Franklin
Custodian
Funds, Inc.
Growth Series, DynaTech Series,
Utilities Series, Income Series,
U.S. Government Securities Series
PROSPECTUS February 1, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
===============================================================================
Franklin Custodian Funds, Inc. (the "Fund") is an open-end management investment
company consisting of the five separate diversified series listed above
(individually or collectively referred to as the "Series"). Each Series
represents a separate fund with its own investment objectives and policies with
various possibilities for income or capital appreciation and subject to varying
market risks. Through the five different Series, the Fund attempts to satisfy a
variety of investment objectives.
The Growth Series, DynaTech Series, Utilities Series, and Income Series may
invest in domestic and foreign securities as described under "How Does the Fund
Invest Its Assets?"
The Income Series may invest up to 100% of its portfolio in non-investment grade
bonds issued by both U.S. and foreign issuers, commonly known as "junk bonds,"
which entail default and other risks greater than those associated with higher
rated securities. You should carefully assess the risks associated with an
investment in the Income Series in light of the securities in which the Series
invests. See "What Are the Fund's Potential Risks? - High Yielding Income
Fixed-Income Securities."
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund and each Series that you should know before
investing. After reading the Prospectus, you should retain it for future
reference; it contains information about the purchase and sale of shares and
other items which you will find useful to have.
An SAI concerning the Fund, dated February 1, 1996, as may be amended from time
to time, provides a further discussion of certain areas in this Prospectus and
other matters which may be of interest to you. It has been filed with the SEC
and is incorporated herein by reference. A copy is available without charge from
the Fund or from Distributors at the address or telephone number shown above.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank; further, such shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
Shares of the Fund involve investment risks, including the possible loss of
principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.
The Growth Series, Utilities Series, Income Series, and U.S. Government
Securities Series offer two classes of shares: 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"). 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
Prospectus. You can choose between Class I shares, which generally bear a higher
front-end sales charge and lower ongoing Rule 12b-1 distribution fees ("Rule
12b-1 fees"), and Class II shares, which generally have a lower front-end sales
charge and higher ongoing Rule 12b-1 fees. You should consider the differences
between the two classes, including the impact of sales charges and Rule 12b-1
fees, in choosing the more suitable class given your anticipated investment
amount and time horizon. See "How Do I Buy Shares? - Deciding which Class of
Growth Series, Utilities Series, Income Series or U.S. Government Securities
Series to Buy."
Contents Page
Expense Tables........................................... 3
Financial Highlights -
How Has the Fund Performed?............................. 6
What Is the Fund?........................................ 7
How Does the Fund Invest Its Assets?..................... 8
What Are the Fund's Potential Risks? .................... 17
How You Participate in the Results
of the Fund's Activities?............................... 22
Who Manages the Fund?.................................... 22
What Distributions Might
I Receive from the Fund?................................ 25
How Taxation Affects You and the Fund.................... 26
How Do I Buy Shares?..................................... 27
What Programs and Privileges
Are Available to Me as a Shareholder?................... 35
What If My Investment Outlook
Changes? - Exchange Privilege........................... 36
How Do I Sell Shares?.................................... 40
Telephone Transactions................................... 44
How Are Fund Shares Valued?.............................. 45
How Do I Get More Information
About My Investment?.................................... 45
How Does the Fund
Measure Performance?.................................... 46
General Information...................................... 47
Registering Your Account................................. 49
Important Notice Regarding
Taxpayer IRS Certifications............................. 50
Who Runs the Fund?....................................... 50
Useful Terms and Definitions ............................ 52
Appendix................................................. 53
Expense Tables
The purpose of the tables is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in each Series of the Fund. These figures are based on the aggregate
operating expenses of each Series' shares for the fiscal year ended September
30, 1995. The Class II figures are annualized.
<TABLE>
<CAPTION>
Class I
Growth Utilities Income U.S. Government DynaTech
Series Series Series Securities Series Series
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price)............................ 4.50% 4.25% 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
Annual Fund Operating Expenses
(as a percentage of average net assets)
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:
Shareholder Servicing Costs................ 0.10% 0.07% 0.05% 0.04% 0.11%
Reports to Shareholders.................... 0.08% 0.06% 0.04% 0.03% 0.04%
Other...................................... 0.02% 0.02% 0.03% 0.01% 0.05%
- --------------------------------------------------------------------------------------------------------------------------
Total 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
Growth Utilities Income U.S. Government
Series Series Series Securities Series
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price).......... 1.00%+ 1.00%+ 1.00%+ 1.00%+
Deferred Sales Charge......................... 1.00%++ 1.00%++ 1.00%++ 1.00%++
Exchange Fee (per transaction)................ NONE $5.00** $5.00** $5.00**
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees............................... 0.50% 0.46% 0.46% 0.45%
Rule 12b-1 Fees***............................ 1.00% 0.65% 0.65% 0.65%
Other Expenses:
Shareholder Servicing Costs.................. 0.10% 0.07% 0.05% 0.04%
Reports to Shareholders...................... 0.08% 0.06% 0.04% 0.03%
Other........................................ 0.02% 0.02% 0.03% 0.01%
- --------------------------------------------------------------------------------------------------------------
Total Other Expenses.......................... 0.20% 0.15% 0.12% 0.08%
Total Fund Operating Expenses................. 1.70% 1.26% 1.23% 1.18%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
*Class I investments of $1 million or more are not subject to a front-end sales
charge; however, a contingent deferred sales charge of 1% is generally imposed
on certain redemptions within a "contingency period" of 12 months of the
calendar month of such investments. See "How Do I Sell Shares? - Contingent
Deferred Sales Charge."
**$5.00 fee is imposed only on Timing Accounts as described under "What If My
Investment Outlook Changes? - Exchange Privilege." All other exchanges are
processed without a fee.
***The maximum amounts of Rule 12b-1 fees allowed pursuant to the Class I
distribution plans are 0.25% per annum for the Growth Series and Dynatech Series
and 0.15% per annum for the Utilities Series, Income Series and U.S. Government
Securities Series. See "Who Manages the Fund? Plans of Distribution." Consistent
with National Association of Securities Dealers, Inc.'s rules, it is possible
that the combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the maximum
front-end sales charges permitted under those same rules.
+Although Class II has a lower front-end sales charge than Class I, over time
the higher Rule 12b-1 fees for Class II may cause you to pay more for Class II
shares than for Class I shares. Given the maximum front-end sales charge and the
rate of Rule 12b-1 fees of each class, it is estimated that this will take less
than six years if you maintain total shares valued at less than $100,000 in the
Franklin Templeton Funds. If your investments in the Franklin Templeton Funds
are valued at $100,000 or more, you will reach the crossover point more quickly.
++Class II shares redeemed within a "contingency period" of 18 months of the
calendar month of such investments are subject to a 1% contingent deferred sales
charge. See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
You should be aware that the above tables are not intended to reflect in precise
detail the fees and expenses associated with an investment in any Series of the
Fund. Rather, the tables have been provided only to assist you in gaining a more
complete understanding of fees, charges and expenses. For a more detailed
discussion of these matters, you should refer to the appropriate sections of
this Prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge and applicable contingent deferred
sales charge, that apply to a $1,000 investment in each Series over various time
periods assuming (1) a 5% annual rate of return and (2) redemption at the end of
each time period.
Class I
Growth Utilities Income U.S. Government DynaTech
Series Series Series Securities Series Series
- -------------------------------------------------------------------------------
One Year*........ $ 54 $ 50 $ 49 $ 48 $ 55
Three Years...... $ 72 $ 65 $ 64 $ 61 $ 76
Five Years....... $ 93 $ 81 $ 80 $ 75 $ 98
Ten Years........ $151 $129 $127 $115 $163
*Assumes that a contingent deferred sales charge will not apply to Class I
shares.
Class II
Growth Utilities Income U.S. Government
Series Series Series Securities Series
- --------------------------------------------------------------------------
One Year......... $ 37 $ 33 $ 32 $ 32
Three Years...... $ 63 $ 50 $ 49 $ 47
Five Years....... $101 $ 78 $ 77 $ 74
Ten Years........ $209 $161 $157 $152
You would pay the following expenses on the same investment, assuming no
redemption.
Growth Utilities Income U.S. Government
Series Series Series Securities Series
- --------------------------------------------------------------------------
One Year......... $ 27 $ 23 $ 22 $ 22
Three Years...... $ 63 $ 50 $ 49 $ 47
Five Years....... $101 $ 78 $ 77 $ 74
Ten Years........ $209 $161 $157 $152
This example is based on the aggregate annual operating expenses shown above and
should not be considered a representation of past or future expenses, which may
be more or less than those shown. The operating expenses are borne by each
Series of the Fund and only indirectly by you as a result of your investment in
the Series. In addition, federal securities regulations require the example to
assume an annual return of 5%, but the actual return for each Series may be more
or less than 5%.
Financial Highlights - How Has the Fund Performed?
Set forth below is a table containing the financial highlights for a share of
each class of each Series of the Fund. The information for each of the five
fiscal years in the period ended September 30, 1995 has been audited by Coopers
& Lybrand L.L.P., independent auditors, whose audit report appears in the
financial statements in the Fund's Annual Report to Shareholders dated September
30, 1995. The remaining figures, which are also audited, are not covered by the
auditors' current report. See "Reports to Shareholders" under "General
Information" in this Prospectus."
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data+++
----------------------------------------------------- ---------------------------
Distri
Net Real- Distri- butions Ratio of Net
Net Asset Net ized & Un- Total butions From Net Asset Net Assets Ratio of Investment
Year Value at Invest- realized Gain From From Net Realized Total Value at End Expenses Income to Portfolio
Ended Beginning ment (Loss) on Investment InvestmentCapital Distri- at End Total of Year to Average Average Turnover
Sep.30 of Year Income Investments Operations Income Gains butions of Year Return***(in 000's) Net Assets Net Assets Rate
Growth Fund:**
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986 $ 6.20 $0.157 $ 1.374 $ 1.531 $(0.130) $(0.091) $(0.221)$ 7.51 24.72% $ 42,861 0.87% 2.12% 1.00%
1987 7.51 0.207 2.852 3.059 (0.150) (0.029) (0.179) 10.39 41.10 115,845 0.81 2.34 8.73
1988 10.39 0.212 (0.570) (0.358) (0.202) (0.190) (0.392) 9.64 (3.28) 106,766 0.77 2.27 -
1989 9.64 0.227 2.332 2.559 (0.221) (0.008) (0.229) 11.97 27.02 134,523 0.76 1.94 2.24
1990 11.97 0.314 (1.188) (0.874) (0.206) (0.200) (0.406) 10.69 (7.55) 169,939 0.73 2.74 -
1991 10.69 0.325 2.703 3.028 (0.268) - (0.268) 13.45 28.65 331,392 0.70 2.58 7.98
1992 13.45 0.229 0.524 0.753 (0.353) (0.150) (0.503) 13.70 5.73 532,971 0.66 2.06 0.81
1993 13.70 0.232 0.575 0.807 (0.189) (0.068) (0.257) 14.25 5.87 560,824 0.64 1.64 1.70
1994 14.25 0.190 0.899 1.089 (0.297) (0.082) (0.379) 14.96 7.63 516,620 0.77 1.23 6.52
1995**** 14.96 0.170 4.427 4.597 (0.135) (0.042) (0.177) 19.38 31.11 712,866 0.90 1.08 1.39
Class II Shares:
1995+ 16.88 0.023 2.427 2.450 - - - 19.33 14.72 4,161 1.79++ 0.37++ 1.39
DynaTech Fund:**
1986 4.75 0.041 0.124 0.165 (0.125) - (0.125) 4.79 3.18 31,834 0.87 0.78 14.58
1987 4.79 0.031 2.292 2.323 (0.033) - (0.033) 7.08 48.60 50,417 0.86 0.48 8.27
1988 7.08 0.040 (1.197) (1.157) (0.033) - (0.033) 5.89 (16.41) 33,575 0.87 0.68 3.68
1989 5.89 0.060 1.719 1.779 (0.039) - (0.039) 7.63 30.26 37,673 0.83 0.90 -
1990 7.63 0.156 (0.352) (0.196) (0.059) (0.605) (0.664) 6.77 (2.71) 36,538 0.79 2.09 11.34
1991 6.77 0.126 1.952 2.078 (0.168) - (0.168) 8.68 31.21 48,867 0.93 1.57 7.12
1992 8.68 0.120 0.522 0.642 (0.112) - (0.112) 9.21 7.29 64,595 0.81 1.42 10.70
1993 9.21 0.102 1.207 1.309 (0.117) (0.112) (0.229) 10.29 14.36 71,469 0.81 1.03 26.56
1994 10.29 0.070 0.210 0.280 (0.124) (0.596) (0.720) 9.85 2.89 67,413 1.00 0.69 9.73
1995 9.85 0.118 2.991 3.109 (0.049) (0.130) (0.179) 12.78 32.10 92,987 1.01 1.11 9.84
Utilities Fund:
1986 6.47 0.530 1.768 2.298 (0.555) (0.003) (0.558) 8.21 36.03 326,985 0.74 5.95 3.49
1987 8.21 0.536 (0.455) 0.081 (0.560) (0.011) (0.571) 7.72 0.56 632,474 0.65 6.55 -
1988 7.72 0.553 (0.243) 0.310 (0.570) - (0.570) 7.46 4.03 615,985 0.64 7.36 1.68
1989 7.46 0.548 0.672 1.220 (0.580) - (0.580) 8.10 16.71 652,308 0.62 7.10 4.02
1990 8.10 0.529 (0.555) (0.026) (0.580) (0.014) (0.594) 7.48 (0.93) 749,386 0.60 6.50 2.07
1991 7.48 0.535 1.385 1.920 (0.590) - (0.590) 8.81 26.15 1,226,118 0.59 6.44 0.89
1992 8.81 0.530 0.849 1.379 (0.559) - (0.559) 9.63 15.89 2,191,095 0.57 5.90 1.39
1993 9.63 0.534 1.161 1.695 (0.545) - (0.545) 10.78 17.83 3,626,774 0.55 5.30 7.81
1994 10.78 0.550 (2.436) (1.886) (0.524) (0.040) (0.564) 8.33 (17.94) 2,572,508 0.64 5.76 6.34
1995 8.33 0.527 1.424 1.951 (0.524) (0.007) (0.531) 9.75 24.19 2,765,976 .73 5.88 5.55
Class II Shares:
1995+ 8.89 0.228 0.880 1.108 (0.248) - (0.248) 9.75 13.01 8,369 1.21++ 5.15++ 5.55
Per Share Operating Performance Ratios/Supplemental Data+++
----------------------------------------------------- ---------------------------
Distri
Net Real- Distri- butions Ratio of Net
Net Asset Net ized & Un- Total butions From Net Asset Net Assets Ratio of Investment
Year Value at Invest- realized Gain From From Net Realized Total Value at End Expenses Income to Portfolio
Ended Beginning ment (Loss) on Investment InvestmentCapital Distri- at End Total of Year to Average Average Turnover
Sep.30 of Year Income Investments Operations Income Gains butions of Year Return***(in 000's) Net Assets Net Assets Rate
Income Fund:
1986 $ 2.06 $0.230 $ 0.238 $ 0.468 $(0.220) $(0.058) $(0.278) $ 2.25 24.20% $ 226,418 0.71% 9.76% 30.76%
1987 2.25 0.206 0.004 0.210 (0.220) (0.020) (0.240) 2.22 9.08 484,270 0.64 9.20 18.14
1988 2.22 0.228 (0.096) 0.132 (0.220) (0.022) (0.242) 2.11 6.00 726,815 0.61 10.50 10.01
1989 2.11 0.222 0.009 0.231 (0.220) (0.011) (0.231) 2.11 11.16 1,189,694 0.57 10.46 12.05
1990 2.11 0.212 (0.324) (0.112) (0.220) (0.018) (0.238) 1.76 (6.37) 1,299,130 0.55 10.73 12.14
1991 1.76 0.190 0.350 0.540 (0.220) - (0.220) 2.08 32.60 1,673,187 0.56 10.17 33.92
1992 2.08 0.190 0.194 0.384 (0.205) (0.009) (0.214) 2.25 18.80 2,483,501 0.55 9.11 23.30
1993 2.25 0.180 0.227 0.407 (0.185) (0.012) (0.197) 2.46 18.76 3,935,444 0.54 7.84 25.41
1994 2.46 0.170 (0.201) (0.031) (0.180) (0.029) (0.209) 2.22 (1.52) 4,891,505 0.64 7.37 23.37
1995 2.22 0.180 0.108 0.288 (0.180) (0.028) (0.208) 2.30 14.00 5,885,788 .71 8.26 58.64
Class II Shares:
1995+ 2.18 0.079 0.113 0.192 (0.072) - (0.072) 2.30 8.96 65,822 1.23++ 7.89++ 58.64
U.S. Government Securities Fund:*
1986 7.33 0.790 0.165 0.955 (0.875) - (0.875) 7.41 13.25 14,361,682 0.54 9.93 36.02
1987 7.41 0.698 (0.500) 0.198 (0.724) (0.014) (0.738) 6.87 2.22 13,024,437 0.52 9.49 52.92
1988 6.87 0.691 0.115 0.806 (0.696) - (0.696) 6.98 11.77 12,112,775 0.53 9.85 34.14
1989 6.98 0.688 (0.072) 0.616 (0.696) - (0.696) 6.90 8.95 11,260,310 0.52 9.99 25.70
1990 6.90 0.668 (0.020) 0.648 (0.688) - (0.688) 6.86 9.47 11,143,333 0.52 9.72 18.23
1991 6.86 0.653 0.287 0.940 (0.660) - (0.660) 7.14 13.97 12,426,910 0.52 9.26 22.14
1992 7.14 0.609 0.106 0.715 (0.595) - (0.595) 7.26 10.14 13,617,157 0.53 8.46 38.75
1993 7.26 0.557 (0.056) 0.501 (0.561) - (0.561) 7.20 6.86 14,268,516 0.52 7.71 43.10
1994 7.20 0.500 (0.678) (0.178) (0.512) - (0.512) 6.51 (2.75) 11,668,747 0.55 7.37 18.28
1995 6.51 0.497 0.348 0.845 (0.485) - (0.485) 6.87 13.56 11,101,605 0.61 7.50 5.48
Class II Shares:
1995+ 6.67 0.206 0.167 0.373 (0.193) - (0.193) 6.85 5.66 11,695 1.18++ 6.48++ 5.48
</TABLE>
+For the period May 1, 1995 (effective date) to September 30, 1995.
++Annualized.
+++Ratios for the year 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 as purchases and sales of securities in computing the portfolio
turnover rate.
**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.
***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. Prior to May 1, 1994, the total
return for Class I shares also assumes reinvestment of dividends at offering
price and capital gains, if any, at net asset value. Effective May 1, 1994, with
the implementation of the Rule 12b-1 distribution plan for Class I shares, the
sales charge on reinvested dividends was eliminated.
****Per share amounts have been calculated using the daily average shares
outstanding during the period.
What is the Fund?
- -------------------------------------------------------------------------------
The Fund is an open-end management investment company commonly called a "mutual
fund." The Fund 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 Growth Series, Utilities Series, Income Series and
U.S. Government Securities Series issue two classes of shares of capital stock
("multiclass" structure) with a par value of $0.01: Growth Series - Class I,
Growth Series - Class II, Utilities Series - Class I, Utilities Series - Class
II, Income Series Class I, Income Series - Class II, U.S. Government Securities
Series - Class I and U.S. Government Securities Series - Class - II. All Fund
shares outstanding before May 1, 1995 have been redesignated as Class I shares
and will retain their previous rights and privileges, except for legally
required modifications to shareholder voting procedures, as discussed in
"General Information - Organization and Voting Rights." The DynaTech Series
currently does not offer Class II shares.
You may purchase shares of each Series (minimum investment of $100 initially and
$25 thereafter) at the current public offering price of the class and Series you
wish to purchase. Please see "How Do I Buy Shares?"
How Does the Fund Invest Its Assets?
- -------------------------------------------------------------------------------
The investment objectives of all Series are fundamental policies and may not be
changed without shareholder approval. Of course, there is no assurance that the
objective of any Series will be achieved.
Growth Series
The primary investment objective of this Series is capital appreciation. The
Series is primarily invested in common stocks or convertible securities believed
to offer favorable possibilities of capital appreciation, some of which may
yield little or no current income. Current income is only a secondary
consideration in selecting portfolio securities. The assets of the Series may be
held only in cash or cash equivalents, or invested in shares of 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 Series may also write covered call options and
purchase 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 Series which may not be changed without shareholder approval.
DynaTech Series
The investment objective of this Series is capital appreciation. The Series is
designed for investors who understand and are willing to accept the risk of loss
involved in seeking capital appreciation. Investments are made primarily in
companies emphasizing technological development, in fast-growing industries or
in the securities of companies which management considers undervalued. The
assets of this Series may be held only in cash or cash equivalents, or invested
in securities traded on any national securities exchange, 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 the bulk of this Series' assets will be invested in common
stocks, including securities convertible into common stocks. The Series may also
purchase put options on securities. When the Manager believes that no attractive
investment opportunities exist, the Series may maintain a significant portion of
its assets in cash. The Series may also invest in debt securities or preferred
stocks which the Manager believes will further the investment objective of the
Series may also be made. This Series may not concentrate more than 25% of its
assets in any one industry. From time to time, through market appreciation of
certain issues, concentration in a few issues may develop. Investments of this
Series 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 Series are both capital appreciation and
current income. As a fundamental policy, the assets of the Series may be held in
cash or cash equivalents, or invested in securities of an issuer engaged in the
public utilities industry. "Public Utilities Industry" includes the manufacture,
production, generation, transmission and sale of gas, water, and electricity.
The term also includes issuers engaged in the communications field including
entities 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 Utilities Series will be
in the securities of an issuer engaged in the Public Utilities Industry. Under
normal circumstances, however, the Series expects to have substantially all of
its assets invested in such securities.
To achieve its investment objective, this Series invests primarily in common
stocks, including, from time to time, non-dividend paying common stocks if, in
the opinion of the Manager, such securities appear to offer attractive
opportunities for capital appreciation. The Series may also invest in preferred
stocks and bonds issued by issuers engaged in the Public Utilities Industry.
When purchasing fixed-income debt securities, the Series may invest in
securities regardless of their rating (including securities in the lowest rating
categories) depending upon prevailing market and economic conditions or in
securities which are not rated. Although most of the Series' 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 Series' intent not to purchase
fixed-income debt securities rated below B by the rating services. Please see
the Appendix to this Prospectus for a discussion of the ratings. With respect to
unrated securities, it is also the Series' intent to purchase securities which,
in the view of the Manager, would be comparable to securities rated B or above
by a nationally recognized rating service or, if no specific equivalent rating
has been assigned by a nationally recognized rating service, securities which
have been determined to be consistent with the Series' objectives without
exposing the Series to excessive risk. The Series will not purchase issues that
are in default nor will the Series invest in securities which are felt by the
manager to involve excessive risk. As of September 30, 1995, 9% of the Utilities
Series' assets were invested in debt securities. All of the rated securities
were rated at least Baa by Moody's or BBB by S&P.
Securities rated B are regarded, on balance, as predominantly speculative with
respect to the capacity to pay interest and repay principal in accordance with
the terms of the obligation. These ratings, which represent the opinions of the
rating services with respect to the securities and are not absolute standards of
quality, will be considered in connection with the investment of the Series'
assets but will not be a determining or limiting factor.
Like all bonds, the value of the Series' fixed-income debt investments generally
shares an inverse relationship with market interest rates. For example, when
interest rates rise, the value of the Series' debt investments tends to fall.
Conversely, when market interest rates decline, the value of these securities
tends to rise. Because securities issued by utility companies are particularly
sensitive to movement in interest rates, the equity securities of such companies
are more affected by movement in interest rates than are the equity securities
of other issuers.
Income Series
The investment objective of this Series is to maximize income while maintaining
prospects for capital appreciation. The Series invests in a diversified
portfolio of securities selected with particular consideration of current income
production. The underlying assets of the Series may be held in cash or cash
equivalents, or invested in securities traded on any national securities
exchange or in securities issued by a corporation, association or similar legal
entity having gross assets valued at not less than $1,000,000 as shown on its
latest published annual report. This Series may also invest in preferred stocks.
There are no restrictions as to the proportion of investments which may be made
in a particular type of security and such determination is entirely within the
Manager's discretion. A breakdown of the ratings for the bonds in the Series'
portfolio is included under "Asset Composition Table" below.
The Series may invest up to 100% of its portfolio in non-investment grade bonds,
commonly known as "junk bonds," which entail default and other risks greater
than those associated with higher rated securities. You should carefully assess
the risks associated with an investment in the Series in light of the securities
in which the Series invests.
Various investment services publish ratings of some of the types of securities
in which the Series may invest. Higher yields are ordinarily available from
securities in the lower-rated categories of the recognized rating services (that
is, securities rated Ba or lower by Moody's, or BB or lower by S&P) or from
unrated securities of comparable quality. A list of these ratings is shown in
the Appendix to this Prospectus. These ratings represent the opinions of the
rating services with respect to the issuer's ability to pay interest and repay
principal, although they do not purport to reflect the risk of fluctuations in
market value and are not absolute standards of quality, and will be considered
in connection with the investment of the Series' assets, but will not be a
determining or limiting factor. The Series may invest in securities regardless
of their rating (including securities in the lowest rating categories) or in
securities which are not rated, including up to 5% of its assets in securities
which are in default at the time of purchase.
In the event the rating on an issue held in the Series' portfolio is changed by
the rating service or the security goes into default such event will be
considered by the Series in its evaluation of the overall investment merits of
that security but will not generally result in an automatic sale of the
security.
Rather than relying principally on the ratings assigned by the rating services,
the investment analysis of securities being considered for the Series' portfolio
may also include, among other things, consideration of relative values, based on
such factors as anticipated cash flow, interest or dividend coverage, asset
coverage, earnings prospects, the experience and managerial strength of the
issuer, responsiveness to changes in interest rates and business conditions,
debt maturity schedules and borrowing requirements and the issuer's changing
financial condition and public recognition thereof. Since a substantial portion
of the Series' portfolio at any particular time may consist of debt securities,
changes in the level of interest rates, among other things, will likely affect
the value of the Series' holdings and thus the value of your investment. Certain
of the high yielding fixed-income securities in which the Series 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.
As market conditions change, it is conceivable that all of the assets of this
Series could be invested in common stocks or, conversely, in debt securities. It
is a fundamental policy of this Series that concentration of investment in a
single industry may not exceed 25% of its total assets.
The Series may purchase debt obligations on a "when-issued" or
"delayed-delivery" basis. These securities are subject to market fluctuation
prior to delivery to the Series and generally do not earn interest until their
scheduled delivery date. Therefore, the value or yields at delivery may be more
or less than the value or yields available when the transaction was entered
into. When the Series is the buyer in such a transaction, it will maintain, in a
segregated account with its custodian, cash or high-grade marketable securities
having an aggregate value equal to the amount of such purchase commitments until
payment is made. To the extent the Income Series engages in when-issued and
delayed delivery transactions, it will do so only for the purpose of acquiring
portfolio securities consistent with the Series' investment objectives and
policies, and not for the purpose of investment leverage. Please see "How Does
the Fund Invest Its Assets? - When-Issued, Delayed Delivery and TBA
Transactions" in the Fund's SAI for a more complete discussion regarding
when-issued and delayed-delivery transactions.
The Series may also purchase bonds issued at a discount and 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. See "What Are the Fund's Potential Risks? - High Yielding,
Fixed-Income Securities" for more information regarding these types of bonds.
The Series' total return for Class I, as calculated pursuant to the formula
prescribed by the SEC, for the one-, five- and ten-year periods ended on
September 30, 1995 was 9.09%, 15.28% and 12.02%, respectively. See "How Does the
Fund Measure Performance?"
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 fixed-income securities rated in each of the specific
rating categories shown and those that are not rated by the rating agency but
deemed by the Manager to be of comparable credit quality. The information was
prepared based on a dollar weighted average of the Income Series' 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.
Moody's Rating Percentage of Assets
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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 ratings services have been
included in the Caa category.
U.S. Government Securities Series
The investment objective of the U.S. Government Securities Series is income
through investment in a portfolio limited to securities which are obligations of
the U.S. government or its instrumentalities. U.S. government securities
include, but are not limited to, U.S. Treasury bonds, notes and bills, Treasury
certificates of indebtedness and securities issued by instrumentalities of the
U.S. government. Other than investments in short-term U.S. Treasury securities
or assets held in cash pending investment, the assets of this Series are
currently invested solely in obligations ("GNMAs" or "Ginnie Maes") of the
Government National Mortgage Association ("Association").
The U.S. Government Series believes that its investment policies, as stated in
this Prospectus and the SAI, make the Series a permissible investment for
federal credit unions, based on the Series' understanding of the laws and
regulations governing credit union regulations as of September 30, 1995. CREDIT
UNION INVESTORS ARE ADVISED TO CONSULT THEIR OWN LEGAL ADVISERS TO DETERMINE
WHETHER AND TO WHAT EXTENT THE SHARES OF THE U.S. GOVERNMENT SECURITIES SERIES
CONSTITUTE LEGAL INVESTMENTS FOR THEM. Please see "How Does the Fund Invest It's
Assets? - Credit Union Investment Regulations" in the SAI for details.
Information about 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
Series will purchase GNMAs for which principal and interest are guaranteed. The
Series also purchases "adjustable rate" GNMAs and other types of securities
which may be issued with the Association's guarantee.
The Association's guarantee of payment of principal and interest on GNMAs is
backed by the full faith and credit of the United States 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 Series,
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 which represents a return of principal will be reinvested by the
Series in securities which may bear interest at a rate 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, such principal payments are passed through to the GNMA
holders, such as the Series. Accordingly, a GNMA's life is likely to be
substantially shorter than the stated maturity of the mortgages in the
underlying pool. Because of this variation in prepayment rates, it is not
possible to accurately predict the life of a particular GNMA.
The Series' investments are continually monitored and changes are made as market
conditions warrant. However, the Series does not engage in the trading of
securities for the purpose of realizing short-term profits.
