AS FILED WITH THE SEC ON MARCH 12, 1998
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No.
(check appropriate box or boxes)
FRANKLIN CUSTODIAN FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
(650) 312-2000
(Area Code and Telephone Number)
777 Mariners Island Blvd., San Mateo, CA 94404
(Address of Principal Executive Offices --
Number, Street, City, State, Zip Code)
Harmon E. Burns, Esquire
777 Mariners Island Blvd.,
San Mateo, CA 94404
(Name and Address of Agent for Service --
Number, Street, City, State, Zip Code)
Copies to:
Bruce G. Leto, Esquire
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103
Approximate Date of Proposed Public Offering: As soon as
practicable after this Registration Statement becomes effective
under the Securities Act of 1933.
TITLE OF SECURITIES BEING REGISTERED: CLASS I, INCOME SERIES
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No filing fee is due because of reliance on Section 24(f) of the
Investment Company Act of 1940. Pursuant to Rule 429(a), this
Registration Statement relates to shares previously registered on
Form N-1A (Securities Act of 1933 File No. 002-11346; Investment
Company Act of 1940 File No. 811-537).
Pursuant to Rule 488 this Registration Statement shall become effective on
April 11, 1998 which shall be thirty days following filing of this
Registration Statement.
FRANKLIN CUSTODIAN FUNDS, INC.
CROSS REFERENCE SHEET
(Pursuant to Rule 481(a) under the
Securities Act of 1933)
N-14 Item No. and Caption Location in Prospectus
PART A
1. Beginning of Registration Statement Cover Page of Registration
and Outside Front Cover Page of Statement; Front Cover Page of
Prospectus Prospectus
2. Beginning and Outside Back Cover Page Table of Contents
of Prospectus
3. Fee Table, Synopsis Information and Summary; Risk Factors
Risk Factors
4. Information About the Transaction Summary; Reasons for the
Reorganization; Information About
the Reorganization
5. Information About the Registrant Prospectus Cover Page; Summary;
Comparison of Investment Policies
and Risks of Income Series and the
Fund; Information About Custodian
Funds
6. Information About the Company Being Prospectus Cover Page; Comparison
Acquired of Investment Policies and Risks
of Income Series and the Fund;
Additional Matters Regarding the
Fund; Other Information Relating
to the Fund
7. Voting Information Prospectus Cover Page; Notice of
Special Meeting of Shareholders;
Solicitation and Revocation of
Proxies and Voting Information;
Principal Shareholders;
Summary-Voting Information
8. Interest of Certain Persons and Experts None
9. Additional Information Required for Not Applicable
Reoffering by Persons Deemed to be
Underwriters
Location in Statement of
PART B Additional Information
10. Cover Page Cover Page of Statement of
Additional Information
11. Table of Contents Not Applicable
12. Additional Information Incorporation of Documents by
about the Registrant Reference in the Statement of
Additional Information
13. Additional Information Incorporation of Documents by
about the Company Being Acquired Reference in the Statement of
Additional Information
14. Financial Statements Incorporation of Documents by
Reference in the Statement of
Additional Information
PART C - OTHER INFORMATION
Part C contains the information required by Items 15-17 under the items set
forth in the Form.
Dear Shareholder:
Enclosed is a Notice for a Special Meeting of Shareholders which has been called
for June 5, 1998 at 2:00 p.m., at our principal office at 777 Mariners Island
Boulevard, San Mateo, CA 94403-7777. The accompanying Prospectus/Proxy Statement
details a proposal being presented for your consideration and requests your
prompt attention and vote via the enclosed proxy card.
PLEASE TAKE A MOMENT TO FILL OUT, SIGN AND RETURN THE ENCLOSED PROXY CARD!
This meeting is critically important as you are being asked to consider and
approve an Agreement and Plan of Reorganization which would result in an
exchange of the assets of Franklin Principal Maturity Trust (the "Fund") for
shares of Class I of the Income Series ("Income Series") of Franklin Custodian
Funds, Inc. ("Custodian Funds"), an open-end investment company also managed by
Franklin Advisers, Inc. ("Advisers"). On the date of the exchange, you will
receive Class I shares of the Income Series equal in value to your investment in
the Fund. Thereafter, the value of your investment will fluctuate with market
conditions and the Income Series' investment performance.
The proposed reorganization is intended to be a tax-free reorganization under
the Internal Revenue Code, as further described in the accompanying
Prospectus/Proxy Statement.
For the reasons described in the accompanying Prospectus/Proxy Statement, this
transaction is being proposed as an alternative to continuing the existence of
the Fund until its scheduled termination date of May 31, 2001.
Please take the time to review this document and vote now! To ensure that your
vote is counted, indicate your position on the enclosed proxy card(s). Sign and
return your card(s) promptly. If you determine at a later date that you wish to
attend the meeting, you may revoke your proxy and vote in person.
Thank you for your attention to this matter.
Sincerely,
Deborah R. Gatzek, Esq.
Secretary
FRANKLIN PRINCIPAL MATURITY TRUST
777 MARINERS ISLAND BOULEVARD
SAN MATEO, CA 94404
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 5, 1998
To the Shareholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of the Shareholders (the
"Shareholders") of Franklin Principal Maturity Trust (the "Fund") will be held
at the Fund's offices which are located at 777 Mariners Island Boulevard, San
Mateo, CA 94404, on June 5, 1998 at 2:00 p.m. Pacific time, for the following
purposes:
1. To approve or disapprove an Agreement and Plan of Reorganization between
the Fund and Franklin Custodian Funds, Inc. on behalf of the Income Series
(the "Income Series") that provides for the acquisition of substantially
all of the assets of the Fund in exchange for Class I shares of the Income
Series, the distribution of such shares to the Shareholders of the Fund,
and the dissolution of the Fund.
2. To consider and act upon any other business (none known as of the date of
this notice) as may legally come before the Special Meeting or any
adjournment thereof.
The attached Prospectus/Proxy Statement provides more information concerning the
transaction contemplated by the Agreement and Plan of Reorganization. A copy of
the Agreement and Plan of Reorganization is attached as Exhibit A.
Shareholders of record as of the close of business on April 3, 1998, are
entitled to notice of, and to vote at, the Special Meeting or any adjournment
thereof.
By Order of the
Board of Trustees,
DEBORAH R. GATZEK, ESQ.
Secretary
San Mateo, California
April ____, 1998
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IF YOU ATTEND THE MEETING, YOU MAY VOTE YOUR SHARES IN PERSON. IF YOU DO NOT
EXPECT TO ATTEND THE MEETING, THE BOARD OF TRUSTEES URGES YOU TO COMPLETE,
DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) IN THE ENCLOSED POSTAGE-PAID
RETURN ENVELOPE. IT IS IMPORTANT THAT YOU RETURN YOUR SIGNED PROXY PROMPTLY
SO THAT A QUORUM MAY BE ENSURED.
- -------------------------------------------------------------------------------
COMBINED PROSPECTUS AND PROXY STATEMENT
TABLE OF CONTENTS
PAGE
------
COVER PAGE...............................................................COVER
PROPOSAL: TO APPROVE OR DISAPPROVE THE AGREEMENT AND
PLAN OF REORGANIZATION......................................................
SUMMARY OF THE PROPOSAL.......................................................
COMPARISON OF IMPORTANT FEATURES
Investment Objectives and Policies.........................................
Management of Custodian Funds and the Fund.................................
Fees and Expenses..........................................................
Distribution Services......................................................
Purchase Price, Redemption Price, Dividends
and Distributions.......................................................
Risk Factors and Comparison of Policies....................................
REASONS FOR THE REORGANIZATION................................................
INFORMATION ABOUT THE REORGANIZATION..........................................
Method of Carrying Out the Reorganization..................................
Conditions Precedent to Closing............................................
Expenses of the Transaction................................................
Tax Considerations.........................................................
Description of Shares of Income Series.....................................
Capitalization.............................................................
COMPARISON OF INVESTMENT POLICIES AND RISKS OF INCOME SERIES
AND THE FUND...............................................................
The Income Series and the Fund............................................
Investment Policies and Restrictions.......................................
Risk Factors...............................................................
Distribution Plan..........................................................
SOLICITATION AND REVOCATION OF PROXIES
AND VOTING INFORMATION......................................................
PRINCIPAL SHAREHOLDERS........................................................
ADDITIONAL MATTERS REGARDING THE FUND.........................................
History of Public Trading of the Fund's Shares.............................
Portfolio Management.......................................................
INFORMATION ABOUT CUSTODIAN FUNDS.............................................
INFORMATION ABOUT THE FUND....................................................
TRANSFER AGENT AND CUSTODIAN..................................................
EXHIBIT A - Agreement and Plan of Reorganization......................Attached
EXHIBIT B - Franklin Custodian Funds, Inc. prospectus,
dated February 1, 1998.............................................Attached
EXHIBIT C - Franklin Custodian Funds, Inc. Annual
Report to Shareholders, dated September 30, 1997 ................. Attached
COMBINED PROSPECTUS AND PROXY STATEMENT
DATED APRIL ___, 1998
ACQUISITION OF THE ASSETS OF
FRANKLIN PRINCIPAL MATURITY TRUST
BY AND IN EXCHANGE FOR CLASS I SHARES OF THE
INCOME SERIES OF
FRANKLIN CUSTODIAN FUNDS, INC.
PURPOSE OF THIS PROSPECTUS/PROXY STATEMENT
This Prospectus/Proxy Statement seeks shareholder approval of a proposed
transaction (the "Reorganization") in which Franklin Principal Maturity Trust
(the "Fund") will be combined with a similar Franklin Templeton fund that is
structured as an "open-end" investment company and the Fund's shareholders will
become shareholders of the new, open-end fund.
OVERVIEW OF THE PROPOSED TRANSACTION
The Fund's management has determined to seek approval of an Agreement and Plan
of Reorganization (the "Agreement and Plan") which provides for the acquisition
of substantially all of the assets of the Fund by the Income Series (the "Income
Series") of Franklin Custodian Funds, Inc. ("Custodian Funds") in exchange for
Class I shares of the Income Series.
Following the transfer of the Fund's assets, Class I shares of the Income Series
will be distributed to Shareholders of the Fund and the Fund will be liquidated.
Individual Fund shareholders will receive Class I shares of the Income Series
equal in value to their previous interest in the Fund.
PARTIES TO THE TRANSACTION
The Income Series is a series of Custodian Funds, an open-end, management
investment company, incorporated under the laws of the State of Maryland, with
principal offices located at 777 Mariners Island Boulevard, San Mateo, CA 94404.
The Income Series has a similar investment objective to the Fund, namely to
maximize income while maintaining prospects for capital appreciation. Although
the investment policies and restrictions and, consequently, the risks of
investing in the Income Series, are similar to those of the Fund, they differ in
certain respects which are described more fully under "Comparison of Investment
Policies and Risks of Income Series and the Fund" in this Prospectus/Proxy
Statement.
The Fund's principal offices are located at 777 Mariners Island Boulevard, San
Mateo, CA 94404 and may be telephoned at (650) 570-3000. The Fund is a
closed-end, management investment company with one class of shares of beneficial
interest outstanding.
RELEVANT INFORMATION ABOUT THE TRANSACTION
This Prospectus/Proxy Statement, which should be retained for future reference,
sets forth concisely the information about the Income Series that Fund
shareholders should know in order to evaluate the proposed Reorganization. The
following documents are incorporated by reference into this Prospectus/Proxy
Statement (and are also attached if indicated). All documents may be obtained
without charge by writing to the address shown above or by calling 1-800/DIAL
BEN:
o a Statement of Additional Information dated April __, 1998 relating to
this Prospectus/Proxy Statement, is on file with the U.S. Securities and
Exchange Commission and is available upon request to the Fund.
o the Prospectus of Custodian Funds relating to the Income Series dated
February 1, 1998. Attached as EXHIBIT B.
o the Annual Report of Custodian Funds relating to the Income Series dated
September 30, 1997. Attached as EXHIBIT C.
o the Fund's Annual Report for the year ended November 30, 1997 is on file
with the U.S. Securities and Exchange Commission and is available upon
request to the Fund.
It is expected that this Prospectus/Proxy Statement will first be sent to
Shareholders on or about April __, 1998.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT
AND IN THE MATERIALS EXPRESSLY INCORPORATED BY REFERENCE. IF ANY PERSON PROVIDES
ANY REPRESENTATION OR OTHER INFORMATION, YOU SHOULD NOT RELY ON THOSE
REPRESENTATIONS OR OTHER INFORMATION SINCE NEITHER THE FUND NOR THE INCOME
SERIES HAS AUTHORIZED THOSE REPRESENTATIONS.
PROPOSAL: TO APPROVE OR DISAPPROVE AN
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN THE FUND AND FRANKLIN CUSTODIAN FUNDS, INC.
SUMMARY OF THE PROPOSAL
This summary of certain information contained in this Prospectus/Proxy Statement
is qualified by reference to the more complete information contained elsewhere
in this Prospectus/Proxy Statement. The Agreement and Plan of Reorganization
(the "Agreement and Plan"), the Prospectus, and Annual Report of Custodian Funds
are all attached to this Prospectus/Proxy Statement as Exhibits A, B, and C,
respectively.
WHY IS THIS PROPOSAL BEING PRESENTED AT THIS TIME?
The prospectus for the Fund requires the Board of Trustees of the Fund to review
discount trading of the Fund's shares at various times. Trading discounts were
considered at a meeting of the Board on November 18, 1997 and it is out of that
meeting that this proposal arose. At a meeting later held on January 12, 1998,
the Board of Trustees of the Fund considered various alternatives for the future
of the Fund which included continuing as a closed-end investment company which
offers only one outstanding class of shares until the termination date of the
Fund on May 31, 2001, converting to an open-end fund or the sale of the Fund's
assets to a larger, open-end investment company.
While realizing that the decision of each Shareholder will involve an assessment
of his or her own personal financial situation and objectives, for the reasons
set forth below under "REASONS FOR THE REORGANIZATION," the Board of Trustees of
the Fund, including a majority of the Trustees who are not "interested persons"
of the Fund as defined in the Investment Company Act of 1940, as amended, (the
"1940 Act") ("Independent Trustees") concluded that the Reorganization is in the
best interests of the shareholders of the Fund and the Income Series and,
therefore, approved the Agreement and Plan and recommend that shareholders also
approve of the Agreement and Plan.
HOW WILL THE PROPOSED REORGANIZATION AFFECT FUND SHAREHOLDERS?
The Agreement and Plan approved of by the Trustees provides for: the transfer of
substantially all of the assets of the Fund in exchange for Class I shares
issued by the Income Series. The value of Class I shares issued by the Income
Series in connection with the Reorganization will equal the value of the net
assets of the Fund acquired by the Income Series. Pursuant to the Agreement and
Plan, Class I shares issued to the Fund by the Income Series will be distributed
to the Shareholders of the Fund in liquidation of the Fund. As a result,
Shareholders of the Fund will cease to be Shareholders of the Fund and will
instead be the owners of that number of full and fractional Class I shares of
the Income Series having an aggregate net asset value equal to the aggregate net
asset value of the shares of the Fund on the closing date of the Reorganization,
as defined herein.
WHAT IS THE EFFECT OF MY VOTE?
The affirmative vote of two-thirds of the outstanding shares of the Fund as of
the Record Date is necessary to approve the Agreement and Plan. Shareholders are
being asked to cast their votes to approve the Agreement and Plan. If the
Agreement and Plan is not approved, the Fund will continue to operate as a
closed-end fund until the date of the scheduled termination on May 31, 2001. IF
YOU RETURN A SIGNED PROXY WITH NO VOTING INSTRUCTIONS, YOUR SHARES WILL BE VOTED
IN FAVOR OF THE AGREEMENT AND PLAN.
WHAT ARE THE TAX CONSEQUENCES FOR THE SHAREHOLDERS?
Completion of the Reorganization is subject to the receipt of an opinion letter
from counsel to the Fund, substantially to the effect that, among other things:
o no gain or loss will be recognized by the Fund or its Shareholders for
federal income tax purposes as a result of such Reorganization; and
o the holding period and aggregate tax basis of shares of the Income Series
received by a Shareholder of the Fund will be the same as the holding
period and aggregate tax basis of the Shareholder's shares of the Fund;
and
o the holding period and tax basis of the assets of the Fund in the hands of
the Income Series as a result of the Reorganization generally will be the
holding period and tax basis of those assets in the hands of the Fund
immediately prior to the Reorganization.
