PROSPECTUS & APPLICATION
Franklin Custodian
Funds, Inc.
Advisor Class
Advisor
JANUARY 1, 1997
INVESTMENT STRATEGY
GROWTH & INCOME
Utilities Series
Income Series
INVESTMENT STRATEGY
GROWTH
Growth Series
INVESTMENT STRATEGY
INCOME
U.S. Government Securities Series
This prospectus describes the Advisor Class shares of the four series of
Franklin Custodian Funds, Inc. ("Custodian Funds") offering Advisor Class
shares. Each series may individually or together be referred to as the
"Fund(s)." It contains information you should know before investing in the Fund.
Please keep it for future reference.
The Custodian Funds' Advisor Class SAI, dated January 1, 1997, as may be amended
from time to time, includes more information about the Custodian Funds'
procedures and policies. It has been filed with the SEC and is incorporated by
reference into this prospectus. For a free copy or a larger print version of
this prospectus, call 1-800/DIAL BEN or write the Fund at the address shown.
Advisor Class shares are only available for purchase by certain persons,
including, among others, certain financial institutions (such as banks, trust
companies, savings institutions and credit unions); government and tax-exempt
entities; pension, profit sharing and employee benefit plans; certain qualified
groups, including family trusts, endowments, foundations and corporations;
Franklin Templeton Fund Allocator Series; and directors, trustees, officers and
full time employees (and their family members) of Franklin Templeton Group and
the Franklin Templeton Group of Funds. See "About Your Account."
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Shares of the Fund involve investment risks, including the possible
loss of principal.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this prospectus. Further
information may be obtained from Distributors.
Franklin
Custodian
Funds, Inc. - Advisor Class
January 1, 1997
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
Table of Contents
About the Fund
Expense Summary .............. 2
How does the Fund Invest its Assets? 3
What are the Fund's Potential Risks? 13
Who Manages the Fund?......... 19
How does the Fund Measure Performance? 22
How is the Fund Organized?.... 22
How Taxation Affects You and the Fund 24
About Your Account
How Do I Buy Shares? ......... 25
May I Exchange Shares for Shares
of Another Fund? ............ 28
How Do I Sell Shares? ........ 30
What Distributions Might I
Receive from the Fund? ...... 31
Transaction Procedures and
Special Requirements ........ 32
Services to Help You Manage Your Account 36
Glossary
Useful Terms and Definitions . 39
Appendix
Description of Ratings ....... 41
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. Because Advisor Class shares were not offered to the public before January
1, 1997, the table is based on the historical expenses of the Class I shares of
the Fund for the fiscal year ended September 30, 1996+. Your actual expenses may
vary.
<TABLE>
<CAPTION>
GROWTH UTILITIES INCOME U.S. GOVERNMENT
SERIES SERIES SERIES SECURITIES SERIES
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A.Shareholder Transaction Expenses++
Maximum Sales Charge Imposed on Purchases NONE NONE NONE NONE
Exchange Fee (per transaction) NONE $5.00+++ $5.00+++ $5.00+++
B.Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.49% 0.46% 0.46% 0.45%
Rule 12b-1 Fees NONE NONE NONE NONE
Other Expenses 0.16% 0.12% 0.10% 0.07%
Total Fund Operating
Expenses 0.65% 0.58% 0.56% 0.52%
C. Example
</TABLE>
Assume the annual return for Advisor Class shares is 5% and operating expenses
are as described above. For each $1,000 investment, you would pay the
following projected expenses if you sold your shares after the number of years
shown.
GROWTH UTILITIES INCOME U.S. GOVERNMENT
----------------------------------------------------------------
1 Year $ 7 $ 6 $ 6 $ 5
3 Years $ 21 $ 19 $ 18 $ 17
5 Years $ 36 $ 32 $ 31 $ 29
10 Years $ 81 $ 73 $ 70 $ 65
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected
in the Net Asset Value or the dividends paid on Advisor Class shares and are
not directly charged to your account.
+Unlike Advisor Class shares, the Class I shares of the Fund have a front-end
sales charge and Rule 12b-1 fees.
++If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for these services.
+++$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
How does the Fund Invest its Assets?
Investment Objective of the Funds
The objective is a fundamental policy of each Fund and may not be changed
without shareholder approval. Of course, there is no assurance that the Fund's
objective will be achieved.
Growth Series
The primary investment objective of this Fund is capital appreciation. The Fund
seeks to achieve its objective by investing primarily in common stocks or
convertible securities believed to offer favorable possibilities for capital
appreciation, some of which may yield little or no current income. Current
income is only a secondary consideration when selecting portfolio securities.
The Fund's assets may be invested in shares of common stock traded on any
national securities exchange or issued by a corporation, association or similar
legal entity with total assets of at least $1,000,000, according to its latest
published annual report. The Fund's assets may also be invested in bonds or
preferred stock convertible into shares of common stock listed for trading on a
national securities exchange or held in cash or cash equivalents. As a
fundamental policy, the Fund may not concentrate or invest more than 25% of its
total assets in any one industry.
Utilities Series
The investment objectives of this Fund are both capital appreciation and current
income. As a fundamental policy, the Fund's assets may be invested in securities
of an issuer engaged in the public utilities industry, or held in cash or cash
equivalents. The public utilities industry includes the manufacture, production,
generation, transmission and sale of gas, water and electricity. The industry
also includes issuers engaged in the communications field, such as telephone,
cellular, telegraph, satellite, microwave and other companies that provide
communication facilities for the public's benefit. As required by the SEC, at
least 65% of the Fund's investments will be in the securities of issuers engaged
in the public utilities industry. Under normal circumstances, the Fund expects
to have substantially all of its assets invested in securities issued by these
types of issuers.
To achieve its investment objectives, the Fund invests primarily in common
stocks, including, from time to time, non-dividend paying common stocks if, in
the opinion of Advisers, these securities appear to offer attractive
opportunities for capital appreciation. The Fund may also invest in preferred
stocks and bonds issued by issuers engaged in the public utilities industry.
When buying fixed-income debt securities, the Fund may invest in securities
regardless of their rating depending upon prevailing market and economic
conditions, including securities in the lowest rating categories and unrated
securities. Although most of the Fund's investments are rated at least Baa by
Moody's Investors Service ("Moody's") or BBB by Standard & Poor's Corporation
("S&P"), the Fund intends not to buy fixed-income debt securities rated below B
by the rating services. Securities rated B are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. These
ratings represent the opinions of the rating services with respect to the
securities and are not absolute standards of quality. They will be considered in
connection with the investment of the Fund's assets but will not be a
determining or limiting factor. Please see the Appendix to this prospectus for a
discussion of the ratings.
With respect to unrated securities, it is also the Fund's intent to buy
securities that, in the view of Advisers, would be comparable in quality to
securities rated B or above or, if no specific equivalent rating has been
assigned by a nationally recognized rating service, have been determined to be
consistent with the Fund's objectives without exposing the Fund to excessive
risk. The Fund will not buy issues that are in default or that Advisers believes
involve excessive risk. All of the rated securities were rated at least Baa by
Moody's or BBB by S&P.
Like all debt securities, the value of the Fund's fixed-income debt securities
generally has an inverse relationship with market interest rates. For example,
when interest rates rise, the value of the Fund's debt securities tends to fall.
On the other hand, when interest rates fall, the value of these securities tends
to rise. Likewise, because securities issued by utility companies are
particularly sensitive to movements in interest rates, the equity securities of
these companies are more affected by movements in interest rates than are the
equity securities of other issuers.
Income Series
The investment objective of this Fund is to maximize income while maintaining
prospects for capital appreciation. The Fund invests in a diversified portfolio
of securities selected with particular consideration of current income
production. The Fund's assets may be invested in securities traded on any
national securities exchange or issued by a corporation, association or similar
legal entity with total assets of at least $1,000,000, according to its latest
published annual report, or held in cash or cash equivalents. The Fund may also
invest in preferred stocks. There are no restrictions as to the proportion of
investments that may be made in a particular type of security and the
determination is entirely within Advisers' discretion.
Lower Rated Securities. The Fund may invest up to 100% of its net assets in
non-investment grade bonds. These are commonly known as "junk bonds." Their
default and other risks are greater than those of higher rated securities. You
should carefully consider these risks before investing in the Fund. Please see
"What Are the Fund's Potential Risks? - High Yielding, Fixed-Income Securities."
Various investment services publish ratings of some of the types of securities
in which the Fund may invest. Higher yields are ordinarily available from
securities in the lower rating categories, such as securities rated Ba or lower
by Moody's or BB or lower by S&P, or from unrated securities of comparable
quality. These ratings represent the opinions of the rating services with
respect to the issuer's ability to pay interest and repay principal. They do not
purport to reflect the risk of fluctuations in market value and are not absolute
standards of quality. These ratings will be considered in connection with the
investment of the Fund's assets but will not be a determining or limiting
factor. Please see the Appendix to this prospectus for a description of these
ratings.
The Fund may invest in securities regardless of their rating or in securities
that are unrated, including up to 5% of its assets in securities that are in
default at the time of purchase. As an operating policy, however, the Fund will
generally invest in securities that are rated at least Caa by Moody's or CCC by
S&P, except for defaulted securities as noted below, or that are unrated but of
comparable quality as determined by Advisers. Unrated debt securities are not
necessarily of lower quality than rated securities, but they may not be
attractive to as many buyers. A breakdown of the ratings for the bonds in the
Fund's portfolio is included under "What Are the Fund's Potential Risks?" below.
