As filed with the Securities and Exchange Commission August 19, 1996
File Nos.
2-11346
811-537
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post Effective Amendment No. 74 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 20 (X)
FRANKLIN CUSTODIAN FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404 (Address of
Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (415) 312-2000
HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ]immediately upon filing pursuant to paragraph (b)
[X]on September 16, 1996 pursuant to paragraph (b)
[ ]60 days after filing pursuant to paragraph (a)(i)
[ ]on (date) pursuant to paragraph (a)(i)
[ ]75 days after filing pursuant to paragraph (a)(ii)
[ ]on (date) pursuant to paragraph (a)(ii)of rule 485
If appropriate, check the following box:
[ ]This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
DECLARATION PURSUANT TO RULE 24F-2. The Registrant has registered an indefinite
number or amount of securities under the Securities Act of 1933 pursuant to Rule
24f-2 under the Investment Company Act of 1940. The Rule 24f-2 Notice for the
issuer's most recent fiscal year was filed on November 27, 1995.
FRANKLIN CUSTODIAN FUNDS, INC.
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
(All Series Prospectus)
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial "Financial Highlights"; "How Does
Information the Fund Measure Performance?"
4. General Description of "How Is the Fund Organized?"; "How
Registrant Does the Fund Invest Its Assets?";
"What Are the Fund's Potential
Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How Is the Fund Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions
Might I Receive From the Fund?";
"How Taxation Affects You and the
Fund"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Useful
Terms and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"
9. Pending Legal Proceedings Not Applicable
FRANKLIN CUSTODIAN FUNDS, INC.
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
(U.S. Government Securities Series)
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial "Financial Highlights"; "How Does
Information the Fund Measure Performance?"
4. General Description of "How Is the Fund Organized?"; "How
Registrant Does the Fund Invest Its Assets?";
"What Are the Fund's Potential
Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How Is the Fund Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions
Might I Receive From the Fund?";
"How Taxation Affects You and the
Fund"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Useful
Terms and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"
9. Pending Legal Proceedings Not Applicable
FRANKLIN CUSTODIAN FUNDS, INC.
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
(Income Series)
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial "Financial Highlights"; "How Does
Information the Fund Measure Performance?"
4. General Description of "How Is the Fund Organized?"; "How
Registrant Does the Fund Invest Its Assets?";
"What Are the Fund's Potential
Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How Is the Fund Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions
Might I Receive From the Fund?";
"How Taxation Affects You and the
Fund"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Useful
Terms and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"
9. Pending Legal Proceedings Not Applicable
FRANKLIN CUSTODIAN FUNDS, INC.
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in the
STATEMENT OF ADDITIONAL INFORMATION
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information Not Applicable
and History
13. Investment Objectives and "How Does the Fund Invest It's
Policies Assets?"; "Investment
Restrictions"
14. Management of the Fund "Officers and Directors";
"Investment Advisory and Other
Services"
15. Control Persons and "Officers and Directors";
Principal Holders of "Investment Advisory and Other
Securities Services"; "General Information"
16. Investment Advisory and "Investment Advisory and Other
Other Services Services"; "The Fund's
Underwriter"
17. Brokerage Allocation and "How Does the Fund Purchase
Other Practices Securities For Its Portfolio?"
18. Capital Stock and Other See Prospectus "How Is the Fund
Securities Organized?"
19. Purchase, Redemption and "How Do I Buy and Sell Shares?"
Pricing of Securities "How Are Fund Shares Valued?";
Being Offered "Financial Statements"
20. Tax Status "Additional Information Regarding
Taxation"
21. Underwriters "The Fund's Underwriter"
22. Calculation of "General Information"
Performance Data
23. Financial Statements "Financial Statements"
PROSPECTUS & APPLICATION
FRANKLIN CUSTODIAN FUNDS, INC.
FEBRUARY 1, 1996, AS AMENDED SEPTEMBER 16, 1996
UTILITIES SERIES - INVESTMENT STRATEGY: GROWTH AND INCOME
INCOME SERIES - INVESTMENT STRATEGY: GROWTH AND INCOME
GROWTH SERIES - INVESTMENT STRATEGY: GROWTH
DYNATECH SERIES - INVESTMENT STRATEGY: GROWTH
U.S. GOVERNMENT SECURITIES SERIES - INVESTMENT STRATEGY: INCOME
This prospectus describes the five series of Franklin Custodian Funds, Inc.
("Custodian Funds"). Each series may individually or together be referred to as
the "Fund(s)." This prospectus contains information you should know before
investing in the Fund. Please keep it for future reference.
The Custodian Funds' SAI, dated February 1, 1996, as may be amended from time to
time, includes more information about the Custodian Funds' procedures and
policies. It has been filed with the SEC and is incorporated by reference into
this prospectus. For a free copy or a larger print version of this prospectus,
call 1-800/DIAL BEN or write the Fund at the address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE INCOME SERIES MAY INVEST UP TO 100% OF ITS NET ASSETS IN NON-INVESTMENT
GRADE BONDS. THESE ARE COMMONLY KNOWN AS "JUNK BONDS." THEIR DEFAULT AND OTHER
RISKS ARE GREATER THAN THOSE OF HIGHER RATED SECURITIES. YOU SHOULD CAREFULLY
CONSIDER THESE RISKS BEFORE INVESTING IN THE FUND. PLEASE SEE "WHAT ARE THE
FUND'S POTENTIAL RISKS?"
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 DISTRIBUTORS.
Each Fund, except the U.S. Government Securities Series, may invest in both
domestic and foreign securities.
FRANKLIN CUSTODIAN FUNDS, INC.
February 1, 1996, as amended September 16, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary..........................................
Financial Highlights.....................................
How Does the Fund Invest Its Assets?.....................
What Are the Fund's Potential Risks?.....................
Who Manages the Fund?....................................
How Does the Fund Measure Performance?...................
How Is the Fund Organized?...............................
How Taxation Affects You and the Fund....................
ABOUT YOUR ACCOUNT
How Do I Buy Shares?.....................................
May I Exchange Shares for Shares of Another Fund?........
How Do I Sell Shares?....................................
What Distributions Might I Receive From the Fund?........
Transaction Procedures and Special Requirements..........
Services to Help You Manage Your Account.................
GLOSSARY
Useful Terms and Definitions.............................
APPENDIX
Description of Ratings...................................
When reading this prospectus, you will see certain terms in capital letters.
This means the term is explained in our glossary section.
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended September 30, 1995. The Class II figures for each Fund, except the
DynaTech Series, are annualized. The Class II figures for the DynaTech Series,
which didn't offer Class II shares until September 16, 1996, are based on the
historical expenses of its Class I shares for the fiscal year ended September
30, 1995. Your actual expenses may vary.
<TABLE>
<CAPTION>
GROWTH UTILITIES INCOME U.S. GOVERNMENT DYNATECH
SERIES SERIES SERIES SECURITIES SERIES SERIES
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
A. SHAREHOLDER TRANSACTION EXPENSES+
CLASS I
Maximum Sales Charge Imposed on
Purchases (as a percentage of
Offering Price)...................... 4.50% 4.25% 4.25% 4.25% 4.50%
Deferred Sales Charge+++............. NONE NONE NONE NONE NONE
Exchange Fee (per transaction)....... NONE $5.00* $5.00* $5.00* NONE
CLASS II
Maximum Sales Charge Imposed on
Purchases (as a percentage of
Offering Price)++.................... 1.00% 1.00% 1.00% 1.00% 1.00%
Deferred Sales Charge+++............. 1.00% 1.00% 1.00% 1.00% 1.00%
Exchange Fee (per transaction)....... NONE $5.00* $5.00* $5.00* NONE
B. ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
CLASS I
Management Fees....................... 0.50% 0.46% 0.46% 0.45% 0.63%
Rule 12b-1 Fees**..................... 0.20% 0.12% 0.13% 0.08% 0.18%
Other Expenses........................ 0.20% 0.15% 0.12% 0.08% 0.20%
--------------------------------------------------------------
Total Fund Operating Expenses......... 0.90% 0.73% 0.71% 0.61% 1.01%
==============================================================
CLASS II
Management Fees....................... 0.50% 0.46% 0.46% 0.45% 0.63%
Rule 12b-1 Fees**..................... 1.00% 0.65% 0.65% 0.65% 1.00%
Other Expenses........................ 0.20% 0.15% 0.12% 0.08% 0.20%
--------------------------------------------------------------
Total Fund Operating Expenses......... 1.70% 1.26% 1.23% 1.18% 1.83%
==============================================================
</TABLE>
C. EXAMPLE
Assume the annual return for each class is 5% and operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
<TABLE>
<CAPTION>
GROWTH UTILITIES INCOME U.S. GOVERNMENT DYNATECH
SERIES SERIES SERIES SECURITIES SERIES SERIES
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS I
1 Year***................................ $ 54 $ 50 $ 49 $ 48 $ 55
3 Years.................................. $ 72 $ 65 $ 64 $ 61 $ 76
5 Years.................................. $ 93 $ 81 $ 80 $ 75 $ 98
10 Years................................. $151 $129 $127 $115 $163
CLASS II
1 Year................................... $ 37 $ 33 $ 32 $ 32 $ 38
3 Years.................................. $ 63 $ 50 $ 49 $ 47 $ 67
5 Years.................................. $101 $ 78 $ 77 $ 74 $108
10 Years................................. $209 $161 $157 $152 $223
</TABLE>
For the same Class II investment, you would pay projected expenses of $27
(Growth Series), $23 (Utilities Series), $22 (Income Series), $22 (U.S.
Government Securities Series) and $28 (DynaTech Series) if you did not sell
your shares at the end of the first year. Your projected expenses for the
remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy."
+++A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more if you sell the shares within one year and any Class II purchase
if you sell the shares within 18 months. There is no front-end sales charge if
you invest $1 million or more in Class I shares. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**For the Utilities, Income and U.S. Government Securities Series, these fees
may not exceed 0.15% for Class I and 0.65% for Class II. For the Growth and
DynaTech Series, these fees may not exceed 0.25% for Class I and 1.00% for Class
II. 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 charge permitted under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in Custodian Funds' Annual Report to Shareholders for the
fiscal year ended September 30, 1995. The Annual Report to Shareholders also
includes more information about each Fund's performance. For a free copy, please
call Fund Information.
<TABLE>
<CAPTION>
Growth Series: Class I+++
-----------------------------------------------------------------------------------------------------------------
FOR THE SIX
MONTHS
ENDED
MARCH 31,
1996 YEAR ENDED SEPT. 30,
-----------------------------------------------------------------------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-----------------------------------------------------------------------------------------------------------------
PER SHARE
OPERATING
PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value
at Beginning
of Period $ 19.38 $14.96 $ 14.25 $13.70 $13.45 $10.69 $11.97 $ 9.64 $10.39 $ 7.51 $ 6.20
------------------------------------------------------------------------------------------------------------------
Net Investment
Income 0.100 0.170 0.190 0.232 0.229 0.325 0.314 0.227 0.212 0.207 0.157
Net Realized &
Unrealized Gain
(Loss) on
Securities 2.398 4.427 0.899 0.575 0.524 2.703 (1.188) 2.332 (0.570) 2.852 1.374
------------------------------------------------------------------------------------------------------------------
Total From
Investment
Operations 2.498 4.597 1.089 0.807 0.753 3.028 (0.874) 2.559 (0.358) 3.059 1.531
==================================================================================================================
Distributions From
Net Investment
Income (0.164) (0.135) (0.297) (0.189) (0.353) (0.268) (0.206) (0.221) (0.202) (0.150) (0.130)
Distributions From
Realized Capital
Gains (0.154) (0.042) (0.082) (0.068) (0.150) --- (0.200) (0.008) (0.190) (0.029) (0.091)
------------------------------------------------------------------------------------------------------------------
Total
Distributions (0.318) (0.177) (0.379) (0.257) (0.503) (0.268) (0.406) (0.229) (0.392) (0.179) (0.221)
------------------------------------------------------------------------------------------------------------------
Net Asset Value
at End of Period $ 21.56 $ 19.38 $ 14.96 $ 14.25 $ 13.70 $ 13.45 $ 10.69 $ 11.97 $ 9.64 $ 10.39 $ 7.51
==================================================================================================================
Total Return* 12.99% 31.11% 7.63% 5.87% 5.73% 28.65% (7.55)% 27.02% (3.28)% 41.10% 24.72%
RATIOS/SUPPLEMENTAL
DATA**
Net Assets at End
of Period
(in 000's) $882,043 $712,866 $516,620 $560,824 $532,971 $331,392 $169,939 $134,523 $106,766 $115,845 $ 42,861
Ratio of Expenses
to Average Net
Assets 0.84%+ 0.90% 0.77% 0.64% 0.66% 0.70% 0.73% 0.76% 0.77% 0.81% 0.87%
Ratio of Net
Investment Income
to Average
Net Assets 1.07%+ 1.08% 1.23% 1.64% 2.06% 2.58% 2.74% 1.94% 2.27% 2.34% 2.12%
Portfolio
Turnover Rate 1.19% 1.39% 6.52% 1.70% 0.81% 7.98% ---% 2.24% ---% 8.73% 1.00%
Average
Commission Rate 0.0524 --- --- --- --- --- --- --- --- --- ---
</TABLE>
Growth Series: Class II
FOR THE SIX FOR THE
MONTHS ENDED PERIOD ENDED
MARCH 31, SEPT. 30,
1996 (UNAUDITED) 1995++
------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $ 19.33 $16.88
------------------------------
Net Investment Income 0.004 0.023
Net Realized & Unrealized Gain (Loss)
on Securities 2.409 2.427
------------------------------
Total From Investment Operations 2.413 2.450
==============================
Distributions From Net Investment Income (0.159) ---
Distributions From Realized Capital Gains (0.154) ---
------------------------------
Total Distributions (0.313) ---
------------------------------
Net Asset Value at End of Period $ 21.43 $ 19.33
==============================
Total Return* 12.58% 14.72%
RATIOS/SUPPLEMENTAL DATA**
Net Assets at End of Period (in 000's) $17,804 $ 4,161
Ratio of Expenses to Average Net Assets 1.62%+ 1.79%+
Ratio of Net Investment Income
to Average Net Assets 0.28%+ 0.37%+
Portfolio Turnover Rate 1.19% 1.39%
Average Commission Rate 0.0524 ---
<TABLE>
<CAPTION>
DynaTech Series: Class I+++
-----------------------------------------------------------------------------------------------------------------
FOR THE SIX
MONTHS
ENDED
MARCH 31,
1996 YEAR ENDED SEPT. 30,
-----------------------------------------------------------------------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-----------------------------------------------------------------------------------------------------------------
PER SHARE
OPERATING
PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value
at Beginning
of Period $ 12.78 $ 9.85 $ 10.29 $ 9.21 $ 8.68 $ 6.77 $ 7.63 $ 5.89 $ 7.08 $ 4.79 $ 4.75
-----------------------------------------------------------------------------------------------------------------
Net Investment
Income 0.040 0.118 0.070 0.102 0.120 0.126 0.156 0.060 0.040 0.031 0.041
Net Realized &
Unrealized Gain
(Loss) on
Securities (0.124) 2.991 0.210 1.207 0.522 1.952 (0.352) 1.719 (1.197) 2.292 0.124
-----------------------------------------------------------------------------------------------------------------
Total From
Investment
Operations (0.084) 3.109 0.280 1.309 0.642 2.078 (0.196) 1.779 (1.157) 2.323 0.165
=================================================================================================================
Distributions From
Net Investment
Income (0.118) (0.049) (0.124) (0.117) (0.112) (0.168) (0.059) (0.039) (0.033) (0.033) (0.125)
Distributions From
Realized Capital
Gains (0.228) (0.130) (0.596) (0.112) --- --- (0.605) --- --- --- ---
-----------------------------------------------------------------------------------------------------------------
Total
Distributions (0.346) (0.179) (0.720) (0.229) (0.112) (0.168) (0.664) (0.039) (0.033) (0.033) (0.125)
-----------------------------------------------------------------------------------------------------------------
Net Asset Value
at End of Period $ 12.35 $ 12.78 $ 9.85 $ 10.29 $ 9.21 $ 8.68 $ 6.77 $ 7.63 $ 5.89 $ 7.08 $ 4.79
=================================================================================================================
Total Return* (0.67)% 32.10% 2.89% 14.36% 7.29% 31.21% (2.71)% 30.26% (16.41)% 48.60% 3.18%
RATIOS/SUPPLEMENTAL
DATA**
Net Assets at
End of Period
(in 000's) $92,523 $92,987 $67,413 $71,469 $64,595 $48,867 $36,538 $37,673 $33,575 $50,417 $31,834
Ratio of Expenses
to Average Net
Assets 1.04%+ 1.01% 1.00% 0.81% 0.81% 0.93% 0.79% 0.83% 0.87% 0.86% 0.87%
Ratio of Net Investment
Income to Average
Net Assets .62%+ 1.11% 0.69% 1.03% 1.42% 1.57% 2.09% 0.90% 0.68% 0.48% 0.78%
Portfolio
Turnover Rate 3.24% 9.84% 9.73% 26.56% 10.70% 7.12% 11.34% ---% 3.68% 8.27% 14.58%
Average
Commission Rate 0.0557 --- --- --- --- --- --- --- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
Utilities Series: Class I
-----------------------------------------------------------------------------------------------------------------
FOR THE SIX
MONTHS
ENDED
MARCH 31,
1996 YEAR ENDED SEPT. 30,
-----------------------------------------------------------------------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-----------------------------------------------------------------------------------------------------------------
PER SHARE
OPERATING
PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value
at Beginning of
Period $ 9.75 $ 8.33 $ 10.78 $ 9.63 $ 8.81 $ 7.48 $ 8.10 $ 7.46 $ 7.72 $ 8.21 $ 6.47
-----------------------------------------------------------------------------------------------------------------
Net Investment
Income 0.260 0.527 0.550 0.534 0.530 0.535 0.529 0.548 0.553 0.536 0.530
Net Realized &
Unrealized Gain
(Loss) on
Securities 0.474 1.424 (2.436) 1.161 0.849 1.385 (0.555) 0.672 (0.243) (0.455) 1.768
-----------------------------------------------------------------------------------------------------------------
Total From
Investment
Operations 0.734 1.951 (1.886) 1.695 1.379 1.920 (0.026) 1.220 0.310 0.081 2.298
=================================================================================================================
Distributions From
Net Investment
Income (0.262) (0.524) (0.524) (0.545) (0.559) (0.590) (0.580) (0.580) (0.570) (0.560) (0.555)
Distributions From
Realized Capital
Gains (0.072) (0.007) (0.040) --- --- --- (0.014) --- --- (0.011) (0.003)
-----------------------------------------------------------------------------------------------------------------
Total
Distributions (0.334) (0.531) (0.564) (0.545) (0.559) (0.590) (0.594) (0.580) (0.570) (0.571) (0.558)
-----------------------------------------------------------------------------------------------------------------
Net Asset Value at
End of Period $10.15 $ 9.75 $ 8.33 $10.78 $ 9.63 $ 8.81 $ 7.48 $ 8.10 $ 7.46 $ 7.72 $ 8.21
=================================================================================================================
Total Return* 7.59% 24.19% (17.94)% 17.83% 15.89% 26.15% (0.93)% 16.71% 4.03% 0.56% 36.03%
RATIOS/SUPPLEMENTAL
DATA**
Net Assets at
End of Period
(in 000's) $2,722,709 $2,765,976 $2,572,508 $3,626,774 $2,191,095 $1,226,118 $749,386 $652,308 $615,985 $632,474 $326,985
Ratio of Expenses
to Average Net
Assets 0.73%+ 0.73% 0.64% 0.55% 0.57% 0.59% 0.60% 0.62% 0.64% 0.65% 0.74%
Ratio of Net
Investment Income
to Average Net
Assets 4.97%+ 5.88% 5.76% 5.30% 5.90% 6.44% 6.50% 7.10% 7.36% 6.55% 5.95%
Portfolio
Turnover Rate 8.29% 5.55% 6.34% 7.81% 1.39% 0.89% 2.07% 4.02% 1.68% ---% 3.49%
Average
Commission Rate 0.0479 --- --- --- --- --- --- --- --- --- ---
</TABLE>
Utilities Series: Class II
FOR THE SIX FOR THE
MONTHS PERIOD ENDED
ENDED MARCH SEPT. 30,
31, 1996 1995++
(UNAUDITED)
-----------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $ 9.75 $ 8.89
-----------------------------
Net Investment Income 0.210 0.228
Net Realized & Unrealized Gain (Loss)
on Securities 0.496 0.880
-----------------------------
Total From Investment Operations 0.706 1.108
=============================
Distributions From Net Investment Income (0.244) (0.248)
Distributions From Realized Capital Gains (0.072) ---
-----------------------------
Total Distributions (0.316) (0.248)
-----------------------------
Net Asset Value at End of Period $ 10.14 $ 9.75
=============================
Total Return* 7.31% 13.01%
RATIOS/SUPPLEMENTAL DATA**
Net Assets at End of Period (in 000's) $16,966 $8,369
Ratio of Expenses to Average Net Assets 1.27%+ 1.21%+
Ratio of Net Investment Income to
Average Net Assets 4.47%+ 5.15%+
Portfolio Turnover Rate 8.29% 5.55%
Average Commission Rate 0.0479 ---
<TABLE>
<CAPTION>
Income Series: Class I
-----------------------------------------------------------------------------------------------------------------
FOR THE SIX
MONTHS
ENDED
MARCH 31,
1996 YEAR ENDED SEPT. 30,
-----------------------------------------------------------------------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-----------------------------------------------------------------------------------------------------------------
PER SHARE
OPERATING
PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value
at Beginning of
Period $ 2.30 $ 2.22 $ 2.46 $ 2.25 $ 2.08 $ 1.76 $ 2.11 $ 2.11 $ 2.22 $ 2.25 $ 2.06
-----------------------------------------------------------------------------------------------------------------
Net Investment
Income 0.090 0.180 0.170 0.180 0.190 0.190 0.212 0.222 0.228 0.206 0.230
Net Realized &
Unrealized Gain
(Loss) on
Securities 0.017 0.108 (0.201) 0.227 0.194 0.350 (0.324) 0.009 (0.096) 0.004 0.238
-----------------------------------------------------------------------------------------------------------------
Total From
Investment
Operations 0.107 0.288 (0.031) 0.407 0.384 0.540 (0.112) 0.231 0.132 0.210 0.468
=================================================================================================================
Distributions From
Net Investment
Income (0.096) (0.180) (0.180) (0.185) (0.205) (0.220) (0.220) (0.220) (0.220) (0.220) (0.220)
Distributions From
Realized Capital
Gains (0.027) (0.028) (0.029) (0.012) (0.009) --- (0.018) (0.011) (0.022) (0.020) (0.058)
-----------------------------------------------------------------------------------------------------------------
Total Distributions (0.117) (0.208) (0.209) (0.197) (0.214) (0.220) (0.238) (0.231) (0.242) (0.240) (0.278)
-----------------------------------------------------------------------------------------------------------------
Net Asset Value
at End of Period $ 2.29 $ 2.30 $ 2.22 $ 2.46 $ 2.25 $ 2.08 $ 1.76 $ 2.11 $ 2.11 $ 2.22 $ 2.25
=================================================================================================================
Total Return* 4.74% 14.00% (1.52)% 18.76% 18.80% 32.60% (6.37)% 11.16% 6.00% 9.08% 24.20%
RATIOS/SUPPLEMENTAL
DATA**
Net Assets at End
of Period
(in 000's) $6,412,610 $5,885,788 $4,891,505 $3,935,444 $2,483,501 $1,673,187 $1,299,130 $1,189,694 $726,815 $484,270 $226,418
Ratio of Expenses
to Average Net
Assets 0.69%+ 0.71% 0.64% 0.54% 0.55% 0.56% 0.55% 0.57% 0.61% 0.64% 0.71%
Ratio of Net
Investment Income
to Average Net
Assets 7.89%+ 8.26% 7.37% 7.84% 9.11% 10.17% 10.73% 10.46% 10.50% 9.20% 9.76%
Portfolio
Turnover Rate 18.73% 58.64% 23.37% 25.41% 23.30% 33.92% 12.14% 12.05% 10.01% 18.14% 30.76%
Average
Commission Rate 0.0517 --- --- --- --- --- --- --- --- --- ---
</TABLE>
Income Series: Class II
FOR THE SIX
MONTHS FOR THE
ENDED MARCH PERIOD ENDED
31, 1996 SEPT. 30,
(UNAUDITED) 1995++
-----------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $ 2.30 $ 2.18
-----------------------------
Net Investment Income 0.080 0.079
Net Realized & Unrealized Gain (Loss)
on Securities 0.031 0.113
-----------------------------
Total From Investment Operations 0.111 0.192
=============================
Distributions From Net Investment Income (0.084) (0.072)
Distributions From Realized Capital Gains (0.027) ---
-----------------------------
Total Distributions (0.111) (0.072)
-----------------------------
Net Asset Value at End of Period $ 2.30 $ 2.30
=============================
Total Return* 4.92% 8.96%
RATIOS/SUPPLEMENTAL DATA**
Net Assets at End of Period (in 000's) $212,662 $65,822
Ratio of Expenses to Average Net Assets 1.22%+ 1.23%+
Ratio of Net Investment Income to
Average Net Assets 7.21%+ 7.89%+
Portfolio Turnover Rate 18.73% 58.64%
Average Commission Rate 0.0517 ---
<TABLE>
<CAPTION>
U.S. Government Securities Series: Class I
-----------------------------------------------------------------------------------------------------------------
FOR THE SIX
MONTHS
ENDED
MARCH 31,
1996 YEAR ENDED SEPT. 30,
-----------------------------------------------------------------------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-----------------------------------------------------------------------------------------------------------------
PER SHARE
OPERATING
PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value
at Beginning of
Period $ 6.87 $ 6.51 $ 7.20 $ 7.26 $ 7.14 $ 6.86 $ 6.90 $ 6.98 $ 6.87 $ 7.41 $ 7.33
-----------------------------------------------------------------------------------------------------------------
Net Investment
Income 0.245 0.497 0.500 0.557 0.609 0.653 0.668 0.688 0.691 0.698 0.790
Net Realized &
Unrealized Gain
(Loss) on
Securities (0.069) 0.348 (0.678) (0.056) 0.106 0.287 (0.020) (0.072) 0.115 (0.500) 0.165
-----------------------------------------------------------------------------------------------------------------
Total From
Investment
Operations 0.176 0.845 (0.178) 0.501 0.715 0.940 (0.648) 0.616 0.806 0.198 0.955
=================================================================================================================
Distributions From
Net Investment
Income (0.246) (0.485) (0.512) (0.561) (0.595) (0.660) (0.688) (0.696) (0.696) (0.724) (0.875)
Distributions From
Realized Capital
Gains ---- ---- ---- ---- ---- ---- ---- ---- ---- (0.014) ----
-----------------------------------------------------------------------------------------------------------------
Total
Distributions (0.246) (0.485) (0.512) (0.561) (0.595) (0.660) (0.688) (0.696) (0.696) (0.738) (0.875)
-----------------------------------------------------------------------------------------------------------------
Net Asset Value
at End of Period $ 6.80 $ 6.87 $ 6.51 $ 7.20 $ 7.26 $ 7.14 $ 6.86 $ 6.90 $ 6.98 $ 6.87 $ 7.41
=================================================================================================================
Total Return* 2.57% 13.56% (2.75)% 6.86% 10.14% 13.97% 9.47% 8.95% 11.77% 2.22% 13.25%
RATIOS/SUPPLEMENTAL
DATA**
Net Assets at End
of Period
(in 000's) $10,659,062$11,101,605$11,668,747$14,268,516$13,617,157$12,426,910$11,143,333$11,260,310$12,112,775$13,024,437$14,361,682
Ratio of
Expenses to
Average Net Assets 0.63%+ 0.61% 0.55% 0.52% 0.53% 0.52% 0.52% 0.52% 0.53% 0.52% 0.54%
Ratio of Net
Investment
Income to Average
Net Assets 7.09%+ 7.50% 7.37% 7.71% 8.46% 9.26% 9.72% 9.99% 9.85% 9.49% 9.93%
Portfolio
Turnover Rate*** 4.52% 5.48% 18.28% 43.10% 38.75% 22.14% 18.23% 25.70% 34.14% 52.92% 36.02%
Average
Commission Rate --- --- --- --- --- --- --- --- --- --- ---
</TABLE>
U.S. Government Securities Series: Class II
FOR THE SIX
MONTHS FOR THE
ENDED MARCH PERIOD ENDED
31, 1996 SEPT. 30,
(UNAUDITED) 1995++
-----------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $ 6.85 $ 6.67
-----------------------------
Net Investment Income 0.235 0.206
Net Realized & Unrealized Gain (Loss)
on Securities (0.082) 0.167
-----------------------------
Total From Investment Operations 0.153 0.373
=============================
Distributions From Net Investment Income (0.223) (0.193)
Distributions From Realized Capital Gains --- ---
-----------------------------
Total Distributions (0.223) (0.193)
-----------------------------
Net Asset Value at End of Period $ 6.78 $ 6.85
=============================
Total Return* 2.23% 5.66%
RATIOS/SUPPLEMENTAL DATA**
Net Assets at End of Period (in 000's) $35,701 $11,695
Ratio of Expenses to Average Net Assets 1.20%+ 1.18%+
Ratio of Net Investment Income to 7.03%+ 6.48%+
Average Net Assets
Portfolio Turnover Rate*** 4.52% 5.48%
Average Commission Rate --- ---
*Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or the Contingent Deferred Sales Charge and assumes reinvestment of
dividends and capital gains, if any, at Net Asset Value. Prior to May 1, 1994,
dividends were reinvested at the maximum Offering Price. Effective May 1, 1994,
with the implementation of the Rule 12b-1 plan for Class I shares, the sales
charge on reinvested dividends was eliminated.
**Ratios for the period ended 1995, Class I and Class II, have been calculated
using the daily average net assets during the period.
***Maturity of U.S. government issues and the reinvestment of the proceeds
thereof are considered purchases and sales of securities in computing the
portfolio turnover rate.
+Annualized.
++For the period May 1, 1995 (effective date) to September 30, 1995.
+++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.
HOW DOES THE FUND INVEST ITS ASSETS?
The investment objective of each Fund is a fundamental policy and may not be
changed without shareholder approval. Of course, there is no assurance that the
Fund's objective will be achieved.
Growth Series
The primary investment objective of this Fund is capital appreciation. The Fund
primarily invests in common stocks or convertible securities believed to offer
favorable possibilities for capital appreciation, 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 Fund may be held only in cash
or cash equivalents, or invested in shares of capital stock traded on any
national securities exchange or issued by a corporation, association or similar
legal entity having gross assets valued at not less than $1,000,000, as shown on
its latest published annual report, or in bonds or preferred stock convertible
into shares of capital stock listed for trading on a national securities
exchange. The Fund may also write covered call options and buy put options on
securities. Concentration of investments in a single industry may not exceed 25%
of its total assets; this is a fundamental policy of the Fund, which may not be
changed without shareholder approval.
DynaTech Series
The investment objective of this Fund is capital appreciation. The Fund 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 the securities of companies which management considers undervalued. The
assets of the Fund may be held only in cash or cash equivalents, or invested in
securities traded on any national securities exchange or issued by a
corporation, association or similar legal entity having gross assets valued at
not less than $1,000,000, as shown on its latest published annual report. It is
contemplated that most of the Fund's assets will be invested in common stocks,
including securities convertible into common stocks. The Fund may also buy put
options on securities. When Advisers believes that no attractive investment
opportunities exist, the Fund may maintain a significant portion of its assets
in cash. The Fund may also invest in debt securities or preferred stocks that
Advisers believes will further the investment objective of the Fund. The Fund
may not concentrate more than 25% of its assets in any one industry. From time
to time, through market appreciation of certain issues, concentration in a few
issues may develop. Investments of the Fund tend to be of a more speculative
nature, and there can be greater emphasis on short-term trading profits. Certain
investments 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 Fund are both capital appreciation and current
income. As a fundamental policy, the assets of the Fund may be held in cash or
cash equivalents, or invested in securities of an issuer engaged in the public
utilities industry. The public utilities industry includes the manufacture,
production, generation, transmission and sale of gas, water and electricity. The
industry also includes issuers engaged in the communications field, such as
telephone, cellular, telegraph, satellite, microwave and other companies
providing communication facilities for the public benefit. As required by the
SEC, at least 65% of the investments made by the Fund will be in the securities
of issuers engaged in the public utilities industry. Under normal circumstances,
however, the Fund expects to have substantially all of its assets invested in
such securities.
To achieve its investment objective, the Fund invests primarily in common
stocks, including, from time to time, non-dividend paying common stocks if, in
the opinion of Advisers, these securities appear to offer attractive
opportunities for capital appreciation. The Fund may also invest in preferred
stocks and bonds issued by issuers engaged in the public utilities industry.
When buying fixed-income debt securities, the Fund may invest in securities
regardless of their rating depending upon prevailing market and economic
conditions, including securities in the lowest rating categories and securities
that are not rated. Although most of the Fund's investments are rated at least
Baa by Moody's Investors Service ("Moody's") or BBB by Standard & Poor's
Corporation ("S&P"), it is the Fund's intent not to buy fixed-income debt
securities rated below B by the rating services. Securities rated B 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
obligation. These ratings represent the opinions of the rating services with
respect to the securities and are not absolute standards of quality. They will
be considered in connection with the investment of the Fund's assets but will
not be a determining or limiting factor. Please see the Appendix to this
prospectus for a discussion of the ratings.
With respect to unrated securities, it is also the Fund's intent to buy
securities that, in the view of Advisers, would be comparable in quality to
securities rated B or above or, if no specific equivalent rating has been
assigned by a nationally recognized rating service, have been determined to be
consistent with the Fund's objectives without exposing the Fund to excessive
risk. The Fund will not buy issues that are in default or that Advisers believes
involve excessive risk. As of September 30, 1995, 9% of the Fund's assets were
invested in debt securities. All of the rated securities were rated at least Baa
by Moody's or BBB by S&P.
Like all bonds, the value of the Fund's fixed-income debt investments generally
shares an inverse relationship with market interest rates. For example, when
interest rates rise, the value of the Fund's debt investments tends to fall.
Conversely, when interest rates decline, the value of these securities tends to
rise. Because securities issued by utility companies are particularly sensitive
to movements in interest rates, the equity securities of these companies are
more affected by the movement in interest rates than are the equity securities
of other issuers.
Income Series
The investment objective of this Fund is to maximize income while maintaining
prospects for capital appreciation. 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 on its
latest published annual report. The Fund may also invest in preferred stocks.
There are no restrictions as to the proportion of investments that may be made
in a particular type of security and the determination is entirely within
Advisers' discretion.
Lower Rated Securities. The Fund may invest up to 100% of its net assets in
non-investment grade bonds. These are commonly known as "junk bonds." Their
default and other risks are greater than those of higher rated securities. You
should carefully consider these risks before investing in the Fund. Please see
"What Are the Fund's Potential Risks? - High Yielding, Fixed-Income Securities."
Various investment services 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 rating categories of the recognized rating services,
such as securities rated Ba or lower by Moody's or BB or lower by S&P, or from
unrated securities of comparable quality. These ratings represent the opinions
of the rating services with respect to the issuer's ability to pay interest and
repay principal. They do not purport to reflect the risk of fluctuations in
market value and are not absolute standards of quality. These ratings will be
considered in connection with the investment of the Fund's assets but will not
be a determining or limiting factor. Please see the Appendix in this prospectus
for a description of these ratings.