COMPARISON OF IMPORTANT FEATURES
HOW DO THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUND AND THE INCOME SERIES
COMPARE?
The investment objective of the Income Series is to maximize income while
maintaining prospects for capital appreciation. The assets of Income Series 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 Income Series may also invest in preferred stocks.
The Fund's primary investment objective is to manage a portfolio of securities
with the goal of returning $10.00 per share to investors on or shortly before
May 31, 2001, while providing high, monthly income. The Fund seeks to achieve
its objective by investing primarily in a combination of mortgage-backed
securities, zero coupon securities, and high income producing debt securities.
HOW ARE THE FUND AND THE INCOME SERIES EACH MANAGED?
The management of the business and affairs of Custodian Funds is the
responsibility of its Board of Directors. Custodian Funds is a corporation
organized under the laws of Delaware in 1947 and reincorporated under the laws
of Maryland in 1979. Similarly, the management of the business and affairs of
the Fund is the responsibility of its Board of Trustees. The Fund is an
investment trust created under the laws of the Commonwealth of Massachusetts by
an Agreement and Declaration of Trust dated November 22, 1988, and amended and
restated on December 13, 1988.
INVESTMENT MANAGEMENT SERVICES:
Both the Income Series and the Fund are advised and managed by Franklin
Advisers, Inc. ("Advisers") whose address is 777 Mariners Island Boulevard, San
Mateo, CA 94404. Advisers is a wholly owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly owned holding company, the principal shareholders
of which are Charles B. Johnson, and Rupert H. Johnson, Jr., who own
approximately 19% and 15%, respectively, of Resources' outstanding shares.
Through its subsidiaries, Resources is engaged in various aspects of the
financial services industry. Advisers and its affiliates also provide advisory
and management services to 57 U.S. registered investment companies (170 separate
series) with aggregate assets of over $170 billion as of December 31, 1997.
Pursuant to its Management Agreement with Advisers, the Income Series is
obligated to pay to Advisers a fee computed at the close of business on the last
business day of each month equal to a monthly rate of 5/96 of 1% (approximately
5/8 of 1% per year) for the first $100 million of net assets; 1/24 of 1%
(approximately 1/2 of 1% per year) of net assets in excess of $100 million up to
$250 million; 9/240 of 1% (approximately 45/100 of 1% per year) of net assets in
excess of $250 million up to $10 billion; 11/300 of 1% (approximately 44/100 of
1% per year) of net assets in excess of $10 billion up to $12.5 billion; 7/200
of 1% (approximately 42/100 of 1% per year) of net assets in excess of $12.5
billion to $15 billion; 1/30 of 1% (approximately 40/100 of 1% per year) of net
assets in excess of $15 billion up to $17.5 billion; 19/100 of 1% (approximately
38/100 of 1%) of net assets in excess of $17.5 billion up to $20 billion; and
3/100 of 1% (approximately 36/100 of 1%) of net assets in excess of $20 billion.
The Income Series currently has net assets of approximately $7.7 billion. Unlike
the Fund's management agreement with Advisers, the fee payable by Income Series
is graduated so that increases in the Income Series' assets may result in a
lower fee rate and decreases in the Series' assets may result in a higher fee
rate.
Pursuant to its Management Agreement with Advisers, the Fund is obligated to pay
to Advisers a management fee computed weekly and payable monthly at an annual
rate of 0.45% of 1% of the Fund's average weekly net assets.
ADMINISTRATIVE SERVICES:
The Income Series receives administrative services and facilities from Franklin
Templeton Services, Inc. ("FT Services"). FT Services is a wholly-owned
subsidiary of Resources and is located at the same address as Advisers. Investor
Services, a wholly owned subsidiary of Resources, serves as the dividend-paying
agent, transfer agent and shareholder servicing agent of the Income Series.
The Fund's transfer agent and shareholder servicing agent is First Data Investor
Group, Inc. a wholly-owned subsidiary of First Data Corporation.
HOW ARE THE INCOME SERIES AND THE FUND DISTRIBUTED?
THE INCOME SERIES.
Franklin/Templeton Distributors, Inc. ("FTDI"), located at 777 Mariners Island
Boulevard, San Mateo, CA 94403, a wholly-owned subsidiary of Resources, serves
as the principal underwriter of the Class I shares of the Income Series and
imposes a sales charge on such shares at a maximum of 4.25% of the public
offering price. No sales charge will be imposed on shares issued as a result of
the proposed Reorganization.
The Income Series has adopted a distribution plan pursuant to the provisions of
Rule 12b-1 under the 1940 Act (the "Plan"). The Plan provides that the Income
Series shall reimburse FTDI or others for all expenses incurred by FTDI or
others in the promotion and distribution of the Income Series' shares in an
amount not to exceed 15/100 of 1% per annum of its average daily net assets.
Reimbursable expenses include, but are not limited to, the printing of
prospectuses and reports used for sales purposes, expenses of preparing and
distributing sales literature and related expenses, advertisements, and other
distribution-related expenses including a prorated portion of FTDI's overhead
expenses, attributable to the distribution of the Income Series' shares, as well
as any distribution or service fees paid to securities dealers or their firms or
others who have executed a servicing agreement with Custodian Funds on behalf of
the Income Series, FTDI or its affiliates.
In addition to the payments which the Income Series is otherwise authorized to
make under the Plan, to the extent that certain parties make payments that are
deemed to be payments for the financing of any activity primarily intended to
result in the sale of shares issued by the Income Series within the context of
Rule 12b-1, then such payments are deemed to have been made pursuant to the
Plan. The Plan was approved by the shareholders of Income Series at a meeting
held on April 18, 1994 and became effective on May 1, 1994 (the "Effective
Date").
THE FUND
Because the Fund is a closed-end investment company whose shares are publicly
traded on an exchange, there is no continuous distribution of its shares. The
Fund, therefore, is not subject to a plan for the distribution of its shares
pursuant to Rule 12b-1 under the 1940 Act.
WHAT ARE THE VARIOUS FEES AND EXPENSES OF THE FUND AND INCOME SERIES?
The following information is provided in order to assist you in understanding
the fees and expenses of the Fund and the Income Series.
FEES INCOME SERIES FUND
CLASS I
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Shareholder Transaction Expenses
Maximum Sales Charge (as a percentage
of Offering Price)
Paid at time of purchase 4.25% N/A
Paid at redemption NONE N/A
Exchange Fee (per transaction) $5.00 N/A
Annual Fund Operating Expenses (as a
percentage of average net assets)
Management Fees 0.46% 0.45%
Rule 12b-1 Fees 0.15% N/A
Other Expenses 0.11% 0.18%
---------------- ------------
Total Fund Operating Expenses 0.72% 0.63%
---------------- ------------
EXAMPLE
You would pay the following expenses on a $1,000 investment based on the
level of expenses shown above, assuming (1) a 5% annual return and (2)
redemption at the end of each time period:
1 Year 3 Year 5 Year 10 Year
The Fund $ 6 $20 $35 $79
Income
Series $50 $65 $81 $128
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AS ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE
ASSUMED 5% ANNUAL RETURN IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE ANNUAL RETURN. THE ACTUAL RETURN MAY BE GREATER
OR LESS THAN THE ASSUMED AMOUNT. The various costs and expenses reflected in the
foregoing Expense Tables and Example are explained in more detail in this
Prospectus/Proxy Statement.
WHAT IS THE CLASS I SHARE PURCHASE PRICE FOR THE INCOME SERIES? Class I Shares
of the Income Series are sold on a continuous basis at the public offering price
per share which is equal to the net asset value per share plus a sales charge
with a maximum level of 4.25% which decreases to less than 1.00% of the offering
price depending upon the amount invested.
The Income Series requires a minimum initial investment of $100. Subsequent
purchases must be at least $25. The minimums may be waived when the shares are
purchased through plans which provide for regular periodic investment.
HOW DOES THE INCOME SERIES REDEEM ITS SHARES?
Class I Shares of the Income Series may be redeemed at any time at the net asset
value per share, although redemptions in excess of $250,000 or 1% of the Income
Series' net assets in any 90-day period may be subject to certain conditions.
Shares of each Franklin Fund may be exchanged for shares of most other mutual
funds in the Franklin Templeton Group of Funds subject to certain limitations,
as provided in the prospectuses of the respective Franklin Templeton Funds.
DOES THE FUND REDEEM ITS SHARES?
The Fund is a closed-end investment company which does not redeem its shares or
offer to exchange them for shares of any other investment company or engage in
the continuous sale of new shares. Shares of the Fund are listed and traded on
the New York Stock Exchange and may be purchased or sold on such exchange at a
market price through a broker that customarily charges sales commissions.
WHAT ARE THE DIVIDEND AND DISTRIBUTION POLICIES FOR THE INCOME SERIES AND THE
FUND?
The Income Series and the Fund have policies of distributing substantially all
of their net investment income and net capital gains to their respective
shareholders. The Income Series declares income dividends from its net
investment income monthly for shareholders of record on the last business day of
the month, payable on or about the 15th day of the following month. The Fund
pays dividends from net investment income and capital gains, if any, monthly.
Dividends and capital gains distributions are automatically reinvested by Income
Series and the Fund in additional shares unless and until the shareholder elects
to receive them in cash.
HOW DO THE RISK FACTORS AND THE INVESTMENT POLICIES OF THE INCOME SERIES AND THE
FUND COMPARE?
Because of the similarities of the investment objectives and policies of the
Income Series and the Fund, the investment risks associated with an investment
in Income Series are generally the same as those of the Fund. There are,
however, some distinctions in the investment program of Income Series and the
Fund. For example, the Income Series may invest up to 100% of its net assets in
non-investment grade bonds commonly known as "junk bonds," and the Fund has no
policies in this regard. See "Comparison of Investment Policies and Risks of
Income Series and the Fund" below and the accompanying prospectus of Income
Series.
REASONS FOR THE REORGANIZATION
WHY IS THE BOARD RECOMMENDING THIS REORGANIZATION?
Because the Fund reached its targeted $10 per share earlier than expected and
was trading in the secondary market at a price which is less than its net asset
value, FTDI notified the Trustees of the Fund in January of 1998 that it was
recommending the sale of the assets of the Fund to a larger open-end fund with
similar investment objectives and policies to the Fund.
FTDI reasoned that a merger would provide Fund shareholders exposure to a fund
with a less restrictive investment objective, and a broader mix of stock and
bond investments. This proposed sale of the Fund's assets would be subject to
the approval of the Fund's Board of Trustees and Shareholders. The Agreement and
Plan was presented to the Trustees of the Fund at a meeting held on February 26,
1998, at which meeting the Trustees of the Fund questioned Advisers and FTDI
about the potential benefits to be gained by Shareholders of the Fund as well as
any additional costs to be borne.
In determining whether to recommend approval of the Reorganization to
Shareholders, the Board of Trustees considered, among others, the following
factors:
(1) expense ratios of Income Series, as well as similar funds; and
(2) the comparative investment performance of Income Series with the
performance of similar funds; and
(3) the compatibility of the investment objectives, policies, restrictions
and portfolios of Income Series with the Fund; and
(4) the tax consequences of the Reorganization.
WHAT ARE THE ADVANTAGES TO SHAREHOLDERS OF THE FUND TO APPROVE THE
REORGANIZATION?
After carefully considering various alternatives with respect to the future of
the Fund, the Reorganization has been recommended by the Board of Trustees of
the Fund on behalf of the Fund for the following reasons:
(1) as Shareholders of an open-end fund, the Shareholders would have
redemption rights and exchange privileges that are not currently
available; and
(2) combining the Fund with a larger open-end fund will better diversify
its investments; and
(3) the Reorganization would permit Shareholders to pursue their
investment goals in a larger fund which should have an enhanced
ability to effect portfolio transactions on more favorable terms and
should have greater investment flexibility.
Economies of scale permit the reduction or elimination of certain duplicate
costs and expenses which may result in lower overall expense ratios by spreading
both fixed and variable costs of fund operations over a larger asset base. As a
general rule, economies can be expected to be realized primarily with respect to
fixed expenses. However, expenses that are based on the value of assets or the
number of shareholder accounts, such as custody and transfer agent fees, would
be largely unaffected by the Reorganization.
HOW WILL THE REORGANIZATION BE FINANCED?
During the course of its deliberations, the Fund's Board of Trustees also
considered the fact that the Fund, Custodian Funds, and Advisers would each bear
one-third of the expenses of the Reorganization.
WILL THE SHARES OF EITHER FUND BE DILUTED AS A RESULT OF THE REORGANIZATION?
In reaching the decision to recommend that Shareholders of the Fund vote to
approve the Reorganization, the Board of Trustees concluded that the
Reorganization is in the best interests of the Shareholders of the Fund and that
no dilution would result to the Shareholders of the Fund from the
Reorganization.
The Board of Directors of Custodian Funds also determined that the
Reorganization was in the best interests of the Class I shareholders of Income
Series and that no dilution would result to Class I shareholders of the Income
Series as a result of the Reorganization.
FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF TRUSTEES OF THE FUND RECOMMENDS
THAT YOU VOTE FOR THE AGREEMENT AND PLAN.
WHAT HAPPENS IF THE AGREEMENT AND PLAN IS NOT APPROVED BY THE SHAREHOLDERS?
If the Agreement and Plan is not approved by the Shareholders at the meeting,
the Fund will continue as a closed-end investment company until its specified
termination date on May 31, 2001.
INFORMATION ABOUT THE REORGANIZATION
The following summary of the Agreement and Plan of Reorganization does not
purport to be complete. It is subject in all respects to the provisions of, and
is qualified in its entirety by reference to, the Agreement and Plan, a copy of
which is attached as Exhibit A.
METHOD OF CARRYING OUT THE REORGANIZATION?
If the Shareholders of the Fund approve the Agreement and Plan, the
reorganization of the Fund will be consummated promptly after the various
conditions to the obligations of each of the parties are satisfied. (See
"Conditions Precedent to Closing.") Consummation of the Reorganization (the
"Closing Date") will be on ___, 1998, or such other date as is agreed to by
Custodian Funds and the Fund, provided that the Agreement and Plan may be
terminated by either party if the Closing Date does not occur on or before
December 31, 1998.
On the Closing Date, the Fund will transfer substantially all of its net assets
in exchange for Class I shares of Income Series having an aggregate net asset
value equal to the aggregate value of net assets so transferred as of 1:00 p.m.
Pacific time on the Closing Date. The stock transfer books of Custodian Funds
with respect to the Fund will be permanently closed as of 1:00 p.m. Pacific time
on the Closing Date. In the event that the Shareholders of the Fund do not
approve the Agreement and Plan, the net assets of the Fund will not be
transferred on the Closing Date and the obligations of Custodian Funds under the
Plan shall not be effective. It is anticipated that trading in the Shares will
be suspended on ___, 1998.
The Fund will receive upon consummation of the Reorganization Class I shares of
Income Series. The number of Class I shares shall be determined by dividing the
aggregate value of the assets of the Fund to be transferred (computed in
accordance with the valuation policies and procedures of the Fund and using
market quotations determined by the Fund) by the net asset value per share of
the Class I shares of common stock of Income Series as of 1:00 p.m. Pacific time
on the Closing Date.
Since the relative asset values of the Fund and Class I shares of the Income
Series have not yet been ascertained for the purposes of the Closing, it is not
possible to determine the exact exchange ratio until the Closing Date.
Fluctuations and relative performances of the Fund and Income Series, among
other matters, will affect this ratio. However, if the Closing Date had been
February 26, 1998, a Shareholder of the Fund would have received 4.052 Class I
shares of Income Series for each share of beneficial interest of the Fund held.
CONDITIONS PRECEDENT TO CLOSING. The obligation of the Fund to transfer its net
assets to Custodian Funds on behalf of the Income Series pursuant to the
Agreement and Plan is subject to the satisfaction of certain conditions
precedent, including performance by Custodian Funds, in all material respects,
of its agreements and undertakings under the Agreement and Plan, the receipt of
certain documents from Custodian Funds, the receipt of an opinion of counsel to
Custodian Funds, the receipt of an opinion of counsel regarding the tax-free
nature of the Reorganization, and the requisite approval of the Agreement and
Plan by the Shareholders of the Fund, as described above. The obligations of
Custodian Funds to consummate the Reorganization are subject to the satisfaction
of certain conditions precedent, including the performance by the Fund of its
agreements and undertakings under the Agreement and Plan, the receipt of certain
documents and financial statements from the Fund, and the receipt of an opinion
of counsel to the Fund.