The Fund may also buy debt securities of issuers that are not currently paying
interest, as well as issuers who are in default, and may keep an issue that has
defaulted. The Fund will buy defaulted debt securities if, in the opinion of
Advisers, they may present an opportunity for later price recovery, the issuer
may resume interest payments, or other advantageous developments appear likely
in the near future. In general, securities that default lose much of their value
before the actual default so that the security, and thus the Fund's Net Asset
Value, would be impacted before the default. Defaulted debt securities may be
illiquid and, as such, will be part of the 10% limit discussed under "Illiquid
Investments."
If the rating on an issue held in the Fund's portfolio is changed by the rating
service or the security goes into default, this event will be considered by the
Fund in its evaluation of the overall investment merits of that security but
will not generally result in an automatic sale of the security.
Rather than relying principally on the ratings assigned by rating services, the
investment analysis of securities being considered for the Fund's portfolio may
also include, among other things, consideration of relative values based on such
factors as anticipated cash flow, interest or dividend coverage, asset coverage,
earnings prospects, the experience and managerial strength of the issuer,
responsiveness to changes in interest rates and business conditions, debt
maturity schedules and borrowing requirements, and the issuer's changing
financial condition and the public recognition of such change.
Certain of the high yielding, fixed-income securities in which the Fund may
invest may be purchased at a discount. When held to maturity or retired, these
securities may include an element of capital gain. Capital losses may be
realized when securities purchased at a premium, that is, in excess of their
stated or par value, are held to maturity or are called or redeemed at a price
lower than their purchase price. Capital gains or losses also may be realized
upon the sale of securities.
Zero Coupon and Pay-In-Kind Bonds. The Fund may buy certain bonds issued at a
discount that defer the payment of interest or pay no interest until maturity,
known as zero coupon bonds, or which pay interest through the issuance of
additional bonds, known as pay-in-kind bonds. For federal tax purposes, holders
of these bonds, such as the Fund, are deemed to receive interest over the life
of the bonds and are taxed as if interest were paid on a current basis although
no cash interest payments are in fact received by the holder until the bonds
mature. See "What Are the Fund's Potential Risks? - High Yielding, Fixed-Income
Securities" for more information about these bonds.
When-Issued and Delayed Delivery Transactions. The Fund may buy debt obligations
on a "when-issued" or "delayed delivery" basis. These transactions are subject
to market fluctuation before delivery to the Fund and generally do not earn
interest until their scheduled delivery date. Therefore, the value or yields at
delivery may be more or less than those available when the transaction was
entered into. When the Fund is the buyer, it will maintain, in a segregated
account with its custodian bank, cash or high-grade marketable securities having
an aggregate value equal to the amount of its purchase commitments until payment
is made. To the extent the Fund engages in when-issued and delayed delivery
transactions, it will do so only for the purpose of acquiring portfolio
securities consistent with its investment objective and policies, and not for
the purpose of investment leverage. See "How Does the Fund Invest Its Assets? -
When-Issued, Delayed Delivery and TBA Transactions" in the SAI for a more
complete discussion of these transactions.
Loan Participations. The Fund may invest up to 5% of its assets in loan
participations and other related direct or indirect bank obligations. These
instruments are interests in floating or variable rate senior loans to U.S.
corporations, partnerships and other entities. While loan participations
generally trade at par value, the Fund will be able to acquire loan
participations, including those that sell at a discount because of the
borrower's credit problems. To the extent the borrower's credit problems are
resolved, the loan participation may appreciate in value. Advisers may acquire
loan participations for the Fund when it believes that over the long term
appreciation will occur. An investment in these securities, however, carries
substantially the same risks as those for defaulted debt securities and may
cause the loss of the entire investment to the Fund. Most loan participations
are illiquid and, to that extent, will be included in the 10% limitation
described under "Illiquid Investments."
Trade Claims. The Fund may invest a portion of its assets in trade claims. Trade
claims are purchased from creditors of companies in financial difficulty. For
buyers, such as the Fund, trade claims offer the potential for profits since
they are often purchased at a significantly discounted value and, consequently,
may generate capital appreciation if the value of the claim increases as the
debtor's financial position improves. If the debtor is able to pay the full
obligation on the face of the claim as a result of a restructuring or an
improvement in the debtor's financial condition, trade claims offer the
potential for higher income due to the difference in the face value of the claim
as compared to the discounted purchase price.
An investment in trade claims is speculative and carries a high degree of risk.
There can be no guarantee that the debtor will ever be able to satisfy the
obligation on the trade claim. Trade claims are not regulated by federal
securities laws or the SEC. Currently, trade claims are regulated primarily by
bankruptcy laws. Because trade claims are unsecured, holders of trade claims may
have a lower priority in terms of payment than most other creditors in a
bankruptcy proceeding. In light of the nature and risk of trade claims, the
Fund's investment in these instruments will not exceed 5% of its net assets at
the time of acquisition.
Concentration. As market conditions change, it is conceivable that all of the
assets of the Fund could be invested in common stocks or, conversely, in debt
securities. It is a fundamental policy of the Fund that concentration of
investment in a single industry may not exceed 25% of the total assets of the
Fund.
U.S. Government Securities Series
The investment objective of this Fund is income through investment in a
portfolio limited to securities that are obligations of the U.S. government or
its instrumentalities. U.S. government securities include, but are not limited
to, U.S. Treasury bonds, notes and bills, Treasury certificates of indebtedness
and securities issued by instrumentalities of the U.S. government. Other than
investments in short-term U.S. Treasury securities or assets held in cash
pending investment, the assets of the Fund are currently invested solely in
obligations of the Government National Mortgage Association ("GNMA(s)" or
"Ginnie Maes").
The Fund believes that its investment policies, as stated in this prospectus and
the SAI, make the Fund a permissible investment for federal credit unions, based
on the Fund's understanding of the laws and regulations governing credit union
regulations as of September 30, 1996. CREDIT UNION INVESTORS ARE ADVISED TO
CONSULT THEIR OWN LEGAL ADVISERS TO DETERMINE WHETHER AND TO WHAT EXTENT THE
SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM. Please see "How Does
the Fund Invest Its Assets? - Credit Union Investment Regulations" in the SAI
for details.
The Fund also believes that it is generally a permissible investment for
national banks, federally chartered savings and loan associations, and the
Fishing Vessel Capital Construction Fund. These investors should confirm the
permissibility of proposed investments in this Fund with their counsel.
The Fund's investments are continually monitored and changes are made as market
conditions warrant. The Fund does not, however, engage in the trading of
securities for the purpose of realizing short-term profits.
GNMAs. GNMAs are mortgage-backed securities representing part ownership of a
pool of mortgage loans. GNMAs differ from other bonds in that principal may be
paid back on an unscheduled basis rather than returned in a lump sum at
maturity. The Fund will buy GNMAs whose principal and interest are guaranteed.
The Fund also buys adjustable rate GNMAs and other types of securities that may
be issued with the guarantee of the Government National Mortgage Association
(the "Association").
The Association's guarantee of payment of principal and interest on GNMAs is
backed by the full faith and credit of the U.S. government. The Association may
borrow U.S. Treasury funds to the extent needed to make payments under its
guarantee. Of course, this guarantee does not extend to the market value or
yield of the GNMAs or the Net Asset Value or performance of the Fund, which will
fluctuate daily with market conditions.
Payments to holders of GNMAs consist of the monthly distributions of interest
and principal less the Association's and issuers' fees. The portion of the
monthly payment that represents a return of principal will be reinvested by the
Fund in securities that may have interest rates that are higher or lower than
the obligation from which the principal payment was received.
When mortgages in the pool underlying a GNMA are prepaid by borrowers or as a
result of foreclosure, the principal payments are passed through to the GNMA
holders, such as the Fund. Accordingly, a GNMA's life is likely to be
substantially shorter than the stated maturity of the mortgages in the
underlying pool. Because of the variation in prepayment rates, it is not
possible to accurately predict the life of a particular GNMA.
To-Be-Announced and Delayed Delivery Transactions. The Fund may buy and sell
GNMAs on a "To-Be-Announced" ("TBA") and "delayed delivery" basis. These
transactions are arrangements under which the Fund may buy securities with
payment and delivery scheduled for a future time, up to 60 days after purchase.
These transactions are subject to market fluctuation and the risk that the value
or yields at delivery may be more or less than those available when the
transaction was entered into. In TBA and delayed delivery transactions, the Fund
relies on the seller to complete the transaction. The seller's failure to do so
may cause the Fund to miss a price or yield considered advantageous. Securities
purchased on a TBA or delayed delivery basis do not generally earn interest
until their scheduled delivery date. The Fund is not subject to any percentage
limit on the amount of its assets that may be invested in delayed delivery and
TBA purchase obligations. For more information about these transactions, please
see the SAI.
The price per share you receive when you sell your shares may be more or less
than the price you paid for the shares. The dividends per share paid by the Fund
may also vary.
Other Investment Policies of the Fund
Foreign Securities. The U.S. Government Securities Series may not buy securities
of foreign issuers. The Income Series may invest up to 25% of its assets in
foreign securities and the Growth and Utilities Series may invest without
restriction in foreign securities, if the investments are consistent with their
objectives and comply with their concentration and diversification policies. The
Funds, other than the Income Series, presently have no intention of investing
more than 10% of their net assets in foreign securities not publicly traded in
the U.S. The holding of foreign securities, however, may be limited by the Fund
to avoid investment in certain Passive Foreign Investment Companies ("PFIC") and
the imposition of a PFIC tax on the Fund resulting from such investments.