The Fund may invest in securities regardless of their rating or in securities
that are not rated, including up to 5% of its assets in securities that 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 that are unrated but of
comparable quality as determined by Advisers. Unrated debt securities are not
necessarily of lower quality than rated securities but they may not be
attractive to as many buyers. A breakdown of the ratings for the bonds in the
Fund's portfolio is included under "What Are the Fund's Potential Risks?" below.
The Fund may also buy debt securities of issuers that are not currently paying
interest, as well as issuers who are in default, and may keep an issue that has
defaulted. The Fund will buy defaulted debt securities if, in the opinion of
Advisers, they may present an opportunity for subsequent price recovery, the
issuer may resume interest payments, or other advantageous developments appear
likely in the near future. In general, securities that default lose much of
their value before the actual default so that the security, and thus the Fund's
Net Asset Value, would be impacted before the default. Defaulted debt securities
may be illiquid and, as such, will be part of the 10% limit discussed under
"Illiquid Investments."
If the rating on an issue held in the Fund's portfolio is changed by the rating
service or the security goes into default, this 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 rating services, 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.
Certain of the high yielding, fixed-income securities in which the Fund may
invest may be purchased at a discount. These 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.
Zero Coupon and Pay-In-Kind Bonds. The Fund may buy certain bonds issued at a
discount which defer the payment of interest or pay no interest until maturity,
known as zero coupon bonds, or which pay interest through the issuance of
additional bonds, known as pay-in-kind bonds. For federal tax purposes, holders
of these bonds, such as the Fund, are deemed to receive interest over the life
of the 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 "What Are the Fund's Potential Risks? - High Yielding, Fixed-Income
Securities" below for more information about these bonds.
When-Issued and Delayed Delivery Transactions. The Fund may buy debt obligations
on a "when-issued" or "delayed delivery" basis. These transactions 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 those available when the transaction was
entered into. When the Fund is the buyer in the transaction, it will maintain,
in a segregated account with its custodian bank, cash or high-grade marketable
securities having an aggregate value equal to the amount of its 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 its investment objective and
policies, and not for the purpose of investment leverage. See "How Does the Fund
Invest Its Assets? - When-Issued, Delayed Delivery and TBA Transactions" in the
SAI for a more complete discussion of these transactions.
Loan Participations. The Fund may invest up to 5% of its assets in loan
participations and other related direct or indirect bank obligations. 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 that 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. Advisers may acquire
loan participations for the Fund when it believes that over the long term
appreciation will take place. An investment in these securities, however,
carries substantially the same risks as those 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."
Trade Claims. The Fund may invest a portion of its assets in trade claims. Trade
claims are purchased from creditors of companies in financial difficulty. For
buyers, such as the Fund, trade claims offer the potential for profits since
they are often purchased at a significantly discounted value and, consequently,
may generate capital appreciation if the value of the claim increases as the
debtor's financial position improves. If the debtor is able to pay the full
obligation on the face of the claim as a result of a restructuring or an
improvement in the debtor's financial condition, trade claims offer the
potential for higher income due to the difference in the face value of the claim
as compared to the discounted purchase price.
An investment in trade claims is speculative and carries a high degree of risk.
There can be no guarantee that the debtor will ever be able to satisfy the
obligation on the trade claim. Trade claims are not regulated by federal
securities laws or the SEC. Currently, trade claims are regulated primarily by
bankruptcy laws. Because trade claims are unsecured, holders of trade claims may
have a lower priority in terms of payment than most other creditors in a
bankruptcy proceeding. In light of the nature and risk of trade claims, the
Fund's investment in these instruments will not exceed 5% of its net assets at
the time of acquisition.
Concentration. 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.
U.S. Government Securities Series
The investment objective of this Fund is income through investment in a
portfolio limited to securities that 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 or assets held in cash
pending investment, the assets of the Fund are currently invested solely in
obligations of the Government National Mortgage Association ("GNMA(s)" 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, 1995. 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 "How Does
the Fund Invest Its Assets? - Credit Union Investment Regulations" in the SAI
for details.
The Fund also believes that it is generally a permissible investment for
national banks, federally chartered savings and loan associations, and the
Fishing Vessel Capital Construction Fund. These investors should confirm the
permissibility of proposed investments in this Fund with their counsel.
The Fund's investments are continually monitored and changes are made as market
conditions warrant. The Fund does not, however, engage in the trading of
securities for the purpose of realizing short-term profits.
GNMAs. GNMAs are mortgage-backed securities representing part ownership of a
pool of mortgage loans. GNMAs differ from other bonds in that principal may be
paid back on an unscheduled basis rather than returned in a lump sum at
maturity. The Fund will buy GNMAs whose principal and interest are guaranteed.
The Fund also buys adjustable rate GNMAs and other types of securities that may
be issued with the guarantee of the Government National Mortgage Association
(the "Association").
THE ASSOCIATION'S GUARANTEE OF PAYMENT OF PRINCIPAL AND INTEREST ON GNMAS IS
BACKED BY THE FULL FAITH AND CREDIT OF THE U.S. GOVERNMENT. THE ASSOCIATION MAY
BORROW U.S. TREASURY FUNDS TO THE EXTENT NEEDED TO MAKE PAYMENTS UNDER ITS
GUARANTEE. OF COURSE, THIS GUARANTEE DOES NOT EXTEND TO THE MARKET VALUE OR
YIELD OF THE GNMAS OR THE NET ASSET VALUE OR PERFORMANCE OF THE FUND, WHICH WILL
FLUCTUATE DAILY WITH MARKET CONDITIONS.
Payments to holders of GNMAs consist of the monthly distributions of interest
and principal less the Association's and issuers' fees. The portion of the
monthly payment that represents a return of principal will be reinvested by the
Fund in securities that may have interest rates that are higher or lower than
the obligation from which the principal payment was received.
When mortgages in the pool underlying a GNMA are prepaid by borrowers or as a
result of foreclosure, the principal payments are passed through to the GNMA
holders, such as the Fund. Accordingly, a GNMA's life is likely to be
substantially shorter than the stated maturity of the mortgages in the
underlying pool. Because of the variation in prepayment rates, it is not
possible to accurately predict the life of a particular GNMA.
To-Be-Announced and Delayed Delivery Transactions. The Fund may buy and sell
GNMAs on a "To-Be-Announced" ("TBA") and "delayed delivery" basis. These
transactions are arrangements under which the Fund may buy securities with
payment and delivery scheduled for a future time, up to 60 days after purchase.
These transactions are subject to market fluctuation and the risk that the value
or yields at delivery may be more or less than those available when the
transaction was entered into. In TBA and delayed delivery transactions, the Fund
relies on the seller to complete the transaction. The seller'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 that may be invested in delayed delivery and
TBA purchase obligations. For more information about these transactions, please
see the SAI.
THE PRICE PER SHARE YOU RECEIVE WHEN YOU SELL YOUR SHARES MAY BE MORE OR LESS
THAN THE PRICE YOU PAID FOR THE SHARES. THE DIVIDENDS PER SHARE PAID BY THE FUND
MAY ALSO VARY.
Other Investment Policies of the Fund
Foreign Securities. The U.S. Government Securities Series may not buy securities
of foreign issuers. The Income Series may invest up to 25% of its assets in
foreign securities and the other Funds may invest without restriction in foreign
securities, provided such investments are consistent with the objectives and
comply with the concentration and diversification policies of the Funds. The
Funds, other than the Income Series, presently have no intention of investing
more than 10% of their net assets in foreign securities not publicly traded in
the U.S. 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 will ordinarily buy foreign securities that are traded in the U.S. or
buy 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. The Fund may also buy 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 tax and other laws limiting the amount and types of foreign
investments. Changes of governmental administrations or economic or monetary
policies in the U.S. or abroad, changed circumstances in dealings between
nations, or changes in currency convertibility or exchange rates could result in
investment losses for the Fund.
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 that are acquired by the Fund outside the U.S. and that 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 that 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 you. These rules are discussed in the SAI.
Options. Each Fund, except the U.S. Government Securities Series, may write
covered call options that are listed for trading on a national securities
exchange. This means that the Fund will only write options on securities that it
actually owns. A call option gives the buyer the right to buy the security on
which the option is written for a specified period of time and at 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 that 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 increase 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."
The Growth and DynaTech Series may buy put options. Put options on particular
securities may be purchased to protect against a decline in the market value of
the underlying security below the exercise price less the premium paid for the
option. A put option gives the holder the right to sell the underlying security
at the option exercise price at any time during the option period. The ability
to buy put options will allow the Fund to protect the unrealized gain in an
appreciated security in its portfolio without actually selling the security. In
addition, the Fund will continue to receive interest or dividend income on the
security. The Fund may sell a put option that it has previously purchased prior
to the sale of the securities underlying the option. These sales will result in
a net gain or loss, depending on whether the amount received on the sale is more
or less than the premium and other transaction costs paid for the put option
that is sold. The gain or loss may be wholly or partially offset by a change in
the value of the underlying security that the Fund owns or has the right to
acquire. The risk associated with put buying is if the value of the underlying
security exceeds the exercise price (or never declines below the exercise
price), the Fund may suffer a loss equal to the amount of the premium it paid
plus transaction costs.
The Fund's investment in options may be limited by the requirements of the Code
for qualification as a regulated investment company and are subject to special
tax rules that may affect the amount, timing and character of distributions to
you. These securities require the application of complex and special rules and
elections. For more information, please see the SAI.
Convertible Securities. Each Fund, except the U.S. Government Securities Series,
may invest in convertible securities. A convertible security is generally a debt
obligation or preferred stock that may be converted within a specified period of
time into a certain amount of common stock of the same or a different issuer. A
convertible security provides a fixed-income stream and the opportunity, through
its conversion feature, to participate in the capital appreciation resulting
from a market price advance in its underlying common stock. As with a straight
fixed-income security, a convertible security tends to increase in market value
when interest rates decline and decrease in value when interest rates rise. Like
a common stock, the value of a convertible security also tends to increase as
the market value of the underlying stock rises, and it tends to decrease as the
market value of the underlying stock declines. Because its value can be
influenced by both interest rate and market movements, a convertible security is
not as sensitive to interest rates as a similar fixed-income security, nor is it
as sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, not interest payments, and are usually treated as such for corporate
tax purposes.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
and subject to the following conditions, each Fund, 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 the Fund's total assets at the time of the most recent loan.
The borrower must deposit with the Fund's custodian bank collateral with an
initial market value of at least 102% of the initial market value of the
securities loaned, including any accrued interest, with the value of the
collateral and loaned securities marked-to-market daily to maintain collateral
coverage of at least 100%. This collateral shall consist of cash, securities
issued by the U.S. Government, its agencies or instrumentalities, or irrevocable
letters of credit. The lending of securities is a common practice in the
securities industry. The Fund may engage in security loan arrangements with the
primary objective of increasing the Fund's income either through investing 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.
Repurchase Agreements. Each Fund, except the U.S. Government Securities Series,
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 Advisers. 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 Board and will be held pursuant to a
written agreement.
Borrowing. None of the Funds borrow money or mortgage or pledge any of their
assets, except that each Fund may borrow for temporary or emergency purposes in
an amount up to 5% of its total asset value.
Illiquid Investments. None of the Funds may invest more than 10% of their net
assets, at the time of purchase, in illiquid securities. Illiquid securities are
generally securities that cannot be sold within seven days in the normal course
of business at approximately the amount at which the Fund has valued them.
Subject to this limitation, the Board has authorized each Fund, except the U.S.
Government Securities Series, to invest in restricted securities where such
investment is consistent with the Fund's investment objective and has authorized
such securities to be considered liquid to the extent Advisers determines on a
daily basis that there is a liquid institutional or other market for such
securities. Notwithstanding Advisers' determinations in this regard, the Board
will remain responsible for such determinations and will consider appropriate
action, consistent with the Fund's objective and policies, if the security
should become illiquid after 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 buying these securities or the market for these securities
contracts.
Percentage Restrictions. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in value of portfolio securities or the amount of net
assets will not be considered a violation of any of the foregoing policies.
Other Policies and Restrictions. Each Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the
SAI.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
High Yielding, Fixed-Income Securities. The Income Series may invest up to 100%
of its net assets in non-investment grade bonds. 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 not be considered a complete investment program and should be carefully
evaluated for its appropriateness in light of your overall investment needs and
goals. If you are on a fixed income or retired, you should also consider the
increased risk of loss to principal that is present with an investment in higher
risk securities such as those in which the Fund invests.
The market value of lower rated, fixed-income securities and unrated securities
of comparable quality, commonly known as junk bonds, tends to reflect individual
developments affecting the issuer to a greater extent than the market value of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Lower rated securities also tend to be more sensitive
to economic conditions than higher rated securities. These lower rated
fixed-income securities are considered by the rating agencies, on balance, to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and will
generally involve more credit risk than securities in the higher rating
categories. Even securities rated triple B by S&P or Moody's, ratings which are
considered investment grade, possess some speculative characteristics.
Issuers of 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 developments affecting
the issuer, 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. Current prices for
defaulted bonds are generally significantly lower than their purchase price, and
the Fund may have unrealized losses on such defaulted securities that are
reflected in the price of the Fund's shares. In general, securities that default
lose much of their value in the time period prior to the actual default so that
the Fund's net assets are impacted prior to the default. The Fund may retain an
issue that has defaulted because the issue may present an opportunity for
subsequent price recovery.
High yielding, fixed-income securities frequently have call or buy-back features
that 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, if a call were exercised by the issuer during
periods of declining interest rates, Advisers may find it necessary to replace
the securities with lower yielding securities, which could result in less net
investment income to the Fund. 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. The
Fund may be required under the Code and U.S. Treasury regulations to accrue
income for income tax purposes on defaulted obligations and to distribute the
income to the Fund's shareholders even though the Fund is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy any or all of these distribution requirements, the Fund
may be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
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 that 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 a
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 "How Are Fund Shares Valued?" in the SAI.)
The Fund is authorized to acquire high yielding, fixed-income securities that
are sold without registration under the federal securities laws and therefore
carry restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if the Fund is required to sell restricted securities before the
securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of restricted securities; however, the Fund will generally incur no costs when
the issuer is responsible for registering the securities.
The Fund may acquire high yielding, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The Fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yielding securities and adversely affected the
value of outstanding securities and the ability of issuers of such securities to
meet their obligations. Although the economy has improved considerably and high
yielding securities have performed more consistently since that time, there is
no assurance that the adverse effects previously experienced will not reoccur.
For example, the highly publicized defaults of some high yield issuers during
1989 and 1990 and concerns regarding a sluggish economy which continued into
1993, depressed the prices for many of these securities. While market prices may
be temporarily depressed due to these factors, the ultimate price of any
security will generally reflect the true operating results of the issuer. 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 Advisers' judgment, analysis and
experience in evaluating the creditworthiness of an issuer. In this evaluation,
Advisers 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 credit risk factors pertaining to lower rated securities also apply to lower
rated zero coupon, deferred interest and pay-in-kind bonds. These bonds carry an
additional risk in that, unlike bonds that 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 that 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 that pay interest through the issuance of
additional bonds. The Fund will be deemed to receive interest over the life of
such bonds and be treated as if interest were paid on a current basis for
federal income tax purposes, although no cash interest payments are received by
the Fund until the cash payment date or until the bonds mature. Accordingly,
during periods when the Fund receives no cash interest payments on its zero
coupon securities or deferred interest or pay-in-kind bonds, it may be required
to dispose of portfolio securities to meet the distribution requirements and
such sales may be subject to the risk factors discussed above. The Fund is not
limited in the amount of its assets that may be invested in such securities.
Further information is included under "How Taxation Affects You and the Fund."
Asset Composition Table. A credit rating by a rating agency evaluates only the
safety of principal and interest of a bond, and does not consider the market
value risk associated with an investment in such a bond. The table below shows
the percentage of the Income Series' assets invested in securities rated in each
of the specific rating categories shown and those that are not rated by the
rating agency but deemed by Advisers to be of comparable credit quality. 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, 1995. The Appendix to this prospectus includes a
description of each rating category.
Average Weighted
Moody's Rating Percentage of Assets
- --------------------------------------------------------
Aaa................................... 9.59%
Aa.................................... 1.70%
A..................................... 0.01%
Baa .................................. 7.29%
Ba.................................... 4.55%
B..................................... 21.57%
Caa*.................................. 5.58%
Ca.................................... 0.77%
*1.55% of these securities, which are unrated by the rating agency, have been
included in the Caa rating category.
Public Utilities Industries Securities. The Utilities Series has substantial
investments in the electric public utilities industries, which have certain
characteristics and risks which you should consider. These characteristics
include: risks associated with regulatory changes; risks associated with
interest rate fluctuations; 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 debt
and equity securities; difficulties in obtaining fuel for electric generation at
reasonable prices; risks associated with the operation of nuclear power plants;
and general effects of energy conservation. Historically, the Utilities Series'
investments in the public utilities industry have been predominantly in
dividend-yielding common stocks.
GNMAs. GNMA yields (interest income as a percentage of price) have historically
exceeded the current yields on other types of U.S. government securities with
comparable maturities. The effects of interest rate fluctuations and
unpredictable prepayments of principal, however, can greatly change realized
yields. As with most bonds, in a period of rising interest rates, the value of a
GNMA will generally decline. 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. This potential for prepayment during periods of declining
interest rates may reduce the general upward price increases of GNMAs as
compared to the increases experienced by noncallable debt securities over the
same periods. In addition, any premium paid on the purchase of a GNMA will be
lost if the obligation is prepaid. Of course, price changes of GNMAs and other
securities held by the U.S. Government Securities Series will have a direct
impact on the Net Asset Value per share of the Fund.
Foreign Securities. 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
that 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 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.
Interest Rate and Market Risk. To the extent a Fund invests in debt securities,
changes in interest rates in any country where the Fund is invested will affect
the value of the Fund's portfolio and its share price. Rising interest rates,
which often occur during times of inflation or a growing economy, are likely to
have a negative effect on the value of the Fund's shares. To the extent a Fund
invests in common stocks, a general market decline, in any country where the
Fund is invested, may also cause the Fund's share price to decline. The value of
worldwide stock markets and interest rates has increased and decreased in the
past. These changes are unpredictable and may happen again in the future.
WHO MANAGES THE FUND?
The Board. The Board oversees the management of the Custodian Funds and elects
its officers. The officers are responsible for each Fund's day-to-day
operations. The Board also monitors each Fund to ensure no material conflicts
exist between the two classes of shares. While none is expected, the Board will
act appropriately to resolve any material conflict that may arise.
Investment Manager. Advisers is the investment manager of the Fund and other
funds with aggregate assets of over $81 billion. It is wholly owned by
Resources, a publicly owned company engaged in the financial services industry
through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources.
Management Team. The teams responsible for the day-to-day management of each
Fund's portfolio are:
Growth Series - Vivian J. Palmieri since 1965 and Conrad B. Herrmann since 1991.
Vivian J. Palmieri
Vice President of Advisers
Mr. Palmieri holds a Bachelor of Arts degree in economics from Williams College.
He has been with Advisers or an affiliate since 1965. Mr. Palmieri is a member
of several securities industry-related associations.
Conrad B. Herrmann
Portfolio Manager of Advisers
Mr. Herrmann is a Chartered Financial Analyst and holds a Master of Business
Administration degree from Harvard University. He earned his Bachelor of Arts
degree from Brown University. Mr. Herrmann has been with Advisers or an
affiliate since 1989 and is a member of several securities industry
associations.
Utilities Series - Sally Edwards Haff since 1990; Gregory E. Johnson since 1987;
and Ian Link since 1995.
Sally Edwards Haff
Portfolio Manager of Advisers
Ms. Haff is a Chartered Financial Analyst and holds a Bachelor of Arts degree in
economics from the University of California at Santa Barbara. She has been with
Advisers or an affiliate since 1986. Ms. Haff is a member of several securities
industry-related associations.
Gregory E. Johnson
Vice President of Advisers
Mr. Johnson holds a Bachelor of Science degree in accounting and business
administration from Washington and Lee University and a certificate as a
Certified Public Accountant. He has been with Advisers or an affiliate since
1986. Mr. Johnson is a member of several securities industry-related
associations.
Ian Link
Portfolio Manager of Advisers
Mr. Link is a Chartered Financial Analyst and holds a Bachelor of Arts degree in
economics from the University of California at Davis. He has been with Advisers
or an affiliate since 1989. He is a member of several securities
industry-related associations.
DynaTech Series - Rupert H. Johnson, Jr. since inception; Lisa Costa since 1983;
and Kevin Carrington since 1995.
Rupert H. Johnson, Jr.
President of Advisers
Mr. Johnson is a graduate of Washington and Lee University. He has been with
Advisers or an affiliate since 1965 and prior thereto was an officer in the U.S.
Marine Corps. Mr. Johnson is a member of several securities industry
associations.
Lisa Costa
Portfolio Manager of Advisers
Ms. Costa holds a Master of Business Administration degree from Golden Gate
University, and a Bachelor of Science degree in finance from California State
University at Hayward. She has been with Advisers or an affiliate since 1983.
Ms. Costa is a Chartered Market Technician and a member of several securities
industry-related committees and associations.
Kevin Carrington
Portfolio Manager of Advisers
Mr. Carrington holds a Bachelor of Science degree in business administration
from California State University at Chico. He has been with Franklin Resources,
Inc. since 1992 and with Advisers or an affiliate since 1993.
Income Series - Charles B. Johnson since 1957 and Matt Avery since 1989.
Charles B. Johnson
Chairman of the Board of Advisers
Mr. Johnson holds a Bachelor of Arts degree in economics and political science
from Yale University. He has been with Advisers or an affiliate since 1957. Mr.
Johnson is a member of several securities industry-related associations.
Matt Avery
Portfolio Manager of Advisers
Mr. Avery hold a Master of Business Administration degree from the University of
California at Los Angeles and a Bachelor of Science degree in industrial
engineering from Stanford University. He has been in the securities industry
since 1982 and with Advisers or an affiliate since 1987.
U.S. Government Securities Series - Jack Lemein since 1984; Anthony Coffey since
1989; and Roger Bayston since 1993.
Jack Lemein
Senior Vice President of Advisers
Mr. Lemein 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 or
an affiliate since 1984. He is a member of several securities industry-related
associations.
Anthony Coffey
Portfolio Manager of Advisers
Mr. Coffey is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned a Bachelor of Arts degree in applied mathematics and economics from
Harvard University. Mr. Coffey has been with Advisers or an affiliate since
1989. He is a member of several securities industry-related associations.
Roger Bayston
Portfolio Manager of Advisers
Mr. Bayston is a Chartered Financial Analyst and holds a Masters of Business
Administration degree from the University of California at Los Angeles. He
earned his Bachelor of Science degree from the University of Virginia. He has
been with Advisers or an affiliate since earning his MBA in 1991.
Services Provided by Advisers. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also provides certain administrative services and
facilities for the Fund and performs similar services for other funds. Please
see "Investment Advisory and Other Services" and "General Information" in the
SAI for information on securities transactions and a summary of the Fund's Code
of Ethics.
Management Fees. During the fiscal year ended September 30, 1995, management
fees paid to Advisers, as a percentage of average monthly net assets, and total
expenses of Class I and Class II shares, including the fees paid to Advisers,
were as follows:
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT OPERATING EXPENSES
------------------
FEES CLASS I CLASS II*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Series............................. 0.50% 0.90% 1.70%
DynaTech Series........................... 0.63% 1.01% n/a
Utilities Series.......................... 0.46% 0.73% 1.26%
Income Series............................. 0.46% 0.71% 1.23%
U.S. Government
Securities Series......................... 0.45% 0.61% 1.18%
</TABLE>
*Annualized.
Portfolio Transactions. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares when selecting a broker or dealer. Please see "How Does the Fund
Purchase Securities For Its Portfolio?" in the SAI for more information.
The Rule 12b-1 Plans
Each class of each Fund has a distribution plan or "Rule 12b-1 Plan" under which
it may pay or reimburse Distributors or others for activities primarily intended
to sell shares of the class. These expenses may include, among others,
distribution or service fees paid to Securities Dealers or others who have
executed a servicing agreement with the Fund, Distributors or its affiliates,
printing prospectuses and reports used for sales purposes, preparing and
distributing sales literature and advertisements, and a prorated portion of
Distributors' overhead expenses.
Payments by the Growth and DynaTech Series under the Class I plan may not exceed
0.25% per year of Class I's average daily net assets. Payments by the Utilities,
Income and U.S. Government Securities Series under the Class I plan may not
exceed 0.15% per year of Class I's average daily net assets. All distribution
expenses over this amount will be borne by those who have incurred them.
Under the Class II plan, the Growth and DynaTech Series may pay Distributors up
to 0.75% per year and the Utilities, Income and U.S. Government Securities
Series may pay Distributors up to 0.50% per year of Class II's average daily net
assets to pay Distributors or others for providing distribution and related
services and bearing certain Class II expenses. All distribution expenses over
this amount will be borne by those who have incurred them. During the first year
after a purchase of Class II shares, Distributors may keep this portion of the
Rule 12b-1 fees associated with the Class II purchase.
The Growth and DynaTech Series may also pay a servicing fee of up to 0.25% per
year and the Utilities, Income and U.S. Government Securities Series may pay a
servicing fee of up to 0.15% per year of Class II's average daily net assets
under the Class II plan. This fee may be used to pay Securities Dealers or
others for, among other things, helping to establish and maintain customer
accounts and records, helping with requests to buy and sell shares, receiving
and answering correspondence, monitoring dividend payments from the Fund on
behalf of customers, and similar servicing and account maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield and
current distribution rate. Performance figures are usually calculated using the
maximum sales charge, but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not indicate future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "General Information" in the SAI.
HOW IS THE FUND ORGANIZED?
Each Fund is a diversified series of Custodian Funds, an open-end management
investment company, commonly called a mutual fund. It was incorporated under the
laws of Delaware in 1947, reincorporated under the laws of Maryland in 1979, and
is registered with the SEC under the 1940 Act. Each Fund, except the DynaTech
Series, began offering two classes of shares on May 1, 1995: Income Series -
Class I, Utilities Series - Class I, Growth Series - Class I and U.S. Government
Securities Series - Class I, and Income Series - Class II, Utilities Series -
Class II, Growth Series- Class II and U.S. Government Securities Series - Class
II. The DynaTech Series began offering two classes of shares on September 16,
1996: DynaTech Series - Class I and DynaTech Series - Class II. All shares
purchased before those times are considered Class I shares. Additional classes
of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state corporation law, or (3) required to
be voted on separately by the 1940 Act. Shares of each class of a series have
the same voting and other rights and preferences as the other classes and series
of Custodian Funds for matters that affect Custodian Funds as a whole. In the
future, additional series may be offered.
Custodian Funds has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the Board.
If this happens, holders of the remaining shares voting will not be able to
elect anyone to the Board.
Custodian Funds does not intend to hold annual shareholder meetings. It may hold
a special meeting of a series, however, for matters requiring shareholder
approval under the 1940 Act. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares to
vote on the removal of Board members. The 1940 Act requires that we help you
communicate with other shareholders in connection with electing or removing
members of the Board. A special meeting may also be called by a majority of the
Board or by the written request of shareholders holding at least 25% of the
shares entitled to vote at the meeting.
HOW TAXATION AFFECTS YOU AND THE FUND
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information Regarding
Taxation" in the SAI.
Each Fund is treated as a separate entity for federal income tax purposes. Each
Fund intends to continue to qualify as a regulated investment company under
Subchapter M of the Code. By distributing all of its income and meeting certain
other requirements relating to the sources of its income and diversification of
its assets, the Fund will not be liable for federal income or excise taxes.
For federal income tax purposes, any income dividends that you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
For the fiscal year ended September 30, 1995, the following amounts of income
dividends may qualify for the federal corporate dividends-received deduction:
INCOME DIVIDEND
FUND QUALIFYING
- -----------------------------------------------------
Growth Series......................... 99.88%
DynaTech Series....................... 41.32%
Utilities Series...................... 90.73%
Income Series......................... 27.99%
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, 1995, 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 that are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if received by
you on December 31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends 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 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
you with the percentage of any dividends paid which may qualify for tax-free
treatment. You should consult your own tax advisor with respect to the
application of your state and local income tax laws to these distributions.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisor regarding the applicability of U.S.
withholding or other taxes to distributions received by you from the Fund and
the application of foreign tax laws to these distributions.
You should also consult your tax advisor with respect to the applicability of
any state and local intangible property or income taxes on your shares of the
Fund and distributions and redemption proceeds received from the Fund.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
Opening Your Account
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. PLEASE INDICATE WHICH CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT
SPECIFY A CLASS, YOUR PURCHASE WILL BE AUTOMATICALLY INVESTED IN CLASS I SHARES.
MINIMUM
INVESTMENTS*
- ---------------------------------
To Open Your Account...... $100
To Add to Your Account.... $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares. Currently, the Growth and DynaTech Series do not allow
investments by Market Timers.
Deciding Which Class to Buy
You should consider a number of factors when deciding which class of shares to
buy. IF YOU PLAN TO BUY $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO
BUY CLASS I SHARES WITHOUT A SALES CHARGE, YOU MAY NOT BUY CLASS II SHARES.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds;
and
o you plan to sell a substantial number of your shares within approximately
six years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
Purchase Price of Fund Shares
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
AS A PERCENTAGE OF AMOUNT PAID TO
------------------ DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE*
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS I - GROWTH AND DYNATECH SERIES
Under $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 None
CLASS I - INCOME, UTILITIES AND U.S.
GOVERNMENT SECURITIES SERIES
Under $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 None
CLASS II - ALL FUNDS
Under $1,000,000** 1.00% 1.01% 1.00%
</TABLE>
*The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated.
**A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
Sales Charge Reductions and Waivers
IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't
include this statement, we cannot guarantee that you will receive the sales
charge reduction or waiver.
Cumulative Quantity Discounts - Class I Only. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your Class I and Class II
shares in the Franklin Templeton Funds, as well as those of your spouse,
children under the age of 21 and grandchildren under the age of 21. If you are
the sole owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
Letter of Intent - Class I Only. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy and Sell Shares? - Letter of Intent" in the SAI or call
Shareholder Services.
Group Purchases - Class I Only. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
Sales Charge Waivers. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or a
REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares reinvested were subject
to a Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to Class I purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to invest
at least $500,000 in the Franklin Templeton Funds over a 13 month period.
Retirement plans that are not Qualified Retirement Plans or SEPS, such as 403(b)
or 457 plans, must also meet the requirements described under "Group Purchases -
Class I Only" above.
9. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
10. Broker-dealers and qualified registered investment advisors who have entered
into a supplemental agreement with Distributors for their clients who are
participating in comprehensive fee programs, sometimes known as wrap fee
programs
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
Other Payments to Securities Dealers
The payments below apply to Securities Dealers who initiate and are responsible
for Class II purchases and certain Class I purchases made without a sales
charge. A Securities Dealer may only receive one of the following payments for
each qualifying purchase. The payments described below are paid by Distributors
or one of its affiliates, at its own expense, and not by the Fund or its
shareholders.
1. Securities Dealers may receive up to 1% of the purchase price for Class II
purchases. During the first year after the purchase, Distributors may keep a
part of the Rule 12b-1 fees associated with that purchase.
2. For the Growth and DynaTech Series, Securities Dealers will receive up to 1%
of the purchase price for Class I purchases of $1 million or more. For the
Income, Utilities and U.S. Government Securities Series, Securities Dealers will
receive up to 0.75% of the purchase price for Class I purchases of $1 million or
more.
3. Securities Dealers may, in the sole discretion of Distributors, receive up to
1% of the purchase price for Class I purchases made under waiver category 8
above.
4. Securities Dealers may receive up to 0.25% of the purchase price for Class I
purchases made under waiver categories 6 and 9 above.
PLEASE SEE THE SAI FOR ANY BREAKPOINTS THAT MAY APPLY.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. Securities Dealers may not use sales of the Fund's shares to qualify for
this compensation if prohibited by the laws of any state or self-regulatory
agency, such as the NASD.
General
Securities laws of states in which the Fund's shares are offered for sale may
differ from federal law, and banks and financial institutions selling Fund
shares may be required to register as dealers pursuant to state law.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Class II shares.
- -------------------------------------- -----------------------------------------
METHOD STEPS TO FOLLOW
- -------------------------------------- -----------------------------------------
BY MAIL 1. Send us written instructions signed by
all account owners
2. Include any outstanding share
certificates for the shares you're
exchanging
- -------------------------------------- -----------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to
exchange by phone to apply to your
account, please let us know.
- -------------------------------------- -----------------------------------------
THROUGH YOUR DEALER Call your investment representative
- -------------------------------------- -----------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
Will Sales Charges Apply to My Exchange?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
Contingent Deferred Sales Charge - Class I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
Contingent Deferred Sales Charge - Class II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
CDSC, such as shares from the reinvestment of dividends and capital gains ("free
shares"), $2,000 in shares that are no longer subject to a CDSC because you have
held them for longer than 18 months ("matured shares"), and $3,000 in shares
that are still subject to a CDSC ("CDSC liable shares"). If you exchange $3,000
into a new fund, $500 will be exchanged from free shares, $1,000 from matured
shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all
transactions. Please notify us in writing if you do not want this option to
be available on your account(s). Additional procedures may apply. Please
see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange
out of the Fund within two weeks of an earlier exchange request, (ii)
exchange shares out of the Fund more than twice in a calendar quarter, or
(iii) exchange shares equal to at least $5 million, or more than 1% of the
Fund's net assets. Shares under common ownership or control are combined
for these limits. If you exchange shares as described in this paragraph,
you will be considered a Market Timer. Each exchange by a Market Timer, if
accepted, will be charged $5.00. Some of our funds do not allow investments
by Market Timers. Currently, the Growth and DynaTech Series do not allow
investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
- -------------------------------------- -----------------------------------------
METHOD STEPS TO FOLLOW
- -------------------------------------- -----------------------------------------
BY MAIL 1. Send us written instructions signed by
all account owners
2. Include any outstanding share
certificates for the shares you are
selling
3. Provide a signature guarantee if
required
4. Corporate, partnership and trust
accounts may need to send additional
documents. Accounts under court
jurisdiction may have additional
requirements.
- -------------------------------------- -----------------------------------------
BY PHONE Call Shareholder Services
(Only available if you have Telephone requests will be accepted:
completed and sent to us the
telephone redemption agreement o If the request is $50,000 or less.
included with this prospectus) Institutional accounts may exceed
$50,000 by completing a separate
agreement. Call Institutional
Services to receive a copy.
o If there are no share certificates
issued for the shares you want to
sell or you have already returned
them to the Fund
o Unless you are selling shares in a
Trust Company retirement plan
account
o Unless the address on your account
was changed by phone within the
last 30 days
- -------------------------------------- -----------------------------------------
THROUGH YOUR DEALER Call your investment representative
- -------------------------------------- -----------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Trust Company Retirement Plan Accounts
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
Contingent Deferred Sales Charge
A Contingent Deferred Sales Charge may apply to Class I purchases of $1 million
or more if you sell all or a portion of the shares within one year and any Class
II purchase if you sell the shares within 18 months. The charge is 1% of the
value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. Distributors keeps the charge to recover payments made to
Securities Dealers.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period, 2) Shares purchased with reinvested
dividends and capital gain distributions, and 3) Shares held longer than the
Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
Waivers. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before
February 1, 1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% a month of an account's Net Asset Value
(3% quarterly, 6% semiannually or 12% annually). For example, if you
maintain an annual balance of $1 million in Class I shares, you can
withdraw up to $120,000 annually through a systematic withdrawal plan free
of charge. Likewise, if you maintain an annual balance of $10,000 in Class
II shares, $1,200 may be withdrawn annually free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to
termination or plan transfer
o Court ordered redemptions from any UTMA account
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of 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 capital loss carryforward or post October
loss deferral) may generally be made once a year in December to reflect any net
short-term and net long-term capital gains realized by the Fund as of October 31
of the current fiscal year and any undistributed capital gains from the prior
fiscal year. The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.