EXPENSES OF THE TRANSACTION. The Fund, Custodian Funds, and Advisers will each
pay one-third of the expenses incurred in connection with entering into, and
completing, the transaction described in the Agreement and Plan.
TAX CONSIDERATIONS. The Reorganization will qualify for federal income tax
purposes as a tax-free reorganization under section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the "Code"). No gain or loss will be
recognized as a consequence of the Reorganization by each of Custodian Funds,
the Fund, the shareholders of Income Series, or the shareholders of the Fund,
subject to the receipt by the Fund and Custodian Funds of an opinion of counsel
letter to that effect.
Shareholders of the Fund should consult their tax advisors regarding the effect,
if any, of the Reorganization in light of their individual circumstances. Since
the foregoing discussion only relates to the federal income tax consequences of
the Reorganization, Shareholders of the Fund should also consult their tax
advisors as to state and local tax consequences, if any, of the Reorganization.
DESCRIPTION OF SHARES OF INCOME SERIES. Class I Shares of Income Series will be
issued to Shareholders of the Fund in accordance with the procedures under the
Agreement and Plan as described above. Each Class I Share will be fully paid and
nonassessable when issued with no personal liability attaching to the ownership
thereof, will have no preemptive or conversion rights and will be transferable
upon the books of Income Series. In accordance with Income Series' normal
procedures as specified in its prospectus, Income Series will not issue
certificates for shares of its capital stock to Shareholders of the Fund, unless
requested in writing by the Shareholder or by his or her broker. Ownership of
Income Series Class I shares by former Shareholders of the Fund will be recorded
electronically and Income Series will issue a confirmation to such Shareholders
relating to those shares acquired as a result of the Reorganization. No
redemption or repurchase of any shares of Income Series issued to former
Shareholders of the Fund represented by unsurrendered stock certificates shall
be permitted until such certificates have been surrendered for cancellation.
As shareholders of Income Series, former Shareholders of the Fund will have
substantially similar voting rights and rights upon dissolution with respect to
Income Series as they currently have with respect to the Fund.
The terms of the Declaration of Trust do not confer upon Shareholders of the
Fund any appraisal rights; however, after the Closing Date, such Shareholders
may redeem their Income Series' Class I shares at net asset value or exchange
their Income Series' Class I shares into shares of most of the other mutual
funds in the Franklin Templeton Group of Funds.
Income Series does not routinely hold annual meetings of shareholders, although
the Fund, whose shares are listed on the New York Stock Exchange, does hold
annual meetings as required by the rules of the New York Stock Exchange.
Custodian Funds may, however, hold a meeting for such purposes as changing
fundamental investment restrictions, approving a new investment management
agreement or any other matters which are required to be acted on by shareholders
under the 1940 Act. In addition, a meeting also may be called by shareholders
holding at least 10% of the shares entitled to vote at the meeting for the
purpose of voting upon the removal of directors, in which case shareholders may
receive assistance in communicating with other shareholders such as that
provided in section 16(c) of the 1940 Act.
Unlike the Fund, Custodian Funds is a multi-series investment company that
currently issues shares representing interests in five separate series, and
shareholders of each series currently vote in the aggregate with the
shareholders of the other series on certain matters (for example, the election
of directors and ratification of the selection of independent accountants).
The Fund is a closed-end investment company which presently has only one class
of shares outstanding, issued in one series, and, therefore, the Shareholders of
the Fund do not vote in the aggregate with any other shareholder series.
Because the Fund is a closed-end investment company, the shares of beneficial
interest, unlike the Income Series' Class I shares, do not have redemption and
exchange rights.
The Fund is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust of the Fund contains an express disclaimer of
shareholder liability for acts or obligations of the Fund and provides for
indemnification and reimbursement of expenses out of the Fund's property for any
shareholder held personally liable for the obligations of the Fund. The
Declaration of Trust also provides that the Fund may maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Fund, its Shareholders, Trustees, officers, employees and
agents covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability also is
limited to circumstances in which both inadequate insurance exists and the Fund
itself is unable to meet its obligations. As shareholders of a Maryland
corporation, shareholders of Custodian Funds will not be subject to such
liabilities.
CAPITALIZATION. The following table sets forth as of February 26, 1998: (i) the
capitalization of the Fund; (ii) the capitalization of the Income Series; and
(iii) the pro forma capitalization of the Income Series as adjusted to give
effect to the proposed Reorganization. The capitalization of the Income Series
is likely to be different when the Reorganization is consummated.
Class I Pro Forma
Income After
Fund Series Reorganization
------------- -------------- --------------
Net Assets........... $208,118,489 $8,069,145,553 $8,277,264,042
Net Asset Value per
Share................ $10.17 $2.51 $2.51
Shares Outstanding...
20,462,600 3,220,691,246 3,303,606,979
To the extent permitted by law, the Agreement and Plan may be amended without
shareholder approval by mutual agreement in writing of the Fund and Custodian
Funds. The Agreement and Plan may be terminated and the Reorganization abandoned
at any time before or, to the extent permitted by law, after the approval of
Shareholders of the Fund by mutual consent of the parties to the Agreement and
Plan.
COMPARISON OF INVESTMENT POLICIES
AND RISKS OF INCOME SERIES AND THE FUND
THE INCOME SERIES AND THE FUND. The Income Series' investment objective is to
maximize income while maintaining prospects for capital appreciation. The Fund's
investment objective is to manage a portfolio of securities that may return
$10.00 per share (the initial public offering price) to investors on or shortly
before May 31, 2001. In seeking to achieve their respective investment
objectives, the Income Series and the Fund are guided by many similar policies
and restrictions that should be considered by the Shareholders of the Fund.
Unless otherwise specified, the following investment policies of both the Income
Series and the Fund may be changed without shareholder approval. Policies or
restrictions stated as fundamental may not be changed without the approval of
the lesser of (i) a majority of the outstanding shares, or (ii) 67% or more of
the shares represented at a meeting of shareholders at which the holders of more
than 50% of the outstanding shares are represented, whichever is less ("Majority
Vote").
INVESTMENT POLICIES AND RESTRICTIONS. The Income Series is a series of Custodian
Funds, a multi-series investment company registered under the 1940 Act. The
shares of beneficial interest are the only outstanding class of shares of the
Fund, a diversified closed-end investment company registered under the 1940 Act.
The Income Series calculates the net asset value per share of all three of its
classes as of the close of trading (currently 1:00 p.m. Pacific Time) on each
day that the New York Stock Exchange is open for business and on which there is
a sufficient degree of trading in the Income Series' portfolio securities that
the net asset value of the Income Series' shares may be effected. The net asset
value per share of the shares of beneficial interest of the Fund is determined
no less frequently than once each week. The net asset value of both the Income
Series - Class I shares and the shares of beneficial interest of the Fund is
calculated by subtracting the aggregate of all liabilities from the gross value
of all assets, and dividing the result by the total number of shares
outstanding.
Both the Income Series and the Fund have a fundamental policy of concentrating
their investments in securities which maximize high monthly income. The Income
Series invests in a diversified portfolio of securities selected with particular
consideration of current income production. Specifically, in achieving its
investment objective, the Income Series invests primarily in corporate bonds,
including, from time to time, non-investment grade bonds if, in the opinion of
management, such securities appear to offer attractive opportunities for capital
appreciation and current income production. In selecting its investments, the
Income Series seeks to invest in whatever type of security best permits it to
achieve its investment objective without excessive risk at the time of purchase.
The assets of Income Series may be held in cash or cash equivalents, or invested
in debt obligations of corporate and governmental issuers. The assets of the
Income Series may be invested in securities issued by a corporation, association
or similar legal entity with total assets of at least $1,000,000, or preferred
stocks. The Income Series may invest up to 100% of its net assets in
non-investment grade bonds, known as "junk bonds." The Fund has no such
comparable policy.
ZERO COUPON BONDS AND SECURITIES:
Both the Income Series and the Fund may buy bonds issued at a discount that
defer the payment of interest, or pay no interest until maturity, known as zero
coupon bonds. The Fund may purchase zero coupon bonds from U.S.
government, corporate, and municipal issuers.
The Fund seeks to achieve its objective of returning $10.00 per share to
investors before May 3, 2001 by investing primarily in a combination of
mortgage-backed securities, zero coupon securities and high income producing
debt securities of U.S. corporate, government and foreign governmental issuers.
The Fund's portfolio consists primarily of (1) mortgage-backed securities,
corporate debt securities, asset-backed securities and all other investments
other than zero coupon securities, which represent a declining portion of the
Fund's assets due to liquidations and repayments over time; and (2) zero coupon
securities which are expected to accrue to an amount equal to the aggregate
initial public offering price of the shares sold.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS
Both the Income Series and the Fund may buy debt obligations on a "when issued"
or "delayed delivery" basis. These transactions are subject to market
fluctuation before delivery and generally do not earn interest until their
scheduled delivery date.
ILLIQUID SECURITIES:
As an open-end fund, the Income Series must ensure adequate liquidity so that it
can meet redemption requests in a timely fashion. For this reason, the Income
Series has a policy requiring that illiquid securities (securities that cannot
be disposed of within seven days in the normal course of business at
approximately the amount at which the Series has valued the securities) may not
constitute, at the time of purchase or at any other time, more than 10% of the
value of the total net assets. The Fund, which as a closed-end fund does not
have to provide cash to meet redemption requests, is not subject to the same
restriction limits as open-end funds. The Fund may not invest in restricted and
illiquid securities which exceed 33 1/3% of the Fund's assets, exclusive of
illiquid zero coupon securities. The Fund has no maximum percentage limitation
on the amount of its assets which may be invested in illiquid zero coupon
securities. The Income Series has no comparable investment policy with respect
to illiquid zero coupon securities.
LOAN PARTICIPATIONS:
The Income Series may invest up to 5%, and the Fund may invest up to 10%, of
total assets in loan participations and other related direct or indirect bank
obligations. Loan participations are interests in floating or variable rate
senior loans to U.S. corporations, partnerships, or other entities which operate
in a variety of industries and geographical regions. The Fund may invest in
loans which are not secured by any collateral, and is not subject to any
restriction with respect to the maturity of the loans it purchases. Most loan
participations are illiquid and, to that extent, will be included in the Income
Series 10% limitation on investments in illiquid securities.
CONVERTIBLE SECURITIES:
Both the Income Series and the Fund may invest in convertible securities.
Convertible securities are debt obligations or preferred stocks that may be
converted into or exchanged for a prescribed amount of common stock of the same,
or a different issuer, within a specified period of time at a specified price or
formula. The Fund is permitted to invest up to 10% of its total assets at the
time of investment in convertible debt securities, and up to 10% in convertible
preferred stocks. The Income Series has no such investment limitation with
respect to convertible securities.
TRADE CLAIMS:
Both the Income Series and the Fund may invest a portion of their assets in
trade claims. Trade claims are purchases from creditors of companies in
financial difficulty and 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. The Income Series will
not invest more than 5% and the Fund will invest no more than 10%, of net assets
at the time of acquisition in these instruments.
DEBT SECURITIES:
With respect to fixed-income debt securities, the Income Series may invest in
investment grade or lower grade securities, depending upon prevailing market and
economic conditions. Although the Income Series will generally invest in
securities that are rated at least Caa by Moody's Investors Service, Inc.
("Moody's") or CCC by Standard & Poor's Corporation ("S&P"), the Income Series
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. With respect to unrated securities, the Income Series
intends to purchase those securities which, in the view of the investment
manager would be comparable to securities rated Caa by Moody's or CCC or above
by S&P or, if no specific equivalent rating has been assigned, securities which
have been determined to be consistent with the Income Series' objectives without
exposing such Series to excessive risk. The Income Series will not purchase
securities which are considered by management to involve excessive risk. As of
September 30, 1997, 29.2% of the Income Series' net assets were invested in
corporate debt securities, all of which were rated at least Caa by Moody's and
CCC by S&P.
Because the Fund intends to maximize its income, it seeks out U.S. corporate
debt securities with high income producing characteristics. Corporate debt
securities offering high current income will ordinarily be in the lower rating
categories of recognized agencies or will be non-rated. The Fund's investments
principally include bonds, debentures and notes that typically are rated below
investment grade. The Fund intends to invest in corporate debt securities which
are typically rated between BB and C by S&P or between Ba and C by Moody's and
are frequently issued by corporations in the growth stage of their development.
However the Fund has no requirements regarding whether the corporate debt
securities it purchases must be rated or what the maximum or minimum rating must
be.
The Fund may invest without limit in securities which are in default; however,
to the extent that such securities may be illiquid, the acquisition of such
defaulted securities is subject to the Fund's investment restriction limiting
investment in illiquid securities to 33 1/3% of the Fund's assets (exclusive of
illiquid zero coupon securities). The Income Series may also invest in defaulted
debt securities; however, since defaulted debt securities may be illiquid, the
Income Series will count such securities in its 10% limit on illiquid
securities.
OPTIONS:
The Income Series may write covered call options that are listed for trading on
a national securities exchange. The Fund may sell or purchase put or call
options on securities in its portfolio in an attempt to earn additional income.
The Fund may purchase and write covered put and call options on debt securities
that are traded on U.S. and foreign securities exchanges or in the
over-the-counter market. The Fund may engage in various interest rate
transactions, put and call option transactions in futures contracts and options
on futures contracts, and forward contracts in an attempt to hedge against a
decline in the value of the securities included in the Fund's portfolio, or an
increase in the price of securities the investment manager plans to purchase for
the Fund.
The Fund may sell puts on securities in its portfolio or on futures contracts on
such securities only if such puts are secured by segregated liquid assets. The
Fund will not sell puts if, as a result, more than 50% of the Fund's assets
would be required to be segregated liquid assets.
EURODOLLAR INSTRUMENTS:
The Fund may make investments in Eurodollar instruments which are essentially
U.S. dollar denominated futures contracts or options limited to the London
Interbank Offered Rate. Eurodollar futures contracts enable purchasers to obtain
a fixed rate for the lending of funds and enable sellers to obtain a fixed rate
for borrowings. The Income Series does not have an investment policy with
respect to Eurodollar instruments.
REPURCHASE AGREEMENTS:
Both the Income Series and the Fund are authorized to enter into repurchase
agreements for U.S. government securities. In a repurchase transaction, the
Income Series or the Fund purchases a U.S. government security subject to resale
to a bank or dealer at an agreed-upon price and date. The transaction requires
the collateralization of the seller's obligation by the pledging of securities
with an initial market value, including accrued interest, equal to at least 102%
of the dollar amount invested by the Income Series or the Fund in each
agreement, with the value of the underlying security marked to market daily to
maintain coverage of at least 100%. Both the Income Series and the Fund
typically enter into repurchase transactions that settle in seven days or less.
Both the Income Series and the Fund may enter into repurchase agreements with
member banks of the Federal Reserve System. The Income Series may enter into
repurchase agreements with government securities dealers recognized by the
Federal Reserve Board; the Fund may enter into repurchase agreements with
securities dealers provided that such banks or dealers meet the creditworthiness
standards established by the Fund's Board of Trustees. The Income Series intends
to enter into repurchase agreements only with banks or broker-dealers that are
considered creditworthy by the investment manager.
REVERSE REPURCHASE AGREEMENTS:
The Fund may also borrow by entering into reverse repurchase agreements with the
same parties with whom it may enter into repurchase agreements (see discussion
above). Under a reverse repurchase agreement, the Fund sells securities and
agrees to repurchase them at a mutually agreed upon date and price. Reverse
repurchase agreements can create leverage, a speculative factor, and will be
considered as borrowings for purposes of the Fund's limitation on borrowing. The
Fund does not pledge, mortgage or hypothecate its assets, except to secure such
borrowings and in connection with collateral arrangements on loans of portfolio
securities. The Income Series, as a matter of fundamental policy, may not
purchase securities on margin, or make short sales of securities.