The Fund will ordinarily buy foreign securities that are traded in the U.S. or
buy American Depositary Receipts, which are certificates issued by U.S. banks
representing the right to receive securities of a foreign issuer deposited with
that bank or a correspondent bank. The Fund may also buy the securities of
foreign issuers directly in foreign markets.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with any applicable U.S. and foreign currency
restrictions and tax and other laws limiting the amount and types of foreign
investments. Changes of governmental administrations or economic or monetary
policies in the U.S. or abroad, changed circumstances in dealings between
nations, or changes in currency convertibility or exchange rates could result in
investment losses for the Fund.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Securities that are acquired by the Fund outside the U.S. and that are publicly
traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered by the Fund to be illiquid assets so long
as the Fund acquires and holds the securities with the intention of reselling
them in the foreign trading market, the Fund reasonably believes it can readily
dispose of the securities for cash in the U.S. or foreign market and current
market quotations are readily available.
Foreign exchange gains and losses realized by the Fund in connection with
transactions involving foreign currencies, foreign currency payables or
receivables and foreign currency-denominated debt securities are subject to
special tax rules that may cause such gains and losses to be treated as ordinary
income and losses rather than capital gains and losses and may affect the amount
and timing of the Fund's income or loss from such transactions and, in turn, its
distributions to you. These rules are discussed in the SAI.
Options. Each Fund, except the U.S. Government Securities Series, may write
covered call options that are listed for trading on a national securities
exchange. This means that the Fund will only write options on securities that it
actually owns. A call option gives the buyer the right to buy the security on
which the option is written for a specified period of time and at a price agreed
to at the time the Fund sells the option, even though that price may be less
than the value of the security at the time the option is exercised. When the
Fund sells covered call options, it will receive a cash premium that can be used
in whatever way is felt to be most beneficial to the Fund. The risks associated
with covered call writing are that in the event of a price increase on the
underlying security, which would likely trigger the exercise of the call option,
the Fund will not participate in the increase in price beyond the exercise
price. If the Fund determines that it does not wish to deliver the underlying
securities from its portfolio, it would have to enter into a "closing purchase
transaction," the premium on which may be higher or lower than that received by
the Fund for writing the option. There is no assurance that a closing purchase
transaction will be available in every instance.
The Growth Series may buy put options. Put options on particular securities may
be purchased to protect against a decline in the market value of the underlying
security below the exercise price less the premium paid for the option. A put
option gives the holder the right to sell the underlying security at the option
exercise price at any time during the option period. The ability to buy put
options will allow the Fund to protect the unrealized gain in an appreciated
security in its portfolio without actually selling the security. In addition,
the Fund will continue to receive interest or dividend income on the security.
The Fund may sell a put option that it has previously purchased before the sale
of the securities underlying the option. These sales will result in a net gain
or loss, depending on whether the amount received on the sale is more or less
than the premium and other transaction costs paid for the put option that is
sold. The gain or loss may be wholly or partially offset by a change in the
value of the underlying security that the Fund owns or has the right to acquire.
The risk associated with put buying is if the value of the underlying security
exceeds the exercise price (or never declines below the exercise price), the
Fund may suffer a loss equal to the amount of the premium it paid plus
transaction costs.
Transactions in options are generally considered "derivative securities." The
Fund's investment in options may be limited by the requirements of the Code for
qualification as a regulated investment company and are subject to special tax
rules that may affect the amount, timing and character of distributions to you.
These securities require the application of complex and special rules and
elections. For more information, please see the SAI.
Convertible Securities. Each Fund, except the U.S. Government Securities Series,
may invest in convertible securities. A convertible security is generally a debt
obligation or preferred stock that may be converted within a specified period of
time into a certain amount of common stock of the same or a different issuer. A
convertible security provides a fixed-income stream and the opportunity, through
its conversion feature, to participate in the capital appreciation resulting
from a market price advance in its underlying common stock. As with a straight
fixed-income security, a convertible security tends to increase in market value
when interest rates decline and decrease in value when interest rates rise. Like
a common stock, the value of a convertible security also tends to increase as
the market value of the underlying stock rises, and it tends to decrease as the
market value of the underlying stock declines. Because its value can be
influenced by both interest rate and market movements, a convertible security is
not as sensitive to interest rates as a similar fixed-income security, nor is it
as sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
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.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
and subject to the following conditions, each Fund, except the U.S. Government
Securities Series, may lend its portfolio securities to qualified securities
dealers or other institutional investors, provided that such loans do not exceed
10% of the value of the Fund's total assets at the time of the most recent loan.
The borrower must deposit with the Fund's custodian bank collateral with an
initial market value of at least 102% of the initial market value of the
securities loaned, including any accrued interest, with the value of the
collateral and loaned securities marked-to-market daily to maintain collateral
coverage of at least 100%. This collateral shall consist of cash, securities
issued by the U.S. government, its agencies or instrumentalities, or irrevocable
letters of credit. The lending of securities is a common practice in the
securities industry. The Fund may engage in security loan arrangements with the
primary objective of increasing the Fund's income either through investing the
cash collateral in short-term interest bearing obligations or by receiving a
loan premium from the borrower. Under the securities loan agreement, the Fund
continues to be entitled to all dividends or interest on any loaned securities.
As with any extension of credit, there are risks of delay in recovery and loss
of rights in the collateral should the borrower of the security fail
financially.
Repurchase Agreements. Each Fund, except the U.S. Government Securities Series,
may engage in repurchase transactions in which the Fund buys a U.S. government
security subject to resale to a bank or dealer at an agreed-upon price and date.
The transaction requires the collateralization of the seller's obligation by the
transfer of securities with an initial market value, including accrued interest,
equal to at least 102% of the dollar amount invested by the Fund in each
agreement, with the value of the underlying security marked-to-market daily to
maintain coverage of at least 100%. A default by the seller might cause the Fund
to experience a loss or delay in the liquidation of the collateral securing the
repurchase agreement. The Fund might also incur disposition costs in liquidating
the collateral. The Fund, however, intends to enter into repurchase agreements
only with financial institutions such as broker-dealers and banks which are
deemed creditworthy by Advisers. A repurchase agreement is deemed to be a loan
by the Fund under the 1940 Act. The U.S. government security subject to resale
(the collateral) will be held on behalf of the Fund by a custodian approved by
the Board and will be held pursuant to a written agreement.
Borrowing. None of the Funds borrow money or mortgage or pledge any of their
assets, except that each Fund may borrow for temporary or emergency purposes in
an amount up to 5% of its total asset value.
Illiquid Investments. Each Fund's policy is not to invest more than 10% of its
net assets, at the time of purchase, in illiquid securities. Generally, illiquid
securities are those that cannot be sold within seven days in the normal course
of business at approximately the amount at which the Fund has valued them.
Subject to this limitation, the Board has authorized each Fund, except the U.S.
Government Securities Series, to invest in restricted securities where such
investment is consistent with the Fund's investment objective and has authorized
such securities to be considered liquid to the extent Advisers determines on a
daily basis that there is a liquid institutional or other market for the
securities. Notwithstanding Advisers' determinations in this regard, the Board
will remain responsible for such determinations and will consider appropriate
action, consistent with the Fund's objective and policies, if the security
should become illiquid after its purchase. To the extent the Fund invests in
restricted securities that are deemed liquid, the general level of illiquidity
in the Fund may be increased if qualified institutional buyers become
uninterested in buying these securities, or the market for these securities
contracts.
Percentage Restrictions. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in value of portfolio securities or the amount of net
assets will not be considered a violation of any of the foregoing policies.
Other Policies and Restrictions. Each Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
What are the Fund's Potential Risks?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
High Yielding, Fixed-Income Securities. The Income Series may invest up to 100%
of its net assets in non-investment grade securities. Because of the Fund's
policy of investing in higher yielding, higher risk securities, an investment in
the Fund is accompanied by a higher degree of risk than is present with an
investment in higher rated, lower yielding securities. Accordingly, an
investment in the Fund should not be considered a complete investment program
and should be carefully evaluated for its appropriateness in light of your
overall investment needs and goals. If you are on a fixed income or retired, you
should also consider the increased risk of loss to principal that is present
with an investment in higher risk securities such as those in which the Fund
invests. The Utilities Series may also invest a portion of its assets in
non-investment grade securities.
The market value of lower rated, fixed-income securities and unrated securities
of comparable quality, commonly known as junk bonds, tends to reflect individual
developments affecting the issuer to a greater extent than the market value of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Lower rated securities also tend to be more sensitive
to economic conditions than higher rated securities. These lower rated
fixed-income securities are considered by the rating agencies, on balance, to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and will
generally involve more credit risk than securities in the higher rating
categories. Even securities rated triple B by S&P or Moody's, ratings which are
considered investment grade, possess some speculative characteristics.
Issuers of high yielding, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with acquiring the securities of these 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, these 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 the securities are generally unsecured and are often
subordinated to other creditors of the issuer. Current prices for defaulted
bonds are generally significantly lower than their purchase price, and the Fund
may have unrealized losses on defaulted securities that are reflected in the
price of the Fund's shares. In general, securities that default lose much of
their value in the time period before the actual default so that the Fund's net
assets are impacted prior to the default. The Fund may retain an issue that has
defaulted because the issue may present an opportunity for subsequent price
recovery.
High yielding, fixed-income securities frequently have call or buy-back features
that permit an issuer to call or repurchase the securities from the Fund.
