's, on balance, to
be speculative and questionable as to payment of principal and interest
thereon. They will generally involve more credit risk than securities
in the higher rating categories. The market values of such securities
tend to reflect individual corporate developments to a greater extent
than do higher rated securities, which react primarily to fluctuations
in the general level of interest rates. Such lower rated securities
also tend to be more sensitive to economic conditions than higher rated
securities. Even securities rated BBB or Baa by S&P and Moody's,
ratings which are considered investment grade, possess some speculative
characteristics.
Companies that issue high yielding, fixed-income securities are often
highly leveraged and may not have more traditional methods of financing
available to them. Therefore, the risk associated with acquiring the
securities of such issuers is generally greater than is the case with
higher rated securities. For example, during an economic downturn or a
sustained period of rising interest rates, highly leveraged issuers of
high yielding securities may experience financial stress. During these
periods, such issuers may not have sufficient cash flow to meet their
interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate
developments, the issuer's inability to meet specific projected
business forecasts, or the unavailability of additional financing. The
risk of loss due to default by the issuer may be significantly greater
for the holders of high yielding securities because such securities are
generally unsecured and are often subordinated to other creditors of
the issuer.
High yielding, fixed-income securities frequently have call or buy-back
features which would permit an issuer to call or repurchase the
securities from the Fund. Although such securities are typically not
callable for a period from three to five years after their issuance,
when calls are exercised by the issuer during periods of declining
interest rates, the Fund must replace such called securities with lower
yielding securities, decreasing the net investment income to the Fund
and thus dividends to shareholders. The premature disposition of a high
yielding security due to a call or buy-back feature, the deterioration
of the issuer's creditworthiness, or a default may also make it more
difficult for the Fund to manage the timing of its receipt of income,
which may have tax implications. Further information is included under
"Taxation of the Fund and Its Shareholders."
The Fund may have difficulty disposing of certain high yielding
securities because there may be a thin trading market for a particular
security at any given time. The market for lower rated fixed-income
securities generally tends to be concentrated among a smaller number of
dealers than is the case for securities which trade in a broader
secondary retail market. Generally, purchasers of these securities are
predominantly dealers and other institutional buyers, rather than
individuals. To the extent the secondary trading market for a
particular high yielding, fixed-income security does exist, it is
generally not as liquid as the secondary market for higher rated
securities. Reduced liquidity in the secondary market may have an
adverse impact on market price and the Fund's ability to dispose of
particular issues, when necessary, to meet the Fund's liquidity needs
or in response to a specific economic event, such as the deterioration
in the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult
for the Fund to obtain market quotations based on actual trades for
purposes of valuing the Fund's portfolio. Current values for these high
yield issues are obtained from pricing services and/or a limited number
of dealers and may be based upon factors other than actual sales. (See
"Valuation of Fund Shares.")
The Fund may acquire such securities that are sold without registration
under the federal securities laws and therefore carry restrictions on
resale. While many recent high yielding securities have been sold with
registration rights, covenants and penalty provisions for delayed
registration, if the Fund were required to sell such restricted
securities before the securities have been registered, it may be deemed
an underwriter of such securities as defined in the Securities Act of
1933, which entails special responsibilities and liabilities. The Fund
may incur special costs in disposing of such securities; however, the
Fund will generally incur no costs when the issuer is responsible for
registering the securities.
The Fund may acquire such securities during an initial underwriting.
Such securities involve special risks because they are new issues. The
Fund has no arrangement with its underwriters or any other person
concerning the acquisition of such securities, and the investment
manager will carefully review the credit and other characteristics
pertinent to such new issues.
Certain provisions of federal income tax law impose limitations on the
use of high yielding securities by issuers in connection with leveraged
buy-outs, mergers and acquisitions, or limit the deductibility of
interest payments on such securities. This legislation could reduce the
market for such securities generally, could negatively affect the
financial condition of issuers of high yield securities by removing or
reducing a source of future financing, and could negatively affect the
value of specific high yield issues and the high yield market in
general.
Factors adversely impacting the market value of high yielding
securities will adversely impact the Fund's net asset value. For
example, adverse publicity regarding lower-rated bonds, which appeared
during 1989 and 1990, along with highly publicized defaults of some
high yield issuers, depressed the prices for many such securities. In
addition, the Fund may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal or
interest on its portfolio holdings. The Fund will rely on the
investment manager's judgment, analysis and experience in evaluating
the creditworthiness of an issuer. In this evaluation, the investment
manager will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends,
its operating history, the quality of the issuer's management and
regulatory matters. As of September 30, 1994, five out of 219 issues
(excluding short-term securities and cash equivalents) in the Fund's
portfolio were in default. No issues defaulted in the past fiscal year
and a total of 12 issues have defaulted over the prior three fiscal
years, of which the Fund still holds the five issues mentioned above.
Currently, defaulted issues represent 0.53% of the net assets of the
Fund, however, current prices for defaulted bonds are generally
significantly lower than their purchase price, and the Fund may have
unrealized losses on such defaulted securities which are reflected in
the price of the Fund's shares. A defaulted security may be retained
because of its potential for price recovery.
The credit risk factors pertaining to lower-rated securities also apply
to lower-rated zero coupon, deferred interest and pay-in-kind bonds.
Such bonds carry an additional risk in that, unlike bonds which pay
interest throughout the period to maturity, the Fund will realize no
cash until the cash payment date and, if the issuer defaults, the Fund
may obtain no return at all on its investment. Zero coupon, deferred
interest and pay-in-kind bonds involve additional special
considerations.
Zero coupon or deferred interest securities are debt obligations which
do not entitle the holder to any periodic payments of interest prior to
maturity or a specified date when the securities begin paying current
interest (the "cash payment date") and therefore are generally issued
and traded at a discount from their face amounts or par value. The
discount varies depending on the time remaining until maturity or cash
payment date, prevailing interest rates, liquidity of the security and
the perceived credit quality of the issuer. The discount, in the
absence of financial difficulties of the issuer, typically decreases as
the final maturity or cash payment date of the security approaches. The
market prices of zero coupon securities are generally more volatile
than the market prices of securities that pay interest periodically and
are likely to respond to changes in interest rates to a greater degree
than do non-zero coupon or deferred interest securities having similar
maturities and credit quality. Current federal income tax law requires
that a holder of a zero coupon security report as income each year the
portion of the original issue discount on such security that accrues
that year, even though the holder receives no cash payments of interest
during the year.
Pay-in-kind bonds are securities which pay interest through the
issuance of additional bonds. The Fund will be deemed to receive
interest over the life of such bonds and be taxed as if interest were
paid on a current basis, although no cash interest payments are
received by the Fund until the cash payment date or until the bonds
mature. The Fund's investment in zero coupon and delayed interest
bonds, or bonds that provide for payment of interest in kind may cause
the Fund to recognize income and make distributions to shareholders
prior to the receipt of cash payments. For example, with respect to
zero coupon and delayed interest bonds, the Fund will be required to
accrue as income a portion of the discount (or deemed discount) at
which securities were issued and to distribute such income each year in
order to maintain its qualification as a regulated investment company
and to avoid income and excise taxes. Payment-in-kind obligations are
subject to special tax rules concerning the amount, character and
timing of income required to be accrued by the Fund.
Because of the Fund's policy of investing in higher yielding, higher
risk securities, an investment in the Fund is accompanied by a higher
degree of risk than is present with an investment in higher rated,
lower yielding securities. Accordingly, an investment in the Fund
should be carefully evaluated for its appropriateness in light of the
investor's overall investment needs and goals. Persons on fixed
incomes, such as retired persons, should also consider the increased
risk of loss of principal which is present with an investment in higher
risk securities. As with any other investment, there is no assurance
that the Fund's objectives will be achieved.
Asset Composition Table
During fiscal year ended September 30, 1994, the Fund had an average of
28.19% of its assets invested in bonds rated below investment grade (Ba
or lower by Moody's or BB or lower by S&P) and 12.89% in bonds which
had not been rated by any NRSRO. A total of 55.55% of the Fund's assets
were invested in bonds. A credit rating by an NRSRO evaluates only the
safety of principal and interest of the bond, and does not consider the
market value risk associated with an investment in such a bond. The
table below shows the percentage invested in each of the specific
rating categories by Moody's or S&P and those that are not rated. The
information was prepared based on a dollar weighted average of the
Fund's portfolio composition based on month-end assets for each of the
12 months in the fiscal year ended September 30, 1994. A description of
each rating category by Moody's and S&P is included in the Appendix.
<TABLE>
<CAPTION>
Average Weighted
Moody's or S&P Ratings Percentage of Assets
- ----------------------------- --------------------
<S> <C>
Aaa or AAA 12.74%
Aa or AA 0.00%
A 0.01%
Baa or BBB 1.72%
Ba or BB 3.93%
B 18.75%
Caa or CCC 4.09%
Ca or CC .94%
C 0.00%
D 0.48%
NR 12.89%
</TABLE>
Management of the Fund
- -----------------------------------------------------------------------
The Board of Directors 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.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin
Resources, Inc. ("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 various subsidiaries
("Franklin Templeton Group"). Advisers acts as investment manager or
administrator to 33 U.S. registered investment companies (111 separate
series) with aggregate assets of over $73 billion.
Pursuant to the management agreement, the Manager supervises and
implements the Fund's investment activities and provides certain
administrative services and facilities which are necessary to conduct
the Fund's business.
During the fiscal year ended September 30, 1994, management fees
totaling 0.46% of the average monthly net assets of the Fund were paid
to Advisers.
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
"The Fund's Policies Regarding Brokers Used on Portfolio Transactions"
in the SAI.
Shareholder accounting and many of the clerical functions for the Fund
are performed by Franklin/Templeton Investor Services, Inc. ("Investor
Services" or "Shareholder Services Agent") in its capacity as transfer
agent and dividend-paying agent. Investor Services is a wholly-owned
subsidiary of Resources.
During the fiscal year ended September 30, 1994, expenses borne by the
Fund, including fees paid to Advisers and to Investor Services, totaled
0.64% of the average monthly net assets of the Fund.
Plan of Distribution
The Fund has adopted a distribution plan (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
maximum amount which the Fund may pay to Distributors or others for
such distribution expenses is 0.15% per annum of the average daily net
assets of the Fund, payable on a quarterly basis. All expenses of
distribution and marketing in excess of .15% 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, including a
discussion of the Board's policies with regard to the amount of Plan
fees, please see the SAI.
Distributions to Shareholders
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income 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 net capital gains from the prior fiscal year. These
distributions, when made, will generally be fully taxable to the Fund's
shareholders. 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 of Directors without prior
notice to or approval by shareholders, the Fund's current policy is to
declare income dividends monthly for shareholders of record on the last
business day of the month, payable on or about the 15th day of the
following month. The Fund may determine to defer the December 31st
dividend declaration to a date shortly thereafter in January for tax or
other operational reasons. 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 of Directors. Fund shares are quoted ex-
dividend on the first business day following 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, an investor must have acquired
Fund shares prior to the close of business on the record date. An
investor considering purchasing Fund shares shortly before the record
date of a distribution 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 the shareholder's
investment, it may be taxable as dividend income or capital gain.
Dividend Reinvestment
Unless requested otherwise in writing or on the Shareholder
Application, income dividends and capital gain distributions, if any,
will be automatically reinvested in the shareholder's account in the
form of additional shares, valued at the closing net asset value
(without sales charge) on the dividend reinvestment date. Shareholders
have the right to change their election with respect to the receipt of
distributions by notifying the Fund, but any such change will be
effective only as to distributions for which the record date is seven
or more business days after the Fund has been notified. See the SAI for
more information.
Many of the Fund's shareholders receive their distributions in the form
of additional shares. This is a convenient way to accumulate additional
shares and maintain or increase the shareholder's earnings base. Of
course, any shares so acquired remain at market risk.
Distributions in Cash
A shareholder may elect to receive income dividends, or both income
dividends and capital gain distributions, in cash. By completing the
"Special Payment Instructions for Distributions" section of the
Shareholder Application included with this Prospectus, a shareholder
may direct the selected distributions to another fund in the Franklin
Group of Funds(registered trademark) or the Templeton Group, to another
person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House, the
payments may be made automatically by electronic funds transfer. If
this last option is requested, the shareholder should allow at least 15
days for initial processing. Dividends which may be paid in the interim
will be sent to the address of record. Additional information regarding
automated fund transfers may be obtained from Franklin's Shareholder
Services Department. Dividend and capital gain distributions are
eligible for investment in another fund in the Franklin Group of Funds
or the Templeton Group at net asset value.
Taxation of the Fund and Its Shareholders
- -----------------------------------------------------------------------
The following discussion reflects some of the tax considerations that
affect mutual funds and their shareholders. Additional information on
tax matters relating to the Fund and its shareholders is included in
the section entitled "Additional Information Regarding Taxation" in the
SAI.
The Fund is treated as a separate entity for federal income tax
purposes. The Fund intends to continue to qualify for treatment as a
regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (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.
For federal income tax purposes, any income dividends which the
shareholder receives 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 the
shareholder has 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 the shareholder has owned Fund shares
and regardless of whether such distributions are received in cash or in
additional shares.
For the fiscal year ended September 30, 1994, 31.87% of the income
dividends paid by the Fund qualified for the corporate dividends-
received deduction, subject to certain holding period and debt
financing restrictions imposed under the Code on the corporation
claiming the deduction. These restrictions are discussed in the SAI.
Pursuant to the Code, certain distributions which are declared in
October, November or December but which, for operational reasons, may
not be paid to the shareholder until the following January, will be
treated for tax purposes as if received by the shareholder on December
31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or
exchange of the Fund's shares, held for six months or less, will be
treated as a long-term capital loss to the extent of capital gain
dividends received with respect to such shares. 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 ninety (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 Group of
Funds or the Templeton Group 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.
The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the
close of each calendar year, advise them of the tax status for federal
income tax purposes of such dividends and distributions.
Shareholders who are not U.S. persons for purposes of federal income
taxation should consult with their financial or tax advisors regarding
the applicability of U.S. withholding or other taxes to distributions
received by them from the Fund and the application of foreign tax laws
to these distributions.
Shareholders should also consult their tax advisors with respect to the
applicability of any state and local intangible property or income
taxes on their shares of the Fund and distributions and redemption
proceeds received from the Fund.
Additional information on tax matters relating to the Fund and its
shareholders is included in the section entitled "Additional
Information Regarding Taxation" in the SAI.