The Income and U.S. Government Securities Series declare dividends from their
net investment income monthly to shareholders of record on the last business day
of that month and pay them on or about the 15th day of the next month. Each of
these Fund may defer the December 31 record date to a later date in January for
tax or other operational reasons. The Utilities Series generally declares
dividends from its net investment income quarterly, and the Growth and DynaTech
Series generally declare dividends annually.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of each class.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the same
class of the Fund (without a sales charge or imposition of a Contingent Deferred
Sales Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. Receive distributions in cash - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days prior to
the record date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
How and When Shares Are Priced
The Fund is open for business each day the Exchange is open. We determine the
Net Asset Value per share of each class of a Fund as of the scheduled close of
the Exchange, generally 1:00 p.m. Pacific time. You can find the prior day's
closing Net Asset Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class of a Fund is
calculated on a pro rata basis. It is based on each class' proportionate
participation in the Fund, determined by the value of the shares of each class.
Each class, however, bears the Rule 12b-1 fees payable under its Rule 12b-1
plan. To calculate Net Asset Value per share of each class, the assets of each
class are valued and totaled, liabilities are subtracted, and the balance,
called net assets, is divided by the number of shares of the class outstanding.
Each Fund's assets are valued as described under "How Are Fund Shares Valued?"
in the SAI.
The Price We Use When You Buy or Sell Shares
You buy shares at the Offering Price of the class you wish to purchase, unless
you qualify to buy shares at a reduced sales charge or with no sales charge. The
Offering Price of each class is based on the Net Asset Value per share of the
class and includes the maximum sales charge. We calculate it to two decimal
places using standard rounding criteria. You sell shares at Net Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the
evening if preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. YOU SHOULD
VERIFY THAT THE INSTITUTION IS AN ELIGIBLE GUARANTOR PRIOR TO SIGNING. A
NOTARIZED SIGNATURE IS NOT SUFFICIENT.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized telephone
transactions if we do not follow reasonable procedures designed to verify the
identity of the caller. When you call, we will request personal or other
identifying information, and will also record calls. For your protection, we may
delay a transaction or not implement one if we are not reasonably satisfied that
telephone instructions are genuine. If this occurs, we will not be liable for
any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
Trust Company Retirement Plan Accounts. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
Account Registrations and Required Documents
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, ALL owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
- ------------------------------- ------------------------------------------------
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- ------------------------------- ------------------------------------------------
CORPORATION Corporate Resolution
- ------------------------------- ------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- ------------------------------- ------------------------------------------------
TRUST 1. The pages from the trust document that
identify the trustees, or
2. A certification for trust
- ------------------------------- ------------------------------------------------
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Electronic Instructions. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
Tax Identification Number
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
Automatic Payroll Deduction
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below. There are no
service charges for establishing or maintaining a systematic withdrawal plan.
Once your plan is established, any distributions paid by the Fund will be
automatically reinvested in your account. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the first business day of the month in which a payment is scheduled. You will
generally receive your payment by the fifth business day of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
Because of the front-end sales charge, you may not want to set up a systematic
withdrawal plan if you plan to buy shares on a regular basis. Shares sold under
the plan may also be subject to a Contingent Deferred Sales Charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
Electronic Fund Transfers
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton
Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the code number for each class to use TeleFACTS. The code numbers
for Class I and Class II are:
CODE NUMBER
FUND NAME CLASS I CLASS II
- --------------------------------------------------------------------------------
Growth Series 106 206
DynaTech Series 108 208
Utilities Series 107 207
Income Series 109 209
U.S. Government Securities Series 110 210
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments.
PLEASE VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce
Fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if you
would like an additional free copy of the Fund's financial reports or an
interim quarterly report.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION
(PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- --------------- ------------- -----------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Directors of Custodian Funds
CD - Certificate of deposit
Class I and Class II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
Exchange - New York Stock Exchange
Franklin Funds - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust
Franklin Templeton Funds - The Franklin Funds and the Templeton Funds
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Market Timer(s) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I of the Growth and DynaTech Series,
4.25% for Class I of the Utilities, Income and U.S. Government Securities
Series, and 1% for Class II.
Qualified Retirement Plan(s) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TeleFACTS(R) - Franklin Templeton's automated customer servicing system
Templeton Funds - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
Trust Company - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or another wholly owned
subsidiary of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
Moody's
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be 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, 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.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in 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.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCCrating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER RATINGS
Moody's
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
PROSPECTUS & APPLICATION
U.S. GOVERNMENT SECURITIES SERIES
Franklin Custodian Funds, Inc.
February 1, 1996, as amended September 16, 1996
INVESTMENT STRATEGY: Income
This prospectus describes the U.S. Government Securities Series (the "Fund"). It
contains information you should know before investing in the Fund. Please keep
it for future reference.
The Fund's SAI, dated February 1, 1996, as may be amended from time to time,
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Shares of the Fund involve investment risks, including the possible
loss of principal.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC 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 Distributors.
U.S. GOVERNMENT SECURITIES SERIES
February 1, 1996, as amended September 16, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
About the Fund
Expense Summary..........................................
Financial Highlights.....................................
How Does the Fund Invest Its Assets?.....................
What Are the Fund's Potential Risks?.....................
Who Manages the Fund?....................................
How Does the Fund Measure Performance?...................
How Is the Fund Organized?...............................
How Taxation Affects You and the Fund....................
About Your Account
How Do I Buy Shares?.....................................
May I Exchange Shares for Shares of Another Fund?........
How Do I Sell Shares?....................................
What Distributions Might I Receive From the Fund?........
Transaction Procedures and Special Requirements..........
Services to Help You Manage Your Account.................
Glossary
Useful Terms and Definitions.............................
When reading this prospectus, you will see certain terms in capital letters.
This means the term is explained in our glossary section.
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended September 30, 1995. The Class II figures are annualized. Your actual
expenses may vary.
A. Shareholder Transaction Expenses+ Class I Class II
------- --------
Maximum Sales Charge Imposed on
Purchases (as a percentage of
Offering Price) 4.25% 1.00%++
Deferred Sales Charge+++ None 1.00%
Exchange Fee (per transaction) $5.00* $5.00*
B. Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.45% 0.45%
Rule 12b-1 Fees 0.08%** 0.65%**
Other Expenses 0.08% 0.08%
----- -----
Total Fund Operating Expenses 0.61% 1.18%
===== =====
C. Example
Assume the annual return for each class is 5% and operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
1 Year 3 Years 5 Years 10 Years
Class I $48*** $61 $75 $115
Class II $32 $47 $74 $152
For the same Class II investment, you would pay projected expenses of $22 if you
did not sell your shares at the end of the first year. Your projected expenses
for the remaining periods would be the same.
This is just an example. It does not represent past or future expenses or
returns. Actual expenses and returns may be more or less than those shown. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of each class and are not directly charged to
your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++Although Class IIhas a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher.Over time you may pay more for Class II shares. Please see
"How Do I Buy Shares?Deciding Which Class to Buy."
+++A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more if you sell the shares withinone year and any Class II purchase
if you sell the shares within 18 months. There is no front-end sales charge if
you invest $1 million or more in Class Ishares. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchangeswithout a
fee.
**These fees may not exceed 0.15% for Class I and 0.65% for Class II. The
combination of front-end sales charges and Rule 12b-1 fees could causelong-term
shareholders to pay more than the economic equivalent of the maximum front-end
sales charge permitted under the NASD's rules.
***Assumes a ContingentDeferred Sales Charge will not apply.
Financial Highlights
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in the Fund's Annual Report to Shareholders for the fiscal
year ended September 30, 1995. The Annual Report to Shareholders also includes
more information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
FOR THE SIX
MONTHS
ENDED
MARCH 31,
1996 YEAR ENDED SEPT. 30,
-----------------------------------------------------------------------------------------------------------------
Class I Shares (UNAUDITED) 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-----------------------------------------------------------------------------------------------------------------
PER SHARE
OPERATING
PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value
at Beginning of
Period $ 6.87 $ 6.51 $ 7.20 $ 7.26 $ 7.14 $ 6.86 $ 6.90 $ 6.98 $ 6.87 $ 7.41 $ 7.33
-----------------------------------------------------------------------------------------------------------------
Net Investment
Income 0.245 0.497 0.500 0.557 0.609 0.653 0.668 0.688 0.691 0.698 0.790
Net Realized &
Unrealized Gain
(Loss) on
Securities (0.069) 0.348 (0.678) (0.056) 0.106 0.287 (0.020) (0.072) 0.115 (0.500) 0.165
-----------------------------------------------------------------------------------------------------------------
Total From
Investment
Operations 0.176 0.845 (0.178) 0.501 0.715 0.940 (0.648) 0.616 0.806 0.198 0.955
=================================================================================================================
Distributions From
Net Investment
Income (0.246) (0.485) (0.512) (0.561) (0.595) (0.660) (0.688) (0.696) (0.696) (0.724) (0.875)
Distributions From
Realized Capital
Gains ---- ---- ---- ---- ---- ---- ---- ---- ---- (0.014) ----
-----------------------------------------------------------------------------------------------------------------
Total
Distributions (0.246) (0.485) (0.512) (0.561) (0.595) (0.660) (0.688) (0.696) (0.696) (0.738) (0.875)
-----------------------------------------------------------------------------------------------------------------
Net Asset Value
at End of Period $ 6.80 $ 6.87 $ 6.51 $ 7.20 $ 7.26 $ 7.14 $ 6.86 $ 6.90 $ 6.98 $ 6.87 $ 7.41
=================================================================================================================
Total Return* 2.57% 13.56% (2.75)% 6.86% 10.14% 13.97% 9.47% 8.95% 11.77% 2.22% 13.25%
RATIOS/SUPPLEMENTAL
DATA**
Net Assets at End
of Period
(in 000's) $10,659,062$11,101,605$11,668,747$14,268,516$13,617,157$12,426,910$11,143,333$11,260,310$12,112,775$13,024,437$14,361,682
Ratio of
Expenses to
Average Net Assets 0.63%+ 0.61% 0.55% 0.52% 0.53% 0.52% 0.52% 0.52% 0.53% 0.52% 0.54%
Ratio of Net
Investment
Income to Average
Net Assets 7.09%+ 7.50% 7.37% 7.71% 8.46% 9.26% 9.72% 9.99% 9.85% 9.49% 9.93%
Portfolio
Turnover Rate*** 4.52% 5.48% 18.28% 43.10% 38.75% 22.14% 18.23% 25.70% 34.14% 52.92% 36.02%
Average
Commission Rate --- --- --- --- --- --- --- --- --- --- ---
</TABLE>
FOR THE SIX
MONTHS FOR THE
ENDED MARCH PERIOD ENDED
31, 1996 SEPT. 30,
Class II Shares (UNAUDITED) 1995++
-----------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $ 6.85 $ 6.67
-----------------------------
Net Investment Income 0.235 0.206
Net Realized & Unrealized Gain (Loss)
on Securities (0.082) 0.167
-----------------------------
Total From Investment Operations 0.153 0.373
=============================
Distributions From Net Investment Income (0.223) (0.193)
Distributions From Realized Capital Gains --- ---
-----------------------------
Total Distributions (0.223) (0.193)
-----------------------------
Net Asset Value at End of Period $ 6.78 $ 6.85
=============================
Total Return* 2.23% 5.66%
RATIOS/SUPPLEMENTAL DATA**
Net Assets at End of Period (in 000's) $35,701 $11,695
Ratio of Expenses to Average Net Assets 1.20%+ 1.18%+
Ratio of Net Investment Income to 7.03%+ 6.48%+
Average Net Assets
Portfolio Turnover Rate*** 4.52% 5.48%
Average Commission Rate --- ---
*Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or the Contingent Deferred Sales Charge and assumes reinvestment of
dividends and capital gains, if any, at Net Asset Value. Prior to May 1, 1994,
dividends were reinvested at the maximum Offering Price. Effective May 1, 1994,
with the implementation of the Rule 12b-1 plan for Class I shares, the sales
charge on reinvested dividends was eliminated.
**Ratios for the period ended 1995, Class I and Class II, have been calculated
using the daily average net assets during the period.
***Maturity of U.S. government issues and the reinvestment of the proceeds
thereof are considered purchases and sales of securities in computing the
portfolio turnover rate.
+Annualized.
++For the period May 1, 1995 (effective date) to September 30, 1995.
How Does the Fund Invest Its Assets?
The Fund's Investment Objective
The Fund's investment objective is income through investment in a portfolio
limited to securities that 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. Of course, there is no assurance that
the Fund's objective will be achieved.
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 or assets held in cash pending investment, the assets
of the Fund are currently invested solely in obligations of the Government
National Mortgage Association ("GNMA(s)" 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, 1995. 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 "How Does
the Fund Invest Its Assets? - Credit Union Investment Regulations" in the SAI
for details.
The Fund also believes that it is generally a permissible investment for
national banks, federally chartered savings and loan associations, and the
Fishing Vessel Capital Construction Fund. These investors should confirm the
permissibility of proposed investments in this Fund with their counsel.
Types of Securities the Fund May Invest In
GNMAs. GNMAs are mortgage-backed securities representing part ownership of a
pool of mortgage loans. GNMAs differ from other bonds in that principal may be
paid back on an unscheduled basis rather than returned in a lump sum at
maturity. The Fund will buy GNMAs whose principal and interest are guaranteed.
The Fund also buys adjustable rate GNMAs and other types of securities that may
be issued with the guarantee of the Government National Mortgage Association
(the "Association").
The Association's guarantee of payment of principal and interest on GNMAs is
backed by the full faith and credit of the U.S. government. The Association may
borrow U.S. Treasury funds to the extent needed to make payments under its
guarantee. Of course, this guarantee does not extend to the market value or
yield of the GNMAs or the Net Asset Value or performance of the Fund, which will
fluctuate daily with market conditions.
Payments to holders of GNMAs consist of the monthly distributions of interest
and principal less the Association's and issuers' fees. The portion of the
monthly payment that represents a return of principal will be reinvested by the
Fund in securities that may have interest rates that are higher or lower than
the obligation from which the principal payment was received.
When mortgages in the pool underlying a GNMA are prepaid by borrowers or as a
result of foreclosure, the principal payments are passed through to the GNMA
holders, such as the Fund. Accordingly, a GNMA's life is likely to be
substantially shorter than the stated maturity of the mortgages in the
underlying pool. Because of the variation in prepayment rates, it is not
possible to accurately predict the life of a particular GNMA.
To-Be-Announced and Delayed Delivery Transactions. The Fund may buy and sell
GNMAs on a "To-Be-Announced" ("TBA") and "delayed delivery" basis. These
transactions are arrangements under which the Fund may buy securities with
payment and delivery scheduled for a future time, up to 60 days after purchase.
These transactions are subject to market fluctuation and the risk that the value
or yields at delivery may be more or less than those available when the
transaction was entered into. In TBA and delayed delivery transactions, the Fund
relies on the seller to complete the transaction. The seller'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 that may be invested in delayed delivery and
TBA purchase obligations. For more information about these transactions, please
see the SAI.
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
its 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's investments are continually monitored and changes are made as market
conditions warrant. The Fund does not, however, engage in the trading of
securities for the purpose of realizing short-term profits.
Percentage Restrictions. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in value of portfolio securities or the amount of net
assets will not be considered a violation of any of the foregoing policies.
Other Policies and Restrictions. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the
SAI.
What Are the Fund's Potential Risks?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund.
GNMAs. GNMA yields (interest income as a percentage of price) have historically
exceeded the current yields on other types of U.S. government securities with
comparable maturities. The effects of interest rate fluctuations and
unpredictable prepayments of principal, however, can greatly change realized
yields. As with most bonds, in a period of rising interest rates, the value of a
GNMA will generally decline. 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. This potential for prepayment during periods of declining
interest rates may reduce the general upward price increases of GNMAs as
compared to the increases experienced by noncallable debt securities over the
same periods. In addition, any premium paid on the purchase of a GNMA will be
lost if the obligation is prepaid. Of course, price changes of GNMAs and other
securities held by the Fund will have a direct impact on the Net Asset Value per
share of the Fund.
Interest Rate Risk. Changes in interest rates will affect the value of the
Fund's portfolio and its share price. Rising interest rates, which often occur
during times of inflation or a growing economy, are likely to have a negative
effect on the value of the Fund's shares. Interest rates have increased and
decreased in the past. These changes are unpredictable and may happen again in
the future.
The price per share you receive when you sell your shares may be more or less
than the price you paid for the shares. The dividends per share paid by the Fund
may also vary.
Who Manages the Fund?
The Board. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
two classes of shares. While none is expected, the Board will act appropriately
to resolve any material conflict that may arise.
Investment Manager. Advisers is the investment manager of the Fund and other
funds with aggregate assets of over $81 billion. It is wholly owned by
Resources, a publicly owned company engaged in the financial services industry
through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources.
Management Team. The team responsible for the day-to-day management of the
Fund's portfolio is: Jack Lemein since 1984, and Roger Bayston and Anthony
Coffey since 1993.
Jack Lemein
Senior Vice President of Advisers
Mr. Lemein 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 or
an affiliate since 1984. He is a member of several securities industry-related
associations.
Anthony Coffey
Portfolio Manager of Advisers
Mr. Coffey is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned a Bachelor of Arts degree in applied mathematics and economics from
Harvard University. Mr. Coffey has been with Advisers or an affiliate since
1989. He is a member of several securities industry-related associations.
Roger Bayston
Portfolio Manager of Advisers
Mr. Bayston is a Chartered Financial Analyst and holds a Masters of Business
Administration degree from the University of California at Los Angeles. He
earned his Bachelor of Science degree from the University of Virginia. He has
been with Advisers or an affiliate since earning his MBA in 1991.
Services Provided by Advisers. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also provides certain administrative services and
facilities for the Fund and performs similar services for other funds. Please
see "Investment Advisory and Other Services" and "General Information" in the
SAI for information on securities transactions and a summary of the Fund's Code
of Ethics.
Management Fees. During the fiscal year ended September 30, 1995, management
fees totaling 0.45% of the average monthly net assets of the Fund were paid to
Advisers. Total expenses of Class I and Class II shares, including fees paid to
Advisers, were 0.61% and 1.18%.
Portfolio Transactions. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares when selecting a broker or dealer. Please see "How Does the Fund
Purchase Securities For Its Portfolio?" in the SAI for more information.
The Rule 12b-1 Plans
Each class has a distribution plan or "Rule 12b-1 Plan" under which it may pay
or reimburse Distributors or others for activities primarily intended to sell
shares of the class. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
Payments by the Fund under the Class I plan may not exceed 0.15% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them.
Under the Class II plan, the Fund may pay Distributors up to 0.50% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the Class II
purchase.
The Fund may also pay a servicing fee of up to 0.15% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
How Does the Fund Measure Performance?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield and
current distribution rate. Performance figures are usually calculated using the
maximum sales charge, but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not indicate future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "General Information" in the SAI.
How Is the Fund Organized?
The Fund is a diversified series of Franklin Custodian Funds, Inc. (the
"Custodian Funds"), an open-end management investment company, commonly called a
mutual fund. It was incorporated under the laws of Delaware in 1947,
reincorporated under the laws of Maryland in 1979, and is registered with the
SEC under the 1940 Act. The Fund began offering two classes of shares on May 1,
1995: U.S. Government Securities Series - Class I and U.S. Government Securities
Series - Class II. All shares purchased before that time are considered Class I
shares. Additional classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state corporation law, or (3) required to
be voted on separately by the 1940 Act. Shares of each class of a series have
the same voting and other rights and preferences as the other classes and series
of Custodian Funds for matters that affect Custodian Funds as a whole. In the
future, additional series may be offered.
Custodian Funds has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the Board.
If this happens, holders of the remaining shares voting will not be able to
elect anyone to the Board.
Custodian Funds does not intend to hold annual shareholder meetings. It may hold
a special meeting of a series, however, for matters requiring shareholder
approval under the 1940 Act. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares to
vote on the removal of Board members. The 1940 Act requires that we help you
communicate with other shareholders in connection with electing or removing
members of the Board. A special meeting may also be called by a majority of the
Board or by the written request of shareholders holding at least 25% of the
shares entitled to vote at the meeting.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information Regarding
Taxation" in the SAI.
The Fund intends to continue to qualify as a regulated investment company under
Subchapter M of the Code. By distributing all of its income and meeting certain
other requirements relating to the sources of its income and diversification of
its assets, the Fund will not be liable for federal income or excise taxes.
For federal income tax purposes, any income dividends that you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned 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 that are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if received by
you on December 31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund shares
held for six months or less will be treated as a long-term capital loss to the
extent of capital gain dividends 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 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
you with the percentage of any dividends paid which may qualify for tax-free
treatment. You should consult your own tax advisor with respect to the
application of your state and local income tax laws to these distributions.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisor regarding the applicability of U.S.
withholding or other taxes to distributions received by you from the Fund and
the application of foreign tax laws to these distributions.
You should also consult your tax advisor with respect to the applicability of
any state and local intangible property or income taxes on your shares of the
Fund and distributions and redemption proceeds received from the Fund.
About Your Account
How Do I Buy Shares?
Opening Your Account
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. Please indicate which class of shares you want to buy. If you do not
specify a class, your purchase will be automatically invested in Class I shares.
MINIMUM
INVESTMENTS*
-------------
To Open Your Account...... $100
To Add to Your Account.... $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares.
Deciding Which Class to Buy
You should consider a number of factors when deciding which class of shares to
buy. If you plan to buy $1 million or more in a single payment or you qualify to
buy Class I shares without a sales charge, you may not buy Class II shares.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge;
or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin
Templeton Funds; and
o you plan to sell a substantial number of your shares within
approximately six years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
Purchase Price of Fund Shares
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
Total Sales Charge
as a Percentage of Amount Paid to
------------------ Dealer as a
Amount of Purchase Offering Net Amount Percentage of
at Offering Price Price Invested Offering Price*
- --------------------------------------------------------------------------------
CLASS I
Under $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 None
CLASS II
Under $1,000,000** 1.00% 1.01% 1.00%
*The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated.
**A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of
$1 million or more and any ClassII purchase. Please see "How Do I Sell Shares?
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its
ownresources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million.Please see "Deciding Which
Class to Buy."
Sales Charge Reductions and Waivers
If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with
each purchase order explaining which privilege applies. If you don't
include this statement, we cannot guarantee that you will receive the sales
charge reduction or waiver.
Cumulative Quantity Discounts - Class I Only. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your Class I and Class II
shares in the Franklin Templeton Funds, as well as those of your spouse,
children under the age of 21 and grandchildren under the age of 21. If you are
the sole owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
Letter of Intent - Class I Only. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
By completing the Letter of Intent section of the shareholder application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy and Sell Shares? - Letter of Intent" in the SAI or call
Shareholder Services.
Group Purchases - Class I Only. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group
members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
Sales Charge Waivers. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or a
REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares reinvested were subject
to a Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to Class I purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to invest
at least $500,000 in the Franklin Templeton Funds over a 13 month period.
Retirement plans that are not Qualified Retirement Plans or SEPS, such as 403(b)
or 457 plans, must also meet the requirements described under "Group Purchases -
Class I Only" above.
9. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
10. Broker-dealers and qualified registered investment advisors who have entered
into a supplemental agreement with Distributors for their clients who are
participating in comprehensive fee programs, sometimes known as wrap fee
programs
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
How Do I Buy Shares in Connection with Retirement Plans?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
Other Payments to Securities Dealers
The payments below apply to Securities Dealers who initiate and are responsible
for Class II purchases and certain Class I purchases made without a sales
charge. A Securities Dealer may only receive one of the following payments for
each qualifying purchase. The payments described below are paid by Distributors
or one of its affiliates, at its own expense, and not by the Fund or its
shareholders.
1. Securities Dealers may receive up to 1% of the purchase price for Class II
purchases. During the first year after the purchase, Distributors may keep a
part of the Rule 12b-1 fees associated with that purchase.
2. Securities Dealers will receive up to 0.75% of the purchase price for Class I
purchases of $1 million or more.
3. Securities Dealers may, in the sole discretion of Distributors, receive up to
1% of the purchase price for Class I purchases made under waiver category 8
above.
4. Securities Dealers may receive up to 0.25% of the purchase price for Class I
purchases made under waiver categories 6 and 9 above.
Please see the SAI for any breakpoints that may apply.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. Securities Dealers may not use sales of the Fund's shares to qualify for
this compensation if prohibited by the laws of any state or self-regulatory
agency, such as the NASD.
General
Securities laws of states in which the Fund's shares are offered for sale may
differ from federal law, and banks and financial institutions selling Fund
shares may be required to register as dealers pursuant to state law.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Class II shares.
- --------------------------------------------------------------------------------
Method Steps to Follow
- --------------------------------------------------------------------------------
By Mail 1. Send us written instructions signed by all
account owners
2. Include any outstanding share certificates
for the shares you're exchanging
- --------------------------------------------------------------------------------
By Phone Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by
phone to apply to your account, please let us
know.
- --------------------------------------------------------------------------------
Through Your Dealer Call your investment representative
- --------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
Will Sales Charges Apply to My Exchange?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
Contingent Deferred Sales Charge - Class I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
Contingent Deferred Sales Charge - Class II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
CDSC, such as shares from the reinvestment of dividends and capital gains ("free
shares"), $2,000 in shares that are no longer subject to a CDSC because you have
held them for longer than 18 months ("matured shares"), and $3,000 in shares
that are still subject to a CDSC ("CDSC liable shares"). If you exchange $3,000
into a new fund, $500 will be exchanged from free shares, $1,000 from matured
shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically registered
money fund account requiring only one signature for all transactions. Please
notify us in writing if you do not want this option to be available on your
account(s). Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange ou
of the Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of the Fund more than twice in a calendar quarter, or (iii)
exchange shares equal to at least $5 million, or more than 1% of the Fund's
net assets. Shares under common ownership or control are combined for these
limits. If you exchange shares as described in this paragraph, you will be
considered a Market Timer. Each exchange by a Market Timer, if accepted, will
be charged $5.00. Some of our funds do not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
How Do I Sell Shares?
You may sell (redeem) your shares at any time.
- --------------------------------------------------------------------------------
Method Steps to Follow
- --------------------------------------------------------------------------------
By Mail 1. Send us written instructions signed by all
account owners
2. Include any outstanding share certificates
for the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts
may need to send additional documents.
Accounts under court jurisdiction may have
additional requirements.
- --------------------------------------------------------------------------------
By Phone Call Shareholder Services
(Only available if you have Telephone requests will be accepted:
completed and sent to us the
telephone redemption o If the request is $50,000 or less.
agreement included with this Institutional accounts may exceed $50,000 by
prospectus) completing a separate agreement.Call
Institutional Services to receive a copy.
o If there are no share certificates issued for
the shares you want to sell or you have
already returned them to the Fund
o Unless you are selling shares in a Trust
Company retirement plan account
o Unless the address on your account was changed
by phone within the last 30 days
- --------------------------------------------------------------------------------
Through Your Dealer Call your investment representative
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Trust Company Retirement Plan Accounts
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
Contingent Deferred Sales Charge
A Contingent Deferred Sales Charge may apply to Class I purchases of $1 million
or more if you sell all or a portion of the shares within one year and any Class
II purchase if you sell the shares within 18 months. The charge is 1% of the
value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. Distributors keeps the charge to recover payments made to
Securities Dealers.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvesteddividends and capital gain distributions, and
3) Shares held longer than the
Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated dollar amount, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated number of shares, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
Waivers. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or
beneficial owner
o Redemptions through a systematic withdrawal plan set up
before February 1, 1995
o Redemptions through a systematic withdrawal plan
set up on or after February 1, 1995, up to 1% a month of an account's Net
Asset Value (3% quarterly, 6% semiannually or 12% annually). For example,
if you maintain an annual balance of $1 million in Class I shares, you can
withdraw up to $120,000 annually through a systematic withdrawal plan free
of charge. Likewise, if you maintain an annual balance of $10,000 in Class
II shares, $1,200 may be withdrawn annually free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to
termination or plan transfer
o Court ordered redemptions from any UTMA account
What Distributions Might I Receive From the Fund?
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of 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 capital loss carryforward or post October
loss deferral) may generally be made once a year in December to reflect any net
short-term and net long-term capital gains realized by the Fund as of October 31
of the current fiscal year and any undistributed capital gains from the prior
fiscal year. The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.
The Fund declares dividends from its net investment income monthly to
shareholders of record on the last business day of that month and pays them on
or about the 15th day of the next month. The Fund may defer the December 31
record date to a later date in January for tax or other operational reasons.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of each class.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the same
class of the Fund (without a sales charge or imposition of a Contingent Deferred
Sales Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. Receive distributions in cash - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
To select one of these options, please complete sections 6 and 7 of the
shareholder application included with this prospectus or tell your investment
representative which option you prefer. If you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the same class
of the Fund. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days prior to
the record date for us to process the new option.
Transaction Procedures and Special Requirements
How and When Shares Are Priced
The Fund is open for business each day the Exchange is open. We determine the
Net Asset Value per share of each class as of the scheduled close of the
Exchange, generally 1:00 p.m. Pacific time. You can find the prior day's closing
Net Asset Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
The Price We Use When You Buy or Sell Shares
You buy shares at the Offering Price of the class you wish to purchase, unless
you qualify to buy shares at a reduced sales charge or with no sales charge. The
Offering Price of each class is based on the Net Asset Value per share of the
class and includes the maximum sales charge. We calculate it to two decimal
places using standard rounding criteria. You sell shares at Net Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor prior to signing. A
notarized signature is not sufficient.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized telephone
transactions if we do not follow reasonable procedures designed to verify the
identity of the caller. When you call, we will request personal or other
identifying information, and will also record calls. For your protection, we may
delay a transaction or not implement one if we are not reasonably satisfied that
telephone instructions are genuine. If this occurs, we will not be liable for
any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
Trust Company Retirement Plan Accounts. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
Account Registrations and Required Documents
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
- --------------------------------------------------------------------------------
Type of Account Documents Required
- --------------------------------------------------------------------------------
Corporation Corporate Resolution
- --------------------------------------------------------------------------------
Partnership 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
Trust 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Electronic Instructions. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
Tax Identification Number
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
Services to Help You Manage Your Account
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
Automatic Payroll Deduction
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below. There are no
service charges for establishing or maintaining a systematic withdrawal plan.
Once your plan is established, any distributions paid by the Fund will be
automatically reinvested in your account. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the first business day of the month in which a payment is scheduled. You will
generally receive your payment by the fifth business day of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
Because of the front-end sales charge, you may not want to set up a systematic
withdrawal plan if you plan to buy shares on a regular basis. Shares sold under
the plan may also be subject to a Contingent Deferred Sales Charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
Electronic Fund Transfers
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the code number for each class to use TeleFACTS. The code numbers
for Class I and Class II are 110 and 210.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments.
Please verify the accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce
Fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if
you would like an additional free copy of the Fund's financial reports
or an interim quarterly report.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
Hours of Operation
(Pacific time)
Department Name Telephone No. (Monday through Friday)
- --------------- ------------- -----------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
Glossary
Useful Terms and Definitions
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Directors of Custodian Funds
CD - Certificate of deposit
Class I and Class II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
Exchange - New York Stock Exchange
Franklin Funds - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust
Franklin Templeton Funds - The Franklin Funds and the Templeton Funds
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Market Timer(s) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II.
Qualified Retirement Plan(s) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TeleFACTS(R) - Franklin Templeton's automated customer servicing system
Templeton Funds - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
Trust Company - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or another wholly owned
subsidiary of Resources.
PROSPECTUS & APPLICATION
INCOME SERIES
FRANKLIN CUSTODIAN FUNDS, INC.
FEBRUARY 1, 1996, AS AMENDED SEPTEMBER 16, 1996
INVESTMENT STRATEGY: GROWTH AND INCOME
This prospectus describes the Income Series (the "Fund"). It contains
information you should know before investing in the Fund. Please keep it for
future reference.
The Fund's SAI, dated February 1, 1996, as may be amended from time to time,
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE FUND MAY INVEST UP TO 100% OF ITS NET ASSETS IN NON-INVESTMENT GRADE BONDS.
THESE ARE COMMONLY KNOWN AS "JUNK BONDS." THEIR DEFAULT AND OTHER RISKS ARE
GREATER THAN THOSE OF HIGHER RATED SECURITIES. YOU SHOULD CAREFULLY CONSIDER
THESE RISKS BEFORE INVESTING IN THE FUND. PLEASE SEE "WHAT ARE THE FUND'S
POTENTIAL RISKS?"
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 DISTRIBUTORS.
The Fund may invest in both domestic and foreign securities.
INCOME SERIES
February 1, 1996, as amended September 16, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary..........................................
Financial Highlights.....................................
How Does the Fund Invest Its Assets?.....................
What Are the Fund's Potential Risks?.....................
Who Manages the Fund?....................................
How Does the Fund Measure Performance?...................
How Is the Fund Organized?...............................
How Taxation Affects You and the Fund....................
ABOUT YOUR ACCOUNT
How Do I Buy Shares?.....................................
May I Exchange Shares for Shares of Another Fund?........
How Do I Sell Shares?....................................
What Distributions Might I Receive From the Fund?........
Transaction Procedures and Special Requirements..........
Services to Help You Manage Your Account.................
GLOSSARY
Useful Terms and Definitions.............................
APPENDIX
Description of Ratings...................................
When reading this prospectus, you will see certain terms in capital letters.
This means the term is explained in our glossary section.
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended September 30, 1995. The Class II figures are annualized. Your actual
expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+ CLASS I CLASS II
------- --------
Maximum Sales Charge Imposed
on Purchases (as a percentage
of Offering Price) 4.25% 1.00%++
Deferred Sales Charge+++ None 1.00%
Exchange Fee (per transaction) $5.00* $5.00*
B. ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.46% 0.46%
Rule 12b-1 Fees 0.13%** 0.65%**
Other Expenses 0.12% 0.12%
----- -----
Total Fund Operating Expenses 0.71% 1.23%
===== =====
C. EXAMPLE
Assume the annual return for each class is 5% and operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
CLASS I $49*** $64 $80 $127
CLASS II $32 $49 $77 $157
For the same Class II investment, you would pay projected expenses of $22
if you did not sell your shares at the end of the first year. Your
projected expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? Deciding Which Class to Buy."