Although these securities are typically not callable for a period from three to
five years after their issuance, if a call were exercised by the issuer during
periods of declining interest rates, Advisers may find it necessary to replace
the securities with lower yielding securities, which could result in less net
investment income to the Fund. The premature disposition of a high yielding
security due to a call or buy-back feature, the deterioration of the issuer's
creditworthiness, or a default may also make it more difficult for the Fund to
manage the timing of its receipt of income, which may have tax implications. The
Fund may be required under the Code and U.S. Treasury regulations to accrue
income for income tax purposes on defaulted obligations and to distribute the
income to the Fund's shareholders even though the Fund is not currently
receiving interest or principal payments on these obligations. In order to
generate cash to satisfy any or all of these distribution requirements, the Fund
may be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
The Fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower rated, fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities that trade in a broader secondary retail market. Generally, buyers of
these securities are predominantly dealers and other institutional buyers,
rather than individuals. To the extent the secondary trading market for a
particular high yielding, fixed-income security does exist, it is generally not
as liquid as the secondary market for higher rated securities. Reduced liquidity
in the secondary market may have an adverse impact on market price and the
Fund's ability to dispose of particular issues, when necessary, to meet the
Fund's liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult for the
Fund to obtain market quotations based on actual trades for purposes of valuing
the Fund's portfolio. Current values for these high yield issues are obtained
from pricing services and/or a limited number of dealers and may be based upon
factors other than actual sales. Please see "How are Fund Shares Valued?" in the
SAI.
The Fund is authorized to acquire high yielding, fixed-income securities that
are sold without registration under the federal securities laws and therefore
carry restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if the Fund is required to sell restricted securities before the
securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of restricted securities; however, the Fund will generally incur no costs when
the issuer is responsible for registering the securities.
The Fund may acquire high yielding, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The Fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yielding securities and adversely affected the
value of outstanding securities and the ability of issuers of such securities to
meet their obligations. Although the economy has improved considerably and high
yielding securities have performed more consistently since that time, there is
no assurance that the adverse effects previously experienced will not reoccur.
For example, the highly publicized defaults of some high yield issuers during
1989 and 1990 and concerns regarding a sluggish economy that continued into
1993, depressed the prices for many of these securities. While market prices may
be temporarily depressed due to these factors, the ultimate price of any
security will generally reflect the true operating results of the issuer.
Factors adversely impacting the market value of high yielding securities will
adversely impact the Fund's Net Asset Value. In addition, the Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings. The Fund will
rely on Advisers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, Advisers will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
The credit risk factors pertaining to lower rated securities also apply to lower
rated zero coupon, deferred interest and pay-in-kind bonds. These bonds carry an
additional risk in that, unlike bonds that pay interest throughout the period to
maturity, the Fund will realize no cash until the cash payment date and, if the
issuer defaults, the Fund may obtain no return at all on its investment. Zero
coupon, deferred interest and pay-in-kind bonds involve additional special
considerations.
Zero coupon or deferred interest securities are debt obligations that do not
entitle the holder to any periodic payments of interest prior to maturity or a
specified date when the securities begin paying current interest (the "cash
payment date") and therefore are generally issued and traded at a discount from
their face amounts or par value. The discount varies depending on the time
remaining until maturity or cash payment date, prevailing interest rates,
liquidity of the security and the perceived credit quality of the issuer. The
discount, in the absence of financial difficulties of the issuer, typically
decreases as the final maturity or cash payment date of the security approaches.
The market prices of zero coupon securities are generally more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero coupon
or deferred interest securities having similar maturities and credit quality.
Current federal income tax law requires that a holder of a zero coupon security
report as income each year the portion of the original issue discount on the
security that accrues that year, even though the holder receives no cash
payments of interest during the year.
Pay-in-kind bonds are securities that pay interest through the issuance of
additional bonds. The Fund will be deemed to receive interest over the life of
these bonds and be treated as if interest were paid on a current basis for
federal income tax purposes, although no cash interest payments are received by
the Fund until the cash payment date or until the bonds mature. Accordingly,
during periods when the Fund receives no cash interest payments on its zero
coupon securities or deferred interest or pay-in-kind bonds, it may be required
to dispose of portfolio securities to meet the distribution requirements and
these 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 these types of
securities. For more information, please see "How Taxation Affects You and the
Fund."
Asset Composition Table. A credit rating by a rating agency evaluates only the
safety of a security's principal and interest, and does not consider the market
value risk associated with the investment. The table below shows the percentage
of the Income Series' assets invested in bonds rated in each of the specific
rating categories shown and those that are not rated by the rating agency but
deemed by Advisers to be of comparable credit quality. The information was
prepared based on a dollar weighted average of the Fund's portfolio composition
based on month-end assets for each of the 12 months in the fiscal year ended
September 30, 1996. The Appendix to this prospectus includes a description of
each rating category.
AVERAGE WEIGHTED
MOODY'S RATING PERCENTAGE OF ASSETS
- --------------------------------------
Aaa 5.59%
Aa 0.61%
A 0.00%
Baa 4.96%
Ba 7.44%
B 24.95%
Caa* 4.19%
Ca 0.67%
C 0.22%
*2.14% of these securities, which are unrated by the rating agency, have been
included in the Caa rating category.
Public Utilities Industry Securities. The Utilities Series has substantial
investments in the electric public utilities industry, which have certain
characteristics and risks that you should consider. These characteristics
include: risks associated with regulatory changes and interest rate
fluctuations; the difficulty of obtaining adequate returns on invested capital
in spite of frequent rate increases and of financing large construction programs
during inflationary periods; restrictions on operations and increased costs and
delays attributable to environmental considerations; difficulties of the capital
markets in absorbing utility debt and equity securities; difficulties in
obtaining fuel for electric generation at reasonable prices; risks associated
with the operation of nuclear power plants; and general effects of energy
conservation. Historically, the Utilities Series' investments in the public
utilities industry have been predominantly in dividend-yielding common stocks.
GNMAs. GNMA yields (interest income as a percentage of price) have historically
exceeded the current yields on other types of U.S. government securities with
comparable maturities. The effects of interest rate fluctuations and
unpredictable prepayments of principal, however, can greatly change realized
yields. As with most bonds, in a period of rising interest rates, the value of a
GNMA will generally decline. In a period of declining interest rates, it is more
likely that mortgages contained in GNMA pools will be prepaid, thus reducing the
effective yield. This potential for prepayment during periods of declining
interest rates may reduce the general upward price increases of GNMAs as
compared to the increases experienced by noncallable debt securities over the
same periods. In addition, any premium paid on the purchase of a GNMA will be
lost if the obligation is prepaid. Of course, price changes of GNMAs and other
securities held by the U.S. Government Securities Series will have a direct
impact on the Net Asset Value per share of the Fund.
Foreign Securities. Investment in the shares of foreign issuers requires
consideration of certain factors that are not normally involved in investments
solely in U.S. issuers. Among other things, the financial and economic policies
of some foreign countries in which the Fund may invest are not as stable as in
the U.S. Furthermore, foreign issuers are not generally subject to uniform
accounting, auditing and financial standards and requirements comparable to
those applicable to U.S. corporate issuers. There may also be less government
supervision and regulation of foreign securities exchanges, brokers and issuers
than exist in the U.S. Restrictions and controls on investment in the securities
markets of some countries may have an adverse effect on the availability and
costs to the Fund of investments in those countries. In addition, there may be
the possibility of expropriations, foreign withholding taxes, confiscatory
taxation, political, economic or social instability or diplomatic developments
that could affect assets of the Fund invested in issuers in foreign countries.
There may be less publicly available information about foreign issuers than is
contained in reports and reflected in ratings published for U.S. issuers. Some
foreign securities markets have substantially less volume than the NYSEand some
foreign government securities may be less liquid and more volatile than U.S.
government securities. Transaction costs on foreign securities exchanges may be
higher than in the U.S., and foreign securities settlements may, in some
instances, be subject to delays and related administrative uncertainties.
Interest Rate and Market Risk. To the extent a Fund invests in debt securities,
changes in interest rates in any country where the Fund is invested will affect
the value of the Fund's portfolio and its share price. Rising interest rates,
which often occur during times of inflation or a growing economy, are likely to
have a negative effect on the value of the Fund's shares. To the extent a Fund
invests in common stocks, a general market decline, shown for example by a drop
in the Dow Jones Industrials or other equity based index in any country where
the Fund is invested, may also cause the Fund's share price to decline. The
value of worldwide stock markets and interest rates has increased and decreased
in the past. These changes are unpredictable and may happen again in the future.
Who Manages the Fund?
The Board. The Board oversees the management of the Custodian Funds and elects
its officers. The officers are responsible for each Fund's day-to-day
operations. The Board also monitors each Fund to ensure no material conflicts
exist among the classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
Investment Manager. Advisers manages the Fund's assets and makes its investment
decisions. Advisers also performs similar services for other funds. It is wholly
owned by Resources, a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr.
are the principal shareholders of Resources. Together, Advisers and its
affiliates manage over $150 billion in assets. Please see "Investment Management
and Other Services" and "Miscellaneous Information" in the SAI for information
on securities transactions and a summary of the Fund's Code of Ethics.
Management Team. The teams responsible for the day-to-day management of each
Fund's portfolio are:
Growth Series - Vivian J. Palmieri since 1965 and Conrad B. Herrmann since 1991.
Vivian J. Palmieri
Vice President of Advisers
Mr. Palmieri holds a Bachelor of Arts degree in economics from Williams College.
He has been with the Franklin Templeton Group 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 the Franklin Templeton
Group since 1989 and is a member of several securities industry-related
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
the Franklin Templeton Group 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 the Franklin Templeton Group 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 the
Franklin Templeton Group since 1989. He is a member of several securities
industry-related associations.
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 the Franklin Templeton Group since 1957.
Mr. Johnson is a member of several securities industry-related associations.
Matt Avery
Portfolio Manager of Advisers
Mr. Avery holds a Master of Business Administration degree from the University
of California at Los Angeles and a Bachelor of Science degree in industrial
engineering from Stanford University. He has been in the securities industry
since 1982 and with the Franklin Templeton Group since 1987.