The price per share you receive on redemption may be more or less than the price
paid for the shares. The dividends per share paid by the Series may also vary.
Other Investment Policies of the Fund
To-Be-Announced and Delayed Delivery Transactions. The U.S. Government
Securities Series may purchase and sell GNMAs on a "To-Be-Announced" ("TBA") and
"delayed delivery" basis. These transactions are arrangements under which the
Series may purchase securities with payment and delivery scheduled for a future
time up to 60 days after purchase. The transactions are subject to market
fluctuation and 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. In TBA and delayed delivery transactions, the Series relies on the
seller to complete the transaction. The other party's failure to do so may cause
the Series to miss a price or yield considered advantageous. Securities
purchased on a TBA or delayed delivery basis do not generally earn interest
until their scheduled delivery date. The Series is not subject to any percentage
limit on the amount of its assets which may be invested in delayed delivery and
TBA purchase obligations. More information concerning these transactions is
included in the SAI.
Options. Each Series, except the U.S. Government Securities Series, may write
covered call options which are listed for trading on a national securities
exchange. This means that the Series will only write options on securities which
it actually owns. A call option gives the person who buys it the right to buy
the security on which the option is written for a specified period of time for a
price agreed to at the time the Series sells the option, even though that price
may be less than the value of the security at the time the option is exercised.
When a Series sells covered call options, it will receive a cash premium which
can be used in whatever way is felt to be most beneficial to the Series. The
risks associated with covered call writing are that in the event of a price rise
on the underlying security which would likely trigger the exercise of the call
option, a Series will not participate in the increase in price beyond the
exercise price. If the Series determines that it does not wish to deliver the
underlying securities from its portfolio, it would have to enter into a "closing
purchase transaction," the premium on which may be higher or lower than that
received by the Series for writing the option. There is no assurance that a
closing purchase transaction will be available in every instance. Transactions
in options are generally considered "derivative securities." The U.S. Government
Securities Series does not engage in option transactions.
The Growth and DynaTech Series may purchase 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 purchase put options will allow a Series to protect the
unrealized gain in an appreciated security in its portfolio without actually
selling the security. In addition, the Series will continue to receive interest
or dividend income on the security. The Series may sell a put option which it
has previously purchased prior to the sale of the securities underlying such
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
which the Series 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 Series may suffer a loss equal to
the amount of the premium it paid plus transaction costs. The Series' 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 shareholders. These
securities require the application of complex and special rules and elections,
more information about which is included in the SAI.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
and subject to the following conditions, each Series, except the U.S. Government
Securities Series, may lend its portfolio securities to qualified securities
dealers or other institutional investors, provided that such loans do not exceed
10% of the value of a Series' total assets at the time of the most recent loan.
The borrower must deposit with the Fund's custodian collateral with an initial
market value of at least 102% of the initial market value of the securities
loaned, including any accrued interest, with the value of the collateral and
loaned securities marked-to-market daily to maintain collateral coverage of at
least 100%. Such collateral shall consist of cash, securities issued by the U.S.
Government, its agencies or instrumentalities, or irrevocable letters of credit.
The lending of securities is a common practice in the securities industry. The
Series may engage in security loan arrangements with the primary objective of
increasing a Series' 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, a Series continues to be entitled
to all dividends or interest on any loaned securities. As with any extension of
credit, there are risks of delay in recovery and loss of rights in the
collateral should the borrower of the security fail financially. The Fund's
Income and Utilities Series loaned securities to certain brokers during the
fiscal year ended September 30, 1995.
Convertible Securities. Each Series, 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 Series 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 Series' 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
that 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, rather than interest payments, and are usually treated as such for
corporate tax purposes.
Trade Claims. The Income Series may invest a portion of its assets in trade
claims. Trade claims are purchased from creditors of companies in financial
difficulty. For purchasers such as the Series, trade claims offer the potential
for profits since they are often purchased at a significantly discounted value
and, consequently, may generate capital appreciation in the event that the value
of the claim increases as the debtor's financial position improves. In the event
that 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. Trading in claims is not regulated by federal
securities laws or the SEC. Currently, trading in claims is 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
Series' investment in these instruments will not exceed 5% of its net assets at
time of acquisition.
Loan Participations. The Income Series may invest up to 5% of its assets in loan
participations and other related direct or indirect bank obligations ("Loan
Participations"). These instruments are interests in floating or variable rate
senior loans to U.S. corporations, partnerships and other entities. While Loan
Participations generally trade at par value, the Income Series will be able to
acquire Loan Participations, including those which sell at a discount because of
the borrower's credit problems. To the extent the borrower's credit problems are
resolved, the Loan Participation may appreciate in value. The Manager may
acquire Loan Participations for the Series when it believes that over the long
term, appreciation will take place. An investment in such securities, however,
carries substantially the same risk as that for defaulted debt securities and
may cause the loss of the entire investment to the Series. Most Loan
Participations are illiquid and, to that extent, will be included in the 10%
limitation described under "Illiquid Investments."
Repurchase Agreements. All Series of the Fund, except for the U.S. Government
Securities Series, may engage in repurchase transactions in which a Series
purchases a U.S. government security subject to resale to a bank or dealer at an
agreed-upon price and date. The transaction requires the collateralization of
the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Series in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller might cause the Series to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Series
might also incur disposition costs in liquidating the collateral. The Series,
however, intend to enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are deemed creditworthy by
the Manager. A repurchase agreement is deemed to be a loan by the Series under
the 1940 Act. The U.S. government security subject to resale (the collateral)
will be held on behalf of a Series by a custodian approved by the Board and will
be held pursuant to a written agreement.
Borrowing. The Series do not borrow money or mortgage or pledge any of their
assets, except that each Series may borrow for temporary or emergency purposes
in an amount up to 5% of total asset value.
Foreign Securities. Securities of foreign issuers cannot be purchased for the
U.S. Government Securities Series. The Income Series 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. There
are no restrictions on investment of the assets of the other Series in foreign
securities, providing such investments are consistent with the objectives and
comply with the concentration and diversification policies of such Series. The
Series, other than the Income Series, presently have no intention of investing
more than 10% of the net assets of any Series in foreign securities not publicly
traded in the United States. The holding of foreign securities, however, may be
limited by the Series to avoid investment in certain Passive Foreign Investment
Companies ("PFIC") and the imposition of a PFIC tax on the Series resulting from
such investments.
The Series will ordinarily purchase foreign securities which are traded in the
United States or purchase American Depositary Receipts ("ADRs"), which are
certificates issued by U.S. banks representing the right to receive securities
of a foreign issuer deposited with that bank or a correspondent bank. However,
the Series may purchase the securities of foreign issuers directly in foreign
markets.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with any applicable U.S. and foreign currency
restrictions and other tax laws and laws limiting the amount and types of
foreign investments. Changes of governmental administrations or of economic or
monetary policies, in the U.S. or abroad, or changed circumstances in dealings
between nations or currency convertibility or exchange rates could result in
investment losses for such Series.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Securities which are acquired by a Series outside the U.S. and which are
publicly traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered by the Series to be an illiquid asset so
long as the Series acquires and holds the security with the intention of
reselling the security in the foreign trading market, the Series reasonably
believes it can readily dispose of the security for cash in the U.S. or foreign
market and current market quotations are readily available. Foreign exchange
gains and losses realized by a Series in connection with transactions involving
foreign currencies, foreign currency payables or receivables, and foreign
currency-denominated debt securities are subject to special tax rules which may
cause such gains and losses to be treated as ordinary income and losses rather
than capital gains and losses and may affect the amount and timing of the Series
income or loss from such transactions and in turn its distributions to
shareholders. These rules are discussed in the SAI.
Illiquid Investments. It is the policy of all Series that illiquid securities
(securities that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which the Series has valued the
securities) may not constitute, at the time of purchase, more than 10% of the
value of the total net assets of the Series. Subject to this limitation, the
Board has authorized each Series, except the U.S. Government Securities Series,
to invest in restricted securities where such investment is consistent with the
Series' investment objectives and has authorized such securities to be
considered liquid to the extent the Manager determines on a daily basis that
there is a liquid institutional or other market for such securities.
Notwithstanding the Manager's determinations in this regard, the Board will
remain responsible for such determinations and will consider appropriate action,
consistent with the objectives and policies of the Series holding such security,
if the security should become illiquid subsequent to its purchase. To the extent
a Series invests in restricted securities that are deemed liquid, the general
level of illiquidity in the Series may be increased if qualified institutional
buyers become uninterested in purchasing these securities or the market for
these securities contracts. See "How Does the Fund Invest It's Assets? " in the
SAI.
All Series are subject to a number of additional investment restrictions, some
of which may be changed only with the approval of the affected Series'
shareholders, which limit its activities to some extent. For a list of these
restrictions and more information concerning the policies discussed herein,
please see "How Does the Fund Invest Its Assets?" and "Investment Restrictions"
in the SAI.
What Are the Fund's Potential Risks?
- -------------------------------------------------------------------------------
High Yielding, Fixed-Income Securities
As previously indicated, the Income Series intends to invest a substantial
portion of its assets in lower rated, fixed-income securities and unrated
securities of comparable quality.
Corporate debt securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and general
market liquidity (market risk). Lower rated or unrated securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general level
of interest rates. The investment manager will consider both credit risk and
market risk in making investment decisions as to corporate debt obligations for
the Fund.
Bonds rated BB or below by S&P or Ba or below by Moody's (or comparable unrated
securities) are considered by S&P and Moody's, on balance, to be speculative and
questionable as to payment of principal and interest thereon. They will
generally involve more credit risk than securities in the higher rating
categories. Because of the Income Series' 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 Series 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 which is present with an investment in higher risk securities
such as those in which the Series invests.
The market value of lower rated, fixed-income securities and unrated securities
of comparable quality, commonly known as junk bonds, tend 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 bonds rated BBB by S&P or Baa by 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. As of September 30, 1995, 3
issues (from 3 separate issuers) out of 205 issues (excluding short-term
securities and cash equivalents) in the Income Series' portfolio were in
default. In the fiscal year ended September 30, 1995, 3 issues defaulted, and a
total of 14 issues defaulted over the prior three years, of which the Series
still holds the 3 issues mentioned above. Defaulted issues represented 0.70% of
the net assets of the Series at September 30, 1995. Current prices for defaulted
bonds are generally significantly lower than their purchase price, and the
Series may have unrealized losses on such defaulted securities which are
reflected in the price of the Series' shares. In general, securities which
default lose much of their value in the time period prior to the actual default
so that the Series' net assets are impacted prior to the default. The Series may
retain an issue which has defaulted because such issue may present an
opportunity for subsequent price recovery.
High yielding, fixed-income securities frequently have call or buy-back features
which permit an issuer to call or repurchase the securities from the Income
Series. Although such securities are typically not callable for a period from
three to five years after their issuance, when calls are exercised by the issuer
during periods of declining interest rates, the Series would likely have to
replace such called securities with lower yielding securities thus decreasing
the net investment income to the Series and dividends to shareholders. The
premature disposition of a high yielding security due to a call or buy-back
feature, the deterioration of the issuer's creditworthiness, or a default may
also make it more difficult for the Income Series to manage the timing of its
receipt of income, which may have tax implications. The Series may be required
under the Code and Treasury Regulations to accrue income for income tax purposes
on defaulted obligations and to distribute such income to the Series'
shareholders even though the Series 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 Series 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 the Series' shares.
The Income Series may have difficulty disposing of certain high yielding
securities because there may be a thin trading market for a particular security
at any given time. The market for lower rated, fixed-income securities generally
tends to be concentrated among a smaller number of dealers than is the case for
securities which trade in a broader secondary retail market. Generally,
purchasers of these securities are predominantly dealers and other institutional
buyers, rather than individuals. To the extent the secondary trading market for
a particular high yielding, fixed-income security does exist, it is generally
not as liquid as the secondary market for higher rated securities. Reduced
liquidity in the secondary market may have an adverse impact on market price and
the Series' ability to dispose of particular issues, when necessary, to meet the
Series' 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
Series to obtain market quotations based on actual trades for purposes of
valuing the Series' 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
this Prospectus and in the SAI.
The Series 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 Series is required to sell such restricted securities
before the securities have been registered, it may be deemed an underwriter of
such securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The Income Series may incur special costs in
disposing of such securities; however, the Series will generally incur no costs
when the issuer is responsible for registering the securities.
The Series may acquire high yielding, fixed-income securities during an initial
underwriting. Such securities involve special risks because they are new issues.
The Series has no arrangement with its underwriters or any other person
concerning the acquisition of such securities, and the Manager will carefully
review the credit and other characteristics pertinent to such new issues.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recent recession 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. Those adverse effects may continue even as the economy
recovers. Factors adversely impacting the market value of high yielding
securities will adversely impact the Series' net asset value. 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. In addition, the Series may incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings. However,
while market prices may be temporarily depressed due to these factors, the
ultimate security price will generally reflect the true operating results of the
issuer. The Series will rely on the Manager's judgment, analysis and experience
in evaluating the creditworthiness of an issuer. In this evaluation, the
investment manager will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and trends,
its operating history, the quality of the issuer's management and regulatory
matters.
The credit risk factors pertaining to lower rated securities also apply to
lower-rated zero coupon, deferred interest and pay-in-kind bonds. Such bonds
carry an additional risk in that, unlike bonds which pay interest throughout the
period to maturity, the Series will realize no cash until the cash payment date
and, if the issuer defaults, the Series may obtain no return at all on its
investment. Zero coupon, deferred interest and pay-in-kind bonds involve
additional special considerations.
Zero coupon or deferred interest securities are debt obligations which do not
entitle the holder to any periodic payments of interest prior to maturity or a
specified date when the securities begin paying current interest (the "cash
payment date") and therefore are generally issued and traded at a discount from
their face amounts or par value. The discount varies depending on the time
remaining until maturity or cash payment date, prevailing interest rates,
liquidity of the security and the perceived credit quality of the issuer. The
discount, in the absence of financial difficulties of the issuer, typically
decreases as the final maturity or cash payment date of the security approaches.
The market prices of zero coupon securities are generally more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero coupon
or deferred interest securities having similar maturities and credit quality.
Current federal income tax law requires that a holder of a zero coupon security
report as income each year the portion of the original issue discount on such
security that accrues that year, even though the holder receives no cash
payments of interest during the year.
Pay-in-kind bonds are securities which pay interest through the issuance of
additional bonds. The Series will be deemed to receive interest over the life of
such bonds and be treated as if interest were paid on a current basis for
federal income tax purposes, although no cash interest payments are received by
the Series until the cash payment date or until the bonds mature. Accordingly,
during periods when the Series 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 Series 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."
Public Utilities Industries Securities
The Utilities Series has substantial investments in the electric public
utilities industries which have certain characteristics and risks of which you
should be aware. 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 debts 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, this Series' investments in the Public Utilities
Industry have been predominantly in dividend-yielding common stocks.
GNMA Securities
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, however,
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. Moreover, 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 Series will have a direct impact on the net asset value
per share of the Series.
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 Series may invest are not as stable as in the U.S.
Furthermore, foreign issuers are not generally subject to uniform accounting,
auditing and financial standards and requirements comparable to those applicable
to U.S. corporate issuers. There may also be less government supervision and
regulation of foreign securities exchanges, brokers and issuers than exist in
the U.S. Restrictions and controls on investment in the securities markets of
some countries may have an adverse effect on the availability and costs to the
Series of investments in those countries. In addition, there may be the
possibility of expropriations, foreign withholding taxes, confiscatory taxation,
political, economic or social instability or diplomatic developments which could
affect assets of the Series invested in issuers in foreign countries.
There may be less publicly available information about foreign issuers than is
contained in reports and reflected in ratings published for U.S. issuers. Some
foreign securities markets have substantially less volume than the 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.
How You Participate in the
Results of the Fund's Activities
- -------------------------------------------------------------------------------
The assets of each Series are invested in portfolio securities. If the
securities owned by that Series increase in value, the value of the shares of
the Series which you own will increase. If the securities owned by a Series
decrease in value, the value of your shares will also decline. In this way, you
participate in any change in the value of the securities owned by the Series.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, you may anticipate that the value of Series
shares will fluctuate with movements in the broader equity and bond markets.
To the extent a Series' investments consist of debt securities, changes in
interest rates will affect the value of a Series' portfolio and thus its share
price. Increased rates of interest which frequently accompany higher inflation
and/or a growing economy are likely to have a negative effect on the value of a
Series' shares. To the extent the Series' investments consist of common stocks,
a decline in the market, expressed for example by a drop in the Dow Jones
Industrials or the Standard & Poor's 500 average or any other equity based
index, may also be reflected in declines in that Series' share price. History
reflects both increases and decreases in the prevailing rate of interest and in
the valuation of the market and these may reoccur unpredictably in the future.
A decline in the stock market of any country in which a Series is invested may
also be reflected in declines in the Series' share price. Changes in currency
valuations will also affect the price of a Series shares. History reflects both
decreases and increases in worldwide stock markets and currency valuations, and
these may reoccur unpredictably in the future.
Who Manages the Fund?
- -------------------------------------------------------------------------------
The Board has the primary responsibility for the overall management of the Fund
and for electing the officers of the Fund who are responsible for administering
the day-to-day operations of each Series.
The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of shares. Although the Board
does not expect to encounter material conflicts in the future, the Board will
continue to monitor the Fund and will take appropriate action to resolve such
conflicts if any should arise.
In developing the multiclass structure the Fund has retained the authority to
establish additional classes of shares. It is the Fund's present intention to
offer only two classes of shares of the Growth Series, Utilities Series, Income
Series, U.S. Government Securities Series, and one class of the DynaTech Series,
but new classes may be offered in the future.
Advisers, serves as the Fund's investment manager. Advisers is a wholly-owned
subsidiary of Resources, a publicly-owned holding company, the principal
shareholders of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its subsidiaries. Advisers acts as investment manager or administrator
to 36 U.S. registered investment companies (118 separate series) with aggregate
assets of over $80 billion.
The team responsible for the day-to-day management of each Series' portfolio is
listed under "Who Runs the Fund?"
Pursuant to a management agreement, the Manager supervises and implements each
Series' investment activities and provides certain administrative services and
facilities which are necessary to conduct the Series' business. The Manager
performs similar services for other funds and there may be times when the
actions taken with respect to the Series' portfolios will differ from those
taken by the Manager on behalf of other funds. Neither the Manager (including
its affiliates) nor its officers, directors or employees nor the officers and
directors of the Fund are prohibited from investing in securities held by the
Series or other funds which are managed or administered by the Manager to the
extent such transactions comply with the Fund's Code of Ethics. Please see
"Investment Advisory and Other Services" and "General Information" in the SAI
for further information on securities transactions and a summary of the Fund's
Code of Ethics.
The management fees and total operating expenses of the shares for each Series,
expressed as a percentage of average monthly net assets, for the fiscal year
ended September 30, 1995 were as follows:
<TABLE>
<CAPTION>
U.S. Government
Class I Growth Series DynaTech SeriesUtilities SeriesIncome Series Securities Series
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Management Fees............. 0.50% 0.63% 0.46% 0.46% 0.45%
Total Operating Expenses.... 0.90% 1.01% 0.73% 0.71% 0.61%
U.S. Government
Class II Growth Series Utilities SeriesIncome Series Securities Series
- ------------------------------------------------------------------------------------------------------
Management Fees............. 0.50% 0.46% 0.46% 0.45%
Total Operating Expenses.... 1.70% 1.26% 1.23% 1.18%
</TABLE>
Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in each Series'
portfolio securities will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. It is not anticipated that the U.S. Government
Securities Series will incur a significant amount of brokerage expenses because
GNMAs are generally traded in principal transactions that involve the receipt by
the broker of a spread between the bid and ask prices for the securities and not
the receipt of commissions. Further information is included under "How Does the
Fund Purchase Securities For Its Portfolios?" in the SAI.
Shareholder accounting and many of the clerical functions for each Series are
performed by Investor Services in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
Plans of Distribution
A separate plan of distribution has been approved and adopted for each class of
each Series ("Class I Plans" and "Class II Plans," respectively, or "Plans")
pursuant to Rule 12b-1 under the 1940 Act. The Rule 12b-1 fees charged to each
class of each Series are based solely on the distribution and, with respect to
the Class II Plan, servicing fees attributable to that particular class of such
Series. Under either Plan, the portion of fees remaining after payment to
securities dealers or others for distribution or servicing may be paid to
Distributors for routine ongoing promotion and distribution expenses incurred
with respect to such class of each Series' shares. Such expenses may include,
but are not limited to, the printing of prospectuses and reports used for sales
purposes, expenses of preparing and distributing sales literature and related
expenses, advertisements, and other distribution-related expenses, including a
prorated portion of Distributors' overhead expenses attributable to the
distribution of shares of each Series.
The maximum amount which a Series may reimburse to Distributors or others under
the Class I Plans for such distribution expenses is 0.25% per annum of Class I's
average daily net assets for the Growth Series and DynaTech Series and 0.15% per
annum of Class I's average daily net assets for the Utilities Series, Income
Series and U.S. Government Securities Series, payable on a quarterly basis. All
expenses of distribution in excess of this amount will be borne by Distributors,
or others who have incurred them, without reimbursement from such Series.
Under the Class II Plans, the Growth Series pays
to Distributors distribution and related expenses up to 0.75% per annum of its
Class II shares' daily net assets and the Utilities Series, Income Series, and
U.S. Government Securities Series pay to Distributors distribution and related
expenses up to 0.50% per annum of each Series' Class II daily net assets,
payable quarterly. Such fees may be used in order to compensate Distributors or
others for providing distribution and related services and bearing certain
expenses of the class. All expenses of distribution, marketing and related
services over that amount will be borne by Distributors or others who have
incurred them, without reimbursement by the Series. In addition, the Class II
Plans provide for an additional payment of up to 0.25% by the Growth Series and
up to 0.15% by the Utilities Series, Income Series and U.S. Government
Securities Series per annum of Class II's average daily net assets as a
servicing fee, payable quarterly. This fee will be used to pay securities
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 Series on behalf of customers, or similar activities related
to furnishing personal services and/or maintaining shareholder accounts.
Either Distributors or one of its affiliates may pay, from its own resources, a
commission of up to 1% of the purchase price of Class II shares to securities
dealers who initiate and are responsible for such purchases. During the first
year following such purchases, Distributors will retain a portion of Class II's
Rule 12b-1 fees attributable to such shares equal to 0.75% per annum of Class
II's average daily net assets for the Growth Series and 0.50% per annum of Class
II's average daily net assets for Utilities Series, Income Series and U.S.
Government Securities Series to partially recoup fees Distributors pays to
securities dealers in connection with initial purchases of Class II shares.
Both Plans cover any payments to or by the Series, Advisers, Distributors, or
other parties on behalf of the Series, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by a Series within the context
of Rule 12b-1. The payments under the Plans are included in the maximum
operating expenses which may be borne by each class of a Series. For more
information, including a discussion of the Board's policies with regard to the
amount of the Class I Plan's fees, please see "The Fund's Underwriter" in the
SAI.
What Distributions Might I Receive from the Fund?
- -------------------------------------------------------------------------------
You may receive two types of distributions from each Series:
1. Income dividends. Each Series receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Series' operations, is its net investment
income from which income dividends may be distributed.
Thus, the amount of dividends paid per share may vary with each distribution.
2. Capital gain distributions. Each Series may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by a Series derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Series as of October 31 of the current fiscal year
and any undistributed capital gains from the prior fiscal year. A Series may
make more than one distribution derived from net short-term and net long-term
capital gains in any year or adjust the timing of these distributions for
operational or other reasons.
Distributions To Each Class of Shares
According to the requirements of the Code, dividends and capital gains will be
calculated and distributed in the same manner for Class I and Class II shares of
each Series. The per share amount of any income dividends will generally differ
only to the extent that each class of each Series is subject to different Rule
12b-1 fees.
Distribution Date
Although subject to change by the Board, without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends monthly
in the U.S. Government Securities Series and Income Series for shareholders of
record on the last business day of the month, payable on or about the 15th day
of the following month. Each of the foregoing Series may determine to defer the
December 31 record date to a date shortly thereafter in January for tax or other
operational reasons. Dividends on the Utilities Series are generally declared
quarterly and those for Growth and DynaTech are generally declared annually.
The amount of income dividend payments by any Series is dependent upon the
amount of net income received by the Series from its portfolio holdings, is not
guaranteed and is subject to the discretion of the Board. Fund shares are quoted
ex-dividend on the first business day following the record date. The Series do
not pay "interest" or guarantees any fixed rate of return on an investment in
their shares.
In order to be entitled to a dividend, you must have acquired the shares of a
Series prior to the close of business on the record date. If you are considering
purchasing shares of a Series shortly before the record date of a distribution,
you should be aware that because the value of a Series' shares is based directly
on the amount of its net assets, rather than on the principle of supply and
demand, any distribution of income or capital gain will result in a decrease in
the value of the shares of the Series equal to the amount of the distribution.
While a dividend or capital gain distribution received shortly after purchasing
shares represents, in effect, a return of a portion of your investment, it may
be taxable as dividend income or capital gain.
Distribution Options
You may choose to receive your distributions from the Series in any of these
ways:
1. Purchase additional shares of the Series - You may purchase additional shares
of the same class of the Series (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 are a Class II shareholder,
you may also reinvest your distributions in Class I shares of the Series. This
is a convenient way to accumulate additional shares and maintain or increase
your earnings base.
2. Purchase shares of other Franklin Templeton Funds - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). If you are a Class II shareholder, you may also direct your
distributions to purchase 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 choose to receive dividends, or both
dividend and capital gain distributions in cash. You may have the money sent
directly to you, to another person, or to a checking account. If you choose to
send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
To select one of these options, please complete sections 6 and 7 of the
Shareholder Application included with this Prospectus or tell your investment
representative which option you prefer. If no option is selected, dividend and
capital gain distributions will be automatically reinvested in the same class of
the Series. You may change the distribution option selected at any time by
notifying the Series by mail or by telephone. Please allow at least seven days
prior to the record date for the Series to process the new option.
How Taxation Affects You and the Fund
- -------------------------------------------------------------------------------
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For additional information on tax matters
relating to the Fund and its shareholders see "Additional Information Regarding
Taxation" in the SAI.
Each Series is treated as a separate entity for federal income tax purposes.
Each Series intends to continue to qualify for treatment 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, each
Series will not be liable for federal income or excise taxes.
For federal income tax purposes, any income dividends which you receive from any
of the Series, as well as any distributions derived from the excess of net
short-term capital gain over net long-term capital loss, are treated as ordinary
income whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned shares of the Series 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 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 you on December 31 of the calendar year in which they are
declared.
Redemptions and exchanges of the shares of a Series are taxable events on which
you may realize a gain or loss. Any loss incurred on the sale or exchange of a
Series' shares, held for six months or less, will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares.
Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by a fund from direct obligations of the U.S.
government, subject in some states to minimum investment requirements that must
be met by each Series. Investments in GNMA securities do not generally qualify
for tax-free treatment. At the end of each calendar year, each Series will
provide you with the percentage of any dividends paid which may qualify for such
tax-free treatment. You should consult with your own tax advisors with respect
to the application of your state and local income tax laws to these
distributions.
The Series 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 advisors regarding the applicability of U.S.
withholding or other taxes to distributions received by you from a Series and
the application of foreign tax laws to these distributions.
You should also consult your tax advisors with respect to the applicability of
any state and local intangible property or income taxes to your shares of a
Series and distributions and redemption proceeds received from such Series.
How Do I Buy Shares?
- -------------------------------------------------------------------------------
You may buy shares to open an account in a Series with as little as $100 and
make additional investments at any time with as little as $25. If you are buying
shares through a retirement plan established by the Franklin Templeton Group,
these minimums may be waived. To open your account, contact your investment
representative or complete and sign the enclosed Shareholder Application and
return it to the Series with your check. Please indicate which class of shares
you want to buy. If you fail to specify a class, your purchase will
automatically be invested in Class I shares.
Deciding Which Class of Growth Series,
Utilities Series, Income Series or
U.S. Government Securities Series to Buy
When deciding which class of shares to buy, you should consider a number of
factors, including the amount you expect to invest and the length of time you
expect to hold your investment. If you plan to invest $1 million or more in a
single payment or you qualify to buy Class I shares at net asset value, you may
not buy Class II shares.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Series over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you intend to purchase $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in Franklin Templeton Funds; and
o you intend to make substantial redemptions within approximately six years or
less of investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees, which 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
Rights of Accumulation programs, but intend 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 will therefore be automatically invested in Class I shares.
You may accumulate more than $1 million in Class II shares through purchases
over time, but if you intend 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
You may buy shares at the public offering price of the class you wish to
purchase unless you qualify to purchase shares at a discount or without a sales
charge as discussed below. The front-end sales charge for Class II shares is 1%
and, unlike Class I shares, does not vary based upon the size of your purchase.
<TABLE>
<CAPTION>
Total Sales Charge
As a Percentage of Amount Allowed to
Growth and DynaTech Series Net Amount Dealer as a Percentage
Size of Transaction at Offering Price Offering Price Invested of Offering Price*
- ---------------------------------------------------------------------------------------------------------
Class I
<S> <C> <C> <C>
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 II - Growth Series Only
Under $1,000,000+...................... 1.00%** 1.01% 1.00%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. Distributors may at times allow
the entire sales charge to the securities dealer. A securities dealer who
receives 90% or more of the sales commission may be deemed an underwriter under
the Securities Act of 1933, as amended.
**A contingent deferred sales charge of 1% may be imposed on: (i) certain
redemptions of all or a part of an investment of $1 million or more in Class I
shares; and (ii) redemptions of Class II shares within 18 months of their
purchase. See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
***Please see "General - Other Payments to Securities Dealers" below for a
discussion of payments Distributors may make to securities dealers out of its
own resources.
+Purchases of Class II shares are limited to purchases below $1 million. See
"Deciding Which Class to Buy."