+++A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more if you sell the shares within one year and any Class II purchase
if you sell the shares within 18 months. There is no front-end sales charge if
you invest $1 million or more in Class I shares. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**These fees may not exceed 0.15% for Class I and 0.65% for Class II. 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 charge permitted under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in the Fund's Annual Report to Shareholders for the fiscal
year ended September 30, 1995. The Annual Report to Shareholders also includes
more information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
FOR THE SIX
MONTHS
ENDED
MARCH 31,
1996 YEAR ENDED SEPT. 30,
-----------------------------------------------------------------------------------------------------------------
Class I Shares (UNAUDITED) 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-----------------------------------------------------------------------------------------------------------------
PER SHARE
OPERATING
PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value
at Beginning of
Period $ 2.30 $ 2.22 $ 2.46 $ 2.25 $ 2.08 $ 1.76 $ 2.11 $ 2.11 $ 2.22 $ 2.25 $ 2.06
-----------------------------------------------------------------------------------------------------------------
Net Investment
Income 0.090 0.180 0.170 0.180 0.190 0.190 0.212 0.222 0.228 0.206 0.230
Net Realized &
Unrealized Gain
(Loss) on
Securities 0.017 0.108 (0.201) 0.227 0.194 0.350 (0.324) 0.009 (0.096) 0.004 0.238
-----------------------------------------------------------------------------------------------------------------
Total From
Investment
Operations 0.107 0.288 (0.031) 0.407 0.384 0.540 (0.112) 0.231 0.132 0.210 0.468
=================================================================================================================
Distributions From
Net Investment
Income (0.096) (0.180) (0.180) (0.185) (0.205) (0.220) (0.220) (0.220) (0.220) (0.220) (0.220)
Distributions From
Realized Capital
Gains (0.027) (0.028) (0.029) (0.012) (0.009) --- (0.018) (0.011) (0.022) (0.020) (0.058)
-----------------------------------------------------------------------------------------------------------------
Total Distributions (0.117) (0.208) (0.209) (0.197) (0.214) (0.220) (0.238) (0.231) (0.242) (0.240) (0.278)
-----------------------------------------------------------------------------------------------------------------
Net Asset Value
at End of Period $ 2.29 $ 2.30 $ 2.22 $ 2.46 $ 2.25 $ 2.08 $ 1.76 $ 2.11 $ 2.11 $ 2.22 $ 2.25
=================================================================================================================
Total Return* 4.74% 14.00% (1.52)% 18.76% 18.80% 32.60% (6.37)% 11.16% 6.00% 9.08% 24.20%
RATIOS/SUPPLEMENTAL
DATA**
Net Assets at End
of Period
(in 000's) $6,412,610 $5,885,788 $4,891,505 $3,935,444 $2,483,501 $1,673,187 $1,299,130 $1,189,694 $726,815 $484,270 $226,418
Ratio of Expenses
to Average Net
Assets 0.69%+ 0.71% 0.64% 0.54% 0.55% 0.56% 0.55% 0.57% 0.61% 0.64% 0.71%
Ratio of Net
Investment Income
to Average Net
Assets 7.89%+ 8.26% 7.37% 7.84% 9.11% 10.17% 10.73% 10.46% 10.50% 9.20% 9.76%
Portfolio
Turnover Rate 18.73% 58.64% 23.37% 25.41% 23.30% 33.92% 12.14% 12.05% 10.01% 18.14% 30.76%
Average
Commission Rate 0.0517 --- --- --- --- --- --- --- --- --- ---
</TABLE>
FOR THE SIX
MONTHS FOR THE
ENDED MARCH PERIOD ENDED
31, 1996 SEPT. 30,
Class II Shares (UNAUDITED) 1995++
-----------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $ 2.30 $ 2.18
-----------------------------
Net Investment Income 0.080 0.079
Net Realized & Unrealized Gain (Loss)
on Securities 0.031 0.113
-----------------------------
Total From Investment Operations 0.111 0.192
=============================
Distributions From Net Investment Income (0.084) (0.072)
Distributions From Realized Capital Gains (0.027) ---
-----------------------------
Total Distributions (0.111) (0.072)
-----------------------------
Net Asset Value at End of Period $ 2.30 $ 2.30
=============================
Total Return* 4.92% 8.96%
RATIOS/SUPPLEMENTAL DATA**
Net Assets at End of Period (in 000's) $212,662 $65,822
Ratio of Expenses to Average Net Assets 1.22%+ 1.23%+
Ratio of Net Investment Income to
Average Net Assets 7.21%+ 7.89%+
Portfolio Turnover Rate 18.73% 58.64%
Average Commission Rate 0.0517 ---
*Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or the Contingent Deferred Sales Charge and assumes reinvestment of
dividends and capital gains, if any, at Net Asset Value. Prior to May 1, 1994,
dividends were reinvested at the maximum Offering Price. Effective May 1, 1994,
with the implementation of the Rule 12b-1 plan for Class I shares, the sales
charge on reinvested dividends was eliminated.
**Ratios for the period ended 1995, Class I and Class II, have been calculated
using the daily average net assets during the period.
+Annualized.
++For the period May 1, 1995 (effective date) to September 30, 1995.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's 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. Of course, there is no
assurance that the Fund's objective will be achieved.
TYPES OF SECURITIES THE FUND MAY INVEST IN
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 on its latest published annual report. The
Fund may also invest in preferred stocks. There are no restrictions as to the
proportion of investments that may be made in a particular type of security and
the determination is entirely within Advisers' discretion.
LOWER RATED SECURITIES. The Fund may invest up to 100% of its net assets in
non-investment grade bonds. These are commonly known as "junk bonds." Their
default and other risks are greater than those of higher rated securities. You
should carefully consider these risks before investing in the Fund. Please see
"What Are the Fund's Potential Risks? - High Yielding, Fixed-Income Securities."
Various investment services 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 rating categories of the recognized rating services,
such as securities rated Ba or lower by Moody's Investors Service ("Moody's") or
BB or lower by Standard & Poor's Corporation ("S&P"), or from unrated securities
of comparable quality. These ratings represent the opinions of the rating
services with respect to the issuer's ability to pay interest and repay
principal. They do not purport to reflect the risk of fluctuations in market
value and are not absolute standards of quality. These ratings will be
considered in connection with the investment of the Fund's assets but will not
be a determining or limiting factor. Please see the Appendix in this prospectus
for a description of these ratings.
The Fund may invest in securities regardless of their rating or in securities
that are not rated, including up to 5% of its assets in securities that 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 that are unrated but of
comparable quality as determined by Advisers. Unrated debt securities are not
necessarily of lower quality than rated securities but they may not be
attractive to as many buyers. A breakdown of the ratings for the bonds in the
Fund's portfolio is included under "What Are the Fund's Potential Risks?" below.
The Fund may also buy debt securities of issuers that are not currently paying
interest, as well as issuers who are in default, and may keep an issue that has
defaulted. The Fund will buy defaulted debt securities if, in the opinion of
Advisers, they may present an opportunity for subsequent price recovery, the
issuer may resume interest payments, or other advantageous developments appear
likely in the near future. In general, securities that default lose much of
their value before the actual default so that the security, and thus the Fund's
Net Asset Value, would be impacted before the default. Defaulted debt securities
may be illiquid and, as such, will be part of the 10% limit discussed under
"Illiquid Investments."
If the rating on an issue held in the Fund's portfolio is changed by the rating
service or the security goes into default, this 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 rating services, 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.
Certain of the high yielding, fixed-income securities in which the Fund may
invest may be purchased at a discount. These 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.
ZERO COUPON AND PAY-IN-KIND BONDS. The Fund may buy certain bonds issued at a
discount which defer the payment of interest or pay no interest until maturity,
known as zero coupon bonds, or which pay interest through the issuance of
additional bonds, known as pay-in-kind bonds. For federal tax purposes, holders
of these bonds, such as the Fund, are deemed to receive interest over the life
of the 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 "What Are the Fund's Potential Risks? - High Yielding, Fixed-Income
Securities" below for more information about these bonds.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may buy debt obligations
on a "when-issued" or "delayed delivery" basis. These transactions 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 those available when the transaction was
entered into. When the Fund is the buyer in the transaction, it will maintain,
in a segregated account with its custodian bank, cash or high-grade marketable
securities having an aggregate value equal to the amount of its 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 its investment objective and
policies, and not for the purpose of investment leverage. See "How Does the Fund
Invest Its Assets? - When-Issued, Delayed Delivery and TBA Transactions" in the
SAI for a more complete discussion of these transactions.
FOREIGN SECURITIES. The Fund may invest up to 25% of its assets in foreign
securities, provided such investments are consistent with its objective and
comply with its concentration and diversification policies. The Fund will
ordinarily buy foreign securities that are traded in the U.S. or buy 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. The Fund may also buy 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 tax and other laws limiting the amount and types of foreign
investments. Changes of governmental administrations or economic or monetary
policies in the U.S. or abroad, changed circumstances in dealings between
nations, or changes in currency convertibility or exchange rates could result in
investment losses for the Fund.
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 that are acquired by the Fund outside the U.S. and that 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 that 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 you. These rules are discussed in the SAI.
The holding of foreign securities 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.
OPTIONS. The Fund may write covered call options that are listed for trading on
a national securities exchange. This means that the Fund will only write options
on securities that it actually owns. A call option gives the buyer the right to
buy the security on which the option is written for a specified period of time
and at 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 that 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 increase 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."
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that may
be converted within a specified period of time into a certain amount of common
stock of the same or a different issuer. A convertible security provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock, the
value of a convertible security also tends to increase as the market value of
the underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both interest
rate and market movements, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, not interest payments, and are usually treated as such for corporate
tax purposes.
LOAN PARTICIPATIONS. The Fund may invest up to 5% of its assets in loan
participations and other related direct or indirect bank obligations. 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 that 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. Advisers may acquire
loan participations for the Fund when it believes that over the long term
appreciation will take place. An investment in these securities, however,
carries substantially the same risks as those 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."
TRADE CLAIMS. The Fund may invest a portion of its assets in trade claims. Trade
claims are purchased from creditors of companies in financial difficulty. For
buyers, such as the Fund, trade claims offer the potential for profits since
they are often purchased at a significantly discounted value and, consequently,
may generate capital appreciation if the value of the claim increases as the
debtor's financial position improves. If the debtor is able to pay the full
obligation on the face of the claim as a result of a restructuring or an
improvement in the debtor's financial condition, trade claims offer the
potential for higher income due to the difference in the face value of the claim
as compared to the discounted purchase price.
An investment in trade claims is speculative and carries a high degree of risk.
There can be no guarantee that the debtor will ever be able to satisfy the
obligation on the trade claim. Trade claims are not regulated by federal
securities laws or the SEC. Currently, trade claims are regulated primarily by
bankruptcy laws. Because trade claims are unsecured, holders of trade claims may
have a lower priority in terms of payment than most other creditors in a
bankruptcy proceeding. In light of the nature and risk of trade claims, the
Fund's investment in these instruments will not exceed 5% of its net assets at
the time of acquisition.
OTHER INVESTMENT POLICIES OF THE FUND
CONCENTRATION. 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.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided 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 bank collateral with an initial market value of at least 102%
of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%. This
collateral shall consist of cash, securities issued by the U.S. Government, its
agencies or instrumentalities, or irrevocable letters of credit. The lending of
securities is a common practice in the securities industry. The Fund may engage
in security loan arrangements with the primary objective of increasing the
Fund's income either through investing 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.
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
Advisers. 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 Board and will be
held pursuant to a written agreement.
BORROWING. 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 its total asset value.
ILLIQUID INVESTMENTS. The Fund may not invest more than 10% of its net assets,
at the time of purchase, in illiquid securities. Illiquid securities are
generally securities that cannot be sold within seven days in the normal course
of business at approximately the amount at which the Fund has valued them.
Subject to this limitation, the Board 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 liquid
to the extent Advisers determines on a daily basis that there is a liquid
institutional or other market for such securities. Notwithstanding Advisers'
determinations in this regard, the Board will remain responsible for such
determinations and will consider appropriate action, consistent with the Fund's
objective and policies, if the security should become illiquid after 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 buying these securities or
the market for these securities contracts.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in value of portfolio securities or the amount of net
assets will not be considered a violation of any of the foregoing policies.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the
SAI.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
HIGH YIELDING, FIXED-INCOME SECURITIES. 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 not be considered a complete investment program and should be carefully
evaluated for its appropriateness in light of your overall investment needs and
goals. If you are on a fixed income or retired, you should also consider the
increased risk of loss to principal that is present with an investment in higher
risk securities such as those in which the Fund invests.
The market value of lower rated, fixed-income securities and unrated securities
of comparable quality, commonly known as junk bonds, tends to reflect individual
developments affecting the issuer to a greater extent than the market value of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Lower rated securities also tend to be more sensitive
to economic conditions than higher rated securities. These lower rated
fixed-income securities are considered by the rating agencies, on balance, to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and will
generally involve more credit risk than securities in the higher rating
categories. Even securities rated triple B by S&P or Moody's, ratings which are
considered investment grade, possess some speculative characteristics.
Issuers of 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 developments affecting
the issuer, 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. Current prices for
defaulted bonds are generally significantly lower than their purchase price, and
the Fund may have unrealized losses on such defaulted securities that are
reflected in the price of the Fund's shares. In general, securities that default
lose much of their value in the time period prior to the actual default so that
the Fund's net assets are impacted prior to the default. The Fund may retain an
issue that has defaulted because the issue may present an opportunity for
subsequent price recovery.
High yielding, fixed-income securities frequently have call or buy-back features
that 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, if a call were exercised by the issuer during
periods of declining interest rates, Advisers may find it necessary to replace
the securities with lower yielding securities, which could result in less net
investment income to the Fund. 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. The
Fund may be required under the Code and U.S. Treasury regulations to accrue
income for income tax purposes on defaulted obligations and to distribute the
income to the Fund's shareholders even though the Fund is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy any or all of these distribution requirements, the Fund
may be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
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 that 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 a
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 "How Are Fund Shares Valued?" in the SAI.)
The Fund is authorized to acquire high yielding, fixed-income securities that
are sold without registration under the federal securities laws and therefore
carry restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if the Fund is required to sell restricted securities before the
securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of restricted securities; however, the Fund will generally incur no costs when
the issuer is responsible for registering the securities.
The Fund may acquire high yielding, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The Fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yielding securities and adversely affected the
value of outstanding securities and the ability of issuers of such securities to
meet their obligations. Although the economy has improved considerably and high
yielding securities have performed more consistently since that time, there is
no assurance that the adverse effects previously experienced will not reoccur.
For example, the highly publicized defaults of some high yield issuers during
1989 and 1990 and concerns regarding a sluggish economy which continued into
1993, depressed the prices for many of these securities. While market prices may
be temporarily depressed due to these factors, the ultimate price of any
security will generally reflect the true operating results of the issuer. 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 Advisers' judgment, analysis and
experience in evaluating the creditworthiness of an issuer. In this evaluation,
Advisers 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 credit risk factors pertaining to lower rated securities also apply to lower
rated zero coupon, deferred interest and pay-in-kind bonds. These bonds carry an
additional risk in that, unlike bonds that 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 that 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 that pay interest through the issuance of
additional bonds. The Fund will be deemed to receive interest over the life of
such bonds and be treated as if interest were paid on a current basis for
federal income tax purposes, although no cash interest payments are received by
the Fund until the cash payment date or until the bonds mature. Accordingly,
during periods when the Fund receives no cash interest payments on its zero
coupon securities or deferred interest or pay-in-kind bonds, it may be required
to dispose of portfolio securities to meet the distribution requirements and
such sales may be subject to the risk factors discussed above. The Fund is not
limited in the amount of its assets that may be invested in such securities.
Further information is included under "How Taxation Affects You and the Fund."
ASSET COMPOSITION TABLE. A credit rating by a rating agency evaluates only the
safety of principal and interest of a bond, and does not consider the market
value risk associated with an investment in such a bond. The table below shows
the percentage of the Fund's assets invested in securities rated in each of the
specific rating categories shown and those that are not rated by the rating
agency but deemed by Advisers to be of comparable credit quality. 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, 1995. The Appendix to this prospectus includes a
description of each rating category.
Average Weighted
MOODY'S RATING PERCENTAGE OF ASSETS
- -----------------------------------------------------
Aaa............................ 9.59%
Aa............................. 1.70%
A.............................. 0.01%
Baa ........................... 7.29%
Ba............................. 4.55%
B.............................. 21.57%
Caa*........................... 5.58%
Ca............................. 0.77%
*1.55% of these securities, which are unrated by the rating agency, have been
included in the Caa rating category.
FOREIGN SECURITIES. 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
that 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 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.
INTEREST RATE AND MARKET RISK. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline, in
any country where the Fund is invested, may also cause the Fund's share price to
decline. The value of worldwide stock markets and interest rates has increased
and decreased in the past. These changes are unpredictable and may happen again
in the future.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
two classes of shares. While none is expected, the Board will act appropriately
to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers is the investment manager of the Fund and other
funds with aggregate assets of over $81 billion. It is wholly owned by
Resources, a publicly owned company engaged in the financial services industry
through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Charles B. Johnson since 1957 and Matt Avery since 1989.
Charles B. Johnson
Chairman of the Board of Advisers
Mr. Johnson holds a Bachelor of Arts degree in economics and political science
from Yale University. He has been with Advisers or an affiliate since 1957. Mr.
Johnson is a member of several securities industry-related associations.
Matt Avery
Portfolio Manager of Advisers
Mr. Avery holds a Master of Business Administration degree from the University
of California at Los Angeles and a Bachelor of Science degree in industrial
engineering from Stanford University. He has been in the securities industry
since 1982 and with Advisers or an affiliate since 1987.
SERVICES PROVIDED BY ADVISERS. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also provides certain administrative services and
facilities for the Fund and performs similar services for other funds. Please
see "Investment Advisory and Other Services" and "General Information" in the
SAI for information on securities transactions and a summary of the Fund's Code
of Ethics.
MANAGEMENT FEES. During the fiscal year ended September 30, 1995, management
fees totaling 0.46% of the average monthly net assets of the Fund were paid to
Advisers. Total expenses of Class I and Class II shares, including fees paid to
Advisers, were 0.71% and 1.23%.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares when selecting a broker or dealer. Please see "How Does the Fund
Purchase Securities For Its Portfolio?" in the SAI for more information.
THE RULE 12B-1 PLANS
Each class has a distribution plan or "Rule 12b-1 Plan" under which it may pay
or reimburse Distributors or others for activities primarily intended to sell
shares of the class. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
Payments by the Fund under the Class I plan may not exceed 0.15% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them.
Under the Class II plan, the Fund may pay Distributors up to 0.50% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the Class II
purchase.
The Fund may also pay a servicing fee of up to 0.15% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield and
current distribution rate. Performance figures are usually calculated using the
maximum sales charge, but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not indicate future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "General Information" in the SAI.
HOW IS THE FUND ORGANIZED?
The Fund is a diversified series of Franklin Custodian Funds, Inc. (the
"Custodian Funds"), an open-end management investment company, commonly called a
mutual fund. It was incorporated under the laws of Delaware in 1947,
reincorporated under the laws of Maryland in 1979, and is registered with the
SEC under the 1940 Act. The Fund began offering two classes of shares on May 1,
1995: Income Series - Class I and Income Series - Class II. All shares purchased
before that time are considered Class I shares. Additional classes of shares may
be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state corporation law, or (3) required to
be voted on separately by the 1940 Act. Shares of each class of a series have
the same voting and other rights and preferences as the other classes and series
of Custodian Funds for matters that affect Custodian Funds as a whole. In the
future, additional series may be offered.
Custodian Funds has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the Board.
If this happens, holders of the remaining shares voting will not be able to
elect anyone to the Board.
Custodian Funds does not intend to hold annual shareholder meetings. It may hold
a special meeting of a series, however, for matters requiring shareholder
approval under the 1940 Act. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares to
vote on the removal of Board members. The 1940 Act requires that we help you
communicate with other shareholders in connection with electing or removing
members of the Board. A special meeting may also be called by a majority of the
Board or by the written request of shareholders holding at least 25% of the
shares entitled to vote at the meeting.
HOW TAXATION AFFECTS YOU AND THE FUND
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information Regarding
Taxation" in the SAI.
The Fund intends to continue to qualify as a regulated investment company under
Subchapter M of the Code. By distributing all of its income and meeting certain
other requirements relating to the sources of its income and diversification of
its assets, the Fund will not be liable for federal income or excise taxes.
For federal income tax purposes, any income dividends that you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
For the fiscal year ended September 30, 1995, 27.99% 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 that are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if received by
you on December 31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisor regarding the applicability of U.S.
withholding or other taxes to distributions received by you from the Fund and
the application of foreign tax laws to these distributions.
You should also consult your tax advisor with respect to the applicability of
any state and local intangible property or income taxes on your shares of the
Fund and distributions and redemption proceeds received from the Fund.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. PLEASE INDICATE WHICH CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT
SPECIFY A CLASS, YOUR PURCHASE WILL BE AUTOMATICALLY INVESTED IN CLASS I SHARES.
MINIMUM
INVESTMENTS*
- ------------------------------------------
To Open Your Account...... $100
To Add to Your Account.... $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares.
DECIDING WHICH CLASS TO BUY
You should consider a number of factors when deciding which class of shares to
buy. IF YOU PLAN TO BUY $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO
BUY CLASS I SHARES WITHOUT A SALES CHARGE, YOU MAY NOT BUY CLASS II SHARES.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds;
and
o you plan to sell a substantial number of your shares within approximately
six years or less of your investment.
ClassI shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID TO
AS A PERCENTAGE OF DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE*
- --------------------------------------------------------------------------------
CLASS I
Under $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 None
CLASS II
Under $1,000,000** 1.00% 1.01% 1.00%
*The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated.
**A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
SALES CHARGE REDUCTIONS AND WAIVERS
IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't
include this statement, we cannot guarantee that you will receive the sales
charge reduction or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your Class I and Class II
shares in the Franklin Templeton Funds, as well as those of your spouse,
children under the age of 21 and grandchildren under the age of 21. If you are
the sole owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy and Sell Shares? - Letter of Intent" in the SAI or call
Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
SALES CHARGE WAIVERS. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or a
REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the SAME CLASS of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares reinvested were subject
to a Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to Class I purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to invest
at least $500,000 in the Franklin Templeton Funds over a 13 month period.
Retirement plans that are not Qualified Retirement Plans or SEPS, such as 403(b)
or 457 plans, must also meet the requirements described under "Group Purchases -
Class I Only" above.
9. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
10. Broker-dealers and qualified registered investment advisors who have entered
into a supplemental agreement with Distributors for their clients who are
participating in comprehensive fee programs, sometimes known as wrap fee
programs
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments below apply to Securities Dealers who initiate and are responsible
for Class II purchases and certain Class I purchases made without a sales
charge. A Securities Dealer may only receive one of the following payments for
each qualifying purchase. The payments described below are paid by Distributors
or one of its affiliates, at its own expense, and not by the Fund or its
shareholders.
1. Securities Dealers may receive up to 1% of the purchase price for Class II
purchases. During the first year after the purchase, Distributors may keep a
part of the Rule 12b-1 fees associated with that purchase.
2. Securities Dealers will receive up to 0.75% of the purchase price for Class I
purchases of $1 million or more.
3. Securities Dealers may, in the sole discretion of Distributors, receive up to
1% of the purchase price for Class I purchases made under waiver category 8
above.
4. Securities Dealers may receive up to 0.25% of the purchase price for Class I
purchases made under waiver categories 6 and 9 above.
PLEASE SEE THE SAI FOR ANY BREAKPOINTS THAT MAY APPLY.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
factivities. Registered representatives and their families may be paid for
travel expenses, including lodging, in connection with business meetings or
seminars. In some cases, this compensation may only be available to Securities
Dealers whose representatives have sold or are expected to sell significant
amounts of shares. Securities Dealers may not use sales of the Fund's shares to
qualify for this compensation if prohibited by the laws of any state or
self-regulatory agency, such as the NASD.
GENERAL
Securities laws of states in which the Fund's shares are offered for sale may
differ from federal law, and banks and financial institutions selling Fund
shares may be required to register as dealers pursuant to state law.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Class II shares.
- ------------------------------- ------------------------------------------------
METHOD STEPS TO FOLLOW
- ------------------------------- ------------------------------------------------
BY MAIL 1. Send us written instructions signed by all
account owners
2. Include any outstanding share certificates
for the shares you're exchanging
- ------------------------------- ------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by
phone to apply to your account, please let us
know.
- ------------------------------- ------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------- ------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE - CLASS I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
CONTINGENT DEFERRED SALES CHARGE - CLASS II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
CDSC, such as shares from the reinvestment of dividends and capital gains ("free
shares"), $2,000 in shares that are no longer subject to a CDSC because you have
held them for longer than 18 months ("matured shares"), and $3,000 in shares
that are still subject to a CDSC ("CDSC liable shares"). If you exchange $3,000
into a new fund, $500 will be exchanged from free shares, $1,000 from matured
shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all
transactions. PLEASE NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO
BE AVAILABLE ON YOUR ACCOUNT(S). Additional procedures may apply. Please
see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange
out of the Fund within two weeks of an earlier exchange request, (ii)
exchange shares out of the Fund more than twice in a calendar quarter, or
(iii) exchange shares equal to at least $5 million, or more than 1% of the
Fund's net assets. Shares under common ownership or control are combined
for these limits. If you exchange shares as described in this paragraph,
you will be considered a Market Timer. Each exchange by a Market Timer, if
accepted, will be charged $5.00. Some of our funds do not allow investments
by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
- ------------------------------- ------------------------------------------------
METHOD STEPS TO FOLLOW
- ------------------------------- ------------------------------------------------
BY MAIL 1. Send us written instructions signed by all
account owners
2. Include any outstanding share certificates
for the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may
need to send additional documents. Accounts
under court jurisdiction may have additional
requirements.
- ------------------------------- ------------------------------------------------
BY PHONE Call Shareholder Services
(Only available if Telephone requests will be accepted:
you have completed
and sent to us the o If the request is $50,000 or less.
telephone redemption Institutional accounts may exceed $50,000
agreement included by completing a separate agreement. Call
with this Institutional Services to receive a copy.
prospectus) o If there are no share certificates issued
for the shares you want to sell or you have
already returned them to the Fund
o Unless you are selling shares in a Trust
Company retirement plan account
o Unless the address on your account was
changed by phone within the last 30 days
- ------------------------------- ------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------- ------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
CONTINGENT DEFERRED SALES CHARGE
A Contingent Deferred Sales Charge may apply to Class I purchases of $1 million
or more if you sell all or a portion of the shares within one year and any Class
II purchase if you sell the shares within 18 months. The charge is 1% of the
value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. Distributors keeps the charge to recover payments made to
Securities Dealers.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain distributions,
and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% a month of an account's Net Asset Value (3%
quarterly, 6% semiannually or 12% annually). For example, if you maintain
an annual balance of $1 million in Class I shares, you can withdraw up to
$120,000 annually through a systematic withdrawal plan free of charge.
Likewise, if you maintain an annual balance of $10,000 in Class II shares,
$1,200 may be withdrawn annually free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to
termination or plan transfer
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
You may receive two types of distributions from the Fund:
1. INCOME DIVIDENDS. The Fund receives income generally in the form of 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 capital loss carryforward or post October
loss deferral) may generally be made once a year in December to reflect any net
short-term and net long-term capital gains realized by the Fund as of October 31
of the current fiscal year and any undistributed capital gains from the prior
fiscal year. The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.
The Fund declares dividends from its net investment income monthly to
shareholders of record on the last business day of that month and pays them on
or about the 15th day of the next month. The Fund may defer the December 31
record date to a later date in January for tax or other operational reasons.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of each class.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class of the Fund (without a sales charge or imposition of a Contingent Deferred
Sales Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days prior to
the record date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the Exchange is open. We determine the
Net Asset Value per share of each class as of the scheduled close of the
Exchange, generally 1:00 p.m. Pacific time. You can find the prior day's closing
Net Asset Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy shares at the Offering Price of the class you wish to purchase, unless
you qualify to buy shares at a reduced sales charge or with no sales charge. The
Offering Price of each class is based on the Net Asset Value per share of the
class and includes the maximum sales charge. We calculate it to two decimal
places using standard rounding criteria. You sell shares at Net Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the
evening if preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. YOU SHOULD
VERIFY THAT THE INSTITUTION IS AN ELIGIBLE GUARANTOR PRIOR TO SIGNING. A
NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized telephone
transactions if we do not follow reasonable procedures designed to verify the
identity of the caller. When you call, we will request personal or other
identifying information, and will also record calls. For your protection, we may
delay a transaction or not implement one if we are not reasonably satisfied that
telephone instructions are genuine. If this occurs, we will not be liable for
any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, ALL owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
- ------------------------- ------------------------------------------------------
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- ------------------------- ------------------------------------------------------
CORPORATION Corporate Resolution
- ------------------------- ------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- ------------------------- ------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- ------------------------- ------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
TAX IDENTIFICATION NUMBER
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below. There are no
service charges for establishing or maintaining a systematic withdrawal plan.
Once your plan is established, any distributions paid by the Fund will be
automatically reinvested in your account. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the first business day of the month in which a payment is scheduled. You will
generally receive your payment by the fifth business day of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
Because of the front-end sales charge, you may not want to set up a systematic
withdrawal plan if you plan to buy shares on a regular basis. Shares sold under
the plan may also be subject to a Contingent Deferred Sales Charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the code number for each class to use TeleFACTS. The code numbers
for Class I and Class II are 109 and 209.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household
and send only one copy of a report. Call Fund Information if you would like
an additional free copy of the Fund's financial reports or an interim
quarterly report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION
(PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Directors of Custodian Funds
CD - Certificate of deposit
CLASS I AND CLASS II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
EXCHANGE - New York Stock Exchange
FRANKLIN FUNDS - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust
FRANKLIN TEMPLETON FUNDS - The Franklin Funds and the Templeton Funds
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMER(S) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II.
QUALIFIED RETIREMENT PLAN(S) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TEMPLETON FUNDS - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or another wholly owned
subsidiary of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be 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, 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.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in 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.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
SUPPLEMENT DATED
September 16, 1996
TO THE
STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN CUSTODIAN FUNDS, INC.
Dated February 1, 1996
I. This Statement of Additional Information is revised to reflect that as of
September 16, 1996, the DynaTech Series offers two classes of shares: DynaTech
Series - Class I and DynaTech Series - Class II.
II. The section "Officers and Directors" is revised to add the following:
As of August 5, 1996, the officers and directors, as a group, owned of record
and beneficially approximately 152,802 shares of Growth Series - Class I, 27,411
shares of Utilities Series - Class I, 35,137 shares of DynaTech Series - Class
I, 62,838 shares of Income Series - Class I, and 138,608 shares of U.S.
Government Securities Series - Class I, or less than 1% of the total outstanding
shares of each Series' Class I shares.
III. The last paragraph on page 11 is replaced with the following:
Bank of New York, Mutual Funds Division, 90 Washington Street, New York, New
York, 10286, acts as custodian of the securities and other assets of the Fund.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian for cash received in connection with the
purchase of Fund shares. Citibank Delaware, One Penn's Way, New Castle, Delaware
19720, acts as custodian in connection with transfer services through bank
automated clearing houses. The custodians do not participate in decisions
relating to the purchase and sale of portfolio securities.
IV. The two paragraphs under "How Do I Buy and Sell Shares? - Other Payments to
Securities Dealers" are replaced in their entirety with the following:
OTHER PAYMENTS TO SECURITIES DEALERS. For the Growth and DynaTech Series,
Distributors will pay the following commissions, out of its own resources, to
Securities Dealers who initiate and are responsible for purchases of Class I
shares of $1 million or more: 1% on sales of $1 million to $2 million, plus
0.80% on sales over $2 million to $3 million, plus 0.50% on sales over $3
million to $50 million, plus 0.25% on sales over $50 million to $100 million,
plus 0.15% on sales over $100 million. For the Income, Utilities and U.S.
Government Securities Series, Distributors will pay the following commissions,
out of its own resources, to Securities Dealers who initiate and are responsible
for purchases of Class I shares of $1 million or more: 0.75% on sales of $1
million to $2 million, plus 0.60% on sales over $2 million to $3 million, plus
0.50% on sales over $3 million to $50 million, plus 0.25% on sales over $50
million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases of Class I shares by certain retirement plans pursuant to a sales
charge waiver, as discussed in the Prospectuses: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
V. The section "The Fund's Underwriter - Distribution Plans" is revised to
reflect that the DynaTech Series has adopted a Rule 12b-1 distribution plan
under the 1940 Act for its Class II shares. The terms of the Class II Plan are
the same as those described in this section for the Class II Plan of the Growth
Series.
VI. The following paragraph is added under the section "General Information -
Comparisons":
According to statistics published by Lipper Analytical Services, Inc., as of
September 30, 1995, the U.S. Government Securities Series is still the largest
non-money market government securities mutual fund.
VII. The following paragraph is added to the section "Financial Statements":
The unaudited financial statements contained in the Semi-Annual Report to
Shareholders of the Fund, for the six month period ended March 31, 1996, are
incorporated herein by reference.
FRANKLIN
CUSTODIAN
FUNDS, INC.
STATEMENT OF
ADDITIONAL INFORMATION
FEBRUARY 1, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
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Contents Page
How Does the Fund Invest Its Assets?...................... 2
Investment Restrictions................................... 6
Officers and Directors.................................... 8
Investment Advisory and Other Services.................... 10
How Does the Fund Purchase
Securities For Its Portfolio?............................ 12
How Do I Buy and Sell Shares?............................. 13
How Are Fund Shares Valued?............................... 16
Additional Information
Regarding Taxation....................................... 17
The Fund's Underwriter.................................... 19
General Information....................................... 22
Financial Statements...................................... 27
Franklin Custodian Funds, Inc. (the "Fund") is an open-end management investment
company consisting of five separate series (individually or collectively
referred to as the "Series"). The Growth Series, Utilities Series, Income
Series, and U.S. Government Securities Series offer two classes to their
investors: the Growth Series - Class I, Utilities Series - Class I, Income
Series - Class I, and U.S. Government Securities Series - Class I (individually
or collectively, "Class I") and the Growth Series - Class II, Utilities Series -
Class II, Income Series - Class II, and U.S. Government Securities Series -
Class II (collectively or individually, "Class II"). This multiclass structure
allows you to consider, among other features, the impact of sales charges and
distribution fees ("Rule 12b-1 fees") on your investment in the Fund. The
DynaTech Series offers only one class of shares ("DynaTech Series - Class I")
and is included in all discussions of Class I shares in this SAI.
There are three Prospectuses for the Fund; one Prospectus covers all five Series
of the Fund; one covers the Income Series of the Fund; and one covers the U.S.
Government Securities Series of the Fund. Each is dated February 1, 1996, as
each may be amended from time to time, provides the basic information you should
know before investing in a Series of the Fund and may be obtained 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 Statement of Additional Information ("SAI") is not a prospectus. It
contains information in addition to and in more detail than set forth in the
Prospectuses. This SAI is intended to provide you with additional information
regarding the activities and operations of the Fund, and should be read in
conjunction with the Fund's Prospectuses.
How Does the Fund Invest Its Assets?
- --------------------------------------------------------------------------------
To accomplish its objective(s), each Series follows certain investment policies,
as discussed in the Fund's Prospectuses. The following discussion contains
additional information regarding the investment policies in which each Series
may engage, except as otherwise indicated.
Option Transactions - Subject to the investment restrictions noted below, the
Fund may write covered call options which trade on national securities
exchanges. Call options written by the Fund give the holder the right to buy the
underlying securities from the Fund at a stated exercise price. A call option is
"covered" if the option writer owns the underlying security which is subject to
the call or a call on the same security where the exercise price of the call
held is equal to or less than the exercise price of the call written.
The writer of an option receives a premium from the buyer, and retains the
premium whether or not the option expires unexercised. The premium paid by the
purchaser of an option will reflect, among other things, the relationship of the
exercise price to the market price and volatility of the underlying security,
the remaining term of the option, supply and demand and interest rates. If a
call option is exercised, the writer also experiences a profit or loss from the
sale of the underlying security. The writer of a call option may have no control
over when the underlying securities must be sold since, with regard to certain
options, the writer may be assigned an exercise notice at any time prior to the
termination of the obligation.
The Fund may terminate its obligation by effecting a "closing purchase
transaction." This is accomplished by buying an option identical to the option
previously written. However, a writer may not effect a closing purchase
transaction after being notified of the exercise of an option. There is no
guarantee that a closing purchase will be available to be effected at the time
desired by the Fund. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option; the Fund
will realize a loss from a closing transaction if the price of the transaction
is more than the premium received from writing the option. Because increases in
the market price of a call option will generally reflect increases in the market
price of the underlying security, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Fund until the time of repurchase. Thereafter,
the Fund bears the risk of the security's rise or fall in market value unless it
sells the security.
The DynaTech and Growth Series may purchase put options to hedge against a
decline in the value of their portfolios. By using put options in this way, the
Series will reduce any profit it might otherwise have realized in the underlying
security by the amount of the premium paid for the put option, plus transaction
costs.