How to Buy Shares of the Fund
- -----------------------------------------------------------------------
Shares of the Fund are continuously offered through securities dealers
which execute an agreement with Distributors, the principal underwriter
of the Fund's shares. The use of the term "securities dealer" shall
include other financial institutions which, pursuant to an agreement
with Distributors (directly or through affiliates), handle customer
orders and accounts with the Fund. Such reference, however, is for
convenience only and does not indicate a legal conclusion of capacity.
The minimum initial investment is $100 and subsequent investments must
be $25 or more. These minimums may be waived when the shares are
purchased through plans established by the Franklin Templeton Group.
The Fund and Distributors reserve the right to refuse any order for the
purchase of shares.
The Fund may impose a $10 charge for each returned item, against any
shareholder account which, in connection with the purchase of Fund
shares submits a check or a draft which is returned unpaid to the Fund.
Purchase Price of Fund Shares
Shares of the Fund are offered at the public offering price, which is
the net asset value per share plus a sales charge, next computed (1)
after the shareholder's securities dealer receives the order which is
promptly transmitted to the Fund or (2) after receipt of an order by
mail from the shareholder directly in proper form (which generally
means a completed Shareholder Application accompanied by a negotiable
check). The sales charge is a variable percentage of the offering price
depending upon the amount of the sale. On orders for 100,000 shares or
more, the offering price will be calculated to four decimal places. On
orders for less than 100,000 shares, the offering price will be
calculated to two decimal places using standard rounding criteria. A
description of the method of calculating net asset value per share is
included under the caption "Valuation of Fund Shares."
Set forth below is a table of total sales charges or underwriting
commissions and dealer concessions.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Total Sales Charge+
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more none none (see below)**
- ------------------------------------------------------------------------------------------------
</TABLE>
*Financial institutions or their affiliated brokers may receive an
agency transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors to dealers who
initiate and are responsible for purchases of $1 million or more: 0.75%
on sales of $1 million but less than $2 million, plus 0.60% 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. Dealer
concession breakpoints are reset every 12 months for purposes of
additional purchases.
Distributors, or one of its affiliates, may make payments, out of its
own resources, of up to 0.75% of the amount purchased to securities
dealers who initiate and are responsible for purchases made at net
asset value by non-designated retirement plans, and up to 1% of the
amount purchased 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), certain trust company and
trust departments of banks and certain retirement plans of
organizations with collective retirement plan assets of $10 million or
more. See "Special Net Asset Value Purchases" as described under
"Purchases at Net Asset Value" and as set forth in the SAI.
No front-end sales charge applies on investments of $1 million or more,
but a contingent deferred sales charge of 1% is imposed on certain
redemptions within 12 months of the calendar month of the purchase. See
"How to Sell Shares of the Fund - Contingent Deferred Sales Charge."
At the discretion of Distributors, all sales charges may at times be
allowed to the securities dealer. If 90% or more of the sales
commission is allowed, such dealer may be deemed to be an underwriter
as that term is defined in the Securities Act of 1933, as amended.
The size of a transaction which determines the applicable sales charge
on the purchase of Fund shares is determined by adding the amount of
the shareholder's current purchase plus the cost or current value
(whichever is higher) of a shareholder's existing investment in one or
more of the funds in the Franklin Group of Funds(registered trademark)
and the Templeton Group of Funds. Included for these aggregating
purposes are (a) the mutual funds in the Franklin Group of Funds except
Franklin Valuemark Funds and Franklin Government Securities Trust (the
"Franklin Funds"), (b) other investment products underwritten by
Distributors or its affiliates (although certain investments may not
have the same schedule of sales charges and/or may not be subject to
reduction) and (c) the U.S. mutual funds in the Templeton Group of
Funds except Templeton American Trust, Inc., Templeton Capital
Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund (the "Templeton Funds"). (Franklin Funds
and Templeton Funds are collectively referred to as the "Franklin
Templeton Funds.") Sales charge reductions based upon aggregate
holdings of (a), (b) and (c) above ("Franklin Templeton Investments")
may be effective only after notification to Distributors that the
investment qualifies for a discount.
Distributors or one of its affiliates, at its expense, may also provide
additional compensation to securities dealers in connection with sales
of shares in the Franklin Templeton Funds. Compensation may include
financial assistance to dealers in connection with conferences, sales
or training programs for their employees, seminars for the public,
advertising, sales campaigns and/or shareholder services and programs
regarding the Franklin Templeton Funds and other dealer-sponsored
programs or events. In some instances, this compensation may be made
available only to certain securities dealers whose representatives have
sold or are expected to sell significant amounts of such shares.
Compensation may include payment for travel expenses, including
lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business
nature. Dealers may not use sales of the Fund's shares to qualify for
this compensation to the extent such may be prohibited by the laws of
any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. None of the aforementioned
additional compensation is paid for by the Fund or its shareholders.
Certain officers and directors of the Fund are also affiliated with
Distributors. A detailed description is included in the SAI.
Quantity Discounts in Sales Charges
Shares may be purchased under a variety of plans which provide for a
reduced sales charge. To be certain to obtain the reduction of the
sales charge, the investor or the dealer should notify Distributors at
the time of each purchase of shares which qualifies for the reduction.
In determining whether a purchase qualifies for any of the discounts,
investments in any Franklin Templeton Investments may be combined with
those of the investor's spouse and children under the age of 21. In
addition, the aggregate investments of a trustee or other fiduciary
account (for an account under exclusive investment authority) may be
considered in determining whether a reduced sales charge is available,
even though there may be a number of beneficiaries of the account.
In addition, an investment in the Fund may qualify for a reduction in
the sales charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is
higher) of existing investments in the Franklin Templeton
Investments may be combined with the amount of the current purchase
in determining the sales charge to be paid.
2. Letter of Intent. An investor may immediately qualify for a reduced
sales charge on a purchase of shares of the Fund by completing the
Letter of Intent section of the Shareholder Application (the "Letter
of Intent" or "Letter"). By completing the Letter, the investor
expresses an intention to invest during the next 13 months a
specified amount which if made at one time, would qualify for a
reduced sales charge and grants to Distributors a security interest
in the reserved shares and irrevocably appoints Distributors as
attorney-in-fact with full power of substitution to surrender for
redemption any or all shares for the purpose of paying any
additional sales charge due. Purchases under the Letter will conform
with the requirements of Rule 22d-1 under the 1940 Act. The investor
or the investor's securities dealer must inform Investor Services or
Distributors that this Letter is in effect each time a purchase is
made.
An investor (except for certain employee benefit plans listed under
"Descriptions of Special Net Asset Value Purchases") acknowledges and
agrees to the following provisions by completing the Letter of Intent
section of the Shareholder Application: Five percent (5%) of the amount
of the total intended purchase will be reserved in shares of the Fund,
registered in the investor's name, to assure that the full applicable
sales charge will be paid if the intended purchase is not completed.
The reserved shares will be included in the total shares owned as
reflected on periodic statements; income and capital gain distributions
on the reserved shares will be paid as directed by the investor. The
reserved shares will not be available for disposal by the investor
until the Letter of Intent has been completed or the higher sales
charge paid. For more information see "Additional Information Regarding
Purchases" in the SAI.
Group Purchases
An individual who is a member of a qualified group may also purchase
shares of the Fund at the reduced sales charge applicable to the group
as a whole. The sales charge is based upon the aggregate dollar value
of shares previously purchased and still owned by the group, plus the
amount of the current purchase. For example, if members of the group
had previously invested and still held $80,000 of Fund shares and now
were investing $25,000, the sales charge would be 3.50%. Information
concerning the current sales charge applicable to a group may be
obtained by contacting Distributors.
A "qualified group" is 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. A qualified group must have more than 10 members, be available
to arrange for group meetings between representatives of the Fund or
Distributors and the members, agree to include sales and other
materials related to the Fund in its publications and mailings to
members at reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to the
Fund.
If an investor selects a payroll deduction plan, subsequent investments
will be automatic and will continue until such time as the investor
notifies the Fund and the investor's employer to discontinue further
investments. Due to the varying procedures used to prepare, process and
forward the payroll deduction information to the Fund, there may be a
delay between the time of the payroll deduction and the time the money
reaches the Fund. The investment in the Fund will be made at the
offering price per share determined on the day that both the check and
payroll deduction data are received in required form by the Fund.
Purchases at Net Asset Value
Shares of the Fund may be purchased at net asset value (without the
imposition of a front-end sales charge and/or contingent deferred sales
charge) by (1) officers, directors, and full-time employees of the
Fund, any of the Franklin Templeton Funds, or of the Franklin Templeton
Group, and by their spouses and family members; (2) companies
exchanging shares with or selling assets pursuant to a merger,
acquisition or exchange offer; (3) insurance company separate accounts
for pension plan contracts; (4) accounts managed by the Franklin
Templeton Group; (5) shareholders of Templeton Institutional Funds,
Inc. reinvesting redemption proceeds from that fund under an employee
benefit plan qualified under Section 401 of the Internal Revenue Code
of 1986, as amended, in shares of the Fund; (6) certain unit investment
trusts and unit holders of such trusts reinvesting their distributions
from the trusts in the Fund; (7) registered securities dealers and
their affiliates, for their investment account only, and (8) registered
personnel and employees of securities dealers, which have, directly or
through affiliates, signed an agreement with Distributors, and by their
spouses and family members, in accordance with the internal policies
and procedures of the employing securities dealer.
Shares of the Fund may be purchased at net asset value by persons who
have redeemed, within the previous 120 days, their shares of the Fund
or another of the Franklin Templeton Funds which were purchased with a
front-end sales charge or assessed a contingent deferred sales charge
on redemption. An investor may reinvest an amount not exceeding the
redemption proceeds. Credit will be given for any contingent deferred
sales charge paid on the shares redeemed. Shares of the Fund redeemed
in connection with an exchange into another fund (see "Exchange
Privilege") are not considered "redeemed" for this privilege. In order
to exercise this privilege, a written order for the purchase of shares
of the Fund must be received by the Fund or the Fund's Shareholder
Services Agent within 120 days after the redemption. The 120 days,
however, do not begin to run on redemption proceeds placed immediately
after redemption in a Franklin Bank Certificate of Deposit ("CD") until
the CD (including any rollover) matures. Reinvestment at net asset
value may also be handled by a securities dealer or other financial
institution, who may charge the shareholder a fee for this service. The
redemption is a taxable transaction but reinvestment without a sales
charge may affect the amount of gain or loss recognized and the tax
basis of the shares reinvested. If there has been a loss on the
redemption, the loss may be disallowed if a reinvestment in the same
fund is made within a 30-day period. Information regarding the possible
tax consequences of such a reinvestment is included in the tax section
of this Prospectus and the SAI.
Dividends and capital gains received in cash by the shareholder may
also be used to purchase shares of the Fund or another of the Franklin
Templeton Funds at net asset value within 120 days of the payment date
of such distribution. To exercise the privilege, a written request to
reinvest the distribution must accompany the purchase order. Additional
information may be obtained from Shareholder Services at 1-800/632-
2301. See "Distributions in Cash" under "Distributions to
Shareholders."
Shares of the Fund may be purchased at net asset value by investors who
have, within the past 60 days, redeemed an investment in an
unaffiliated mutual fund which charged the investor a contingent
deferred sales charge upon redemption and which has investment
objectives similar to those of the Fund.
Shares of the Fund may also be purchased at net asset value by (1)
officers, directors and full-time employees of the Fund or any fund in
the Franklin Group of Funds(registered trademark) or the Templeton
Group, the Manager and Distributors and affiliates of such companies,
if they have been such for at least 90 days, and by their spouses and
family members, (2) registered securities dealers and their affiliates,
for their investment account only, and (3) registered personnel and
employees of securities dealers and by their spouses and family
members, in accordance with the internal policies and procedures of the
employing securities dealer. Such sales are made upon the written
assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be transferred or resold
except through redemption or repurchase by or on behalf of the Fund.
Employees of securities dealers must obtain a special application from
their employers or from Franklin's Sales Department in order to
qualify.
Shares of the Fund may be purchased at net asset value by registered
investment advisors and/or their affiliated broker-dealers who have
entered into a supplemental agreement with Distributors, on behalf of
their clients who are participating in a comprehensive fee program
(also known as a wrap fee program).
Shares of the Fund may be purchased at net asset value by anyone who
has taken a distribution from an existing retirement plan already
invested in the Franklin Templeton Funds (including former participants
of the Franklin Templeton Profit Sharing 401(k) plan) to the extent of
such distribution. In order to exercise this privilege a written order
for the purchase of shares of the Fund must be received by Franklin
Templeton Trust Company (the "Trust Company"), the Fund or Investor
Services, within 120 days after the plan distribution. A prospectus
outlining the investment objectives and policies of a fund in which the
shareholder wishes to invest may be obtained by calling toll free at 1-
800/DIAL BEN (1-800/342-5236).
Shares of the Fund may also be purchased at net asset value by 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"). SUCH INVESTORS SHOULD CONSULT THEIR
OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES
OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM. 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 its investment manager on
arbitrage rebate calculations. If an investment by an eligible
governmental authority at net asset value is made through a dealer who
has executed a dealer agreement with Distributors, Distributors or one
of its affiliates may make a payment, out of their own resources, to
such dealer in an amount not to exceed 0.25% of the amount invested.
Contact Franklin's Institutional Sales Department for additional
information.
Description of Special Net Asset Value Purchases.
Shares of the Fund may also be purchased at net asset value by certain
designated retirement plans, including profit sharing, pension, 401(k)
and simplified employee pension plans, subject to minimum requirements
with respect to number of employees or amount of purchase, which may be
established by Distributors. Currently those criteria require that the
employer establishing the plan have 200 or more employees or that the
amount invested or to be invested during the subsequent 13-month period
in the Fund or in any of the Franklin Templeton Investments totals at
least $1,000,000. Employee benefit plans not designated above or
qualified under Section 401 of the Code may be afforded the same
privilege if they meet the above requirements as well as the uniform
criteria for qualified groups previously described under "Group
Purchases" which enable Distributors to realize economies of scale in
its sales efforts and sales related expenses.
Shares of the Fund may be purchased at net asset value by trust
companies and bank trust departments for funds over which they exercise
exclusive discretionary investment authority and which are held in a
fiduciary, agency, advisory, custodial or similar capacity. Such
purchases are subject to minimum requirements with respect to amount of
purchase, which may be established by Distributors. Currently, those
criteria require that the amount invested or to be invested during the
subsequent 13-month period in this Fund or any of the Franklin
Templeton Investments must total at least $1,000,000. Orders for such
accounts will be accepted 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.
Shares of the Fund may be purchased at net asset value by trustees or
other fiduciaries purchasing securities for certain retirement plans of
organizations with collective retirement plan assets of $10 million or
more, without regard to where such assets are currently invested.