FOREIGN SECURITIES:
The Income Series is permitted to invest up to 25% of its assets in foreign
securities, provided such investments are consistent with the objectives and
comply with the concentration and diversification policies of the Series. The
Income Series will ordinarily purchase foreign securities which are traded in
the United States or purchase 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 Income
Series may purchase the securities of foreign issuers directly in foreign
markets. Investments in foreign securities where delivery takes place outside
the United States is made in compliance with applicable U.S. and foreign
currency restrictions and other tax laws and laws limiting the amount and types
of foreign investments.
Investments by the Income Series may be in securities of foreign issuers,
whether located in developed or underdeveloped countries, but investments are
not made by the Income Series without the issuance of stock certificates or
comparable stock documents. A security acquired outside the United States and
which is publicly traded in the United States or on a foreign securities
exchange or in a foreign securities market is not considered to be an illiquid
asset so long as the Income Series acquires and holds the security with the
intention of reselling it in the foreign trading market and the Series
reasonably believes it can readily dispose of the security for cash in the U.S.
or foreign markets for which current market quotations are readily available.
The Fund may invest in the debt obligations of foreign governmental issuers. The
types of foreign government obligations in which the Fund invests includes debt
obligations of foreign governments, their political subdivisions, governmental
authorities, agencies and instrumentalities, and supranational organizations,
such as the World Bank. The Fund may also invest in "semi-government securities"
which are debt obligations issued by entities owned by either a national, state,
or equivalent government or are obligations of such a government jurisdiction
which are not backed by its full faith and credit and general taxing powers.
INVESTMENT RESTRICTIONS:
The investment restrictions of the Income Series and the Fund described below
are fundamental and may not be changed without a Majority Vote of the
shareholders of the Income Series and the Fund, respectively.
As a matter of fundamental policy, the Income Series may not lend any funds or
other assets, except: (1) by the purchase of publicly distributed bonds,
debentures, notes, to-be-announced securities or other debt securities; and (2)
the Series may loan up to 10% of its portfolio securities to qualified
broker/dealers or other institutional investors who deposit and maintain with
the Series cash collateral equal to 102% of the 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%. The Fund may not make loans to other persons except: (1) through the
lending of its portfolio securities; (2) through the purchase of debt securities
in accordance with its investment objectives and policies; and (3) to the extent
the entry into a repurchase agreement is deemed to be a loan. The Fund may lend
its portfolio securities subject to the following guidelines: (1) the borrower
pledges and maintains with the Fund collateral consisting of cash, cash
equivalents or U.S. government securities having a value at all times not less
than 102% of the value of the securities loaned; (2) the borrower adds to such
collateral whenever the price of the securities loan rises, (3) the loan is made
subject to termination by the Fund at any time; and (4) the Fund received
reasonable interest on the loan. The Fund will not lend portfolio securities if,
as a result, the aggregate of such loans exceed 33 1/3% of the value of the
Fund's total assets.
Neither the Income Series nor the Fund may invest more than 25% of their total
assets in securities of companies engaged in any one industry. With respect to
the Income Series and the Fund, this restriction does not apply to securities
issued or guaranteed by the U.S. government or its instrumentalities and, with
respect to the Fund, agencies of the U.S. government.
As a fundamental policy, the Income Series does not borrow money, issue senior
securities, mortgage, hypothecate, or pledge any of its assets except to secure
permitted borrowings and in connection with collateral arrangements on loans of
portfolio securities. Both the Income Series and the Fund may borrow for
temporary or emergency purposes in an amount up to 5% of their total asset
value. The Fund is permitted to borrow money from banks or otherwise in an
amount up to 33 1/3% of the Fund's total assets.
Neither the Income Series nor the Fund may act as underwriter of securities of
other issuers, except insofar as they may be technically deemed an underwriter
under the federal securities laws in connection with the disposition of
portfolio securities and, in the case of the Fund, the issuance of its own
shares.
The Income Series may not invest more than 5% of the value of its gross assets
in the securities of any one issuer. The Fund, with respect to 75% of its total
assets, may not invest more than 5% of its total assets (taken at market value
at the time of investment) in securities of any one issuer. This restriction
with respect to both the Income Series and the Fund does not apply to securities
issued or guaranteed by the U.S. government or its instrumentalities and, with
respect to the Fund, agencies of the U.S. government.
Neither the Income Series nor the Fund may purchase the securities of any issuer
which would result in the Income Series or the Fund owning more than 10% of the
outstanding voting securities of such issuer. With respect to the Fund, this
restriction applies at the time of acquisition and does not apply to securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
The Income Series may not 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. The Fund does not have a comparable restriction
in this regard. The Income Series also may not retain securities of any issuer
if, to the knowledge of the Income Series, one or more of its officers,
directors or investment adviser own beneficially more than 1/2 of 1% of the
securities of such issuer and all such officers and directors together own
beneficially more than 5% of such securities.
Neither the Income Series nor the Fund may invest in companies for the purpose
of exercising control or management. The Income Series may not purchase the
securities of other investment companies, except to the extent the Series
invests its uninvested daily cash balances in shares of the Franklin Money Fund
and other money market funds in the Franklin Templeton Group of Funds (the
"Money Funds"). The Income Series may purchase shares of the Money Funds,
provided (i) its purchases and redemptions of such Money 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 the Income Series' shares (as determined under Rule
12b-1, as amended under the federal securities laws); and (iii) aggregate
investments by the Income Series' in any such Money Fund do not exceed (A) the
greater of (i) 5% of the Income Series' total net assets or (ii) $2.5 million,
or (B) more than 3% of the outstanding shares of any such Money Fund. The Fund
does not have a comparable exception from this restriction on investing in
investment company securities. However, the Fund's restriction in this regard
provides that it may only acquire securities of other investment companies if
the amount does not exceed the limitations set forth in the 1940 Act and the
rules thereunder, except as part of a merger, consolidation or other plan of
reorganization.
The Income Series may not invest in commodities and commodity contracts, puts,
calls, straddles, spreads or any combination thereof. However, as described
above, the Income Series may 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. The Fund may not purchase or sell
commodity or commodity contracts, except that the Fund may enter into forward
commitment contracts, futures contracts and options on futures contracts with
respect to securities or foreign currencies.
The Income Series may not invest in, and the Fund may not purchase or sell,
interests in oil, gas or mineral exploration or development programs and, with
respect to the Fund, real estate or any interest therein. The Fund, however, may
invest in securities issued by companies (including partnerships and real estate
investment trusts) that invest in such interests or are engaged in such
activities and in mortgage related securities. The Income Series is also
prohibited from acquiring, leasing or holding real estate, except as may be
necessary or advisable for the maintenance of its offices.
The Income Series may not 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. The Fund does not have such a
restriction.
The Fund may not invest in collateralized mortgage obligations and real estate
mortgage investment conduit residual interests or residual interests of
asset-backed securities. The Income Series does not have such fundamental
restriction.
The Income Series will not buy any securities on "margin" or sell any securities
"short." The Fund may not make any short sale of securities except in conformity
with applicable laws, rules and regulations and further provided that, after
giving effect to such sale, the market value of all securities sold short does
not exceed 25% of the value of the Fund's total assets and the Fund's aggregate
short sales of a particular class of securities does not exceed 25% of then
outstanding securities of that class.
RISK FACTORS. As indicated above, both the Income Series and the Fund may
concentrate their investments in debt securities. Depending upon prevailing
market and economic conditions, the Income Series may invest in fixed-income
debt securities regardless of their ratings (including securities in the lowest
rating categories) or in securities which are not rated. Like all bonds, the
value of the Income Series' fixed-income debt investments generally share an
inverse relationship with market interest rates. For example, when interest
rates rise, the value of the Income Series' debt investments tends to fall.
Conversely, when market interest rates decline, the value of these securities
tends to rise. The Fund concentrates its assets in corporate debt securities
that have high income producing characteristics. The market values of such
securities will typically fluctuate more than the market value of higher quality
fixed-income securities in response to interest rate changes, changes in general
economic conditions and changes in business conditions affecting specific
industries in which such issuers are engaged.
The Fund invests a substantial portion of its assets in derivative
mortgage-backed securities, such as stripped mortgage-backed securities, which
are highly sensitive to changes in prepayment and interest rates and have
greater market volatility than zero coupon and high income producing securities.
Mortgage-backed and asset-backed securities may decrease in value as a result of
increases in interest rates and may benefit less than other fixed-income
securities from declining interest rates because of the risk of prepayment. The
Manager will attempt to manage prepayment risk through diversification and
hedging.
The Fund invests a substantial portion of its assets in zero coupon securities.
The market prices of these 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
securities having similar maturities and credit quality.
The Income Series may invest up to 100% of its net assets in non-investment
grade securities ("junk bonds") which tend to be more sensitive to economic
conditions and individual developments affecting the issuer. The risk of loss
due to default may also be considerably greater with lower-quality securities
because they are generally unsecured and are often subordinated to other
creditors of the issuer. Securities rated B or lower are regarded, on balance,
as predominantly speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the obligation. These ratings,
which represent the opinions of the rating services with respect to the
securities are not absolute standards of quality, will be considered in
connection with investments of the Income Series' and Fund's assets but will not
be a determining or limiting factor.
Both the Income Series and the Fund may engage in covered call writing. The
risks associated with covered call writing are such that in the event of a price
rise on the underlying security which would likely trigger the exercise of the
call option, a fund will not participate in the increase in price beyond the
exercise price. If the Income Series or 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 Income Series or the Fund for writing the option.
There is no assurance that a closing purchase transaction will be available in
every instance.
The use of options also involves the risk of imperfect correlation between
movements in option prices and movements in the price of the securities which
are the subject of the hedge. With respect to the writing of calls on stock
index options by the Fund, because exercises of index options are settled in
cash, when the Fund writes calls on stock index options, it cannot determine the
amount of its settlement obligations in advance and, unlike call writing on
specific stocks, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities.
Unless the Fund has other liquid assets which are sufficient to satisfy the
exercise of a call written by it, the Fund would be required to liquidate
portfolio securities in order to satisfy the exercise. Because an exercise must
be settled within hours after receiving the notice of exercise, if the Fund
fails to anticipate an exercise, it may have to borrow from a bank (in amounts
not exceeding its borrowing authority) pending settlement of the sale of
securities in its portfolio and would incur interest charges thereon.
There is also a timing risk. When the Fund has written a call, there is a risk
that the market may decline between the time the Fund has a call exercised
against it (or receives notice of the exercise) at a price which is fixed as of
the closing level of the index on the date of exercise and at the time the Fund
is able to sell securities in its portfolio. As with options on securities, the
Fund may not learn that an index option has been exercised until the day
following the exercise date. This timing risk makes certain strategies involving
more than one option substantially more risky with index options than with
options on securities.
With respect to the purchasing of index puts and calls, if the Fund holds an
index option and exercises it before final determination of the closing index
value for that day, it runs the risk that the level of the underlying index may
change before closing. If such a change causes the exercised option to fall
out-of-the-money, the Fund will be required to pay the difference between the
closing index value and the exercise price of the option (times the applicable
multiple) to the assigned writer. Although the Fund may be able to minimize this
risk by withholding exercise instructions until just before the daily cutoff
time or by selling rather than exercising an option when the index level is
close to the exercise price, it may not be possible to eliminate this risk
entirely because the cutoff times for index options may be earlier than those
fixed for other types of options and may occur before definitive closing index
values are announced.
The Income Series' and the Fund's successful use of options depends upon their
respective investment manager's ability to predict the general direction of the
market or a particular industry, which requires skills and techniques different
from those necessary for predicting changes in the prices of individual stocks,
and is subject to various additional risks.
As with any extension of credit, loans by the Income Series and the Fund may be
subject to the risks of delay in recovery and loss of rights in the collateral
should the borrower of the securities fail financially. However, loans of
portfolio securities are only made to firms deemed by Advisers to be of good
standing, and when, in the judgment of Advisers, the income which can be earned
currently from such loans justifies the attendant risk.
Under the 1940 Act, a repurchase agreement is deemed to be the loan of money by
the Income Series or the Fund to the seller, collateralized by the underlying
security. With respect to the repurchase agreements, a default by the seller
might cause the Income Series or the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Income
Series or the Fund might also incur disposition costs in liquidating the
collateral. However, the Income Series intends to enter into repurchase
agreements only with government securities dealers recognized by the Federal
Reserve Board or with member banks of the Federal Reserve System. The Fund may
enter into repurchase agreements with member banks of the Federal Reserve System
and member firms of the New York Stock Exchange and only for U.S. government
securities.
The Income Series' and the Fund's investments in foreign securities, where
delivery takes place outside the United States, involve risks that are different
from investments in U.S. securities. These risks may include future unfavorable
political and economic developments, possible withholding taxes, seizure of
foreign deposits, currency exchange controls, including currency blockage,
higher transactional costs due to a lack of negotiated commissions, or other
governmental restrictions which might affect the amount and types of foreign
investments made or the payment of principal or interest on securities the
Income Series and the Fund hold. In addition, there may be less information
available about these securities and it may be more difficult to obtain or
enforce a court judgment in the event of a lawsuit. Fluctuations in currency
convertibility or exchange rates could result in investment losses for the
Income Series and the Fund. Investment in foreign securities may also subject
the Income Series and the Fund to losses due to nationalization, expropriation
or differing accounting practices and treatments.
Investments made by the Fund and the Income Series on a "when-issued" or
"delayed delivery" basis are subject to market fluctuations and to the risk that
the value or yields at delivery may be more or less than the purchase price or
yields available when the transaction was entered into.
Investments by the Fund and the Income Series in loan participations or other
debt securities which are in default 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.
Investments in trade claims by the Fund and the Income Series are speculative
and carry a high degree of risk as there can be no guarantee that the debtor
will ever be able to satisfy the obligation on the trade claim. Further, trading
in claims is not regulated by federal securities laws or the Securities and
Exchange Commission.
DISTRIBUTION PLAN. The Income Series has three classes of shares; two of the
classes, Class I and Class II, have separate distribution plans under which they
may pay or reimburse Distributors or others for the expenses of activities that
are primarily intended to sell shares of the class. The Income Series has
adopted a distribution plan for Class I (the "Class I Plan") pursuant to Rule
12b-1 under the 1940 Act which permits a registered open-end investment company
to bear expenses relating to the distribution of its shares only pursuant to a
written plan that has been approved by the fund's directors and shareholders.
In August, September, October and November 1993, the Board of Directors,
including the Independent Directors who have no direct or indirect financial
interest in the operation of the Class I Plan or any related agreements,
reviewed the Class I Plan for described below with the assistance of the
Custodian Fund's independent legal counsel. After carefully evaluating the
potential benefits of the Class I Plan to the Income Series and its
shareholders, both the directors as a whole, and the Independent Directors
voting separately, unanimously approved the Class I Plan and determined to
recommend the Class I Plan to and for approval by shareholders. The shareholders
of Class I of the Income Series approved the Class I Plan at a meeting held on
April 18, 1994, and the Effective Date of the Class I Plan was May 1, 1994.
The Class I Plan provides that the Income Series shall reimburse FTDI or others
for all expenses incurred by FTDI or others in the promotion and distribution of
the Income Series' Class I shares in an amount not to exceed 15/100 of 1% per
annum of its average daily net assets. Reimbursable expenses include, but are
not limited to, the printing of prospectuses and reports used for sales
purposes, expenses of preparing and distributing of sales literature and related
expenses, advertisements, and other distribution-related expenses, including a
prorated portion of Distributors' overhead expenses attributable to the
distribution of Class I shares of the Income Series, as well as any distribution
or service fees paid to securities dealers or their firms or others who have
executed a servicing agreement with Custodian Funds on behalf of the Income
Series, FTDI or its affiliates.
In addition to the payments which the Income Series is otherwise authorized to
make under the Class I Plan, to the extent that certain parties make payments
that are deemed to be payments for the financing of any activity primarily
intended to result in the sale of shares issued by the Income Series within the
context of Rule 12b-1, then such payments are deemed to have been made pursuant
to the Class I Plan.