The Fund's manager does not currently intend to write options which would cause
the market value of any Series' open options to exceed 5% of that Series' total
net assets. There is no specific limitation on the Fund's ability to write
covered call options. However, as a practical matter, the Fund's option writing
activities may be limited by state or federal regulations. Among other things,
state regulations limit the aggregate value of securities underlying outstanding
options to 25% or less of net assets. As of the fiscal year ended September 30,
1995, there were no open options transactions in any Series. The U.S. Government
Securities Series does not presently engage in option transactions, as discussed
in restriction 10, below.
Enhanced Convertible Securities. The Fund, other than the U.S. Government
Securities Series, may 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 convertible into common stock of the issuer (PERCS are generally
not convertible into cash at maturity). 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. PERCS can be called at any time prior to maturity, and
hence do not provide call protection. However if called early the issuer must
pay a call premium over the market price to the investor. This call premium
declines at a preset rate daily, up to the maturity date of the PERCS.
The Fund may also invest in other classes of enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted;
unlike PERCS, they do not have a capital appreciation limit; they seek to
provide the investor with high current income with some prospect of future
capital appreciation; they are typically issued with three or four-year
maturities; they typically have some built-in call protection for the first two
to three years; investors have the right to convert them into shares of common
stock at a preset conversion ratio or hold them until maturity, and upon
maturity they will necessarily convert into either cash or a specified number of
shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company whose common stock is to be acquired in the event the security
is converted or by a different issuer, such as an investment bank. These
securities may be identified by names such as ELKS (Equity Linked Securities) or
similar names. Typically they share most of the salient characteristics of an
enhanced convertible preferred stock but will be ranked as senior or
subordinated debt in the issuer's corporate structure according to the terms of
the debt indenture. There may be additional types of convertible securities not
specifically referred to herein which may be also similar to those described in
which a Fund may invest, consistent with its objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Fund. 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 credit worthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the Fund's portfolio. The Fund, however, intends
to acquire liquid securities, though there can be no assurances that this will
be achieved. The U.S. Government Securities Series does not invest in
convertible preferred stocks.
Loan Participations - The Income Series may invest up to 5% of its total assets
(at the time of investment) in loan participations, all of which may have
speculative characteristics. The Income Series may purchase loan participations
at par or 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 but not beyond par value.
The investment manager may acquire loan participations for the Income Series
from time to time when it believes the investments offer the possibility of
long-term appreciation in value. An investment in loan participations carries a
high degree of risk and may have the consequence that interest payments with
respect to such securities may be reduced, deferred, suspended or eliminated and
may have the further consequence that principal payments may likewise be
reduced, deferred, suspended or canceled, causing the loss of the entire amount
of the investment. Loans will generally be acquired by the Income Series from a
bank, finance company or other similar financial services entity ("Lender").
Loan participations are interests in floating or variable rate senior loans
("Loans") to U.S. corporations, partnerships and other entities ("Borrowers")
which operate in a variety of industries and geographical regions. Loans in
which the Income Series will purchase participation interests may pay interest
at rates which are periodically redetermined on the basis of a base lending rate
plus a premium. These base lending rates are generally the Prime Rate offered by
a major U.S. bank, the London Inter-Bank Offered Rate, the Certificate of
Deposit rate or other base lending rates used by commercial lenders. The Loans
typically have the most senior position in a Borrower's capital structure,
although some Loans may hold an equal ranking with other senior securities of
the Borrower. Although the Loans generally are secured by specific collateral,
the Income Series may invest in Loans which are not secured by any collateral.
Uncollateralized Loans pose a greater risk of nonpayment of interest or loss of
principal than do collateralized Loans. The collateral underlying a
collateralized Loan may consist of assets that may not be readily liquidated,
and there is no assurance that the liquidation of such assets would satisfy
fully a Borrower's obligations under a Loan. The Income Series is not subject to
any restrictions with respect to the maturity of the Loans in which it purchases
participation interests.
The Loans generally are not rated by nationally recognized statistical rating
organizations. Ratings of other securities issued by a Borrower do not
necessarily reflect adequately the relative quality of a Borrower's Loans.
Therefore, although the investment manager may consider such ratings in
determining whether to invest in a particular Loan, such ratings will not be the
determinative factor in the investment manager's analysis.
The Loans are not readily marketable and may be subject to restrictions on
resale. Participation interests in the Loans generally are not listed on any
national securities exchange or automated quotation system and no regular market
has developed for such interests. Any secondary purchases and sales of loan
participations generally are conducted in private transactions between buyers
and sellers. Many of the Loans in which the Income Series expects to purchase
interests are of a relatively large principal amount and are held by a
relatively large number of owners which, in the investment manager's opinion,
should enhance the relative liquidity of such interests.
When acquiring a loan participation, the Income Series will have a contractual
relationship only with the Lender (typically an entity in the banking, finance
or financial services industries), not with the Borrower. The Income Series has
the right to receive payments of principal and interest to which it is entitled
only from the Lender selling the loan participation and only upon receipt by
such Lender of such payments from the Borrower. In connection with purchasing
loan participations, the Income Series generally will have no right to enforce
compliance by the Borrower with the terms of the Loan Agreement, nor any rights
with respect to any funds acquired by other Lenders through set-off against the
Borrower, and the Fund may not directly benefit from the collateral supporting
the Loan in which it has purchased the loan participation. As a result, the
Income Series may assume the credit risk of both the Borrower and the Lender
selling the loan participation. In the event of the insolvency of the Lender
selling a loan participation, the Income Series may be treated as a general
creditor of such Lender, and may not benefit from any set-off between such
Lender and the Borrower.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
of Directors and subject to the following conditions, the Fund, other than 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 the Fund's total assets at the time
of the most recent loan. The borrower must deposit with the Fund's custodian
bank collateral with an initial market value of at least 102% of the initial
market value of the securities loaned, including any accrued interest, with the
value of the collateral and loaned securities marked-to-market daily to maintain
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 may engage in security loan arrangements with
the primary objective of increasing the Fund's income either through investing
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.
GNMA Certificates - Securities of the type to be included in the U.S. Government
Securities Series portfolio have historically involved little risk to principal
if held to maturity. However, due to fluctuations in interest rates, the market
value of such securities may vary during the period of a shareholder's
investment in the Series. The U.S. government has never defaulted and never
delayed payments of interest or principal on its obligations, however, this does
not guarantee the value of a shareholder's investment in the U.S. Government
Securities Series.
When-Issued, Delayed Delivery and TBA Transactions - The Income Series may
purchase debt obligations and the U.S. Government Series may purchase and sell
GNMA Certificates on a "when-issued," "delayed delivery" or "TBA" basis. These
transactions are arrangements under which either Series may purchase securities
with payment and delivery scheduled for a future time, generally within 30 to 60
days. These 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 yields available when the transaction was entered into.
Although both Series will generally purchase these securities on a when-issued
or TBA basis with the intention of acquiring such securities, they may sell such
securities before the settlement date if it is deemed advisable. When a Series
is the buyer in such a transaction, it will maintain, in a segregated account
with its custodian bank, 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 Series engages in when-issued, delayed delivery or
TBA 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. In when-issued, delayed delivery and
TBA 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 when-issued, delayed delivery
or TBA basis do not generally earn interest until their scheduled delivery date.
Neither Series is subject to any percentage limit on the amount of its assets
which may be invested in when-issued, delayed delivery or TBA purchase
obligations.
Credit Union Investment Regulations - This section summarizes the investment
policies of the U.S. Government Securities Series, under which, based on the
Fund's understanding of laws and regulations governing investments by federal
credit unions on September 30, 1995, this Series would be a permissible
investment for federal credit unions. 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.
All investments of the U.S. Government Securities Series will be subject to the
following limitations:
(a) This Series will invest only in obligations of, or securities guaranteed as
to principal and interest by, the U.S. Government or its agencies and
instrumentalities, including without limitation GNMA certificates representing
proportional interests in pools of whole loans.
(b) All purchases and sales of securities will be settled on a cash basis within
30 days of the trade date. However, this Series may agree to settle a purchase
or sale transaction on a specific date up to 120 days after the trade date if,
on the trade date, the Series has cash flow projections evidencing its ability
to complete the purchase or the Series owns the security it has agreed to sell.
(c) This Series will not engage in repurchase agreements or reverse repurchase
agreements.
(d) This Series will not engage in (1) futures or options transactions; (2)
short sales; or (3) purchases of zero-coupon bonds which mature more than ten
years after the purchase date.
(e) This Series will not invest in derivative mortgage-backed securities, such
as collateralized mortgage obligations and real estate mortgage investment
conduits, which represent non-proportional interests in pools of mortgage loans.
Other Policies - As discussed in the Prospectuses, the Fund, other than the U.S.
Government Securities Series, may enter into repurchase agreements with banks or
government securities dealers recognized by the Federal Reserve Board and which
have been approved by the Board of Directors, who agree to repurchase the
securities at a predetermined price within a specified time (normally one day to
one week). In these transactions, the securities purchased by the Fund have an
initial total value in excess of the value of the repurchase agreement and are
held by the Fund's custodian bank until repurchased. Such arrangements permit
the Fund to keep all of its assets at work while retaining flexibility in
pursuit of investments of a longer-term nature. Repurchase agreements of more
than one week's duration are considered to be illiquid. The U.S. Government
Securities Series does not engage in repurchase agreements.
There are no restrictions or limitations on investments in obligations of the
U.S. government, or of corporations chartered by Congress as federal government
instrumentalities. The underlying assets may be retained in cash, including cash
equivalents which are Treasury bills, commercial paper and short-term bank
obligations such as certificates of deposit and bankers' acceptances. However,
it is intended that only as much of the underlying assets of each Series be
retained in cash as is deemed desirable or expedient under then-existing market
conditions.
The Fund, other than the U.S. Government Securities Series, may invest in
securities that cannot be offered to the public for sale without first being
registered under the Securities Act of 1933 ("restricted securities"), or in
other securities which, in the opinion of the Board of Directors, may be
otherwise illiquid. Illiquid equity securities will not be purchased if, upon
such purchase, such securities will constitute 5% of the value of the total net
assets of the Series in which they are held.
As noted in the Prospectuses, it is also the policy of the Fund that illiquid
securities may not constitute, at the time of purchase, more than 10% of the
value of the total net assets of the Series in which they are held. Generally an
"illiquid security" is any security that cannot be disposed of promptly and in
the ordinary course of business at approximately the amount at which the Fund
has valued the instrument. The Fund's Board of Directors has authorized the Fund
to invest in restricted securities where such investment is consistent with a
Series' investment objective and has authorized such securities to be considered
liquid and thus not subject to the foregoing limitation, to the extent the
investment manager determines that there is a liquid institutional or other
market for such securities - for example, restricted securities which may be
freely transferred among qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended, and for which a liquid
institutional market has developed. The Board of Directors will review any
determination by the investment manager to treat a restricted security as a
liquid security on an ongoing basis, including the investment manager's
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security is properly considered
a liquid security, the investment manager and the Board of Directors will take
into account the following factors: (i) the frequency of trades and quotes for
the security; (ii) the number of dealers willing to purchase or sell the
security and the number of other potential purchasers; (iii) dealer undertakings
to make a market in the security; and (iv) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of transfer). To
the extent a Series of the Fund invests in restricted securities that are deemed
liquid, the general level of illiquidity in that Series of the Fund may be
increased if qualified institutional buyers become uninterested in purchasing
these securities or the market for these securities contracts. Pursuant to an
undertaking with the state of Ohio, the DynaTech Series will limit its
investments in restricted securities to 15% of its total assets. This limit will
include investments in Rule 144A restricted securities deemed liquid by the
Fund's Board of Directors only to the extent such securities are included in the
Ohio Securities Division's meaning of restricted securities under Ohio
Administrative Code 1301:1:6-3-90(E)(12), as amended, in effect at the time of
investment in such securities.
When Will the Fund Engage
in Securities Transactions?
It is intended that portfolio changes in the Growth, Utilities, Income and U.S.
Government Securities Series be made as infrequently as possible, consistent
with market and economic factors generally, and special considerations affecting
any particular security such as the limitation of loss or realization of price
appreciation at a time believed to be opportune. In the DynaTech Series,
investments will be made from time to time for the purpose of achieving
short-term trading profits, and it is contemplated that this will result in a
greater degree of portfolio turnover than characterizes the other Series. The
sale of securities held for relatively short periods and reinvestment of the
proceeds will result in increased brokerage and transaction costs to the Series
and may involve an increase in taxes to the shareholders.
The portfolio turnover rates for each Series are set forth below:
Portfolio Turnover
For Fiscal Years
Ended September 30
- --------------------------------------------------------------------------------
Fund 1994 1995
- --------------------------------------------------------------------------------
Growth Series......................... 6.52% 1.39%
DynaTech Series....................... 9.73% 9.84%
Utilities Series...................... 6.34% 5.55%
Income Series......................... 23.37% 58.64%
U.S. Government
Securities Series.................... 18.28% 5.48%
Investment Restrictions
- --------------------------------------------------------------------------------
As noted in the Prospectuses, each Series has its own investment objective and
follows policies designed to achieve its objective. The investment objective(s)
of each Series as set forth in the Prospectuses are fundamental policies and may
not be changed without approval of the shareholders of the Series. In addition,
the following restrictions have been adopted as fundamental policies for all
Series, which means that they may not be changed without the approval of a
majority of the outstanding voting securities of the Series. Under the
Investment Company Act of 1940, as amended (the "1940 Act"), a "vote of a
majority of the outstanding voting securities" of a Series means the affirmative
vote of the lesser of (i) more than 50% of the outstanding shares of the Series
or (ii) 67% or more of the shares of the Series present at a shareholder meeting
if more than 50% of the outstanding shares of the Series are represented at the
meeting in person or by proxy. Each Series may not:
1. Borrow money or mortgage or pledge any of the assets of the Fund, except
that borrowings for temporary or emergency purposes may be made in an amount up
to 5% of total asset value.
2. Buy any securities on "margin" or sell any securities "short."
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes, to-be-announced securities or other debt
securities and except that securities of any Series, other than the U.S.
Government Securities Series, may be loaned to broker-dealers or other
institutional investors as discussed below under "Loans of Portfolio
Securities." For additional information relating to this policy see discussions
under "Loan Participations" and limitations on illiquid securities under "Other
Policies."
4. Act as underwriter of securities issued by other persons except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Invest more than 5% of the value of the gross assets of a Series in the
securities of any one issuer, but this limitation does not apply to investments
in securities issued or guaranteed by the U.S. government or its
instrumentalities. (The Growth, DynaTech, Income and Utilities Series also have
policies that concentration of investments in a single industry may not exceed
25% of their assets, except that the Utilities Series will concentrate its
investments in the utilities industry.)
6. Purchase the securities of any issuer which would result in any Series owning
more than 10% of the outstanding voting securities of an issuer.
7. Purchase from or sell to its officers and directors, or any firm of which
any officer or director is a member, as principal, any securities, but may deal
with such persons or firms as brokers and pay a customary brokerage commission;
retain securities of any issuer if, to the knowledge of the Fund, one or more of
its officers, directors or investment advisor own beneficially more than
one-half of 1% of the securities of such issuer and all such officers and
directors together own beneficially more than 5% of such securities.
8. Purchase any securities issued by a corporation which has not been in
continuous operation for three years, but such period may include the operation
of a predecessor.
9. Acquire, lease or hold real estate except such as may be necessary or
advisable for the maintenance of its offices.
10. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas or other mineral
exploration or development programs. The Fund may, however, write covered call
options listed for trading on a national securities exchange and purchase call
options to the extent necessary to cancel call options previously written. At
the present, there are no options listed for trading on a national securities
exchange covering the types of securities which are appropriate for investment
by the U.S. Government Securities Series and, therefore, there are no option
transactions available for that Series.
11. Invest in companies for the purpose of exercising control or management.
12. Purchase securities of other investment companies; except to the extent each
Series invests its uninvested daily cash balances in shares of the Franklin
Money Fund and other money market funds in the Franklin Group of Funds provided
(i) its purchases and redemptions of such money market fund shares may not be
subject to any purchase or redemption fees, (ii) its investments may not be
subject to duplication of management fees, nor to any charge related to the
expense of distributing each Series' shares (as determined under Rule 12b-1, as
amended, under the federal securities laws) and (iii) provided aggregate
investments by a Series in any such money market fund do not exceed (A) the
greater of (i) 5% of each Series' total net assets or (ii) $2.5 million, or (B)
more than 3% of the outstanding shares of any such money market fund.
In addition to these fundamental policies, pursuant to an undertaking with the
state of Texas it is the present policy of the Fund (which may be changed
without the approval of shareholders) not to invest in real estate limited
partnerships or in interests (other than publicly traded equity securities) in
oil, gas, or other mineral leases, exploration or development programs. Also
pursuant to an undertaking with the state of Texas, the Growth Series may not
invest in excess of 5% of its net assets, in warrants valued at the lower of
cost or market, nor more than 2% of its net assets in warrants not listed on
either the New York or American Stock Exchange.
Officers and Directors
- --------------------------------------------------------------------------------
The Board of Directors (the "Board") has the responsibility for the overall
management of the Fund, including general supervision and review of its
investment activities. The directors, in turn, elect the officers of the Fund
who are responsible for administering day-to-day operations of the Fund. The
affiliations of the officers and directors and their principal occupations for
the past five years are listed below. Directors who are deemed to be "interested
persons" of the Fund, as defined in the 1940 Act, are indicated by an asterisk
(*).
Positions and Offices Principal Occupations
Name, Age and Address with the Fund During Past Five Years
- --------------------------------------------------------------------------------
Harris J. Ashton (63) Director
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (63) Director
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
* Charles B. Johnson (63) President and
777 Mariners Island Blvd. Director
San Mateo, CA 94404
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin Resources, Inc. and
of 57 of the investment companies in the Franklin Templeton Group of Funds.
* Rupert H. Johnson, Jr. (55) Vice President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies
in the Franklin Templeton Group of Funds.
Gordon S. Macklin (67) Director
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), and Fusion Systems Corporation (industrial
technology); and director, trustee or managing general partner, as the case may
be, of 53 of the investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht and Quist Group;
Director, H & Q Healthcare Investors; and President, National Association of
Securities Dealers, Inc.
Harmon E. Burns (50) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 43 of the investment companies in the Franklin Templeton Group of Funds.
Kenneth V. Domingues (63) Vice President -
777 Mariners Island Blvd. Financial
San Mateo, CA 94404 Reporting and
Accounting
Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (35) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (47) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President - Legal, Franklin Resources, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and officer of 37 of
the investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (56) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Brian E. Lorenz (56) Secretary
One North Lexington Avenue
White Plains, New York
10001-1700
Attorney, member of the law firm of Bleakley Platt & Schmidt; officer of three
of the investment companies in the Franklin Group of Funds.
The preceding table indicates those officers and directors who are also
affiliated persons of Distributors and the investment manager. Directors not
affiliated with the investment manager ("nonaffiliated directors") are currently
paid fees of $1,350 per month plus $1,300 per meeting attended. As indicated
above, certain of the Fund's nonaffiliated directors also serve as directors,
trustees or managing general partners of other investment companies in the
Franklin Group of Funds(R) and the Templeton Group of Funds (the "Franklin
Templeton Group of Funds") from which they may receive fees for their services.
The following table indicates the total fees paid to nonaffiliated directors by
the Fund and by other funds in the Franklin Templeton Group of Funds.
Number of Boards
Total Fees in the Franklin
Total Fees Received from the Templeton Group
Received from Franklin Templeton of Funds on which
Name the Fund* Group of Funds** Each Serves***
- --------------------------------------------------------------------------------
Harris J. Ashton..... $31,800 $327,925 56
S. Joseph Fortunato.. 31,800 344,745 58
Gordon S. Macklin.... 31,800 321,525 53
*For the fiscal year ended September 30, 1995.
**For the calendar year ended December 31, 1995.
***The number of boards is based on the number of registered investment
companies in the Franklin Templeton Group of Funds and does not include the
total number of series or funds within each investment company for which the
directors are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, consisting of approximately 163
U.S. based funds or series.
Nonaffiliated directors are reimbursed for expenses incurred in connection with
attending board meetings, paid pro rata by each fund in the Franklin Templeton
Group of Funds for which they serve as director, trustee or managing general
partner. No officer or director received any other compensation directly from
the Fund. Certain officers or directors who are shareholders of Franklin
Resources, Inc. ("Resources") may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
During the last fiscal year, the law firm of which Mr. Lorenz is a partner
received payments totaling $64,100 for legal services rendered.
As of November 3, 1995, the officers and directors, as a group, owned of record
and beneficially approximately 131,406 shares of Growth Series - Class I, 25,327
shares of Utilities Series - Class I, 31,820 shares of DynaTech Series, 53,595
shares of Income Series - Class I, and 139,174 shares of U.S. Government
Securities Series - Class I, or less than 1% of the total outstanding shares of
each Series' Class I shares. The directors and officers owned no Class II
shares. Many of the Fund's directors also own shares in various of the other
funds in the Franklin Templeton Group of Funds. Charles B. Johnson and Rupert H.
Johnson, Jr. are brothers.
From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of the Fund's outstanding shares.
Investment Advisory and Other Services
- --------------------------------------
The investment manager of each Series of the Fund is Franklin Advisers, Inc.
("Advisers" or "Manager"). Advisers is a wholly-owned subsidiary of Resources, a
publicly owned holding company whose shares are listed on the New York Stock
Exchange (the "Exchange"). Resources owns several other subsidiaries that are
involved in investment management and shareholder services.
Pursuant to the management agreement for each Series, the Manager provides
investment research and portfolio management services, including the selection
of securities for the Fund to purchase, hold or sell and the selection of
brokers through whom the Fund's portfolio transactions are executed. The
Manager's activities are subject to the review and supervision of the Board to
whom the Manager renders periodic reports of the each Series' investment
activities. Under the terms of the management agreement, the Manager provides
office space and office furnishings, facilities and equipment required for
managing the business affairs of the Fund; maintains all internal bookkeeping,
clerical, secretarial and administrative personnel and services; and provides
certain telephone and other mechanical services. The Manager is covered by
fidelity insurance on its officers, directors and employees for the protection
of the Fund. Please see the Statement of Operations in the financial statements
included in the Fund's Annual Report to Shareholders dated September 30, 1995.
The Manager also provides management services to numerous other investment
companies or funds pursuant to management agreements with each fund. The Manager
may give advice and take action with respect to any of the other funds it
manages, or for its own account, which may differ from action taken by the
Manager on behalf of the Fund. Similarly, with respect to the Fund, the Manager
is not obligated to recommend, purchase or sell, or to refrain from
recommending, purchasing or selling any security that the Manager and access
persons, as defined by the 1940 Act, may purchase or sell for its or their own
account or for the accounts of any other fund. Furthermore, the Manager is not
obligated to refrain from investing in securities held by the Fund or other
funds which it manages or administers. Of course, any transactions for the
accounts of the Manager and other access persons will be made in compliance with
the Fund's Code of Ethics.
Pursuant to the management agreement for each Series, the Fund is obligated to
pay the Manager a fee computed separately for each Series at the close of
business on the last business day of each month equal to a monthly rate of 5/96
of 1% (approximately 5/8 of 1% per year) for the first $100 million of net
assets of such Series; 1/24 of 1% (approximately 1/2 of 1% per year) on net
assets of such Series in excess of $100 million up to $250 million; 9/240 of 1%
(approximately 45/100 of 1% per year) of net assets of such Series from $250
million up to $10 billion; 11/300 of 1% (approximately 44/100 of 1% per year) of
net assets of such Series from $10 billion to $12.5 billion; 7/200 of 1%
(approximately 42/100 of 1% per year) of net assets of such Series from $12.5
billion to $15 billion; 1/30 of 1% (approximately 40/100 of 1%) of net assets of
such Series from $15 billion to $17.5 billion; 19/600 (approximately 38/100 of
1%) of net assets of such Series from $17.5 billion to $20 billion; and 3/100
(approximately 36/100 of 1%) of net assets of such Series above $20 billion. As
a result of the implementation of a plan of distribution adopted pursuant to
Rule 12b-1 under the 1940 Act, Advisers has voluntarily agreed effective May 1,
1994, to limit its fees for the U.S. Government Securities Series - Class I to
the extent overall expenses exceed 0.70% of average daily net assets. Each class
will pay its share of the management fee, as determined by the proportion of the
Series that each class represents.
The management agreement for each Series specifies that the management fee will
be reduced to the extent necessary to comply with the most stringent limits on
the expenses which may be borne by the Fund as prescribed by any state in which
the Fund's shares are offered for sale. The most stringent current limit
requires the Manager to reduce or eliminate its fee to the extent that aggregate
operating expenses of a Series (excluding interest, taxes, brokerage commissions
and extraordinary expenses such as litigation costs) would otherwise exceed in
any fiscal year 2.5% of the first $30 million of average net assets of the
Series, 2% of the next $70 million of average net assets of the Series and 1.5%
of average net assets of the Series in excess of $100 million. Expense
reductions have not been necessary based on state requirements.
Management fees for the five Series of the Fund for the fiscal years ended
September 30, 1993, 1994 and 1995, were as follows:
Fund 1993 1994 1995
- --------------------------------------------------------------------------------
Growth Series......................$ 2,855,536 $ 2,681,332 $ 2,969,094
DynaTech Series.................... 441,449 424,859 491,673
Utilities series................... 13,422,576 13,930,637 12,223,592
Income Series...................... 14,769,836 20,628,160 23,887,430
U.S. Government Securities Series.. 62,607,011 58,414,490 50,269,876
The management agreement for each Series is in effect until January 31, 1997.
Thereafter, each agreement may continue in effect for successive annual periods
providing such continuance is specifically approved at least annually by a vote
of the Board or by a vote of the holders of a majority of the Fund's outstanding
voting securities of each Series, and in either event by a majority vote of the
Fund's directors who are not parties to the management agreement or interested
persons of any such party (other than as directors of the Fund), cast in person
at a meeting called for that purpose. The management agreement for each Series
may be terminated without penalty at any time by the Board or by a vote of the
holders of a majority of such Series' outstanding voting securities or by the
Manager on 30 days' written notice and will automatically terminate in the event
of its assignment, as defined in the 1940 Act.
Franklin/Templeton Investor Services, Inc. ("Investor Services"), a wholly-owned
subsidiary of Resources, is the shareholder servicing agent for the Fund and
acts as the Fund's transfer agent and dividend-paying agent. Investor Services
is compensated on the basis of a fixed fee per account.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian of the securities and other assets of the
Fund. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as
custodian in connection with transfer services through bank automated clearing
houses. The custodians do not participate in decisions relating to the purchase
and sale of portfolio securities.
Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California 94105,
are the Fund's independent auditors. During the fiscal year ended September 30,
1995, their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report to Shareholders
dated September 30, 1995.
The firm of Bleakley Platt & Schmidt, White Plains, New York, serves as legal
counsel to the Fund.
How Does the Fund Purchase
Securities For Its Portfolio?
- -----------------------------
Under the current management agreements, the selection of brokers and dealers to
execute transactions in each Series' portfolio is made by the Manager in
accordance with criteria set forth in the management agreement and any
directions which the Board may give.
When placing a portfolio transaction, the Manager attempts to obtain the best
net price and execution of the transaction. On portfolio transactions done on a
securities exchange, the amount of commission paid by the Fund is negotiated
between the Manager and the broker executing the transaction. The Manager seeks
to obtain the lowest commission rate available from brokers that are felt to be
capable of efficient execution of the transactions. The determination and
evaluation of the reasonableness of the brokerage commissions paid in connection
with portfolio transactions are based to a large degree on the professional
opinions of the persons responsible for the placement and review of such
transactions. These opinions are formed on the basis of, among other things, the
experience of these individuals in the securities industry and information
available to them concerning the level of commissions being paid by other
institutional investors of comparable size. The Manager will ordinarily place
orders for the purchase and sale of over-the-counter securities on a principal
rather than agency basis with a principal market maker unless, in the opinion of
the Manager, a better price and execution can otherwise be obtained. Purchases
of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask price. The Fund seeks to obtain
prompt execution of orders at the most favorable net price.
The amount of commission is not the only relevant factor to be considered in the
selection of a broker to execute a trade. If it is felt to be in the Fund's best
interest, the Manager may place portfolio transactions with brokers who provide
the types of services described below, even if it means the Fund will pay a
higher commission than if no weight were given to the broker's furnishing of
these services. This will be done only if, in the opinion of the Manager, the
amount of any additional commission is reasonable in relation to the value of
the services. Higher commissions will be paid only when the brokerage and
research services received are bona fide and produce a direct benefit to the
Fund or assist the Manager in carrying out its responsibilities to the Fund, or
when it is otherwise in the best interest of the Fund to do so, whether or not
such services may also be useful to the Manager in advising other clients.
When it is felt that several brokers are equally able to provide the best net
price and execution, the Manager may decide to execute transactions through
brokers who provide quotations and other services to the Fund, specifically
including the quotations necessary to determine the value of the Fund's net
assets, in such amount of total brokerage as may reasonably be required in light
of such services, and through brokers who supply research, statistical and other
data to the Fund and Manager in such amount of total brokerage as may reasonably
be required.
Since most purchases by the U.S. Government Securities Series are principal
transactions at net prices, the U.S. Government Securities Series incurs little
or no brokerage costs.
It is not possible to place a dollar value on the special executions or on the
research services received by the Manager from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits the Manager to supplement its own research
and analysis activities and to receive the views and information of individuals
and research staff of other securities firms. As long as it is lawful and
appropriate to do so, the Manager and its affiliates may use this research and
data in their investment advisory capacities with other clients. Provided that
the Fund's officers are satisfied that the best execution is obtained, the sale
of Fund shares may also be considered as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the National Association of Securities
Dealers, it is sometimes entitled to obtain certain fees when the Fund tenders
portfolio securities pursuant to a tender-offer solicitation. As a means of
recapturing brokerage for the benefit of the Fund, any portfolio securities
tendered by the Fund will be tendered through Distributors if it is legally
permissible to do so. In turn, the next management fee payable to Advisers under
the management agreement will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection
therewith.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by the Manager are considered at or about the
same time, transactions in such securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
Manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. It is recognized that in some cases this
procedure could possibly have a detrimental effect on the price or volume of the
security so far as the Fund is concerned. In other cases it is possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.
During the past three fiscal years ended September 30, each Series paid
brokerage commissions as follows:
Fund 1993 1994 1995
- --------------------------------------------------------------------------------
Growth Series...................... $ 175,563 $ 99,627 $ 50,102
DynaTech Series.................... 30,033 11,863 1,025,293
Utilities Series................... 1,715,627 487,079 11,850
Income Series...................... 814,753 1,223,298 895,111
U.S. Government Securities Series.. -0- -0- -0-
In the fiscal year ended September 30, 1995, the Income Series owned a security
issued by Associate Corp. of North America which was valued in the aggregate at
$19,964,400 as of the end of such fiscal year. Except as stated above, no Series
owned any securities issued by the Fund's regular broker-dealers as of the end
of such fiscal year.
How Do I Buy and Sell Shares?
- --------------------------------------------------------------------------------
All checks, drafts, wires and other payment mediums used for purchasing or
redeeming shares of the Fund must be denominated in U.S. dollars. The Fund
reserves the right, in its sole discretion, to either (a) reject any order for
the purchase or sale of shares denominated in any other currency or (b) honor
the transaction or make adjustments to your account for the transaction as of a
date and with a foreign currency exchange factor determined by the drawee bank.
In connection with exchanges, it should be noted that since the proceeds from
the sale of shares of an investment company are generally not available until
the fifth business day following the redemption, the funds into which you are
seeking to exchange reserve the right to delay issuing shares pursuant to an
exchange until said fifth business day. The redemption of shares of the Fund to
complete an exchange will be effected at the close of business on the day the
request for exchange is received in proper form at the net asset value then
effective. Please see "What If My Investment Outlook Changes? - Exchange
Privilege" in the Prospectus.
If, in connection with the purchase of Fund shares, you submit a check or a
draft that is returned unpaid to the Fund, the Fund may impose a $10 charge
against your account for each returned item.
Dividend checks returned to the Fund marked "unable to forward" by the postal
service will be deemed to be a request to change your dividend option to
reinvest all distributions and the proceeds will be reinvested in additional
shares at net asset value until new instructions are received.
The Fund may deduct from your account the costs of its efforts to locate you if
mail is returned as undeliverable or the Fund is otherwise unable to locate you
or verify your current mailing address. These costs may include a percentage of
the account when a search company charges a percentage fee in exchange for its
location services.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to such banks' discretionary trust funds at net asset
value. The banks may charge service fees to their customers who participate in
the discretionary trusts. Pursuant to agreements, a portion of such service fees
may be paid to Distributors or one of its affiliates to help defray expenses of
maintaining a service office in Taiwan, including expenses related to local
literature fulfillment and communication facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities firms known locally as Securities Investment Consulting Enterprises.
In conformity with local business practices in Taiwan, Class I shares of each
series of the Fund will be offered with the following schedule of sales charges:
Sales
Size of Purchase - U.S. dollars Charge
- --------------------------------------------------------------------------------
Up to $100,000........................................ 3%
$100,000 to $1,000,000................................ 2%
Over $1,000,000....................................... 1%
Purchases and Redemptions
through Securities Dealers
Orders for the purchase of shares of any Series received in proper form prior to
the scheduled close of the Exchange (generally 1:00 p.m. Pacific time) any
business day that the Exchange is open for trading and promptly transmitted to
the Fund will be based upon the public offering price determined that day.
Purchase orders received by securities dealers or other financial institutions
after the scheduled close of the Exchange will be effected at the public
offering price for such Series on the day it is next calculated. The use of the
term "securities dealer" herein shall include other financial institutions
which, either directly or through affiliates, have an agreement with
Distributors to handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity.
Orders for the redemption of shares are effected at net asset value subject to
the same conditions concerning time of receipt in proper form. It is the
securities dealer's responsibility to transmit the order in a timely fashion and
any loss to you resulting from the failure to do so must be settled between you
and the securities dealer.
Other Payments to Securities Dealers
As discussed in the Prospectus under "How Do I Buy Shares? - General," either
Distributors or one of its affiliates may make payments, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of Class I shares made at net asset value by certain trust companies and trust
departments of banks, certain designated retirement plans (excluding IRA and IRA
Rollovers), certain non-designated plans, and certain retirement plans of
organizations with collective retirement plan assets of $10 million or more, as
described below. Distributors may make these payments in the form of contingent
advance payments, which may be recovered from the securities dealer or set off
against other payments due to the securities dealer in the event shares are
redeemed within 12 months of the calendar month of purchase. Other conditions
may apply. All terms and conditions may be imposed by an agreement between
Distributors, or one of its affiliates, and the securities dealer.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to securities dealers who initiate and are responsible for
purchases of Class I shares made at net asset value by certain designated
retirement plans (excluding IRA and IRA rollovers): 1% on sales of $1 million
but less than $2 million, plus 0.80% on sales of $2 million but less than $3
million, plus 0.50% on sales of $3 million but less than $50 million, plus 0.25%
on sales of $50 million but less than $100 million, plus 0.15% on sales of $100
million or more; and for purchases of Class I shares of the Utilities Series,
Income Series and U.S. Government Securities Series made at net asset value by
certain non-designated retirement plans: 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. These payment breakpoints are reset every 12 months for purposes of
additional purchases. With respect to purchases of Class I shares made at net
asset value by certain trust companies and trust departments of banks and
certain retirement plans of organizations with collective retirement plan assets
of $10 million or more, either Distributors or one of its affiliates, out of its
own resources, may pay up to 1% of the amount invested.