U.S. Government Securities Series - Jack Lemein since 1984, Anthony Coffey since
1989, and Roger Bayston since 1993.
Jack Lemein
Senior Vice President of Advisers
Mr. Lemein holds a Bachelor of Science degree in finance from the University of
Illinois. He has been in the securities industry since 1967 and with the
Franklin Templeton Group 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 the Franklin Templeton Group 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 Master 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 the Franklin Templeton Group since earning his MBA in 1991.
Management Fees. During the fiscal year ended September 30, 1996, management
fees paid to Advisers, as a percentage of average monthly net assets, were as
follows:
MANAGEMENT
FEES
- -----------------------------
Growth Series 0.49%
Utilities Series 0.46%
Income Series 0.46%
U.S. Government
Securities Series 0.45%
Portfolio Transactions. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, consistent with internal policies it may consider research
and related services and the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "How does the Fund Buy Securities for its Portfolio?" in the
SAI for more information.
Administrative Services. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
How does the Fund Measure Performance?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield and
current distribution rate. Performance figures are usually calculated using the
maximum sales charges, if applicable. Certain performance figures may not
include any applicable sales charges or Rule 12b-1 fees.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class or, in the case of Advisor Class shares, the Net Asset Value of the class.
Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
How is the Fund Organized?
Each Fund is a diversified series of Custodian Funds, an open-end management
investment company, commonly called a mutual fund. It was incorporated under the
laws of Delaware in 1947, reincorporated under the laws of Maryland in 1979, and
is registered with the SEC under the 1940 Act. Each Fund began offering two
classes of shares on May 1, 1995: Income Series - Class I, Utilities Series -
Class I, Growth Series - Class I and U.S. Government Securities Series - Class
I, and Income Series - Class II, Utilities Series - Class II, Growth Series-
Class II and U.S. Government Securities Series - Class II. All shares purchased
before that time are considered Class I shares. Each Fund began offering a third
class of shares on January 1, 1997: Income Series - Advisor Class, Utilities
Series - Advisor Class, Growth Series - Advisor Class and U.S. Government
Securities Series - Advisor Class. Custodian Fund's other series, DynaTech
Series offers Class I and Class II shares only. Class I, Class II and Advisor
Class shares differ as to sales charges, expenses and services. Different fees
and expenses will affect performance. Additional classes and series may be
offered in the future. A further description of Class I and Class II is set
forth below.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state law, or (3) required to be voted on
separately by the 1940 Act. Shares of each class of a series have the same
voting and other rights and preferences as the other classes and series of
Custodian Funds for matters that affect Custodian Funds as a whole.
Custodian Funds has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the Board.
If this happens, holders of the remaining shares voting will not be able to
elect anyone to the Board.
Custodian Funds does not intend to hold annual shareholder meetings. It may hold
a special meeting of a series, however, for matters requiring shareholder
approval under the 1940 Act. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares.
The 1940 Act requires that we help you communicate with other shareholders in
connection with removing members of the Board.
Class I and Class II. Class I and Class II shares of the Fund are described in a
separate prospectus relating only to those classes. You may buy Class I and
Class II shares through your investment representative or directly by contacting
the Fund. If you would like a prospectus relating to the Fund's Class I and
Class II shares, contact your investment representative or Distributors.
Class I and Class II shares of the Fund have sales charges and Rule 12b-1
charges that may affect performance. Class I shares of the Growth Series have a
front-end sales charge of 4.50% (4.71% of the net amount invested) that is
reduced on certain transactions of $100,000 or more. The Utilities, Income and
U.S. Government Securities Series are subject to a front-end sales charge of
4.25% (4.44% of the net amount invested) that is reduced on certain transactions
of $100,000 or more. For Class I shares of the Growth Series, Rule 12b-1 fees
may not exceed 0.25%. Rule 12b-1 fees may not exceed 0.15% of the average daily
net assets for the Class I shares of the Utilities, Income and U.S. Government
Securities Series. Class II shares of each series have a 1.00% (1.01% of the
amount invested) front-end sales charge. The Growth Series Class II shares are
subject to Rule 12b-1 fees up to a maximum of 1.00% per year of Class II's
average daily net assets. Class II shares of the Utilities, Income and U.S.
Government Securities Series are subject to Rule 12b-1 fees up to a maximum of
0.65% per year of the average daily net assets. Shares of Class I may be subject
to, and shares of Class II are generally subject to, a Contingent Deferred Sales
Charge upon redemption.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
Each Fund has elected and intends to continue to qualify as a regulated
investment company under Subchapter M of the Code. By distributing all of its
income and meeting certain other requirements relating to the sources of its
income and diversification of its assets, the Fund will not be liable for
federal income or excise taxes.
For federal income tax purposes, any income dividends that you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
For the fiscal year ended September 30, 1996, the following amounts of income
dividends may qualify for the federal corporate dividends-received deduction:
INCOME DIVIDEND
FUND QUALIFYING
- -------------------------------
Growth Series 99.86%
Utilities Series 81.37%
Income Series 24.17%
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.
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
Fund and 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 that may qualify for tax-free
treatment. You should consult your own tax advisor with respect to the
application of your state and local income tax laws to these distributions.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not considered a U.S. person for federal income tax purposes, 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 to your shares of the
Fund and distributions and redemption proceeds received from the Fund.
About Your Account
How Do I Buy Shares?
Opening Your Account
You may buy shares with a minimum initial investment of $5 million (in the
aggregate) in one or more Advisor Class shares of the Franklin Templeton Funds
($25 for subsequent investments) except if you fall in one of the following
categories of investors satisfying one of the following criteria:
(a) Broker-dealers, qualified registered investment advisors or certified
financial planners who have entered into a supplemental agreement with
Distributors for clients participating in comprehensive fee programs;
(b) Qualified registered investment advisors or registered certified financial
planners who have clients invested in Mutual Series on October 31, 1996;
(c) Qualified registered investment advisors or registered certified financial
planners who did not have clients invested in Mutual Series on October 31, 1996,
may buy through a broker-dealer or service agent who has entered into an
agreement with Distributors;
(d) Employer stock, bonus, pension or profit-sharing plans that meet the
requirements for qualification under Section 401 of the Code, including salary
reduction plans qualified under Section 401(k) of the Code, are subject to no
initial investment requirement if the number of employees is 5,000 or more or
the plan has assets of $50 million or more;
(e) Effective on or about February 1, 1997, participants in Franklin Templeton's
401(k) and Franklin Templeton's Profit Sharing Plans;
(f) Trust companies and bank trust departments initially investing in any
Franklin Templeton Funds at least $1 million of assets held in a fiduciary,
agency, advisory, custodial or similar capacity and over which the trust
companies, bank trust departments or other plan fiduciaries or participants, in
the case of certain retirement plans, have full or shared investment discretion;
(g) Governments, municipalities and tax-exempt entities that meet the
requirements for qualification under Section 501 of the Code (subject to an
initial investment in Advisor Class shares of $1 million);
(h) Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of a qualified group may also purchase
Advisor Class shares of the Fund if the group as a whole meets the required
minimum initial investment of $5 million;
(i) Directors, trustees, officers and full-time employees (and members of their
immediate family) of Franklin Templeton Group and Franklin Templeton Group of
Funds who invest $100 or more;
(j) Accounts managed by the Franklin Templeton Group;
(k) Class I shareholders of the Fund who qualify under one of the above
categories, may have their existing Class I shares invested into the Fund's
Advisor Class by sending written instructions indicating that they wish to do
so, by June 30, 1997. Instructions should be addressed to Investor Services.
Generally, for federal income tax purposes, there will be no recognition of gain
or loss associated with such a transaction. You may wish to consult with your
tax advisor to determine whether there are any state income tax consequences to
such a transaction.
(l) Each series of Franklin Templeton Fund Allocator Series that invests $1,000
or more.
The qualified group referred to in Item (h) above, is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
If you are subject to the $5 million minimum investment requirement, the cost or
current value (whichever is higher) of your investment in other funds in the
Franklin Templeton Funds will be included for purposes of determining compliance
with the required minimum investment amount, provided that at least $1 million
is invested in Advisor Class shares of the Franklin Templeton Funds.
The minimum for subsequent investments in Advisor Class shares is $25 for most
purchases of Advisor Class shares of the Fund and for purchases by directors,
trustees, officers and full-time employees (and members of their immediate
family) of Franklin Templeton Group and Franklin Templeton Funds; and $1,000 for
each series of Franklin Templeton Fund Allocator Series.
Purchase Price of Fund Shares
Advisor Class shares are purchased at Net Asset Value without a sales charge.
Securities Dealers may receive compensation up to 0.25% of the amount invested
from Distributors or an affiliated company.
How Do I Buy Shares in Connection with Retirement Plans?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Advisor Class shares.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you're exchanging
- --------------------------------------------------------------------------------
By Phone Call Shareholder Services
If you do not want the ability to exchange by phone to apply
to your account, please let us know.