Refer to the SAI for further information.
General
Securities laws of states in which the Fund's shares are offered for
sale may differ from the interpretations of federal law, and banks and
financial institutions selling Fund shares may be required to register
as dealers pursuant to state law.
Purchasing Shares of the Fund in
Connection with Retirement Plans
Involving Tax-Deferred Investments
- -----------------------------------------------------------------------
Shares of the Fund may be used for retirement programs providing for
tax-deferred investments for both individuals and businesses. The Fund
may be used as an investment vehicle for an existing retirement plan,
or the Trust Company may provide the plan documents and trustee or
custodian services. A plan document must be adopted in order for a plan
to be in existence.
The Trust Company, an affiliate of Distributors, can serve as custodian
or trustee for various types of retirement plans. Brochures for each of
the plans sponsored by Franklin contain important information regarding
eligibility, contribution limits and IRS requirements. Please note that
the separate applications other than the one contained in this
Prospectus must be used to establish a Trust Company retirement
account. To obtain a retirement plan brochure or application, call toll
free 1-800/DIAL BEN (1-800/342-5236).
The Franklin IRA is an individual retirement account in which the
contributions, annually limited to the lesser of $2,000 or 100% of an
individual's earned compensation*, accumulate on a tax-deferred basis
until withdrawn. Under the current tax law, individuals who (or whose
spouses) are covered by a company retirement plan (termed "active
participants") may be restricted in the amount they may claim as an IRA
deduction on their returns. The IRA deduction is gradually reduced to
the extent that a taxpayer's adjusted gross income exceeds certain
specified limits.
Two IRAs, with a combined limit of $2,250 or 100% of earned
compensation*, may be established by a married couple in which only one
spouse is a wage earner. The $2,250 may be split between the two IRAs,
so long as no more than $2,000 is contributed to either one for a given
tax year.
A Franklin Rollover IRA account is designed to maintain the tax-
deferred status of a qualifying distribution from an employer-sponsored
retirement plan, such as a 401(k) plan or qualified pension plan.
Additionally, if the eligible distribution is directly transferred to a
rollover IRA account, the distribution will be exempt from 20%
mandatory federal withholding.
The Franklin Simplified Employee Pension Plan (SEP-IRA) and Salary
Reduction Simplified Employee Pension Plan (SAR-SEP) are for use by
small businesses (generally 25 or fewer employees) to provide a
retirement plan for their employees and, at the same time, provide for
a tax-deduction to the employer. SEP-IRA contributions are made to an
employee's IRA, at the discretion of the employer, up to the lesser of
$30,000 or 15% of compensation* per employee. The SAR-SEP allows
employees to contribute a portion of their salary to an IRA on a pre-
tax basis through salary deferrals. The maximum annual salary deferral
limit for a SAR-SEP is the lesser of 15% of compensation (adjusted for
deferrals) or $9,240 (1995 limit; indexed for inflation).
The Franklin 403(b) Retirement Plan is a salary deferral plan for
employees of certain non-profit and educational institutions
[(section)501(c)(3) organizations and public schools]. The 403(b) Plan
allows participants to determine the annual amount of salary they wish
to defer. The maximum annual salary deferral amount is generally the
lesser of 25% of compensation (adjusted for deferrals) or $9,500.
The Franklin Business Retirement Plans provide employers with
additional retirement plan options and may be used individually, in
combination, or with custom designed features. The Profit Sharing Plan
allows an employer to make contributions, at its discretion, of up to
the lesser of $30,000 or 15% of compensation* per employee each year.
The Money Purchase Pension Plan allows the employer to contribute up to
the lesser of $30,000 or 25% of compensation* per employee; however,
contributions are required annually at the rate (percentage) elected by
the employer at the outset of the plan. In order to achieve a combined
contribution rate of 25% while maintaining a certain degree of
flexibility, employers may establish both a Profit Sharing Plan and a
Money Purchase Pension Plan (with a fixed contribution rate of 10%).
The Trust Company can add optional provisions to the Profit Sharing and
Money Purchase Pension Plans described above and provide Defined
Benefit, Target Benefit, and 401(k) Plans on a custom designed basis.
Business Retirement Plans, whether standard or custom designed, may
require an annual report (Form 5500)to be filed with the IRS.
Redemptions from any Franklin retirement plan accounts require the
completion of specific distribution forms to comply with IRS
regulations. Please see "How to Sell Shares of the Fund."
Individuals and employers should consult with a competent tax or
financial advisor before choosing a retirement plan.
Other Programs and Privileges
Available to Fund Shareholders
- -----------------------------------------------------------------------
Certain of the programs and privileges described in this section may
not be available directly from the Fund to shareholders whose 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 the section captioned "Account Registrations"
in this Prospectus).
Share Certificates
Shares for 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 the shareholder, can be 2% or more of the value
of the lost, stolen or destroyed certificate. A certificate will be
issued if requested in writing by the shareholder or by the securities
dealer.
Confirmations
A confirmation statement will be sent to each shareholder quarterly to
reflect the dividends reinvested during that period and after each
other transaction which affects the shareholder's account. This
statement will also show the total number of shares owned by the
shareholder, including the number of shares in "plan balance" for the
account of the shareholder.
Automatic Investment Plan
Under the Automatic Investment Plan, a shareholder may be able to
arrange to make additional purchases of shares automatically on a
monthly basis by electronic funds transfer from a checking account, if
the bank which maintains the account is a member of the Automated
Clearing House, or by preauthorized checks drawn on the shareholder's
bank account. A shareholder may, of course, terminate the program at
any time. The Shareholder Application included with this Prospectus
contains the requirements applicable to this program. In addition,
shareholders may obtain more information concerning this program from
their securities dealers or from Distributors.
The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should
keep in mind that such a program does not assure a profit or protect
against a loss.
Systematic Withdrawal Plan
A shareholder may establish a Systematic Withdrawal Plan and receive
regular periodic payments from the account, provided that the net asset
value of the shares held by the shareholder is at least $5,000. There
are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. The minimum amount which the shareholder may withdraw
is $50 per withdrawal transaction although this is merely the minimum
amount allowed under the plan and should not be mistaken for a
recommended amount. The plan may be established on a monthly,
quarterly, semiannual or annual basis. If the shareholder establishes a
plan, any capital gain distributions and income dividends paid by the
Fund will be reinvested for the shareholder's account in additional
shares at net asset value. Payments will then be made from the
liquidation of shares at net asset value on the day of the transaction
(which is generally the first business day of the month in which the
payment is scheduled) with payment generally received by the
shareholder three to five days after the date of liquidation. By
completing the "Special Payment Instructions for Distributions" section
of the Shareholder Application included with this Prospectus, a
shareholder may direct the selected withdrawals to another of the
Franklin Templeton Funds, to another person, or directly to a checking
account. If the bank at which the account is maintained is a member of
the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If this last option is requested, the
shareholder should allow at least 15 days for initial processing.
Withdrawals which may be paid in the interim will be sent to the
address of record. Liquidation of shares may reduce or possibly exhaust
the shares in the shareholder's account, to the extent withdrawals
exceed shares earned through dividends and distributions, particularly
in the event of a market decline. If the withdrawal amount exceeds the
total plan balance, the account will be closed and the remaining
balance will be sent to the shareholder. As with other redemptions, a
liquidation to make a withdrawal payment is a sale for federal income
tax purposes. Because the amount withdrawn under the plan may be more
than the shareholder's actual yield or income, part of the payment may
be a return of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with
purchases of additional shares of the Fund would be disadvantageous
because of the sales charge on the additional purchases. The
shareholder should ordinarily not make additional investments of less
than $5,000 or three times the annual withdrawals under the plan during
the time such a plan is in effect. A Systematic Withdrawal Plan may be
terminated on written notice by the shareholder or the Fund, and it
will terminate automatically if all shares are liquidated or withdrawn
from the account, or upon the Fund's receipt of notification of the
death or incapacity of the shareholder. Shareholders may change the
amount (but not below the specified minimums) and schedule of
withdrawal payments or suspend one such payment by giving written
notice to Investor Services at least seven business days prior to the
end of the month preceding a scheduled payment. Share certificates may
not be issued while a Systematic Withdrawal Plan is in effect.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging
shares of the Fund available to institutional accounts. For further
information, contact Franklin's Institutional Services Department at 1-
800/321-8563.
Exchange Privilege
- -----------------------------------------------------------------------
The Franklin Templeton Funds consist of a number of investment
companies with various investment objectives or policies. The shares of
most of these mutual funds are offered to the public with a sales
charge. If a shareholder's investment objective or outlook for the
securities markets changes, the Fund shares may be exchanged for shares
of other Franklin Templeton Funds which are eligible for sale in the
shareholder's state of residence and in conformity with such fund's
stated eligibility requirements and investment minimums. Investors
should review the prospectus of the fund they wish to exchange from and
the fund they wish to exchange into for all specific requirements or
limitations on exercising the exchange privilege, for example, minimum
holding periods or applicable sales charges. Exchanges may be made in
any of the following ways:
Exchanges 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.
Exchanges By Telephone
Shareholders, or their investment representative of record, if any, may
exchange shares of the Fund by telephone by calling Investor Services
at 1-800/632-2301 or the automated Franklin TeleFACTS(registered
trademark) system (day or night) at 1-800/247-1753. If the shareholder
does not wish this privilege extended to a particular account, the Fund
or Investor Services should be notified.
The Telephone Exchange Privilege allows a shareholder to effect
exchanges from the Fund into an identically registered account 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 the shareholder's account. The Fund
and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Please refer to
"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, shareholders
should follow the other exchange procedures discussed in this section,
including the procedures for processing exchanges through securities
dealers.
Exchanges Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares,
Investor Services will accept exchange orders by telephone or by other
means of electronic transmission from securities dealers who execute a
dealer or similar agreement with Distributors. See also "Exchanges By
Telephone" above. Such a dealer-ordered exchange will be effective only
for uncertificated shares on deposit in the shareholder's 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 values 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 investment on which no sales charge was paid was
transferred in from a fund on which the investor paid a sales charge.
Exchanges of shares of the Fund which were purchased with a lower sales
charge to 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. 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 12
months of the calendar month of the original purchase date, a
contingent deferred sales charge will be imposed. The 12-month period
will be tolled (or stopped) for the period such shares are exchanged
into and held in a Franklin or Templeton money market fund. See also
"How to Sell Shares of the Fund - Contingent Deferred Sales Charge."
When an investor requests the exchange of the total value of the Fund
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, the shareholder 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 in the SAI.
There are differences among the Franklin Templeton Funds. Before making
an exchange, a shareholder should obtain and review a current
prospectus of the fund into which the shareholder wishes to transfer.
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 objectives 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 Accounts
Franklin/Templeton IRA and 403(b) retirement accounts may accomplish
exchanges directly. Certain restrictions may apply, however, to other
types of retirement plans. See "Restricted Accounts" under "Telephone
Transactions."
Timing Accounts
Accounts which are administered by allocation or market timing services
to purchase or redeem shares based on predetermined market indicators
("Timing Accounts") will be charged a $5.00 administrative service fee
per each such 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 Timing Accounts.
The Fund reserves the right to temporarily or permanently terminate the
exchange privilege or reject any specific purchase order for any Timing
Account or any person whose transactions seem to follow a timing
pattern who: (i) make an exchange request out of the Fund within two
weeks of an earlier exchange request out of the Fund, or (ii) make more
than two exchanges out of the Fund per calendar quarter, or (iii)
exchange shares equal in value to at least $5 million, or more than 1/4
of 1% of the Fund's net assets. Accounts under common ownership or
control, including accounts administered so as to redeem or purchase
shares based upon certain predetermined market indicators, will be
aggregated for purposes of the exchange limits.
The Fund reserves the right to refuse the purchase side of exchange
requests by any Timing Account, person, or group if, in the Manager's
judgment, the Fund would be unable to invest effectively in accordance
with its investment objectives and policies, or would otherwise
potentially be adversely affected. A shareholder's purchase exchanges
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 also, as indicated in "How to Buy Shares of
the Fund," reserve the right to refuse any order for the purchase of
shares.
How to Sell Shares of the Fund
- -----------------------------------------------------------------------
A shareholder may at any time liquidate shares owned and receive from
the Fund the value of the shares. Shares may be redeemed in any of the
following ways:
Redemptions 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. The shareholder
will then receive from the Fund the value of the shares based upon the
net asset value per share 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
(1:00 p.m. Pacific time) each day that the Exchange is open for
business will receive the price calculated on the following business
day. Shareholders are requested to provide a telephone number(s) where
they may be reached during business hours, or in the evening if
preferred. Investor Services' ability to contact a shareholder promptly
when necessary will speed the processing of the redemption.
To be considered in proper form, signature(s) 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 owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other
than the shareholder's 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.
Signature(s) 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 which are
members of a national securities exchange or a clearing agency or which
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.
Where 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 shareholders exactly
as the account is registered, with the signature(s) guaranteed as
referenced above. Shareholders are advised, for their own 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 officer(s) 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
trustee(s) and (2) a copy of the pertinent pages of the trust document
listing the trustee(s) or a Certification for Trust if the trustee(s)
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 the
applicable state law since these accounts have varying requirements,
depending upon the state of residence.
Payment for redeemed shares will be sent to the shareholder within
seven days after receipt of the request in proper form.
Redemptions by Telephone
Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this
Prospectus may redeem shares of the Fund by telephone, subject to the
Restricted Account exception noted under "Telephone Transactions -
Restricted Accounts." Information may also be obtained 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. Shareholders, however, bear the risk of loss in certain
cases as described under "Telephone Transactions - Verification
Procedures."
For shareholder accounts with the 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 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, a shareholder should follow the
other redemption procedures set forth in this Prospectus. Institutional
accounts (certain corporations, bank trust departments, government
entities, and qualified retirement plans which qualify to purchase
shares at net asset value pursuant to the terms of this Prospectus)
which wish to execute redemptions in excess of $50,000 must complete an
Institutional Telephone Privileges Agreement which is available from
Franklin's Institutional Services Department by telephoning 1-800/321-
8563.