<TABLE>
<CAPTION>
Total Sales Charge
As a Percentage of Amount Allowed to
Income, Utilities and U.S. Government Securities Series Net Amount Dealer as a Percentage
Size of Transaction at Offering Price Offering Price Invested of Offering Price*
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Class I
<S> <C> <C> <C>
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%
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</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. Distributors may at times allow
the entire sales charge to the securities dealer. A securities dealer who
receives 90% or more of the sales commission may be deemed an underwriter under
the Securities Act of 1933, as amended.
**A contingent deferred sales charge of 1% may be imposed on: (i) certain
redemptions of all or a part of an investment of $1 million or more in Class I
shares; and (ii) redemptions of Class II shares within 18 months of their
purchase. See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
***Please see "General - Other Payments to Securities Dealers" below for a
discussion of payments Distributors may make to securities dealers out of its
own resources.
+Purchases of Class II shares are limited to purchases below $1 million. See
"Deciding Which Class to Buy."
The offering price for each class will be calculated to two decimal places using
standard rounding criteria.
Quantity Discounts in Sales Charges -
Class I Shares Only
As shown in the table above, the sales charge you pay when you buy Class I
shares may be reduced based upon the size of your purchase.
Rights of Accumulation. To determine if you may pay a reduced sales charge, you
may add the cost or current value, whichever is higher, of your Class I and
Class II shares in other Franklin Templeton Funds, as well as those of your
spouse, children under the age of 21 and grandchildren under the age of 21, to
the amount of your current Class I purchase. To receive the reduction, you or
your investment representative must notify Distributors that your investment
qualifies for a discount.
Letter of Intent. You may purchase 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. You or your investment representative must inform us that the
Letter is in effect each time you purchase shares.
By completing the Letter of Intent section of the Shareholder Application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve five percent (5%) of the amount of the
total intended purchase in Class I shares registered in your name.
o You grant Distributors a security interest in these shares and appoint
Distributors as attorney-in-fact with full power of substitution to redeem any
or all of these reserved shares to pay any unpaid sales charge if you do not
fulfill the terms of the Letter.
o We will include the reserved shares in the total shares you own as reflected
on your periodic statements.
o You will receive dividend and capital gain distributions on the reserved
shares; we will pay or reinvest these distributions as you direct.
o Although you may exchange your shares, you may not liquidate reserved shares
until you complete the Letter or pay the higher sales charge.
o Our policy of reserving shares does not apply to certain benefit plans
described under "Purchases at Net Asset Value."
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy and Sell Shares? - Letter of Intent" in the SAI or call our
Shareholder Services Department.
Group Purchases. If you are a member of a qualified group, you may purchase
Class I shares at the reduced sales charge applicable to the group as a whole.
The sales charge is based on the combined dollar value of the group members'
existing investments, plus the amount of the current purchase. For example, if
group members previously invested and still hold $80,000 of shares in a Series
and invest $25,000, the sales charge will be 3.75% for the Growth and DynaTech
Series and 3.50% for the Income, Utilities and U.S. Government Securities
Series.
We define a qualified group as one which (i) has been in existence for more than
six months, (ii) has a purpose other than acquiring shares in the Series of the
Fund at a discount and (iii) satisfies uniform criteria which enable
Distributors to realize economies of scale in its costs of distributing shares.
In addition, a qualified group must have more than 10 members, and be available
to arrange for meetings between our representatives and group members. It must
also agree to include sales and other materials related to the Franklin
Templeton Funds in publications and mailings to its members at reduced or no
cost to Distributors, and arrange for payroll deduction or other bulk
transmission of investments to the Series.
If you select a payroll deduction plan, your investments will continue
automatically until you notify the Series and your employer to discontinue
further investments. Due to the varying procedures used by employers to handle
payroll deductions, there may be a delay between the time of the payroll
deduction and the time the money reaches the Series. We invest your purchase at
the applicable offering price per share determined on the day that the Series
receives both the check and the payroll deduction data in required form.
Purchases at Net Asset Value
You may invest money from the following sources in Class I shares of the Series
of the Fund without paying front-end or contingent deferred sales charges. You
may also purchase Class II shares without paying front-end or contingent
deferred sales charges if the source of your investment proceeds is included in
paragraph (i) below:
(i) a distribution that you have received from a Franklin Templeton Fund or a
real estate investment trust ("REIT") sponsored or advised by Franklin
Properties, Inc., if the distribution is returned within 365 days of its payment
date. When you return the distribution, please include a written request to
reinvest the money at net asset value. You may reinvest Class II distributions
in either Class I or Class II shares, but Class I distributions may only be
invested in Class I shares under this privilege. For more information, see
"Distribution Options" under "What Distributions Might I Receive from the Fund?"
or call Shareholder Services at 1-800/632-2301;
(ii) a redemption from a mutual fund with investment objectives similar to those
of the Series, if (a) your investment in that fund was subject to either a
front-end or contingent deferred sales charge at the time of purchase, (b) the
fund is not part of the Franklin Templeton Funds, and (c) your redemption
occurred within the past 60 days;
(iii) a distribution from an existing retirement plan already invested in the
Franklin Templeton Funds (including the Franklin Templeton Profit Sharing 401(k)
plan), up to the total amount of the distribution. When you return the
distribution, please include a written request to reinvest the money at net
asset value. The distribution must be returned to the Series within 365 days of
the distribution date; or
(iv) a redemption from Templeton Institutional Funds, Inc., if you then reinvest
the redemption proceeds under an employee benefit plan qualified under Section
401 of the Code, in shares of the Series.
You may also reinvest the proceeds from a redemption of any of the Franklin
Templeton Funds in Class I or Class II shares of the Series of the Fund at net
asset value. To do so, you must (a) have paid a sales charge on the purchase or
sale of the original shares, (b) reinvest the redemption money in the same class
of shares, and (c) request the reinvestment of the money in writing to the
Series within 365 days of the redemption date. You may reinvest up to the total
amount of the redemption proceeds under this privilege. If a different class of
shares is purchased, the full front-end sales charge must be paid at the time of
purchase of the new shares. While you will receive credit for any contingent
deferred sales charge paid on the shares redeemed, a new contingency period will
begin. Shares that were no longer subject to a contingent deferred sales charge
will be reinvested at net asset value and will not be subject to a new
contingent deferred sales charge. Shares exchanged into other Franklin Templeton
Funds are not considered "redeemed" for this privilege (see "What If My
Investment Outlook Changes? - Exchange Privilege").
If you immediately reinvested your redemption proceeds in a Franklin Bank
Certificate of Deposit ("CD") but you would like to reinvest them back into the
Franklin Templeton Funds as described above, you will have 365 days from the
date the CD (including any rollover) matures to do so.
If your securities dealer or another financial institution reinvests your money
in the Series at net asset value for you, that person or institution may charge
you a fee for this service.
A redemption is a taxable transaction, but reinvestment without a sales charge
may affect the amount of gain or loss you recognize and the tax basis of the
shares reinvested. If you have a loss on the redemption, the loss may be
disallowed if you reinvest in the same fund within a 30-day period. If you would
like more information regarding the possible tax consequences of such a
reinvestment, please see the tax section of this Prospectus and the SAI.
Certain categories of investors also qualify to purchase Class I shares of the
Series of the Fund at net asset value regardless of the source of the investment
proceeds. If you or your account is included in one of the categories below,
none of the Class I shares you purchase will be subject to front-end or
contingent deferred sales charges:
(i) companies exchanging shares or selling assets pursuant to a merger,
acquisition or exchange offer;
(ii) accounts managed by the Franklin Templeton Group;
(iii) certain unit investment trusts and unit holders of these trusts
reinvesting distributions from the trusts in the Series;
(iv) registered securities dealers and their affiliates, for their investment
accounts only;
(v) current employees of securities dealers and their affiliates and their
family members, in accordance with the internal policies and procedures of the
employing securities dealer and affiliate;
(vi) broker-dealers who have entered into a supplemental agreement with
Distributors, or registered investment advisors affiliated with such
broker-dealers, on behalf of their clients who are participating in a
comprehensive fee program (sometimes known as a wrap fee program);
(vii) any state, county, or city, or any instrumentality, department, authority
or agency thereof which has determined that the Series is a legally permissible
investment and which is prohibited by applicable investment laws from paying a
sales charge or commission in connection with the purchase of shares of any
registered management investment company ("an eligible governmental authority").
IF YOU ARE SUCH AN INVESTOR, PLEASE CONSULT YOUR OWN LEGAL ADVISORS TO DETERMINE
WHETHER AND TO WHAT EXTENT THE SHARES OF THE SERIES CONSTITUTE LEGAL
INVESTMENTS. Municipal investors considering investment of proceeds of bond
offerings into the Series should consult with expert counsel to determine the
effect, if any, of various payments made by the Series or its investment manager
on arbitrage rebate calculations. If you are a securities dealer who has
executed a dealer agreement with Distributors and, through your services, an
eligible governmental authority invests in the Series at net asset value,
Distributors or one of its affiliates may make a payment, out of its own
resources, to you in an amount not to exceed 0.25% of the amount invested.
Please contact the Franklin Templeton Institutional Services Department for
additional information;
(viii) officers, trustees, directors and full-time employees of the Franklin
Templeton Funds, or of the Franklin Templeton Group, and their family members.
Although you may pay sales charges on investments in accounts opened after your
association with us has ended, you may continue to invest in accounts opened
while you were with us without paying sales charges;
(ix) trust companies and bank trust departments that exercise exclusive
discretionary investment authority over funds held in a fiduciary, agency,
advisory, custodial or similar capacity and agree to invest at least $1 million
in Franklin Templeton Funds over a 13-month period. We will accept orders for
such accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with payment
by federal funds received by the close of business on the next business day
following such order;
(x) insurance company separate accounts investing for pension plan contracts;
(xi) trustees or other fiduciaries purchasing securities for certain retirement
plans of organizations with collective retirement plan assets of $10 million or
more, without regard to where such assets are currently invested; or
(xii) Designated Retirement Plans. Non-Designated Retirement Plans may also
qualify to purchase shares of the Series under this privilege if they meet the
requirements described under "Group Purchases," above.
If you would like more information, please see "How Do I Buy and Sell Shares?"
in the SAI.
How Do I Buy Shares in Connection
with Tax-Deferred Retirement Plans?
Your individual or employer-sponsored tax-deferred retirement plans may invest
in the Series of the Fund. You may use the Series for an existing retirement
plan, or, because Trust Company can serve as custodian or trustee for retirement
plans, you may ask Trust Company to provide the plan documents and serve as
custodian or trustee. A plan document must be adopted in order for a retirement
plan to be in existence.
Brochures for Trust Company plans contain important information regarding
eligibility, contribution and deferral limits and distribution requirements.
Please note that you must use an application other than the one contained in
this Prospectus to establish a retirement plan account with Trust Company. To
obtain a retirement plan brochure or application, please call 1-800/DIAL BEN
(1-800/342-5236). Trust Company is an affiliate of Distributors.
Please see "How Do I Sell Shares?" for information regarding redemptions from
retirement plan accounts. You must complete specific forms in order to receive
distributions from Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or benefits and
pension plan consultants before choosing a retirement plan. In addition, if you
are a retirement plan investor, you should consider consulting your investment
representatives or advisors about investment decisions within your plans.
General
The Fund continuously offers it shares through securities dealers who have an
agreement with Distributors. The Fund and Distributors may refuse any order for
the purchase of shares. Currently, the DynaTech and Growth Series do not allow
investments by "Timing Accounts." Timing Accounts generally include accounts
administered so as to buy, sell or exchange shares based upon certain
predetermined market indicators.
Securities laws of states in which each Series offers its shares may differ from
federal law. Banks and financial institutions that sell shares of any Series may
be required to register as securities dealers pursuant to state law.
Other Payments to Securities Dealers. Distributors will pay the following
commissions, out of its own resources, to securities dealers who initiate and
are responsible for Class I purchases of $1 million or more of the Dynatech and
Growth Series: 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 the Income,
Utilities and U.S. Government Securities Series: 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 breakpoints are reset every 12 months for purposes of
additional purchases.
Distributors or one of its affiliates may also pay up to 1% of the purchase
price to securities dealers who initiate and are responsible for Class I
purchases of any Series made at net asset value by any of the entities described
in paragraphs (ix), (xi) or (xii) under "Purchases at Net Asset Value" above. In
addition, the Income, Utilities and U.S. Government Securities Series may pay up
to 0.75% of the purchase price to securities dealers who initiate and are
responsible for purchases made at net asset value by Non-Designated Retirement
Plans. Please see "How Do I Buy and Sell Shares?" in the SAI for the breakpoints
applicable to these purchases.
For Class II purchases, either Distributors or one of its affiliates may pay
securities dealers, out of its own resources, up to 1% of the purchase price. To
partially recoup these payments, Distributors will keep part of the Rule 12b-1
fees assessed to the shares during the first year following their purchase.
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with the
sale of shares of the Franklin Templeton Funds. In some cases, this compensation
may be available only to securities dealers whose representatives have sold or
are expected to sell significant amounts of shares of the Franklin Templeton
Funds. Compensation may include financial assistance and payments made in
connection with conferences, sales or training programs for employees of the
securities dealer, seminars for the public, advertising, sales campaigns and/or
shareholder services, programs regarding one or more of the Franklin Templeton
Funds and other programs or events sponsored by securities dealers, and payment
for travel expenses of invited registered representatives and their families,
including lodging, in connection with business meetings or seminars located
within or outside the United States. Securities dealers may not use sales of the
Series' shares to qualify for this compensation if prohibited by the laws of any
state or self-regulatory agency, such as the National Association of Securities
Dealers, Inc. None of this compensation is paid for by the Series or their
shareholders.
For additional information about shares of the Series, please see "How Do I Buy
and Sell Shares?" in the SAI. The SAI also includes a listing of the officers
and directors of the Fund who are affiliated with Distributors. See "Officers
and Directors."
What Programs and Privileges Are
Available to Me as a Shareholder?
- -------------------------------------------------------------------------------
Certain of the programs and privileges described in this section may not be
available directly from a Series if your shares are held, of record, by a
financial institution or in a "street name" account or networked account through
the National Securities Clearing Corporation ("NSCC") (see "Registering Your
Account" in this Prospectus).
Share Certificates
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of each Series of
the Fund, without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by you, can be 2% or more of the value of the lost,
stolen or destroyed certificate. A certificate will be issued if requested by
you or your securities dealer.
Confirmations
A confirmation statement will be sent to you quarterly for a Series paying
dividends on a quarterly or more frequent basis to reflect the dividends
reinvested during that period and after each dividend for a Series paying
dividends less frequently than quarterly and after each other transaction which
affects your account. This statement will also show the total number of shares
you own, including the number of shares in "plan balance" for your account.
Automatic Investment Plan
The Automatic Investment Plan offers a convenient way to invest in the Series of
the Fund. Under the plan, you can arrange to have money transferred
automatically from your checking account to the Series each month to purchase
additional shares. If you are interested in this program, please refer to the
Automatic Investment Plan Application at the back of this Prospectus for the
requirements of the program or contact your investment representative. Of
course, the market value of the Series' shares may fluctuate and a systematic
investment plan such as this will not assure a profit or protect against a loss.
You may terminate the program at any time by notifying Investor Services by mail
or by phone.
Systematic Withdrawal Plan
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply.
If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Shareholder Application included with
this Prospectus and indicate how you would like to receive your payments. You
may choose to receive your payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. Receive payments in cash - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Series will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the
Series. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be closed
and the remaining balance in your account will be sent to you. Redemptions under
a Systematic Withdrawal Plan are considered a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than your
actual yield or income, part of the payment may be a return of your investment.
While a Systematic Withdrawal Plan is in effect, shares must be held either in
plan balance or, where share certificates are outstanding, deposited with the
Series. You should ordinarily not make additional investments in the Series of
less than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases. Shares redeemed under the
plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Series may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Series
receives notification of the shareholder's death or incapacity.
Electronic Fund Transfers
You may choose to have distributions from the Series or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Series available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
What If My Investment Outlook Changes? - Exchange Privilege
- -------------------------------------------------------------------------------
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, a Series' shares may be exchanged
for the same class of shares of other Franklin Templeton Funds which are
eligible for sale in your state of residence and in conformity with such fund's
stated eligibility requirements and investment minimums. Some funds, however,
may not offer Class II shares. Class I shares may be exchanged for Class I
shares of any of the other Franklin Templeton Funds. Class II shares may be
exchanged for Class II shares of any of the other Franklin Templeton Funds. No
exchanges between different classes of shares will be allowed. A contingent
deferred sales charge will not be imposed on exchanges. If, however, the
exchanged shares were subject to a contingent deferred sales charge in the
original fund purchased and shares are subsequently redeemed within the
contingency period, a contingent deferred sales charge will be imposed. Before
making an exchange, you should review the prospectus of the fund you wish to
exchange from and the fund you wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
limitations on a fund's sale of its shares, minimum holding periods for
exchanges at net asset value, or applicable sales charges.
You may exchange shares in any of the following ways:
By Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
By Telephone
You or your investment representative of record, if any, may exchange shares of
a Series by calling Investor Services at 1-800/632-2301 or the automated
Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753. If you do not
wish this privilege extended to a particular account, you should notify the Fund
or Investor Services.
The telephone exchange privilege allows you to effect exchanges from the Series
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "Telephone Transactions - Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
Through Securities Dealers
As is the case with all purchases and redemptions of a Series' shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "By Telephone" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in your account or for which certificates have previously been
deposited. A securities dealer may charge a fee for handling an exchange.
Additional Information Regarding Exchanges
Exchanges of the same class of shares are made on the basis of the net asset
value of the class involved, except as set forth below. Exchanges of shares of a
class of a Series which were purchased without a sales charge will be charged a
sales charge in accordance with the terms of the prospectus of the fund and the
class of shares being purchased, unless the original investment in the Franklin
Templeton Funds was made pursuant to the privilege permitting purchases at net
asset value, as discussed under "How Do I Buy Shares?" Exchanges of Class I
shares of a Series which were purchased with a lower sales charge into a fund
which has a higher sales charge will be charged the difference, unless the
shares were held in the Series for at least six months prior to executing the
exchange.
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be transferred to
the fund being exchanged into and will be invested at net asset value. Because
the exchange is considered a redemption and purchase of shares, you may realize
a gain or loss for federal income tax purposes. Backup withholding and
information reporting may also apply. Information regarding the possible tax
consequences of such an exchange is included in the tax section in this
Prospectus and under "Additional Information Regarding Taxation" in the SAI.
If a substantial portion of a Series' shareholders should, within a short
period, elect to redeem their shares of that Series pursuant to the exchange
privilege, the Series might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of each
Series to initially invest this money in short-term, interest-bearing money
market instruments, unless it is felt that attractive investment opportunities
consistent with the Series' investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The exchange privilege may be modified or discontinued by the Series at any time
upon 60 days' written notice to shareholders.
Exchanges of Class I Shares
The contingency period during which a contingent deferred sales charge may be
assessed for Class I shares will be tolled (or stopped) for the period such
shares are exchanged into and held in a Franklin or Templeton Class I money
market fund. If a Class I account has shares subject to a contingent deferred
sales charge, Class I shares will be exchanged into the new account on a
"first-in, first-out" basis. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge" for a discussion of investments subject to a contingent deferred
sales charge.
Exchanges of Class II Shares
When an account is composed of Class II shares subject to the contingent
deferred sales charge, and Class II shares that are not, the shares will be
transferred proportionately into the new fund. Shares received from reinvestment
of dividends and capital gains are referred to as "free shares," shares which
were originally subject to a contingent deferred sales charge but to which the
contingent deferred sales charge no longer applies are called "matured shares,"
and shares still subject to the contingent deferred sales charge are referred to
as "CDSC liable shares." CDSC liable shares held for different periods of time
are considered different types of CDSC liable shares. For instance, if you have
$1,000 in free shares, $2,000 in matured shares, and $3,000 in CDSC liable
shares, and 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.
Similarly, if CDSC liable shares have been purchased at different periods, a
proportionate amount will be taken from shares held for each period. If, for
example, you hold $1,000 in shares bought 3 months ago, $1,000 bought 6 months
ago, and $1,000 bought 9 months ago, and you exchange $1,500 into the new fund,
$500 from each of these shares will be deemed exchanged into the new fund.
The only money market fund exchange option available to Class II shareholders is
the Franklin Templeton Money Fund II ("Money Fund II"), a series of the Franklin
Templeton Money Fund Trust. No drafts (checks) may be written on Money Fund II
accounts, nor may Class II shareholders purchase shares of Money Fund II
directly. Class II shares exchanged for shares of Money Fund II will continue to
age, for purposes of calculating the contingent deferred sales charge, because
they continue to be subject to Rule 12b-1 fees. The contingent deferred sales
charge will be assessed if CDSC liable shares are redeemed. Class I shares may
be exchanged for shares of any of the money market funds in the Franklin
Templeton Funds except Money Fund II. Draft writing privileges and direct
purchases are allowed on these other money market funds as described in their
respective prospectuses.
To the extent shares are exchanged proportionately, as opposed to another
method, such as first-in first-out or free shares followed by CDSC liable
shares, the exchanged shares may, in some instances, be CDSC liable even though
a redemption of such shares, as discussed elsewhere herein, may no longer be
subject to a contingent deferred sales charge. The proportional method is
believed by management to more closely meet and reflect the expectations of
Class II shareholders in the event shares are redeemed during the contingency
period. For federal income tax purposes, the cost basis of shares redeemed or
exchanged is determined under the Code without regard to the method of
transferring shares chosen by the Fund.
Retirement Plan Accounts
Franklin Templeton IRA and 403(b) retirement plan accounts may exchange shares
directly. Certain restrictions may apply, however, to other types of retirement
plans. See "Restricted Accounts" under "Telephone Transactions."
Timing Accounts
Accounts which are administered by allocation or market timing services to
exchange shares based on predetermined market indicators ("Timing Accounts")
will be charged a $5.00 administrative service fee per each such exchange. All
other exchanges are without charge.
The Growth Series and DynaTech Series currently will not accept investments from
Timing Accounts.
Restrictions on Exchanges
In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently terminate the exchange
privilege or reject any specific purchase order for any Timing Account or any
person whose transactions seem to follow a timing pattern who: (i) makes an
exchange request out of a Series within two weeks of an earlier exchange request
out of that Series, or (ii) makes more than two exchanges out of a Series per
calendar quarter, or (iii) exchanges shares equal in value to at least $5
million, or more than 1% of the Series' net assets. Accounts under common
ownership or control, including accounts administered so as to redeem or
purchase shares based upon certain predetermined market indicators, will be
aggregated for purposes of the exchange limits.
Each Series reserves the right to refuse the purchase side of an exchange
request by any Timing Account, person, or group if, in the Manager's judgment,
the Series would be unable to invest effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected. The purchase side of an exchange may be restricted or refused if the
Series receives or anticipates simultaneous orders affecting significant
portions of the Series' assets. In particular, a pattern of exchanges that
coincide with a "market timing" strategy may be disruptive to the Series and
therefore may be refused.
The Fund and Distributors, as indicated under "How Do I Buy Shares?", reserve
the right to refuse any order for the purchase of shares.
Transfers
Transfers between identically registered accounts in the same fund and class are
treated as non-monetary and non-taxable events and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Shares of each class will be transferred on
the same basis as described above for exchanges.
Conversion Rights
It is not presently anticipated that Class II shares will be convertible to
Class I shares. You may, however, sell Class II shares and use the proceeds to
purchase Class I shares, subject to all applicable sales charges.
How Do I Sell Shares?
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You may liquidate your shares at any time and receive from the Series the value
of the shares. You may redeem shares in any of the following ways:
By Mail
Send a written request signed by all registered owners to Investor Services, at
the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. You will then receive from the Series the
value of the class of shares redeemed based upon the net asset value per share
(less a contingent deferred sales charge, if applicable) next computed after the
written request in proper form is received by Investor Services. Redemption
requests received after the time at which the net asset value is calculated will
receive the price calculated on the following business day. The net asset value
per share of each class is determined as of the scheduled close of the Exchange
(generally 1:00 p.m. Pacific time) each day that the Exchange is open for
trading. You are requested to provide a telephone number where you may be
reached during business hours, or in the evening if preferred. Investor
Services' ability to contact you promptly when necessary will speed the
processing of the redemption.
To be considered in proper form, signatures must be guaranteed if the redemption
request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
address of record, preauthorized bank account or brokerage firm
account;
(4) share certificates, if the redemption proceeds are in excess of $50,000;
or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated
or may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signatures must be guaranteed by an "eligible guarantor institution" as defined
under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are advised,
for your protection, to send the share certificate and assignment form in
separate envelopes if they are being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officers of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustees and (2)
a copy of the pertinent pages of the trust document listing the trustees or a
Certification for Trust if the trustees are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and applicable state
law since these accounts have varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
By Telephone
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this Prospectus, you may redeem
shares of the Fund by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts." You may obtain
additional information about telephone redemptions by writing to the Fund or
Investor Services at the address shown on the cover or by calling
1-800/632-2301. The Fund and Investor Services will employ reasonable procedures
to confirm that instructions given by telephone are genuine. You, however, bear
the risk of loss in certain cases as described under "Telephone Transactions -
Verification Procedures."
If your account has a completed Agreement on file, redemptions of uncertificated
shares or shares which have previously been deposited with a Series or Investor
Services may be made for up to $50,000 per day per Series account. Telephone
redemption requests received before the scheduled close of the Exchange
(generally 1:00 p.m. Pacific time) on any business day will be processed that
same day. The redemption check will be sent within seven days, made payable to
all the registered owners on the account, and will be sent only to the address
of record. Redemption requests by telephone will not be accepted within 30 days
following an address change by telephone. In that case, you should follow the
other redemption procedures set forth in this Prospectus. Institutional accounts
(certain corporations, bank trust departments, qualified retirement plans and
government entities which qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) that wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from the Franklin Templeton Institutional Services Department by
calling 1-800/321-8563.
Through Securities Dealers
Each Series will accept redemption orders from securities dealers who have
entered into an agreement with Distributors. This is known as a repurchase. The
only difference between a normal redemption and a repurchase is that if you
redeem shares through a dealer, the redemption price will be the net asset value
next calculated after your dealer receives the order which is promptly
transmitted to a Series, rather than on the day the Series receives your written
request in proper form. The documents described under "By Mail" above, as well
as a signed letter of instruction, are required regardless of whether you redeem
shares directly or submit such shares to a securities dealer for repurchase.
Your letter should reference the Series and the class, the account number, the
fact that the repurchase was ordered by a dealer and the dealer's name. Details
of the dealer-ordered trade, such as trade date, confirmation number, and the
amount of shares or dollars, will help speed processing of the redemption. The
seven-day period within which the proceeds of your redemption will be sent will
begin when the Series receives all documents required to complete ("settle") the
repurchase in proper form. The redemption proceeds will not earn dividends or
interest during the time between receipt of the dealer's repurchase order and
the date the redemption is processed upon receipt of all documents necessary to
settle the repurchase. Thus, it is in your best interest to have the required
documentation completed and forwarded to the Series as soon as possible. Your
dealer may charge a fee for handling the order. See "How Do I Buy and Sell
Shares?" in the SAI for more information on the redemption of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers, all or a portion of
Class I investments of $1 million or more and any Class II investments redeemed
within the contingency period (12 months for Class I and 18 months for Class II)
will be assessed a contingent deferred sales charge, unless one of the
exceptions described below applies. The charge is 1% of the lesser of the value
of the shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the net asset value at the time of purchase of such shares,
and is retained by Distributors. The contingent deferred sales charge is waived
in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: specified net asset value purchases discussed under "How Do I
Buy Shares? - Purchases at Net Asset Value;" exchanges; any account fees;
distributions from an individual retirement plan account due to death or
disability or upon periodic distributions based on life expectancy; tax-free
returns of excess contributions from employee benefit plans; distributions from
employee benefit plans, including those due to termination or plan transfer;
redemptions initiated by a Series due to an account falling below the minimum
specified account size; court-ordered redemptions from any UTMA account;
redemptions following the death of the shareholder or beneficial owner; and
redemptions through a Systematic Withdrawal Plan set up for shares prior to
February 1, 1995, and for Systematic Withdrawal Plans set up thereafter,
redemptions of up to 1% monthly of an account's net asset value (3% quarterly,
6% semiannually or 12% annually). For example, if a Class I account maintained
an annual balance of $1,000,000, only $120,000 could be withdrawn through a
once-yearly Systematic Withdrawal Plan free of charge. Any amount over that
$120,000 would be assessed a 1% contingent deferred sales charge. Likewise, if a
Class II account maintained an annual balance of $10,000, only $1,200 could be
withdrawn through a once-yearly Systematic Withdrawal Plan free of charge.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests for redemptions of a specified dollar
amount will result in additional shares being redeemed to cover any applicable
contingent deferred sales charge, while requests for redemption of a specific
number of shares will result in the applicable contingent deferred sales charge
being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
Each Series may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase shares of a Series, which may
take up to 15 days or more. Although the use of a certified or cashier's check
will generally reduce this delay, shares purchased with these checks will also
be held pending clearance. Shares purchased by federal funds wire are available
for immediate redemption.
The right of redemption may be suspended or the date of payment postponed if the
Exchange is closed (other than customary closing) or upon the determination of
the SEC that trading on the Exchange is restricted or an emergency exists, or if
the SEC permits it, by order, for the protection of shareholders. Of course, the
amount received may be more or less than the amount you invested, depending on
fluctuations in the market value of securities owned by a Series.
Retirement Plan Accounts
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement plan account, you or your securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such plans to a
participant under age 591/2, unless the distribution meets one of the exceptions
set forth in the Code.
Other Information
Distribution or redemption checks sent to you do not earn interest or any other
income during the time such checks remain uncashed and neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
Telephone Transactions
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By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer shares of a
Series in one account to another identically registered account in the Series,
(iv) request the issuance of certificates (to be sent to the address of record
only) and (v) exchange shares of a Series as described in this Prospectus by
telephone. In addition, if you complete and file an Agreement as described under
"How Do I Sell Shares? - By Telephone" you will be able to redeem shares of a
Series.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to you caused by an unauthorized transaction. The Fund and
Investor Services may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not followed. You are,
of course, under no obligation to apply for or accept telephone transaction
privileges. In any instance where the Fund or Investor Services is not
reasonably satisfied that instructions received by telephone are genuine, the
requested transaction will not be executed, and neither the Fund nor Investor
Services will be liable for any losses which may occur because of a delay in
implementing a transaction.