- --------------------------------------------------------------------------------
Through Your
Dealer Call your investment representative
- --------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
How We Process Your Exchange
If you are exchanging your Advisor Class shares of the Fund you may:
o exchange into any of our money funds except Franklin Templeton Money Fund
II.
o exchange into the other Advisor Class shares of the Franklin Templeton
Funds (excluding Templeton Developing Markets Trust, Templeton Foreign Fund
and Templeton Growth Fund, except as described below) Mutual Series Class Z
shares and Templeton Institutional Funds, Inc., if you meet the investment
requirements of the fund to be acquired.
o exchange into the Advisor Class shares of Templeton Developing Markets
Trust, Templeton Foreign Fund and Templeton Growth Fund if you fall into
one of the following categories: (i) you are a broker-dealer or a qualified
registered investment advisor who has entered into a special agreement with
Distributors for your clients who are participating in comprehensive fee
programs; (ii) you are a qualified registered investment advisor or
certified financial planner who has clients invested in Mutual Series on
October 31, 1996; (iii) you are a qualified registered investment advisor
or certified financial planner who did not have clients invested in Mutual
Series on October 31, 1996 and are buying through a broker-dealer or
service agent who has entered into an agreement with Distributors; (iv) you
are a director, trustee, officer or full-time employee (or a family member)
of the Franklin Templeton Group or the Franklin Templeton Funds; (v) you
are a participant in Franklin Templeton's 401(k) or Franklin Templeton's
Profit Sharing Plans; (vi) the exchanging shareholder is an account managed
by the Franklin Templeton Group; or (vii) the exchanging shareholder is a
series of the Franklin Templeton Fund Allocator Series.
o If the fund you are exchanging into does not offer Advisor Class shares,
you may exchange into the Class I shares of the fund at Net Asset Value.
Please be aware that the following restrictions may apply to exchanges:
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all
transactions. Please notify us in writing if you do not want this option to
be available on your account(s). Additional procedures may apply. Please
see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy upon 60 days' written
notice.
o Your exchange may be restricted or refused if you: (i) request an exchange
out of the Fund within two weeks of an earlier exchange request, (ii)
exchange shares out of the Fund more than twice in a calendar quarter, or
(iii) exchange shares equal to at least $5 million, or more than 1% of the
Fund's net assets. Shares under common ownership or control are combined
for these limits. If you exchange shares as described in this paragraph,
you will be considered a Market Timer. Each exchange by a Market Timer, if
accepted, will be charged $5.00. Some of our funds do not allow investments
by Market Timers.
o Currently, the Growth Series does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
How Do I Sell Shares?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have additional requirements.
- --------------------------------------------------------------------------------
By Phone Call Shareholder Services
(Only available Telephone requests will be accepted:
if you have
completed and o If the request is $50,000 or less. Institutional accounts
sent to us the may exceed $50,000 by completing a separate agreement. Call
telephone Institutional Services to receive a copy.
redemption
agreement o If there are no share certificates issued for the shares
included with you want to sell or you have already returned them to the
this prospectus) Fund
o Unless you are selling shares in a Trust Company retirement
plan account
o Unless the address on your account was changed by phone
within the last 30 days
o Beginning on or about May 1, 1997, you will automatically be
able to redeem shares by telephone without completing a
telephone redemption agreement. Please notify us if you do
not want this option to be available on your account. If you
later decide you would like this option, send us written
instructions signed by all account owners.
- --------------------------------------------------------------------------------
Through Your
Dealer Call your investment representative
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Trust Company Retirement Plan Accounts
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
What Distributions Might I Receive from the Fund?
The Income and U.S. Government Securities Series declare dividends from their
net investment income monthly to shareholders of record on the last business day
of that month and pay them on or about the 15th day of the next month. Each of
these Funds may defer the December 31 record date to a later date in January for
tax or other operational reasons. The Utilities Series generally declares
dividends from its net investment income quarterly, and the Growth Series
generally declares dividends annually. The daily allocation of net investment
income begins on the day after we receive your money or settlement of a wire
order trade and continues to accrue through the day we receive your request to
sell your shares or the settlement of a wire order trade.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the applicable Rule 12b-1 fees of any class.
Class Z shares are not subject to Rule 12b-1 fees.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the same
class of the Fund by reinvesting capital gain distributions, or both dividend
and capital gain distributions. This is a convenient way to accumulate
additional shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy Advisor Class shares or Class I shares of another Franklin
Templeton Fund. Many shareholders find this a convenient way to diversify their
investments.
3. Receive distributions in cash - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee.
To select one of these options, please complete sections 6 and 7 of the
shareholder application included with this prospectus or tell your investment
representative which option you prefer. If you do not select an option, we will
automatically reinvest dividend and capital gain distributions in Advisor Class
shares of the Fund. For Trust Company retirement plans, special forms are
required to receive distributions in cash. You may change your distribution
option at any time by notifying us by mail or phone. Please allow at least seven
days prior to the record date for us to process the new option.
Transaction Procedures and Special Requirements
How and When Shares are Priced
The Fund is open for business each day the NYSEis open. We determine the Net
Asset Value per share of each class of a Fund as of the scheduled close of the
NYSE, generally 1:00 p.m. Pacific time. You can find the prior day's closing Net
Asset Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class of a Fund is
calculated on a pro rata basis. It is based on each class' proportionate
participation in the Fund, determined by the value of the shares of each class.
To calculate Net Asset Value per share of each class, the assets of each class
are valued and totaled, liabilities are subtracted, and the balance, called net
assets, is divided by the number of shares of the class outstanding. Each Fund's
assets are valued as described under "How are Fund Shares Valued?" in the SAI.
The Price We Use When You Buy or Sell Shares
You buy shares of Advisor Class at the Net Asset Value per share. We calculate
it to two decimal places using standard rounding criteria. You also sell shares
at Net Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor prior to signing. A
notarized signature is not sufficient.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
Trust Company Retirement Plan Accounts. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
Account Registrations and Required Documents
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
Corporation Corporate Resolution
Partnership 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
Trust 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Electronic Instructions. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions received directly from your dealer or representative without
further inquiry. Electronic instructions may be processed through the services
of the NSCC, which currently include the NSCC's "Networking," "Fund/SERV," and
"ACATS" systems, or through Franklin/Templeton's PCTrades IIo System.
Tax Identification Number
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is $50 or less, except for investors
under categories (d), (e), (i) and (l) under "Opening Your Account." We will do
this if the value of your account falls below this minimum because you
voluntarily sold your shares and your account has been inactive (except for the
reinvestment of distributions) for at least six months. Before we close your
account, we will notify you and give you 30 days to increase the value of your
account to at least $100.
Services to Help You Manage Your Account
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the application included with this prospectus
or contact your investment representative. The market value of the Fund's shares
may fluctuate and a systematic investment plan such as this will not assure a
profit or protect against a loss. You may discontinue the program at any time by
notifying Investor Services by mail or phone.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. Beginning with your February 1997 payment,
however, you will generally receive your payment by the end of the month in
which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. Please
verify the accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household
and send only one copy of a report. Call Fund Information if you would like
an additional free copy of the Fund's financial reports or an interim
quarterly report.
Brokers and Dealers and Plan Administrators
You may buy and sell Fund shares through registered broker-dealers. The Fund
does not impose a sales or service charge but your broker-dealer may charge you
a transaction fee. Transaction fees and services may vary among broker-dealers,
and your broker-dealer may impose higher initial or subsequent investment
requirements than those established by the Fund. Services provided by
broker-dealers may include allowing you to establish a margin account and borrow
on the value of the Fund's shares in that account. If your broker-dealer
receives your order before pricing on a given day, the broker-dealer is required
to forward the order to the Fund before pricing closes on that day. A
broker-dealer's failure to timely forward an order may give rise to a claim by
the investor against the broker.
Third party plan administrators of tax-qualified retirement plans and other
entities may provide sub-transfer agent services to the Fund. In such cases, the
Fund may pay the third party an annual sub-transfer agency fee that is not
greater than the Fund otherwise would have paid for such services.
Institutional Accounts
Institutional investors will likely be required to complete an institutional
account application. There may be additional methods of opening accounts and
purchasing, redeeming or exchanging shares of the Fund available for
institutional accounts. To obtain an institutional application or additional
information regarding institutional accounts, contact Franklin Templeton
Institutional Services at 1-800/321-8563 Monday through Friday, from 6:00 a.m.
to 5:00 p.m. Pacific time.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- --------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
- --------------------------------------------------------------------------------
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
Glossary
Useful Terms and Definitions
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Directors of Custodian Funds
CD - Certificate of deposit
Class I, Class II and Advisor Class - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. Class I and Class II differ,
however, primarily in their sales charge structures and Rule 12b-1 plans.
Advisor Class shares are purchased without a sales charge and do not have a Rule
12b-1 plan.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
Franklin Funds - The mutual funds in the Franklin Group of FundsAE except
Franklin Valuemark Funds and the Franklin Government Securities Trust
Franklin Templeton Funds - The Franklin Funds and the Templeton Funds
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of FundsAE and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the Fund's administrator
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Market Timer(s) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
Mutual Series - Franklin Mutual Series Fund Inc., a member of the Franklin Group
of Funds, formerly the Mutual Series Fund Inc. Each series of Mutual Series
began offering three classes of shares on November 1, 1996: Class I, Class II
and Class Z. All shares sold before that time are designated Class Z shares.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge, if applicable. The
maximum front-end sales charge is 4.50% for Class I shares of the Growth Series,
4.25% for Class I shares of the Utilities, Income and U.S. Government Securities
Series and 1% for all Class II shares. Advisor Class shares have no front-end
sales charge.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
Templeton Funds - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
Trust Company - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
Appendix
Description of Ratings
Corporate Bond Ratings
Moody's
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Commercial Paper Ratings
Moody's
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN
CUSTODIAN
FUNDS, INC.-
ADVISOR CLASS
STATEMENT OF
ADDITIONAL INFORMATION
JANUARY 1, 1997
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
How does the Fund Invest its Assets? 2
Investment Restrictions .......... 6
Officers and Directors ........... 8
Investment Management
and Other Services .............. 10
How does the Fund Buy
Securities for its Portfolio? ... 12
How Do I Buy, Sell
and Exchange Shares? ............ 13
How are Fund Shares Valued? ...... 15
Additional Information on
Distributions and Taxes ......... 15
The Fund's Underwriter ........... 17
How does the Fund
Measure Performance? ............ 18
Miscellaneous Information ........ 21
Financial Statements ............. 22
Useful Terms and Definitions ..... 22
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
The 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"). This SAI relates to the Advisor Class
shares of the Fund.