Redeeming Shares Through Securities Dealers
The Fund will accept redemption orders by telephone or other means of
electronic transmission from securities dealers who have entered into a
dealer or similar agreement with Distributors. This is known as a
repurchase. The only difference between a normal redemption and a
repurchase is that if the shareholder redeems shares through a dealer,
the redemption price will be the net asset value next calculated after
the shareholder's dealer receives the order which is promptly
transmitted to the Fund, rather than on the day the Fund receives the
shareholder's written request in proper form. These documents, as
described in the preceding section, are required even if the
shareholder's securities dealer has placed the repurchase order. After
receipt of a repurchase order from the dealer, the Fund will still
require a signed letter of instruction and all other documents set
forth above. A shareholder's 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 the shareholder's 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 a shareholder's best interest to have the required documentation
completed and forwarded to the Fund as soon as possible. The
shareholder's dealer may charge a fee for handling the order. The SAI
contains more information on the redemption of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers on qualified
investments of $1 million or more, a contingent deferred sales charge
of 1% applies to redemptions of those investments within 12 months of
the calendar month of their purchase. The charge is 1% of the lesser of
the value of the shares redeemed (exclusive of reinvested dividends and
capital gain distributions) or the total cost of such shares, and is
retained by Distributors. In determining if a charge applies, shares
not subject to a contingent deferred sales charge are deemed to be
redeemed first, in the following order: (i) Shares representing amounts
attributable to capital appreciation of those shares held less than 12
months; (ii) shares purchased with reinvested dividends and capital
gain distributions; and (iii) other shares held longer than 12 months;
and followed by any shares held less than 12 months, on a "first in,
first out" basis.
The contingent deferred sales charge is waived for: exchanges;
distributions to participants in Trust Company qualified retirement
plans due to death, disability or attainment of age 591U2; tax-free
returns of excess contributions to employee benefit plans, including
those due to termination or plan transfer; distributions from employee
benefit plans; redemptions through a Systematic Withdrawal Plan set up
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); and redemptions
initiated by the Fund due to a shareholder's account falling below the
minimum specified account size.
Requests for redemptions for 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. In
addition, 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 invested by the
shareholder, depending on fluctuations in the market value of
securities owned by the Fund.
Retirement Accounts
Retirement account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To
liquidate a retirement account, a shareholder or securities dealer may
call Franklin's Retirement Plans Department to obtain the necessary
forms.
Other
For any information required about a proposed liquidation, a
shareholder may call Franklin's Shareholder Services Department or the
securities dealer may call Franklin's Dealer Services Department.
Telephone Transactions
- -----------------------------------------------------------------------
Shareholders of the Fund and their investment representative of record,
if any, may be able to execute various transactions by calling Investor
Services at 1-800/632-2301.
All shareholders will be able 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, and (iv) exchange Fund shares as described in this
Prospectus by telephone. In addition, shareholders who complete and
file an Agreement as described under "How to Sell Shares of the Fund -
Redemptions by Telephone" 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 by 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 the shareholder caused by an
unauthorized transaction. Shareholders 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 Trust Company retirement accounts. To assure compliance with all
applicable regulations, special forms are required for any
distribution, redemption, or dividend payment. 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. Changes to dividend options must also be made in
writing.
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 for Franklin accounts or 1-800/354-9191 (press "2" when
prompted to do so) for Templeton accounts.
General
During periods of drastic economic or market changes, it is possible
that the telephone transaction privileges will be difficult to execute
because of heavy telephone volume. In such situations, shareholders may
wish to contact their investment representative for assistance, or to
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 the inability of a shareholder to execute a telephone
transaction.
The telephone transaction privilege may be modified or discontinued by
the Fund at any time upon 60 days' written notice to shareholders
Valuation of Fund Shares
- -----------------------------------------------------------------------
The net asset value per share of the Fund is determined as of 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, which includes the
maximum sales charge of the Fund).
The net asset value per share of the Fund is determined in the
following manner: The aggregate of all liabilities, including, without
limitation, the current market value of any outstanding options written
by the Fund, accrued expenses and taxes and any necessary reserves is
deducted from the aggregate gross value of all assets, and the
difference is divided by the number of shares of the Fund outstanding
at the time. 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
for which market quotations are readily available are valued within the
range of the most recent bid and ask prices as obtained from one or
more dealers that make markets in the securities. 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 sales 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. 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 of Directors. All money market
instruments with a maturity of more than 60 days are valued at current
market, as discussed above. All money market instruments with a
maturity of 60 days or less are valued at their amortized cost, which
the Board of Directors has determined in good faith constitutes fair
value for purposes of complying with the 1940 Act. This valuation
method will continue to be used until such time as the directors
determine that it does not constitute fair value for such purposes.
With the approval of directors, the Fund may utilize a pricing service,
bank or securities dealer to perform any of the above described
functions.
How to Get Information Regarding an Investment in the Fund
- -----------------------------------------------------------------------
Any questions or communications regarding a shareholder's account
should be directed to Investor Services at the address shown on the
back cover of this Prospectus.
From a touch-tone phone, shareholders may obtain current price, yield
or performance information specific to a fund in the Franklin Funds by
calling the automated Franklin TeleFACTS system (day or night) at 1-
800/247-1753. Information about the Fund may be accessed by entering
Fund Code 09 followed by the # sign, when requested to do so by the
automated operator. The TeleFACTS system is also available for
processing exchanges. See "Exchange Privilege."
To assist shareholders and securities dealers wishing to speak directly
with a representative, the following is a list of the various Franklin
departments, telephone numbers and hours of operation to call. The same
numbers may be used when calling from a rotary phone:
<TABLE>
<CAPTION>
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
- -------------------------------------------------------------------------
<S> <C> <C>
Shareholder Services 1-800/632-2301 6:00a.m. to 5:00p.m.
Dealer Services 1-800/524-4040 6:00a.m. to 5:00p.m.
Fund Information 1-800/DIAL BEN 6:00a.m. to 8:00p.m.
8:30a.m. to 5:00p.m.
(Saturday)
Retirement Plans 1-800/527-2020 6:00a.m. to 5:00p.m.
TDD (hearing impaired) 1-800/851-0637 6:00a.m. to 5:00p.m.
</TABLE>
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.
Performance
- -----------------------------------------------------------------------
Advertisements, sales literature and communications to shareholders may
contain various measures of the Fund's performance, including current
yield, various expressions of total return and current distribution
rate. They may occasionally cite statistics to reflect its 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 (offering price includes sales charge)
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.
Yield which is calculated according to a formula prescribed by the SEC
(see 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 are reflected in the current
distribution rate, which may be quoted to shareholders. 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 premium income from option writing, and
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 yield, distribution rate or total return may be in any
future period. Additional information is contained in the Fund's annual
report, which is available without charge upon request.
General Information
- -----------------------------------------------------------------------
Reports to Shareholders
The Fund's fiscal year ends September 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. 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 Fund's
Annual Report to Shareholders and the SAI.
Organization
The authorized capital stock of the Custodian Funds consists of ten
billion shares of Capital Stock of $0.01 par value, 9,900,000,000 of
which has been authorized by the Board of Directors to be issued in
five separate series, 3,100,000,000 of which have been designated as
Fund shares. The Board of Directors is empowered by the Charter to
issue other series of Capital Stock and to increase or decrease the
number, but not below that at the time outstanding.
The assets received for the issue or sale of each series of the Capital
Stock and all income, earnings, profits and proceeds thereof, subject
only to the rights of creditors, are especially allocated to such
series, and constitute the underlying assets of such series. The
underlying assets of each series are required to be segregated on the
books of account, and are to be charged with the liabilities in respect
to such series and with a share of the general liabilities of the
Custodian Funds. Liabilities in respect to any two or more series are
to be allocated in proportion to the asset value of the respective
series except where direct expenses can otherwise be fairly allocated.
The Board of Directors has the right to determine which liabilities are
allocable to a given series, and which are general or allocable to two
or more series. In the event of the dissolution or liquidation of the
Custodian Funds, the registered holders of the Capital Stock of any
series are entitled to receive as a class the underlying assets of such
series available for distribution to shareholders.
Voting Rights
Shares of Capital Stock entitle their holders to one vote per share;
however, votes are made by series on matters affecting an individual
series. Shares have noncumulative voting rights, which means that in
all elections of directors, holders of more than 50% of the shares
voting can elect 100% of the directors 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 of Directors. Shares have
no preemptive or subscription rights and are fully transferable. There
are no conversion rights; however, holders of shares of any series may
reinvest all or any portion of the proceeds from the redemption or
repurchase of such shares into shares of any other series as described
under "Exchange Privilege."
Shareholders' Meetings
The Fund does not intend to hold annual meetings. The Fund may,
however, hold a meeting 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 a majority of the Board
of Directors or by shareholders holding at least ten percent of the
shares entitled to vote at the meeting for the purpose of voting upon
the removal of directors, in which case shareholders may receive
assistance in communicating with other shareholders such as that
provided in Section 16(c) of the 1940 Act. In addition, Maryland
General Corporation Law provides that a special meeting may be called
by a majority of the Board of Directors or by the written request of
shareholders holding at least 25% of the shares entitled to vote at the
meeting.
Redemptions by the Fund
The Fund reserves the right to redeem, at net asset value, shares of
any shareholder whose account has a value of less than $50, but only
where the value of such account has been reduced by the shareholder's
prior voluntary redemption of shares and has been inactive (except for
the reinvestment of distributions) for a period of at least six months,
provided advance notice is given to the shareholder. More information
is included in the SAI.
Other Information
Distribution or redemption checks sent to shareholders 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 to the shareholder caused by the shareholder's failure to cash
such check(s).
"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.
Account Registrations
- -----------------------------------------------------------------------
An account registration should reflect the investor's 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, a shareholder may transfer an account in the Fund
carried in "street" or "nominee" name by the shareholder's 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 the
shareholder's delivering securities dealer. To effect the transfer, a
shareholder should instruct the securities dealer to transfer the
account to a receiving securities dealer and sign any documents
required by the securities dealer(s) 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 the shareholder's
delivering securities dealer. In the future it may be possible to
effect such transfers electronically through the services of the NSCC.
The Fund may conclusively accept instructions from an owner or the
owner's nominee listed in publicly available nominee lists, regardless
of whether the account was initially registered in the name of or by
the owner, the nominee, or both. If a securities dealer or other
representative is of record on an investor's account, the investor 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 the Shareholder
Services Agent, and to have authorized them to execute the instructions
without further inquiry. At the present time, such services which are
available, or which are anticipated to be made available in the near
future, 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 Internal Revenue Service ("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. A shareholder may also be subject to backup withholding if
the IRS or the shareholder's securities dealer notifies the Fund that
the number furnished by the shareholder is incorrect or that the
shareholder is 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 the shareholder 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.
Portfolio Operations
- -----------------------------------------------------------------------
The following persons are primarily responsible for the day-to-day
management of the Fund's portfolio: Mr. Charles B. Johnson since 1957,
and Mr. Matt Avery and Mr. Ian Link since 1989.
Charles B. Johnson
Senior Portfolio Manager
Franklin Advisers, Inc.
Mr. Johnson holds a Bachelor of Arts degree in economics and political
science from Yale University. He has been with Advisers since 1957. Mr.
Johnson is a member of several securities industry-related committees
and associations.
Matt Avery
Portfolio Manager
Franklin Advisers, Inc.
Mr. Avery has a Master's Degree from U.C.L.A. Graduate School of
Management and a Bachelor of Science degree in industrial engineering
from Stanford University. He has been in the securities industry since
1982, with Advisers since 1987.
Ian Link
Portfolio Manager
Franklin Advisers, Inc.
Mr. Link has a Bachelor of Arts degree in economics from the University
of California at Davis and recently became a Chartered Financial
Analyst. Mr. Link joined Advisers in 1989. He is a member of several
securities industry-related committees and associations.
Appendix
- -----------------------------------------------------------------------
Description of Moody's corporate bond ratings:
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt-edged." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have predominantly
speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad
times over the future. Uncertainty of position characterizes bonds in
this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect
to principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
Description of S&P Corporation's
corporate bond ratings:
AAA - This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay
principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the
majority of instances they differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay principal and
interest for bonds in this category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the
terms of the obligations. BB indicates the lowest degree of speculation
and CC the highest degree of speculation. While such bonds will likely
have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions.
*The limit on compensation for determining SEP and qualified plan
contributions is reduced from $235,840 in 1993 to $150,000 in 1994 and
1995. The new $150,000 limit will be adjusted for inflation, but only
in $10,000 increments.
59
U.S. Government
Securities Series
Franklin Custodian Funds, Inc.
FRANKLIN LOGO
PROSPECTUS February 1, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
The U.S. Government Securities Series (the "Fund") is a diversified
series of Franklin Custodian Funds, Inc. ("Custodian Funds"), an open-
end management investment company. The primary investment objective of
the Fund is income through investment in obligations of the U.S.
government or its instrumentalities. At the present time, the assets of
the Fund are invested in obligations of the Government National
Mortgage Association ("Ginnie Maes" or "GNMA"). This Prospectus is
intended to set forth in a clear and concise manner information about
the Fund that a prospective investor should know before investing.
After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of
shares and other items which the prospective investor will find useful
to have.
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.
This Prospectus pertains only to the U.S. Government Securities Series.
A separate Prospectus, also dated February 1, 1995, as may be amended
from time to time, describes all five series of Custodian Funds and is
incorporated herein by reference. A Statement of Additional Information
("SAI") concerning Custodian Funds dated February 1, 1995, 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
some investors. It has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated herein by reference. A copy is
available without charge from the Fund or the Fund's principal
underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"), at
the address or telephone number shown above.
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.
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.
Contents Page
- --------------------------------- ----
Expense Table 2
Financial Highlights 4
About the Fund 5
Investment Objective
and Policies of the Fund 5
Management of the Fund 7
Distributions to Shareholders 9
Taxation of the Fund
and Its Shareholders 10
How to Buy Shares of the Fund 11
Purchasing Shares of the Fund in
Connection with Retirement Plans
Involving Tax-Deferred Investments 17
Other Programs and Privileges
Available to Fund Shareholders 18
Exchange Privilege 20
How to Sell Shares of the Fund 22
Telephone Transactions 26
Valuation of Fund Shares 27
How to Get Information Regarding
an Investment in the Fund 27
Performance 28
General Information 29
Account Registrations 30
Important Notice Regarding
Taxpayer IRS Certifications 31
Portfolio Operations 32
Expense Table
- ---------------------------------------------------------------------------
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder will bear directly or
indirectly in connection with an investment in the Fund. These figures
are based on aggregate operating expenses of the Fund for the fiscal
year ended September 30, 1994.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.25%
Maximum Sales Charge Imposed on Reinvested Dividends NONE
Deferred Sales Charge NONE*
Redemption Fees NONE
Exchange Fee (per transaction) $5.00**
</TABLE>
*Investments of $1 million or more are not subject to an initial sales
charge; however, a contingent deferred sales charge of 1% is imposed on
certain redemptions within 12 months of the calendar month following
such investments. See "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge."