Restricted Accounts
Telephone redemptions and dividend option changes may not be accepted on
Franklin Templeton retirement accounts. To assure compliance with all applicable
regulations, special forms are required for any redemption, distribution or
dividend payment changes. While the telephone exchange privilege is extended to
Franklin Templeton IRA and 403(b) retirement accounts, certain restrictions may
apply to other types of retirement plans.
To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plan Specialist at 1-800/527-2020.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In such situations, you may wish to contact your investment
representative for assistance or send written instructions to the Fund as
detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from your inability to execute a telephone transaction.
How Are Fund Shares Valued?
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The net asset value per share of each class of a Series is determined separately
as of the scheduled close of the Exchange (generally 1:00 p.m. Pacific time)
each day that the Exchange is open for trading. Many newspapers carry daily
quotations of the prior trading day's closing "bid" (net asset value) and "ask"
(offering price).
The net asset value per share of each class of a Series is determined by
deducting the aggregate gross value of all liabilities of each class from the
aggregate gross value of all assets of each class, and then dividing the
difference by the number of shares of the respective class of a Series
outstanding. Assets in the Series' portfolios are valued as described under "How
Are Fund Shares Valued?" in the SAI.
Each class will bear, pro rata, all of the common expenses of a Series except
that each class will bear the Rule 12b-1 fees payable under its respective plan.
The net asset value of all outstanding shares of each class of a Series will be
computed on a pro rata basis based on the proportionate participation in the
Series represented by the value of shares of such class. Due to the specific
distribution expenses and other costs that will be allocable to each class, the
dividends paid to each class of the Fund may vary.
How Do I Get More Information
About My Investment?
- -------------------------------------------------------------------------------
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this Prospectus.
From a touch-tone phone, you may access an automated system (day or night) which
offers the following features.
By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, you may obtain
Class I and Class II account information, current price and, if available, yield
or other performance information, specific to the Fund or any Franklin Templeton
Fund. In addition, Class I shareholders may process an exchange, within the same
class, into an identically registered Franklin account and request duplicate
confirmation or year-end statements and deposit slips.
Class I and Class II share codes for the Fund, which will be needed to access
system information, are, respectively, 106 and 206 for Growth Series, 108 for
DynaTech Series, 107 and 207 for Utilities Series, 109 and 209 for Income Series
and 110 and 210 for U.S. Government Securities Series. The system's automated
operator will prompt you with easy to follow step-by-step instructions from the
main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided. The same numbers may be used when calling
from a rotary phone:
Hours of Operation (Pacific Time)
Department Name Telephone No. (Monday through Friday)
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Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
How Does the Fund Measure Performance?
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Advertisements, sales literature and communications to you may contain several
measures of a class of a Series' performance, including current yield, various
expressions of total return, and current distribution rate. They may also
occasionally cite statistics to reflect the Series' volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price for one-, five- and ten-year periods, or portion thereof,
to the extent applicable, through the end of the most recent calendar quarter,
assuming reinvestment of all distributions. The Series may also furnish total
return quotations for each of their classes for other periods or based on
investments at various sales charge levels or at net asset value. For such
purposes, total return equals the total of all income and capital gain paid to
shareholders, assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a percentage of the
purchase price.
Current yield for each class of a Series reflects the income per share earned by
the Series' portfolio investments. It is calculated for each class of a Series
by dividing that class' net investment income per share during a recent 30-day
period by the maximum public offering price for that class of shares on the last
day of that period and annualizing the result.
Current yield for each class of a Series, which is calculated according to a
formula prescribed by the SEC (see "General Information" in the SAI), is not
indicative of the dividends or distributions which were or will be paid to
shareholders of any Series. Dividends or distributions paid to shareholders of a
class of a Series are reflected in the current distribution rate, which may be
quoted to you. The current distribution rate is computed by dividing the total
amount of dividends per share paid by a class of a Series during the past 12
months by a current maximum offering price for that class of shares. Under
certain circumstances, such as when there has been a change in the amount of
dividend payout or a fundamental change in investment policies, it might be
appropriate to annualize the dividends paid during the period such policies were
in effect, rather than using the dividends during the past 12 months. The
current distribution rate differs from the current yield computation because it
may include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gain, and is calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against a class of a Series' income and will assume the
payment of the maximum sales charge on the purchase of that class of shares.
When there has been a change in the sales charge structure, the historical
performance figures will be restated to reflect the new rate. The investment
results of each class of a Series, like all other investment companies, will
fluctuate over time; thus, performance figures should not be considered to
represent what an investment may earn in the future or what a class of the
Series' total return, current yield, or distribution rate may be in any future
period.
General Information
- -------------------------------------------------------------------------------
Reports to Shareholders
The Fund's fiscal year ends September 30. Annual Reports containing audited
financial statements of the Fund, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to each household, as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Fund at
the telephone number or address set forth on the cover page of this Prospectus.
Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and under "General Information" in the SAI.
Organization and Voting Rights
The Fund's authorized capital stock consists of fourteen billion shares of
capital stock of $0.01 par value which have been authorized by the Board to be
issued in ten separate sub-classes: 250,000,000 shares designated as Growth
Series - Class I shares, 250,000,000 shares designated as Growth Series - Class
II shares, 2,500,000,000 shares as U.S. Government Securities - Class I,
2,500,000,000 shares as U.S. Government Securities Series - Class II shares,
3,600,000,000 shares as Income Series - Class I shares, 3,600,000,000 as Income
Series - Class II shares, 400,000,000 shares as Utilities Series - Class I
shares, 400,000,000 shares as Utilities Series - Class II shares, 250,000,000
shares as DynaTech Series - Class I, and 250,000,000 as DynaTech Series - Class
II shares. The Board is empowered by the Charter to issue other classes or
Series of capital stock and to increase or decrease the number, but not below
that at the time outstanding.
The assets of the Fund received for the issue or sale of each Series of the
capital stock and all income, earnings, profits and proceeds thereof, subject
only to the rights of creditors, are especially allocated to such Series, and
constitute the underlying assets of such Series. The underlying assets of each
Series are required to be segregated on the books of account and are to be
charged with the liabilities in respect to such Series and with a share of the
general liabilities of the Fund. Liabilities in respect to any two or more
Series are to be allocated in proportion to the asset value of the respective
Series except where direct expenses can otherwise be fairly allocated. The Board
has the right to determine which liabilities are allocable to a given Series and
which are general or allocable to two or more Series. In the event of the
dissolution or liquidation of the Fund, the registered holders of the capital
stock of any Series are entitled to receive as a class the underlying assets of
such Series available for distribution to shareholders.
All shares have one vote and, when issued, are fully paid and nonassessable. All
shares have equal voting, participation and liquidation rights, but have no
subscription, preemptive or conversion rights.
Shares of each class of a Series represent proportionate interests in the assets
of the Series and have the same voting and other rights and preferences as the
other classes and Series of the Fund for matters that affect the Fund as a
whole. For matters that only affect a certain class of a Series' shares,
however, only shareholders of that class will be entitled to vote. Therefore
each class of shares of a Series will vote separately on matters (1) affecting
only that class of such Series, (2) expressly required to be voted on separately
by class by state corporation law, or (3) required to be voted on separately by
class by the 1940 Act, or the rules adopted thereunder. For instance, if a
change to the Rule 12b-1 plan relating to Class I shares of a Series requires
shareholder approval, only shareholders of Class I of that Series may vote on
the change to the Rule 12b-1 plan affecting that class. Similarly, if a change
to the Rule 12b-1 plan relating to Class II shares requires approval, only
shareholders of Class II of such Series may vote on changes to such plan. On the
other hand, if there is a proposed change to the investment objectives of a
Series, the proposal would affect all shareholders, regardless of which class of
shares they hold and, therefore, each share has the same voting rights.
Voting rights are noncumulative, so that in any election of directors, the
holders of more than 50% of the shares voting can elect all of the directors, if
they choose to do so, and in such event the holders of the remaining shares
voting will not be able to elect any person or persons to the Board.
The Fund does not intend to hold annual shareholders meetings. The Fund may,
however, hold a special shareholders meeting of a Series for such purposes as
changing fundamental investment restrictions, approving a new management
agreement or any other matters which are required to be acted on by shareholders
under the 1940 Act. A meeting may also be called by shareholders holding at
least ten percent of the shares entitled to vote at the meeting for the purpose
of voting upon the removal of directors, in which case shareholders may receive
assistance in communicating with other shareholders in connection with the
election or removal of directors such as that provided in Section 16(c) of the
1940 Act. In addition, Maryland General Corporation Law provides that a special
meeting may be called by a majority of the Board or by the written request of
shareholders holding at least 25% of the shares entitled to vote at the meeting.
Redemptions by the Fund
The Fund reserves the right to redeem your shares, at net asset value, if your
account in any Series of the Fund has a value of less than $50, but only where
the value of your account has been reduced by the prior voluntary redemption of
shares and has been inactive (except for the reinvestment of distributions) for
a period of at least six months, provided you are given advance notice. For more
information, see "How Do I Buy and Sell Shares?" in the SAI.
Other Information
The Fund believes that the U.S. Government Securities Series is generally a
permissible investment for national banks, federally chartered savings and loan
associations, federally chartered credit unions and the Fishing Vessel Capital
Construction Fund. Such investors should confirm the permissibility of proposed
investments in this Series with their counsel.
Registering Your Account
- -------------------------------------------------------------------------------
An account registration should reflect your intentions as to ownership. Where
there are two co-owners on the account, the account will be registered as "Owner
1" and "Owner 2"; the "or" designation is not used except for money market fund
accounts. If co-owners wish to have the ability to redeem or convert on the
signature of only one owner, a limited power of attorney may be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, you may transfer an account in the Fund carried in "street"
or "nominee" name by your securities dealer to a comparably registered Fund
account maintained by another securities dealer. Both the delivering and
receiving securities dealers must have executed dealer agreements on file with
Distributors. Unless a dealer agreement has been executed and is on file with
Distributors, the Fund will not process the transfer and will so inform your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer to transfer the account to a receiving securities dealer and
sign any documents required by the securities dealers to evidence consent to the
transfer. Under current procedures, the account transfer may be processed by the
delivering securities dealer and the Fund after the Fund receives authorization
in proper form from your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, you will
be deemed to have authorized the use of electronic instructions on the account,
including, without limitation, those initiated through the services of the NSCC,
to have adopted as instruction and signature any such electronic instructions
received by the Fund and Investor Services, and to have authorized them to
execute the instructions without further inquiry. At the present time, such
services which are available include the NSCC's "Networking," "Fund/SERV," and
"ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
- -------------------------------------------------------------------------------
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the Internal Revenue Service ("IRS") any taxable dividend, capital
gain distribution, or other reportable payment (including share redemption
proceeds) and withhold 31% of any such payments made to individuals and other
non-exempt shareholders who have not provided a correct taxpayer identification
number ("TIN") and made certain required certifications that appear in the
Shareholder Application. You may also be subject to backup withholding if the
IRS or a securities dealer notifies the Fund that the number furnished by you is
incorrect or that you are subject to backup withholding for previous
under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by you is in
fact incorrect or upon the failure of a shareholder who has completed an
"awaiting TIN" certification to provide the Fund with a certified TIN within 60
days after opening the account.
Who Runs the Fund?
- -------------------------------------------------------------------------------
The teams responsible for the day-to-day management of each Series' 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; Tony 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.
Tony 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.
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 the Fund.
Code - Internal Revenue Code of 1986, as amended.
Designated Retirement Plans - certain retirement plans, including
profit-sharing, pension, 401(k) and simplified employee pension plans, that: (i)
are sponsored by an employer with at least 200 employees; (ii) have aggregate
plan assets of at least $1 million; or (iii) agree to invest at least $1 million
in any of the Franklin Templeton Funds over a 13-month period. Distributors
determines the qualifications for Designated Retirement Plans.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter.
Exchange - New York Stock Exchange.
Franklin Funds - the mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust.
Franklin Templeton Funds - the Franklin Funds and the Templeton Funds.
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries.
Investor Services - Franklin/Templeton Investor Services, Inc.
Letter - Letter of Intent.
Manager - Franklin Advisers, Inc., the Fund's investment manager.
Net asset value (NAV) - the value of a mutual fund determined by deducting the
fund's liabilities from the total assets of the portfolio. The net asset value
per share is determined by dividing the net asset value of the fund by the
number of shares outstanding. When you buy, sell or exchange shares, we will use
the NAV per share for the applicable class next calculated after we receive your
request in proper form.
Non-Designated Retirement Plans - employee benefit plans not included as
"Designated Retirement Plans" and not qualified under Section 401 of the Code.
Offering price - The public offering price is equal to the net asset value of
the class plus the front-end sales charge. The front-end sales charge is 4.50%
for Class I shares of Growth and DynaTech Series and 4.25% for Class I shares of
Income, Utilities and U.S. Government Securities Series and 1% for Class II
shares.
Proper Form (Purchases) - generally, the Series must receive a completed
Shareholder Application accompanied by a negotiable check.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information.
SEC - Securities and Exchange Commission.
Securities Dealer - financial institutions which, either directly or through
affiliates, have an agreement with Distributors to handle customer orders and
accounts with each Series of the Fund. This reference is for convenience only
and does not indicate a legal conclusion of capacity.
Templeton Funds - the U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund.
Trust Company - Franklin Templeton Trust Company.
Appendix
- -------------------------------------------------------------------------------
Description of 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.
U.S. GOVERNMENT
SECURITIES SERIES
FRANKLIN CUSTODIAN FUNDS, INC.
PROSPECTUS February 1, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
================================================================================
The U.S. Government Securities Series (the "Fund") is a diversified series of
Franklin Custodian Funds, Inc. ("Custodian Funds"), an open-end management
investment company. The investment objective of the Fund is income through
investment in obligations of the U.S. government or its instrumentalities. At
the present time, the assets of the Fund are invested in obligations of the
Government National Mortgage Association ("Ginnie Maes" or "GNMA").
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that you should know before investing. After reading
the Prospectus, you should retain it for future reference; it contains
information about the purchase and sale of shares and other items which you will
find useful to have.
This Prospectus pertains only to the U.S. Government Securities Series. A
separate Prospectus, also dated February 1, 1996, as may be amended from time to
time, describes all five series of Custodian Funds and is incorporated herein by
reference. An SAI concerning Custodian Funds, dated February 1, 1996, as may be
amended from time to time, provides a further discussion of certain areas in
this Prospectus and other matters which may be of interest to you. It has been
filed with the SEC and is incorporated herein by reference. A copy is available
without charge from the Fund or from Distributors, at the address or telephone
number shown above.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Fund offers two classes of shares: U.S. Government Securities Series - Class
I ("Class I") and U.S. Government Securities Series - Class II ("Class II"). You
can choose between Class I shares, which generally bear a higher front-end sales
charge and lower ongoing Rule 12b-1 distribution fees ("Rule 12b-1 fees"), and
Class II shares, which generally have a lower front-end sales charge and higher
ongoing Rule 12b-1 fees. You should consider the differences between the two
classes, including the impact of sales charges and Rule 12b-1 fees, in choosing
the more suitable class given your anticipated investment amount and time
horizon. See "How Do I Buy Shares? - Deciding Which Class to Buy."
Contents Page
Expense Table............................................ 3
Financial Highlights - How
Has the Fund Performed?................................. 4
What Is the U.S. Government
Securities Series?...................................... 5
How Does the Fund Invest Its Assets?..................... 5
How You Participate in the
Results of the Fund's Activities........................ 7
Who Manages the Fund?.................................... 8
What Distributions Might
I Receive from the Fund?................................ 10
How Taxation Affects You and the Fund.................... 11
How Do I Buy Shares?..................................... 12
What Programs and Privileges
Are Available to Me as a Shareholder?................... 19
What If My Investment Outlook
Changes? - Exchange Privilege........................... 21
How Do I Sell Shares?.................................... 24
Telephone Transactions................................... 28
How Are Fund Shares Valued?.............................. 29
How Do I Get More Information
About My Investment?.................................... 30
How Does the Fund
Measure Performance?.................................... 30
General Information...................................... 31
Registering Your Account................................. 33
Important Notice Regarding
Taxpayer IRS Certifications............................. 34
Useful Terms and Definitions............................. 34
Expense Table
The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. These figures are based on the aggregate operating
expenses of each class for the fiscal year ended September 30, 1995. The Class
II figures are annualized.
Class I Class II
-------- --------
Shareholder Transaction Expenses
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*
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:
Shareholder Servicing Costs................ 0.04% 0.04%
Reports to Shareholders.................... 0.03% 0.03%
Other...................................... 0.01% 0.01%
-------- --------
Total Other Expenses......................... 0.08% 0.08%
-------- --------
Total Fund Operating Expenses................ 0.61% 1.18%
-------- --------
-------- --------
++Although Class II has a lower front-end sales charge than Class I, over time
the higher Rule 12b-1 fees for Class II may cause you to pay more for Class II
shares than for Class I shares. Given the maximum front-end sales charge and the
rate of Rule 12b-1 fees of each class, it is estimated that this will take less
than six years if you maintain total shares valued at less than $100,000 in the
Franklin Templeton Funds. If your investments in the Franklin Templeton Funds
are valued at $100,000 or more, you will reach the crossover point more quickly.
++++Class I investments of $1 million or more are not subject to a front-end
sales charge; however, a contingent deferred sales charge of 1% is generally
imposed on certain redemptions within a "contingency period" of 12 months of the
calendar month of such investments. See "How Do I Sell Shares? - Contingent
Deferred Sales Charge."
++++++Class II shares redeemed within a "contingency period" of 18 months of the
calendar month of such investments are subject to a 1% contingent deferred sales
charge. See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
*$5.00 fee imposed only on Timing Accounts as described under "What If My
Investment Outlook Changes? - Exchange Privilege." All other exchanges are
processed without a fee.
**The maximum amount of Rule 12b-1 fees allowed pursuant to the Class I
distribution plan is 0.15%. See "Who Manages the Fund? - Plans of Distribution."
Consistent with National Association of Securities Dealers, Inc.'s rules, it is
possible that the combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the economic equivalent of
the maximum front-end sales charges permitted under those same rules.
You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Fund. Rather,
the table has been provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you should refer to the appropriate sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge and applicable contingent deferred
sales charge, that apply to a $1,000 investment in the Fund over various time
periods assuming (1) a 5% annual rate of return and (2) redemption at the end of
each time period.
One Year Three Years Five Years Ten Years
Class I... $48* $61 $75 $115
Class II.. $32 $47 $74 $152
*Assumes that a contingent deferred sales charge will not apply to Class I
shares.
You would pay the following expenses on the same investment, assuming no
redemption.
One Year Three Years Five Years Ten Years
Class II.. $22* $47 $74 $152
This example is based on the aggregate annual operating expenses shown above and
should not be considered a representation of past or future expenses, which may
be more or less than those shown. The operating expenses are borne by the Fund
and only indirectly by you as a result of your investment in the Fund. In
addition, federal securities regulations require the example to assume an annual
return of 5%, but the Fund's actual return may be more or less than 5%.
Financial Highlights - How Has the Fund Performed?
- --------------------------------------------------------------------------------
Set forth below is a table containing the financial highlights for a share of
each class of the Fund. The information for each of the five fiscal years in the
period ended September 30, 1995 has been audited by Coopers & Lybrand L.L.P.,
independent auditors, whose audit report appears in the financial statements in
the Fund's Annual Report to Shareholders dated September 30, 1995. The remaining
figures, which are also audited, are not covered by the auditors' current
report. See "Reports to Shareholders" under "General Information" in this
Prospectus.
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data***
----------------------------------------------------- ---------------------------
Distri-
Net Real- Distri- butions Ratio of Net
Net Asset Net ized & Un- butions From Net Asset Net Assets Ratio of Investment
Year Value Invest-realized Gain Total From From Net Realized Total Value at End Expenses Income to Portfolio
Ended Beginning ment (Loss) on Investment InvestmentCapital Distri- at End Total of Year to Average Average Turnover
Sep.30 of Year Income Investments Operations Income Gains butions of Year Return**(in 000's)Net Assets Net Assets Rate**
- ------------------------------------------------------------------------------------------------------------------------------------
Class I
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986 $7.33 $0.790 $0.165 $0.955 $(0.875) $ - $(0.875) $7.41 13.25% $14,361,682 0.54% 9.93% 36.02%
1987 7.41 0.698 (0.500) 0.198 (0.724) (0.014) (0.738) 6.87 2.22 13,024,437 0.52 9.49 52.92
1988 6.87 0.691 0.115 0.806 (0.696) - (0.696) 6.98 11.77 12,112,775 0.53 9.85 34.14
1989 6.98 0.688 (0.072) 0.616 (0.696) - (0.696) 6.90 8.95 11,260,310 0.52 9.99 25.70
1990 $6.90 $0.668 $(0.020) $0.648 $(0.688) $ - $(0.688) $6.86 9.47% $11,143,333 0.52% 9.72% 18.23%
1991 6.86 0.653 0.287 0.940 (0.660) - (0.660) 7.14 13.97 12,426,910 0.52 9.26 22.14
1992 7.14 0.609 0.106 0.715 (0.595) - (0.595) 7.26 10.14 13,617,157 0.53 8.46 38.75
1993 7.26 0.557 (0.056) 0.501 (0.561) - (0.561) 7.20 6.86 14,268,516 0.52 7.71 43.10
1994 7.20 0.500 (0.678) (0.178) (0.512) - (0.512) 6.51 (2.75) 11,668,747 0.55 7.37 18.28
1995 6.51 0.497 0.348 0.845 (0.485) - (0.485) 6.87 13.56 11,101605 0.61 7.50 5.48
Class II
1995+ 6.67 0.206 0.167 0.373 (0.193) - (0.193) 6.85 5.66 11,695 1.18++ 6.48++ 5.48
</TABLE>
***Ratios for the year ended 1995, Class I and Class II, have been calculated
using the daily average net assets during the period.
+For the period May 1, 1995 (effective date) to September 30, 1995.
++Annualized.
*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. Prior to May 1, 1994, the total
return for Class I shares also assumes reinvestment of dividends at the offering
price and capital gains, if any, at net asset value. Effective May 1, 1994 with
the implementation of the Rule 12b-1 distribution plan for Class I shares, the
sales charge on reinvested dividends was eliminated.
**Maturity of U.S. government issues and the reinvestment of the proceeds
thereof are considered as purchases and sales of securities in computing the
portfolio turnover rate of the Fund.
What Is the U.S. Government Securities Series?
- --------------------------------------------------------------------------------
The Fund is a diversified series of Custodian Funds, an open-end management
investment company, commonly called a "mutual fund". Custodian Funds was
incorporated under the laws of Delaware in 1947, reincorporated under the laws
of Maryland in 1979, and registered with the SEC under the 1940 Act. Custodian
Funds has five separate diversified series with a par value of $0.01: Growth
Series, DynaTech Series, Utilities Series, Income Series and U.S. Government
Securities Series. The Growth Series, Utilities Series, Income Series and U.S.
Government Securities Series issue two classes of capital stock ("multiclass"
structure): Growth Series - Class I, Growth Series - Class II, Utilities Series
- - Class I, Utilities Series - Class II, Income Series - Class I, Income Series -
Class II, U.S. Government Securities Series - Class I and U.S. Government
Securities Series - Class II. All Fund shares outstanding before May 1, 1995,
have been redesignated as Class I shares and will retain their previous rights
and privileges except for legally required modifications to shareholder voting
procedures, as discussed in "General Information - Organization and Voting
Rights."
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.
You may purchase shares of the Fund (minimum investment of $100 initially and
$25 thereafter) at the current public offering price of the class you wish to
purchase. Please see "How Do I Buy Shares?"
How Does the Fund Invest Its Assets?
- --------------------------------------------------------------------------------
The Fund's investment objective is income through investment in a portfolio
limited to securities which are obligations of the U.S. government or its
instrumentalities. The objective is a fundamental policy of the Fund and may not
be changed without shareholder approval. U.S. government securities include, but
are not limited to, U.S. Treasury bonds, notes and bills, Treasury certificates
of indebtedness and securities issued by instrumentalities of the U.S.
government. Other than investments in short-term U.S. Treasury securities or
assets held in cash pending investment, the assets of the Fund are currently
invested solely in obligations ("GNMAs" or "Ginnie Maes") of the Government
National Mortgage Association ("Association"). Of course, there is no assurance
that the Fund's objective will be achieved.
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.
Information about 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 purchase GNMAs for which principal and interest are guaranteed. The Fund
also purchases "adjustable rate" GNMAs and other types of securities which may
be issued with the Association's guarantee.
The Association's guarantee of payment of principal and interest on GNMAs is
backed by the full faith and credit of the United States 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 which represents a return of principal will be reinvested by the
Fund in securities which may bear interest at a rate 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, such 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 such variation in prepayment rates, it is not
possible to accurately predict the life of a particular GNMA.
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, however,
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. Moreover, 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.
The Fund's investments are continually monitored and changes are made as market
conditions warrant. However, the Fund does not engage in the trading of
securities for the purpose of realizing short-term profits.
Other Policies of the Fund
The Fund does not borrow money or mortgage or pledge any of its assets except
that it may borrow for temporary or emergency purposes in an amount up to 5% of
total asset value. The Fund does not currently engage in option transactions or
repurchase agreements. The Fund does not loan its securities or acquire illiquid
securities or the securities of foreign issuers.
The Fund may purchase and sell GNMA Certificates on a "To-Be-Announced" ("TBA")
and "delayed delivery" basis. These transactions are arrangements under which
the Fund may purchase securities with payment and delivery scheduled for a
future time up to 60 days after purchase. The transactions are subject to market
fluctuation and are subject to the risk that the value or yields at delivery may
be more or less than the purchase price or the yields available when the
transaction was entered into. In TBA and delayed delivery transactions, the Fund
relies on the seller to complete the transaction. The other party's failure to
do so may cause the Fund to miss a price or yield considered advantageous.
Securities purchased on a TBA or delayed delivery basis do not generally earn
interest until their scheduled delivery date. The Fund is not subject to any
percentage limit on the amount of its assets which may be invested in delayed
delivery and TBA purchase obligations. More information concerning these
transactions is included in the SAI.
The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. For a list of these restrictions and more information
concerning the policies discussed herein, please see "How Does the Fund Invest
Its Assets? and "Investment Restrictions" in the SAI.
How You Participate
in the Results of the Fund's Activities
- --------------------------------------------------------------------------------
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
you own will increase. If the securities owned by the Fund decrease in value,
the value of your shares will also decline. In this way, you participate in any
change in the value of the securities owned by the Fund.
In particular, changes in interest rates will affect the value of the Fund's
portfolio and thus its share price. Increased rates of interest which frequently
accompany higher inflation and/or a growing economy are likely to have a
negative effect on the value of Fund shares. History reflects both increases and
decreases in the prevailing rate of interest and these may reoccur unpredictably
in the future.
The price per share you receive on redemption may be more or less than the price
paid for the shares. The dividends per share paid by the Fund may also vary.
Who Manages the Fund?
- --------------------------------------------------------------------------------
The Board has the primary responsibility for the overall management of the Fund
and for electing the officers of Custodian Funds who are responsible for
administering its day-to-day operations.
The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of shares. Although the Board
does not expect to encounter material conflicts in the future, the Board will
continue to monitor the Fund and will take appropriate action to resolve such
conflicts if any should arise.
In developing the multiclass structure the Fund has retained the authority to
establish additional classes of shares. It is the Fund's present intention to
offer only two classes of shares, but new classes may be offered in the future.
Advisers serves as the Fund's investment manager. Advisers is a wholly-owned
subsidiary of Resources, a publicly-owned holding company, the principal
shareholders of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its subsidiaries. Advisers acts as investment manager or administrator
to 36 U.S. registered investment companies (118 separate series) with aggregate
assets of over $80 billion.
The team responsible for the day-to-day management of the Fund's portfolio is:
Jack Lemein since 1984, and Roger Bayston and Tony 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.
Pursuant to a management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business. The Manager
performs similar services for other funds and there may be times when the
actions taken with respect to the Fund's portfolio will differ from those taken
by the Manager on behalf of other funds. Neither the Manager (including its
affiliates) nor its officers, directors or employees nor the officers and
directors of Custodian Funds are prohibited from investing in securities held by
the Fund or other funds which are managed or administered by the Manager to the
extent such transactions comply with the Fund's Code of Ethics. Please see
"Investment Advisory and Other Services" and "General Information" in the SAI
for further information on securities transactions and a summary of the Fund's
Code of Ethics.
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.
It is not anticipated that the Fund will incur a significant amount of brokerage
expenses because GNMA securities are generally traded in principal transactions
that involve the receipt by the broker of a spread between the bid and ask
prices for the securities and not the receipt of commissions. In the event that
the Fund does participate in transactions involving brokerage commissions, it is
the Manager's responsibility to select brokers through whom such transactions
will be effected. The Manager would try to obtain the best execution on all such
transactions. If it is felt that more than one broker would be able to provide
the best execution, the Manager will consider the furnishing of quotations and
of other market services, research, statistical and other data for the Manager
and its affiliates, as well as the sale of shares of the Fund, as factors in
selecting a broker. Further information is included under "How Does the Fund
Purchase Securities For Its Portfolio?" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Investor Services, in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
During the fiscal year ended September 30, 1995, expenses borne by Class I and
Class II shares of the Fund, including fees paid to Advisers and to Investor
Services, totaled 0.61% and 1.18%, respectively, of the average net assets of
such class.
Plans of Distribution
A separate plan of distribution has been approved and adopted for each class
("Class I Plan" and "Class II Plan," respectively, or "Plan(s)") pursuant to
Rule 12b-1 under the 1940 Act. The Rule 12b-1 fees charged to each class are
based solely on the distribution and, with respect to the Class II Plan,
servicing fees attributable to that particular class. Under either Plan, the
portion of fees remaining after payment to securities dealers or others for
distribution or servicing may be paid to Distributors for routine ongoing
promotion and distribution expenses incurred with respect to such class. Such
expenses may include, but are not limited to, the printing of prospectuses and
reports used for sales purposes, expenses of preparing and distributing sales
literature and related expenses, advertisements, and other distribution-related
expenses, including a prorated portion of Distributors' overhead expenses
attributable to the distribution of Fund shares.