Letter of Intent
You may qualify for a reduced sales charge on the purchase of Class I shares of
the Fund, as described in the Prospectuses. At any time within 90 days after the
first investment which you want to qualify for a reduced sales charge, you may
file with the Fund a signed Shareholder Application with the Letter of Intent
(the "Letter") section completed. After the Letter is filed, each additional
investment will be entitled to the sales charge applicable to the level of
investment indicated on the Letter. Sales charge reductions based upon purchases
in more than one of the Franklin Templeton Funds will be effective only after
notification to Distributors that the investment qualifies for a discount. Your
holdings in the Franklin Templeton Funds, including Class II shares, acquired
more than 90 days before the Letter is filed, will be counted towards completion
of the Letter but will not be entitled to a retroactive downward adjustment in
the sales charge. Any redemptions you make, unless by a designated retirement
plan, during the 13-month period will be subtracted from the amount of the
purchases for purposes of determining whether the terms of the Letter have been
completed. If the Letter is not completed within the 13-month period, there will
be an upward adjustment of the sales charge, depending upon the amount actually
purchased (less redemptions) during the period. The upward adjustment does not
apply to designated retirement plans. If you execute a Letter prior to a change
in the sales charge structure for the Fund, you will be entitled to complete the
Letter at the lower of the new sales charge structure or the sales charge
structure in effect at the time the Letter was filed.
As mentioned in the Prospectuses, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name. This policy of reserving shares does not apply to a designated
retirement plan. If the total purchases, less redemptions, equal the amount
specified under the Letter, the reserved shares will be deposited to an account
in your name or delivered to you or your order. If the total purchases, less
redemptions, exceed the amount specified under the Letter and is an amount which
would qualify for a further quantity discount, a retroactive price adjustment
will be made by Distributors and the securities dealer through whom purchases
were made pursuant to the Letter (to reflect such further quantity discount) on
purchases made within 90 days before and on those made after filing the Letter.
The resulting difference in offering price will be applied to the purchase of
additional shares at the offering price applicable to a single purchase or the
dollar amount of the total purchases. If the total purchases, less redemptions,
are less than the amount specified under the Letter, you will remit to
Distributors an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge that would have applied to
the aggregate purchases if the total of such purchases had been made at a single
time. Upon such remittance, the reserved shares held for your account will be
deposited to an account in your name or delivered to you or your order. If
within 20 days after written request the difference in sales charge is not paid,
the redemption of an appropriate number of reserved shares to realize the
difference will be made. In the event of a total redemption of the account prior
to fulfillment of the Letter, the additional sales charge due will be deducted
from the proceeds of the redemption, and the balance will be forwarded to you.
If a Letter is executed on behalf of a designated retirement plan, the level and
any reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
Redemptions in Kind
The Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of a Series' net
assets at the beginning of the 90-day period. This commitment is irrevocable
without the prior approval of the Securities and Exchange Commission ("SEC"). In
the case of redemption requests in excess of these amounts, the directors
reserve the right to make payments in whole or in part in securities or other
assets of the Series from which the shareholder is redeeming, in case of an
emergency, or if the payment of such a redemption in cash would be detrimental
to the existing shareholders of the Series. In such circumstances, the
securities distributed would be valued at the price used to compute the Series'
net assets. Should the Fund do so, you may incur brokerage fees in converting
the securities to cash. The Fund does not intend to redeem illiquid securities
in kind. Should it happen, however, you may not be able to recover your
investment in a timely manner and you may incur brokerage costs in selling the
securities.
Redemptions by the Fund
Due to the relatively high cost of handling small investments, the Fund reserves
the right to involuntarily redeem your shares at net asset value if your account
has a value of less than one-half of your initial required minimum investment,
but only where the value of your account has been reduced by the prior voluntary
redemption of shares. Until further notice, it is the present policy of the Fund
not to exercise this right if your account has a value of $50 or more. In any
event, before the Fund redeems your shares and sends you the proceeds, it will
notify you that the value of the shares in your account is less than the minimum
amount and allow you 30 days to make an additional investment in an amount which
will increase the value of your account to at least $100.
Reinvestment Date
Shares acquired through the reinvestment of dividends will be purchased at the
net asset value determined on the business day following the dividend record
date (sometimes known as the "ex-dividend date"). The processing date for the
reinvestment of dividends may vary from month to month and does not affect the
amount or value of the shares acquired.
Reports to Shareholders
The Fund sends annual and semiannual reports regarding it's performance and
portfolio holdings to shareholders. If you would like to receive an interim
quarterly report, you may phone Fund Information at 1-800/DIAL BEN.
Special Services
The Franklin Templeton Institutional Services Department provides specialized
services, including recordkeeping, for institutional investors of the Fund. The
cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with a Series on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, such Series may reimburse Investor Services an amount not
to exceed the per account fee which the Series normally pays Investor Services.
These financial institutions may also charge a fee for their services directly
to their clients.
How Are Fund Shares Valued?
- --------------------------------------------------------------------------------
As noted in the Prospectuses, each Series calculates the net asset value of each
class as of the scheduled close of the Exchange (generally 1:00 p.m. Pacific
time) each day that the Exchange is open for trading. As of the date of this
SAI, the Fund is informed that the Exchange observes the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of each 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 are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by the Manager.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
a Series is its last sale price on the relevant exchange prior to the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, the options are valued within the range of the
current closing bid and ask prices if such valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the Exchange, if that is earlier, and that value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale is
reported at that time, the mean between the current bid and ask prices is used.
Occasionally, events which affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and the
close of the exchange and will, therefore, not be reflected in the computation
of the net asset value of each class of a Series. If events which materially
affect the values of these foreign securities occur during such period, then
these securities will be valued in accordance with procedures established by the
Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior to
the scheduled close of the Exchange. The value of these securities used in
computing the net asset value of the Fund's shares is determined as of such
times. Occasionally, events affecting the values of such securities may occur
between the times at which they are determined and the scheduled close of the
Exchange which will not be reflected in the computation of the net asset value
of each class of each Series. If events materially affecting the value of these
securities occur during such period, then the securities will be valued at their
fair value as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of directors, the
Fund may utilize a pricing service, bank or securities dealer to perform any of
the above described functions.
Additional Information Regarding Taxation
- --------------------------------------------------------------------------------
As stated in the Prospectus, each Series of the Fund has elected to be treated
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). The directors reserve the right not to
maintain the qualification of a Series as a regulated investment company if they
determine such course of action to be beneficial to the shareholders. In such
case, the Series will be subject to federal and possibly state corporate taxes
on its taxable income and gains, and distributions to shareholders will be
ordinary dividend income to the extent of the Series' available earnings and
profits.
Subject to the limitations discussed below, all or a portion of the income
distributions paid by a Series (with the exception of the U.S. Government
Securities Series) may be treated by corporate shareholders as qualifying
dividends for purposes of the dividends-received deduction under federal income
tax law. If the aggregate qualifying dividends received by the Series
(generally, dividends from U.S. domestic corporations, the stock in which is not
debt-financed by the Series and is held for at least a minimum holding period)
are less than 100% of its distributable income, then the amount of the Series'
dividends paid to corporate shareholders which may be designated as eligible for
such deduction will not exceed the aggregate qualifying dividends received by
the Series for the taxable year. The amount or percentage of income qualifying
for the corporate dividends-received deduction will be declared by the Series
annually in a notice to shareholders mailed shortly after the end of the Series'
fiscal year.
Corporate shareholders should note that dividends paid by a Series from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and net
short-term capital gain (in excess of any net long-term capital loss or capital
loss carryover) included in investment company taxable income and distributed by
a Series as a dividend will not qualify for the dividends-received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless the shares in a Series have been held (or
deemed held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid or
accrued by a corporate shareholder is directly attributable to its investment in
shares of a Series. The entire dividend, including the portion which is treated
as a deduction, is includable in the tax base on which the alternative minimum
tax is computed and may also result in a reduction in the shareholder's tax
basis in its shares of the Series, under certain circumstances, if the shares
have been held for less than two years. Corporate shareholders whose investment
in a Series is "debt financed" for these tax purposes should consult with their
tax advisors concerning the availability of the dividends-received deduction.
The Code requires all regulated investment companies to distribute at least 98%
of their taxable ordinary income earned during the calendar year and at least
98% of their capital gain net income earned during the 12-month period ending
October 31 of each year (in addition to amounts from the prior year that were
neither distributed, nor taxed to the Series) to you by December 31 of each year
in order to avoid the imposition of a federal excise tax. Under these rules,
certain distributions which are declared in October, November or December but
which, for operational reasons, may not be paid to you until the following
January, will be treated for tax purposes as if paid by the Series and received
by the shareholder on December 31 of the calendar year in which they are
declared. Each Series intends as a matter of policy to declare and pay such
dividends, if any, in December to avoid the imposition of this tax, but does not
guarantee that its distributions will be sufficient to avoid any or all federal
excise taxes.
Each Series' transactions in options may be limited by the requirements for
qualification as a regulated investment company and may reduce the portion of
the Income Fund's dividends which is eligible for the corporate
dividends-received deduction. These transactions are subject to special tax
rules that may affect the amount, timing and character of certain distributions
to you.
Gain realized by a Series from transactions entered into after April 30, 1993
that are deemed to constitute "conversion transactions" under the Code and which
would otherwise produce capital gain may be recharacterized as ordinary income
to the extent that such gain does not exceed an amount defined by the Code as
the "applicable imputed income amount." A conversion transaction is any
transaction in which substantially all of the Series' expected return is
attributable to the time value of the Series' net investment in such transaction
and any one of the following criteria are met: 1) there is an acquisition of
property with a substantially contemporaneous agreement to sell the same or
substantially identical property in the future; 2) the transaction is an
applicable straddle; 3) the transaction was marketed or sold to the Series on
the basis that it would have the economic characteristics of a loan but would be
taxed as capital gain; or 4) the transaction is specified in Treasury
regulations to be promulgated in the future. The applicable imputed income
amount, which represents the deemed return on the conversion transaction based
upon the time value of money, is computed using a yield equal to 120 percent of
the applicable federal rate, reduced by any prior recharacterizations under this
provision or Section 263(g) of the Code concerning capitalized carrying costs.
Redemptions and exchanges of shares of a Series are taxable transactions for
federal and state income tax purposes. For most shareholders, gain or loss will
be recognized in an amount equal to the difference between your basis in the
shares and the amount realized from the transaction, subject to the rules
described below. If such shares are a capital asset in your hands, gain or loss
will be capital gain or loss and will be long-term for federal income tax
purposes if the shares have been held for more than one year.
All or a portion of 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 Templeton Funds and a sales charge which
would otherwise apply to the reinvestment is reduced or eliminated. Any portion
of such sales charge excluded from the tax basis of the shares sold will be
added to the tax basis of the shares acquired in the reinvestment. You should
consult with your tax advisor concerning the tax rules applicable to the
redemption or exchange of Fund shares.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
Each Series, other than the U.S. Government Securities Series, may be subject to
foreign withholding taxes on income from certain of its foreign securities.
Because a Series generally has not invested and does not intend in the future to
invest more than 50% of its total assets in securities of foreign corporations,
it is not entitled under the Code to pass through to its shareholders their pro
rata share of the foreign taxes paid by each Series. These taxes will be taken
as a deduction by each Series.
Foreign exchange gains and losses realized by a Series (except for the U.S.
Government Securities Series) in connection with certain 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
you. Additionally, investments in foreign securities pose special issues to the
Series in meeting its asset diversification and income tests as a regulated
investment company. The Series will limit its investments in foreign securities
to the extent necessary to comply with these requirements.
If a Series owns shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax purposes and the
Series does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Series may be subject to U.S. federal
income taxation on a portion of any "excess distribution" it receives from the
PFIC or any gain it derives from the disposition of such shares, even if such
income is distributed as a taxable dividend by the Series to its U.S.
shareholders. The Series may also be subject to additional interest charges in
respect of deferred taxes arising from such distributions or gains. Any federal
income tax paid by the Series as a result of its ownership on shares of a PFIC
will not give rise to a deduction or credit to the Series or to you. A PFIC
means any foreign corporation if, for the taxable year involved, either (i) it
derives at least 75 percent of its income from "passive income" (including, but
not limited to, interest, dividends, royalties, rents and annuities), or (ii) on
average, at least 50 percent of the value (or adjusted basis, if elected) of the
assets held by the corporation produce "passive income."
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark to market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares held by the
Series in a PFIC would be treated as an excess distribution received by the
Series in the current year, eliminating the deferral and the related interest
charge. Such excess distribution amounts are treated as ordinary income, which
the Series will be required to distribute to shareholders even though the Series
has nor received any cash to satisfy this distribution requirement. These
regulations would be effective for taxable years ending after the promulgation
of the proposed regulations as final regulations.
The Fund's Underwriter
- --------------------------------------------------------------------------------
Pursuant to an underwriting agreement in effect until January 31, 1997,
Distributors acts as principal underwriter in a continuous public offering for
both classes of the Fund's shares. The underwriting agreement will continue in
effect for successive annual periods provided that its continuance is
specifically approved at least annually by a vote of the Board, or by a vote of
the holders of a majority of the outstanding voting securities of each Series,
and in either event by a majority vote of the Fund's Directors who are not
parties to the underwriting agreement or interested persons of any such party
(other than as directors of the Fund), cast in person at a meeting called for
that purpose. The underwriting agreement terminates automatically in the event
of its assignment and may be terminated by either party on 90 days' written
notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Until April 30, 1994, income dividends for Class I shares were reinvested at the
offering price (which includes the sales charge) and Distributors allowed 50% of
the entire commission to the securities dealer of record, if any, on an account.
Starting with any income dividends paid after April 30, 1994, such reinvestment
is at net asset value.
In connection with the offering of the Fund's shares, during the fiscal years
ended September 30, 1993, 1994 and 1995 the aggregate underwriting commissions
received by Distributors and the amounts retained, after allowances to dealers,
were as follows:
Fiscal Year - September 30, 1993
- --------------------------------------------------------------------------------
Commissions Commissions
Fund Received Retained
- --------------------------------------------------------------------------------
Growth Series.............. $ 3,960,004 $ 112,573
DynaTech Series........... 313,990 12,277
Utilities Series........... 48,570,562 1,885,048
Income Series.............. 48,743,641 2,014,263
U.S. Government
Securities Series......... 79,919,762 6,885,309
Fiscal Year - September 30, 1994
- --------------------------------------------------------------------------------
Commissions Commissions
Fund Received Retained
- --------------------------------------------------------------------------------
Growth Series.............. $ 2,157,161 $ 213,992
DynaTech Series........... 172,942 4,415
Utilities Series........... 19,947,028 1,181,619
Income Series.............. 53,164,210 1,717,009
U.S. Government
Securities Series......... 35,631,313 4,226,864
Fiscal Year - September 30, 1995
- --------------------------------------------------------------------------------
Commissions Commissions
Fund Received Retained
- --------------------------------------------------------------------------------
Growth Series.............. $ 2,112,855 $ 233,027
DynaTech Series........... 231,256 25,733
Utilities Series.......... 6,047,891 366,179
Income Series............. 37,121,561 2,117,539
U.S. Government
Securities Series........ 10,902,931 656,562
For the fiscal year ended September 30, 1995, Distributors received the
following amounts in connection with redemptions or repurchases of shares:
Amount
Fund Retained
- --------------------------------------------------------------------------------
Growth Series...................................... $ 227
DynaTech Series.................................... 280
Utilities Series................................... -0-
Income Series...................................... 4,700
U.S. Government
Securities Series................................. 2,188
Distributors may be entitled to reimbursement under the distribution plans of
the Series, as discussed below. Except as noted, Distributors received no other
compensation for acting as underwriter of the Fund.
Distribution Plans
The DynaTech Series and each class of the Growth Series, Utilities Series,
Income Series, and the U.S. Government Securities Series have adopted
distribution plans pursuant to Rule 12b-1 under the 1940 Act (the "Class I
Plan(s)" and "Class II Plan(s)," respectively, or "Plan(s)").
The Class I Plans. Under the Class I Plans, Growth Series and DynaTech Series
may pay up to a maximum of 0.25% and Income Series, Utilities Series, and U.S.
Government Securities Series may pay up to a maximum of 0.15% per annum of their
average daily net assets, payable quarterly, for expenses incurred in the
promotion and distribution of Class I shares.
In implementing the Class I Plans, the Board has determined that the annual fees
payable under the Growth Series and DynaTech Series' Class I Plans, will be
equal to the sum of: (i) the amount obtained by multiplying 0.25% by the average
daily net assets represented by Class I shares of such Series that were acquired
by investors of such Series on or after May 1, 1994, the effective date of the
plan ("New Assets"), and (ii) the amount obtained by multiplying 0.15% by the
average daily net assets represented by Class I shares of such Series that were
acquired before May 1, 1994 ("Old Assets"). Such fees will be paid to the
current securities dealer of record on the account. In addition, until such time
as the maximum payment of 0.25% is reached on a yearly basis, up to an
additional 0.05% will be paid to Distributors under the Growth Series and
DynaTech Series' Class I Plans. With respect to the Income and Utilities Series,
the annual fees payable under their respective Class I Plans 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' Class I shares, and
(ii) the amount obtained by multiplying 0.10% by the average daily net assets
represented by the Old Assets of such Series' Class I shares. With respect to
the U.S. Government Securities Series, the annual fees payable under it's Class
I Plan will be equal to the sum of: (i) the amount obtained by multiplying 0.15%
by the New Assets of such Series' Class I shares, 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 their
respective Class I 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.
The fee is a Class I expense so that all Class I shareholders of a Series,
regardless of when they purchased their shares, will bear Rule 12b-1 expenses at
the same rate. The initial rates 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 May 1, 1994, will increase over time. Thus, as the
proportion of a Series' Class I shares purchased on or after May 1, 1994,
increases in relation to outstanding Class I shares of a Series, the expenses
attributable to payments under the Plan will also increase (but will not exceed
the maximum allowable under each Class I Plan). While this is the currently
anticipated calculation for fees payable under the Class I Plans, the Class I
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 at any time. The approval of the Board would be
required to change the calculation of the payments to be made under the Class I
Plans.
Pursuant to the Class I Plans, Distributors or others will be entitled to be
reimbursed each quarter (up to the maximums stated above) for actual expenses
incurred in the distribution and promotion of each Series' Class I shares,
including, but not limited to, the printing of prospectuses and reports used for
sales purposes, expenses of preparing and distributing sales literature and
related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of Distributors' overhead expenses attributable to
the distribution of the Class I 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, Distributors or its
affiliates. The Class I Plans do not permit unreimbursed expenses incurred in a
particular year to be carried over to or reimbursed in subsequent years.
The Class II Plans. Under the Class II Plans, the Growth Series pays
Distributors up to 0.75% per annum of Class II's average daily net assets,
payable quarterly, and the Utilities Series, Income Series, and U.S. Government
Securities Series pays Distributors up to 0.50% per annum of Class II's average
daily net assets, payable quarterly for distribution and related expenses. These
fees may be used to compensate Distributors or others for providing distribution
and related services and bearing certain Class II expenses of the respective
Series. All expenses of distribution and marketing over these amounts will be
borne by Distributors or others who have incurred them without reimbursement by
the Series. Under the Class II Plans, the Growth Series also pays an additional
0.25% per annum and the Utilities Series, Income Series and the U.S. Government
Securities Series also pays an additional 0.15% per annum, payable quarterly, of
the average daily net assets of Class II of such Series as a servicing fee. This
fee will be used to pay dealers or others for, among other things, assisting in
establishing and maintaining customer accounts and records; assisting with
purchase and redemption requests; receiving and answering correspondence;
monitoring dividend payments from the respective Series on behalf of customers;
and similar activities related to furnishing personal services and maintaining
shareholder accounts. At the time of investment, Distributors may pay the
securities dealer a commission of up to 1% of the amount invested out of its own
resources.
Class I and Class II Plans. In addition to the payments that Distributors or
others are entitled to under the Plans, each Plan also provides that to the
extent a Series, the Manager or Distributors or other parties on behalf of a
Series, the Manager or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of shares of
each class of a Series within the context of Rule 12b-1 under the 1940 Act, then
such payments shall be deemed to have been made pursuant to a Plan. The terms
and provisions of the Plans relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under the Plans, plus any other payments deemed to be made
pursuant to the Plans, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.,
Article III, Section 26(d)4.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the Plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. Such banking institutions, however, are permitted to receive fees under
the Plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing such services, you would be
permitted to remain a shareholder of the Series, and alternate means for
continuing the servicing would be sought. In such an event, changes in the
services provided might occur and you might no longer be able to avail yourself
of any automatic investment or other services then being provided by the bank.
It is not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
The Plans have been approved in accordance with the provisions of Rule 12b-1.
The Plans are effective through January 31, 1997 and renewable annually by a
vote of the Board, including a majority vote of the directors who are
non-interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Plan, cast in person at a meeting called for
that purpose. It is also required that the selection and nomination of such
directors be done by the non-interested directors. The Plans and any related
agreements may be terminated at any time, without penalty, by vote of a majority
of the non-interested directors on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of a management agreement with the Manager or, as to
each Series, by vote of a majority of the Series' outstanding shares of the
class. Distributors or any dealer or other firm may also terminate their
respective distribution or service agreement at any time upon written notice.
The Plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class of the respective Series, and all
material amendments to the Plans or any related agreements shall be approved by
a vote of the non-interested directors, cast in person at a meeting called for
the purpose of voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the Plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the Plans should be continued.
The table below shows the amounts paid by each Series pursuant to the Class I
and Class II Plans for the fiscal year ended September 30, 1995.
<TABLE>
<CAPTION>
Payments Under 12b-1 Plans
Fiscal Year Ended September 30, 1995
Printing/Mailing Payments to Payments to
Advertising Prospectuses Underwriters Brokers or Dealers Total
- ------------------------------------------------------------------------------------------------------------
Class I
<S> <C> <C> <C> <C> <C>
Growth Series......... $193,462 $ 89,706 $ 11,903 $ 852,339 $1,147,410
Utilities Series...... 283,241 197,804 38,723 2,635,919 3,155,687
DynaTech Series....... 14,298 21,602 1,452 99,426 136,778
Income Series......... 551,791 269,755 216,120 5,591,438 6,629,104
U.S. Government
Securities Series.... 1,066,361 799,972 140,031 6,036,785 8,043,149
Class II*
Growth Series......... -0- -0- -0- 64,467 64,467
Utilities Series...... -0- -0- -0- 127,293 127,293
Income Series......... -0- -0- -0- 71,000 71,000
U.S. Government
Securities Series.... -0- -0- -0- 12,518 12,518
</TABLE>
*For the five-month period ended September 30, 1995.
General Information
- --------------------------------------------------------------------------------
Performance
As noted in the Prospectuses, each Series may from time to time quote various
performance figures for each class to illustrate past performance and may
occasionally cite statistics to reflect volatility or risk.
Performance quotations by investment companies are subject to rules adopted by
the SEC. These rules require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by
the Series be accompanied by certain standardized performance information
computed as required by the SEC. Current yield and average annual compounded
total return quotations used by the Series are based on the standardized methods
of computing performance mandated by the SEC. An explanation of those and other
methods used by the Fund to compute or express performance for each class
follows.
Total Return
The average annual total return is determined by finding the average annual
compounded rates of return over one-, five- and ten-year periods that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes the maximum front-end sales charge is deducted from the
initial $1,000 purchase order, and income dividends and capital gains are
reinvested at net asset value. The quotation assumes the account was completely
redeemed at the end of each one-, five- and ten-year period and the deduction of
all applicable charges and fees. If a change is made on the sales charge
structure, historical performance information will be restated to reflect the
maximum front-end sales charge currently in effect.
The average annual compounded rates of return for Class I shares for the one-,
five- and ten-year periods ended on September 30, 1995 was as follows:
One-Year Five-Year Ten-Year
Class I Period Period Period
- --------------------------------------------------------------------------------
Growth Series.............. 25.25% 14.26% 14.60%
DynaTech Series............ 26.21% 15.95% 13.08%
Utilities Series............ 18.91% 11.14% 10.96%
Income Series.............. 9.09% 15.28% 12.02%
U.S. Government
Securities Series.......... 8.72% 7.51% 8.50%
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-, five-
or ten-year periods
As discussed in the Prospectus, a Series may quote total rates of return in
addition to the average annual total return for each class. These quotations are
computed in the same manner as the average annual compounded rates, except they
will be based on each Series' actual return for a specified period rather than
its average return over one-, five- and ten-year periods. The total rates of
return for both classes (as applicable) for each Series for the indicated
periods ended on September 30, 1995 were as follows:
One-Year Five-Year Ten-Year
Class I Period Period Period
- --------------------------------------------------------------------------------
Growth Series............ 25.25% 94.74% 290.76%
DynaTech Series.......... 26.21% 109.56% 241.87%
Utilities Series......... 18.91% 69.58% 182.90%
Income Series............ 9.09% 103.58% 211.10%
U.S. Government
Securities Series....... 8.72% 43.64% 126.02%
From
Class II Inception
- --------------------------------------------------------------------------------
Growth Series..................................... 12.58%
Utilities Series.................................. 10.89%
Income Series..................................... 7.47%
U.S. Government
Securities Series................................ 4.20%
Current Yield
The current yield of each class reflects the income per share earned by each
Series' portfolio investments and is determined by dividing the net investment
income per share of each class earned during a 30-day base period by the maximum
offering price per share on the last day of the period and annualizing the
result. Expenses accrued for the period include any fees charged to all
shareholders of a class during the base period. The yield for each Series for
the 30-day period ended on September 30, 1995 were as follows:
30-Day
Yield
- --------------------------------------------------------------------------------
Class I
Growth Series........................................ 0.97%
DynaTech Series...................................... 0.79
Utilities Series..................................... 5.29%
Income Series........................................ 7.90%
U.S. Government
Securities Series................................... 6.55%
Class II
Growth Series........................................ 0.25%
Utilities Series..................................... 4.97%
Income Series........................................ 7.66%
U.S. Government
Securities Series................................... 6.21%
These figures were obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
----
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
Current Distribution Rate
Current yield which is calculated according to a formula prescribed by the SEC
is not indicative of the amounts which were or will be paid to shareholders of a
class of a Series. Amounts paid to shareholders are reflected in the quoted
current distribution rate. The current distribution rate is computed by dividing
the total amount of dividends per share paid by a class of a 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 over the period such policies were in effect, rather than
using the dividends during the past 12 months. The current distribution rate
differs from the current yield computation because it may include distributions
to shareholders from sources other than dividends and interest, such as premium
income from option writing and short-term capital gains, and is calculated over
a different period of time. The current distribution rate for each Series as of
September 30, 1995 were as follows:
Current
Distribution
Rate
- --------------------------------------------------------------------------------
Class I
Growth Series................................... 0.67%
DynaTech Series................................. 0.37%
Utilities Series................................ 5.15%
Income Series................................... 7.50%
U.S. Government Securities Series............... 6.86%
Class II
Growth Series................................... n/a
Utilities Series................................ 4.91%
Income Series................................... 7.24%
U.S. Government Securities Series............... 6.42%
Volatility
Occasionally statistics may be used to specify Fund volatility or risk. Measures
of volatility or risk are generally used to compare a Series' net asset value or
performance relative to a market index. One measure of volatility is beta. Beta
is the volatility of a fund relative to the total market, as represented by an
index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market,
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of net asset value or total return around an average,
over a specified period of time. The idea is that greater volatility means
greater risk undertaken in achieving performance.
Other Performance Quotations
For investors who are permitted to purchase Class I shares of a Series at net
asset value, sales literature pertaining to Class I may quote a current
distribution rate, yield, total return, average annual total return and other
measures of performance as described elsewhere in this SAI with the substitution
of net asset value for the public offering price.
Sales literature referring to the use of the Fund or any of its Series as a
potential investment for Individual Retirement Accounts (IRAs), Business
Retirement Plans, and other tax-advantaged retirement plans may quote a total
return based upon compounding of dividends on which it is presumed no federal
income tax applies.
Regardless of the method used, past performance is not necessarily indicative of
future results, but is an indication of the return to shareholders only for the
limited historical period used.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Templeton Group of Funds. Resources is the parent company of the advisors and
underwriter of both the Franklin Group of Funds and Templeton Group of Funds.
Comparisons
To help you better evaluate how an investment in a Series of the Fund may
satisfy your investment objective, advertisements and other materials regarding
the Fund or any of its Series may discuss certain measures of the performance of
each class of a Series' as reported by various financial publications. Materials
may also compare performance (as calculated above) to performance as reported by
other investments, indices, and averages. Such comparisons may include, but are
not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the New York Stock Exchange.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for equity funds.
h) Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines provide performance
statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
In addition to the indices listed above, the following specific comparisons may
be appropriate:
Utilities Series may be compared to Moody's Utilities Stock Index, an unmanaged
index of utility stock performance.
DynaTech Series may be compared to:
a) Hambrecht & Quist Technology Index - an unmanaged index of technology-based
companies published by Hambrecht & Quist.
b) Pacific Stock Exchange Technology Index - an unmanaged index representing a
wide variety of technology-based companies ranging from established companies to
emerging growth companies.
c) Over-the-Counter (OTC) Composite Stock Index - an unmanaged index of stock
performance of all stocks listed in the OTC market.
Income Series and U.S. Government Securities Series may be compared to:
a) Salomon Brothers Broad Bond Index or its component indices - measures yield,
price, and total return for Treasury, agency, corporate, and mortgage bonds.
b) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage, and
Yankee bonds.
c) Standard & Poor's Bond Indices - measures yield and price of corporate,
municipal, and government bonds.
d) Other taxable investments including certificates of deposit (CDs), money
market deposit accounts (MMDAs), checking accounts, savings accounts, money
market mutual funds, and repurchase agreements.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived by an investment in
any of the Fund's Series. Such advertisements or information may include
symbols, headlines, or other material which highlight or summarize the
information discussed in more detail in the communication. For example:
1. Franklin pioneered the concept of Ginnie Mae funds, and the U.S. Government
Securities Series, with over $11 billion in assets and more than 500,000
shareholders at the end of its fiscal year, is one of the largest Ginnie Mae
funds in the U.S. and the world. Shareholders in this Series, which has a
history of solid performance, range from individual investors with a few
thousand dollars to institutions that have invested millions of dollars.
The U.S. Government Securities Series offers investors the opportunity to invest
in GNMAs, which are among the highest yielding U.S. government securities on the
market.
2. Advertisements or information about the U.S. Government Securities Series may
compare the performance of a class of the Series to the return on certificates
of deposit or other investments. You should be aware, however, that an
investment in the U.S. Government Securities Series involves the risk of
fluctuation of principal value, a risk generally not present in an investment in
a certificate of deposit issued by a bank. For example, as the general level of
interest rates rise, the value of the U.S. Government Series' fixed-income
investments, as well as the value of its shares which are based upon the value
of such portfolio investments, can be expected to decrease. Conversely, when
interest rates decrease, the value of the Series' shares can be expected to
increase. Certificates of deposit are frequently insured by an agency of the
U.S. government. An investment in the Series is not insured by any federal,
state or private entity.
3. The Utilities Series has paid uninterrupted dividends for the past 47 years.
Over the life of the Utilities Series, dividends have increased in 28 of the
last 46 years. Historically, equity securities of utility companies have paid a
higher level of dividends than that paid by the general stock market. The
Utilities Series, well established for over 40 years, is the oldest mutual fund
in the U.S. investing in securities issued by public utility companies,
primarily in the country's fast growing regions, and the Series has been
continuously managed by the same portfolio manager since 1957.
4. The Income Series has paid uninterrupted dividends for the past 46 years.
5. The Growth Series offers investors a convenient way to invest in a
diversified portfolio of America's established growth companies, companies that
are leaders in their industries.
6. The Growth Series made the 1990 and 1991 Forbes Mutual Fund Honor Roll for
its performance in both up and down markets.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the portfolio of any Series of the Fund, the indices and averages
are generally unmanaged, and the items included in the calculations of the
averages may not be identical to the formula used by any Series to calculate its
figures. In addition, there can be no assurance that any Series of the Fund will
continue its performance as compared to such other averages.
Other Features and Benefits
A Series may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and/or
other long-term goals. The following list reflects some of the ways in which a
Series may be used to achieve investment objectives or to illustrate other
benefits:
Dollar Cost Averaging - The Series of the Fund can be used in programs involving
dollar cost averaging to help investors reduce the per share costs of their
investments over time.
Retirement Planning - The Series of the Fund can be used to help an investor
build a retirement plan. The Franklin Retirement Planning Guide leads you
through the steps to start a retirement savings program. Of course, an
investment in a Series cannot guarantee that such goals will be met.
College Costs - The Series of the Fund can be used to help an investor save for
educational costs. The Franklin College Costs Planner may assist you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are published by the College Board.) Of
course, an investment in the Fund cannot guarantee that such goals will be met.
Price Stability - The example below can be used to illustrate the stability of
the Income Series' net asset value, when compared to the Dow Jones industrial
average, during periods of market volatility:
Dow Jones Fund's Net
Date Average Asset Value
- --------------------------------------------------------------------------------
10/16/87........................ 2246.73 $2.19
10/19/87........................ 1738.41 $2.12
- --------------------------------------------------------------------------------
Change -508.32 -.07
04/13/88........................ 2107.09 $2.17
04/14/88........................ 2005.63 $2.16
- --------------------------------------------------------------------------------
Change -101.46 -.01
Miscellaneous Information
Each Series may also be discussed in shareholder newsletters; with the Franklin
Automatic Investment Plan; in articles discussing tax planning; in discussions
about using Franklin Gift Certificates to purchase shares of a Series; to
demonstrate the benefits offered by professional management.
In advertising ratings or rankings of the Franklin Group of Funds(R) operations,
the Funds may advertise, together or separately, the following past rating, and
such information in that category that may appear in the future:
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the United States, and may be considered in
a program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 47 years and
now services more than 2.5 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Together, the Franklin Templeton Group has over $135
billion in assets under management for more than 3.9 million U.S. based mutual
fund shareholder and other accounts. The Franklin Group of Funds and the
Templeton Group of Funds offers to the public 114 U.S. based mutual funds. The
Fund may identify itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past seven years.
Employees of Resources or its subsidiaries who are access persons under the 1940
Act are permitted to engage in personal securities transactions subject to the
following general restrictions and procedures: (i) the trade must receive
advance clearance from a compliance officer and must be completed within 24
hours after clearance; (ii) copies of all brokerage confirmations must be sent
to a compliance officer and, within 10 days after the end of each calendar
quarter, a report of all securities transactions must be provided to the
compliance officer; and (iii) access persons involved in preparing and making
investment decisions must, in addition to (i) and (ii) above, file annual
reports of their securities holdings each January and inform the compliance
officer (or other designated personnel) if they own a security that is being
considered for a fund or other client transaction or if they are recommending a
security in which they have an ownership interest for purchase or sale by a fund
or other client.
Ownership and Authority Disputes
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, prior to
executing instructions regarding the account; (b) interplead disputed funds or
accounts with a court of competent jurisdiction; or (c) surrender ownership of
all or a portion of the account to the Internal Revenue Service in response to a
Notice of Levy.
Additional Information for
Institutional Investors
As the investments permitted to the U.S. Government Securities Series are
limited to securities issued or guaranteed by the U.S. government or its
agencies and instrumentalities, the shares of the U.S. Government Securities
Series are generally eligible for investment by federally-chartered credit
unions, federally-chartered savings and loan associations, national banks and
the National Marine Fisheries Service Capital Construction Fund. While the
Series is not aware of any investments permitted to it which would destroy such
eligibility, it has agreed for the benefit of such federally-chartered
institutions to refrain from such investments should the situation arise. The
U.S. Government Securities Series may be a permissible investment for certain
state-chartered institutions as well.