Under the Class I Plan, FTDI will furnish to the Board of Directors of Custodian
Funds, for their review, on a quarterly basis, a written report of the monies
reimbursed to it and to others under the Class I Plan, and shall furnish the
Board with such other information as the Board may reasonably request in
connection with the payments under the Class I Plan in order to enable the Board
to make an informed determination of whether the Class I Plan shall be
continued. The Class I Plan shall continue in effect for a period of one year
only so long as its continuance is specifically approved at least annually by
the Board of Directors of Custodian Funds, including the Independent Directors,
cast in person at a meeting called for the purpose of voting on the Class I
Plan. The Class I Plan, or any agreements entered into pursuant to the Class I
Plan, may be terminated at any time, without penalty, by vote of a majority of
the outstanding voting securities, or by vote of a majority of the Independent
Directors, on not more than sixty (60) days' written notice, or by FTDI on not
more than sixty (60) days' written notice. In addition, the Class I Plan
terminates automatically in the event of any act that constitutes an assignment
of the management agreement with Advisers or the underwriting agreement with
FTDI.
In implementing the Class I Plan, the Board has determined that initially the
annual fees payable thereunder will be equal to the sum of: (i) the amount
obtained by multiplying 0.15% by the average daily net assets represented by the
shares of the Income Series that were acquired by investors on or after the
Effective Date of the Class I Plan ("New Assets"), and (ii) the amount obtained
by multiplying 0.10% by the average daily net assets represented by shares of
the Income Series that were acquired before the Effective Date of the Class I
Plan ("Old Assets"). In addition, until such time as the maximum payment of
0.15% is reached on a yearly basis, up to an additional 0.02% will be paid to
FTDI under the Class I Plan. It is anticipated that the 0.10% will be paid to
dealers who are responsible for Old Assets having been invested in the Income
Series, while the 0.15% will be paid to dealers for New Assets. The payments to
be made to FTDI will be used by FTDI to defray other marketing expenses that
have been incurred in accordance with the Class I Plan, such as advertising.
While this is the currently anticipated method for calculating the 12b-1 fees to
be paid by the Income Series, the fee is a Income Series' expense so that all
shareholders regardless of when they purchased their shares will bear 12b-1
expenses at the same rate. That rate initially will be at least 0.12% (0.10%
plus 0.02%) of such average daily net assets and, as Income Series' shares are
sold on or after the Effective Date, will increase over time. Thus, as the
proportion of Income Series' shares purchased on or after the Effective Date to
outstanding Income Series' shares increases, the expenses attributable to
payments under the Class I Plan will also increase (but will not exceed 0.15% of
average daily net assets). While this is the currently anticipated calculation
for fees payable under the Class I Plan, the Class I Plan permits the Income
Series to pay a full 0.15% on all assets both Old and New at any time. The
approval of the Custodian Fund's Board of Directors would be required to change
the calculation of the payments to be made under the Class I Plan.
The Fund is a closed-end investment company whose shares are traded on an
exchange and, therefore, there is not a continuous distribution of the shares of
the Fund. Consequently, unlike the Income Series, the Fund is not subject to a
plan pursuant to the terms of Rule 12b-1 under the 1940 Act with respect to the
on-going distribution of its shares.
SOLICITATION AND REVOCATION
OF PROXIES AND VOTING INFORMATION
WHEN IS THE SPECIAL MEETING OF SHAREHOLDERS?
The enclosed proxy is solicited by and on behalf of the Board of Trustees of the
Fund in connection with a Special Meeting of Shareholders of the Fund to be held
at the offices of the Fund, 777 Mariners Island Boulevard, San Mateo, California
94404, on June 5, 1998 at 2:00 p.m. Pacific time, and at any or all adjournments
thereof. You may revoke your proxy at any time before it is exercised by
delivering a written notice to the Fund expressly revoking your proxy, by
signing and forwarding to the Fund a later-dated proxy, or by attending the
meeting and casting your votes in person.
WHAT ARE THE EXPENSES OF THE SPECIAL MEETING VOTE?
The Fund will request broker-dealer firms, custodians, nominees and fiduciaries
to forward proxy material to the beneficial owners of the shares of record by
such persons. The Fund may reimburse such broker-dealer firms, custodians,
nominees and fiduciaries for their reasonable expenses incurred in connection
with such proxy solicitation. The cost of soliciting these proxies will be borne
one-third by the Fund and one-third by Advisers and one-third by the Income
Series. In addition to solicitations by mail, some of the officers and employees
of the Fund and Advisers, without extra remuneration, may conduct additional
solicitations by telephone, telegraph and personal interviews. The Fund has
engaged Shareholder Communications Corporation to solicit proxies from brokers,
banks, other institutional holders and individual shareholders for an
approximate fee, including out-of-pocket expenses, ranging between $16,659 and
$24,600.
WHO MAY VOTE AT THE SPECIAL MEETING?
Shareholders of record of the Fund at the close of business on April 3, 1998
(the "Record Date") will be entitled to vote at the Special Meeting or any
adjournment thereof. On the Record Date, there were outstanding ___ Shares of
the Fund. Each Shareholder will be entitled to one vote for each share of the
Fund held on the Record Date.
WHAT OTHER BUSINESS WILL BE DISCUSSED AT THE SPECIAL MEETING?
The Board of Trustees does not intend to bring any matters before the Special
Meeting other than the proposal described below and is not aware of any other
matters to be brought before the Special Meeting or any adjournments thereof by
others. If any other matter legally comes before the meeting, your shares will
be voted in accordance with the recommendation of the Board of Trustees of the
Fund.
WHAT IF THE PROPOSAL IS NOT APPROVED AT THE SPECIAL MEETING?
In the event that a quorum is present at the Special Meeting but sufficient
votes to approve the proposals set forth in the Notice of Special Meeting of
Shareholders are not received by the date of the Special Meeting, the persons
named as proxies may propose one or more adjournments of the Special Meeting for
a period or periods of not more than 60 days in the aggregate to permit further
solicitations of proxies. Any such adjournment will require the affirmative vote
of a majority of those shares present at the Special Meeting in person or by
proxy. The proxies will vote in the best interest of management and all
Shareholders in proposing adjournment or in voting on an adjournment proposed by
a Shareholder.
Under relevant state law and the Fund's trust documents, abstentions and broker
non-votes will be included for purposes of determining whether a quorum is
present at the meeting, but will be treated as votes not cast and, therefore,
will not be counted for purposes of determining whether matters to be voted upon
at the meeting have been approved. Under Maryland law, abstentions and broker
non-votes would be treated in the same manner.
The proxyholders will vote all proxies received. It is the present intention
that, absent contrary instructions, the enclosed proxy will be voted: FOR the
approval of the Agreement and Plan; and, in the discretion of the proxyholders,
upon such other matters not now known or determined as may legally come before
the Special Meeting.
PRINCIPAL SHAREHOLDERS
To the knowledge of Income Series and the Fund, no person owned 5% or more of
their outstanding securities as of the Record Date, although from time to time,
the number of shares held in "street name" accounts of various securities
dealers for the benefit of their clients or in centralized securities
depositories may exceed 5% of the total outstanding shares of the Class I shares
of the Income Series or the Fund. All of the respective officers, trustees and
directors of the Fund and Custodian Funds, as a group, owned less than 1% of the
outstanding voting securities of the Fund and the Class I shares of the Income
Series, as relevant.
ADDITIONAL MATTERS REGARDING THE FUND
This section sets forth additional information about the Fund which is not
contained elsewhere in this Prospectus/Proxy Statement.
HISTORY OF PUBLIC TRADING OF THE FUND'S SHARES. The following table shows the
history of public trading of the shares of beneficial interest of the Fund by
quarter for the last two fiscal years:
Net Asset Percentage
Value Market Price Discount
------------- ------------- ------------
Quarter Ended High Low High Low High Low
- ------------- ---- --- ---- --- ---- ---
March 31, 1996 $ 8.91 $ 8.51 $7.88 $7.50 14.87% 8.11%
June 30, 1996 $ 9.25 $ 8.75 $8.00 $7.50 15.67% 11.11%
September 30, 1996 $ 9.46 $ 8.28 $8.25 $7.75 15.69% 1.87%
December 31, 1996 $ 9.64 $ 9.26 $8.38 $8.00 10.52%
15.88%
March 31, 1997 $ 9.48 $ 8.97 $8.88 $8.25 11.48% 3.74%
June 30, 1997 $ 9.40 $ 8.84 $9.00 $8.25 8.33% 3.01%
September 30, 1997 $10.08 $ 9.28 $9.19 $8.75 10.71% 4.36%
December 31, 1997 $10.30 $10.00 $9.31 $9.00 12.11% 8.07%
March 31, 1998 $ $ $ $ % %
The Shares generally have traded at a discount from net asset value since
January 19, 1989. On ____________, 1998, the Shares traded at a market price of
$_______ with a net asset value of $_________. There is an unlimited amount of
Shares of the Fund authorized. As of __________, 1998, there were no Shares held
by, or for the account of, the Fund.
PORTFOLIO MANAGEMENT. Since September 1991, Chauncey Lufkin has been the
person primarily responsible for the day-to-day portfolio management of the
Fund's portfolio. He joined Advisers in 1990 as a specialist in
restructuring and distressed securities. Prior to 1990, Mr. Lufkin worked
for the special finance group of Manufacturers Hanover Trust Co. and in the
leveraged finance division at Security Pacific National Bank. Mr. Lufkin
received his bachelor of arts degree from St. Lawrence University.
INFORMATION ABOUT CUSTODIAN FUNDS
Information about the Income Series is included in the current Prospectus and
Annual Report of Custodian Funds, each of which is attached to this
Prospectus/Proxy Statement and incorporated by reference herein. Additional
information about the Income Series is included in the Custodian Funds'
Statement of Additional Information, dated February 1, 1998, the same date as
the Custodian Funds' Prospectus. Both the Custodian Funds' Statement of
Additional Information and the Prospectus have been filed with the Securities
and Exchange Commission and are incorporated by reference herein. Copies of the
Statement of Additional Information and the Custodian Fund's Prospectus may be
obtained without charge by writing to the Income Series or calling 1-800/DIAL
BEN.
Custodian Funds is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act, as applicable, and, in accordance with
such requirements, files proxy materials, reports and other information with the
Securities and Exchange Commission. These materials may be inspected and copied,
at prescribed rates, at the Public Reference Facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street N.W., Washington, DC
20549, at the Los Angeles Regional Office of the Securities and Exchange
Commission at 5757 Wilshire Boulevard, Suite 500 East, Los Angeles, California
90036-3648, at the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, DC 20549,
and at the offices of the Income Series at 777 Mariners Island Boulevard, San
Mateo, CA 94404.
INFORMATION ABOUT THE FUND
Information about the Fund is incorporated herein by reference from its Form
N-2, dated November 25, 1988, as amended to date, and current Annual Report,
copies of which may be obtained without charge by writing or calling the Fund at
the address and telephone number shown on the cover page of this
Prospectus/Proxy Statement. The current Annual Report is attached to this
Prospectus/Proxy Statement. Reports and other information filed by the Fund may
be inspected and copied at prescribed rates, at the Public Reference Facilities
maintained by the Securities and Exchange Commission at 450 Fifth Street N.W.,
Washington, DC 20549, at the Los Angeles Regional Office of the Securities and
Exchange Commission at 5757 Wilshire Boulevard, Suite 500 East, Los Angeles,
California 90036-3648, at the Public Reference Branch, Office of Consumer
Affairs and Information Services, Securities and Exchange Commission,
Washington, DC 20549 and at the offices of the Fund at 777 Mariners Island
Boulevard, San Mateo, CA 94404.
The Shares of Beneficial Interest of the Fund are listed on the New York Stock
Exchange and, in accordance with the requirements of the New York Stock
Exchange, the Fund files proxy materials, reports and other information with the
Exchange. These materials can be inspected at the New York Stock Exchange
located at 11 Wall Street, New York, NY 10005, or telephone the Exchange at
(212) 656-3000.
TRANSFER AGENT AND CUSTODIAN
Franklin/Templeton Investor Services, Inc., a wholly-owned subsidiary of
Resources, serves as the shareholder servicing agent, transfer agent, and
dividend disbursing agent for Custodian Funds. Bank of New York, Mutual Funds
Division is the custodian for Custodian Funds. The main office of
Franklin/Templeton Investor Services, Inc. is 777 Mariners Island Blvd., San
Mateo, CA 94404. The main office of the Bank of New York is 90 Washington St.,
New York, NY 10286.
First Data Investor Services Group, Inc., a wholly-owned subsidiary of First
Data Corporation, serves as the dividend disbursing agent, the transfer agent,
and registrar, for the Fund. The main office of First Data Investor Services
Group, Inc. is 53 State St., Boston, MA 02109. The Bank of New York serves as
the custodian for the Fund (see address above).
EXHIBITS TO COMBINED
PROSPECTUS AND PROXY STATEMENT
EXHIBIT
A Agreement and Plan of Reorganization between Franklin Principal Maturity
Trust and Franklin Custodian Funds, Inc. on behalf of its Income Series.
B Prospectus dated February 1, 1998 of Franklin Custodian Funds, Inc.
C Annual Report dated September 30, 1997 of Franklin Custodian Funds, Inc.
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, made as of this ____ day of ______,
1998 by and between Franklin Custodian Funds, Inc. ("Custodian Funds"), a
corporation organized under the laws of the State of Delaware in 1947 and
reincorporated under the laws of the State of Maryland in 1979, with its
principal place of business at 777 Mariners Island Boulevard, San Mateo,
California 94404 and Franklin Principal Maturity Trust ("PMT"), a diversified,
closed-end management investment company registered under the Investment Company
Act of 1940. Custodian Funds is an open-end management investment company
consisting of five series and is registered under the Investment Company Act of
1940. PMT is organized as a business trust under the laws of the Commonwealth of
Massachusetts by an Agreement and Declaration of Trust, as amended and restated
December 13, 1988 with its principal place of business at 777 Mariners Island
Boulevard, San Mateo, California 94404.
PLAN OF REORGANIZATION
The reorganization (hereinafter referred to as the "Plan of Reorganization")
will consist of (i) the acquisition by the Income Series ("Income Series") of
Custodian Funds of substantially all of the property, assets and goodwill of PMT
in exchange solely for shares of common stock of Class I ("Class I Shares") of
the Income Series (the "Income Series"), $0.01 par value, (ii) the distribution
of such shares of common stock of the Class I Shares of the Income Series to the
shareholders of PMT according to their respective interests, and (iii) the
dissolution of PMT as soon as practicable after the closing (as defined in
Section 3, hereinafter called the "Closing"), all upon and subject to the terms
and conditions of this Agreement hereinafter set forth.
AGREEMENT
In order to consummate the Plan of Reorganization and in consideration of the
premises and of the covenants and agreements hereinafter set forth, and
intending to be legally bound, the parties hereto covenant and agree as follows:
1. SALE AND TRANSFER OF ASSETS, LIQUIDATION AND DISSOLUTION OF PMT
(a)Subject to the terms and conditions of this Agreement, and in reliance on
the representations and warranties of Custodian Funds on behalf of the Income
Series herein contained, and in consideration of the delivery by Income Series
of the number of its Class I Shares hereinafter provided, PMT agrees that it
will convey, transfer and deliver to Custodian Funds for the benefit of the
Income Series at the Closing all of the then existing assets of PMT free and
clear of all liens, encumbrances, and claims whatsoever (other than
shareholders' rights of redemption) except for cash, bank deposits, or cash
equivalent securities in an estimated amount necessary (1) to pay its costs and
expenses of carrying out this Agreement (including, but not limited to, fees of
counsel and accountants, and expenses of its liquidation and dissolution as
contemplated hereunder), which costs and expenses shall be established on PMT's
books as liability reserves, (2) to discharge its unpaid liabilities on its
books at the closing date (as defined in Section 3, hereinafter called the
"Closing Date"), including, but not limited to, its income dividends and capital
gains distributions, if any, payable for the period prior to the Closing Date,
and (3) to pay such contingent liabilities as the trustees shall reasonably deem
to exist against PMT, if any, at the Closing Date, for which contingent and
other appropriate liability reserves shall be established on PMT's books
(hereinafter "Net Assets"). PMT shall also retain any and all rights which it
may have over and against any person which may have accrued up to and including
the close of business on the Closing Date.