The maximum amount which the Fund may reimburse to Distributors or others under
the Class I Plan for such distribution expenses is 0.15% per annum of Class I's
average daily net assets payable on a quarterly basis. All expenses of
distribution in excess of 0.15% per annum will be borne by Distributors, or
others who have incurred them, without reimbursement from the Fund.
Under the Class II Plan, the Fund pays to Distributors distribution and related
expenses up to 0.50% per annum of Class II's daily net assets, payable
quarterly. Such fees may be used in order to compensate Distributors or others
for providing distribution and related services and bearing certain expenses of
the class. All expenses of distribution, marketing and related services over
that amount will be borne by Distributors or others who have incurred them,
without reimbursement by the Fund. In addition, the Class II Plan provides for
an additional payment by the Fund of up to 0.15% per annum of Class II's average
daily net assets as a servicing fee, payable quarterly. This fee will be used to
pay securities 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 Fund on behalf of customers, or similar
activities related to furnishing personal services and/or maintaining
shareholder accounts.
Either Distributors or one of its affiliates may pay, from its own resources, a
commission of up to 1% of the purchase price of Class II shares to securities
dealers who initiate and are responsible for such purchases. During the first
year following such purchases, Distributors will retain a portion of Class II's
Rule 12b-1 fees attributable to such shares equal to 0.50% per annum of Class
II's average daily net assets to partially recoup fees Distributors pays to
securities dealers in connection with initial purchases of Class II shares.
Both Plans cover any payments to or by the Fund, Advisers, Distributors, or
other parties on behalf of the Fund, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund within the context
of Rule 12b-1. The payments under the Plans are included in the maximum
operating expenses which may be borne by each class of the Fund. For more
information, including a discussion of the Board's policies with regard to the
amount of the Class I Plan's fees, please see "The Fund's Underwriter" in the
SAI.
What Distributions Might I Receive from the Fund?
- --------------------------------------------------------------------------------
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed capital gains from the prior fiscal year. The Fund may
make more than one distribution derived from net short-term and net long-term
capital gains in any year or adjust the timing of these distributions for
operational or other reasons.
Distributions To Each Class of Shares
According to the requirements of the Code, dividends and capital gains will be
calculated and distributed in the same manner for Class I and Class II shares.
The per share amount of any income dividends will generally differ only to the
extent that each class is subject to different Rule 12b-1 fees.
Distribution Date
Although subject to change by the Board, without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends monthly
for shareholders of record on the last business day of the month, payable on or
about the 15th day of the following month. The Fund may determine to defer the
December 31 record date to a date shortly thereafter in January for tax or other
operational reasons. The amount of income dividend payments by the Fund is
dependent upon the amount of net income received by the Fund from its portfolio
holdings, is not guaranteed and is subject to the discretion of the Board. Fund
shares are quoted ex-dividend on the first business day following the record
date. The Fund does not pay "interest" or guarantee any fixed rate of return on
an investment in its shares.
In order to be entitled to a dividend, you must have acquired Fund shares prior
to the close of business on the record date. If you are considering purchasing
Fund shares shortly before the record date of a distribution, you should be
aware that because the value of the Fund's shares is based directly on the
amount of its net assets, rather than on the principle of supply and demand, any
distribution of income or capital gain will result in a decrease in the value of
the Fund's shares equal to the amount of the distribution. While a dividend or
capital gain distribution received shortly after purchasing shares represents,
in effect, a return of a portion of your investment, it may be taxable as
dividend income or capital gain.
Distribution Options
You may choose to receive your distributions from the Fund in any of these ways:
1. Purchase additional shares of the Fund - You may purchase additional shares
of the 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 are a Class II shareholder,
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. Purchase shares of other Franklin Templeton Funds - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). If you are a Class II shareholder, you may also direct your
distributions to purchase 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 choose to receive dividends, or both
dividend and capital gain distributions in cash. You may have the money sent
directly to you, to another person, or to a checking account. If you choose to
send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
To select one of these options, please complete sections 6 and 7 of the
Shareholder Application included with this Prospectus or tell your investment
representative which option you prefer. If no option is selected, dividend and
capital gain distributions will be automatically reinvested in the same class of
the Fund. You may change the distribution option selected at any time by
notifying the Fund by mail or by telephone. Please allow at least seven days
prior to the record date for the Fund to process the new option.
How Taxation Affects You and the Fund
- --------------------------------------------------------------------------------
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For additional information on tax matters
relating to the Fund and its shareholders, see "Additional Information Regarding
Taxation" in the SAI.
The Fund intends to continue to qualify for treatment 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 which 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 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 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 such
tax-free treatment. You should consult their own tax advisors with respect to
the application of their state and local income tax laws to these distributions.
The Fund will inform 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 advisors 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 advisors 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.
How Do I Buy Shares?
- --------------------------------------------------------------------------------
You may buy shares to open a Fund account with as little as $100 and make
additional investments at any time with as little as $25. If you are buying
shares through a retirement plan established by the Franklin Templeton Group,
these minimums may be waived. 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 fail to specify a class, your purchase will automatically be
invested in Class I shares.
Deciding Which Class to Buy
When deciding which class of shares to buy, you should consider a number of
factors, including the amount you expect to invest and the length of time you
expect to hold your investment. If you plan to invest $1 million or more in a
single payment or you qualify to buy Class I shares at net asset value, 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 intend to purchase $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in Franklin Templeton Funds; and
o you intend to make substantial redemptions within approximately six years or
less of investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees, which 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
Rights of Accumulation programs, but intend 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 will therefore be automatically invested in Class I shares.
You may accumulate more than $1 million in Class II shares through purchases
over time, but if you intend 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
You may buy shares at the public offering price of the class you wish to
purchase, unless you qualify to purchase shares at a discount or without a sales
charge as discussed below. The front-end sales charge for Class II shares is 1%
and, unlike Class I shares, does not vary based upon the size of your purchase.
<TABLE>
<CAPTION>
Total Sales Charge
As a Percentage of Amount Allowed to
Net Amount Dealer as a Percentage
Size of Transaction at Offering Price Offering Price Invested of Offering Price*
- -------------------------------------------------------------------------------------------------------
Class I
<S> <C> <C> <C>
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%
- -------------------------------------------------------------------------------------------------------
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. Distributors may at times allow
the entire sales charge to the securities dealer. A securities dealer who
receives 90% or more of the sales commission may be deemed an underwriter under
the Securities Act of 1933, as amended.
**A contingent deferred sales charge of 1% may be imposed on: (i) certain
redemptions of all or a part of an investment of $1 million or more in Class I
shares; and (ii) redemptions of Class II shares within 18 months of their
purchase. See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
***Please see "General - Other Payments to Securities Dealers" below for a
discussion of payments Distributors may make to securities dealers out of its
own resources.
+Purchases of Class II shares are limited to purchases below $1 million. See
"Deciding Which Class to Buy."
The offering price for each class will be calculated to two decimal places using
standard rounding criteria.
Quantity Discounts in Sales Charges -
Class I Shares Only
As shown in the table above, the sales charge you pay when you buy Class I
shares may be reduced based upon the size of your purchase.
Rights of Accumulation. To determine if you may pay a reduced sales charge, you
may add the cost or current value, whichever is higher, of your Class I and
Class II shares in other Franklin Templeton Funds, as well as those of your
spouse, children under the age of 21 and grandchildren under the age of 21, to
the amount of your current Class I purchase. To receive the reduction, you or
your investment representative must notify Distributors that your investment
qualifies for a discount.
Letter of Intent. You may purchase 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. You or your investment representative must inform us that the
Letter is in effect each time you purchase shares.
By completing the Letter of Intent section of the Shareholder Application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve five percent (5%) of the amount of the
total intended purchase in Class I shares registered in your name.
o You grant Distributors a security interest in these shares and appoint
Distributors as attorney- in-fact with full power of substitution to redeem any
or all of these reserved shares to pay any unpaid sales charge if you do not
fulfill the terms of the Letter.
o We will include the reserved shares in the total shares you own as reflected
on your periodic statements.
o You will receive dividend and capital gain distributions on the reserved
shares; we will pay or reinvest these distributions as you direct.
o Although you may exchange your shares, you may not liquidate reserved shares
until you complete the Letter or pay the higher sales charge.
o Our policy of reserving shares does not apply to certain benefit plans
described under "Purchases at Net Asset Value."
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy and Sell Shares? - Letter of Intent" in the SAI or call our
Shareholder Services Department.
Group Purchases. If you are a member of a qualified group, you may purchase
Class I shares at the reduced sales charge applicable to the group as a whole.
The sales charge is based on the combined dollar value of the group members'
existing investments, plus the amount of the current purchase. For example, if
group members previously invested and still hold $80,000 of Fund shares and
invest $25,000, the sales charge will be 3.5%.
We define a qualified group as one which (i) has been in existence for more than
six months, (ii) has a purpose other than acquiring Fund shares at a discount
and (iii) satisfies uniform criteria which enable Distributors to realize
economies of scale in its costs of distributing shares.
In addition, a qualified group must have more than 10 members, and be available
to arrange for meetings between our representatives and group members. It must
also agree to include sales and other materials related to the Franklin
Templeton Funds in publications and mailings to its members at reduced or no
cost to Distributors, and arrange for payroll deduction or other bulk
transmission of investments to the Fund.
If you select a payroll deduction plan, your investments will continue
automatically until you notify the Fund and your employer to discontinue further
investments. Due to the varying procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time the money reaches the Fund. We invest your purchase at the applicable
offering price per share determined on the day that the Fund receives both the
check and the payroll deduction data in required form.
Purchases at Net Asset Value
You may invest money from the following sources in Class I shares of the Fund
without paying front-end or contingent deferred sales charges. You may also
purchase Class II shares without paying front-end or contingent deferred sales
charges if the source of your investment proceeds is included in paragraph (i)
below:
(i) a distribution that you have received from a Franklin Templeton Fund or a
real estate investment trust ("REIT") sponsored or advised by Franklin
Properties, Inc., if the distribution is returned within 365 days of its payment
date. When you return the distribution, please include a written request to
reinvest the money at net asset value. You may reinvest Class II distributions
in either Class I or Class II shares, but Class I distributions may only be
invested in Class I shares under this privilege. For more information, see
"Distribution Options" under "What Distributions Might I Receive from the Fund?"
or call Shareholder Services at 1-800/632-2301;
(ii) a redemption from a mutual fund with investment objectives similar to those
of the Fund, if (a) your investment in that fund was subject to either a
front-end or contingent deferred sales charge at the time of purchase, (b) the
fund is not part of the Franklin Templeton Funds, and (c) your redemption
occurred within the past 60 days;
(iii) a distribution from an existing retirement plan already invested in the
Franklin Templeton Funds (including the Franklin Templeton Profit Sharing 401(k)
plan), up to the total amount of the distribution. When you return the
distribution, please include a written request to reinvest the money at net
asset value. The distribution must be returned to the Fund within 365 days of
the distribution date; or
(iv) a redemption from Templeton Institutional Funds, Inc., if you then reinvest
the redemption proceeds under an employee benefit plan qualified under Section
401 of the Code, in shares of the Fund.
You may also reinvest the proceeds from a redemption of any of the Franklin
Templeton Funds in Class I or Class II shares of the Fund at net asset value. To
do so, you must (a) have paid a sales charge on the purchase or sale of the
original shares, (b) reinvest the redemption money in the same class of shares,
and (c) request the reinvestment of the money in writing to the Fund within 365
days of the redemption date. You may reinvest up to the total amount of the
redemption proceeds under this privilege. If a different class of shares is
purchased, the full front-end sales charge must be paid at the time of purchase
of the new shares. While you will receive credit for any contingent deferred
sales charge paid on the shares redeemed, a new contingency period will begin.
Shares that were no longer subject to a contingent deferred sales charge will be
reinvested at net asset value and will not be subject to a new contingent
deferred sales charge. Shares exchanged into other Franklin Templeton Funds are
not considered "redeemed" for this privilege (see "What If My Investment Outlook
Changes? - Exchange Privilege").
If you immediately reinvested your redemption proceeds in a Franklin Bank
Certificate of Deposit ("CD") but you would like to reinvest them back into the
Franklin Templeton Funds as described above, you will have 365 days from the
date the CD (including any rollover) matures to do so.
If your securities dealer or another financial institution reinvests your money
in the Fund at net asset value for you, that person or institution may charge
you a fee for this service.
A redemption is a taxable transaction, but reinvestment without a sales charge
may affect the amount of gain or loss you recognize and the tax basis of the
shares reinvested. If you have a loss on the redemption, the loss may be
disallowed if you reinvest in the same fund within a 30-day period. If you would
like more information regarding the possible tax consequences of such a
reinvestment, please see the tax section of this Prospectus and the SAI.
Certain categories of investors also qualify to purchase Class I shares of the
Fund at net asset value regardless of the source of the investment proceeds. If
you or your account is included in one of the categories below, none of the
Class I shares you purchase will be subject to front-end or contingent deferred
sales charges:
(i) companies exchanging shares or selling assets pursuant to a merger,
acquisition or exchange offer;
(ii) accounts managed by the Franklin Templeton Group;
(iii) certain unit investment trusts and unit holders of these trusts
reinvesting distributions from the trusts in the Fund;
(iv) registered securities dealers and their affiliates, for their investment
accounts only;
(v) current employees of securities dealers and their affiliates and their
family members, in accordance with the internal policies and procedures of the
employing securities dealer and affiliate;
(vi) broker-dealers who have entered into a supplemental agreement with
Distributors, or registered investment advisors affiliated with such
broker-dealers, on behalf of their clients who are participating in a
comprehensive fee program (sometimes known as a wrap fee program);
(vii) any state, county, or city, or any instrumentality, department, authority
or agency thereof which has determined that the Fund is a legally permissible
investment and which is prohibited by applicable investment laws from paying a
sales charge or commission in connection with the purchase of shares of any
registered management investment company ("an eligible governmental authority").
IF YOU ARE SUCH AN INVESTOR, PLEASE CONSULT YOUR OWN LEGAL ADVISORS TO DETERMINE
WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. If you are a securities dealer who has executed a dealer agreement
with Distributors and, through your services, an eligible governmental authority
invests in the Fund at net asset value, Distributors or one of its affiliates
may make a payment, out of its own resources, to you in an amount not to exceed
0.25% of the amount invested. Please contact the Franklin Templeton
Institutional Services Department for additional information;
(viii) officers, trustees, directors and full-time employees of the Franklin
Templeton Funds, or of the Franklin Templeton Group, and their family members.
Although you may pay sales charges on investments in accounts opened after your
association with us has ended, you may continue to invest in accounts opened
while you were with us without paying sales charges;
(ix) trust companies and bank trust departments that exercise exclusive
discretionary investment authority over funds held in a fiduciary, agency,
advisory, custodial or similar capacity and agree to invest at least $1 million
in Franklin Templeton Funds over a 13-month period. We will accept orders for
such accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with payment
by federal funds received by the close of business on the next business day
following such order;
(x) insurance company separate accounts investing for pension plan contracts;
(xi) trustees or other fiduciaries purchasing securities for certain retirement
plans of organizations with collective retirement plan assets of $10 million or
more, without regard to where such assets are currently invested; or
(xii) Designated Retirement Plans. Non-Designated Retirement Plans may also
qualify to purchase shares of the Fund under this privilege if they meet the
requirements described under "Group Purchases," above.
If you would like more information, please see "How Do I Buy and Sell Shares?"
in the SAI.
How Do I Buy Shares in Connection
with Tax-Deferred Retirement Plans?
Your individual or employer-sponsored tax-deferred retirement plans may invest
in the Fund. You may use the Fund for an existing retirement plan, or, because
Trust Company can serve as custodian or trustee for retirement plans, you may
ask Trust Company to provide the plan documents and serve as custodian or
trustee. A plan document must be adopted in order for a retirement plan to be in
existence.
Brochures for Trust Company plans contain important information regarding
eligibility, contribution and deferral limits and distribution requirements.
Please note that you must use an application other than the one contained in
this Prospectus to establish a retirement plan account with Trust Company. To
obtain a retirement plan brochure or application, please call 1-800/DIAL BEN
(1-800/342-5236). Trust Company is an affiliate of Distributors.
Please see "How Do I Sell Shares?" for information regarding redemptions from
retirement plan accounts. You must complete specific forms in order to receive
distributions from Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or benefits and
pension plan consultants before choosing a retirement plan. In addition, if you
are a retirement plan investor, you should consider consulting your investment
representatives or advisors about investment decisions within your plans.
General
The Fund continuously offers it shares through securities dealers who have an
agreement with Distributors. The Fund and Distributors may refuse any order for
the purchase of shares.
Securities laws of states in which the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required to register as securities dealers pursuant to state law.
Other Payments to Securities Dealers. Distributors will pay the following
commissions, out of its own resources, to securities dealers who initiate and
are responsible for Class I purchases of $1 million or more: 0.75% on sales of
$1 million but less than $2 million, plus 0.60% on sales of $2 million but less
than $3 million, plus 0.50% on sales of $3 million but less than $50 million,
plus 0.25% on sales of $50 million but less than $100 million, plus 0.15% on
sales of $100 million or more. These breakpoints are reset every 12 months for
purposes of additional purchases.
Distributors or one of its affiliates may also pay up to 1% of the purchase
price to securities dealers who initiate and are responsible for Class I
purchases made at net asset value by any of the entities described in paragraphs
(ix), (xi) or (xii) under "Purchases at Net Asset Value" above and up to 0.75%
of the amount purchased to securities dealers who initiate and are responsible
for purchases made at net asset value by Non-Designated Retirement Plans. Please
see "How Do I Buy and Sell Shares?" in the SAI for the breakpoints applicable to
these purchases.
For Class II purchases, either Distributors or one of its affiliates may pay
securities dealers, out of its own resources, up to 1% of the purchase price. To
partially recoup these payments, Distributors will keep part of the Rule 12b-1
fees assessed to the shares during the first year following their purchase.
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with the
sale of shares of the Franklin Templeton Funds. In some cases, this compensation
may be available only to securities dealers whose representatives have sold or
are expected to sell significant amounts of shares of the Franklin Templeton
Funds. Compensation may include financial assistance and payments made in
connection with conferences, sales or training programs for employees of the
securities dealer, seminars for the public, advertising, sales campaigns and/or
shareholder services, programs regarding one or more of the Franklin Templeton
Funds and other programs or events sponsored by securities dealers, and payment
for travel expenses of invited registered representatives and their families,
including lodging, in connection with business meetings or seminars located
within or outside the United States. Securities dealers may not use sales of the
Fund's shares to qualify for this compensation if prohibited by the laws of any
state or self-regulatory agency, such as the National Association of Securities
Dealers, Inc. None of this compensation is paid for by the Fund or its
shareholders.
For additional information about shares of the Fund, please see "How Do I Buy
and Sell Shares?" in the SAI. The SAI also includes a listing of the officers
and directors of the Fund who are affiliated with Distributors. See "Officers
and Directors."
What Programs and Privileges
Are Available to Me as a Shareholder?
- --------------------------------------------------------------------------------
Certain of the programs and privileges described in this section may not be
available directly from the Fund if your shares are held, of record, by a
financial institution or in a "street name" account or networked account through
the National Securities Clearing Corporation ("NSCC") (see "Registering Your
Account" in this Prospectus).
Share Certificates
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of the investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by you, can be 2% or more of the value of the lost,
stolen or destroyed certificate. A certificate will be issued if requested by
you or your securities dealer.
Confirmations
A confirmation statement will be sent to you quarterly to reflect the dividends
reinvested during the period and after each other transaction which affects your
account. This statement will also show the total number of shares you own,
including the number of shares in "plan balance" for your account.
Automatic Investment Plan
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to purchase additional shares. If
you are interested in this program, please refer to the Automatic Investment
Plan Application at the back of this Prospectus for the requirements of the
program or contact your investment representative. Of course, the market value
of the Fund's shares may fluctuate and a systematic investment plan such as this
will not assure a profit or protect against a loss. You may terminate the
program at any time by notifying Investor Services by mail or by phone.
Systematic Withdrawal Plan
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply.
If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Shareholder Application included with
this Prospectus and indicate how you would like to receive your payments. You
may choose to receive your payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. Receive payments in cash - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Fund will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you.
Redemptions under a Systematic Withdrawal Plan are considered a sale for federal
income tax purposes. Because the amount withdrawn under the plan may be more
than your actual yield or income, part of the payment may be a return of your
investment.
While a Systematic Withdrawal Plan is in effect, shares must be held either in
plan balance or, where share certificates are outstanding, deposited with the
Fund. You should ordinarily not make additional investments in the Fund of less
than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases. Shares redeemed under the
plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Fund
receives notification of the shareholder's death or incapacity.
Electronic Fund Transfers
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
What If My Investment Outlook Changes? - Exchange Privilege
- --------------------------------------------------------------------------------
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for the
same class of shares of other Franklin Templeton Funds which are eligible for
sale in your state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Some funds, however, may not
offer Class II shares. Class I shares may be exchanged for Class I shares of any
of the other Franklin Templeton Funds. Class II shares may be exchanged for
Class II shares of any of the other Franklin Templeton Funds. No exchanges
between different classes of shares will be allowed. A contingent deferred sales
charge will not be imposed on exchanges. If, however, the exchanged shares were
subject to a contingent deferred sales charge in the original fund purchased and
shares are subsequently redeemed within the contingency period, a contingent
deferred sales charge will be imposed. Before making an exchange, you should
review the prospectus of the fund you wish to exchange from and the fund you
wish to exchange into for all specific requirements or limitations on exercising
the exchange privilege, for example, limitations on a fund's sale of its shares,
minimum holding periods for exchanges at net asset value, or applicable sales
charges.
You may exchange shares in any of the following ways:
By Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
By Telephone
You or your investment representative of record, if any, may exchange shares of
the Fund by calling Investor Services at 1-800/632-2301 or the automated
Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753. If you do not
wish this privilege extended to a particular account, you should notify the Fund
or Investor Services.
The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "Telephone Transactions - Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS(R)
option may not be available. In this event, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "By Telephone" above.
Such a dealer- ordered exchange will be effective only for uncertificated shares
on deposit in your account or for which certificates have previously been
deposited. A securities dealer may charge a fee for handling an exchange.
Additional Information Regarding Exchanges
Exchanges of the same class of shares are made on the basis of the net asset
value of the class involved, except as set forth below. Exchanges of shares of a
class which were purchased without a sales charge will be charged a sales charge
in accordance with the terms of the prospectus of the fund and the class of
shares being purchased, unless the original investment in the Franklin Templeton
Funds was made pursuant to the privilege permitting purchases at net asset
value, as discussed under "How Do I Buy Shares?" Exchanges of Class I shares of
the Fund which were purchased with a lower sales charge into a fund which has a
higher sales charge will be charged the difference, unless the shares were held
in the Fund for at least six months prior to executing the exchange.
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be transferred to
the fund being exchanged into and will be invested at net asset value. Because
the exchange is considered a redemption and purchase of shares, you may realize
a gain or loss for federal income tax purposes. Backup withholding and
information reporting may also apply. Information regarding the possible tax
consequences of such an exchange is included in the tax section in this
Prospectus and under "Additional Information Regarding Taxation" in the SAI.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money market
instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objective exist immediately. Subsequently,
this money will be withdrawn from such short-term money market instruments and
invested in portfolio securities in as orderly a manner as is possible when
attractive investment opportunities arise.
The exchange privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
Exchanges of Class I Shares
The contingency period during which a contingent deferred sales charge may be
assessed for Class I shares will be tolled (or stopped) for the period such
shares are exchanged into and held in a Franklin or Templeton Class I money
market fund. If a Class I account has shares subject to a contingent deferred
sales charge, Class I shares will be exchanged into the new account on a
"first-in, first-out" basis. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge" for a discussion of investments subject to a contingent deferred
sales charge.
Exchanges of Class II Shares
When an account is composed of Class II shares subject to the contingent
deferred sales charge and Class II shares that are not, the shares will be
transferred proportionately into the new fund. Shares received from reinvestment
of dividends and capital gains are referred to as "free shares," shares which
were originally subject to a contingent deferred sales charge but to which the
contingent deferred sales charge no longer applies are called "matured shares,"
and shares still subject to the contingent deferred sales charge are referred to
as "CDSC liable shares." CDSC liable shares held for different periods of time
are considered different types of CDSC liable shares. For instance, if you have
$1,000 in free shares, $2,000 in matured shares, and $3,000 in CDSC liable
shares, and 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.
Similarly, if CDSC liable shares have been purchased at different periods, a
proportionate amount will be taken from shares held for each period. If, for
example, you hold $1,000 in shares bought 3 months ago, $1,000 bought 6 months
ago, and $1,000 bought 9 months ago, and you exchange $1,500 into the new fund,
$500 from each of these shares will be deemed exchanged into the new fund.
The only money market fund exchange option available to Class II shareholders is
the Franklin Templeton Money Fund II ("Money Fund II"), a series of the Franklin
Templeton Money Fund Trust. No drafts (checks) may be written on Money Fund II
accounts, nor may Class II shareholders purchase shares of Money Fund II
directly. Class II shares exchanged for shares of Money Fund II will continue to
age, for purposes of calculating the contingent deferred sales charge, because
they continue to be subject to Rule 12b-1 fees. The contingent deferred sales
charge will be assessed if CDSC liable shares are redeemed. Class I shares may
be exchanged for shares of any of the money market funds in the Franklin
Templeton Funds except Money Fund II. Draft writing privileges and direct
purchases are allowed on these other money market funds as described in their
respective prospectuses.
To the extent shares are exchanged proportionately, as opposed to another method
such as first-in first-out or free-shares followed by CDSC liable shares, the
exchanged shares may, in some instances, be CDSC liable even though a redemption
of such shares, as discussed elsewhere herein, may no longer be subject to a
contingent deferred sales charge. The proportional method is believed by
management to more closely meet and reflect the expectations of Class II
shareholders in the event shares are redeemed during the contingency period. For
federal income tax purposes, the cost basis of shares redeemed or exchanged is
determined under the Code without regard to the method of transferring shares
chosen by the Fund.
Retirement Plan Accounts
Franklin Templeton IRA and 403(b) retirement plan accounts may exchange shares
directly. Certain restrictions may apply, however, to other types of retirement
plans. See "Restricted Accounts" under "Telephone Transactions."
Timing Accounts
Accounts which are administered by allocation or market timing services to
exchange shares based on predetermined market indicators ("Timing Accounts")
will be charged a $5.00 administrative service fee per each such exchange. All
other exchanges are without charge.
Restrictions on Exchanges
In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently terminate the exchange
privilege or reject any specific purchase order for any Timing Account or any
person whose transactions seem to follow a timing pattern who: (i) makes an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, (ii) makes more than two exchanges out of the Fund per calendar
quarter, or (iii) exchanges shares equal in value to at least $5 million, or
more than 1% of the Fund's net assets. Accounts under common ownership or
control, including accounts administered so as to redeem or purchase shares
based upon certain predetermined market indicators, will be aggregated for
purposes of the exchange limits.
The Fund also reserves the right to refuse the purchase side of an exchange
request by any Timing Account, person, or group if, in the Manager's judgment,
the Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
The purchase side of an exchange may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and therefore may be
refused.
The Fund and Distributors, as indicated under "How Do I Buy Shares?", reserve
the right to refuse any order for the purchase of shares.
Transfers
Transfers between identically registered accounts in the same fund and class are
treated as non-monetary and non-taxable events and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Shares of each class will be transferred on
the same basis as described above for exchanges.
Conversion Rights
It is not presently anticipated that Class II shares will be convertible to
Class I shares. You may, however, sell Class II shares and use the proceeds to
purchase Class I shares, subject to all applicable sales charges.
How Do I Sell Shares?
- --------------------------------------------------------------------------------
You may liquidate your shares at any time and receive from the Fund the value of
the shares. You may redeem shares in any of the following ways:
By Mail
Send a written request signed by all registered owners, to Investor Services, at
the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. You will then receive from the Fund the
value of the class of shares redeemed based upon the net asset value per share
(less a contingent deferred sales charge, if applicable) next computed after the
written request in proper form is received by Investor Services. Redemption
requests received after the time at which the net asset value is calculated will
receive the price calculated on the following business day. The net asset value
per share of each class is determined as of the scheduled close of the Exchange
(generally 1:00 p.m. Pacific time) each day that the Exchange is open for
trading. You are requested to provide a telephone number where you may be
reached during business hours, or in the evening if preferred. Investor
Services' ability to contact you promptly when necessary will speed the
processing of the redemption.
To be considered in proper form, signatures must be guaranteed if the redemption
request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
address of record, preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated
or may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signatures must be guaranteed by an "eligible guarantor institution" as defined
under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are advised,
for your protection, to send the share certificate and assignment form in
separate envelopes if they are being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officers of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustees and (2)
a copy of the pertinent pages of the trust document listing the trustees or a
Certification for Trust if the trustees are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and applicable state
law since these accounts have varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
By Telephone
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this Prospectus, you may redeem
shares of the Fund by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts." You may obtain
additional information about telephone redemptions by writing to the Fund or
Investor Services at the address shown on the cover or by calling
1-800/632-2301. The Fund and Investor Services will employ reasonable procedures
to confirm that instructions given by telephone are genuine. You, however, bear
the risk of loss in certain cases as described under "Telephone Transactions -
Verification Procedures."
If your account has a completed Agreement on file, redemptions of uncertificated
shares or shares which have previously been deposited with the Fund or Investor
Services may be made for up to $50,000 per day per Fund account. Telephone
redemption requests received before the scheduled close of the Exchange
(generally 1:00 p.m. Pacific time) on any business day will be processed that
same day. The redemption check will be sent within seven days, made payable to
all the registered owners on the account, and will be sent only to the address
of record.