ALL INSTITUTIONAL INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE
WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS
FOR THEM.
Financial Statements
- --------------------------------------------------------------------------------
The audited financial statements contained in the Annual Report to Shareholders
of the Fund dated September 30, 1995, including the auditors' report, are
incorporated herein by reference.
FRANKLIN CUSTODIAN FUNDS, INC.
File Nos.
2-11346
811-537
FORM N-1A
PART C
OTHER INFORMATION
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements
(1) Unaudited Financial Statements incorporated herein by reference to
the Registrant's Semi-Annual Report to Shareholders dated March 31,
1996, as filed with the SEC electronically on Form Type N-30D on June
3, 1995
(i) Statement of Investments in Securities and Net Assets -
March 31, 1996
(ii) Statements of Assets and Liabilities - March 31, 1996
(iii)Statements of Operations - for the six months ended
March 31, 1996
(iv) Statements of Changes in Net Assets - for the six months ended March
31, 1996 and the year ended September 30, 1995
(v) Notes to Financial Statements
(2) Audited Financial Statements incorporated herein by reference to the
Registrant's Annual Report to Shareholders dated September 30, 1995
as filed with the SEC electronically on Form Type N-30D on November
29, 1995
(i) Report of Independent Auditors - November 3, 1995
(ii) Statement of Investments in Securities and Net Assets -
September 30, 1995
(iii)Statements of Assets and Liabilities - September 30,
1995
(iv) Statements of Operations - for the year ended September
30, 1995
(v) Statements of Changes in Net Assets - for the years
ended September 30, 1995 and 1994
(vi) Notes to Financial Statements
b) Exhibits:
The following exhibits are incorporated herein by reference, except
exhibits 8(iii), 8(iv), 11(i), 13(ii), and 15(viii) which are attached.
(1) copies of the charter as now in effect;
(i) Articles of Incorporation dated October 9, 1979
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Agreement and Articles of Merger dated November
7, 1979
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iii) Certificate of Amendment to Articles of
Incorporation dated October 4, 1985
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iv) Articles of Amendment dated October 14, 1985
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(v) Certificate of Amendment to Articles of
Incorporation dated February 24, 1989
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(vi) Certificate of Amendment to Articles of
Incorporation dated March 21, 1995
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(vii) Articles Supplementary to the Charter dated June
29, 1995
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 72 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 30, 1995
(2) copies of the existing By-Laws or instruments
corresponding thereto;
(i) By-Laws
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(3) copies of any voting trust agreement with respect to more than five
percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant, including
copies of all constituent instruments, defining the rights of the
holders of such securities, and copies of each security being
registered;
Not Applicable
(5) copies of all investment advisory contracts relating to
the management of the assets of the Registrant;
(i) Management Agreement between the Registrant on behalf
of the DynaTech Series and Franklin Advisers, Inc.
dated May 1, 1994
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Management Agreement between the Registrant on behalf
of the Growth Series and Franklin Advisers, Inc. dated
May 1, 1994
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iii) Management Agreement between the Registrant on behalf
of the Income Series and Franklin Advisers, Inc. dated
May 1, 1994
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iv) Management Agreement between the Registrant on behalf
of the U.S. Government Securities Series and Franklin
Advisers, Inc. dated May 1, 1994
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(v) Management Agreement between the Registrant on behalf
of the Utilities Series and Franklin Advisers, Inc.
dated May 1, 1994
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of all
agreements between principal underwriters and dealers;
(i) Amended and Restated Distribution Agreement between
Registrant and Franklin/Templeton Distributors, Inc.
dated March 29, 1995
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 72 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 30, 1995
(ii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and dealers
Registrant: Franklin Tax-Free Trust
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(7) copies of all bonus, profit sharing, pension or other similar contracts
or arrangements wholly or partly for the benefit of directors or
officers of the Registrant in their capacity as such; any such plan that
is not set forth in a formal document, furnish a reasonably detailed
description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and similar
investments of the Registrant, including the schedule of remuneration;
(i) Custody Agreement between Registrant and Bank of
America NT & SA dated September 17, 1991
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Amendment to Custodian Agreement between Registrant
and Bank of America dated April 12, 1995
Registrant: Franklin Gold Fund
Filing: Post-Effective Amendment No. 44 to
Registration Statement on Form N-1A
File No.2-30761
Filing Date: September 28, 1995
(iii) Master Custody Agreement between Registrant and Bank
of New York dated February 16, 1996
(iv) Terminal Link Agreement between Registrant and
Bank of New York dated February 16, 1996
(9) copies of all other material contracts not made in the ordinary course
of business which are to be performed in whole or in part at or after
the date of filing the Registration Statement;
Not Applicable
(10) an opinion and consent of counsel as to the legality of the securities
being registered, indicating whether they will when sold be legally
issued, fully paid and nonassessable;
(i) Opinion and consent of counsel dated November 21, 1995
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 72 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 30, 1995
(11) copies of any other opinions, appraisals or rulings and consents to the
use thereof relied on in the preparation of this Registration Statement
and required by Section 7 of the 1933 Act;
(i) Consent of Independent Auditors dated August 19, 1996
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, adviser, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their purchases
were made for investment purposes without any present intention of
redeeming or reselling;
(i) Letter of Understanding dated April 12, 1995
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Form of Subscription Agreement for Dynatech Series -
Class II
(14) copies of the model plan used in the establishment of any retirement
plan in conjunction with which Registrant offers its securities, any
instructions thereto and any other documents making up the model plan.
Such form(s) should disclose the costs and fees charged in connection
therewith;
(i) Copy of Model Retirement Plan
Registrant: AGE High Income Fund, Inc.
Filing: Post-Effective Amendment No. 26 to
Registration Statement on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(15) copies of any plan entered into by Registrant pursuant to Rule 12b-1
under the 1940 Act, which describes all material aspects of the
financing of distribution of Registrant's shares, and any agreements
with any person relating to implementation of such plan.
(i) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the DynaTech Series and
Franklin/Templeton Distributors, Inc. dated May 1,
1994
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the Growth Series and
Franklin/Templeton Distributors, Inc. dated May 1,
1994
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the Income Series and
Franklin/Templeton Distributors, Inc. dated May 1,
1994
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iv) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the U.S. Government Securities
Series and Franklin/Templeton Distributors, Inc. dated
May 1, 1994
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(v) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the Utilities Series and
Franklin/Templeton Distributors, Inc. dated May 1,
1994
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(vi) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the Utilities Series, Income
Series and U.S. Government Securities Series - Class
II and Franklin/Templeton Distributors, Inc. dated
March 30, 1995
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 72 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 30, 1995
(vii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the Growth Series - Class II
and Franklin/Templeton Distributors, Inc. dated March
30, 1995
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 72 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 30, 1995
(viii)Form of Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the Dynatech Series - Class II and
Franklin/Templeton Distributors, Inc.
(16) Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 (which need not be
audited).
(i) Schedule for Computation of Performance Quotation
Registrant: Franklin Tax-Advantaged U.S. Government
Securities Fund
Filing: Post-Effective Amendment No. 8 to
Registration Statement on Form N-1A
File No. 33-11963
Filing Date: March 1, 1995
(17) Powers of Attorney
(i) Powers of Attorney dated February 16, 1995
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Certificate of Secretary dated February 16, 1995
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(18) Copies of any plan entered into by Registrant pursuant to Rule 18f-3
under the 1940 Act.
(i) Form of Multiple Class Plan
Registrant: Franklin Custodian Funds, Inc.
Filing: Post-Effective Amendment No. 72 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 30, 1995
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of May 31, 1996 the number of record holders of each series of the Registrant
was as follows:
NUMBER OF RECORD HOLDERS
CLASS I CLASS II
Growth Series 94,242 3,591
Utilities Series 197,388 1,696
DynaTech Series 12,824 N/A
Income Series 326,003 13,449
U.S. Government Securities Series 446,130 2,397
ITEM 27 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court or appropriate
jurisdiction the question whether such indemnification is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
a) Franklin Advisers, Inc.
The officers and directors of the Registrant's manager also serve as officers
and/or directors for (1) the manager's corporate parent, Franklin Resources,
Inc., and/or (2) other investment companies in the Franklin Group of Funds(R).
In addition, Mr. Charles B. Johnson is a director of General Host Corporation.
For additional information please see Part B and Schedules A and D of Form ADV
of the Funds' Investment Manager (SEC File 801-26292), incorporated herein by
reference, which sets forth the officers and directors of the investment manager
and information as to any business, profession, vocation or employment of a
substantial nature engaged in by those officers and directors during the past
two years.
ITEM 29 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc. ("Distributors") also acts as principal
underwriter of shares of AGE High Income Fund, Inc., Franklin California
Tax-Free Income Fund, Inc., Franklin California Tax-Free Trust, Franklin Equity
Fund, Franklin Federal Money Fund, Franklin Federal Tax-Free Income Fund,
Franklin Gold Fund, Franklin Investors Securities Trust, Franklin Managed Trust,
Franklin Money Fund, Franklin Municipal Securities Trust, Franklin New York
Tax-Free Income Fund, Inc., Franklin New York Tax-Free Trust, Franklin Premier
Return Fund, Franklin Real Estate Securities Trust, Franklin Strategic Series,
Franklin Tax-Advantaged High Yield Securities Fund, Franklin Tax-Advantaged
International Bond Fund, Franklin Tax-Advantaged U.S. Government Securities
Fund, Franklin Tax-Exempt Money Fund, Franklin Tax-Free Trust, Franklin
Templeton Global Trust, Franklin Templeton International Trust, Franklin
Templeton Money Fund Trust, Franklin Value Investors Trust, Institutional
Fiduciary Trust, Franklin Templeton Japan Fund, Templeton American Trust, Inc.,
Templeton Capital Accumulator Fund, Inc., Templeton Developing Markets Trust,
Templeton Funds, Inc., Templeton Global Investment Trust, Templeton Global
Opportunities Trust, Templeton Growth Fund, Inc., Templeton Income Trust,
Templeton Institutional Funds, Inc., Templeton Global Real Estate Fund,
Templeton Global Smaller Companies Fund, Inc., and Templeton Variable Products
Series Fund
b) The information required by this item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889)
c) Not applicable. Registrant's principal underwriter is an affiliated person of
an affiliated person of the Registrant.
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section 31
(a) of the Investment Company Act of 1940 are kept by the Fund or its
shareholder services agent, Franklin/Templeton Investor Services, Inc., both of
whose address is 777 Mariners Island Blvd., San Mateo, California 94404.
ITEM 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32 UNDERTAKINGS
a) The Registrant hereby undertakes to promptly call a meeting of shareholders
for the purpose of voting upon the question of removal of any director or
directors when requested in writing to do so by the record holders of not less
than 10 percent of the Registrant's outstanding shares to assist its
shareholders in accordance with the requirements of Section 16(c) of the
Investment Company Act of 1940.
b) The Registrant hereby undertakes to comply with the information requirement
in Item 5A of the Form N-1A by including the required information in the Fund's
Annual Report to Shareholders and to furnish each person to whom a prospectus is
delivered a copy of the Annual Report upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Mateo and the State of California, on the 19th day of August, 1996.
FRANKLIN CUSTODIAN FUNDS, INC.
(Registrant)
By: CHARLES B. JOHNSON*
-------------------
Charles B. Johnson
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
CHARLES B. JOHNSON* Principal Executive
Charles B. Johnson Officer and Director
Dated: August 19, 1996
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: August 19, 1996
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: August 19, 1996
HARRIS J. ASHTON* Director
Harris J. Ashton Dated: August 19, 1996
S. JOSEPH FORTUNATO* Director
S. Joseph Fortunato Dated: August 19, 1996
RUPERT H. JOHNSON, JR.* Director
Rupert H. Johnson, Jr. Dated: August 19, 1996
GORDON S. MACKLIN* Director
Gordon S. Macklin Dated: August 19, 1996
*By /s/ Larry L. Greene
Larry L. Greene, Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
FRANKLIN CUSTODIAN FUNDS, INC.
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION PAGE NO. IN
SEQUENTIAL
NUMBERING SYSTEM
EX-99.B1(i) Articles of Incorporation *
dated October 9, 1979
EX-99.B1(ii) Agreement and Articles of Merger *
dated November 7, 1979
EX-99.B1(iii) Certificate of Amendment to *
Articles of Incorporation
dated October 4, 1985
EX-99.B1(iv) Articles of Amendment dated *
October 14, 1985
EX-99.B1(v) Certificate of Amendment to *
Articles of Incorporation
dated February 24, 1989
EX-99.B1(vi) Certificate of Amendment to *
Articles of Incorporation
dated March 21, 1995
EX-99.B1(vii) Articles Supplementary to the *
Charter dated June 29, 1995
EX-99.B2(i) By-Laws *
EX-99.B5(i) Management Agreement between *
the Registrant on behalf of the
DynaTech Series and Franklin
Advisers, Inc. dated May 1, 1994
EX-99.B5(ii) Management Agreement between the *
Registrant on behalf of the Growth
Series and Franklin Advisers, Inc.
dated May 1, 1994
EX-99.B5(iii) Management Agreement between the *
Registrant on behalf of the Income
Series and Franklin Advisers, Inc.
dated May 1, 1994
EX-99.B5(iv) Management Agreement between the *
Registrant on behalf of the U.S.
Government Securities Series and
Franklin Advisers, Inc. dated May
1, 1994
EX-99.B5(v) Management Agreement between the *
Registrant on behalf of the Utilities
Series and Franklin Advisers, Inc.
dated May 1, 1994
EX-99.B6(i) Amended and Restated Distribution *
Agreement between Registrant and
Franklin/Templeton Distributors, Inc.
dated March 29, 1995
EX-99.B6(ii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors, Inc.
and dealers
EX-99.B8(i) Custody Agreement between Registrant *
and Bank of America NT & SA dated
September 17, 1991
EX-99.B8(ii) Amendment to Custodian Agreement *
between Registrant and Bank of
America dated December 1, 1994
EX-99.B8(iii) Master Custody Agreement between Attached
Registrant and Bank of New York
dated February 16, 1996
EX-99.B8(iv) Terminal Link Agreement between Attached
Registrant and Bank of New York
dated February 16, 1996
EX-99.B10(i) Opinion and Consent of Counsel *
dated November 21, 1995
EX-99.B11(i) Consent of Independent Auditors Attached
dated August 19, 1996
EX-99.B13(i) Letter of Understanding dated *
April 12, 1995
EX-99.B13(ii) Form of Subscription Agreement Attached
for Dynatech Series - Class II
EX-99.B14(i) Copy of Model Retirement Plan *
EX-99.B15(i) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on
behalf of the DynaTech Series and
Franklin/Templeton Distributors,
Inc. dated May 1, 1994
EX-99.B15(ii) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on
behalf of the Growth Series and
Franklin/Templeton Distributors,
Inc. dated May 1, 1994
EX-99.B15(iii) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on
behalf of the Income Series and
Franklin/Templeton Distributors,
Inc. dated May 1, 1994
EX-99.B15(iv) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on
behalf of the U.S. Government
Securities Series and Franklin/Templeton
Distributors, Inc. dated May 1, 1994
EX-99.B15(v) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on
behalf of the Utilities Series and
Franklin/Templeton Distributors, Inc.
dated May 1, 1994
EX-99.B15(vi) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on
behalf of the Utilities Series,
Income Series and U.S. Government
Securities Series - Class II and
Franklin/Templeton Distributors,
Inc., dated March 30, 1995
EX-99.B15(vii) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on
behalf of the Growth Series -
Class II and Franklin/Templeton
Distributors, Inc., dated
March 30, 1995
EX-99.B15(viii) Form of Distribution Plan Attached
pursuant to Rule 12b-1 between
the Registrant on behalf of the
Dynatech Series Class II and
Franklin/Templeton Distributors,
Inc.
EX-99.B16(i) Schedule for Computation of *
Performance Quotation
EX-99.B17(i) Powers of Attorney dated February *
16, 1995
EX-99.B17(ii) Certificate of Secretary dated *
February 16, 1995
EX-99.B18(i) Form of Multiple Class Plan *
* Incorporated by reference
MASTER CUSTODY AGREEMENT
THIS CUSTODY AGREEMENT ("Agreement") is made and entered into as of
February 16, 1996, by and between each Investment Company listed on Exhibit A,
for itself and for each of its Series listed on Exhibit A, and BANK OF NEW YORK,
a New York corporation authorized to do a banking business (the "Custodian").
RECITALS
A. Each Investment Company is an investment company registered under
the Investment Company Act of 1940, as amended (the "Investment Company Act")
that invests and reinvests, for itself or on behalf of its Series, in Domestic
Securities and Foreign Securities.
B. The Custodian is, and has represented to each Investment Company
that the Custodian is, a "bank" as that term is defined in Section 2(a)(5) of
the Investment Company Act of 1940, as amended, and is eligible to receive and
maintain custody of investment company assets pursuant to Section 17(f) and Rule
17f-2 thereunder.
C. The Custodian and each Investment Company, for itself and for
each of its Series, desire to provide for the retention of the Custodian as a
custodian of the assets of each Investment Company and each Series, on the terms
and subject to the provisions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto agree
as follows:
Section 1.0 FORM OF AGREEMENT
Although the parties have executed this Agreement in the form of a
Master Custody Agreement for administrative convenience, this Agreement shall
create a separate custody agreement for each Investment Company and for each
Series designated on Exhibit A, as though each Investment Company had separately
executed an identical custody agreement for itself and for each of its Series.
No rights, responsibilities or liabilities of any Investment Company or Series
shall be attributed to any other Investment Company or Series.
Section 1.1 DEFINITIONS
For purposes of this Agreement, the following terms shall have the
respective meanings specified below:
"Agreement" shall mean this Custody Agreement.
"Board" shall mean the Board of Trustees, Directors or Managing
General Partners, as applicable, of an Investment Company.
"Business Day" with respect to any Domestic Security means any day,
other than a Saturday or Sunday, that is not a day on which banking institutions
are authorized or required by law to be closed in The City of New York and, with
respect to Foreign Securities, a London Business Day. "London Business Day"
shall mean any day on which dealings and deposits in U.S. dollars are transacted
in the London interbank market.
"Custodian" shall mean Bank of New York.
"Domestic Securities" shall have the meaning provided in Subsection
2.1 hereof.
"Executive Committee" shall mean the executive committee of a Board.
"Foreign Custodian" shall have the meaning provided in Section 4.1
hereof.
"Foreign Securities" shall have the meaning provided in Section 2.1
hereof.
"Foreign Securities Depository" shall have the meaning provided in
Section 4.1 hereof.
"Fund" shall mean an entity identified on Exhibit A as an Investment
Company, if the Investment Company has no series, or a Series.
"Investment Company" shall mean an entity identified on Exhibit A
under the heading "Investment Company."
"Investment Company Act" shall mean the Investment Company Act of
1940, as amended.
"Securities" shall have the meaning provided in Section 2.1 hereof.
"Securities System" shall have the meaning provided in Section 3.1
hereof.
"Securities System Account" shall have the meaning provided in
Subsection 3.8(a) hereof.
"Series" shall mean a series of an Investment Company which is
identified as such on Exhibit A.
"Shares" shall mean shares of beneficial interest of the Investment
Company.
"Subcustodian" shall have the meaning provided in Subsection 3.7
hereof, but shall not include any Foreign Custodian.
"Transfer Agent" shall mean the duly appointed and acting transfer
agent for each Investment Company.
"Writing" shall mean a communication in writing, a communication by
telex, facsimile transmission, bankwire or other teleprocess or electronic
instruction system acceptable to the Custodian.
Section 2. APPOINTMENT OF CUSTODIAN; DELIVERY OF ASSETS
2.1 Appointment of Custodian. Each Investment Company hereby
appoints and designates the Custodian as a custodian of the assets of each Fund,
including cash denominated in U.S. dollars or foreign currency ("cash"),
securities the Fund desires to be held within the United States ("Domestic
Securities") and securities it desires to be held outside the United States
("Foreign Securities"). Domestic Securities and Foreign Securities are sometimes
referred to herein, collectively, as "Securities." The Custodian hereby accepts
such appointment and designation and agrees that it shall maintain custody of
the assets of each Fund delivered to it hereunder in the manner provided for
herein.
2.2 Delivery of Assets. Each Investment Company may deliver to the
Custodian Securities and cash owned by the Funds, payments of income, principal
or capital distributions received by the Funds with respect to Securities owned
by the Funds from time to time, and the consideration received by the Funds for
such Shares or other securities of the Funds as may be issued and sold from time
to time. The Custodian shall have no responsibility whatsoever for any property
or assets of the Funds held or received by the Funds and not delivered to the
Custodian pursuant to and in accordance with the terms hereof. All Securities
accepted by the Custodian on behalf of the Funds under the terms of this
Agreement shall be in "street name" or other good delivery form as determined by
the Custodian.
2.3 Subcustodians. The Custodian may appoint BNY Western Trust
Company as a Subcustodian to hold assets of the Funds in accordance with the
provisions of this Agreement. In addition, upon receipt of Proper Instructions
and a certified copy of a resolution of the Board or of the Executive Committee,
and certified by the Secretary or an Assistant Secretary, of an Investment
Company, the Custodian may from time to time appoint one or more other
Subcustodians or Foreign Custodians to hold assets of the affected Funds in
accordance with the provisions of this Agreement.
2.4 No Duty to Manage. The Custodian, a Subcustodian or a Foreign
Custodian shall not have any duty or responsibility to manage or recommend
investments of the assets of any Fund held by them or to initiate any purchase,
sale or other investment transaction in the absence of Proper Instructions or
except as otherwise specifically provided herein.
Section 3. DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE FUNDS HELD
BY THE CUSTODIAN
3.1 Holding Securities. The Custodian shall hold and physically
segregate from any property owned by the Custodian, for the account of each
Fund, all non-cash property delivered by each Fund to the Custodian hereunder
other than Securities which, pursuant to Subsection 3.8 hereof, are held through
a registered clearing agency, a registered securities depository, the Federal
Reserve's book-entry securities system (referred to herein, individually, as a
"Securities System"), or held by a Subcustodian, Foreign Custodian or in a
Foreign Securities Depository.
3.2 Delivery of Securities. Except as otherwise provided in
Subsection 3.5 hereof, the Custodian, upon receipt of Proper Instructions, shall
release and deliver Securities owned by a Fund and held by the Custodian in the
following cases or as otherwise directed in Proper Instructions:
(a) except as otherwise provided herein, upon sale of such
Securities for the account of the Fund and receipt by the Custodian, a
Subcustodian or a Foreign Custodian of payment therefor;
(b) upon the receipt of payment by the Custodian, a
Subcustodian or a Foreign Custodian in connection with any repurchase agreement
related to such Securities entered into by the Fund;
(c) in the case of a sale effected through a Securities
System, in accordance with the provisions of Subsection 3.8 hereof;
(d) to a tender agent or other authorized agent in connection
with (i) a tender or other similar offer for Securities owned by the Fund, or
(ii) a tender offer or repurchase by the Fund of its own Shares;
(e) to the issuer thereof or its agent when such Securities
are called, redeemed, retired or otherwise become payable; provided, that in any
such case, the cash or other consideration is to be delivered to the Custodian,
a Subcustodian or a Foreign Custodian;
(f) to the issuer thereof, or its agent, for transfer into the
name or nominee name of the Fund, the name or nominee name of the Custodian, the
name or nominee name of any Subcustodian or Foreign Custodian; or for exchange
for a different number of bonds, certificates or other evidence representing the
same aggregate face amount or number of units; provided that, in any such case,
the new Securities are to be delivered to the Custodian, a Subcustodian or
Foreign Custodian;
(g) to the broker selling the same for examination in
accordance with the "street delivery" custom;
(h) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, or reorganization of the issuer of such
Securities, or pursuant to a conversion of such Securities; provided that, in
any such case, the new Securities and cash, if any, are to be delivered to the
Custodian or a Subcustodian;
(i) in the case of warrants, rights or similar securities, the
surrender thereof in connection with the exercise of such warrants, rights or
similar Securities or the surrender of interim receipts or temporary Securities
for definitive Securities; provided that, in any such case, the new Securities
and cash, if any, are to be delivered to the Custodian, a subcustodian or a
Foreign Custodian;
(j) for delivery in connection with any loans of Securities
made by the Fund, but only against receipt by the Custodian, a Subcustodian or a
Foreign Custodian of adequate collateral as determined by the Fund (and
identified in Proper Instructions communicated to the Custodian), which may be
in the form of cash or obligations issued by the United States government, its
agencies or instrumentalities, except that in connection with any loans for
which collateral is to be credited to the account of the Custodian, a
Subcustodian or a Foreign Custodian in the Federal Reserve's book-entry
securities system, the Custodian will not be held liable or responsible for the
delivery of Securities owned by the Fund prior to the receipt of such
collateral;
(k) for delivery as security in connection with any borrowings
by the Fund requiring a pledge of assets by the Fund, but only against receipt
by the Custodian, a Subcustodian or a Foreign Custodian of amounts borrowed;
(l) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian
and a broker-dealer relating to compliance with the rules of registered clearing
corporations and of any registered national securities exchange, or of any
similar organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund;
(m) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian
and a futures commission merchant, relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any contract market, or any similar
organization or organizations, regarding account deposits in connection with
transactions by the Fund;
(n) upon the receipt of instructions from the Transfer Agent
for delivery to the Transfer Agent or to the holders of Shares in connection
with distributions in kind in satisfaction of requests by holders of Shares for
repurchase or redemption; and
(o) for any other proper purpose, but only upon receipt of
Proper Instructions, and a certified copy of a resolution of the Board or of the
Executive Committee certified by the Secretary or an Assistant Secretary of the
Fund, specifying the securities to be delivered, setting forth the purpose for
which such delivery is to be made, declaring such purpose to be a proper
purpose, and naming the person or persons to whom delivery of such securities
shall be made.
3.3 Registration of Securities. Securities held by the Custodian, a
Subcustodian or a Foreign Custodian (other than bearer Securities) shall be
registered in the name or nominee name of the appropriate Fund, in the name or
nominee name of the Custodian or in the name or nominee name of any Subcustodian
or Foreign Custodian. Each Fund agrees to hold the Custodian, any such nominee,
Subcustodian or Foreign Custodian harmless from any liability as a holder of
record of such Securities.
3.4 Bank Accounts. The Custodian shall open and maintain a separate
bank account or accounts for each Fund, subject only to draft or order by the
Custodian acting pursuant to the terms of this Agreement, and shall hold in such
account or accounts, subject to the provisions hereof, all cash received by it
hereunder from or for the account of each Fund, other than cash maintained by a
Fund in a bank account established and used in accordance with Rule 17f-3 under
the Fund Act. Funds held by the Custodian for a Fund may be deposited by it to
its credit as Custodian in the banking departments of the Custodian, a
Subcustodian or a Foreign Custodian. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity. In the event a Fund's account for any reason
becomes overdrawn, or in the event an action requested in Proper Instructions
would cause such an account to become overdrawn, the Custodian shall immediately
notify the affected Fund.
3.5 Collection of Income; Trade Settlement; Crediting of Accounts.
The Custodian shall collect income payable with respect to Securities owned by
each Fund, settle Securities trades for the account of each Fund and credit and
debit each Fund's account with the Custodian in connection therewith as stated
in this Subsection 3.5. This Subsection shall not apply to repurchase
agreements, which are treated in Subsection 3.2(b), above.
(a) Upon receipt of Proper Instructions, the Custodian shall
effect the purchase of a Security by charging the account of the Fund on the
contractual settlement date, and by making payment against delivery. If the
seller or selling broker fails to deliver the Security within a reasonable
period of time, the Custodian shall notify the Fund and credit the transaction
amount to the account of the Fund, but the Custodian shall have no further
liability or responsibility for the transaction.
(b) Upon receipt of Proper Instructions, the Custodian shall
effect the sale of a Security by withdrawing a certificate or other indicia of
ownership from the account of the Fund and by making delivery against payment,
and shall credit the account of the Fund with the amount of such proceeds on the
contractual settlement date. If the purchaser or the purchasing broker fails to
make payment within a reasonable period of time, the Custodian shall notify the
Fund, debit the Fund's account for any amounts previously credited to it by the
Custodian as proceeds of the transaction and, if delivery has not been made,
redeposit the Security into the account of the Fund.
(c) The Fund is responsible for ensuring that the Custodian
receives timely and accurate Proper Instructions to enable the Custodian to
effect settlement of any purchase or sale. If the Custodian does not receive
such instructions within the required time period, the Custodian shall have no
liability of any kind to any person, including the Fund, for failing to effect
settlement on the contractual settlement date. However, the Custodian shall use
its best reasonable efforts to effect settlement as soon as possible after
receipt of Proper Instructions.
(d) The Custodian shall credit the account of the Fund with
interest income payable on interest bearing Securities on payable date.
Dividends and other amounts payable with respect to Domestic Securities and
Foreign Securities shall be credited to the account of the Fund when received by
the Custodian. The Custodian shall not be required to commence suit or
collection proceedings or resort to any extraordinary means to collect such
income and other amounts payable with respect to Securities owned by the Fund.
The collection of income due the Fund on Domestic Securities loaned pursuant to
the provisions of Subsection 3.2(j) shall be the responsibility of the Fund. The
Custodian will have no duty or responsibility in connection therewith, other
than to provide the Fund with such information or data as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian of the
income to which the Fund is entitled. The Custodian shall have no liability to
any person, including the Fund, if the Custodian credits the account of the Fund
with such income or other amounts payable with respect to Securities owned by
the Fund (other than Securities loaned by the Fund pursuant to Subsection 3.2(j)
hereof) and the Custodian subsequently is unable to collect such income or other
amounts from the payors thereof within a reasonable time period, as determined
by the Custodian in its sole discretion. In such event, the Custodian shall be
entitled to reimbursement of the amount so credited to the account of the Fund.
3.6 Payment of Fund Monies. Upon receipt of Proper Instructions
the Custodian shall pay out monies of a Fund in the following cases or as
otherwise directed in Proper Instructions:
(a) upon the purchase of Securities, futures contracts or
options on futures contracts for the account of the Fund but only, except as
otherwise provided herein, (i) against the delivery of such securities, or
evidence of title to futures contracts or options on futures contracts, to the
Custodian or a Subcustodian registered pursuant to Subsection 3.3 hereof or in
proper form for transfer; (ii) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth in Subsection 3.8
hereof; or (iii) in the case of repurchase agreements entered into between the
Fund and the Custodian, another bank or a broker-dealer (A) against delivery of
the Securities either in certificated form to the Custodian or a Subcustodian or
through an entry crediting the Custodian's account at the appropriate Federal
Reserve Bank with such Securities or (B) against delivery of the confirmation
evidencing purchase by the Fund of Securities owned by the Custodian or such
broker-dealer or other bank along with written evidence of the agreement by the
Custodian or such broker-dealer or other bank to repurchase such Securities from
the Fund;
(b) in connection with conversion, exchange or surrender of
Securities owned by the Fund
as set forth in Subsection 3.2 hereof;
(c) for the redemption or repurchase of Shares issued by the
Fund;
(d) for the payment of any expense or liability incurred by
the Fund, including but not limited to the following payments for the account of
the Fund: custodian fees, interest, taxes, management, accounting, transfer
agent and legal fees and operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or treated as deferred expenses;
and
(e) for the payment of any dividends or distributions
declared by the Board with respect to the Shares.
3.7 Appointment of Subcustodians. The Custodian may appoint BNY
Western Trust Company or, upon receipt of Proper Instructions, another bank or
trust company, which is itself qualified under the Investment Company Act to act
as a custodian (a "Subcustodian"), as the agent of the Custodian to carry out
such of the duties of the Custodian hereunder as a Custodian may from time to
time direct; provided, however, that the appointment of any Subcustodian shall
not relieve the Custodian of its responsibilities or liabilities hereunder.
3.8 Deposit of Securities in Securities Systems. The Custodian may
deposit and/or maintain Domestic Securities owned by a Fund in a Securities
System in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
(a) the Custodian may hold Domestic Securities of the Fund in
the Depository Trust Company or the Federal Reserve's book entry system or, upon
receipt of Proper Instructions, in another Securities System provided that such
securities are held in an account of the Custodian in the Securities System
("Securities System Account") which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or otherwise for
customers;
(b) the records of the Custodian with respect to Domestic
Securities of the Fund which are maintained in a Securities System shall
identify by book-entry those Domestic Securities belonging to the Fund;
(c) the Custodian shall pay for Domestic Securities purchased
for the account of the Fund upon (i) receipt of advice from the Securities
System that such securities have been transferred to the Securities System
Account, and (ii) the making of an entry on the records of the Custodian to
reflect such payment and transfer for the account of the Fund. The Custodian
shall transfer Domestic Securities sold for the account of the Fund upon (A)
receipt of advice from the Securities System that payment for such securities
has been transferred to the Securities System Account, and (B) the making of an
entry on the records of the Custodian to reflect such transfer and payment for
the account of the Fund. Copies of all advices from the Securities System of
transfers of Domestic Securities for the account of the Fund shall be maintained
for the Fund by the Custodian and be provided to the Fund at its request. Upon
request, the Custodian shall furnish the Fund confirmation of the transfer to or
from the account of the Fund in the form of a written advice or notice; and
(d) upon request, the Custodian shall provide the Fund with
any report obtained by the Custodian on the Securities System's accounting
system, internal accounting control and procedures for safeguarding domestic
securities deposited in the Securities System.
3.9 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for and on
behalf of a Fund, into which account or accounts may be transferred cash and/or
Securities, including Securities maintained in an account by the Custodian
pursuant to Section 3.8 hereof, (i) in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer or futures
commission merchant, relating to compliance with the rules of registered
clearing corporations and of any national securities exchange (or the Commodity
Futures Trading Commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund, (ii) for purposes of segregating cash
or securities in connection with options purchased, sold or written by the Fund
or commodity futures contracts or options thereon purchased or sold by the Fund,
and (iii) for other proper corporate purposes, but only, in the case of this
clause (iii), upon receipt of, in addition to Proper Instructions, a certified
copy of a resolution of the Board or of the Executive Committee certified by the
Secretary or an Assistant Secretary, setting forth the purpose or purposes of
such segregated account and declaring such purposes to be proper corporate
purposes.
3.10 Ownership Certificates for Tax Purposes. The Custodian shall
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to domestic securities of each Fund held by it and in connection with
transfers of such securities.
3.11 Proxies. The Custodian shall, with respect to the Securities
held hereunder, promptly deliver to each Fund all proxies, all proxy soliciting
materials and all notices relating to such Securities. If the Securities are
registered otherwise than in the name of a Fund or a nominee of a Fund, the
Custodian shall use its best reasonable efforts, consistent with applicable law,
to cause all proxies to be promptly executed by the registered holder of such
Securities in accordance with Proper Instructions.
3.12 Communications Relating to Fund Portfolio Securities. The
Custodian shall transmit promptly to each Fund all written information
(including, without limitation, pendency of calls and maturities of Securities
and expirations of rights in connection therewith and notices of exercise of put
and call options written by the Fund and the maturity of futures contracts
purchased or sold by the Fund) received by the Custodian from issuers of
Securities being held for the Fund. With respect to tender or exchange offers,
the Custodian shall transmit promptly to each Fund all written information
received by the Custodian from issuers of the Securities whose tender or
exchange is sought and from the party (or its agents) making the tender or
exchange offer. If a Fund desires to take action with respect to any tender
offer, exchange offer or any other similar transaction, the Fund shall notify
the Custodian at least three Business Days prior to the date of which the
Custodian is to take such action.