(b)Subject to the terms and conditions of this Agreement, and in reliance on
the representations and warranties of PMT herein contained, and in consideration
of such sale, conveyance, transfer, and delivery, Custodian Funds agrees at the
Closing to deliver to PMT the number of Income Series' Class I Shares of common
stock ($0.01 par value) determined by dividing the aggregate value of the assets
of PMT on the Closing Date by the net asset value per share of the Class I
Shares of Income Series as of 1:00 P.M. Pacific time on the Closing Date. All
such values shall be determined in the manner and as of the time set forth in
Section 2 hereof.
(c)Immediately following the Closing, PMT shall dissolve and distribute pro
rata to its shareholders of record as of the close of business on the Closing
Date the Class I Shares of Income Series received by PMT pursuant to this
Section 1. Such liquidation and distribution shall be accomplished by the
establishment of accounts on the share records of the Class I Shares of Income
Series of the type and in the amounts due such shareholders based on their
respective holdings as of the close of business on the Closing Date. Fractional
shares of common stock of the Class I Shares of Income Series shall be carried
to the third decimal place. As promptly as practicable after the Closing, each
holder of any outstanding certificate or certificates representing shares of
beneficial interest of PMT shall be entitled to surrender the same to the
transfer agent for Income Series and request in exchange therefor a certificate
or certificates representing the number of whole shares of common stock of the
Class I Shares of Income Series into which the shares of beneficial interest of
PMT theretofore represented by the certificate or certificates so surrendered
shall have been converted. Certificates for fractional shares of the Class I
Shares of Income Series shall not be issued, but shall continue to be carried by
Income Series for the account of such shareholder as unissued shares. Until so
surrendered, each outstanding certificate which, prior to the Closing,
represented shares of beneficial interest of PMT shall be deemed for all Income
Series' purposes to evidence ownership of the number of Class I Shares of Income
Series into which the shares of beneficial interest of PMT (which prior to the
Closing were represented thereby) have been converted.
2. VALUATION
(a)The value of PMT's Net Assets to be acquired by Income Series hereunder
shall be computed as of 1:00 P.M. Pacific Time on the Closing Date using the
valuation procedures set forth in PMT's registration statement on Form N-2 dated
November 25, 1988 as amended to date.
(b)The net asset value of the Class I Shares of Income Series shall be
determined to the nearest full cent as of 1:00 P.M. Pacific Time on the Closing
Date, using the valuation procedures as set forth in Income Series' then
effective prospectus.
(c)The net asset value of a share of beneficial interest of PMT shall be
determined to the nearest full cent as of 1:00 P.M. Pacific Time on the Closing
Date, using the valuation procedures as set forth in the PMT's registration
statement on Form N-2 dated November 25, 1988 as amended to date.
3. CLOSING AND CLOSING DATE
The Closing Date shall be June 26, 1998 or such later date as the parties may
mutually agree. The Closing shall take place at the principal office of
Custodian Funds, 777 Mariners Island Boulevard, San Mateo, California 94404 at
2:00 p.m. Pacific Time on the Closing Date. PMT shall have provided for delivery
as of the Closing of those Net Assets to be transferred to Income Series'
Custodian, Bank of New York, 90 Washington Street, New York, New York 10286.
Also, PMT shall deliver at the Closing a list of names and addresses of the
shareholders of record of PMT and the number of shares of beneficial interest of
PMT owned by each such shareholder, indicating thereon which such shares are
represented by outstanding certificates and which by book-entry accounts, all as
of 1:00 P.M. Pacific Time on the Closing Date, certified by its Transfer Agent
or by its President to the best of their knowledge and belief. Custodian Funds
shall issue and deliver a certificate or certificates evidencing the Class I
Shares of Income Series to be delivered to said Transfer Agent registered in
such manner as PMT may request, or provide evidence satisfactory to PMT that
such shares of the Class I Shares of Income Series have been registered in an
account on the books of Income Series in such manner as PMT may request.
4. REPRESENTATIONS AND WARRANTIES BY PMT
PMT represents and warrants to Custodian Funds that:
(a)PMT is a business trust created under the laws of the Commonwealth of
Massachusetts by an Agreement and Declaration of Trust dated December 13, 1988,
and is validly existing and in good standing under the laws of that state. PMT
is duly registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end, management investment company and all its shares sold
were sold pursuant to an effective registration statement filed under the
Securities Act of 1933, as amended, except for those shares sold pursuant to the
private offering exemption for the purpose of raising the required initial
capital and those shares sold pursuant to PMT's Dividend Reinvestment Plan.
(b)PMT has elected to be treated as a regulated investment company ("RIC")
for federal income tax purposes under Part I of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), has qualified as a RIC for each
taxable year of its operations, and will continue to qualify as a RIC as of the
Closing Date with respect to its final taxable year ending upon its liquidation.
(c)PMT is authorized to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, each outstanding share of which is fully
paid, non-assessable, fully transferable and has full voting rights.
(d)The financial statements appearing in PMT's Annual Report to Shareholders
for the period ending November 30, 1997, audited by Coopers & Lybrand, LLP,
copies of which have been delivered to Custodian Funds, fairly present the
financial position of PMT as of the respective dates indicated, in conformity
with generally accepted accounting principles applied on a consistent basis.
(e)The books and records of PMT made available to Custodian Funds and/or its
counsel, accurately summarize the accounting data represented and contain no
material omissions with respect to the business and operations of PMT.
(f)PMT has the necessary power and authority to conduct its business as such
business is now being conducted.
(g)PMT is not a party to or obligated under any provision of its Agreement
and Declaration of Trust, bylaws, or any contract or any other commitment or
obligation, and is not subject to any order or decree, which would be violated
by its execution of or performance under this Agreement.
(h)PMT is not under the jurisdiction of a Court in a Title 11 or similar case
within the meaning of Section 368(a)(3)(A) of the Code.
(i)There is no intercorporate indebtedness existing between PMT and Custodian
Funds that was issued, acquired, or will be settled at a discount.
(j)PMT does not have any unamortized or unpaid organizational fees or
expenses.
5. REPRESENTATIONS AND WARRANTIES BY CUSTODIAN FUNDS
Custodian Funds represents and warrants to PMT that:
(a)Custodian Funds is a corporation organized under the laws of the State of
Delaware on November 28, 1947 and reincorporated under the laws of the State of
Maryland on October 16, 1979, and is validly existing and in good standing under
the laws of that state. Custodian Funds is duly registered under the Investment
Company Act of 1940, as amended, as an open-end, management investment company
and all its shares sold have been sold pursuant to an effective Registration
Statement filed under the Securities Act of 1933, as amended, except for those
shares sold pursuant to the private offering exemption for the purpose of
raising the required initial capital.
(b)Custodian Funds has three classes of capital stock, which are issued in
five separate series. The authorized capital stock of Custodian Funds consists
of 19,000,000,000 shares of common stock, with $0.01 par value, with
9,200,000,000 designated as Income Series' shares (4,600,000,000 allocated to
Income Series Class I; 3,600,000,000 allocated to Income Series Class II;
1,000,000,000 allocated to Income Series Class Z). Each outstanding share is
fully paid, non-assessable, fully transferable, and has full voting rights. The
shares of common stock of the Class I Shares of Income Series issued pursuant to
the Plan of Reorganization will be fully paid, non-assessable, freely
transferable and have full voting rights.
(c)At the Closing, all shares of common stock of Income Series will be duly
qualified for offering to the public in all states of the United States in which
qualification of such shares is required in order for the transaction
contemplated under this Agreement to take place, and there are a sufficient
number of such shares registered under the Securities Act of 1933, as amended,
to permit the transfers contemplated by this Agreement to be consummated.
(d)The financial statements appearing in Custodian Funds' Annual Report to
Shareholders for the fiscal year ending September 30, 1997, audited by Coopers &
Lybrand L.L.P., copies of which have been delivered to PMT, fairly present the
financial position of Income Series as of the respective dates indicated and the
results of its operations for the periods indicated in conformity with generally
accepted accounting principles applied on a consistent basis.
(e)Custodian Funds has the necessary power and authority to conduct its
business as such business is now being conducted.
(f)Custodian Funds is not a party to or obligated under any provision of its
Articles of Incorporation, bylaws, or any contract or any other commitment or
obligation, and is not subject to any order or decree, which would be violated
by its execution of or performance under this Agreement.
(g)Income Series of Custodian Funds has elected to be treated as a RIC for
federal income tax purposes under Part I of Subchapter M of the Code, has
qualified as a RIC for each taxable year since its inception, and will qualify
as a RIC as of the Closing Date.
(h)Neither PMT nor Custodian Funds is under the jurisdiction of a Court in a
Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code.
(i)Income Series of the Custodian Fund does not own, directly or indirectly,
nor has it owned during the past five (5) years, directly or indirectly, any
stock of PMT.
6. REPRESENTATIONS AND WARRANTIES BY PMT AND CUSTODIAN FUNDS
PMT and Custodian Funds each represents and warrants to the other that:
(a)The statement of assets and liabilities to be furnished by it as of 1:00
P.M. Pacific Time on the Closing Date for the purpose of determining the number
of shares of common stock of the Class I Shares of Income Series to be issued
pursuant to Section 1 of this Agreement will accurately reflect its net assets
in the case of PMT and its net assets in the case of Income Series, and
outstanding shares of beneficial interest or shares of common stock, as the case
may be, as of such date in conformity with generally accepted accounting
principles applied on a consistent basis.
(b)At the Closing it will have good and marketable title to all of the
securities and other assets shown on the statement of assets and liabilities
referred to in "(a)" above, free and clear of all liens or encumbrances of any
nature whatever except such imperfections of title or encumbrances as do not
materially detract from the value or use of the assets subject thereto, or
materially affect title thereto.
(c)In the case of PMT, except as disclosed in its Form N-2 as amended and
supplemented to date, and in current reports, and, in the case of Custodian
Funds and Income Series, except as disclosed in its currently effective
prospectus, there is no material suit, judicial action, or legal or
administrative proceeding pending or threatened against it.
(d)There are no known actual or proposed deficiency assessments with respect
to any taxes payable by it.
(e)The execution, delivery and performance of this Agreement have been duly
authorized by all necessary action of its Board of Trustees or Board of
Directors, as the case may be, and this Agreement constitutes its valid and
binding obligation enforceable in accordance with its terms.
(f)Neither PMT nor the Income Series of the Custodian Funds anticipate that
the consummation of this Agreement will cause either to fail to conform to the
requirements of Subchapter M of the Code, for federal income taxation as a RIC
at the end of the fiscal year in which the Closing Date occurs.
7. COVENANTS OF PMT AND CUSTODIAN FUNDS
(a)PMT and Custodian Funds each covenant to operate their respective
businesses as presently conducted between the date hereof and the Closing.
(b)PMT undertakes that it will not acquire Income Series' Class I Shares for
the purpose of making distributions thereof other than to PMT's shareholders.
(c)PMT undertakes that if this Agreement is consummated, it will file an
application pursuant to Section 8(f) of the Investment Company Act of 1940, as
amended, for an order declaring that it has ceased to be an investment company.
(d)PMT and Custodian Funds each agree that by the Closing, all of its Federal
and other tax returns and reports required by law to be filed on or before such
date shall have been filed and all Federal and other taxes shown as due on said
returns shall have either been paid or adequate liability reserves shall have
been provided for the payment of such taxes.
(e)PMT will at the Closing provide Custodian Funds with a copy of the
shareholder ledger accounts for all the shareholders of record of PMT as of 1:00
P.M. Pacific Time on the Closing Date, who are to become shareholders of Class I
Shares of Income Series as a result of the transfer of assets which is the
subject of this Agreement, certified by its Transfer Agent or its President to
the best of their knowledge and belief.
(f)PMT agrees to mail to each shareholder of record of PMT entitled to vote
at the meeting of shareholders at which action on this Agreement is to be
considered, in sufficient time to comply with requirements as to notice thereof,
a Combined Proxy Statement and Prospectus which complies in all material
respects with the applicable provisions of Section 14(a) of the Securities
Exchange Act of 1934, as amended, and Section 20(a) of the Investment Company
Act of 1940, as amended, and the rules and regulations, respectively,
thereunder.
(g)Custodian Funds will file with the Securities and Exchange Commission a
Registration Statement on Form N-14 under the Securities Act of 1933, as amended
("Registration Statement") relating to the Class I Shares of Income Series
issuable hereunder, and will use its best efforts to provide that the
Registration Statement becomes effective as promptly as practicable. At the time
the Registration Statement becomes effective, it (i) will comply in all material
respects with the applicable provisions of the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder; and (ii) will not
contain any untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading; at the time the Registration Statement becomes effective, at the
time of the PMT shareholders' meeting, and at the Closing Date, the prospectus
and statement of additional information included therein will not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading.
8. CONDITIONS PRECEDENT TO BE FULFILLED BY PMT AND CUSTODIAN FUNDS
The obligations of PMT and Custodian Funds to effectuate this Agreement and
the Plan of Reorganization hereunder shall be subject to the following
respective conditions:
(a)That (1) all the representations and warranties of the other party
contained herein shall be true and correct as of the Closing with the same
effect as though made as of and at such date; (2) the other party shall have
performed all obligations required by this Agreement to be performed by it prior
to the Closing; and (3) the other party shall have delivered to such party a
certificate signed by the President and by the Secretary or equivalent officer
to the foregoing effect.
(b)That the other party shall have delivered to such party a copy of the
resolutions approving this Agreement adopted by the other party's Board of
Directors or Trustees, as relevant, certified by the Secretary or equivalent
officer.
(c)That the Securities and Exchange Commission shall not have issued an
unfavorable management report under Section 25(b) of the Investment Company Act
of 1940, as amended, nor instituted nor threatened to institute any proceeding
seeking to enjoin consummation of the Plan of Reorganization under Section 25(c)
of the Investment Company Act of 1940, as amended, and no other legal,
administrative or other proceeding shall be instituted or threatened which would
materially affect the financial condition of either party or would prohibit the
transactions contemplated hereby.
(d)That the holders of at least a majority of the outstanding shares of
beneficial interest of PMT shall have voted in favor of the adoption of this
Agreement and the Plan of Reorganization contemplated hereby at an annual or
special meeting.
[(e) That PMT shall have declared a distribution or distributions prior to
the Closing Date which, together with all previous distributions, shall have the
effect of distributing to its shareholders (i) all of its net investment income,
if any, for the period from the close of its last fiscal year to 1:00 P.M.
Pacific Time on the Closing Date, and (ii) any undistributed net investment
income from any prior period.]
(f)That prior to or at the Closing, PMT and Custodian Funds shall receive an
opinion of counsel letter stating that provided the acquisition contemplated
hereby is carried out in accordance with this Agreement:
(1) Provided the acquisition is carried out in accordance with the
applicable laws of Maryland, the acquisition by Income Series of substantially
all the assets of PMT as provided for herein in exchange for Class I Shares of
Income Series will qualify as a reorganization within the meaning of Section
368(a)(1)(C) of the Code, and PMT and Income Series will each be a party to the
respective reorganization within the meaning of Section 368(b) of the Code;
(2) No gain or loss will be recognized by PMT upon the transfer of
substantially all of its assets to Income Series in exchange solely for voting
shares of the Class I Shares of Income Series (Sections 361(a) and 357(a) of the
Code);
(3) No gain or loss will be recognized by Income Series upon the receipt
of substantially all of the assets of PMT in exchange solely for voting shares
of Class I Shares of Income Series (Section 1032(a) of the Code);
(4) The basis of the assets of PMT received by Income Series will be the
same as the basis of such assets to PMT immediately prior to the exchange
(Section 362(b) of the Code);
(5) The holding period of the assets of PMT received by Income Series will
include the period during which such assets were held by PMT (Section 1223(2) of
the Code);
(6) No gain or loss will be recognized to the shareholders of PMT upon the
exchange of their shares in PMT for voting shares of the Class I Shares of
Income Series (Section 354(a) of the Code);
(7) The basis of Income Series' Class I Shares received by PMT's
shareholders shall be the same as the basis of the shares of PMT exchanged
therefor (Section 358(a)(1) of the Code);
(8) The holding period of Income Series' Class I Shares received by PMT's
shareholders will include the holding period of PMT's shares surrendered in
exchange therefor, provided that PMT's shares were held as a capital asset on
the date of the exchange (Section 1223(1)of the Code); and
(9) Income Series will succeed to and take into account as of the date of
the proposed transfer the items of PMT described in Section 381(c) of the Code,
including the earnings and profits, or deficit in earnings and profits, of PMT
as of the date of the exchange (ss.381(a) of the Code and Income Tax Regulation
ss.1.381-1(a)), subject to the conditions and limitations specified in Sections
381, 382, 383 and 384 of the Code and the Income Tax Regulations thereunder.