Redemption requests by telephone will not be accepted within 30 days following
an address change by telephone. In that case, you should follow the other
redemption procedures set forth in this Prospectus. Institutional accounts
(certain corporations, bank trust departments, qualified retirement plans and
government entities which qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) that wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from the Franklin Templeton Institutional Services Department by
calling 1-800/321-8563.
Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if you redeem
shares through a dealer, the redemption price will be the net asset value next
calculated after your dealer receives the order which is promptly transmitted to
the Fund, rather than on the day the Fund receives your written request in
proper form. The documents described under "By Mail" above, as well as a signed
letter of instruction, are required regardless of whether you redeem shares
directly or submit such shares to a securities dealer for repurchase. Your
letter should reference the Fund and the class, the account number, the fact
that the repurchase was ordered by a dealer and the dealer's name. Details of
the dealer-ordered trade, such as trade date, confirmation number, and the
amount of shares or dollars, will help speed processing of the redemption. The
seven-day period within which the proceeds of your redemption will be sent will
begin when the Fund receives all documents required to complete ("settle") the
repurchase in proper form. The redemption proceeds will not earn dividends or
interest during the time between receipt of the dealer's repurchase order and
the date the redemption is processed upon receipt of all documents necessary to
settle the repurchase. Thus, it is in your best interest to have the required
documentation completed and forwarded to the Fund as soon as possible. Your
dealer may charge a fee for handling the order. See "How Do I Buy and Sell
Shares?" in the SAI for more information on the redemption of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers, all or a portion of
Class I investments of $1 million or more and any Class II investments redeemed
within the contingency period (12 months for Class I and 18 months for Class II)
will be assessed a contingent deferred sales charge, unless one of the
exceptions described below applies. The charge is 1% of the lesser of the value
of the shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the net asset value at the time of purchase of such shares,
and is retained by Distributors. The contingent deferred sales charge is waived
in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: specified net asset value purchases discussed under "How Do I
Buy Shares? - Purchases at Net Asset Value;" exchanges; any account fees;
distributions from an individual retirement plan account due to death or
disability or upon periodic distributions based on life expectancy; tax-free
returns of excess contributions from employee benefit plans; distributions from
employee benefit plans, including those due to termination or plan transfer;
redemptions initiated by the Fund due to an account falling below the minimum
specified account size; court-ordered redemptions from any UTMA account;
redemptions following the death of the shareholder or beneficial owner; and
redemptions through a Systematic Withdrawal Plan set up for shares prior to
February 1, 1995, and for Systematic Withdrawal Plans set up thereafter,
redemptions of up to 1% monthly of an account's net asset value (3% quarterly,
6% semiannually or 12% annually). For example, if a Class I account maintained
an annual balance of $1,000,000, only $120,000 could be withdrawn through a
once-yearly Systematic Withdrawal Plan free of charge. Any amount over that
$120,000 would be assessed a 1% contingent deferred sales charge. Likewise, if a
Class II account maintained an annual balance of $10,000, only $1,200 could be
withdrawn through a once-yearly Systematic Withdrawal Plan free of charge.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests for redemptions of a specified dollar
amount will result in additional shares being redeemed to cover any applicable
contingent deferred sales charge, while requests for redemption of a specific
number of shares will result in the applicable contingent deferred sales charge
being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption.
The right of redemption may be suspended or the date of payment postponed if the
Exchange is closed (other than customary closing) or upon the determination of
the SEC that trading on the Exchange is restricted or an emergency exists, or if
the SEC permits it, by order, for the protection of shareholders. Of course, the
amount received may be more or less than the amount you invested, depending on
fluctuations in the market value of securities owned by the Fund.
Retirement Plan Accounts
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement plan account, you or your securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such plans to a
participant under age 591/2, unless the distribution meets one of the exceptions
set forth in the Code.
Other Information
Distribution or redemption checks sent to you do not earn interest or any other
income during the time such checks remain uncashed and neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
Telephone Transactions
- --------------------------------------------------------------------------------
By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer Fund shares in
one account to another identically registered account in the Fund, (iv) request
the issuance of certificates (to be sent to the address of record only) and (v)
exchange Fund shares as described in this Prospectus by telephone. In addition,
if you complete and file an Agreement as described under "How Do I Sell Shares?
- - By Telephone" you will be able to redeem shares of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to you caused by an unauthorized transaction. The Fund and
Investor Services may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not followed. You are,
of course, under no obligation to apply for or accept telephone transaction
privileges. In any instance where the Fund or Investor Services is not
reasonably satisfied that instructions received by telephone are genuine, the
requested transaction will not be executed, and neither the Fund nor Investor
Services will be liable for any losses which may occur because of a delay in
implementing a transaction.
Restricted Accounts
Telephone redemptions and dividend option changes may not be accepted on
Franklin Templeton retirement accounts. To assure compliance with all applicable
regulations, special forms are required for any redemption, distribution or
dividend payment changes. While the telephone exchange privilege is extended to
Franklin Templeton IRA and 403(b) retirement accounts, certain restrictions may
apply to other types of retirement plans.
To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plan Specialist at 1-800/527-2020.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In such situations, you may wish to contact your investment
representative for assistance, or send written instructions to the Fund as
detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from your inability to execute a telephone transaction.
How Are Fund Shares Valued?
- --------------------------------------------------------------------------------
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price).
The net asset value per share of each class is determined by deducting the
aggregate gross value of all liabilities of each class from the aggregate gross
value of all assets of each class, and then dividing the difference by the
number of shares of the class outstanding. Assets in the Fund's portfolio are
valued as described under "How Are Fund Shares Valued?" in the SAI.
Each class will bear, pro rata, all of the common expenses of the Fund, except
that each class will bear the Rule 12b-1 fees payable under its respective plan.
The net asset value of all outstanding shares of each class of the Fund will be
computed on a pro rata basis based on the proportionate participation in the
Fund represented by the value of shares of such class. Due to the specific
distribution expenses and other costs that will be allocable to each class, the
dividends paid to each class of the Fund may vary.
How Do I Get More Information About My Investment?
- --------------------------------------------------------------------------------
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this Prospectus.
From a touch-tone phone, you may access an automated system (day or night) which
offers the following features. By calling the Franklin TeleFACTS(R) system at
1-800/247-1753, you may obtain Class I and Class II account information, current
price and, if available, yield or other performance information, specific to the
Fund or any Franklin Templeton Fund. In addition, Class I shareholders may
process an exchange, within the same class, into an identically registered
Franklin account, and request duplicate confirmation or year-end statements and
deposit slips.
Class I and Class II share codes for the Fund, which will be needed to access
system information, are 110 and 210, respectively. The system's automated
operator will prompt you with easy to follow step-by-step instructions from the
main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided. The same numbers may be used when calling
from a rotary phone.
Hours of Operation (Pacific Time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing Impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
How Does the Fund Measure Performance?
- --------------------------------------------------------------------------------
Advertisements, sales literature and communications to you may contain several
measures of a class' performance, including current yield, various expressions
of total return and current distribution rate. They may occasionally cite
statistics to reflect the Fund's volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price for one-, five- and ten-year periods, or portion thereof,
to the extent applicable, through the end of the most recent calendar quarter,
assuming reinvestment of all distributions. The Fund may also furnish total
return quotations for each class for other periods, or based on investments at
various sales charge levels or at net asset value. For such purposes, total
return equals the total of all income and capital gain paid to shareholders,
assuming reinvestment of all distributions, plus (or minus) the change in the
value of the original investment, expressed as a percentage of the purchase
price.
Current yield for each class reflects the income per share earned by the Fund's
portfolio investments. It is calculated for each class by dividing that class'
net investment income per share during a recent 30-day period by the maximum
public offering price for that class of shares on the last day of that period
and annualizing the result.
Current yield for each class, which is calculated according to a formula
prescribed by the SEC (see "General Information" in the SAI), is not indicative
of the dividends or distributions which were or will be paid to the Fund's
shareholders. Dividends or distributions paid to shareholders of a class are
reflected in the current distribution rate which may be quoted to you. The
current distribution rate is computed by dividing the total amount of dividends
per share paid by a class during the past 12 months by a current maximum
offering price for that class of shares. Under certain circumstances, such as
when there has been a change in the amount of dividend payout or a fundamental
change in investment policies, it might be appropriate to annualize the
dividends paid during the period such policies were in effect, rather than using
the dividends during the past 12 months. The current distribution rate differs
from the current yield computation because it may include distributions to
shareholders from sources other than dividends and interest, such as short-term
capital gain, and is calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against a class' income and will assume the payment of the
maximum sales charge on the purchase of that class of shares. When there has
been a change in the sales charge structure, the historical performance figures
will be restated to reflect the new rate. The investment results of each class,
like all other investment companies, will fluctuate over time; thus, performance
figures should not be considered to represent what an investment may earn in the
future or what a class' total return, current yield or distribution rate may be
in any future period.
General Information
- --------------------------------------------------------------------------------
Reports to Shareholders
The Fund's fiscal year ends September 30. Annual Reports containing audited
financial statements of Custodian Funds, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to each household, as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to Custodian
Funds at the telephone number or address set forth on the cover page of this
Prospectus.
Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and under "General Information" in the SAI.
Organization and Voting Rights
The authorized capital stock of Custodian Funds consists of fourteen billion
shares of capital stock of $0.01 par value, all of which has been authorized by
the Board to be issued in five separate series, 7,000,000,000 of which have been
designated as Class I shares, and 7,000,000,000 of which have been designated as
Class II shares. Of those shares, 2,500,000,000 have been designated as Class I
shares of the Fund, and 2,500,000,000 have been designated as Class II shares of
the Fund. The Board is empowered by the Charter to issue other series of capital
stock and to increase or decrease the number, but not below that at the time
outstanding.
The assets received for the issue or sale of each series of the capital stock of
Custodian Funds and all income, earnings, profits and proceeds thereof, subject
only to the rights of creditors, are especially allocated to such series, and
constitute the underlying assets of such series. The underlying assets of each
series are required to be segregated on the books of account, and are to be
charged with the liabilities in respect to such series and with a share of the
general liabilities of Custodian Funds. Liabilities in respect to any two or
more series are to be allocated in proportion to the asset value of the
respective series except where direct expenses can otherwise be fairly
allocated. The Board has the right to determine which liabilities are allocable
to a given series, and which are general or allocable to two or more series. In
the event of the dissolution or liquidation of Custodian Funds, the registered
holders of the capital stock of any series are entitled to receive as a class
the underlying assets of such series available for distribution to shareholders.
Shares of capital stock entitle their holders to one vote per share; however,
votes are made by series on matters affecting an individual series. Shares have
noncumulative voting rights which means that in all elections of directors, the
holders of more than 50% of the shares voting can elect all of the directors if
they choose to do so and, in such event, the holders of the remaining shares
voting will not be able to elect any person or persons to the Board. Shares have
no preemptive or subscription rights, and are fully transferable. There are no
conversion rights; however, holders of shares of each class of any series may
reinvest all or any portion of the proceeds from the redemption or repurchase of
such shares into shares of the same class of any other series as described under
"What If My Investment Outlook Changes? Exchange Privilege."
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 a certain class of the Fund's shares, however, only shareholders of that
class will be entitled to vote. Therefore each class of shares will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by class by state corporation law, or (3) required to be
voted on separately by class by the 1940 Act, or the rules adopted thereunder.
For instance, if a change to the Rule 12b-1 plan relating to Class I shares
requires shareholder approval, only shareholders of Class I may vote on the
change to the Rule 12b-1 plan affecting that class. Similarly, if a change to
the Rule 12b-1 plan relating to Class II shares requires approval, only
shareholders of Class II may vote on changes to such plan. On the other hand, if
there is a proposed change to the investment objective of the Fund, the proposal
would affect all shareholders, regardless of which class of shares they hold
and, therefore, each share has the same voting rights.
Maryland General Corporation Law does not require corporations registered as
management investment companies under the 1940 Act to hold routine annual
meetings of shareholders and the Fund does not intend to hold such routine
annual shareholders meetings. The Fund may, however, hold a special shareholders
meeting for such purposes as changing fundamental investment restrictions,
approving a new management agreement or any other matters which are required to
be acted on by shareholders under the 1940 Act.
A meeting may also be called by the directors in their discretion or by
shareholders holding at least 10% of the shares entitled to vote at the meeting
for the purpose of voting upon the removal of directors, in which case
shareholders may receive assistance in communicating with other shareholders in
connection with the election or removal of directors such as that provided in
Section 16(c) of the 1940 Act. In addition, Maryland General Corporation Law
provides that a special meeting may be called by a majority of the Board or by
the written request of shareholders holding at least 25% of the shares entitled
to vote at the meeting.
Redemptions by the Fund
The Fund reserves the right to redeem your shares, at net asset value, if your
account has a value of less than $50, but only where the value of your account
has been reduced by the prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at least
six months, provided you are given advance notice. For more information, see
"How Do I Buy and Sell Shares?" in the SAI.
Other Information
The Fund believes that it is generally a permissible investment for national
banks, federally chartered savings and loan associations, federally chartered
credit unions and the Fishing Vessel Capital Construction Fund. Such investors
should confirm the permissibility of proposed investments in this series with
their counsel.
Registering Your Account
- --------------------------------------------------------------------------------
An account registration should reflect your intentions as to ownership. Where
there are two co-owners on the account, the account will be registered as "Owner
1" and "Owner 2"; the "or" designation is not used except for money market fund
accounts. If co-owners wish to have the ability to redeem or convert on the
signature of only one owner, a limited power of attorney may be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, you may transfer an account in the Fund carried in "street"
or "nominee" name by your securities dealer to a comparably registered Fund
account maintained by another securities dealer. Both the delivering and
receiving securities dealers must have executed dealer agreements on file with
Distributors. Unless a dealer agreement has been executed and is on file with
Distributors, the Fund will not process the transfer and will so inform your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer to transfer the account to a receiving securities dealer and
sign any documents required by the securities dealers to evidence consent to the
transfer. Under current procedures, the account transfer may be processed by the
delivering securities dealer and the Fund after the Fund receives authorization
in proper form from your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, you will
be deemed to have authorized the use of electronic instructions on the account,
including, without limitation, those initiated through the services of the NSCC,
to have adopted as instruction and signature any such electronic instructions
received by the Fund and Investor Services, and to have authorized them to
execute the instructions without further inquiry. At the present time, such
services which are available include the NSCC's "Networking," "Fund/SERV," and
"ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
- --------------------------------------------------------------------------------
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of any
such payments made to individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN") and made certain
required certifications that appear in the Shareholder Application. You may also
be subject to backup withholding if the IRS or a securities dealer notifies the
Fund that the number furnished by you is incorrect or that you are subject to
backup withholding for previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by you is in
fact incorrect or upon the failure of a shareholder who has completed an
"awaiting TIN" certification to provide the Fund with a certified TIN within 60
days after opening the account.
Useful Terms and Definitions
- --------------------------------------------------------------------------------
1940 Act - Investment Company Act of 1940, as amended.
Advisers - Franklin Advisers, Inc., the Fund's investment manager.
Board - The Board of Directors of Custodian Funds.
Code - Internal Revenue Code of 1986, as amended.
Designated Retirement Plans - certain retirement plans, including
profit-sharing, pension, 401(k) and simplified employee pension plans, that: (i)
are sponsored by an employer with at least 200 employees; (ii) have aggregate
plan assets of at least $1 million; or (iii) agree to invest at least $1 million
in any of the Franklin Templeton Funds over a 13-month period. Distributors
determines the qualifications for Designated Retirement Plans.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter.
Exchange - New York Stock Exchange.
Franklin Funds - the mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust.
Franklin Templeton Funds - the Franklin Funds and the Templeton Funds.
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries.
Investor Services - Franklin/Templeton Investor Services, Inc.
Letter - Letter of Intent.
Manager - Franklin Advisers, Inc., the Fund's investment manager.
Net asset value (NAV) - the value of a mutual fund determined by deducting the
fund's liabilities from the total assets of the portfolio. The net asset value
per share is determined by dividing the net asset value of the fund by the
number of shares outstanding. When you buy, sell or exchange shares, we will use
the NAV per share for the applicable class next calculated after we receive your
request in proper form.
Non-Designated Retirement Plans - employee benefit plans not included as
"Designated Retirement Plans" and not qualified under Section 401 of the Code.
Offering price - The public offering price is equal to the net asset value of
the class plus the front-end sales charge. The front-end sales charge is 4.25%
for Class I shares and 1% for Class II shares.
Proper Form (Purchases) - generally, the Fund must receive a completed
Shareholder Application accompanied by a negotiable check.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information.
SEC - Securities and Exchange Commission.
Securities Dealer - financial institutions which, either directly or through
affiliates, have an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
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.
INCOME SERIES
FRANKLIN CUSTODIAN FUNDS, INC.
PROSPECTUS February 1, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
================================================================================
The Income Series (the "Fund") is a diversified series of Franklin Custodian
Funds, Inc. (the "Custodian Funds"), an open-end management investment company.
The investment objective of the Fund is to maximize income while maintaining
prospects for capital appreciation. The Fund may invest in domestic and foreign
securities as described under "How Does the Fund Invest Its Assets?"
The Fund may invest up to 100% of its portfolio in non-investment grade bonds,
commonly known as "junk bonds," which entail default and other risks greater
than those associated with higher rated securities. You should carefully assess
the risks associated with an investment in the Fund in light of the securities
in which the Fund invests. See "What Are the Fund's Potential Risks? - High
Yielding, Fixed-Income Securities."
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that you should know before investing. After reading
the Prospectus, you should retain it for future reference; it contains
information about the purchase and sale of shares and other items which you will
find useful to have.
This Prospectus pertains only to the Income Series. A separate Prospectus, also
dated February 1, 1996, describes all five series of Custodian Funds and is
incorporated herein by reference. An SAI concerning Custodian Funds, dated
February 1, 1996 as may be amended from time to time, provides a further
discussion of certain areas in this Prospectus and other matters which may be of
interest to you. It has been filed with the SEC and is incorporated herein by
reference. A copy is available without charge from the Fund or from
Distributors, at the address or telephone number shown above.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank; further, such shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
Shares of the Fund involve investment risks, including the possible loss of
principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.
The Fund offers two classes of shares: Income Series - Class I ("Class I") and
Income Series - Class II ("Class II"). You can choose between Class I shares,
which generally bear a higher front-end sales charge and lower ongoing Rule
12b-1 distribution fees ("Rule 12b-1 fees"), and Class II shares, which
generally have a lower front-end sales charge and higher ongoing Rule 12b-1
fees. You should consider the differences between the two classes, including the
impact of sales charges and Rule 12b-1 fees, in choosing the more suitable class
given your anticipated investment amount and time horizon. See "How Do I Buy
Shares? - Deciding Which Class to Buy."
ContentsPage
Expense Table............................................ 2
Financial Highlights -
How Has the Fund Performed?............................. 4
What Is the Franklin Income Series?...................... 4
How Does the Fund Invest Its Assets?..................... 5
What Are the Fund's Potential Risks?..................... 11
How You Participate in the Results
of the Fund's Activities................................ 15
Who Manages the Fund?.................................... 15
What Distributions Might
I Receive from the Fund?................................ 17
How Taxation Affects You and the Fund.................... 19
How Do I Buy Shares?..................................... 20
What Programs and Privileges Are
Available to Me as a Shareholder?....................... 26
What If My Investment Outlook
Changes? - Exchange Privilege........................... 28
How Do I Sell Shares?.................................... 31
Telephone Transactions................................... 35
How Are Fund Shares Valued?.............................. 36
How Do I Get More Information
About My Investment?.................................... 37
How Does the Fund Measure Performance?................... 37
General Information...................................... 38
Registering Your Account................................. 40
Important Notice Regarding
Taxpayer IRS Certifications............................. 41
Useful Terms and Definitions............................. 41
Appendix................................................. 42
Expense Table
- --------------------------------------------------------------------------------
The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. These figures are based on the aggregate operating
expenses of each class for the fiscal year ended September 30, 1995. The Class
II figures are annualized.
Class I Class II
Shareholder Transaction Expenses
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*
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:
Shareholder Servicing Costs............... 0.05% 0.05%
Reports to Shareholders................... 0.04% 0.04%
Other..................................... 0.03% 0.03%
Total Other Expenses...................... 0.12% 0.12%
Total Fund Operating Expenses............. 0.71% 1.23%
+Although Class II has a lower front-end sales charge than Class I, over time
the higher Rule 12b-1 fees for Class II may cause you to pay more for Class II
shares than for Class I shares. Given the maximum front-end sales charge and the
rate of Rule 12b-1 fees of each class, it is estimated that this will take less
than six years if you maintain total shares valued at less than $100,000 in the
Franklin Templeton Funds. If your investments in the Franklin Templeton Funds
are valued at $100,000 or more, you will reach the crossover point more quickly.
++Class I investments of $1 million or more are not subject to a front-end sales
charge; however, a contingent deferred sales charge of 1% is generally imposed
on certain redemptions within a "contingency period" of 12 months of the
calendar month of such investments. See "How Do I Sell Shares? - Contingent
Deferred Sales Charge."
+++Class II shares redeemed within a "contingency period" of 18 months of the
calendar month of such investments are subject to a 1% contingent deferred sales
charge. See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
*$5.00 fee imposed only on Timing Accounts as described under "What If My
Investment Outlook Changes? - Exchange Privilege." All other exchanges are
processed without a fee.
**The maximum amount of Rule 12b-1 fees allowed pursuant to the Class I
distribution plan is 0.15%. See "Who Manages the Fund? - Plans of Distribution."
Consistent with National Association of Securities Dealers, Inc.'s rules, it is
possible that the combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the economic equivalent of
the maximum front-end sales charges permitted under those same rules.
You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Fund. Rather,
the table has been provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you should refer to the appropriate sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge and applicable contingent deferred
sales charge, that apply to a $1,000 investment in the Fund over various time
periods assuming (1) a 5% annual rate of return and (2) redemption at the end of
each time period.
One Year Three Years Five Years Ten Years
Class I..... $49* $64 $80 $127
Class II.... $32 $49 $77 $157
*Assumes that a contingent deferred sales charge will not apply to Class I
shares.
You would pay the following expenses on the same investment, assuming no
redemption.
One Year Three Years Five Years Ten Years
- --------------------------
Class II.... $22 $49 $77 $157
This example is based on the aggregate annual operating expenses shown above and
should not be considered a representation of past or future expenses, which may
be more or less than those shown. The operating expenses are borne by the Fund
and only indirectly by you as a result of your investment in the Fund. In
addition, federal securities regulations require the example to assume an annual
return of 5%, but the Fund's actual return may be more or less than 5%.
Financial Highlights - How Has the Fund Performed?
- --------------------------------------------------------------------------------
Set forth below is a table containing the financial highlights for a share of
each class of the Fund. The information for each of the five fiscal years in the
period ended September 30, 1995 has been audited by Coopers & Lybrand L.L.P.,
independent auditors, whose audit report appears in the financial statements in
the Fund's Annual Report to Shareholders dated September 30, 1995. The remaining
figures, which are also audited, are not covered by the auditors' current
report. See "Reports to Shareholders" under "General Information" in this
Prospectus.
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data+++
-------------------------------------------------------- ---------------------------
Distri-
Net Real- Distri- butions Ratio of Net
Net Asset Net ized & Un- butions From Net Asset Net Assets Ratio of Investment
Year Value Invest- realized GainTotal From From Net Realized Total Value at End Expenses Income to Portfolio
Ended Beginning ment (Loss) on Investment InvestmentCapital Distri- at End Total of Year to Average Average Turnover
Sep.30 of Year Income Investments Operations Income Gains butions of Year Return* (in 000's)Net Assets Net Assets Rate
Class I Shares:
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986 $2.06 $0.230 $0.238 $0.468 $(0.220) $(0.058) $(0.278) $2.25 24.20% $ 226,418 0.71% 9.76% 30.76%
1987 2.25 0.206 0.004 0.210 (0.220) (0.020) (0.240) 2.22 9.08 484,270 0.64 9.20 18.14
1988 2.22 0.228 (0.096) 0.132 (0.220) (0.022) (0.242) 2.11 6.00 726,815 0.61 10.50 10.01
1989 2.11 0.222 0.009 0.231 (0.220) (0.011) (0.231) 2.11 11.16 1,189,694 0.57 10.46 12.05
1990 2.11 0.212 (0.324) (0.112) (0.220) (0.018) (0.238) 1.76 (6.37) 1,299,130 0.55 10.73 12.14
1991 1.76 0.190 0.350 0.540 (0.220) - (0.220) 2.08 32.60 1,673,187 0.56 10.17 33.92
1992 2.08 0.190 0.194 0.384 (0.205) (0.009) (0.214) 2.25 18.80 2,483,501 0.55 9.11 23.30
1993 2.25 0.180 0.227 0.407 (0.185) (0.012) (0.197) 2.46 18.76 3,935,444 0.54 7.84 25.41
1994 2.46 0.170 (0.201) (0.031) (0.180) (0.029) (0.209) 2.22 (1.52) 4,891,505 0.64 7.37 23.37
1995 2.22 0.180 0.108 0.288 (0.180) (0.028) (0.208) 2.30 14.00 5,885,788 0.71 8.26 58.64
Class II Shares:
1995+ 2.18 0.079 0.113 0.192 (0.072) - (0.072) 2.30 8.96 65,822 1.23++ 7.89++ 58.64
</TABLE>
+For the period May 1, 1995 (effective date) to September 30, 1995.
++Annualized.
+++Ratios for the year ended 1995, Class I and Class II, have been calculated
using the daily average net assets during the period.
*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. Prior to May 1, 1994, the total
return for Class I shares also assumes reinvestment of dividends at the offering
price and capital gains, if any, at net asset value. Effective May 1, 1994 with
the implementation of the Rule 12b-1 distribution plan for Class I shares, the
sales charge on reinvested dividends was eliminated.
What Is the Franklin Income Series?
- --------------------------------------------------------------------------------
The Fund is a diversified series of Custodian Funds, an open-end management
investment company commonly called a "mutual fund." Custodian Funds was
incorporated under the laws of Delaware in 1947, reincorporated under the laws
of Maryland in 1979, and registered with the SEC under the 1940 Act. Custodian
Funds has five separate diversified series: Growth Series, DynaTech Series,
Utilities Series, Income Series and U.S. Government Securities Series. The
Growth Series, Utilities Series, Income Series and U.S. Government Securities
Series have two classes of shares of capital stock ("multiclass" structure) with
a par value of $0.01: Growth Series - Class I, Growth Series - Class II,
Utilities Series - Class I, Utilities Series - Class II, Income Series - Class
I, Income Series - Class II, U.S. Government Securities Series - Class I and
U.S. Government Securities Series - Class II. All Fund shares outstanding before
May 1, 1995, have been redesignated as Class I shares and will retain their
previous rights and privileges, except for legally required modifications to
shareholder voting procedures, as discussed in "General Information -
Organization and Voting Rights."
You may purchase shares of the Fund (minimum investment of $100 initially and
$25 thereafter) at the current public offering price of the class you wish to
purchase. Please see "How Do I Buy Shares?"
How Does the Fund Invest Its Assets?
- --------------------------------------------------------------------------------
The Fund's principal investment objective is to maximize income while
maintaining prospects for capital appreciation. The objective is a fundamental
policy of the Fund and may not be changed without shareholder approval. Of
course, there is no assurance that the Fund's objective will be achieved.
Types of Securities the Fund May Purchase
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 which may be made in a particular type of security and
such determination is entirely within the Manager's discretion. A breakdown of
the ratings for the bonds in the Fund's portfolio is included under "What Are
the Fund's Potential Risks?" below.
Lower Rated Securities. The Fund may invest up to 100% of its portfolio in
non-investment grade bonds, commonly known as "junk bonds", which entail default
and other risks greater than those associated with higher rated securities. You
should carefully assess the risks associated with an investment in the Fund in
light of the securities in which the Fund invests.
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 rated categories of the recognized rating services (that
is, 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. A list of these ratings is shown in the Appendix to this
Prospectus. These ratings represent the opinions of the rating services with
respect to the issuer's ability to pay interest and repay principal, although
they do not purport to reflect the risk of fluctuations in market value and are
not absolute standards of quality, and will be considered in connection with the
investment of the Fund's assets, but will not be a determining or limiting
factor. The Fund may invest in securities regardless of their rating (including
securities in the lower rating categories) or in securities which are not rated,
including up to 5% of its assets in securities which are in default at the time
of purchase. As an operating policy, however, the Fund will generally invest in
securities that are rated at least Caa by Moody's or CCC by S&P, except for
defaulted securities as noted below or, if unrated, are at least of comparable
quality as determined by the Manager. Unrated debt securities are not
necessarily of lower quality than rated securities but they may not be
attractive to as many buyers.
The Fund may also purchase debt obligations of issuers not currently paying
interest, as well as issuers who are in default, and may retain an issue which
has defaulted. Defaulted debt securities will be purchased if, in the opinion of
the Manager, it may present an opportunity for subsequent price recovery, the
issuer may resume interest payments or other advantageous developments appear
likely in the near term. In general, securities which default lose much of their
value in the time period prior to the actual default so that the security and
thus the Fund's net asset value would be impacted prior to the default.
Defaulted debt securities may be illiquid and, as such, will be part of the 10%
limit discussed under "Illiquid Investments." See "What Are the Fund's Potential
Risks? - High Yielding, Fixed-Income Securities."
In the event the rating on an issue held in the Fund's portfolio is changed by
the rating service or the security goes into default, such event will be
considered by the Fund in its evaluation of the overall investment merits of
that security but will not generally result in an automatic sale of the
security.
Rather than relying principally on the ratings assigned by 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. Since a substantial portion
of the Fund's portfolio at any particular time may consist of debt securities,
changes in the level of interest rates, among other things, will likely affect
the value of the Fund's holdings and thus the value of a shareholder's
investment.
Certain of the high yielding fixed-income securities in which the Fund may
invest may be purchased at a discount. 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.
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.
Zero Coupon Bonds. The Fund may also purchase 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 such
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 regarding these types of bonds.