**$5.00 fee is only imposed on Timing Accounts as described under
"Exchange Privilege." All other exchanges are processed without a fee.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
(as a percentage of average net assets)
<S> <C> <C>
Management Fees 0.45%
12b-1 Fees 0.07%+***
Other Expenses:
Shareholder Service Costs 0.03%
Reports to Shareholders 0.03%
------
Other 0.01%
------
Total Other Expenses 0.07%
---------
Total Fund Operating Expenses 0.59%+
=========
</TABLE>
***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. See "Plan of Distribution" under
"Management of the Fund" in this Prospectus.
+Annualized. Actual 12b-1 fees incurred by the Fund for the period May
1, 1994 through September 30, 1994 were .03%.
Investors should be aware that the above table is not intended to
reflect in precise detail the fees and expenses associated with an
individual's own investment in the Fund. Rather, the table has been
provided only to assist investors in gaining a more complete
understanding of fees, charges and expenses. For a more detailed
discussion of these matters, investors should refer to the appropriate
sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the
expenses, including the initial 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. As noted in the table above, the Fund charges no redemption
fees:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C>
$48 $61 $74 $113
</TABLE>
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES, AS
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
shareholders as a result of their investment in the Fund. In addition,
federal regulations require the example to assume an annual return of
5%, but the Fund's actual return may be more or less than 5%.
Financial Highlights
- -----------------------------------------------------------------------
Set forth below is a table containing the financial highlights for a
share of the Fund throughout the ten fiscal years in the period ended
September 30, 1994. The information for each of the five fiscal years
in the period ended September 30, 1994 has been audited by Coopers &
Lybrand L.L.P., independent auditors, whose audit report appears in the
financial statements in the Fund's SAI. The remaining figures, which
are also audited, are not covered by the auditor's current report. See
the discussion "Reports to Shareholders" under "General Information."
<TABLE>
<CAPTION>
Per Share Operating PerformanceRatios/Supplemental Data
- -----------------------------------------------------------------------------------------------------------------
Net Asset Net Realized Dividends
Year Value Net Unrealized Total From From Net Distributions
Ended Beginning Investment Gain (Loss) Investment Investment From Capital Total
Sep. 30 of Year Income on Securities Operations Income Gains Distribution
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Securities Fund:
1985 $6.85 $0.880 $ 0.500 $ 1.380 $(0.900) $ -- $(0.900)
1986 7.33 0.790 0.165 0.955 (0.875) -- (0.875)
1987 7.41 0.698 (0.500) 0.198 (0.724) (0.014) (0.738)
1988 6.87 0.691 0.115 0.806 (0.696) -- (0.696)
1989 6.98 0.688 (0.072) 0.616 (0.696) -- (0.696)
1990 6.90 0.668 (0.020) 0.648 (0.688) -- (0.688)
1991 6.86 0.653 0.287 0.940 (0.660) -- (0.660)
1992 7.14 0.609 0.106 0.715 (0.595) -- (0.595)
1993 7.26 0.557 (0.056) 0.501 (0.561) -- (0.561)
1994 7.20 0.500 (0.678) (0.178) (0.512) -- (0.512)
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Per Share Operating PerformanceRatios/Supplemental Data
- --------------------------------------------------------------------------------------------------
Net Asset Net Assets Ratio of Ratio of
Year Value at End Expenses Net Income Portfolio
Ended at End Total of Year to Average to Average Turnover
Sep. 30 of Year Return+ (in 000's) Net Assets Net Assets Rate*
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Securities Fund:
1985 $7.33 20.83% $ 6,512,982 0.57% 11.06% 9.27%
1986 7.41 13.25 14,361,682 0.54 9.93 36.02
1987 6.87 2.22 13,024,437 0.52 9.49 52.92
1988 6.98 11.77 12,112,775 0.53 9.85 34.14
1989 6.90 8.95 11,260,310 0.52 9.99 25.70
1990 6.86 9.47 11,143,333 0.52 9.72 18.23
1991 7.14 13.97 12,426,910 0.52 9.26 22.14
1992 7.26 10.14 13,617,157 0.53 8.46 38.75
1993 7.20 6.86 14,268,516 0.52 7.71 43.10
1994 6.51 (2.75) 11,668,747 0.55 7.37 18.28
- --------------------------------------------------------------------------------------------------
</TABLE>
+Total return measures the change in value of an investment over the
periods indicated. It does not include the maximum 4.25% initial sales
charge and assumes reinvestment of dividends at the offering price and
capital gains, if any, at net asset value. Effective May 1, 1994, with
the implementation of the Rule 12b-1 distribution plan, the existing
sales charge on reinvested dividends has been eliminated.
*Maturity of U.S. government issues and the reinvestment of the
proceeds thereof are considered as purchases and sales of securities in
computing the portfolio turnover rate of the Fund.
About the Fund
- -----------------------------------------------------------------------
The Fund is a diversified series of Custodian Funds, an open-end
management investment company, commonly called a "mutual fund" and
registered with the SEC under the 1940 Act. Custodian Funds was
organized under the laws of Delaware in 1947 and reincorporated under
the laws of Maryland in 1979. Custodian Funds has only one class of
capital stock, which is issued in five separate series: Growth Series,
DynaTech Series, Utilities Series, Income Series, and U.S. Government
Securities Series. According to statistics published by Lipper
Analytical Services, Inc., as of September 30, 1994, the U.S.
Government Securities Series is still the largest non-money market
government securities mutual fund.
Shares of the Fund may be purchased (minimum investment of $100
initially and $25 thereafter) at the current public offering price,
which is equal to the Fund's net asset value (see "Valuation of Fund
Shares") plus a sales charge not exceeding 4.25% of the offering price,
depending upon the amount invested. (See "How to Buy Shares of the
Fund.")
Investment Objective
and Policies of the Fund
- -----------------------------------------------------------------------
The Fund's principal investment objective is income through investment
in a portfolio limited to securities which are obligations of the U.S.
government or its instrumentalities. The objective is a fundamental
policy of the Fund and may not be changed without shareholder approval.
U.S. government securities include, but are not limited to, U.S.
Treasury bonds, notes and bills, Treasury certificates of indebtedness
and securities issued by instrumentalities of the U.S. government.
Other than investments in short-term U.S. Treasury securities, the
assets of the Fund are currently invested solely in obligations of the
Government National Mortgage Association (popularly called "GNMAs" or
"Ginnie Maes").
The Fund believes that its investment policies, as stated in this
Prospectus and the SAI, make the Fund a permissible investment for
federal credit unions, based on the Fund's understanding of the laws
and regulations governing credit union regulations as of September 30,
1994. CREDIT UNION INVESTORS ARE ADVISED TO CONSULT THEIR OWN LEGAL
ADVISERS TO DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND
CONSTITUTE LEGAL INVESTMENTS FOR THEM. Please see the SAI ("The Fund's
Investment Objectives and Restrictions" -- "Credit Union Investment
Regulations") for details.
Information about GNMAs
GNMAs are mortgage backed securities representing part ownership of a
pool of mortgage loans. GNMA Certificates differ from bonds in that
principal is scheduled to be paid back by the borrower over the length
of the loan rather than returned in a lump sum at maturity. The Fund
purchases GNMA Certificates for which principal and interest are
guaranteed. The Fund also purchases "variable rate" GNMA Certificates
and may purchase other types which may be issued with GNMA's guarantee.
The GNMA guarantee of principal and interest on GNMA Certificates is
backed by the full faith and credit of the United States government.
GNMA may borrow U.S. Treasury funds to the extent needed to make
payments under its guarantee.
GNMA Certificates are created by an "issuer," which is a Federal
Housing Administration ("FHA") approved lender, such as mortgage
bankers, commercial banks and savings and loan associations, which also
meet criteria imposed by GNMA. The issuer assembles a specific pool of
mortgages insured by either the FHA or the Farmers Home Administration
or guaranteed by the Veterans Administration. Upon application by the
issuer, and after approval by GNMA of the pool, GNMA provides its
commitment for the guarantee of principal and interest on the GNMA
Certificates secured by the mortgages included in the pool. The GNMA
Certificates, endorsed by GNMA, are then sold by the issuer through
securities dealers.
When mortgages in the pool underlying a GNMA Certificate are prepaid by
mortgagees or as a result of foreclosure, such principal payments are
passed through to the Certificate holders (such as the Fund).
Accordingly, the life of the GNMA Certificate is likely to be
substantially shorter than the stated maturity of the mortgages in the
underlying pool. Because of such variation in prepayment, it is not
possible to accurately predict the life of a particular GNMA
Certificate.
Generally, GNMA Certificates bear a "coupon rate," which represents the
effect of FHA-Veterans Administration mortgage rates for the underlying
pool of mortgages, less 0.5% which constitutes the GNMA and issuer's
fees. For providing its guarantee, GNMA currently receives an annual
fee of 0.06% of the outstanding principal on Certificates backed by
single-family dwelling mortgages, and the issuer currently receives an
annual fee of 0.44% for assembling the pool and for passing through
monthly payments of interest and principal.
Payments to holders of GNMA Certificates consist of the monthly
distributions of interest and principal less the GNMA and issuer's
fees. The portion of the monthly payment which represents a return of
principal will be reinvested by the Fund in then-available GNMA
obligations which may bear interest at a rate higher or lower than the
obligation from which the payment was received. The actual yield to be
earned by the holder of a GNMA Certificate is calculated by dividing
such payments by the purchase price paid for the GNMA Certificate
(which may be at a premium or a discount from the face value of the
Certificate). Unpredictable prepayments of principal, however, can
greatly change realized yields. In a period of declining interest rates
it is more likely that mortgages contained in GNMA pools will be
prepaid thus reducing the effective yield. Moreover, any premium paid
on the purchase of a GNMA Certificate will be lost if the obligation is
prepaid. In periods of falling interest rates this potential for pre-
payment may reduce the general upward price increase of GNMA
Certificates which might otherwise occur. As with other debt
instruments, the price of GNMA Certificates is likely to decrease in
times of rising interest rates. Price changes of the GNMA Certificates
held by the Fund have a direct impact on the net asset value per share
of the Fund.
The Fund's investments are continually monitored and changes are made
as market conditions warrant. However, the Fund does not engage in the
trading of securities for the purpose of realizing short-term profits.
When interest rates rise, the value of a GNMA Certificate will
generally decline. Conversely, when rates fall, the GNMA Certificate
value may rise, although not as much as other debt issues due to the
prepayment feature.
Although the securities in the Fund's portfolio are guaranteed as to
principal and interest by the U.S. government or its instrumentalities,
the market value of these securities, upon which daily net asset value
is based, may fluctuate based upon such factors as changing interest
rates. As a result, the price per share the shareholder receives on
redemption may be more or less than the price paid for the shares. The
dividends per share paid by the Fund may also vary.
Some of the Other Investment
Policies of the Fund
The Fund does not borrow money or mortgage or pledge any of its assets
except that it may borrow for temporary or emergency purposes in an
amount up to 5% of total asset value. The Fund does not currently
engage in option transactions or repurchase agreements. The Fund does
not loan its securities or acquire illiquid securities or the
securities of foreign issuers.
The Fund may purchase and sell GNMA Certificates on a "To-Be-Announced"
("TBA") and "delayed delivery" basis. These transactions are
arrangements under which the Fund may purchase securities with payment
and delivery scheduled for a future time up to 60 days after purchase.
The transactions are subject to market fluctuation and are subject to
the risk that the value or yields at delivery may be more or less than
the purchase price or the yields available when the transaction was
entered into. In TBA and delayed delivery transactions, the Fund relies
on the seller to complete the transaction. The other party's failure to
do so may cause the Fund to miss a price or yield considered
advantageous. Securities purchased on a TBA or delayed delivery basis
do not generally earn interest until their scheduled delivery date. The
Fund is not subject to any percentage limit on the amount of its assets
which may be invested in TBA purchase obligations. More information
concerning these transactions is included in the SAI.
The Fund is subject to a number of additional investment restrictions,
some of which may be changed only with the approval of shareholders,
which limit its activities to some extent. For a list of these
restrictions and more information concerning the policies discussed
herein, please see the SAI.
How Shareholders 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 the shareholder owns will increase. If the securities
owned by the Fund decrease in value, the value of the shareholder's
shares will also decline. In this way, shareholders participate in any
change in the value of the securities owned by the Fund.
In particular, changes in interest rates will affect the value of the
Fund's portfolio and thus its share price. Increased rates of interest
which frequently accompany higher inflation and/or a growing economy
are likely to have a negative effect on the value of Fund shares.
History reflects both increases and decreases in the prevailing rate of
interest and these may reoccur unpredictably in the future.
Management of the Fund
- -----------------------------------------------------------------------
The Board of Directors of Custodian Funds has the primary
responsibility for the overall management of the Fund and for electing
the officers of Custodian Funds who are responsible for administering
its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin
Resources, Inc. ("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. Through its subsidiaries, Resources is
engaged in various aspects of the financial services industry. Advisers
acts as investment manager or administrator to 33 U.S. registered
investment companies (111 separate series) with aggregate assets of
over $73 billion.
Pursuant to the management agreement, the Manager supervises and
implements the Fund's investment activities and provides certain
administrative services and facilities which are necessary to conduct
the Fund's business. During the fiscal year ended September 30, 1994,
fees totaling 0.45% of the average monthly net assets of the Fund were
paid to Advisers.
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
"The Fund's Policies Regarding Brokers Used on Portfolio Transactions"
in the SAI.
Shareholder accounting and many of the clerical functions for the Fund
are performed by Franklin/Templeton Investor Services, Inc. ("Investor
Services" or "Shareholder Services Agent") in its capacity as transfer
agent and dividend-paying agent. Investor Services is a wholly-owned
subsidiary of Resources.
During the fiscal year ended September 30, 1994, the expenses borne by
the Fund, including fees paid to Advisers and to Investor Services
totaled 0.55% of the average monthly net assets of the Fund.
Plan of Distribution
The Fund has adopted a distribution plan (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 Custodian Funds on behalf of the Fund,
Distributors or its affiliates. The maximum amount which the Fund may
pay to Distributors or others for such distribution expenses is 0.15%
per annum of the average daily net assets of the Fund, payable on a
quarterly basis. All expenses of distribution and marketing in excess
of 0.15% 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, including a discussion of the Board's policies with regard
to the amount of Plan fees, please see the SAI.