The Growth Series investment objective is capital appreciation. The Growth
Series seeks to achieve its objective by investing primarily in common stocks or
convertible securities believed to offer favorable possibilities for capital
appreciation, some of which may yield little or no current income. Current
income is only a secondary consideration when selecting portfolio securities.
The Utilities Series investment objectives are both capital appreciation and
current income. The Utilities Series seeks to achieve its investment objectives
by investing primarily in common stocks, including, from time to time,
non-dividend paying common stocks if, in the opinion of Advisers, these
securities appear to offer attractive opportunities for capital appreciation.
The Income Series investment objective is to maximize income while maintaining
prospects for capital appreciation. The Income Series invests in a diversified
portfolio of securities selected with particular consideration of current income
production. The U.S. Government Securities Series investment objective is
income. The U.S. Government Securities Series seeks to achieve its objective by
investing in a portfolio limited to securities that are obligations of the U.S.
government or its instrumentalities.
Advisor Class shares are only available for purchase by certain persons,
including, among others, certain financial institutions (such as banks, trust
companies, savings institutions and credit unions); government and tax-exempt
entities; pension, profit sharing and employee benefit plans; certain qualified
groups, including family trusts, endowments, foundations and corporations;
Franklin Templeton Fund Allocator Series; and directors, trustees, officers and
full time employees (and their family members) of Franklin Templeton Group and
the Franklin Templeton Group of Funds.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
The Prospectus, dated January 1, 1997, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "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 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, 1996, 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.
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. The sale of securities held for
relatively short periods and reinvestment of the proceeds will result in
increased brokerage and transaction costs to the Series and may involve an
increase in taxes to the shareholders.
The portfolio turnover rates for each Series are set forth below:
Portfolio Turnover
For Fiscal Years
Ended September 30
Fund 1995 1996
Growth Series........ 1.39% 2.03%
Utilities Series..... 5.55% 17.05%
Income Series........ 58.64% 25.29%
U.S. Government
Securities Series... 5.48% 8.01%
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The Fund 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, 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.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in value of portfolio securities
or the amount of assets will not be considered a violation of any of the
foregoing restrictions.
OFFICERS AND DIRECTORS
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupation
Name, Age and Address with the Fund During the Past Five Years
Harris J. Ashton (64) 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 (64) 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 (64) President
777 Mariners Island Blvd. and 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. (56) 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 61 of the investment companies
in the Franklin Templeton Group of Funds.
Gordon S. Macklin (68) Director
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (financial services); Director, Fund American
Enterprises Holdings, Inc., MCI Communications Corporation, CCC Information
Services Group, Inc. (information services), MedImmune, Inc. (biotechnology),
Source One Mortgage Services Corporation (information services), Shoppers
Express (information services), Spacelab, Inc. (aerospace 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; formerly
Chairman, Hambrecht and Quist Group; Director, H & Q Healthcare Investors; and
President, National Association of Securities Dealers, Inc.
Harmon E. Burns (51) 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 61 of the investment companies in the Franklin Templeton Group of Funds.
Kenneth V. Domingues (64) Vice President -
777 Mariners Island Blvd. Financial Reporting
San Mateo, CA 94404 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 38 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (36) 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, director and/or trustee of 61 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (48) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; Vice President, Franklin
Advisers, Inc. and officer of 61 of the investment companies in the Franklin
Templeton Group of Funds.
Diomedes Loo-Tam (57) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 38 of the investment
companies in the Franklin Group of Funds.
Brian E. Lorenz (57) 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 table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently paid
$1,350 per month plus $1,300 per meeting attended. As shown above, some of the
nonaffiliated Board members also serve as directors, trustees or managing
general partners of other investment companies in the Franklin Templeton Group
of Funds. They may receive fees from these funds for their services. The
following table provides the total fees paid to nonaffiliated Board members by
the Fund and by other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
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***
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Harris J. Ashton................. $30,500 $327,925 56
S. Joseph Fortunato.............. 30,500 344,745 58
Gordon S. Macklin................ 30,500 321,525 53
</TABLE>
*For the fiscal year ended September 30, 1996.
**For the calendar year ended December 31, 1995.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 62 registered investment companies, with approximately 174 U.S. based
funds or series.
Nonaffiliated members of the Board 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 Board member received any other
compensation, including pension or retirement benefits, directly or indirectly
from the Fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries.
As of December 6, 1996, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: Approximately 14,338
shares of Growth Series - Class I, 7424 shares of Utilities Series - Class I,
16,482 shares of Income Series - Class I, and 149,371 shares of U.S. Government
Securities Series - Class I, or less than 1% of the total outstanding shares of
each Series' Class I shares. Many of the Board members also own shares in other
funds in the Franklin Templeton Group of Funds.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Manager and Services Provided. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' activities are subject to the review and supervision of
the Board to whom Advisers renders periodic reports of the Fund's investment
activities. Advisers is covered by fidelity insurance on its officers, directors
and employees for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Fund. Similarly, with
respect to the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information Summary of Code of Ethics."
Management Fees. Under its management agreement, the Fund pays Advisers a
management fee equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1%
per year) for the first $100 million of average monthly net assets of each
Series; 1/24 of 1% (approximately 1/2 of 1% per year) on average monthly net
assets of each 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 each Series from $250
million up to $10 billion; 11/300 of 1% (approximately 44/100 of 1% per year) of
net assets of each Series from $10 billion to $12.5 billion; 7/200 of 1%
(approximately 42/100 of 1% per year) of net assets of each Series from $12.5
billion to $15 billion; 1/30 of 1% (approximately 40/100 of 1%) of net assets of
each Series from $15 billion to $17.5 billion; 19/600 (approximately 38/100 of
1%) of net assets of each Series from $17.5 billion to $20 billion; and 3/100
(approximately 36/100 of 1%) of net assets of each Series above $20 billion. The
fee is computed at the close of business on the last business day of each month.
Each class pays its proportionate share of the management fee.
Management fees for the four Series of the Fund for the fiscal years ended
September 30, 1994, 1995 and 1996, were as follows:
Fund 1994 1995 1996
- --------------------------------------------------------------------------------
Growth Series......................... $ 2,681,332 $ 2,969,094 $ 4,329,460
Utilities Series...................... 13,930,637 12,223,592 12,335,820
Income Series......................... 20,628,160 23,887,430 30,075,761
U.S. Government Securities Series..... 58,414,490 50,269,876 48,138,799
Management Agreement. The management agreement is in effect until January 31,
1997. It may continue in effect for successive annual periods if its continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities, or by Advisers on 30 days' written notice, and will automatically
terminate in the event of its assignment, as defined in the 1940 Act.
Administrative Services. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. These include
preparing and maintaining books, records, and tax and financial reports, and
monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
The fee is paid by Advisers. It is not a separate expense of the Fund.
Shareholder Servicing Agent. Investor Services, a wholly-owned subsidiary of
Resources, is the Fund's shareholder servicing agent 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.
Custodians. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York, 10286, acts as custodian of the securities and other assets of
the Fund. Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian for cash received in connection
with the purchase of Fund shares. Citibank Delaware, One Penn's Way, New Castle,
Delaware 19720, acts as custodian in connection with transfer services through
bank automated clearing houses. The custodians do not participate in decisions
relating to the purchase and sale of portfolio securities.
Auditors. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year eded
September 30, 1996, their auditing services consisted of rendering an opinion on
the financial statements of the Fund included in the Fund's Annual Report to
Shareholders for the fiscal year ended September 30, 1996. Advisor Class shares
of the Fund were not offered to the public before January 1, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
The selection of brokers and dealers to execute transactions in the Fund's
portfolio is made by Advisers in accordance with criteria set forth in the
management agreement and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt execution
of orders at the most favorable net price. When portfolio transactions are done
on a securities exchange, the amount of commission paid by the Fund is
negotiated between Advisers and the broker executing the transaction. 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 the transactions. These opinions are based on the experience of these
individuals in the securities industry and information available to them about
the level of commissions being paid by other institutional investors of
comparable size. Advisers will ordinarily place orders to buy and sell
over-the-counter securities on a principal rather than agency basis with a
principal market maker unless, in the opinion of Advisers, 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 amount of commission is not the only factor Advisers considers in the
selection of a broker to execute a trade. If Advisers believes it is in the
Fund's best interest, Advisers 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 Advisers, 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 Advisers 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 Advisers in advising other clients.
When Advisers believes several brokers are equally able to provide the best net
price and execution, it may decide to execute transactions through brokers who
provide quotations and other services to the Fund, in an amount of total
brokerage as may reasonably be required in light of these services.
Specifically, these services may include providing the quotations necessary to
determine the Fund's Net Asset Value, as well as research, statistical and other
data.
It is not possible to place a dollar value on the special executions or on the
research services received by Advisers from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers 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, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, consistent with
internal policies the sale of Fund shares, as well as shares of other funds in
the Franklin Templeton Group of Funds, may also be considered a factor in the
selection of broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive 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 will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could 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 fiscal years ended September 30, 1994, 1995 and 1996, the Fund paid
brokerage commissions as follows:
Fund 1994 1995 1996
- --------------------------------------------------------------------------------
Growth Series............................ $ 99,627 $ 50,102 $ 105,528
Utilities Series......................... 487,079 11,850 1,525,621
Income Series............................ 1,223,298 895,111 1,220,342
U.S. Government Securities Series........ -0- -0- -0-
As of September 30, 1996, the Fund did not own securities of its regular
broker-dealers.