3.13 Reports by Custodian. The Custodian shall each business day
furnish each Fund with a statement summarizing all transactions and entries for
the account of the Fund for the preceding day. At the end of every month, the
Custodian shall furnish each Fund with a list of the cash and portfolio
securities showing the quantity of the issue owned, the cost of each issue and
the market value of each issue at the end of each month. Such monthly report
shall also contain separate listings of (a) unsettled trades and (b) when-issued
securities. The Custodian shall furnish such other reports as may be mutually
agreed upon from time-to-time.
Section 4. CERTAIN DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE
FUNDS HELD OUTSIDE THE UNITED STATES
4.1 Custody Outside the United States. Each Fund authorizes the
Custodian to hold Foreign Securities and cash in custody accounts which have
been established by the Custodian with (i) its foreign branches, (ii) foreign
banking institutions, foreign branches of United States banks and subsidiaries
of United States banks or bank holding companies (each a "Foreign Custodian")
and (iii) Foreign Securities depositories or clearing agencies (each a "Foreign
Securities Depository"); provided, however, that the appropriate Board or
Executive Committee has approved in advance the use of each such Foreign
Custodian and Foreign Securities Depository and the contract between the
Custodian and each Foreign Custodian and that such approval is set forth in
Proper Instructions and a certified copy of a resolution of the Board or of the
Executive Committee certified by the Secretary or an Assistant Secretary of the
appropriate Investment Company. Unless expressly provided to the contrary in
this Section 4, custody of Foreign Securities and assets held outside the United
States by the Custodian, a Foreign Custodian or through a Foreign Securities
Depository shall be governed by this Agreement, including Section 3 hereof.
4.2 Assets to be Held. The Custodian shall limit the securities and
other assets maintained in the custody of its foreign branches, Foreign
Custodians and Foreign Securities Depositories to: (i) "foreign securities", as
defined in paragraph (c) (1) of Rule 17f-5 under the Fund Act, and (ii) cash and
cash equivalents in such amounts as the Custodian or an affected Fund may
determine to be reasonably necessary to effect the Fund's Foreign Securities
transactions.
4.3 Omitted.
4.4 Segregation of Securities. The Custodian shall identify on its
books and records as belonging to the appropriate Fund, the Foreign Securities
of each Fund held by each Foreign Custodian.
4.5 Agreements with Foreign Custodians. Each agreement between the
Custodian and a Foreign Custodian shall be substantially in the form as
delivered to the Investment Companies for their Boards' review, and shall not be
amended in a way that materially adversely affects any Fund without the prior
written consent of the Fund. Upon request, the Custodian shall certify to the
Funds that an agreement between the Custodian and a Foreign Custodian meets the
requirements of Rule 17f-5 under the 1940 Act.
4.6 Access of Independent Accountants of the Funds. Upon request of
a Fund, the Custodian will use its best reasonable efforts to arrange for the
independent accountants or auditors of the Fund to be afforded access to the
books and records of any Foreign Custodian insofar as such books and records
relate to the custody by any such Foreign Custodian of assets of the Fund.
4.7 Transactions in Foreign Custody Accounts. Upon receipt of Proper
Instructions, the Custodian shall instruct the appropriate Foreign Custodian to
transfer, exchange or deliver Foreign Securities owned by a Fund, but, except to
the extent explicitly provided herein, only in any of the cases specified in
Subsection 3.2. Upon receipt of Proper Instructions, the Custodian shall pay out
or instruct the appropriate Foreign Custodian to pay out monies of a Fund in any
of the cases specified in Subsection 3.6. Notwithstanding anything herein to the
contrary, settlement and payment for Foreign Securities received for the account
of a Fund and delivery of Foreign Securities maintained for the account of a
Fund may be effected in accordance with the customary or established securities
trading or securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt with the expectation of
receiving later payment for such securities from such purchaser or dealer.
Foreign Securities maintained in the custody of a Foreign Custodian may be
maintained in the name of such entity or its nominee name to the same extent as
set forth in Section 3.3 of this Agreement and each Fund agrees to hold any
Foreign Custodian and its nominee harmless from any liability as a holder of
record of such securities.
4.8 Liability of Foreign Custodian. Each agreement between the
Custodian and a Foreign Custodian shall, unless otherwise mutually agreed to by
the Custodian and a Fund, require the Foreign Custodian to exercise reasonable
care or, alternatively, impose a contractual liability for breach of contract
without an exception based upon a standard of care in the performance of its
duties and to indemnify and hold harmless the Custodian from and against any
loss, damage, cost, expense, liability or claim arising out of or in connection
with the Foreign Custodian's performance of such obligations, excepting,
however, Citibank, N.A., and its subsidiaries and branches, where the
indemnification is limited to direct money damages and requires that the claim
be promptly asserted. At the election of a Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claims against a
Foreign Custodian as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made whole
for any such loss, damage, cost, expense, liability or claim, unless such
subrogation is prohibited by local law.
4.9 Monitoring Responsibilities.
(a) The Custodian will promptly inform each Fund in the event
that the Custodian learns of a material adverse change in the financial
condition of a Foreign Custodian or learns that a Foreign Custodian's financial
condition has declined or is likely to decline below the minimum levels required
by Rule 17f-5 of the 1940 Act.
(b) The custodian will furnish such information as may be
reasonably necessary to assist each Investment Company's Board in its annual
review and approval of the continuance of all contracts or arrangements with
Foreign Subcustodians.
Section 5. PROPER INSTRUCTIONS
As used in this Agreement, the term "Proper Instructions" means
instructions of a Fund received by the Custodian via telephone or in Writing
which the Custodian believes in good faith to have been given by Authorized
Persons (as defined below) or which are transmitted with proper testing or
authentication pursuant to terms and conditions which the Custodian may specify.
Any Proper Instructions delivered to the Custodian by telephone shall promptly
thereafter be confirmed in accordance with procedures, and limited in subject
matter, as mutually agreed upon by the parties. Unless otherwise expressly
provided, all Proper Instructions shall continue in full force and effect until
canceled or superseded. If the Custodian requires test arrangements,
authentication methods or other security devices to be used with respect to
Proper Instructions, any Proper Instructions given by the Funds thereafter shall
be given and processed in accordance with such terms and conditions for the use
of such arrangements, methods or devices as the Custodian may put into effect
and modify from time to time. The Funds shall safeguard any testkeys,
identification codes or other security devices which the Custodian shall make
available to them. The Custodian may electronically record any Proper
Instructions given by telephone, and any other telephone discussions, with
respect to its activities hereunder. As used in this Agreement, the term
"Authorized Persons" means such officers or such agents of a Fund as have been
properly appointed pursuant to a resolution of the appropriate Board or
Executive Committee, a certified copy of which has been provided to the
Custodian, to act on behalf of the Fund under this Agreement. Each of such
persons shall continue to be an Authorized Person until such time as the
Custodian receives Proper Instructions that any such officer or agent is no
longer an Authorized Person.
Section 6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from
a Fund:
(a) make payments to itself or others for minor expenses of
handling Securities or other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted for to the Fund;
(b) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
(c) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer and other
dealings with the Securities and property of the Fund except as otherwise
provided in Proper Instructions.
Section 7. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions
(conveyed by telephone or in Writing), notice, request, consent, certificate or
other instrument or paper believed by it to be genuine and to have been properly
given or executed by or on behalf of a Fund. The Custodian may receive and
accept a certified copy of a resolution of a Board or Executive Committee as
conclusive evidence (a) of the authority of any person to act in accordance with
such resolution or (b) of any determination or of any action by the Board or
Executive Committee as described in such resolution, and such resolution may be
considered as in full force and effect until receipt by the Custodian of written
notice by an Authorized Person to the contrary.
Section 8. DUTY OF CUSTODIAN TO SUPPLY INFORMATION
The Custodian shall cooperate with and supply necessary information
in its possession (to the extent permissible under applicable law) to the entity
or entities appointed by the appropriate Board to keep the books of account of a
Fund and/or compute the net asset value per Share of the outstanding Shares of a
Fund.
Section 9. RECORDS
The Custodian shall create and maintain all records relating to its
activities under this Agreement which are required with respect to such
activities under Section 31 of the Investment Company Act and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the appropriate
Investment Company and shall at all times during the regular business hours of
the Custodian be open for inspection by duly authorized officers, employees or
agents of the Investment Company and employees and agents of the Securities and
Exchange Commission. The Custodian shall, at a Fund's request, supply the Fund
with a tabulation of Securities and Cash owned by the Fund and held by the
Custodian and shall, when requested to do so by the Fund and for such
compensation as shall be agreed upon between the Fund and the Custodian, include
certificate numbers in such tabulations.
Section 10. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
each Investment Company, on behalf of each Fund, and the Custodian. In addition,
should the Custodian in its discretion advance funds (to include overdrafts) to
or on behalf of a Fund pursuant to Proper Instructions, the Custodian shall be
entitled to prompt reimbursement of any amounts advanced. In the event of such
an advance, and to the extent permitted by the 1940 Act and the Fund's policies,
the Custodian shall have a continuing lien and security interest in and to the
property of the Fund in the possession or control of the Custodian or of a third
party acting in the Custodian's behalf, until the advance is reimbursed. Nothing
in this Agreement shall obligate the Custodian to advance funds to or on behalf
of a Fund, or to permit any borrowing by a Fund except for borrowings for
temporary purposes, to the extent permitted by the Fund's policies.
Section 11. RESPONSIBILITY OF CUSTODIAN
The Custodian shall be responsible for the performance of only such
duties as are set forth herein or contained in Proper Instructions and shall use
reasonable care in carrying out such duties. The Custodian shall be liable to a
Fund for any loss which shall occur as the result of the failure of a Foreign
Custodian engaged directly or indirectly by the Custodian to exercise reasonable
care with respect to the safekeeping of securities and other assets of the Fund
to the same extent that the Custodian would be liable to the Fund if the
Custodian itself were holding such securities and other assets. Nothing in this
Agreement shall be read to limit the responsibility or liability of the
Custodian or a Foreign Custodian for their failure to exercise reasonable care
with regard to any decision or recommendation made by the Custodian or
Subcustodian regarding the use or continued use of a Foreign Securities
Depository. In the event of any loss to a Fund by reason of the failure of the
Custodian or a Foreign Custodian engaged by such Foreign Custodian or the
Custodian to utilize reasonable care, the Custodian shall be liable to the Fund
to the extent of the Fund's damages, to be determined based on the market value
of the property which is the subject of the loss at the date of discovery of
such loss and without reference to any special conditions or circumstances. The
Custodian shall be held to the exercise of reasonable care in carrying out this
Agreement, and shall not be liable for acts or omissions unless the same
constitute negligence or willful misconduct on the part of the Custodian or any
Foreign Custodian engaged directly or indirectly by the Custodian. Each Fund
agrees to indemnify and hold harmless the Custodian and its nominees from all
taxes, charges, expenses, assessments, claims and liabilities (including legal
fees and expenses) incurred by the Custodian or its nominess in connection with
the performance of this Agreement with respect to such Fund, except such as may
arise from any negligent action, negligent failure to act or willful misconduct
on the part of the indemnified entity or any Foreign Custodian. The Custodian
shall be entitled to rely, and may act, on advice of counsel (who may be counsel
for a Fund) on all matters and shall be without liability for any action
reasonably taken or omitted pursuant to such advice. The Custodian need not
maintain any insurance for the benefit of any Fund.
All collections of funds or other property paid or distributed in
respect of Securities held by the Custodian, agent, Subcustodian or Foreign
Custodian hereunder shall be made at the risk of the Funds. The Custodian shall
have no liability for any loss occasioned by delay in the actual receipt of
notice by the Custodian, agent, Subcustodian or by a Foreign Custodian of any
payment, redemption or other transaction regarding securities in respect of
which the Custodian has agreed to take action as provided in Section 3 hereof.
The Custodian shall not be liable for any action taken in good faith upon Proper
Instructions or upon any certified copy of any resolution of the Board and may
rely on the genuineness of any such documents which it may in good faith believe
to be validly executed. Notwithstanding the foregoing, the Custodian shall not
be liable for any loss resulting from, or caused by, the direction of a Fund to
maintain custody of any Securities or cash in a foreign country including, but
not limited to, losses resulting from nationalization, expropriation, currency
restrictions, civil disturbance, acts of war or terrorism, insurrection,
revolution, nuclear fusion, fission or radiation or other similar occurrences,
or events beyond the control of the Custodian. Finally, the Custodian shall not
be liable for any taxes, including interest and penalties with respect thereto,
that may be levied or assessed upon or in respect of any assets of any Fund held
by the Custodian.
Section 12. LIMITED LIABILITY OF EACH INVESTMENT COMPANY
The Custodian acknowledges that it has received notice of and
accepts the limitations of liability as set forth in each Investment Company's
Agreement and Declaration of Trust, Articles of Incorporation, or Agreement of
Limited Partnership. The Custodian agrees that each Fund's obligation hereunder
shall be limited to the assets of the Fund, and that the Custodian shall not
seek satisfaction of any such obligation from the shareholders of the Fund nor
from any Board Member, officer, employee, or agent of the Fund or the Investment
Company on behalf of the Fund.
Section 13. EFFECTIVE PERIOD; TERMINATION
This Agreement shall become effective as of the date of its
execution and shall continue in full force and effect until terminated as
hereinafter provided. This Agreement may be terminated by each Investment
Company, on behalf of a Fund, or by the Custodian by 90 days notice in Writing
to the other provided that any termination by an Investment Company shall be
authorized by a resolution of the Board, a certified copy of which shall
accompany such notice of termination, and provided further, that such resolution
shall specify the names of the persons to whom the Custodian shall deliver the
assets of the affected Funds held by the Custodian. If notice of termination is
given by the Custodian, the affected Investment Companies shall, within 90 days
following the giving of such notice, deliver to the Custodian a certified copy
of a resolution of the Boards specifying the names of the persons to whom the
Custodian shall deliver assets of the affected Funds held by the Custodian. In
either case the Custodian will deliver such assets to the persons so specified,
after deducting therefrom any amounts which the Custodian determines to be owed
to it hereunder (including all costs and expenses of delivery or transfer of
Fund assets to the persons so specified). If within 90 days following the giving
of a notice of termination by the Custodian, the Custodian does not receive from
the affected Investment Companies certified copies of resolutions of the Boards
specifying the names of the persons to whom the Custodian shall deliver the
assets of the Funds held by the Custodian, the Custodian, at its election, may
deliver such assets to a bank or trust company doing business in the State of
California to be held and disposed of pursuant to the provisions of this
Agreement or may continue to hold such assets until a certified copy of one or
more resolutions as aforesaid is delivered to the Custodian. The obligations of
the parties hereto regarding the use of reasonable care, indemnities and payment
of fees and expenses shall survive the termination of this Agreement.
Section 14. MISCELLANEOUS
14.1 Relationship. Nothing contained in this Agreement shall (i)
create any fiduciary, joint venture or partnership relationship between the
Custodian and any Fund or (ii) be construed as or constitute a prohibition
against the provision by the Custodian or any of its affiliates to any Fund of
investment banking, securities dealing or brokerages services or any other
banking or financial services.
14.2 Further Assurances. Each party hereto shall furnish to the
other party hereto such instruments and other documents as such other party may
reasonably request for the purpose of carrying out or evidencing the
transactions contemplated by this Agreement.
14.3 Attorneys' Fees. If any lawsuit or other action or proceeding
relating to this Agreement is brought by a party hereto against the other party
hereto, the prevailing party shall be entitled to recover reasonable attorneys'
fees, costs and disbursements (including allocated costs and disbursements of
in-house counsel), in addition to any other relief to which the prevailing party
may be entitled.
14.4 Notices. Except as otherwise specified herein, each notice or
other communication hereunder shall be in Writing and shall be delivered to the
intended recipient at the following address (or at such other address as the
intended recipient shall have specified in a written notice given to the other
parties hereto):
if to a Fund or Investment Company: if to the Custodian:
[Fund or Investment Company] The Bank of New York
c/o Franklin Resources, Inc. Mutual Fund Custody Manager
777 Mariners Island Blvd. BNY Western Trust Co.
San Mateo, CA 94404 550 Kearney St., Suite 60
Attention: Chief Legal Officer San Francisco, CA 94108
14.5 Headings. The underlined headings contained herein are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the interpretation
hereof.
14.6 Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original and both of which, when taken
together, shall constitute one agreement.
14.7 Governing Law. This Agreement shall be construed in accordance
with, and governed in all respects by, the laws of the State of New York
(without giving effect to principles of conflict of laws).
14.8 Force Majeure. Notwithstanding the provisions of Section 11
hereof regarding the Custodian's general standard of care, no failure, delay or
default in performance of any obligation hereunder shall constitute an event of
default or a breach of this agreement, or give rise to any liability whatsoever
on the part of one party hereto to the other, to the extent that such failure to
perform, delay or default arises out of a cause beyond the control and without
negligence of the party otherwise chargeable with failure, delay or default;
including, but not limited to: action or inaction of governmental, civil or
military authority; fire; strike; lockout or other labor dispute; flood; war;
riot; theft; earthquake; natural disaster; breakdown of public or common carrier
communications facilities; computer malfunction; or act, negligence or default
of the other party. This paragraph shall in no way limit the right of either
party to this Agreement to make any claim against third parties for any damages
suffered due to such causes.
14.9 Successors and Assigns. This Agreement shall be binding upon,
and shall inure to the benefit of, the parties hereto and their respective
successors and assigns, if any.
14.10 Waiver. No failure on the part of any person to exercise any
power, right, privilege or remedy hereunder, and no delay on the part of any
person in the exercise of any power, right, privilege or remedy hereunder, shall
operate as a waiver thereof; and no single or partial exercise of any such
power, right, privilege or remedy shall preclude any other or further exercise
thereof or of any other power, right, privilege or remedy.
14.11 Amendments. This Agreement may not be amended, modified,
altered or supplemented other than by means of an agreement or instrument
executed on behalf of each of the parties hereto.
14.12 Severability. In the event that any provision of this
Agreement, or the application of any such provision to any person or set of
circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than those as to
which it is determined to be invalid, unlawful, void or unenforceable, shall not
be impaired or otherwise affected and shall continue to be valid and enforceable
to the fullest extent permitted by law.
14.13 Parties in Interest. None of the provisions of this Agreement
is intended to provide any rights or remedies to any person other than the
Investment Companies, for themselves and for the Funds, and the Custodian and
their respective successors and assigns, if any.
14.14 Pre-Emption of Other Agreements. In the event of any conflict
between this Agreement, including without limitation any amendments hereto, and
any other agreement which may now or in the future exist between the parties,
the provisions of this Agreement shall prevail.
14.15 Variations of Pronouns. Whenever required by the context
hereof, the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; and the neuter
gender shall include the masculine and feminine genders.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
THE BANK OF NEW YORK
By: _____________________________
Its: _____________________________
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A
By: ______________________________
Harmon E. Burns
Their: Vice President
By: ______________________________
Deborah R. Gatzek
Their: Vice President & Secretary
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series
for which the Custodian shall serve under the Master Custody Agreement dated as
of February 16, 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Delaware Business Trust U.S. Government Adjustable Rate Mortgage
Portfolios Portfolio
Adjustable Rate Securities Portfolio
AGE High Income Fund, Inc. Colorado Corporation
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income
Trust Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income California Corporation
Fund
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business
Trust
Franklin Templeton International Delaware Business Trust Templeton Pacific Growth Fund
Trust Franklin International Equity Fund
Franklin Investors Securities Trust Massachusetts Business Franklin Global Government Income Fund
Trust Franklin Short-Intermediate U.S. Gov't
Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities
Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Managed Trust Massachusetts Business Franklin Corporate Qualified Dividend Fund
Trust Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Institutional Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Income New York Corporation
Fund, Inc.
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund
Trust Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Tax-Advantaged California Limited
International Bond Fund Partnership
Franklin Tax-Advantaged U.S. California Limited
Government Securities Fund Partnership
Franklin Tax-Advantaged High Yield California Limited
Securities Fund. Partnership
Franklin Premier Return Fund California Corporation
Franklin Real Estate Securities Delaware Business Trust Franklin Real Estate Securities Fund
Trust
Franklin Strategic Mortgage Delaware Business Trust
Portfolio
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Institutional MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Tax-Exempt Money Fund California Corporation
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin North Carolina Tax-Free Income Fund
(cont.) Trust Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free
Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Templeton Global Trust Massachusetts Business Franklin Templeton German Government Bond Fund
Trust Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund
Trust Franklin MicroCap Value Fund
Franklin Value Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Valuemark Funds Massachusetts Business Money Market Fund
Trust Growth and Income Fund
Precious Metals
Fund Real Estate
Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global
Income Securities
Fund Investment
Grade Intermediate
Bond Fund Income
Securities Fund
U.S. Government
Securities Fund
Zero Coupon Fund -
2000 Zero Coupon
Fund - 2005 Zero
Coupon Fund - 2010
Adjustable U.S.
Government Fund
Rising Dividends
Fund Templeton
Pacific Growth Fund
Templeton
International
Equity Fund
Templeton
Developing Markets
Equity Fund
Templeton Global
Growth Fund
Templeton Global
Asset Allocation
Fund Small Cap Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio
Trust Franklin Late Day Money Market Portfolio
Franklin U.S. Government Securities Money
Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S.
Government
Securities Fund
Franklin Institutional Adjustable Rate
Securities Fund
Franklin U.S. Government Agency Money Market
Fund
Franklin Cash Reserves Fund
MidCap Growth Portfolio Delaware Business Trust
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market
Portfolio
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Principal Maturity Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
- ------------------------------------------------------------------------------------------------------------
</TABLE>
TERMINAL LINK AGREEMENT
AGREEMENT made as of February 16, 1996 between The Bank of New York as custodian
(the "Custodian") and each Investment Company listed on Exhibit A, for itself
and for each of Series listed on Exhibit A (each, a "Fund").
WHEREAS, the parties have entered into a Master Custody Agreement dated
as of February 16, 1996;
WHEREAS, the parties desire to provide for the electronic transmission
of instructions from each Fund to the Custodian, as and to the extent permitted
by the Master Custody Agreement; and
WHEREAS, the Board of Directors, Trustees or Managing General Partners,
as applicable, of each Investment Company have previously authorized each
Investment Company to enter into the Master Custody Agreement;
NOW, THEREFORE, in consideration for the mutual promises set forth, the parties
agree as follows:
A. Except as otherwise provided herein, all terms shall have the same meaning as
in the Master Custody Agreement.
B. The term "Certificate" shall mean any Proper Instruction by a Fund to the
Custodian communicated by the Terminal Link.
C . The term "Officer" shall mean an Authorized Person as defined in section 5
of the Master Custody Agreement.
D. The term "Terminal Link" shall mean an electronic data transmission link
between a Fund, Franklin Templeton Investor Services, Inc. acting as agent for
the Fund ("FTISI"), and the Custodian requiring in connection with each use of
the Terminal Link by or on behalf of the Fund use of an authorization code
provided by the Custodian and at least two access codes established by the Fund.
Each Fund represents that FTISI will maintain a transmission line to the
Custodian and has been selected by the Fund to receive electronic data
transmissions from the Custodian or the Fund and forward the same to the Fund or
the Custodian, respectively.
E. Terminal Link
1. The Terminal Link shall be utilized by a Fund only for the purpose of the
Fund providing Certificates to the Custodian with respect to transactions
involving Securities or for the transfer of money to be applied to the payment
of dividends, distributions or redemptions of Fund Shares, and shall be utilized
by the Custodian only for the purpose of providing notices to the Fund. Such use
shall commence only after a Fund shall have established access codes and
safekeeping procedures to safeguard and protect the confidentiality and
availability of such access codes, and shall have reviewed the safekeeping
procedures established by FTISI to assure that transmissions inputted by the
Fund, and only such transmissions, are forwarded by FTISI to the Custodian
without any alteration or omission. Each use of the Terminal Link by a Fund
shall constitute a representation and warranty that the Terminal Link is being
used only for the purposes permitted hereby, that at least two Officers have
each utilized an access code, that such safekeeping procedures have been
established by the Fund, that FTISI has safekeeping procedures reviewed by the
Fund to assure that all transmissions inputted by the Fund, and only such
transmissions, are forwarded by FTISI to the Custodian without any alteration or
omission by FTISI, and that such use does not, to the Fund's knowledge,
contravene the Investment Company Act of 1940, as amended, or the rules or
regulations thereunder.
2. Each Fund shall obtain and maintain at its own cost and expense all equipment
and services, including, but not limited to communications services, necessary
for it to utilize the Terminal Link, and the Custodian shall not be responsible
for the reliability or availability of any such equipment or services.
3. Each Fund acknowledges that any data bases made available as part of, or
through the Terminal Link and any proprietary data, software, processes,
information and documentation (other than which are or become part of the public
domain or are legally required to be made available to the public)
(collectively, the "Information"), are the exclusive and confidential property
of the Custodian. Each Fund shall, and shall cause others to which it discloses
the Information, including without limitation FTISI, to keep the Information
confidential, by using the same care and discretion it uses with respect to its
own confidential property and trade secrets, and shall neither make nor permit
any disclosure without the express prior written consent of the Custodian.
4. Upon termination of this Agreement for any reason, the Fund shall return to
the Custodian any and all copies of the Information which are in the Fund's
possession or under its control, or which the Fund distributed to third parties,
including without limitation FTISI. The provisions of this Article shall not
affect the copyright status of any of the Information which may be copyrighted
and shall apply to all information whether or not copyrighted.
5. The Custodian reserves the right to modify the Terminal Link from time to
time without notice to the Funds or FTISI, except that the Custodian shall give
the Funds notice not less than 75 days in advance of any modification which
would materially adversely affect the Funds' operation. The Funds agree that
neither the Funds nor FTISI shall modify or attempt to modify the Terminal Link
without the Custodian's prior written consent. Each Fund acknowledges that any
software or procedures provided the Fund or FTISI as part of the Terminal Link
are the property of the Custodian and, accordingly, agrees that any
modifications to the Terminal Link, whether by the Fund, FTISI or the Custodian
and whether with or without the Custodian's consent, shall become the property
of the Custodian.
6. The Custodian, the Funds, FTISI and any manufacturers and suppliers utilized
by the Custodian, the Funds or FTISI in connection with the Terminal Link, make
no warranties or representations to any other party, express or implied, in fact
or in law, including but not limited to warranties of merchantability and
fitness for a particular purpose.
7. Each Fund will cause its officers and employees to treat the authorization
codes and the access codes applicable to Terminal Link with extreme care, and
irrevocably authorizes the Custodian to act in accordance with and rely on
Certificates received by it through the Terminal Link. Each Fund acknowledges
that it is its responsibility to assure that only its officers and authorized
persons of FTISI use the Terminal Link on its behalf, and that the Custodian
shall not be responsible nor liable for any action taken in good faith in
reliance upon a Certificate, nor for any alteration, omission, or failure to
promptly forward by FTISI.
8. (a) Except as otherwise specifically provided in Section 8(b) of this
Article, the Custodian shall have no liability for any losses, damages,
injuries, claims, costs or expenses arising out of or in connection with any
failure, malfunction or other problem relating to the Terminal Link except for
money damages suffered as the result of the negligence of the Custodian,
provided however, that the Custodian shall have no liability under this Section
8 if the Fund fails to comply with the provisions of section 10.
(b) The Custodian's liability for its negligence in executing or failing
to act in accordance with a Certificate received through Terminal Link shall be
only with respect to a transfer of funds or assets which is not made in
accordance with such Certificate, and shall be subject to Section 11 of this
Article and contingent upon the Fund complying with the provisions of Section 10
of this Article, and shall be limited to the extent of the Fund's damages,
without reference to any special conditions or circumstances.
9. Without limiting the generality of the foregoing, in no event shall the
Custodian or any manufacturer or supplier of its computer equipment, software or
services relating to the Terminal Link be responsible for any special, indirect,
incidental or consequential damages which a Fund or FTISI may incur or
experience by reason of any malfunction of such equipment or software, even if
the Custodian or any manufacturer or supplier has been advised of the
possibility of such damages, nor with respect to the use of the Terminal Link
shall the Custodian or any such manufacturer or supplier be liable for acts of
God, or with respect to the following to the extent beyond such person's
reasonable control: machine or computer breakdown or malfunction, interruption
or malfunction of communication facilities, labor difficulties or any other
similar or dissimilar cause.
10. Each Fund shall notify the Custodian of any errors, omissions or
interruptions in, or delay or unavailability of, the Terminal Link as promptly
as practicable, and in any event within 24 hours after the earliest of (i)
discovery thereof, or (ii) the business day on which discovery should have
occurred through the exercise of reasonable care. The Custodian shall promptly
advise the Fund or FTISI whenever the Custodian learns of any errors, omissions
or interruption in, or delay or unavailability of, the Terminal Link.
11. The Custodian shall acknowledge to each affected Fund or to FTISI, by use of
the Terminal Link, receipt of each Certificate the Custodian receives through
the Terminal Link, and in the absence of such acknowledgment the Custodian shall
not be liable for any failure to act in accordance with such Certificate and the
Funds may not claim that such Certificate was received by the Custodian. Such
acknowledgment, which may occur after the Custodian has acted upon such
Certificate, shall be given on the same day on which such Certificate is
received.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
by their respective officers, thereunto duly authorized and their respective
seals to be hereto affixed as of the day and year first above written.
THE BANK OF NEW YORK
By: ______________________
Title: ______________________
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A
By: ______________________
Harmon E. Burns
Title: Vice President
By: ______________________
Deborah R. Garzek
Title: Vice President & Secretary
<TABLE>
<CAPTION>
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series
for which the Custodian shall serve under the Master Custody Agreement dated as
of February 16, 1996.
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage Portfolio
Adjustable Rate Securities Portfolio
AGE High Income Fund, Inc. Colorado Corporation
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income Fund
Trust Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income Fund California Corporation
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business
Trust
Franklin Templeton International Trust Delaware Business Trust Templeton Pacific Growth Fund
Franklin International Equity Fund
Franklin Investors Securities Trust Massachusetts Business Franklin Global Government Income Fund
Trust Franklin Short-Intermediate U.S. Gov't Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Managed Trust Massachusetts Business Franklin Corporate Qualified Dividend Fund
Trust Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Institutional Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Income Fund, New York Corporation
Inc.
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund
Trust Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Tax-Advantaged International Bond California Limited
Fund Partnership
Franklin Tax-Advantaged U.S. Government California Limited
Securities Fund Partnership
Franklin Tax-Advantaged High Yield California Limited
Securities Fund. Partnership
Franklin Premier Return Fund California Corporation
Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Business Trust
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Institutional MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Tax-Exempt Money Fund California Corporation
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income Fund
Trust Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin North Carolina Tax-Free Income Fund
(cont.) Trust Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Templeton Global Trust Massachusetts Business Franklin Templeton German Government Bond Fund
Trust Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund
Trust Franklin MicroCap Value Fund
Franklin Value Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Valuemark Funds Massachusetts Business Money Market Fund
Trust Growth and Income Fund
Precious Metals Fund
Real Estate Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global Income
Securities Fund Investment
Grade Intermediate Bond
Fund Income Securities
Fund U.S. Government
Securities Fund Zero
Coupon Fund -2000 Zero
Coupon Fund -2005 Zero Coupon
Fund -2010 Adjustable U.S. Government
Fund Rising Dividends Fund
Templeton Pacific Growth Fund
Templeton International Equity
Fund Templeton Developing
Markets Equity Fund Templeton
Global Growth Fund Global
Asset Allocation Fund Small
Cap Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio
Trust Franklin Late Day Money Market Portfolio
Franklin U.S. Government Securities Money Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S. Government
Securities Fund
Franklin Institutional Adjustable Rate Securities Fund
Franklin U.S. Government Agency Money Market Fund
Franklin Cash Reserves Fund
MidCap Growth Portfolio Delaware Business Trust
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market Portfolio
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Principal Maturity Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
</TABLE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 74
to the Registration Statement of Franklin Custodian Funds, Inc. on Form N-1A
File Nos. 2-11346 and 811-537 of our report dated November 3, 1995 on our audit
of the financial statements and financial highlights of Franklin Custodian
Funds, Inc., which report is included in the Annual Report to Shareholders for
the year ended September 30, 1995 which is incorporated by reference in the
Registration Statement.
/s/ COOPERS & LYBRAND L.L.P.
San Francisco, California
August 19, 1996
_________, 1996
FRANKLIN CUSTODIAN FUNDS, INC.
777 Mariners Island Blvd.
San Mateo, CA 94404
Gentlemen:
We propose to invest $100.00 in the Class II shares (the "Shares") of the
DYNATECH SERIES (the "Fund"), a series of FRANKLIN CUSTODIAN FUNDS, INC., on the
business day immediately preceding the effective date for Class II shares, at a
purchase price per share equivalent to the net asset value per share of the
Fund's Class I shares on the date of purchase. We will purchase the Shares in a
private offering prior to the effectiveness of the post-effective amendment to
the Form N-1A registration statement under which the Fund's Class II shares are
initially offered, as filed by the Fund under the Securities Act of 1933. The
Shares are being purchased to serve as the initial advance in connection with
the operations of the Fund's Class II shares prior to the commencement of the
public offering of Class II shares.
In connection with such purchase, we understand that we, the purchaser,
intend to acquire the Shares for our own account as the sole beneficial owner
thereof and have no present intention of redeeming or reselling the Shares so
acquired.
We consent to the filing of this Investment Letter as an exhibit to the
form N-1A registration statement of the Fund.
Sincerely,
FRANKLIN RESOURCES, INC.
By: ________________________
Harmon E. Burns
Executive Vice President
[FORM]
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN CUSTODIAN FUNDS, INC.
II. Fund: DYNATECH SERIES - CLASS II
III. Maximum Per Annum Rule 12b-1 Fees for Class II Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
Preamble to Class II Distribution Plan
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class II shares
(the "Class") of the Fund named above (the "Fund"), which Plan shall take effect
as of the date class II shares are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Directors of
the Investment Company (the "Board"), including a majority of the Board members
who are not interested persons of the Investment Company and who have no direct,
or indirect financial interest in the operation of the Plan (the "non-interested
Board members"), cast in person at a meeting called for the purpose of voting on
such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisers, Inc. and the terms of the Underwriting Agreement between
the Investment Company and Franklin/Templeton Distributors, Inc.
("Distributors"). The Board concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the Underwriting Agreement,
was fair and not excessive. The approval of the Plan included a determination
that in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders.
Distribution Plan
1. (a) The Fund shall pay to Distributors a monthly fee not to exceed the
above-stated maximum distribution fee per annum of the Class' average daily net
assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall pay
(i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Fund's Board from time to time, as a service fee
pursuant to servicing agreements which have been approved from time to time by
the Board, including the non-interested Board members.
2. (a) Distributors shall use the monies paid to it pursuant to Paragraph
1(a) above to assist in the distribution and promotion of shares of the Class.
Payments made to Distributors under the Plan may be used for, among other
things, 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 pro-rated
portion of Distributors' overhead expenses attributable to the distribution of
Class shares, as well as for additional distribution fees paid to securities
dealers or their firms or others who have executed agreements with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Directors, including the non-interested
directors. In addition, such fees may be used to pay for advancing the
commission costs to dealers or others with respect to the sale of Class shares.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be used to
pay dealers or others for, among other things, furnishing personal services and
maintaining shareholder accounts, which services include, among other things,
assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; arranging for bank wires;
monitoring dividend payments from the Fund on behalf of customers; forwarding
certain shareholder communications from the Fund to customers; receiving and
answering correspondence; and aiding in maintaining the investment of their
respective customers in the Class. Any amounts paid under this paragraph 2(b)
shall be paid pursuant to a servicing or other agreement, which form of
agreement has been approved from time to time by the Board.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested Board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not
be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the Fund's
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: __________________
FRANKLIN CUSTODIAN FUNDS, INC.
By: _________________________
Deborah R. Gatzek
Vice President & Secretary
Franklin/Templeton Distributors, Inc.
By: _________________________
Harmon E. Burns
Executive Vice President