Distributions to Shareholders
- -----------------------------------------------------------------------
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income 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 net capital gains from the prior fiscal year. These
distributions, when made, will generally be fully taxable to the Fund's
shareholders. 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 of Directors, without prior
notice to or approval by shareholders, the Fund's current policy is to
declare income dividends monthly for shareholders of record on the last
business day of the month, payable on or about the 15th day of the
following 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 of Directors. Fund shares are quoted ex-dividend on the
first business day following the record date. The Fund does not pay
"interest" or guarantee any fixed rate of return on an investment in
its shares. The Fund may determine to defer the December 31 record date
to a date shortly thereafter in January for tax or other operational
reasons.
In order to be entitled to a dividend, an investor must have acquired
Fund shares prior to the close of business on the record date. An
investor considering purchasing Fund shares shortly before the record
date of a distribution 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 the shareholder's
investment, it may be taxable as dividend income or capital gain.
Dividend Reinvestment
Unless requested otherwise in writing or on the Shareholder
Application, income dividends and capital gain distributions, if any,
will be automatically reinvested in the shareholder's account in the
form of additional shares, valued at the closing net asset value
(without sales charge) on the dividend reinvestment date. Shareholders
have the right to change their election with respect to the receipt of
distributions by notifying the Fund, but any such change will be
effective only as to distributions for which the record date is seven
or more business days after the Fund has been notified. See the SAI for
more information.
Many of the Fund's shareholders receive their distributions in the form
of additional shares. This is a convenient way to accumulate additional
shares and maintain or increase the shareholder's earnings base. Of
course, any shares so acquired remain at market risk.
Distributions in Cash
A shareholder may elect to receive income dividends, or both income
dividends and capital gain distributions, in cash. By completing the
"Special Payment Instructions for Distributions" section of the
Shareholder Application included with this Prospectus, a shareholder
may direct the selected distributions to another fund in the Franklin
Group of Funds(registered trademark) or the Templeton Group, to another
person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House, the
payments may be made automatically by electronic funds transfer. If
this last option is requested, the shareholder should allow at least 15
days for initial processing. Dividends which may be paid in the interim
will be sent to the address of record. Additional information regarding
automated fund transfers may be obtained from Franklin's Shareholder
Services Department. Dividend and capital gain distributions are
eligible for investment in another fund in the Franklin Group of Funds
or the Templeton Group at Net Asset Value. See "How to Buy Shares of
the Fund."
Taxation of the Fund and Its Shareholders
- -----------------------------------------------------------------------
The Fund intends to continue to qualify for treatment as a regulated
investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (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.
For federal income tax purposes, any income dividends which the
shareholder receives 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 the
shareholder has 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 the shareholder has owned Fund shares
and regardless of whether such distributions are received in cash or in
additional shares.
For corporate shareholders, none of the dividends paid by the Fund will
qualify for the dividends-received deduction.
Pursuant to the Code, certain distributions which are declared in
October, November or December but which, for operational reasons, may
not be paid to the shareholder until the following January, will be
treated for tax purposes as if received by the shareholder on December
31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or
exchange of the Fund's shares, held for six months or less, will be
treated as a long-term capital loss to the extent of capital gain
dividends received with respect to such shares. 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 ninety (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 Group of
Funds or the Templeton Group 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.
Many states grant tax-free status to dividends paid to shareholders of
mutual funds from interest income earned by the fund from direct
obligations of the U.S. government, subject in some states to minimum
investment requirements that must be met by the Fund. Investments in
GNMA securities do not generally qualify for tax-free treatment. At the
end of each calendar year, the Fund will provide shareholders with the
percentage of any dividends paid which may qualify for such tax-free
treatment. Shareholders should consult their own tax advisors with
respect to the application of their state and local income tax laws to
these distributions.
The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will promptly, after the
close of each calendar year, advise them of the tax status for federal
income tax purposes of such dividends and distributions.
Shareholders who are not U.S. persons for purposes of federal income
taxation should consult with their financial or tax advisors regarding
the applicability of U.S. withholding or other taxes to distributions
received by them from the Fund and the application of foreign tax laws
to these distributions.
Shareholders should also consult their tax advisors with respect to the
applicability of any state and local intangible property or income
taxes on their shares of the Fund and distributions and redemption
proceeds received from the Fund.
How to Buy Shares of the Fund
- -----------------------------------------------------------------------
Shares of the Fund are continuously offered through securities dealers
which execute an agreement with Distributors, the principal underwriter
of the Fund's shares. The use of the term "securities dealer" shall
include other financial institutions which pursuant to an agreement
with Distributors (directly or through affiliates) handle customer
orders and accounts with the Fund. Such reference however is for
convenience only and does not indicate a legal conclusion of capacity.
The minimum initial investment is $100 and subsequent investments must
be $25 or more. These minimums may be waived when the shares are
purchased through plans established by the Franklin Templeton Group.
The Fund and Distributors reserve the right to refuse any order for the
purchase of shares.
The Fund may impose a $10 charge for each returned item, against any
shareholder account which, in connection with the purchase of Fund
shares submits a check or a draft which is returned unpaid to the Fund.
Purchase Price of Fund Shares
Shares of the Fund are offered at the public offering price, which is
the net asset value per share plus a sales charge, next computed (1)
after the shareholder's securities dealer receives the order which is
promptly transmitted to the Fund or (2) after receipt of an order by
mail from the shareholder directly in proper form (which generally
means a completed Shareholder Application accompanied by a negotiable
check). The sales charge is a variable percentage of the offering price
depending upon the amount of the sale. On orders for 100,000 shares or
more, the offering price will be calculated to four decimal places. On
orders for less than 100,000 shares, the offering price will be
calculated to two decimal places using standard rounding criteria. A
description of the method of calculating net asset value per share is
included under the caption "Valuation of Fund Shares."
Set forth below is a table of total sales charges or underwriting
commissions and dealer concessions.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Total Sales Charge
----------------------------------------------------------
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*
<S> <C> <C> <C>
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more NONE NONE (see below)**
- -------------------------------------------------------------------------------------------------
</TABLE>
*Financial institutions or their affiliated brokers may receive an
agency transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors to dealers who
initiate and are responsible for purchases of $1 million or more: .75%
on sales of $1 million but less $2 million, plus 0.60% 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. Dealer
concession breakpoints are reset every 12 months for purposes of
additional purchases.
Distributors, or one of its affiliates, may make payments, out of its
own resources, of up to 0.75% of the amount purchased to securities
dealers who initiate and are responsible for purchases made at net
asset value by non-designated retirement plans, and up to 1% of the
amount purchased 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), certain trust company and
trust departments of banks and certain retirement plans of
organizations with collective retirement plan assets of $10 million or
more. See "Special Net Asset Value Purchases" as described under
"Purchases at Net Asset Value" and as set forth in the SAI.
No initial sales charge applies on investments of $1 million or more,
but a contingent deferred sales charge of 1% is imposed on certain
redemptions within 12 months of the calendar month of the purchase. See
"How to Sell Shares of the Fund - Contingent Deferred Sales Charge."
At the discretion of Distributors, all sales charges may at times be
allowed to the securities dealer. If 90% or more of the sales
commission is allowed, such dealer may be deemed to be an underwriter
as that term is defined in the Securities Act of 1933, as amended.
The size of a transaction which determines the applicable sales charge
on the purchase of Fund shares is determined by adding the amount of
the shareholder's current purchase plus the cost or current value
(whichever is higher) of a shareholder's existing investment in one or
more of the funds in the Franklin Group of Funds(registered trademark)
and the Templeton Group of Funds. Included for these aggregation
purposes are (a) the mutual funds in the Franklin Group of Funds except
Franklin Valuemark Funds and Franklin Government Securities Trust (the
"Franklin Funds"), (b) other investment products underwritten by
Distributors or its affiliates (although certain investments may not
have the same schedule of sales charges and/or may not be subject to
reduction) and (c) the U.S. mutual funds in the Templeton Group of
Funds except Templeton American Trust, Inc., Templeton Capital
Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund (the "Templeton Funds"). (Franklin Funds
and Templeton Funds are collectively referred to as the "Franklin
Templeton Funds.") Sales charge reductions based upon aggregate
holdings of (a), (b) and (c) above ("Franklin Templeton Investments")
may be effective only after notification to Distributors that the
investment qualifies for a discount.
Distributors or its affiliates, at their expense, may also provide
additional compensation to dealers in connection with sales of shares
of the Fund and other funds in the Franklin Group of Funds or the
Templeton Group. Compensation may include financial assistance to
dealers in connection with conferences, sales or training programs for
their employees, seminars for the public, advertising, sales campaigns
and/or shareholder services and programs regarding one or more of the
Franklin Group of Funds or the Templeton Group and other dealer-
sponsored programs or events. In some instances, this compensation may
be made available only to certain dealers whose representatives have
sold or are expected to sell significant amounts of such shares.
Compensation may include payment for travel expenses, including
lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business
nature. Dealers may not use sales of the Fund's shares to qualify for
this compensation to the extent such may be prohibited by the laws of
any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. None of the aforementioned
additional compensation is paid for by the Fund or its shareholders.
Certain officers and directors of the Fund are also affiliated with
Distributors. A detailed description is included in the SAI.
Quantity Discounts in Sales Charges
Shares may be purchased under a variety of plans which provide for a
reduced sales charge. To be certain to obtain the reduction of the
sales charge, the investor or the dealer should notify Distributors at
the time of each purchase of shares which qualifies for the reduction.
In determining whether a purchase qualifies for any of the discounts,
any Franklin Templeton Investments may be combined with those of the
investor's spouse and children under the age of 21. In addition, the
aggregate investments of a trustee or other fiduciary account (for an
account under exclusive investment authority) may be considered in
determining whether a reduced sales charge is available, even though
there may be a number of beneficiaries of the account.
In addition, an investment in the Fund may qualify for a reduction in
the sales charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is
higher) of existing Franklin Templeton Investments may be combined with
the amount of the current purchase in determining the sales charge to
be paid.
2. Letter of Intent. An investor may immediately qualify for a reduced
sales charge on a purchase of shares of the Fund by completing the
Letter of Intent section of the Shareholder Application (the "Letter of
Intent" or the "Letter"). By completing the Letter, the investor
expresses an intention to invest during the next 13 months a specified
amount which, if made at one time, would qualify for a reduced sales
charge and grants to Distributors a security interest in the reserved
shares and irrevocably appoints Distributors as attorney-in-fact with
full power of substitution to surrender for redemption any or all
shares for the purpose of paying any additional sales charge due.
Purchases under the Letter will conform with the requirements of Rule
22d-1 under the 1940 Act. The investor or the investor's securities
dealer must inform Investor Services or Distributors that this Letter
is in effect each time a purchase is made.
An investor (except for certain employee benefit plans described below)
acknowledges and agrees to the following provisions by completing the
Letter of Intent section of the Shareholder Application: Five percent
(5%) of the amount of the total intended purchase will be reserved in
shares of the Fund registered in the investor's name, to assure that
the full applicable sales charge will be paid if the intended purchase
is not completed. The reserved shares will be included in the total
shares owned as reflected on periodic statements; income and capital
gain distributions on the reserved shares will be paid as directed by
the investor. The reserved shares will not be available for disposal by
the investor until the Letter of Intent has been completed or the
higher sales charge paid. For more information, see "Additional
Information Regarding Purchases" in the SAI.
Group Purchases
An individual who is a member of a qualified group may also purchase
shares of the Fund at the reduced sales charge applicable to the group
as a whole. The sales charge is based upon the aggregate dollar value
of shares previously purchased and still owned by the group, plus the
amount of the current purchase. For example, if members of the group
had previously invested and still held $80,000 of Fund shares and now
were investing $25,000, the sales charge would be 3.50%. Information
concerning the current sales charge applicable to a group may be
obtained by contacting Distributors.
A "qualified group" is 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. A qualified group must have more than 10 members, be available
to arrange for group meetings between representatives of the Fund or
Distributors and the members, agree to include sales and other
materials related to the Fund in its publications and mailings to
members at reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to the
Fund.
If an investor selects a payroll deduction plan, subsequent investments
will be automatic and will continue until such time as the investor
notifies the Fund and the investor's employer to discontinue further
investments. Due to the varying procedures used to prepare, process and
forward the payroll deduction information to the Fund, there may be a
delay between the time of the payroll deduction and the time the money
reaches the Fund. The investment in the Fund will be made at the
offering price per share determined on the day that both the check and
payroll deduction data are received in required form by the Fund.
Purchases at Net Asset Value
Shares of the Fund may be purchased at net asset value (without the
imposition of a front and/or contingent deferred sales charge) by (1)
officers, directors, and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group, and by
their spouses and family members; (2) companies exchanging shares with
or selling assets pursuant to a merger, acquisition or exchange offer;
(3) insurance company separate accounts for pension plan contracts; (4)
accounts managed by the Franklin Templeton Group; (5) shareholders of
Templeton Institutional Funds, Inc. reinvesting redemption proceeds
from that fund under an employee benefit plan qualified under Section
401 of the Internal Revenue Code of 1986, as amended, in shares of the
Fund; (6) certain unit investment trusts and unit holders of such
trusts reinvesting their distributions from the trusts in the Fund; (7)
registered securities dealers and their affiliates, for their
investment account only, and (8) registered personnel and employees of
securities dealers, which have directly or through affiliates, signed
an agreement with Distributors, and by their spouses and family
members, in accordance with the internal policies and procedures of the
employing securities dealer.
Shares of the Fund may be purchased at net asset value by persons who
have redeemed, within the previous 120 days, their shares of the Fund
or another of the Franklin Templeton Funds which were purchased with a
sales charge or assessed a contingent deferred sales charge on
redemption. An investor may reinvest an amount not exceeding the
redemption proceeds. Credit will be given for any contingent deferred
sales charge paid on the shares redeemed. Shares of the Fund redeemed
in connection with an exchange into another fund (see "Exchange
Privilege") are not considered "redeemed" for this privilege. In order
to exercise this privilege, a written order for the purchase of shares
of the Fund must be received by the Fund or the Fund's Shareholder
Services Agent within 120 days after the redemption. The 120 days,
however, do not begin to run on redemption proceeds placed immediately
after redemption in a Franklin Bank Certificate of Deposit ("CD") until
the CD (including any rollover) matures. Reinvestment at net asset
value may also be handled by a securities dealer or other financial
institution, who may charge the shareholder a fee for this service. The
redemption is a taxable transaction but reinvestment without a sales
charge may affect the amount of gain or loss recognized and the tax
basis of the shares reinvested. If there has been a loss on the
redemption, the loss may be disallowed if a reinvestment in the same
fund is made within a 30-day period. Information regarding the possible
tax consequences of such a reinvestment is included in the tax section
of this Prospectus and the SAI.