How Do I Buy, Sell and Exchange Shares?
ADDITIONAL INFORMATION ON BUYING SHARES
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of Franklin Templeton Group of Funds. This
support is based primarily on the amount of sales of fund shares. The amount of
support may be affected by: total sales; net sales; levels of redemptions; the
proportion of a Securities Dealers's support of, and participation in,
Distributors' marketing programs; a Securities Dealer's compensation programs
for its registered representatives; and the extent of a Securities Dealer's
marketing programs relating to the Franklin Templeton Group of Funds. Financial
support to Securities Dealers may be made by payment from Distributors'
resources, from Distributors' retention of underwriting concessions and, in the
case of funds that have Rule 12b-1 plans, from payments to Distributors under
such plans. In addition, certain Securities Dealers may receive brokerage
commissions generated by fund portfolio transactions in accordance with the
NASD's rules.
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 and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objectives exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
Systematic Withdrawal Plan. 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 before February 1997 and on the 25th day of the
month beginning with your February 1997 payment. If the 25th falls on a weekend
or holiday, we will process the redemption on the prior business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
Through Your Securities Dealer. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
Redemptions in Kind. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell 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.
Special Services. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to the owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share of each class as of the scheduled
close of the NYSE, generally 1:00 p.m. Pacific time, each day that the NYSE is
open for trading. As of the date of this SAI, the Fund is informed that the NYSE
observes the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that 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 Advisers.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the 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 NYSE, if that is earlier. The 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 that 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. If events materially affecting the values
of these foreign securities occur during this period, the 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 before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value of each class is determined as of such times. Occasionally,
events affecting the values of these securities may occur between the times at
which they are determined and the scheduled close of the NYSE that will not be
reflected in the computation of the Net Asset Value of each class. If events
materially affecting the values of these securities occur during this period,
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 the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION
ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
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 capital loss carryforward or post October
loss deferral) may generally be made once a year in December to reflect any net
short-term and net long-term capital gains realized by the Fund as of October 31
of the current fiscal year and any undistributed capital gains from the prior
fiscal year. The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified to be treated as
a regulated investment company under Subchapter M of the Code. The Board
reserves the right not to maintain the qualification of the Fund as a regulated
investment company if it determines this course of action to be beneficial to
shareholders. In that case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, and distributions to
shareholders will be taxable to the extent of the Fund's available earnings and
profits.
Subject to the limitations discussed below, 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
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 provided by the Fund annually
in the Fund's Annual Report to Shareholders.
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 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 your 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 you on December 31 of the calendar year in which they are declared. Each
Series intends as a matter of policy to declare and pay 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 the 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 of shares in a PFIC
will not give rise to a deduction or credit to the Series or to any shareholder.
A PFIC means any foreign corporation if, for the taxable year involved, either
(i) it derives at least 75 percent of its gross income from "passive income"
(including, but not limited to, interest, dividends, royalties, rents and
annuities), or (ii) on average, at least 50 percent of the value (or adjusted
basis, if elected) of the assets held by the corporation produce "passive
income."
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark-to-market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares of stock 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. These excess distribution amounts are treated as ordinary income, which
the Series will be required to distribute to you even though the Series has not
received any cash to satisfy this distribution requirement. These regulations
would be effective for taxable years ending after promulgation of the proposed
regulations as final regulations.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for each class of the Fund's shares.
The underwriting agreement will continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), 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.
Distributors will not receive compensation from the Fund for acting as
underwriter with respect to the Advisor Class shares.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Current yield and average annual total return quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance for the Advisor Class shares follows.
For any period prior to January 1, 1997, the standardized performance quotations
for Advisor Class will be calculated by substituting the performance of Class I
for the relevant time period, and excluding the effect of the maximum sales
charge and including the effect of Rule 12b-1 fees applicable to Class I.
Regardless of the method used, past performance does not guarantee future
results, and is an indication of the return to shareholders only for the limited
historical period used.
TOTAL RETURN
Average Annual Total Return. Average annual total return is determined by
finding the average annual 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 income dividends and capital gain
distributions 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. The average annual
total returns for Advisor Class shares for the one-, five- and ten-year periods
ended September 30, 1996 would have been as follows:
One-Year Five-Year Ten-Year
Period Period Period
- ---------------------------------------------------
Growth Series.... 14.33% 12.60% 4.13%
Utilities Series. 1.47% 7.26% 8.20%
Income Series.... 4.87% 10.88% 10.56%
U.S. Government
Securities Series 0.75% 5.69% 7.65%
These rates of return will be calculated according to the SEC formula:
P(1+T)n = 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
Cumulative Total Return. The Fund may also quote the cumulative total return for
each class, in addition to the average annual total return. These quotations are
computed the same way, except the cumulative total return will be based on the
actual return for each class for a specified period rather than on the average
return over one-, five- and ten-year periods. The cumulative total return for
Advisor Class shares for the one-, five- and ten-year periods ended September
30, 1996 would have been as follows:
One-Year Five-Year Ten-Year
Period Period Period
- -----------------------------------------------------
Growth Series.... 14.33% 81.02% 274.81%
Utilities Series. 1.47% 41.99% 119.90%
Income Series.... 4.87% 67.57% 172.77%
U.S. Government
Securities Series 0.75% 31.89% 108.97%
YIELD
Current Yield. Current yield of each class shows the income per share earned by
the Fund. It is calculated by dividing the net investment income per share of
each class earned during a 30-day base period by the Net Asset Value 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 the class during the
base period. The yields for Advisor Class shares for the 30-day period ended
September 30, 1996, would have been as follows:
30-Day
Yield
- ---------------------------------------
Growth Series................... 1.21%
Utilities Series................ 5.52%
Income Series................... 7.62%
U.S. Government
Securities Series.............. 6.81%
These rates of return will be calculated using the following SEC formula:
Yield = 2 [(a-b + 1)6 - 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 Net Asset Value 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. Amounts paid to shareholders are reflected in the quoted current
distribution rate. For Advisor Class, the current distribution rate is usually
computed by annualizing the dividends paid per share by the class during a
certain period and dividing that amount by the current Net Asset Value. 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 the 30-day period ended September 30, 1996, for Advisor
Class shares would have been as follows:
Current
Distribution
Rate
Class I
- -----------------------------------------
Growth Series................ 0.68%
Utilities Series............. 5.16%
Income Series................ 7.50%
U.S. Government
Securities Series........... 7.01%
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance 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 any period prior to January 1, 1997, sales literature about Advisor Class
may quote a current distribution rate, yield, cumulative total return, average
annual total return and other measures of performance as described elsewhere in
this SAI by substituting the performance of Class I for the relevant time period
and excluding the effect of the maximum sales charge and Rule 12b-1 fees
applicable to Class I.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of both the Franklin Group of Funds and Templeton Group
of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of each class' performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These 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 NYSE composite or component indices - an unmanaged index of all
industrial, utilities, transportation, and finance stocks listed on the NYSE.
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 mutual funds.
h) Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Standard & Poor's 100 Stock Index - an unmanaged index based on the prices of
100 blue-chip stocks, including 92 industrials, one utility, two transportation
companies, and five financial institutions. The S&P 100 Stock Index is a smaller
more flexible index for options trading.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk adjusted performance of a fund over specified
time periods relative to other funds within its category.
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.
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 from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
1. Franklin pioneered the concept of Ginnie Mae funds, and the U.S. Government
Securities Series, with over $10 billion in assets and more than 459,000
shareholders as of March 31, 1996, 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
also compare the performance of Advisor Class to the return on CDs 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 CD 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
that 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. CDs 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 29 of the
last 47 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 47 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 Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 48 years and
now services more than 2.6 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 $153
billion in assets under management for more than 4.2 million U.S. based mutual
fund shareholder and other accounts. The Franklin Templeton Group of Funds
offers 125 U.S. based open-end investment companies to the public. 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 eight years.
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 Advisor Class outstanding shares.
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 IRS in response to a Notice of Levy.
Summary of Code of Ethics. 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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Fund, for the fiscal year ended September 30, 1996, including the
auditors' report, are incorporated herein by reference. These audited financial
statements do not include information for Advisor Class as these shares were not
publicly offered prior to the date of this SAI.
USEFUL TERMS AND DEFINITIONS
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
CD - Certificate of deposit
Class I, Class II and Advisor Class - The Fund offers three classes of shares,
designated "Class I," "Class II" and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. Class I and Class II differ,
however, primarily in their sales charge structures and Rule 12b-1 plans.
Advisor Class shares are purchased without a sales charge and do not have a Rule
12b-1 plan.
Code - Internal Revenue Code of 1986, as amended
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
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
Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the Fund's administrator
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Moody's - Moody's Investors Service, Inc.
Mutual Series - Franklin Mutual Series Fund Inc., a member of the Franklin Group
of Funds, formerly the Mutual Series Fund. Each series of Mutual Series began
offering three classes of shares on November 1, 1996; Class I, Class II and
Class Z. All shares sold before that time are designated Class Z shares.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge, if applicable. The
maximum front-end sales charge for the Growth is 4.50% for Class I and 1% for
Class II. The maximum front-end sales charge for the Utilities Series, Income
Series, and U.S. Government Series is 4.25% for Class I and 1% for Class II.
Advisor Class shares have no front-end sales charge.
Prospectus - The prospectus for Advisor Class of the Fund dated January 1, 1997,
as may be amended from time to time
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution which, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
Templeton Funds - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
U.S. - United States
We/Our/Us - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly-owned
subsidiaries of Resources.
This page intentionally left blank.