In giving the opinions set forth above, this counsel may state that it is
relying on certificates of the officers of PMT and Custodian Funds with regard
to matters of fact and certain certifications, and written statements of
governmental officials with respect to the good standing of PMT and Custodian
Funds.
(g)That Custodian Funds shall have received an opinion in form and substance
satisfactory to it from Messrs. Stradley, Ronon, Stevens & Young LLP, counsel to
PMT, to the effect that, subject in all respects to the effects of bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance, and other laws
now or hereafter affecting generally the enforcement of creditors' rights:
(1) PMT was created as a business trust under the laws of the Commonwealth
of Massachusetts by an Agreement and Declaration of Trust dated December 13,
1988, and is validly existing and in good standing under the laws of the
Commonwealth of Massachusetts;
(2) PMT is authorized to issue an unlimited number of shares of beneficial
interest, par value $0.01 per share, and, assuming that the initial shares of
beneficial interest were issued in accordance with the Investment Company Act of
1940, as amended, and the Agreement and Declaration of Trust and bylaws of PMT,
and that all other outstanding shares of PMT were sold, issued and paid for in
accordance with the terms of PMT's prospectus in effect at the time of such
sales, each such outstanding share is fully paid, non-assessable, fully
transferable and has full voting rights;
(3) PMT is a closed-end, diversified investment company of the management
type registered as such under the Investment Company Act of 1940, as amended;
(4) Except as disclosed in the Form N-2, as amended to date, of PMT, such
counsel does not know of any material suit, action, or legal or administrative
proceeding pending or threatened against PMT, the unfavorable outcome of which
would materially and adversely affect PMT;
(5) All actions required to be taken by PMT to authorize this Agreement
and to effect the Plan of Reorganization contemplated hereby have been duly
authorized by all necessary action on the part of PMT; and
(6) This Agreement is the legal, valid and binding obligation of PMT and
is enforceable against PMT in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization or other
similar laws pertaining to the enforcement of creditors' rights generally and by
equitable principles or any principles of public policy limiting the right to
enforce the indemnification provisions contained therein.
In giving the opinions set forth above, this counsel may state that it is
relying on certificates of the officers of PMT with regard to matters of fact
and certain certifications and written statements of governmental officials with
respect to the good standing of PMT.
(h)That PMT shall have received an opinion in form and substance satisfactory
to it from Messrs. Bleakley Platt & Schmidt, counsel to Custodian Funds, to the
effect that, subject in all respects to the effects of bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance and other laws now or
hereafter affecting generally the enforcement of creditors' rights:
(1) Custodian Funds was incorporated under the laws of the State of
Delaware on November 28, 1947 and reincorporated under the laws of the State of
Maryland on October 16, 1979, and is validly existing and in good standing under
the laws of that state;
(2) Custodian Funds has three classes of capital stock, which are issued
in five separate series. The authorized capital stock of Custodian Funds
consists of 19,000,000,000 shares of common stock with $0.01 par value, with
9,200,000,000 designated as Income Series' shares (4,600,000,000 allocated to
Income Series Class I; 3,600,000,000 allocated to Income Series Class II;
1,000,000,000 allocated to Income Series Class Z), and, assuming that the
initial capital shares of Custodian Funds were issued in accordance with the
Investment Company Act of 1940, as amended, and its Articles of Incorporation
and that all other shares were sold, issued and paid for in accordance with the
terms of Custodian Funds' prospectus in effect at the time of such sales, each
such outstanding share is fully paid, non-assessable, freely transferable and
has full voting rights;
(3) Custodian Funds is an open-end, management investment company
consisting of five series registered as such under the Investment Company Act of
1940, as amended;
(4) Except as disclosed in Custodian Funds' currently effective
prospectus, such counsel does not know of any material suit, action, or legal or
administrative proceeding pending or threatened against Custodian Funds, the
unfavorable outcome of which would materially and adversely affect Custodian
Funds or the Income Series;
(5) The Class I Shares of Income Series to be issued pursuant to the terms
of this Agreement have been duly authorized and, when issued and delivered as
provided in this Agreement, will have been validly issued and fully paid and
will be non-assessable by Income Series;
(6) All corporate actions required to be taken by Custodian Funds to
authorize this Agreement and to effect the Plan of Reorganization have been duly
authorized by all necessary corporate action on the part of Custodian Funds;
(7) Neither the execution, delivery nor performance of this Agreement by
Custodian Funds violates any provision of its Certificate of Incorporation, its
bylaws, or the provisions of any agreement or other instrument, known to such
counsel to which Custodian Funds is a party or by which Custodian Funds is
otherwise bound; this Agreement is the legal, valid and binding obligation of
Custodian Funds and is enforceable against Custodian Funds in accordance with
its terms except as enforceability may be limited by bankruptcy, insolvency,
reorganization or other similar laws pertaining to the enforcement of creditors'
rights generally and by equitable principles; and
(8) The Registration Statement of which the Prospectus of the Income
Series is a part, dated February 1, 1998 (the "Prospectus"), is, at the time of
the signing of this Agreement, effective under the Securities Act of 1933, as
amended, and, to the best knowledge of such counsel, no stop order suspending
the effectiveness of the Registration Statement has been issued, and no
proceedings for such purpose have been instituted or are pending before or
threatened by the Securities and Exchange Commission under the Securities Act of
1933, as amended, and nothing has come to its attention which causes it to
believe that at the time the Prospectus became effective, or at the time of the
signing of this Agreement, or at the Closing, such Prospectus (except for the
financial statements and other financial and statistical data included therein,
as to which counsel need express no opinion), contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; and such
counsel know of no legal or government proceedings required to be described in
the Prospectus or of any contract or document of a character required to be
described in the Prospectus that is not described as required.
In giving the opinions set forth above, this counsel may state that it is
relying on certificates of the officers of Custodian Funds with regard to
matters of fact and certain certifications and written statements of
governmental officials with respect to the good standing of Custodian Funds.
(i)That PMT shall have received a certificate from the President and
Secretary of Custodian Funds to the effect that the statements contained in the
Income Series Prospectus dated February 1, 1998, at the time the Prospectus
became effective, at the date of the signing of this Agreement and at the
Closing, did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; and
(j)That Custodian Funds' Registration Statement with respect to the shares of
the Class I Shares of Income Series to be delivered to PMT shareholders in
accordance with this Agreement shall have become effective, and no stop order
suspending the effectiveness of the Registration Statement or any amendment or
supplement thereto, shall have been issued prior to the Closing Date or shall be
in effect at Closing, and no proceedings for the issuance of such an order shall
be pending or threatened on that date.
(k)That the shares of Income Series to be delivered hereunder shall have been
registered with each state commission or agency with which such registration is
required in order to permit the Class I Shares lawfully to be delivered to each
PMT shareholder.
(l)That at the Closing, PMT transfers to Income Series at least 90% in fair
market value of PMT's total net assets and 70% of the fair market value of the
total gross assets recorded on the books of PMT on the Closing Date.
9. BROKERAGE FEES AND EXPENSES
(a)PMT and Custodian Funds each represents and warrants to the other that
there are no broker or finders fees payable by it in connection with the
transactions provided for herein.
(b)The expenses of entering into and carrying out the provisions of this
Agreement shall be borne one-third by PMT, one-third by the Income Series and
one-third by Franklin Advisers, Inc.
10. TERMINATION; POSTPONEMENT; WAIVER; ORDER
(a)Anything contained in this Agreement to the contrary notwithstanding, this
Agreement may be terminated and the Plan of Reorganization abandoned at any time
(whether before or after adoption thereof by the shareholders of PMT) prior to
the Closing or the Closing may be postponed as follows:
(1) by mutual consent of PMT and Custodian Funds;
(2) by Custodian Funds if any condition of its obligations set forth in
Section 8 has not been fulfilled or waived by Custodian Funds; and
(3) by PMT if any condition of its obligations set forth in Section 8 has
not been fulfilled or waived by PMT.
An election by PMT or Custodian Funds to terminate this Agreement and to
abandon the Plan of Reorganization shall be exercised respectively by the Board
of Trustees of PMT or the Board of Directors of Custodian Funds.
(b)If the transactions contemplated by this Agreement have not been
consummated by December 31, 1998, the Agreement shall automatically terminate on
that date, unless a later date is agreed to by both Custodian Funds and PMT by
its Board of Directors and Board of Trustees, respectively.
(c)In the event of termination of this Agreement pursuant to the provisions
hereof, the same shall become void and have no further effect, and there shall
not be any liability on the part of either PMT or Custodian Funds or persons who
are their trustees, directors, officers, agents or shareholders in respect of
this Agreement.
(d)At any time prior to the Closing, any of the terms or conditions of this
Agreement may be waived by either PMT or Custodian Funds, respectively
(whichever is entitled to the benefit thereof), by action taken by the Board of
Trustees of PMT or the Board of Directors of Custodian Funds, if, in the
judgment of the Board of Trustees of PMT or the Board of Directors of Custodian
Funds (as the case may be), such action or waiver will not have a material
adverse affect on the benefits intended under this Agreement to the holders of
shares of PMT or Income Series, on behalf of which such action is taken.
(e)The respective representations, warranties and covenants contained in
Sections 4-7 hereof shall expire with, and be terminated by, the Plan of
Reorganization, and neither PMT nor Custodian Funds nor any of their officers,
trustees, directors, agents or shareholders shall have any liability with
respect to such representations or warranties after the Closing. This provision
shall not protect any officer, trustee, director, agent or shareholder of PMT or
Custodian Funds against any liability to the entity for which that officer,
trustee, director, agent or shareholder so acts or to its shareholders to which
that officer, trustee, director, agent or shareholder would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties in the conduct of such office.
(f)If any order or orders of the U.S. Securities and Exchange Commission with
respect to this Agreement shall be issued prior to the Closing and shall impose
any terms or conditions which are determined by action of the Board of Trustees
of PMT and the Board of Directors of Custodian Funds to be acceptable, such
terms and conditions shall be binding as if a part of this Agreement without
further vote or approval of the shareholders of PMT, unless such terms and
conditions shall result in a change in the method of computing the number of
shares of the Class I Shares of Income Series to be issued to PMT in which
event, unless such terms and conditions shall have been included in the proxy
solicitation material furnished to the shareholders of PMT prior to the meeting
at which the transactions contemplated by this Agreement shall have been
approved, this Agreement shall not be consummated and shall terminate unless PMT
shall promptly call a special meeting of shareholders at which such conditions
so imposed shall be submitted for approval.
11. ENTIRE AGREEMENT AND AMENDMENTS
This Agreement embodies the entire Agreement between the parties and there
are no agreements, understandings, restrictions, or warranties between the
parties other than those set forth herein or herein provided for. This Agreement
may be amended only by mutual consent of the parties in writing. Neither this
Agreement nor any interest herein may be assigned without the prior written
consent of the other party.
12. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all such counterparts together shall
constitute but one instrument.
13. NOTICES
Any notice, report, or demand required or permitted by any provision of
this Agreement shall be in writing and shall be deemed to have been given if
delivered or mailed, first class postage prepaid, addressed to PMT at 777
Mariners Island Boulevard, P. O. Box 7777, San Mateo, CA 94403-7777,
Attention: Mr. Edward B. Jamieson, President, or Custodian Funds at 777
Mariners Island Boulevard, P. O. Box 7777, San Mateo, CA 94403-7777,
Attention: Mr. Charles B. Johnson, President, as the case may be.
14. GOVERNING LAW
This Agreement shall be governed by and carried out in accordance with the
laws of the State of Maryland.
IN WITNESS WHEREOF, Franklin Principal Maturity Trust and Franklin Custodian
Funds, Inc. have each caused this Agreement and Plan of Reorganization to be
executed on its behalf by its duly authorized officers, all as of the date and
year first-above written.
FRANKLIN CUSTODIAN FUNDS, INC.
Attest:
_________________________ By:________________________________
Assistant Secretary Deborah R. Gatzek
Vice President
FRANKLIN PRINCIPAL MATURITY TRUST
Attest:
_________________________ By:________________________________
Assistant Secretary Deborah R. Gatzek
Vice President
EXHIBIT B: FRANKLIN CUSTODIAN FUNDS, INC. - CLASS I & II PROSPECTUS DATED
FEBRUARY 1, 1998
PROSPECTUS & APPLICATION
FRANKLIN CUSTODIAN FUNDS, INC.
FEBRUARY 1, 1998
UTILITIES SERIES
INCOME SERIES
INVESTMENT STRATEGY
GROWTH & INCOME
GROWTH SERIES
DYNATECH SERIES
INVESTMENT STRATEGY
GROWTH
U.S. GOVERNMENT SECURITIES SERIES
INVESTMENT STRATEGY
INCOME
This prospectus describes Class I and Class II shares of the five series of
Franklin Custodian Funds, Inc. ("Custodian Funds"). Each series may individually
or together be referred to as the "Fund(s)." This prospectus contains
information you should know before investing in the Fund. Please keep it for
future reference.
Utilities Series, Income Series, Growth Series and U.S. Government Securities
Series currently offer another class of shares with a different sales charge and
expense structure, which affects performance. This class is described in a
separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Custodian Funds has a Statement of Additional Information ("SAI") for its
Class I and Class II shares, dated February 1, 1998, which may be amended from
time to time. It 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.
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.
INCOME SERIES MAY INVEST UP TO 100% OF ITS NET ASSETS IN NON-INVESTMENT GRADE
BONDS. THESE ARE COMMONLY KNOWN AS "JUNK BONDS." THEIR DEFAULT AND OTHER RISKS
ARE GREATER THAN THOSE OF HIGHER RATED SECURITIES. YOU SHOULD CAREFULLY CONSIDER
THESE RISKS BEFORE INVESTING IN THE FUND. PLEASE SEE "WHAT ARE THE RISKS OF
INVESTING IN THE FUND?"
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY 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.
February 1, 1998
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
Financial Highlights ........................................................4
How Does the Fund Invest Its Assets? ........................................13
What Are the Risks of Investing in the Fund? ................................24
Who Manages the Fund? .......................................................29
How Does the Fund Measure Performance? ......................................33
How Taxation Affects the Fund and Its Shareholders ..........................34
How Is the Fund Organized? ..................................................37
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ........................................................38
May I Exchange Shares for Shares of Another Fund? ...........................46
How Do I Sell Shares? .......................................................49
What Distributions Might I Receive From the Fund? ...........................52
Transaction Procedures and Special Requirements .............................53
Services to Help You Manage Your Account ....................................57
What If I Have Questions About My Account? ..................................60
GLOSSARY
Useful Terms and Definitions ................................................60
APPENDIX
Description of Ratings ......................................................63
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. It is based on the historical expenses of each class for the fiscal year
ended September 30, 1997. The Fund's actual expenses may vary.
<TABLE>
<CAPTION>
GROWTH UTILITIES INCOME U.S. GOVERNMENT DYNATECH
SERIES SERIES SERIES SECURITIES SERIES SERIES
A.SHAREHOLDER TRANSACTION EXPENSES+
CLASS I
Maximum Sales Charge (as a percentage
<S> <C> <C> <C> <C> <C>
of Offering Price) 4.50% 4.25% 4.25% 4.25% 4.50%
Paid at time of purchase++ 4.50% 4.25% 4.25% 4.25% 4.50%
Paid at redemption++++ NONE NONE NONE NONE NONE
Exchange Fee (per transaction) $5.00* $5.00* $5.00* $5.00* NONE
Class II
Maximum Sales Charge (as a
percentage of Offering Price) 1.99% 1.99% 1.99% 1.99% 1.99%
Paid at time of purchase+++ 1.00% 1.00% 1.00% 1.00% 1.00%
Paid at redemption++++ 0.99% 0.99% 0.99% 0.99% 0.99%
Exchange Fee (per transaction) $5.00* $5.00* 5.00* $5.00* NONE
B.Annual Fund Operating Expenses
(as a percentage of average net assets)
Class I
Management Fees 0.48% 0.46% 0.46% 0.45% 0.60%
Rule 12b-1 Fees** 0.23% 0.13% 0.15% 0.09% 0.22%
Other Expenses 0.18% 0.16% 0.11% 0.10% 0.22%
-----------------------------------------------
Total Fund Operating Expenses 0.89% 0.75% 0.72% 0.64% 1.04%
===============================================
Class II
Management Fees 0.48% 0.46% 0.46% 0.45% 0.60%
Rule 12b-1 Fees** 1.00% 0.65% 0.65% 0.65% 1.00%
Other Expenses 0.18% 0.16% 0.11% 0.10% 0.22%
-----------------------------------------------
Total Fund Operating Expenses 1.66% 1.27% 1.22% 1.20% 1.82%
===============================================
</TABLE>
C. Example
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the Fund.