Loan Participations. The Fund may invest up to 5% of its assets in loan
participations and other related direct or indirect bank obligations ("Loan
Participations"). These instruments are interests in floating or variable rate
senior loans to U.S. corporations, partnerships and other entities. While Loan
Participations generally trade at par value, the Fund will be able to acquire
Loan Participations, including those which sell at a discount because of the
borrower's credit problems. To the extent the borrower's credit problems are
resolved, the Loan Participation may appreciate in value. The Manager may
acquire Loan Participations for the Fund when it believes that over the long
term, appreciation will take place. An investment in such securities, however,
carries substantially the same 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."
When-Issued and Delayed Delivery Transactions. The Fund may purchase debt
obligations on a "when-issued" or "delayed delivery" basis. These securities are
subject to market fluctuation prior to delivery to the Fund and generally do not
earn interest until their scheduled delivery date. Therefore, the value or
yields at delivery may be more or less than the value or yields available when
the transaction was entered into. When the Fund is the buyer in such a
transaction, it will maintain, in a segregated account with its custodian, cash
or high-grade marketable securities having an aggregate value equal to the
amount of such purchase commitments until payment is made. To the extent the
Fund engages in when-issued and delayed delivery transactions, it will do so
only for the purpose of acquiring portfolio securities consistent with the
Fund's investment 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 Fund's SAI for a more complete discussion
regarding when-issued and delayed delivery transactions.
The Fund's total return for Class I, as calculated pursuant to the formula
prescribed by the SEC, for the one-, five- and ten-year periods for the Class I
shares ended on September 30, 1995 was 9.09%, 15.28% and 12.02% respectively.
See "How Does the Fund Measure Performance?"
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 purchase foreign securities which are traded in the U.S. or purchase
American Depositary Receipts ("ADRs"), which are certificates issued by U.S.
banks representing the right to receive securities of a foreign issuer deposited
with that bank or a correspondent bank. However, the Fund may also purchase the
securities of foreign issuers directly in foreign markets.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with any applicable U.S. and foreign currency
restrictions and other tax laws and laws limiting the amount and types of
foreign investments. Changes of governmental administrations or of economic or
monetary policies, in the U.S. or abroad, or changed circumstances in dealings
between nations, or currency convertibility or exchange rates could result in
investment losses for the Fund.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Securities which are acquired by the Fund outside the U.S. and which are
publicly traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered by the Fund to be illiquid assets so long
as the Fund acquires and holds the securities with the intention of reselling
them in the foreign trading market, the Fund reasonably believes it can readily
dispose of the securities for cash in the U.S. or foreign market and current
market quotations are readily available.
Foreign exchange gains and losses realized by the Fund in connection with
transactions involving foreign currencies, foreign currency payables or
receivables, and foreign currency-denominated debt securities are subject to
special tax rules which may cause such gains and losses to be treated as
ordinary income and losses rather than capital gains and losses and may affect
the amount and timing of the Fund's income or loss from such transactions and in
turn its distributions to shareholders. These rules are discussed in the SAI.
The holding of foreign securities, however, may be limited by the Fund to avoid
investment in certain Passive Foreign Investment Companies ("PFIC") and the
imposition of a PFIC tax on the Fund resulting from such investments.
Options. The Fund may write covered call options which are listed for trading on
a national securities exchange. This means that the Fund will only write options
on securities which it actually owns. A call option gives the person who buys it
the right to buy the security on which the option is written for a specified
period of time for a price agreed to at the time the Fund sells the option, even
though that price may be less than the value of the security at the time the
option is exercised. When the Fund sells covered call options, it will receive a
cash premium which can be used in whatever way is felt to be most beneficial to
the Fund. The risks associated with covered call writing are that in the event
of a price rise on the underlying security which would likely trigger the
exercise of the call option, the Fund will not participate in the increase in
price beyond the exercise price. If the Fund determines that it does not wish to
deliver the underlying securities from its portfolio, it would have to enter
into a "closing purchase transaction," the premium on which may be higher or
lower than that received by the Fund for writing the option. There is no
assurance that a closing purchase transaction will be available in every
instance. Transactions in options are generally considered "derivative
securities."
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
that 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, rather than interest payments, and are usually treated as such for
corporate tax purposes.
Other Policies 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%. 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.
Repurchase Agreements. The Fund may engage in repurchase transactions, in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked-to-market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or delay
in the liquidation of the collateral securing the repurchase agreement. The Fund
might also incur disposition costs in liquidating the collateral. The Fund,
however, intends to enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are deemed creditworthy by
the Manager. A repurchase agreement is deemed to be a loan by the Fund under the
1940 Act. The U.S. government security subject to resale (the collateral) will
be held on behalf of the Fund by a custodian approved by the 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. It is the policy of the Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the
securities) may not constitute, at the time of purchase, more than 10% of the
value of the total net assets of the Fund. Subject to this limitation, the
Fund's Board 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 the Manager
determines on a daily basis that there is a liquid institutional or other market
for such securities. Notwithstanding the Manager's determinations in this
regard, the Board will remain responsible for such determinations and will
consider appropriate action, consistent with the objective and policies of the
Fund, if the security should become illiquid subsequent to its purchase. To the
extent the Fund invests in restricted securities that are deemed liquid, the
general level of illiquidity in the Fund may be increased if qualified
institutional buyers become uninterested in purchasing these securities or the
market for these securities contracts.
See "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the
SAI.
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
purchasers 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 in the event that the value of the claim
increases as the debtor's financial position improves. In the event that 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. Trading in claims is not regulated by federal
securities laws or the SEC. Currently, trading in claims is 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
time of acquisition.
The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. For a list of these restrictions and more information
concerning the policies discussed herein, please see "How Does the Fund Invest
Its Assets?" and "Investment Restrictions" in the SAI.
What Are the Fund's Potential Risks?
- --------------------------------------------------------------------------------
High Yielding Fixed-Income Securities
Corporate debt securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and general
market liquidity (market risk). Lower rated or unrated securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general level
of interest rates. The investment manager will consider both credit risk and
market risk in making investment decisions as to corporate debt obligations for
the Fund.
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
which 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 bonds rated BBB by S&P or Baa by 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. As of September 30, 1995, 3
issues out of 205 issues (excluding short-term securities and cash equivalents)
in the Fund's portfolio were in default. In the fiscal year ended September 30,
1995, 3 issues defaulted (from 3 separate issuers) and a total of 14 issues
defaulted over the prior three years, of which the Fund still holds the 3 issues
mentioned above. Defaulted issues represented 0.70% of the net assets of the
Fund at September 30, 1995. Current prices for defaulted bonds are generally
significantly lower than their purchase price, and the Fund may have unrealized
losses on such defaulted securities which are reflected in the price of the
Fund's shares. In general, securities which 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 which has defaulted
because such issue may present an opportunity for subsequent price recovery.
High yielding, fixed-income securities frequently have call or buy-back features
which 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, the Manager may find it necessary to
replace such 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 such 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 which trade in a broader secondary retail market. Generally,
purchasers of these securities are predominantly dealers and other institutional
buyers, rather than individuals. To the extent the secondary trading market for
a particular high yielding, fixed-income security does exist, it is generally
not as liquid as the secondary market for higher rated securities. Reduced
liquidity in the secondary market may have an adverse impact on market price and
the Fund's ability to dispose of particular issues, when necessary, to meet the
Fund's liquidity needs or in response to a specific economic event, such as the
deterioration in the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult for the
Fund to obtain market quotations based on actual trades for purposes of valuing
the Fund's portfolio. Current values for these high yield issues are obtained
from pricing services and/or a limited number of dealers and may be based upon
factors other than actual sales. See "How Are Fund Shares Valued?" in this
Prospectus and 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 such restricted securities before
the securities have been registered, it may be deemed an underwriter of such
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of such securities; however, the Fund will generally incur no costs when the
issuer is responsible for registering the securities.
The Fund may acquire high yielding, fixed-income securities during an initial
underwriting. Such securities involve special risks because they are new issues.
The Fund has no arrangement with its underwriters or any other person concerning
the acquisition of such securities, and the Manager will carefully review the
credit and other characteristics pertinent to such new issues.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recent recession 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. Those adverse effects may continue even as the economy
recovers. Factors adversely impacting the market value of high yielding
securities will adversely impact the Fund's net asset value. 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. 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. However, while
market prices may be temporarily depressed due to these factors, the ultimate
security price will generally reflect the true operating results of the issuer.
The Fund will rely on the Manager's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the Manager
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters.
The credit risk factors pertaining to lower rated securities also apply to lower
rated zero coupon, deferred interest and pay-in-kind bonds. Such bonds carry an
additional risk in that, unlike bonds which pay interest throughout the period
to maturity, the Fund will realize no cash until the cash payment date and, if
the issuer defaults, the Fund may obtain no return at all on its investment.
Zero coupon, deferred interest and pay-in-kind bonds involve additional special
considerations.
Zero coupon or deferred interest securities are debt obligations which do not
entitle the holder to any periodic payments of interest prior to maturity or a
specified date when the securities begin paying current interest (the "cash
payment date") and therefore are generally issued and traded at a discount from
their face amounts or par value. The discount varies depending on the time
remaining until maturity or cash payment date, prevailing interest rates,
liquidity of the security and the perceived credit quality of the issuer. The
discount, in the absence of financial difficulties of the issuer, typically
decreases as the final maturity or cash payment date of the security approaches.
The market prices of zero coupon securities are generally more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero coupon
or deferred interest securities having similar maturities and credit quality.
Current federal income tax law requires that a holder of a zero coupon security
report as income each year the portion of the original issue discount on such
security that accrues that year, even though the holder receives no cash
payments of interest during the year.
Pay-in-kind bonds are securities which pay interest through the issuance of
additional bonds. The Fund will be deemed to receive interest over the life of
such bonds and be 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 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 the 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
the Manager 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 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 which could
affect assets of the Fund invested in issuers in foreign countries.
There may be less publicly available information about foreign issuers than is
contained in reports and reflected in ratings published for U.S. issuers. Some
foreign securities markets have substantially less volume than the 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.
How You Participate in
the Results of the Fund's Activities
- --------------------------------------------------------------------------------
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
you own will increase. If the securities owned by the Fund decrease in value,
the value of your shares will also decline. In this way, you participate in any
change in the value of the securities owned by the Fund.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, you may anticipate that the value of Fund
shares will fluctuate with movements in the broader equity and bond markets.
To the extent the Fund's investments consist of debt securities, changes in
interest rates will affect the value of the Fund's portfolio and thus its share
price. Increased rates of interest which frequently accompany higher inflation
and/or a growing economy are likely to have a negative effect on the value of
Fund shares. To the extent the Fund's investments consist of common stocks, a
decline in the market, expressed for example by a drop in the Dow Jones
Industrials or the Standard & Poor's 500 average or any other equity based
index, may also be reflected in declines in the Fund's share price. History
reflects both increases and decreases in the prevailing rate of interest and in
the valuation of the market, and these may reoccur unpredictably in the future.
A decline in the stock market of any country in which the Fund is invested may
also be reflected in a decline in the Fund's share price. Changes in currency
valuations will also affect the price of the Fund's shares. History reflects
both increases and decreases in worldwide stock markets and currency valuations
and these may reoccur unpredictably in the future.
Who Manages the Fund?
- --------------------------------------------------------------------------------
The Board has the primary responsibility for the overall management of the Fund
and for electing the officers of the Fund who are responsible for administering
its day-to-day operations.
The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of shares. Although the Board
does not expect to encounter material conflicts in the future, the Board will
continue to monitor the Fund and will take appropriate action to resolve such
conflicts if any should arise.
In developing the multiclass structure the Fund has retained the authority to
establish additional classes of shares. It is the Fund's present intention to
offer only two classes of shares, but new classes may be offered in the future.
Advisers serves as the Fund's investment manager. Advisers is a wholly-owned
subsidiary of Resources, a publicly owned holding company, the principal
shareholders of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its subsidiaries. Advisers acts as investment manager or administrator
to 36 U.S. registered investment companies (118 separate series) with aggregate
assets of over $80 billion.
The team responsible for the day-to-day management of the Fund's portfolio is:
Mr. Charles B. Johnson since 1957 and Mr. 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.
Pursuant to a management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business. The Manager
performs similar services for other funds and there may be times when the
actions taken with respect to the Fund's portfolio will differ from those taken
by the Manager on behalf of other funds. Neither the Manager (including its
affiliates) nor its officers, directors or employees nor the officers and
directors of Custodian Funds are prohibited from investing in securities held by
the Fund or other funds which are managed or administered by the Manager to the
extent such transactions comply with the Fund's Code of Ethics. Please see
"Investment Advisory and Other Services" and "General Information" in the SAI
for further information on securities transactions and a summary of the Fund's
Code of Ethics.
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.
Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in the Fund's
portfolio securities will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "How
Does the Fund Purchase Securities For Its Portfolio?" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Investor Services, in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
During the fiscal year ended September 30, 1995, expenses borne by Class I and
Class II shares of the Fund, including fees paid to Advisers and to Investor
Services, totaled 0.71% and 1.23%, respectively, of the average monthly net
assets of such class.
Plans of Distribution
A separate plan of distribution has been approved and adopted for each class
("Class I Plan" and "Class II Plan", respectively, or "Plan(s)") pursuant to
Rule 12b-1 under the 1940 Act. The Rule 12b-1 fees charged to each class are
based solely on the distribution and, with respect to the Class II Plan,
servicing fees attributable to that particular class. Under either Plan, the
portion of fees remaining after payment to securities dealers or others for
distribution or servicing may be paid to Distributors for routine ongoing
promotion and distribution expenses incurred with respect to such class. Such
expenses may include, but are not limited to, the printing of prospectuses and
reports used for sales purposes, expenses of preparing and distributing sales
literature and related expenses, advertisements, and other distribution-related
expenses, including a prorated portion of Distributors' overhead expenses
attributable to the distribution of Fund shares.
The maximum amount which the Fund may reimburse to Distributors or others under
the Class I Plan for such distribution expenses is 0.15% per annum of Class I's
average daily net assets, payable on a quarterly basis. All expenses of
distribution in excess of 0.15% per annum will be borne by Distributors, or
others who have incurred them, without reimbursement from the Fund.
Under the Class II Plan, the Fund pays to Distributors distribution and related
expenses up to 0.50% per annum of Class II's daily net assets, payable
quarterly. Such fees may be used in order to compensate Distributors or others
for providing distribution and related services and bearing certain expenses of
the class. All expenses of distribution, marketing and related services over
that amount will be borne by Distributors or others who have incurred them,
without reimbursement by the Fund. In addition, the Class II Plan provides for
an additional payment by the Fund of up to 0.15% per annum of Class II's average
daily net assets as a servicing fee, payable quarterly. This fee will be used to
pay securities 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 Fund on behalf of customers, or similar
activities related to furnishing personal services and/or maintaining
shareholder accounts.
Either Distributors or one of its affiliates may pay, from its own resources, a
commission of up to 1% of the purchase price of Class II shares to securities
dealers who initiate and are responsible for such purchases. During the first
year following such purchases, Distributors will retain a portion of Class II's
Rule 12b-1 fees attributable to such shares equal to 0.50% per annum of Class
II's average daily net assets to partially recoup fees Distributors pays to
securities dealers in connection with initial purchases of Class II shares.
Both Plans cover any payments to or by the Fund, Advisers, Distributors, or
other parties on behalf of the Fund, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund within the context
of Rule 12b-1. The payments under the Plans are included in the maximum
operating expenses which may be borne by each class of the Fund. For more
information, including a discussion of the Board's policies with regard to the
amount of the Class I Plan's fees, please see "The Fund's Underwriter" in the
SAI.
What Distributions Might I Receive from the Fund?
- --------------------------------------------------------------------------------
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed capital gains from the prior fiscal year. The Fund may
make more than one distribution derived from net short-term and net long-term
capital gains in any year or adjust the timing of these distributions for
operational or other reasons.
Distributions To Each Class of Shares
According to the requirements of the Code, dividends and capital gains will be
calculated and distributed in the same manner for Class I and Class II shares.
The per share amount of any income dividends will generally differ only to the
extent that each class is subject to different Rule 12b-1 fees.
Distribution Date
Although subject to change by the Board without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends monthly
for shareholders of record on the last business day of the month, payable on or
about the 15th day of the following month. The Fund may determine to defer the
December 31st record date to a date shortly thereafter in January for tax or
other operational reasons.
The amount of income dividend payments by the Fund is dependent upon the amount
of net income received by the Fund from its portfolio holdings, is not
guaranteed and is subject to the discretion of the Board. Fund shares are quoted
ex-dividend on the first business day following the record date. The Fund does
not pay "interest" or guarantee any fixed rate of return on an investment in its
shares.
In order to be entitled to a dividend, you must have acquired Fund shares prior
to the close of business on the record date. If you are considering purchasing
Fund shares shortly before the record date of a distribution, you should be
aware that because the value of the Fund's shares is based directly on the
amount of its net assets, rather than on the principle of supply and demand, any
distribution of income or capital gain will result in a decrease in the value of
the Fund's shares equal to the amount of the distribution. While a dividend or
capital gain distribution received shortly after purchasing shares represents,
in effect, a return of a portion of your investment, it may be taxable as
dividend income or capital gain.
Distribution Options
You may choose to receive your distributions from the Fund in any of these ways:
1. Purchase additional shares of the Fund - You may purchase additional shares
of the 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 are a Class II shareholder,
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. Purchase shares of other Franklin Templeton Funds - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). If you are a Class II shareholder, you may also direct your
distributions to purchase 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 choose to receive dividends, or both
dividend and capital gain distributions in cash. You may have the money sent
directly to you, to another person, or to a checking account. If you choose to
send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
To select one of these options, please complete sections 6 and 7 of the
Shareholder Application included with this Prospectus or tell your investment
representative which option you prefer. If no option is selected, dividend and
capital gain distributions will be automatically reinvested in the same class of
the Fund. You may change the distribution option selected at any time by
notifying the Fund by mail or by telephone. Please allow at least seven days
prior to the record date for the Fund to process the new option.
How Taxation Affects You and the Fund
- --------------------------------------------------------------------------------
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For additional information on tax matters
relating to the Fund and its shareholders, see "Additional Information Regarding
Taxation" in the SAI.
The Fund intends to continue to qualify for treatment 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 which 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 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 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 a
shareholder 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.
How Do I Buy Shares?
- --------------------------------------------------------------------------------
You may buy shares to open a Fund account with as little as $100 and make
additional investments at any time with as little as $25. If you are buying
shares through a retirement plan established by the Franklin Templeton Group,
these minimums may be waived. 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 fail to specify a class, your purchase will automatically be
invested in Class I shares.
Deciding Which Class to Buy
When deciding which class of shares to buy, you should consider a number of
factors, including the amount you expect to invest and the length of time you
expect to hold your investment. If you plan to invest $1 million or more in a
single payment or you qualify to buy Class I shares at net asset value, 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 intend to purchase $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in Franklin Templeton Funds; and
o you intend to make substantial redemptions within approximately six years or
less of investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees, which 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
Rights of Accumulation programs, but intend 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 will therefore be automatically invested in Class I shares.
You may accumulate more than $1 million in Class II shares through purchases
over time, but if you intend 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
You may buy shares at the public offering price of the class you wish to
purchase, unless you qualify to purchase shares at a discount or without a sales
charge as discussed below. The front-end sales charge for Class II shares is 1%
and, unlike Class I shares, does not vary based upon the size of your purchase.
<TABLE>
<CAPTION>
Total Sales Charge
As a Percentage of Amount Allowed to
Net Amount Dealer as a Percentage
Size of Transaction at Offering Price Offering Price Invested of Offering Price*
Class I
<S> <C> <C> <C>
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%
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. Distributors may at times allow
the entire sales charge to the securities dealer. A securities dealer who
receives 90% or more of the sales commission may be deemed an underwriter under
the Securities Act of 1933, as amended.
**A contingent deferred sales charge of 1% may be imposed on: (i) certain
redemptions of all or a part of an investment of $1 million or more in Class I
shares; and (ii) redemptions of Class II shares within 18 months of their
purchase. See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
***Please see "General - Other Payments to Securities Dealers" below for a
discussion of payments Distributors may make to securities dealers out of its
own resources.
+Purchases of Class II shares are limited to purchases below $1 million. See
"Deciding Which Class to Buy."
The offering price for each class will be calculated to two decimal places using
standard rounding criteria.
Quantity Discounts in Sales Charges -
Class I Shares Only
As shown in the table above, the sales charge you pay when you buy Class I
shares may be reduced based upon the size of your purchase.
Rights of Accumulation. To determine if you may pay a reduced sales charge, you
may add the cost or current value, whichever is higher, of your Class I and
Class II shares in other Franklin Templeton Funds, as well as those of your
spouse, children under the age of 21 and grandchildren under the age of 21, to
the amount of your current Class I purchase. To receive the reduction, you or
your investment representative must notify Distributors that your investment
qualifies for a discount.
Letter of Intent. You may purchase 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. You or your investment representative must inform us that the
Letter is in effect each time you purchase shares.
By completing the Letter of Intent section of the Shareholder Application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve five percent (5%) of the amount of the
total intended purchase in Class I shares registered in your name.
o You grant Distributors a security interest in these shares and appoint
Distributors as attorney-in-fact with full power of substitution to redeem any
or all of these reserved shares to pay any unpaid sales charge if you do not
fulfill the terms of the Letter.
o We will include the reserved shares in the total shares you own as reflected
on your periodic statements.
o You will receive dividend and capital gain distributions on the reserved
shares; we will pay or reinvest these distributions as you direct.
o Although you may exchange your shares, you may not liquidate reserved shares
until you complete the Letter or pay the higher sales charge.
o Our policy of reserving shares does not apply to certain benefit plans
described under "Purchases at Net Asset Value."
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy and Sell Shares? - Letter of Intent" in the SAI or call our
Shareholder Services Department.
Group Purchases. If you are a member of a qualified group, you may purchase
Class I shares at the reduced sales charge applicable to the group as a whole.
The sales charge is based on the combined dollar value of the group members'
existing investments, plus the amount of the current purchase. For example, if
group members previously invested and still hold $80,000 of Fund shares and
invest $25,000, the sales charge will be 3.50%.
We define a qualified group as one which (i) has been in existence for more than
six months, (ii) has a purpose other than acquiring Fund shares at a discount
and (iii) satisfies uniform criteria which enable Distributors to realize
economies of scale in its costs of distributing shares.
In addition, a qualified group must have more than 10 members, and be available
to arrange for meetings between our representatives and group members. It must
also agree to include sales and other materials related to the Franklin
Templeton Funds in publications and mailings to its members at reduced or no
cost to Distributors, and arrange for payroll deduction or other bulk
transmission of investments to the Fund.
If you select a payroll deduction plan, your investments will continue
automatically until you notify the Fund and your employer to discontinue further
investments. Due to the varying procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time the money reaches the Fund. We invest your purchase at the applicable
offering price per share determined on the day that the Fund receives both the
check and the payroll deduction data in required form.
Purchases at Net Asset Value
You may invest money from the following sources in Class I shares of the Fund
without paying front-end or contingent deferred sales charges. You may also
purchase Class II shares without paying front-end or contingent deferred sales
charges if the source of your investment proceeds is included in paragraph (i)
below:
(i) a distribution that you have received from a Franklin Templeton Fund or a
real estate investment trust ("REIT") sponsored or advised by Franklin
Properties, Inc., if the distribution is returned within 365 days of its payment
date. When you return the distribution, please include a written request to
reinvest the money at net asset value. You may reinvest Class II distributions
in either Class I or Class II shares, but Class I distributions may only be
invested in Class I shares under this privilege. For more information, see
"Distribution Options" under "What Distributions Might I Receive from the Fund?"
or call Shareholder Services at 1-800/632-2301;
(ii) a redemption from a mutual fund with investment objectives similar to those
of the Fund, if (a) your investment in that fund was subject to either a
front-end or contingent deferred sales charge at the time of purchase, (b) the
fund is not part of the Franklin Templeton Funds, and (c) your redemption
occurred within the past 60 days;
(iii) a distribution from an existing retirement plan already invested in the
Franklin Templeton Funds (including the Franklin Templeton Profit Sharing 401(k)
plan), up to the total amount of the distribution. When you return the
distribution, please include a written request to reinvest the money at net
asset value. The distribution must be returned to the Fund within 365 days of
the distribution date; or
(iv) a redemption from Templeton Institutional Funds, Inc., if you then reinvest
the redemption proceeds under an employee benefit plan qualified under Section
401 of the Code, in shares of the Fund.
You may also reinvest the proceeds from a redemption of any of the Franklin
Templeton Funds in Class I or Class II shares of the Fund at net asset value. To
do so, you must (a) have paid a sales charge on the purchase or sale of the
original shares, (b) reinvest the redemption money in the same class of shares,
and (c) request the reinvestment of the money in writing to the Fund within 365
days of the redemption date. You may reinvest up to the total amount of the
redemption proceeds under this privilege. If a different class of shares is
purchased, the full front-end sales charge must be paid at the time of purchase
of the new shares. While you will receive credit for any contingent deferred
sales charge paid on the shares redeemed, a new contingency period will begin.
Shares that were no longer subject to a contingent deferred sales charge will be
reinvested at net asset value and will not be subject to a new contingent
deferred sales charge. Shares exchanged into other Franklin Templeton Funds are
not considered "redeemed" for this privilege (see "What If My Investment Outlook
Changes? - Exchange Privilege").
If you immediately reinvested your redemption proceeds in a Franklin Bank
Certificate of Deposit ("CD") but you would like to reinvest them back into the
Franklin Templeton Funds as described above, you will have 365 days from the
date the CD (including any rollover) matures to do so.
If your securities dealer or another financial institution reinvests your money
in the Fund at net asset value for you, that person or institution may charge
you a fee for this service.
A redemption is a taxable transaction, but reinvestment without a sales charge
may affect the amount of gain or loss you recognize and the tax basis of the
shares reinvested. If you have a loss on the redemption, the loss may be
disallowed if you reinvest in the same fund within a 30-day period. If you would
like more information regarding the possible tax consequences of such a
reinvestment, please see the tax section of this Prospectus and the SAI.
Certain categories of investors also qualify to purchase Class I shares of the
Fund at net asset value regardless of the source of the investment proceeds. If
you or your account is included in one of the categories below, none of the
Class I shares you purchase will be subject to front-end or contingent deferred
sales charges:
(i) companies exchanging shares or selling assets pursuant to a merger,
acquisition or exchange offer;
(ii) accounts managed by the Franklin Templeton Group;
(iii) certain unit investment trusts and unit holders of these trusts
reinvesting distributions from the trusts in the Fund;
(iv) registered securities dealers and their affiliates, for their investment
accounts only;
(v) current employees of securities dealers and their affiliates and their
family members, in accordance with the internal policies and procedures of the
employing securities dealer and affiliate;
(vi) broker-dealers who have entered into a supplemental agreement with
Distributors, or registered investment advisors affiliated with such
broker-dealers, on behalf of their clients who are participating in a
comprehensive fee program (sometimes known as a wrap fee program);
(vii) any state, county, or city, or any instrumentality, department, authority
or agency thereof which has determined that the Fund is a legally permissible
investment and which is prohibited by applicable investment laws from paying a
sales charge or commission in connection with the purchase of shares of any
registered management investment company ("an eligible governmental authority").
IF YOU ARE SUCH AN INVESTOR, PLEASE CONSULT YOUR OWN LEGAL ADVISORS TO DETERMINE
WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. If you are a securities dealer who has executed a dealer agreement
with Distributors and, through your services, an eligible governmental authority
invests in the Fund at net asset value, Distributors or one of its affiliates
may make a payment, out of its own resources, to you in an amount not to exceed
0.25% of the amount invested. Please contact the Franklin Templeton
Institutional Services Department for additional information;
(viii) officers, trustees, directors and full-time employees of the Franklin
Templeton Funds, or of the Franklin Templeton Group, and their family members.
Although you may pay sales charges on investments in accounts opened after your
association with us has ended, you may continue to invest in accounts opened
while you were with us without paying sales charges;
(ix) trust companies and bank trust departments that exercise exclusive
discretionary investment authority over funds held in a fiduciary, agency,
advisory, custodial or similar capacity and agree to invest at least $1 million
in Franklin Templeton Funds over a 13-month period. We will accept orders for
such accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with payment
by federal funds received by the close of business on the next business day
following such order;
(x) insurance company separate accounts investing for pension plan contracts;
(xi) trustees or other fiduciaries purchasing securities for certain retirement
plans of organizations with collective retirement plan assets of $10 million or
more, without regard to where such assets are currently invested; or
(xii) Designated Retirement Plans. Non-Designated Retirement Plans may also
qualify to purchase shares of the Fund under this privilege if they meet the
requirements described under "Group Purchases," above.
If you would like more information, please see "How Do I Buy and Sell Shares?"
in the SAI.
How Do I Buy Shares in Connection
with Tax-Deferred Retirement Plans?
Your individual or employer-sponsored tax-deferred retirement plans may invest
in the Fund. You may use the Fund for an existing retirement plan, or, because
Trust Company can serve as custodian or trustee for retirement plans, you may
ask Trust Company to provide the plan documents and serve as custodian or
trustee. A plan document must be adopted in order for a retirement plan to be in
existence.
Brochures for Trust Company plans contain important information regarding
eligibility, contribution and deferral limits and distribution requirements.
Please note that you must use an application other than the one contained in
this Prospectus to establish a retirement plan account with Trust Company. To
obtain a retirement plan brochure or application, please call 1-800/DIAL BEN
(1-800/342-5236). Trust Company is an affiliate of Distributors.
Please see "How Do I Sell Shares?" for information regarding redemptions from
retirement plan accounts. You must complete specific forms in order to receive
distributions from Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or benefits and
pension plan consultants before choosing a retirement plan. In addition, if you
are a retirement plan investor, you should consider consulting your investment
representatives or advisors about investment decisions within your plans.
General
The Fund continuously offers it shares through securities dealers who have an
agreement with Distributors. The Fund and Distributors may refuse any order for
the purchase of shares.
Securities laws of states in which the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required to register as securities dealers pursuant to state law.