Dividends and capital gains received in cash by the shareholder may
also be used to purchase shares of the Fund or of the Franklin
Templeton Funds at net asset value within 120 days of the payment date
of such distribution. To exercise this privilege, a written request to
reinvest the distribution must accompany the purchase order.
Additional information may be obtained from Shareholder Services at
1-800/632-2301. See "Distributions in Cash" under "Distributions
to Shareholders."
Shares of the Fund may be purchased at net asset value by investors who
have, within the past 60 days, redeemed an investment in an
unaffiliated mutual fund which charged the investor a contingent
deferred sales charge upon redemption and which has investment
objectives similar to those of the Fund.
Shares of the Fund may be purchased at net asset value by registered
investment advisors and/or their affiliated broker-dealers, who have
entered into a supplemental agreement with Distributors, on behalf of
their clients who are participating in a comprehensive fee program
(also known as a wrap fee program).
Shares of the Fund may be purchased at net asset value by anyone who
has taken a distribution from an existing retirement plan already
invested in the Franklin Group of Funds(registered trademark) or the
Templeton Group (including former participants of the Franklin/Templeton
Profit Sharing 401(k) plan) to the extent of such distribution.
In order to exercise this privilege a written order for the
purchase of shares of the Fund must be received by Franklin
Templeton Trust Company (the "Trust Company"), the Fund or
Investor Services, within 120 days after the plan distribution. A
prospectus outlining the investment objectives and policies of a fund
in which the shareholder wishes to invest may be obtained by calling
toll free at 1-800/DIAL BEN (1-800/342-5236).
Shares of the Fund may also be purchased at net asset value by 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"). SUCH INVESTORS SHOULD CONSULT THEIR
OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES
OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM. 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 its investment manager on
arbitrage rebate calculations. If an investment by an eligible
governmental authority at net asset value is made through a dealer who
has executed a dealer agreement with Distributors, Distributors or one
of its affiliates may make a payment, out of their own resources, to
such dealer in an amount not to exceed 0.25% of the amount invested.
Contact Franklin's Institutional Sales Department for additional
information.
Description of Special Net Asset Value Purchases.
Shares of the Fund may also be purchased at net asset value by certain
designated retirement plans, including profit sharing, pension, 401(k)
and simplified employee pension plans, subject to minimum requirements
with respect to number of employees or amount of purchase, which may be
established by Distributors. Currently those criteria require that the
employer establishing the plan have 200 or more employees or that the
amount invested or to be invested during the subsequent 13-month period
in the Fund or in any of the Franklin Templeton Investments totals at
least $1,000,000. Employee benefit plans not designated above or
qualified under Section 401 of the Code may be afforded the same
privilege if they meet the above requirements as well as the uniform
criteria for qualified groups previously described under Group
Purchases which enable Distributors to realize economies of scale in
its sales efforts and sales related expenses.
Shares of the Fund may be purchased at net asset value by trust
companies and bank trust departments for funds over which they exercise
exclusive discretionary investment authority and which are held in a
fiduciary, agency, advisory, custodial or similar capacity. Such
purchases are subject to minimum requirements with respect to amount of
purchase, which may be established by Distributors. Currently, those
criteria require that the amount invested or to be invested during the
subsequent 13-month period in this Fund or any of the Franklin
Templeton Investments must total at least $1,000,000. Orders for such
accounts will be accepted 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.
Shares of the Fund may be purchased at net asset value by trustees or
other fiduciaries purchasing securities for certain retirement plans of
organizations with collective retirement plan assets of $10 million or
more, without regard to where such assets are currently invested.
Refer to the SAI for further information.
General
Securities laws of states in which the Fund's shares are offered for
sale may differ from the interpretations of federal law, and banks and
financial institutions selling Fund shares may be required to register
as dealers pursuant to state law.
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments
Shares of the Fund may be used for retirement programs providing for
tax-deferred investments for both individuals and businesses. The Fund
may be used as an investment vehicle for an existing retirement plan,
or the Trust Company may provide the plan documents and trustee or
custodian services. A plan document must be adopted in order for a plan
to be in existence.
The Trust Company, an affiliate of Distributors, can serve as custodian
or trustee for various types of retirement plans. Brochures for each of
the plans sponsored by Franklin contain important information regarding
eligibility, contribution limits and IRS requirements. Please note that
separate applications, other than the one contained in this Prospectus,
must be used to establish a Trust Company retirement account. To obtain
a retirement plan brochure or application, call toll free 1-800/DIAL
BEN (1-800/342-5236).
The Franklin Templeton IRA is an individual retirement account in which
the contributions, annually limited to the lesser of $2,000 or 100% of
an individual's earned compensation*, accumulate on a tax-deferred
basis until withdrawn. Under the current tax law, individuals who (or
whose spouses) are covered by a company retirement plan (termed "active
participants") may be restricted in the amount they may claim as an IRA
deduction on their returns. The IRA deduction is gradually reduced to
the extent that a taxpayer's adjusted gross income exceeds certain
specified limits.
Two IRAs, with a combined limit of $2,250 or 100% of earned
compensation*, may be established by a married couple in which only one
spouse is a wage earner. The $2,250 may be split between the two IRAs,
so long as no more than $2,000 is contributed to either one for a given
tax year.
A Franklin Rollover IRA account is designed to maintain the tax-
deferred status of a qualifying distribution from an employer-sponsored
retirement plan, such as a 401(k) plan or qualified pension plan.
Additionally, if the eligible distribution is directly transferred to a
rollover IRA account, the distribution will be exempt from 20%
mandatory federal withholding.
The Franklin Simplified Employee Pension Plan (SEP-IRA) and Salary
Reduction Simplified Employee Pension Plan (SAR-SEP) are for use by
small businesses (generally 25 or fewer employees) to provide a
retirement plan for their employees and, at the same time, provide for
a tax-deduction to the employer. SEP-IRA contributions are made to an
employee's IRA, at the discretion of the employer, up to the lesser of
$30,000 or 15% of compensation* per employee. The SAR-SEP allows
employees to contribute a portion of their salary to an IRA on a pre-
tax basis through salary deferrals. The maximum annual salary deferral
limit for a SAR-SEP is the lesser of 15% of compensation (adjusted for
deferrals) or $9,240 (1995 limit; indexed for inflation).
The Franklin Templeton 403(b) Retirement Plan is a salary deferral plan
for employees of certain non-profit and educational institutions
[(section)501(c)(3) organizations and public schools]. The 403(b) Plan
allows participants to determine the annual amount of salary they wish
to defer. The maximum annual salary deferral amount is generally the
lesser of 25% of compensation (adjusted for deferrals) or $9,500.
The Franklin Business Retirement Plans provide employers with
additional retirement plan options and may be used individually, in
combination, or with custom designed features. The Profit Sharing Plan
allows an employer to make contributions, at its discretion, of up to
the lesser of $30,000 or 15% of compensation* per employee each year.
The Money Purchase Pension Plan allows the employer to contribute up to
the lesser of $30,000 or 25% of compensation* per employee; however,
contributions are required annually at the rate (percentage) elected by
the employer at the outset of the plan. In order to achieve a combined
contribution rate of 25% while maintaining a certain degree of
flexibility, employers may establish both a Profit Sharing Plan and a
Money Purchase Pension Plan (with a fixed contribution rate of 10%).
The Trust Company can add optional provisions to the Profit Sharing and
Money Purchase Pension Plans described above and provide a Defined
Benefit, Target Benefit, and 401(k) Plans on a custom designed basis.
Business Retirement Plans, whether standard or custom designed, may
require an annual report (Form 5500) to be filed with the IRS.
Redemptions from any Franklin retirement plan accounts require the
completion of specific distribution forms to comply with IRS
regulations. Please see "How to Sell Shares of the Fund."
Individuals and employers should consult with a competent tax or
financial advisor before choosing a retirement plan.
*The limit on compensation for determining SEP and qualified plan
contributions is reduced from $235,840 in 1993 to $150,000 for 1994 and
1995. The $150,000 limit will be adjusted for inflation, but only in
$10,000 increments.
Other Programs and Privileges
Available to Fund Shareholders
Certain of the programs and privileges described in this section may
not be available directly from the Fund to shareholders whose 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 the section captioned "Account Registrations"
in this Prospectus).
Share Certificates
Shares for 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 the shareholder, can be 2% or more of the value
of the lost, stolen or destroyed certificate. A certificate will be
issued if requested in writing by the shareholder or by the securities
dealer.
Confirmations
A confirmation statement will be sent to each shareholder quarterly to
reflect the dividends reinvested during that period and after each
other transaction which affects the shareholder's account. This
statement will also show the total number of shares owned by the
shareholder, including the number of shares in "plan balance" for the
account of the shareholder.
Automatic Investment Plan
Under the Automatic Investment Plan, a shareholder may be able to
arrange to make additional purchases of shares automatically on a
monthly basis by electronic funds transfer from a checking account, if
the bank which maintains the account is a member of the Automated
Clearing House, or by preauthorized checks drawn on the shareholder's
bank account. A shareholder may, of course, terminate the program at
any time. The Shareholder Application included with this Prospectus
contains the requirements applicable to this program. In addition,
shareholders may obtain more information concerning this program from
their securities dealers or from Distributors.
The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should
keep in mind that such a program does not assure a profit or protect
against a loss.
Systematic Withdrawal Plan
A shareholder may establish a Systematic Withdrawal Plan and receive
regular periodic payments from the account, provided that the net asset
value of the shares held by the shareholder is at least $5,000. There
are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. The minimum amount which the shareholder may withdraw
is $50 per withdrawal transaction although this is merely the minimum
amount allowed under the plan and should not be mistaken for a
recommended amount. The plan may be established on a monthly,
quarterly, semiannual or annual basis. If the shareholder establishes a
plan, any capital gain distributions and income dividends paid by the
Fund will be reinvested for the shareholder's account in additional
shares at net asset value. Payments will then be made from the
liquidation of shares at net asset value on the day of the transaction
(which is generally the first business day of the month in which the
payment is scheduled) with payment generally received by the
shareholder three to five days after the date of liquidation. By
completing the "Special Payment Instructions for Distributions" section
of the Shareholder Application included with this Prospectus, a
shareholder may direct the selected withdrawals to another fund in the
Franklin Templeton Funds, to another person, or directly to a checking
account. If the bank at which the account is maintained is a member of
the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If this last option is requested, the
shareholder should allow at least 15 days for initial processing.
Withdrawals which may be paid in the interim will be sent to the
address of record. Liquidation of shares may reduce or possibly exhaust
the shares in the shareholder's account, to the extent withdrawals
exceed shares earned through dividends and distributions, particularly
in the event of a market decline. If the withdrawal amount exceeds the
total plan balance, the account will be closed and the remaining
balance will be sent to the shareholder. As with other redemptions, a
liquidation to make a withdrawal payment is a sale for federal income
tax purposes. Because the amount withdrawn under the plan may be more
than the shareholder's actual yield or income, part of the payment may
be a return of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with
purchases of additional shares of the Fund would be disadvantageous
because of the sales charge on the additional purchases. The
shareholder should ordinarily not make additional investments of less
than $5,000 or three times the annual withdrawals under the plan during
the time such a plan is in effect. A Systematic Withdrawal Plan may be
terminated on written notice by the shareholder or the Fund, and it
will terminate automatically if all shares are liquidated or withdrawn
from the account, or upon the Fund's receipt of notification of the
death or incapacity of the shareholder. Shareholders may change the
amount (but not below the specified minimum) and schedule of withdrawal
payments or suspend one such payment by giving written notice to
Investor Services at least seven business days prior to the end of the
month preceding a scheduled payment. Share certificates may not be
issued while a Systematic Withdrawal Plan is in effect.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging
shares of the Fund available to institutional accounts. For further
information, contact Franklin's Institutional Services Department at 1-
800/321-8563.
Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with
various investment objectives or policies. The shares of most of these
mutual funds are offered to the public with a sales charge. If a
shareholder's investment objective or outlook for the securities
markets changes, the Fund shares may be exchanged for shares of other
Franklin Templeton Funds which are eligible for sale in the
shareholder's state of residence and in conformity with such fund's
stated eligibility requirements and investment minimums. Investors
should review the prospectus of the fund they wish to exchange from and
the fund they wish to exchange into for all specific requirements or
limitations on exercising the exchange privilege, for example, minimum
holding periods or applicable sales charges. Exchanges may be made in
any of the following ways:
Exchanges 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.
Exchanges By Telephone
Shareholders, or their investment representative of record, if any, may
exchange shares of the Fund by telephone by calling Investor Services
at 1-800/632-2301 or the automated Franklin TeleFACTS(registered
trademark) system (day or night) at 1-800/247-1753. If the shareholder
does not wish this privilege extended to a particular account, the Fund
or Investor Services should be notified.
The Telephone Exchange Privilege allows a shareholder to effect
exchanges from the Fund into an identically registered account 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 the shareholder's account. The Fund
and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Please refer to
"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(registered trademark) option may not be available. In
this event, shareholders should follow the other exchange procedures
discussed in this section, including the procedures for processing
exchanges through securities dealers.
Exchanges Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares,
Investor Services will accept exchange orders by telephone or by other
means of electronic transmission from securities dealers who execute a
dealer or similar agreement with Distributors. See also "Exchanges By
Telephone" above. Such a dealer-ordered exchange will be effective only
for uncertificated shares on deposit in the shareholder's 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 values 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 investment on which no sales charge was paid was
transferred in from a fund on which the investor paid a sales charge.
Exchanges of shares of the Fund which were purchased with a lower sales
charge to 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.
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 12 months of the calendar month of the
original purchase date, a contingent deferred sales charge will be
imposed. The 12-month period will be tolled (or stopped) for the
period such shares are exchanged into and held in a Franklin or
Templeton money market fund. See also "Contingent Deferred Sales
Charge" under "How to Sell Shares of the Fund."
When an investor requests the exchange of the total value of the Fund
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, the shareholder 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 in the SAI.
There are differences among the Franklin Templeton Funds. Before
making an exchange, a shareholder should obtain and review a current
prospectus of the fund into which the shareholder wishes to transfer.
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 objectives 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 Accounts
Franklin/Templeton IRA and 403(b) retirement accounts may accomplish
exchanges directly. Certain restrictions may apply, however, to other
types of retirement plans. See "Restricted Accounts" under "Telephone
Transactions."
Timing Accounts
Accounts which are administered by allocation or market timing services
to purchase or redeem shares based on predetermined market indicators
("Timing Accounts") will be charged a $5.00 administrative service fee
per each such 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 Timing Accounts.