Other Payments to Securities Dealers. Distributors will pay the following
commissions, out of its own resources, to securities dealers who initiate and
are responsible for Class I purchases of $1 million or more: 0.75% on sales of
$1 million but less than $2 million, plus 0.60% on sales of $2 million but less
than $3 million, plus 0.50% on sales of $3 million but less than $50 million,
plus 0.25% on sales of $50 million but less than $100 million, plus 0.15% on
sales of $100 million or more. These breakpoints are reset every 12 months for
purposes of additional purchases.
Distributors or one of its affiliates may also pay up to 1% of the purchase
price to securities dealers who initiate and are responsible for Class I
purchases made at net asset value by any of the entities described in paragraphs
(ix), (xi) or (xii) under "Purchases at Net Asset Value" above and up to 0.75%
of the amount purchased to securities dealers who initiate and are responsible
for purchases made at net asset value by Non-Designated Retirement Plans. Please
see "How Do I Buy and Sell Shares?" in the SAI for the breakpoints applicable to
these purchases.
For Class II purchases, either Distributors or one of its affiliates may pay
securities dealers, out of its own resources, up to 1% of the purchase price. To
partially recoup these payments, Distributors will keep part of the Rule 12b-1
fees assessed to the shares during the first year following their purchase.
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with the
sale of shares of the Franklin Templeton Funds. In some cases, this compensation
may be available only to securities dealers whose representatives have sold or
are expected to sell significant amounts of shares of the Franklin Templeton
Funds. Compensation may include financial assistance and payments made in
connection with conferences, sales or training programs for employees of the
securities dealer, seminars for the public, advertising, sales campaigns and/or
shareholder services, programs regarding one or more of the Franklin Templeton
Funds and other programs or events sponsored by securities dealers, and payment
for travel expenses of invited registered representatives and their families,
including lodging, in connection with business meetings or seminars located
within or outside the United States. Securities dealers may not use sales of the
Fund's shares to qualify for this compensation if prohibited by the laws of any
state or self-regulatory agency, such as the National Association of Securities
Dealers, Inc. None of this compensation is paid for by the Fund or its
shareholders.
For additional information about shares of the Fund, please see "How Do I Buy
and Sell Shares?" in the SAI. The SAI also includes a listing of the officers
and directors of the Fund who are affiliated with Distributors. See "Officers
and Directors."
What Programs and Privileges Are
Available to Me as a Shareholder?
Certain of the programs and privileges described in this section may not be
available directly from the Fund if your shares are held, of record, by a
financial institution or in a "street name" account or networked account through
the National Securities Clearing Corporation ("NSCC") (see "Registering Your
Account" in this Prospectus).
Share Certificates
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by you, can be 2% or more of the value of the lost,
stolen or destroyed certificate. A certificate will be issued if requested by
you or your securities dealer.
Confirmations
A confirmation statement will be sent to you quarterly to reflect the dividends
reinvested during the period and after each other transaction which affects your
account. This statement will also show the total number of shares you own,
including the number of shares in "plan balance" for your account.
Automatic Investment Plan
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to purchase additional shares. If
you are interested in this program, please refer to the Automatic Investment
Plan Application at the back of this Prospectus for the requirements of the
program or contact your investment representative. Of course, the market value
of the Fund's shares may fluctuate and a systematic investment plan such as this
will not assure a profit or protect against a loss. You may terminate the
program at any time by notifying Investor Services by mail or by phone.
Systematic Withdrawal Plan
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply.
If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Shareholder Application included with
this Prospectus and indicate how you would like to receive your payments. You
may choose to receive your payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. Receive payments in cash - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Fund will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Redemptions under a
Systematic Withdrawal Plan are considered a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than your
actual yield or income, part of the payment may be a return of your investment.
While a Systematic Withdrawal Plan is in effect, shares must be held either in
plan balance or, where share certificates are outstanding, deposited with the
Fund. You should ordinarily not make additional investments in the Fund of less
than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases. Shares redeemed under the
plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Fund
receives notification of the shareholder's death or incapacity.
Electronic Fund Transfers
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
What If My Investment Outlook Changes? - Exchange Privilege
- --------------------------------------------------------------------------------
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for the
same class of shares of other Franklin Templeton Funds which are eligible for
sale in your state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Some funds, however, may not
offer Class II shares. Class I shares may be exchanged for Class I shares of any
of the other Franklin Templeton Funds. Class II shares may be exchanged for
Class II shares of any of the other Franklin Templeton Funds. No exchanges
between different classes of shares will be allowed. A contingent deferred sales
charge will not be imposed on exchanges. If, however, the exchanged shares were
subject to a contingent deferred sales charge in the original fund purchased and
shares are subsequently redeemed within the contingency period, a contingent
deferred sales charge will be imposed. Before making an exchange, you should
review the prospectus of the fund you wish to exchange from and the fund you
wish to exchange into for all specific requirements or limitations on exercising
the exchange privilege, for example, limitations on a fund's sale of its shares,
minimum holding periods for exchanges at net asset value, or applicable sales
charges.
You may exchange shares in any of the following ways:
By Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
By Telephone
You or your investment representative of record, if any, may exchange shares of
the Fund by calling Investor Services at 1-800/632-2301 or the automated
Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753. If you do not
wish this privilege extended to a particular account, you should notify the Fund
or Investor Services.
The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "Telephone Transactions - Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "By Telephone" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in your account or for which certificates have previously been
deposited. A securities dealer may charge a fee for handling an exchange.
Additional Information Regarding Exchanges
Exchanges of the same class of shares are made on the basis of the net asset
value of the class involved, except as set forth below. Exchanges of shares of a
class which were purchased without a sales charge will be charged a sales charge
in accordance with the terms of the prospectus of the fund and the class of
shares being purchased, unless the original investment in the Franklin Templeton
Funds was made pursuant to the privilege permitting purchases at net asset
value, as discussed under "How Do I Buy Shares?" Exchanges of Class I shares of
the Fund which were purchased with a lower sales charge into a fund which has a
higher sales charge will be charged the difference, unless the shares were held
in the Fund for at least six months prior to executing the exchange.
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be transferred to
the fund being exchanged into and will be invested at net asset value. Because
the exchange is considered a redemption and purchase of shares, you may realize
a gain or loss for federal income tax purposes. Backup withholding and
information reporting may also apply. Information regarding the possible tax
consequences of such an exchange is included in the tax section in this
Prospectus and under "Additional Information Regarding Taxation" in the SAI.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money market
instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objective exist immediately. Subsequently,
this money will be withdrawn from such short-term money market instruments and
invested in portfolio securities in as orderly a manner as is possible when
attractive investment opportunities arise.
The exchange privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
Exchanges of Class I Shares
The contingency period during which a contingent deferred sales charge may be
assessed for Class I shares will be tolled (or stopped) for the period such
shares are exchanged into and held in a Franklin or Templeton Class I money
market fund. If a Class I account has shares subject to a contingent deferred
sales charge, Class I shares will be exchanged into the new account on a
"first-in, first-out" basis. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge" for a discussion of investments subject to a contingent deferred
sales charge.
Exchanges of Class II Shares
When an account is composed of Class II shares subject to the contingent
deferred sales charge and Class II shares that are not, the shares will be
transferred proportionately into the new fund. Shares received from reinvestment
of dividends and capital gains are referred to as "free shares," shares which
were originally subject to a contingent deferred sales charge but to which the
contingent deferred sales charge no longer applies are called "matured shares,"
and shares still subject to the contingent deferred sales charge are referred to
as "CDSC liable shares." CDSC liable shares held for different periods of time
are considered different types of CDSC liable shares. For instance, if you have
$1,000 in free shares, $2,000 in matured shares, and $3,000 in CDSC liable
shares and 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.
Similarly, if CDSC liable shares have been purchased at different periods, a
proportionate amount will be taken from shares held for each period. If, for
example, you hold $1,000 in shares bought 3 months ago, $1,000 bought 6 months
ago, and $1,000 bought 9 months ago and you exchange $1,500 into the new fund,
$500 from each of these shares will be deemed exchanged into the new fund.
The only money market fund exchange option available to Class II shareholders is
the Franklin Templeton Money Fund II ("Money Fund II"), a series of the Franklin
Templeton Money Fund Trust. No drafts (checks) may be written on Money Fund II
accounts, nor may Class II shareholders purchase shares of Money Fund II
directly. Class II shares exchanged for shares of Money Fund II will continue to
age, for purposes of calculating the contingent deferred sales charge, because
they continue to be subject to Rule 12b-1 fees. The contingent deferred sales
charge will be assessed if CDSC liable shares are redeemed. Class I shares may
be exchanged for shares of any of the money market funds in the Franklin
Templeton Funds except Money Fund II. Draft writing privileges and direct
purchases are allowed on these other money market funds as described in their
respective prospectuses.
To the extent shares are exchanged proportionately, as opposed to another
method, such as first-in first-out, or free-shares followed by CDSC liable
shares, the exchanged shares may, in some instances, be CDSC liable even though
a redemption of such shares, as discussed elsewhere herein, may no longer be
subject to a contingent deferred sales charge. The proportional method is
believed by management to more closely meet and reflect the expectations of
Class II shareholders in the event shares are redeemed during the contingency
period. For federal income tax purposes, the cost basis of shares redeemed or
exchanged is determined under the Code without regard to the method of
transferring shares chosen by the Fund.
Retirement Plan Accounts
Franklin Templeton IRA and 403(b) retirement plan accounts may exchange shares
directly. Certain restrictions may apply, however, to other types of retirement
plans. See "Restricted Accounts" under "Telephone Transactions."
Timing Accounts
Accounts which are administered by allocation or market timing services to
exchange shares based on predetermined market indicators ("Timing Accounts")
will be charged a $5.00 administrative service fee per each such exchange. All
other exchanges are without charge.
Restrictions on Exchanges
In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently terminate the exchange
privilege or reject any specific purchase order for any Timing Account or any
person whose transactions seem to follow a timing pattern who: (i) makes an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, (ii) makes more than two exchanges out of the Fund per calendar
quarter, or (iii) exchanges shares equal in value to at least $5 million, or
more than 1% of the Fund's net assets. Accounts under common ownership or
control, including accounts administered so as to redeem or purchase shares
based upon certain predetermined market indicators, will be aggregated for
purposes of the exchange limits.
The Fund also reserves the right to refuse the purchase side of an exchange
request by any Timing Account, person, or group if, in the Manager's judgment,
the Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
The purchase side of an exchange may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and therefore may be
refused.
The Fund and Distributors, as indicated under "How Do I Buy Shares?", reserve
the right to refuse any order for the purchase of shares.
Transfers
Transfers between identically registered accounts in the same fund and class are
treated as non-monetary and non-taxable events and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Shares of each class will be transferred on
the same basis as described above for exchanges.
Conversion Rights
It is not presently anticipated that Class II shares will be convertible to
Class I shares. You may, however, sell Class II shares and use the proceeds to
purchase Class I shares, subject to all applicable sales charges.
How Do I Sell Shares?
- --------------------------------------------------------------------------------
You may liquidate your shares at any time and receive from the Fund the value of
the shares. You may redeem shares in any of the following ways:
By Mail
Send a written request signed by all registered owners to Investor Services, at
the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. You will then receive from the Fund the
value of the class of shares redeemed based upon the net asset value per share
(less a contingent deferred sales charge, if applicable) next computed after the
written request in proper form is received by Investor Services. Redemption
requests received after the time at which the net asset value is calculated will
receive the price calculated on the following business day. The net asset value
per share of each class is determined as of the scheduled close of the Exchange
(generally 1:00 p.m. Pacific time) each day that the Exchange is open for
trading. You are requested to provide a telephone number where you may be
reached during business hours, or in the evening if preferred. Investor
Services' ability to contact you promptly when necessary will speed the
processing of the redemption.
To be considered in proper form, signatures must be guaranteed if the redemption
request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
address of record, preauthorized bank account or brokerage firm account;
(4) certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions, including,
for example, when (a) the current address of one or more joint owners of an
account cannot be confirmed, (b) multiple owners have a dispute or give
inconsistent instructions to the Fund, (c) the Fund has been notified of an
adverse claim, (d) the instructions received by the Fund are given by an agent,
not the actual registered owner, (e) the Fund determines that joint owners who
are married to each other are separated or may be the subject of divorce
proceedings, or (f) the authority of a representative of a corporation,
partnership, association, or other entity has not been established to the
satisfaction of the Fund.
Signatures must be guaranteed by an "eligible guarantor institution" as defined
under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are advised,
for your protection, to send the share certificate and assignment form in
separate envelopes if they are being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officers of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustees and (2)
a copy of the pertinent pages of the trust document listing the trustees or a
Certification for Trust if the trustees are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and applicable state
law since these accounts have varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
By Telephone
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this Prospectus, you may redeem
shares of the Fund by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts." You may obtain
additional information about telephone redemptions by writing to the Fund or
Investor Services at the address shown on the cover or by calling
1-800/632-2301. The Fund and Investor Services will employ reasonable procedures
to confirm that instructions given by telephone are genuine. You, however, bear
the risk of loss in certain cases as described under "Telephone Transactions -
Verification Procedures."
If your account has a completed Agreement on file, redemptions of uncertificated
shares or shares which have previously been deposited with the Fund or Investor
Services may be made for up to $50,000 per day per Fund account. Telephone
redemption requests received before the scheduled close of the Exchange
(generally 1:00 p.m. Pacific time) on any business day will be processed that
same day. The redemption check will be sent within seven days, made payable to
all the registered owners on the account, and will be sent only to the address
of record. Redemption requests by telephone will not be accepted within 30 days
following an address change by telephone. In that case, you should follow the
other redemption procedures set forth in this Prospectus. Institutional accounts
(certain corporations, bank trust departments, qualified retirement plans, and
government entities which qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) that wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from the Franklin Templeton Institutional Services Department by
calling 1-800/321-8563.
Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if you redeem
shares through a dealer, the redemption price will be the net asset value next
calculated after your dealer receives the order which is promptly transmitted to
the Fund, rather than on the day the Fund receives your written request in
proper form. The documents described under "By Mail" above, as well as a signed
letter of instruction, are required regardless of whether you redeem shares
directly or submit such shares to a securities dealer for repurchase. Your
letter should reference the Fund and the class, the account number, the fact
that the repurchase was ordered by a dealer and the dealer's name. Details of
the dealer-ordered trade, such as trade date, confirmation number, and the
amount of shares or dollars, will help speed processing of the redemption. The
seven-day period within which the proceeds of your redemption will be sent will
begin when the Fund receives all documents required to complete ("settle") the
repurchase in proper form. The redemption proceeds will not earn dividends or
interest during the time between receipt of the dealer's repurchase order and
the date the redemption is processed upon receipt of all documents necessary to
settle the repurchase. Thus, it is in your best interest to have the required
documentation completed and forwarded to the Fund as soon as possible. Your
dealer may charge a fee for handling the order. See "How Do I Buy and Sell
Shares?" in the SAI for more information on the redemption of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers, all or a portion of
Class I investments of $1 million or more and any Class II investments redeemed
within the contingency period (12 months for Class I and 18 months for Class II)
will be assessed a contingent deferred sales charge, unless one of the
exceptions described below applies. The charge is 1% of the lesser of the value
of the shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the net asset value at the time of purchase of such shares,
and is retained by Distributors. The contingent deferred sales charge is waived
in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation of on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: specified net asset value purchases discussed under "How Do I
Buy Shares? - Purchases at Net Asset Value;" exchanges; any account fees;
distributions from an individual retirement plan account due to death or
disability or upon periodic distributions based on life expectancy; tax-free
returns of excess contributions from employee benefit plans; distributions from
employee benefit plans, including those due to termination or plan transfer;
redemptions initiated by the Fund due to an account falling below the minimum
specified account size; redemptions following the death of the shareholder or
beneficial owner; and redemptions through a Systematic Withdrawal Plan set up
for shares prior to February 1, 1995, and for Systematic Withdrawal Plans set up
thereafter, redemptions of up to 1% monthly of an account's net asset value (3%
quarterly, 6% semiannually or 12% annually). For example, if a Class I account
maintained an annual balance of $1,000,000, only $120,000 could be withdrawn
through a once-yearly Systematic Withdrawal Plan free of charge. Any amount over
that $120,000 would be assessed a 1% contingent deferred sales charge. Likewise,
if a Class II account maintained an annual balance of $10,000, only $1,200 could
be withdrawn through a once-yearly Systematic Withdrawal Plan free of charge.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests for redemptions of a specified dollar
amount will result in additional shares being redeemed to cover any applicable
contingent deferred sales charge, while requests for redemption of a specific
number of shares will result in the applicable contingent deferred sales charge
being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. The right of redemption may be suspended or the date of
payment postponed if the Exchange is closed (other than customary closing) or
upon the determination of the SEC that trading on the Exchange is restricted or
an emergency exists, or if the SEC permits it, by order, for the protection of
shareholders. Of course, the amount received may be more or less than the amount
you invested, depending on fluctuations in the market value of securities owned
by the Fund.
Retirement Plan Accounts
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement plan account, you or your securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such plans to a
participant under age 591/2, unless the distribution meets one of the exceptions
set forth in the Code.
Other Information
Distribution or redemption checks sent to you do not earn interest or any other
income during the time such checks remain uncashed and neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
Telephone Transactions
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By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer Fund shares in
one account to another identically registered account in the Fund, (iv) request
the issuance of certificates (to be sent to the address of record only) and (v)
exchange Fund shares as described in this Prospectus by telephone. In addition,
if you complete and file an Agreement as described under "How Do I Sell Shares?
- - By Telephone" you will be able to redeem shares of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to you caused by an unauthorized transaction. The Fund and
Investor Services may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not followed. You are,
of course, under no obligation to apply for or accept telephone transaction
privileges. In any instance where the Fund or Investor Services is not
reasonably satisfied that instructions received by telephone are genuine, the
requested transaction will not be executed, and neither the Fund nor Investor
Services will be liable for any losses which may occur because of a delay in
implementing a transaction.
Restricted Accounts
Telephone redemptions and dividend option changes may not be accepted on
Franklin Templeton retirement accounts. To assure compliance with all applicable
regulations, special forms are required for any redemption, distribution or
dividend payment changes. While the telephone exchange privilege is extended to
Franklin Templeton IRA and 403(b) retirement accounts, certain restrictions may
apply to other types of retirement plans.
To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plan Specialist at 1-800/527-2020.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In such situations, you may wish to contact your investment
representative for assistance or send written instructions to the Fund as
detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from your inability to execute a telephone transaction.
How Are Fund Shares Valued?
- --------------------------------------------------------------------------------
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price).
The net asset value per share of each class is determined by deducting the
aggregate gross value of all liabilities of each class from the aggregate gross
value of all assets of each class, and then dividing the difference by the
number of shares of the class outstanding. Assets in the Fund's portfolio are
valued as described under "How Are Fund Shares Valued?" in the SAI.
Each class will bear, pro rata, all of the common expenses of the Fund, except
that each class will bear the Rule 12b-1 fees payable under its respective plan.
The net asset value of all outstanding shares of each class of the Fund will be
computed on a pro rata basis based on the proportionate participation in the
Fund represented by the value of shares of such class. Due to the specific
distribution expenses and other costs that will be allocable to each class, the
dividends paid to each class of the Fund may vary.
How Do I Get More Information About My Investment?
- --------------------------------------------------------------------------------
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this Prospectus.
From a touch-tone phone, you may access an automated system (day or night) which
offers the following features.
By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, you may obtain
Class I and Class II account information, current price and, if available, yield
or other performance information specific to the Fund or any Franklin Templeton
Fund. In addition, Class I shareholders may process an exchange, within the same
class, into an identically registered Franklin account and request duplicate
confirmation or year-end statements and deposit slips.
Class I and Class II share codes for the Fund, which will be needed to access
system information, are 109 and 209, respectively. The system's automated
operator will prompt you with easy to follow step-by-step instructions from the
main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided. The same numbers may be used when calling
from a rotary phone.
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being
provided, telephone calls placed to or by representatives in
Franklin's service departments may be accessed, recorded and
monitored. These calls can be determined by the presence of a
regular beeping tone.
How Does the Fund Measure Performance?
- --------------------------------------------------------------------------------
Advertisements, sales literature and communications to you may contain several
measures of a class' performance, including current yield, various expressions
of total return and current distribution rate. They may also occasionally cite
statistics to reflect the Fund's volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price for one-, five- and ten-year periods, or portion thereof,
to the extent applicable, through the end of the most recent calendar quarter,
assuming reinvestment of all distributions. The Fund may also furnish total
return quotations for each class for other periods or based on investments at
various sales charge levels or at net asset value. For such purposes, total
return equals the total of all income and capital gain paid to shareholders,
assuming reinvestment of all distributions, plus (or minus) the change in the
value of the original investment, expressed as a percentage of the purchase
price.
Current yield for each class reflects the income per share earned by the Fund's
portfolio investments. It is calculated for each class by dividing that class'
net investment income per share during a recent 30-day period by the maximum
public offering price for that class of shares on the last day of that period
and annualizing the result.
Current yield for each class, which is calculated according to a formula
prescribed by the SEC (see "General Information" in the SAI), is not indicative
of the dividends or distributions which were or will be paid to the Fund's
shareholders. Dividends or distributions paid to shareholders of a class are
reflected in the current distribution rate, which may be quoted to you. The
current distribution rate is computed by dividing the total amount of dividends
per share paid by a class during the past 12 months by a current maximum
offering price for that class of shares. Under certain circumstances, such as
when there has been a change in the amount of dividend payout or a fundamental
change in investment policies, it might be appropriate to annualize the
dividends paid during the period such policies were in effect, rather than using
the dividends during the past 12 months. The current distribution rate differs
from the current yield computation because it may include distributions to
shareholders from sources other than dividends and interest, such as premium
income from option writing and short-term capital gain, and is calculated over a
different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against a class' income and will assume the payment of the
maximum sales charge on the purchase of that class of shares. When there has
been a change in the sales charge structure, the historical performance figures
will be restated to reflect the new rate. The investment results of each class,
like all other investment companies, will fluctuate over time; thus, performance
figures should not be considered to represent what an investment may earn in the
future or what a class' total return, current yield or distribution rate may be
in any future period.
General Information
- --------------------------------------------------------------------------------
Reports to Shareholders
The Fund's fiscal year ends September 30. Annual Reports containing audited
financial statements of the Fund, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to each household, as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household, and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Fund at
the telephone number or address set forth on the cover page of this Prospectus.
Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and under "General Information" in the SAI.
Organization and Voting Rights
The authorized capital stock of the Custodian Funds consists of fourteen billion
shares of capital stock of $0.01 par value, all of which has been authorized by
the Board to be issued in five separate series, 7,000,000,000 of which have been
designated as Class I shares, and 7,000,000,000 of which have been designated as
Class II shares. Of those shares, 3,600,000,000 have been designated as Class I
shares of the Fund, and 3,600,000,000 have been designated as Class II shares of
the Fund. The Board is empowered by the Charter to issue other series of capital
stock and to increase or decrease the number, but not below that at the time
outstanding.
The assets received for the issue or sale of each series of the capital stock of
the Custodian Funds and all income, earnings, profits and proceeds thereof,
subject only to the rights of creditors, are especially allocated to such
series, and constitute the underlying assets of such series. The underlying
assets of each series are required to be segregated on the books of account, and
are to be charged with the liabilities in respect to such series and with a
share of the general liabilities of the Custodian Funds. Liabilities in respect
to any two or more series are to be allocated in proportion to the asset value
of the respective series except where direct expenses can otherwise be fairly
allocated. The Board has the right to determine which liabilities are allocable
to a given series, and which are general or allocable to two or more series. In
the event of the dissolution or liquidation of the Custodian Funds, the
registered holders of the capital stock of any series are entitled to receive as
a class the underlying assets of such series available for distribution to
shareholders.
Shares of capital stock entitle their holders to one vote per share; however,
votes are made by series on matters affecting an individual series. Voting
rights are noncumulative, so that in any election of directors, the holders of
more than 50% of the shares voting can elect all of the directors, if they
choose to do so, and in such event the holders of the remaining shares voting
will not be able to elect any person or persons to the Board. Shares have no
preemptive or subscription rights and are fully transferable. There are no
conversion rights; however, holders of shares of each class of any series may
reinvest all or any portion of the proceeds from the redemption or repurchase of
such shares into shares of the same class of any other series as described under
"What if My Investment Outlook Changes? - Exchange Privilege."
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 a certain class of the Fund's shares, however, only shareholders of that
class will be entitled to vote. Therefore each class of shares will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by class by state corporation law, or (3) required to be
voted on separately by class by the 1940 Act, or the rules adopted thereunder.
For instance, if a change to the Rule 12b-1 plan relating to Class I shares
requires shareholder approval, only shareholders of Class I may vote on the
change to the Rule 12b-1 plan affecting that class. Similarly, if a change to
the Rule 12b-1 plan relating to Class II shares requires approval, only
shareholders of Class II may vote on changes to such plan. On the other hand, if
there is a proposed change to the investment objective of the Fund, the proposal
would affect all shareholders, regardless of which class of shares they hold
and, therefore, each share has the same voting rights.
Maryland General Corporation Law does not require corporations registered as
management investment companies under the 1940 Act to hold routine annual
meetings of shareholders and the Fund does not intend to hold annual meetings.
The Fund may, however, hold a meeting for such purposes as changing fundamental
investment restrictions, approving a new management agreement or any other
matters which are required to be acted on by shareholders under the 1940 Act. A
meeting may also be called by a majority of the Board or by shareholders holding
at least ten percent of the shares entitled to vote at the meeting for the
purpose of voting upon the removal of directors, in which case shareholders may
receive assistance in communicating with other shareholders in connection with
the election or removal of directors such as that provided in Section 16(c) of
the 1940 Act. In addition, Maryland General Corporation Law provides that a
special meeting may be called by a majority of the Board or by the written
request of shareholders holding at least 25% of the shares entitled to vote at
the meeting.
Redemptions by the Fund
The Fund reserves the right to redeem your shares, at net asset value, if your
account has a value of less than $50, but only where the value of your account
has been reduced by the prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at least
six months, provided you are given advance notice. For more information, see
"How Do I Buy and Sell Shares?" in the SAI.
Registering Your Account
- --------------------------------------------------------------------------------
An account registration should reflect your intentions as to ownership. Where
there are two co-owners on the account, the account will be registered as "Owner
1" and "Owner 2"; the "or" designation is not used except for money market fund
accounts. If co-owners wish to have the ability to redeem or convert on the
signature of only one owner, a limited power of attorney may be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, you may transfer an account in the Fund carried in "street"
or "nominee" name by your securities dealer to a comparably registered Fund
account maintained by another securities dealer. Both the delivering and
receiving securities dealers must have executed dealer agreements on file with
Distributors. Unless a dealer agreement has been executed and is on file with
Distributors, the Fund will not process the transfer and will so inform your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer to transfer the account to a receiving securities dealer and
sign any documents required by the securities dealers to evidence consent to the
transfer. Under current procedures, the account transfer may be processed by the
delivering securities dealer and the Fund after the Fund receives authorization
in proper form from your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, you will
be deemed to have authorized the use of electronic instructions on the account,
including, without limitation, those initiated through the services of the NSCC,
to have adopted as instruction and signature any such electronic instructions
received by the Fund and Investor Services, and to have authorized them to
execute the instructions without further inquiry. At the present time, such
services which are available include the NSCC's "Networking," "Fund/SERV," and
"ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
- --------------------------------------------------------------------------------
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of any
such payments made to individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN") and made certain
required certifications that appear in the Shareholder Application. You may also
be subject to backup withholding if the IRS or a securities dealer notifies the
Fund that the number furnished by you is incorrect or that you are subject to
backup withholding for previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by you is in
fact incorrect or upon the failure of a shareholder who has completed an
"awaiting TIN" certification to provide the Fund with a certified TIN within 60
days after opening the account.
Useful Terms and Definitions
- --------------------------------------------------------------------------------
1940 Act - Investment Company Act of 1940, as amended.
Advisers - Franklin Advisers, Inc., the Fund's investment manager.
Board - The Board of Directors of Custodian Funds.
Code - Internal Revenue Code of 1986, as amended.
Designated Retirement Plans - certain retirement plans, including
profit-sharing, pension, 401(k) and simplified employee pension plans, that: (i)
are sponsored by an employer with at least 200 employees; (ii) have aggregate
plan assets of at least $1 million; or (iii) agree to invest at least $1 million
in any of the Franklin Templeton Funds over a 13 month period. Distributors
determines the qualifications for Designated Retirement Plans.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter.
Exchange - New York Stock Exchange.
Franklin Funds - the mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust.
Franklin Templeton Funds - the Franklin Funds and the Templeton Funds.
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries.
Investor Services - Franklin/Templeton Investor Services, Inc.
Letter - Letter of Intent.
Manager - Franklin Advisers, Inc., the Fund's investment manager.
Net asset value (NAV) - the value of a mutual fund determined by deducting the
fund's liabilities from the total assets of the portfolio. The net asset value
per share is determined by dividing the net asset value of the fund by the
number of shares outstanding. When you buy, sell or exchange shares, we will use
the NAV per share for the applicable class next calculated after we receive your
request in proper form.
Non-Designated Retirement Plans - employee benefit plans not included as
"Designated Retirement Plans" and not qualified under Section 401 of the Code.
Offering price - The public offering price is equal to the net asset value of
the class plus the front-end sales charge. The front-end sales charge is 4.25%
for Class I shares and 1% for Class II shares.
Proper Form (Purchases) - generally, the Fund must receive a completed
Shareholder Application accompanied by a negotiable check.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information.
SEC - Securities and Exchange Commission.
Securities Dealer - financial institutions which, either directly or through
affiliates, have an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
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.
Appendix
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Description of 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.
FRANKLIN
CUSTODIAN
FUNDS, INC.
STATEMENT OF
ADDITIONAL INFORMATION
777 Mariners Island Blvd., P.O. Box 7777 FEBRUARY 1, 1996
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
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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
(*).
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
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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
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Commissions Commissions
Fund Received Retained
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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
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Commissions Commissions
Fund Received Retained
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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
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Commissions Commissions
Fund Received Retained
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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
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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.