The Fund reserves the right to temporarily or permanently terminate the
exchange privilege or reject any specific purchase order for any Timing
Account or any person whose transactions seem to follow a timing
pattern who: (i) make an exchange request out of the Fund within two
weeks of an earlier exchange request out of the Fund, or (ii) make more
than two exchanges out of the Fund per calendar quarter, or (iii)
exchange 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 so as to redeem or purchase shares
based upon certain predetermined market indicators, will be aggregated
for purposes of the exchange limits.
The Fund reserves the right to refuse the purchase side of exchange
requests by any Timing Account, person, or group if, in the Manager's
judgment, the Fund would be unable to invest effectively in accordance
with its investment objectives and policies, or would otherwise
potentially be adversely affected. A shareholder's purchase exchanges
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 also, as indicated in "How to Buy Shares of
the Fund," reserve the right to refuse any order for the purchase of
shares.
How to Sell Shares of the Fund
A shareholder may at any time liquidate shares owned and receive from
the Fund the value of the shares. Shares may be redeemed in any of the
following ways:
Redemptions 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. The shareholder
will then receive from the Fund the value of the shares based upon the
net asset value per share 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 (at
1:00 p.m. Pacific time) each day that the New York Stock Exchange (the
"Exchange") is open for business will receive the price calculated on
the following business day. Shareholders are requested to provide a
telephone number(s) where they may be reached during business hours, or
in the evening if preferred. Investor Services' ability to contact a
shareholder promptly when necessary will speed the processing of the
redemption.
To be considered in proper form, signature(s) 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 owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other
than the shareholder's 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.
Signature(s) 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 which are
members of a national securities exchange or a clearing agency or which
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.
Where 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 shareholders exactly
as the account is registered, with the signature(s) guaranteed as
referenced above. Shareholders are advised, for their own 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 officer(s) 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
trustee(s) and (2) a copy of the pertinent pages of the trust document
listing the trustee(s) or a Certification for Trust if the trustee(s)
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 the
applicable state law since these accounts have varying requirements,
depending upon the state of residence.
Payment for redeemed shares will be sent to the shareholder within
seven days after receipt of the request in proper form.
Redemptions by Telephone
Shareholders who complete a Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement") included with this Prospectus
may redeem shares of the Fund by telephone, subject to the Restricted
Account exception noted under "Telephone Transactions - Restricted
Accounts." Information may also be obtained 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.
Shareholders, however, bear the risk of loss in certain cases as
described under "Telephone Transactions - Verification Procedures."
For shareholder accounts with the 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 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, a shareholder should follow the
other redemption procedures set forth in this Prospectus. Institutional
accounts (certain corporations, bank trust departments, government
entities, and qualified retirement plans which qualify to purchase
shares at net asset value pursuant to the terms of this Prospectus)
which wish to execute redemptions in excess of $50,000 must complete an
Institutional Telephone Privileges Agreement which is available from
Franklin's Institutional Services Department by telephoning 1-800/321-
8563.
Redeeming Shares Through Securities Dealers
The Fund will accept redemption orders by telephone or other means of
electronic transmission from securities dealers who have entered into a
dealer or similar agreement with Distributors. This is known as a
repurchase. The only difference between a normal redemption and a
repurchase is that if the shareholder redeems shares through a dealer,
the redemption price will be the net asset value next calculated after
the shareholder's dealer receives the order which is promptly
transmitted to the Fund, rather than on the day the Fund receives the
shareholder's written request in proper form. These documents, as
described in the preceding section, are required even if the
shareholder's securities dealer has placed the repurchase order. After
receipt of a repurchase order from the dealer, the Fund will still
require a signed letter of instruction and all other documents set
forth above. A shareholder's 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 the shareholder's 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 a shareholder's best interest to have the required documentation
completed and forwarded to the Fund as soon as possible. The
shareholder's dealer may charge a fee for handling the order. The SAI
contains more information on the redemption of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers on qualified
investments of $1 million or more, a contingent deferred sales charge
of 1% applies to redemptions of those investments within 12 months of
the calendar month of their purchase. The charge is 1% of the lesser of
the value of the shares redeemed (exclusive of reinvested dividends and
capital gain distributions) or the total cost of such shares, and is
retained by Distributors. In determining if a charge applies, shares
not subject to a contingent deferred sales charge are deemed to be
redeemed first, in the following order: (i) Shares representing amounts
attributable to capital appreciation of those shares held less than 12
months; (ii) shares purchased with reinvested dividends and capital
gain distributions; and (iii) other shares held longer than 12 months;
and followed by any shares held less than 12 months, on a "first in,
first out" basis.
The contingent deferred sales charge is waived for: exchanges;
distributions to Trust Company participants in qualified retirement
plans due to death, disability or attainment of age 591U2; tax-free
returns of excess contributions to employee benefit plans, including
those due to plan termination or plan transfer; distributions from
employee benefit plans; redemptions through a Systematic Withdrawal
Plan set up 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); and redemptions initiated by the Fund due to a shareholder's
account falling below the minimum specified account size.
Requests for redemptions for 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. In
addition, 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 invested by the
shareholder, depending on fluctuations in the market value of
securities owned by the Fund.
Retirement Accounts
Retirement account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To
liquidate a retirement account, a shareholder or securities dealer may
call Franklin's Retirement Plans Department to obtain the necessary
forms.
Other
For any information required about a proposed liquidation, a
shareholder may call Franklin's Shareholder Services Department or the
securities dealer may call Franklin's Dealer Services Department.
Telephone Transactions
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Shareholders of the Fund and their investment representative of record,
if any, may be able to execute various transactions by calling Investor
Services at 1-800/632-2301.
All shareholders will be able 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, and (iv) exchange Fund shares as described in this
Prospectus by telephone. In addition, shareholders who complete and
file an Agreement as described under "How to Sell Shares of the Fund -
Redemptions by Telephone" 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 by 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 the shareholder caused by an
unauthorized transaction. Shareholders 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
distribution, redemption, or dividend payment. 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. Changes to dividend options must also be made in
writing.
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 1-
800/527-2020 for Franklin accounts or 1-800/354-9191 (press "2" when
prompted to do so) for Templeton accounts.
General
During periods of drastic economic or market changes, it is possible
that the telephone transaction privileges will be difficult to execute
because of heavy telephone volume. In such situations, shareholders may
wish to contact their investment representative for assistance, or to
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 the inability of a shareholder to execute a telephone
transaction.
The telephone transaction privilege may be modified or discontinued by
the Fund at any time upon 60 days' written notice to shareholders.
Valuation of Fund Shares
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The net asset value per share of the Fund is determined separately from
the other series of the Custodian Funds, as of 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, which includes the maximum sales
charge of the Fund).
The net asset value per share of the Fund is determined in the
following manner: The aggregate of all liabilities, including, without
limitation, accrued expenses and taxes and any necessary reserves, is
deducted from the aggregate gross value of all assets, and the
difference is divided by the number of shares of the Fund outstanding
at the time. 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. The GNMA Certificates in the Fund's
portfolio are valued within the range of the bid and ask prices when
over-the-counter market quotations are readily available. If it is
determined that reliable market quotations may not be readily
available, 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 of Directors. The fair value of debt
securities originally purchased with remaining maturities of 60 days or
less are valued at their amortized cost, as determined in accordance
with the 1940 Act unless conditions indicate otherwise. With the
approval of directors, the Fund may utilize a pricing service, bank or
securities dealer to perform any of the above described functions.
How to Get Information
Regarding an Investment in the Fund
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Any questions or communications regarding a shareholder's account
should be directed to Investor Services at the address shown on the
back cover of this Prospectus.
From a touch-tone phone, shareholders may obtain current price, yield
or performance information specific to a fund in the Franklin Funds by
calling the automated Franklin TeleFACTS system (day or night) at 1-
800/247-1753. Information about the Fund may be accessed by entering
Fund Code 10 followed by the # sign, when requested to do so by the
automated operator. The TeleFACTS system is also available for
processing exchanges. See "Exchange Privilege."
To assist shareholders and securities dealers wishing to speak directly
with a representative, the following is a list of the various Franklin
departments, telephone numbers and hours of operation to call. The same
numbers may be used when calling from a rotary phone.
<TABLE>
<CAPTION>
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
- -----------------------------------------------------------------------
<S> <C> <C>
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
</TABLE>
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.
Performance
- -----------------------------------------------------------------------
Advertisements, sales literature and communications to shareholders may
contain various measures of the Fund's performance, including current
yield, various expressions of total return and current distribution
rate. They may occasionally cite statistics to reflect its 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 (offering price includes sales charge)
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.
Yield which is calculated according to a formula prescribed by the SEC
(see 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 are reflected in the current
distribution rate which may be quoted to shareholders. 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 yield, distribution rate or total return may be in any
future period.
General Information
- -----------------------------------------------------------------------
Reports to Shareholders
The Fund's fiscal year ends September 30. Annual Reports containing
audited financial statements of the Trust, including the auditors'
report, and Semi-Annual Reports containing unaudited financial
statements are automatically sent to shareholders. Additional copies
may be obtained, without charge, upon request to the Trust at the
telephone number or address set forth on the cover page of this
prospectus.
Additional information on Fund performance is included in the Fund's
Annual Report to Shareholders and in the SAI.
Organization
The authorized Capital Stock of Custodian Funds consists of
10,000,000,000 shares of Capital Stock of $0.01 par value,
9,900,000,000 of which has been authorized by the Board of Directors to
be issued in five separate series, with 5,000,000,000 designated as
U.S. Government Securities Series shares. The Board of Directors is
empowered by the Charter to issue other series of Capital Stock and to
increase or decrease the number, but not below that at the time
outstanding.
The assets received for the issue or sale of each series of the Capital
Stock and all income, earnings, profits and proceeds thereof, subject
only to the rights of creditors, are especially allocated to such
series, and constitute the underlying assets of such series. The
underlying assets of each series are required to be segregated on the
books of account, and are to be charged with the liabilities in respect
to such series and with a share of the general liabilities of the
Custodian Funds. Liabilities in respect to any two or more series are
to be allocated in proportion to the asset value of the respective
series except where direct expenses can otherwise be fairly allocated.
The Board of Directors has the right to determine which liabilities are
allocable to a given series, and which are general or allocable to two
or more series. In the event of the dissolution or liquidation of the
Custodian Funds, the registered holders of the Capital Stock of any
series are entitled to receive as a class the underlying assets of such
series available for distribution to shareholders.
Voting Rights
Shares of Capital Stock entitle their holders to one vote per share;
however, votes are made by series on matters affecting an individual
series. Shares have noncumulative voting rights which means that in all
elections of directors, the holders of more than 50% of the shares
voting can elect 100% of the directors 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 of Directors. Shares have
no preemptive or subscription rights, and are fully transferable. There
are no conversion rights; however, holders of shares of any series may
reinvest all or any portion of the proceeds from the redemption or
repurchase of such shares into shares of any other series as described
under "Exchange Privilege."
Meetings of Shareholders
Maryland General Corporation Law does not require corporations
registered as management investment companies under the 1940 Act to
hold routine annual meetings of shareholders and the Fund does not
intend to hold such routine annual meetings. The Fund may, however,
hold a special meeting 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 shareholders holding at least 10% of
the shares entitled to vote at the meeting for the purpose of voting
upon the removal of directors, in which case shareholders may receive
assistance in communicating with other shareholders such as that
provided in Section 16(c) of the 1940 Act. In addition, Maryland
General Corporation Law provides that a special meeting may be called
by a majority of the Board of Directors or by the written request of
shareholders holding at least 25% of the shares entitled to vote at the
meeting.
Redemptions by the Fund
The Fund reserves the right to redeem, at net asset value, shares of
any shareholder whose account has a value of less than $50, but only
where the value of such account has been reduced by the shareholder's
prior voluntary redemption of shares and has been inactive (except for
the reinvestment of distributions) for a period of at least six months,
provided advance notice is given to the shareholder. More information
is included in the SAI.
Other Information
Distribution or redemption checks sent to shareholders 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 to the shareholder caused by the shareholder's failure to cash
such check(s).
The Fund believes that the Fund is generally a permissible investment
for national banks, federally chartered savings and loan associations,
federally chartered credit unions and the Fishing Vessel Capital
Construction Fund. Such investors should confirm the permissibility of
proposed investments in this series with their counsel. See "Investment
Objective and Policies of the Fund," above.
"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.
Account Registrations
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An account registration should reflect the investor's 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, a shareholder may transfer an account in the Fund
carried in "street" or "nominee" name by the shareholder's 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 the
shareholder's delivering securities dealer. To effect the transfer, a
shareholder should instruct the securities dealer to transfer the
account to a receiving securities dealer and sign any documents
required by the securities dealer(s) 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 the shareholder's
delivering securities dealer. In the future it may be possible to
effect such transfers electronically through the services of the NSCC.
The Fund may conclusively accept instructions from an owner or the
owner's nominee listed in publicly available nominee lists, regardless
of whether the account was initially registered in the name of or by
the owner, the nominee, or both. If a securities dealer or other
representative is of record on an investor's account, the investor 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 the Shareholder
Services Agent, and to have authorized them to execute the instructions
without further inquiry. At the present time, such services which are
available, or which are anticipated to be made available in the near
future, 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 Internal Revenue Service ("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. A shareholder may also be subject to backup withholding if
the IRS or a securities dealer notifies the Fund that the number
furnished by the shareholder is incorrect or that the shareholder is
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 the shareholder 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.
Portfolio Operations
- -----------------------------------------------------------------------
The following persons are primarily responsible for the day-to-day
management of the Fund's portfolio: Jack Lemein since 1984, and Roger
Bayston and Tony Coffey since 1993.
Mr. Lemein, Senior Vice President and Portfolio Manager of Advisers,
holds a Bachelor of Science degree in finance from the University of
Illinois. He has been in the securities industry since 1967 and with
Advisers since 1984. He is a member of several securities industry
associations.
Mr. Bayston, Portfolio Manager of Advisers, holds a Bachelor of Science
degree from the University of Virginia and a Master's degree in
Business Administration from the University of California at Los
Angeles. He has been with the Franklin organization since 1991
(following completion of his MBA program) and was an Assistant
Treasurer for Bankers Trust Company from 1986 to 1989.
Mr. Coffey, Portfolio Manager of Advisers, holds a Master's degree in
Business Administration from the University of California at Los
Angeles and a Bachelor of Arts degree from Harvard University. He has
been with Advisers since 1989. From 1985 to 1987 Mr. Coffey was an
associate with Analysis Group. He is a member of several securities
industry associations.
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