GROWTH UTILITIES INCOME U.S. GOVERNMENT DYNATECH
SERIES SERIES SERIES SECURITIES SERIES SERIES
CLASS I
1 Year*** $ 54 $ 50 $ 50 $ 49 $ 55
3 Years $ 72 $ 65 $ 65 $ 62 $ 77
5 Years $ 92 $ 82 $ 81 $ 77 $100
10 Years $150 $132 $128 $119 $166
CLASS II
1 Year $ 37 $ 33 $ 32 $ 32 $ 38
3 Years $ 62 $ 50 $ 48 $ 48 $ 67
5 Years $ 99 $ 79 $ 76 $ 75 $108
10 Years $205 $162 $156 $154 $222
For the same Class II investment, you would pay projected expenses of $27
(Growth Series), $23 (Utilities Series), $22 (Income Series), $22 (U.S.
Government Securities Series) and $28 (DynaTech Series) if you did not sell
your shares at the end of the first year. Your projected expenses for the
remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected
in the Net Asset Value or dividends of each class and are not directly charged
to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in Class I
shares.
+++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Choosing a Share Class."
++++A Contingent Deferred Sales Charge may apply to any Class II purchase if you
sell the shares within 18 months and to Class I purchases of $1 million or more
if you sell the shares within one year. A Contingent Deferred Sales Charge may
also apply to purchases by certain retirement plans that qualify to buy Class I
shares without a front-end sales charge. The charge is 1% of the value of the
shares sold or the Net Asset Value at the time of purchase, whichever is less.
The number in the table shows the charge as a percentage of Offering Price.
While the percentage is different depending on whether the charge is shown based
on the Net Asset Value or the Offering Price, the dollar amount paid by you
would be the same. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**For Utilities, Income and U.S. Government Securities Series, these fees may
not exceed 0.15% for Class I and 0.65% for Class II. For Growth and DynaTech
Series, these fees may not exceed 0.25% for Class I and 1.00% for Class II. The
combination of front-end sales charges and Rule 12b-1 fees could cause long-term
shareholders to pay more than the economic equivalent of the maximum front-end
sales charge permitted under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes each Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Funds' independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in Custodian Funds' Annual Report to Shareholders for the
fiscal year ended September 30, 1997. The Annual Report to Shareholders also
includes more information about each Fund's performance. For a free copy, please
call Fund Information.
<TABLE>
<CAPTION>
GROWTH SERIES
CLASS I+++
YEAR ENDED SEPT. 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $22.82 $19.38 $14.96 $14.25 $13.70 $13.45 $10.69 $11.97 $ 9.64 $10.39
-------------------------------------------------------------------------------
Income from investment operations:
Net investment income .36 .22 .17 .19 .23 .23 .33 .32 .23 .21
Net realized and unrealized
gains (losses) 4.34 3.53 4.43 .90 .58 .52 2.70 (1.19) 2.33 (.57)
------------------------------------------------------------------------------
Total from investment operations 4.70 3.75 4.60 1.09 .81 .75 3.03 (.87) 2.56 (.36)
==============================================================================
Less distributions:
Dividends from net investment income (.23) (.16) (.14) (.30) (.19) (.35) (.27) (.21) (.22) (.20)
Distributions from net realized gains (.20) (.15) (.04) (.08) (.07) (.15) - (.20) (.01) (.19)
------------------------------------------------------------------------------
Total distributions (.43) (.31) (.18) (.38) (.26) (.50) (.27) (.41) (.23) (.39)
------------------------------------------------------------------------------
Net Asset Value, end of year $27.09 $22.82 $19.38 $14.96 $14.25 $13.70 $13.45 $10.69 $11.97 $ 9.64
===============================================================================
Total return* 20.84% 19.60% 31.11% 7.63% 5.87% 5.73% 28.65% (7.55)% 27.02% (3.28)%
Ratios/Supplemental Data
Net assets, end of year
(in millions) $1,436 $1,020 $713 $517 $561 $533 $331 $170 $135 $107
Ratio to average net assets:
Expenses .89% .87% .90% .77% .64% .66% .70% .73% .76% .77%
Net investment income 1.60% 1.16% 1.08% 1.23% 1.64% 2.06% 2.58% 2.74% 1.94% 2.27%
Portfolio turnover rate 1.77% 2.03% 1.39% 6.52% 1.70% .81% 7.98% - -2.24% -
Average commission rate paid*** $.0568 $.0543 - - - - - - - -
</TABLE>
CLASS II
YEAR ENDED SEPT. 30,
1997 1996 1995+
----------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $22.60 $19.33 $16.88
------------------------
Income from investment operations:
Net investment income .20 .12 .02
------------------------
Net realized and unrealized gains 4.25 3.46 2.43
Total from investment operations 4.45 3.58 2.45
======================
Less distributions:
Dividends from net investment income (.15) (.16) -
Distributions from net realized gains (.20) (.15) -
----------------------
Total distributions (.35) (.31) -
----------------------
Net Asset Value, end of year $26.70 $22.60 $19.33
========================
Total return* 19.91% 18.73% 14.72%
Ratios/Supplemental Data
Net assets, end of year (in millions) $117 $43 $4
Ratio to average net assets:
Expenses 1.66% 1.63% 1.79%**
Net investment income .85% .40% .37%**
Portfolio turnover rate 1.77% 2.03% 1.39%
Average commission rate paid*** $.0568 $ .0543 -
<TABLE>
<CAPTION>
DYNATECH SERIES
CLASS I+++
YEAR ENDED SEPT. 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance
(for a share outstanding throughout
the year)
Net Asset Value, beginning of year $14.03 $12.78 $ 9.85 $10.29 $9.21 $8.68 $6.77 $7.63 $5.89 $7.08
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income .10 .06 .12 .07 .10 .12 .13 .15 .06 .04
Net realized and unrealized gains (losses) 4.81 1.54 2.99 .21 1.21 .52 1.95 (.35) 1.72 (1.20)
------------------------------------------------------------------------------
Total from investment operations 4.91 1.60 3.11 .28 1.31 .64 2.08 (.20) 1.78 (1.16)
==============================================================================
Dividends from net investment income (.06) (.12) (.05) (.12) (.12) (.11) (.17) (.06) (.04) (.03)
Distributions from net realized gains (.40) (.23) (.13) (.60) (.11) - - (.60) - -
------------------------------------------------------------------------------
Total distributions (.46) (.35) (.18) (.72) (.23) (.11) (.17) (.66) (.04) (.03)
------------------------------------------------------------------------------
Net Asset Value, end of year $18.48 $14.03 $12.78 $ 9.85 $10.29 $9.21 $8.68 $6.77 $7.63 $5.89
================================================================================
Total return* 35.63% 12.84% 32.10% 2.89% 14.36% 7.29% 31.21% (2.71)% 30.26% (16.41)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in millions) $188 $105 $93 $67 $71 $65 $49 $37 $38 $34
Ratio to average net assets:
Expenses 1.04% 1.05% 1.01% 1.00% .81% .81% .93% .79% .83% .87%
Net investment income .75% .43% 1.11% .69% 1.03% 1.42% 1.57% 2.09% .90% .68%
Portfolio turnover rate 5.59% 11.94% 9.83% 9.73% 26.56% 10.70% 7.12% 11.34% - 3.68%
Average commission rate paid*** $.0536 $.0551 - - - - - - - -
</TABLE>
CLASS II
YEAR ENDED SEPT. 30
1997 1996++
-------------------------
Per Share Operating Performance
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $14.03 $13.57
-------------------
Income from investment operations:
Net investment income .07 -
Net realized and unrealized gains 4.66 .46
------------------
Total from investment operations 4.73 .46
==================
Less distributions:
Dividends from net investment income (.06) -
Distributions from net realized gains (.40) -
------------------
Total distributions (.46) -
------------------
Net Asset Value, end of year $18.30 $14.03
==================
Total return* 34.32% 3.39%
RATIOS/SUPPLEMENTAL DATA
Net assets, at end of year (in millions) $3 -
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.82% 1.85%**
Net investment income .25% (.14)%**
Portfolio turnover rate 5.59% 11.94%
Average commission rate paid*** $.0536 $.0551
<TABLE>
<CAPTION>
UTILITIES SERIES
CLASS I
YEAR ENDED SEPT. 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the year)
Net Asset Value, beginning of year $ 9.73 $9.75 $8.33 $10.78 $ 9.63 $8.81 $7.48 $8.10 $7.46 $7.72
------------------------------------------------------------------------------
Income from investment operations:
Net investment income .53 .54 .53 .55 .53 .53 .54 .53 .55 .55
Net realized and unrealized gains
(losses) .73 .03 1.42 (2.44) 1.17 .85 1.38 (.56) .67 (.24)
----------------------------------------------------------------------------
Total from investment operations 1.26 .57 1.95 (1.89) 1.70 1.38 1.92 (.03) 1.22 .31
============================================================================
Less distributions:
Dividends from net investment income (.52) (.52) (.52) (.52) (.55) (.56) (.59) (.58) (.58) (.57)
Distributions from net realized gains (.43) (.07) (.01) (.04) - - - (.01) - -
-------------------------------------------------------------------------
Total distributions (.95) (.59) (.53) (.56) (.55) (.56) (.59) (.59) (.58) (.57)
-----------------------------------------------------------------------------
Net Asset Value, end of year $10.04 $9.73 $9.75 $ 8.33 $10.78 $9.63 $8.81 $7.48 $8.10 $7.46
==============================================================================
Total return* 13.72% 5.94% 24.19% (17.94)% 17.83% 15.89% 26.15% (.93)% 16.71% 4.03%
Ratios/Supplemental Data
Net assets, end of year (in millions) $1,953 $2,401 $2,766 $2,573 $3,627 $2,191 $1,226$ 749 $ 652 $ 616
Ratio to average net assets:
Expenses .75% .71% .73% .64% .55% .57% .59% .60% .62% .64%
Net investment income 5.26% 5.24% 5.88% 5.76% 5.30% 5.90% 6.44% 6.50% 7.10% 7.36%
Portfolio turnover rate 7.24% 17.05% 5.55% 6.34% 7.81% 1.39% .89% 2.07% 4.02% 1.68%
Average commission rate paid*** $.0505 $.0486 - - - - - - - -
</TABLE>
CLASS II
YEAR ENDED SEPT. 30,
1997 1996 1995+
---------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $ 9.72 $9.75 $8.89
--------------------------
Income from investment operations:
Net investment income .45 .46 .23
Net realized and unrealized gains .76 .06 .88
-----------------------
Total from investment operations 1.21 .52 1.11
========================
Less distributions:
Dividends from net investment income (.48) (.48) (.25)
Distributions from net realized gains (.43) (.07) -
------------------------
Total distributions (.91) (.55) (.25)
------------------------
Net Asset Value, at end of year $10.02 $9.72 $9.75
==========================
Total return* 13.06% 5.39% 13.01%
Ratios/Supplemental Data
Net assets, end of year (in millions) $22 $20 $8
Ratio to average net assets:
Expenses 1.27% 1.23% 1.21%**
Net investment income 4.78% 4.86% 5.15%**
Portfolio turnover rate 7.24% 17.05% 5.55%
Average commission rate paid*** $.0505 $.0486 -
INCOME SERIES
<TABLE>
<CAPTION>
CLASS I
YEAR ENDED SEPT. 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $2.30 $2.30 $2.22 $2.46 $2.25 $2.08 $1.76 $2.11 $2.11 $2.22
------------------------------------------------------------------------------
Income from investment operations:
Net investment income .18 .19 .18 .17 .18 .19 .19 .21 .22 .23
Net realized and unrealized gains (losses) .20 .02 .11 (.20) .23 .19 .35 (.32) .01 (.10)
-----------------------------------------------------------------------------
Total from investment operations .38 .21 .29 (.03) .41 .38 .54 (.11) .23 .13
=============================================================================
Less distributions:
Dividends from net investment income (.18) (.18) (.18) (.18) (.19) (.20) (.22) (.22) (.22) (.22)
Distributions from net realized gains (.01) (.03) (.03) (.03) (.01) (.01) - (.02) (.01) (.02)
------------------------------------------------------------------------------
Total distributions (.19) (.21) (.21) (.21) (.20) (.21) (.22) (.24) (.23) (.24)
------------------------------------------------------------------------------
Net Asset Value, end of year $2.49 $2.30 $2.30 $2.22 $2.46 $2.25 $2.08 $1.76 $2.11 $2.11
==============================================================================
Total return* 17.31% 9.43 14.00% (1.52)%18.76% 18.80% 32.60% (6.37)% 11.16% 6.00%
Ratios/Supplemental Data
Net assets, end of year (in millions) $7,739 $6,780 $5,886 $4,892 $3,935 $2,484 $1,673 $1,299$1,190 $727
Ratio to average net assets:
Expenses .72% .70% .71% .64% .54% .55% .56% .55% .57% .61%
Net investment income 7.45% 8.27% 8.26% 7.37% 7.84% 9.11% 10.17% 10.73% 10.46% 10.50%
Portfolio turnover rate 16.15% 25.29% 58.64% 23.37% 25.41% 23.30% 33.92% 12.14% 12.05% 10.01%
Average commission rate paid*** $.0498 $.0518 - - - - - - - -
</TABLE>
CLASS II
YEAR ENDED SEPT. 30,
1997 1996 1995+
---------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $2.30 $2.30 $2.18
---------------------------
Income from investment operations:
Net investment income .16 .17 .08
Net realized and unrealized gains .21 .03 .11
--------------------------
Total from investment operations .37 .20 .19
==========================
Less distributions:
Dividends from net investment income (.17) (.17) (.07)
Distributions from net realized gains (.01) (.03) -
--------------------------
Total distributions (.18) (.20) (.07)
--------------------------
Net Asset Value, end of year $2.49 $2.30 $2.30
===========================
Total return* 16.72% 8.86% 8.96%
Ratios/Supplemental Data
Net assets, end of year (in millions) $695 $343 $66
Ratio to average net assets:
Expenses 1.22% 1.21% 1.23%**
Net Investment Income 6.96% 7.84% 7.89%**
Portfolio turnover rate 16.15% 25.29% 58.64%
Average commission rate*** $.0498 $.0518 -
U.S. Government Securities Series
<TABLE>
<CAPTION>
CLASS I
YEAR ENDED SEPT. 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $6.72 $6.87 $6.51 $7.20 $7.26 $7.14 $6.86 $6.90 $6.98 $6.87
--------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .48 .49 .50 .50 .56 .61 .65 .67 .69 .69
Net realized and unrealized gains (losses) .17 (.15) .35 (.68) (.06) .11 .29 (.02) (.07) .12
------------------------------------------------------------------------------------
Total from investment operations .65 .34 .85 (.18) .50 .72 .94 .65 .62 .81
====================================================================================
Less distributions:
Dividends from net investment income (.48) (.49) (.49) (.51) (.56) (.60) (.66) (.69) (.70) (.70)
-------------------------------------------------------------------------------------
Net Asset Value, end of year $6.89 $6.72 $6.87 $6.51 $7.20 $7.26 $7.14 $6.86 $6.90 $6.98
======================================================================================
Total return* 10.08% 5.15% 13.56% (2.75%) 6.86% 10.14% 13.97% 9.47% 8.95% 11.77%
Ratios/Supplemental Data
Net assets, end of year (in millions) $9,351 $10,129 $11,102 $11,669 $14,269 $13,617 $12,427 $11,143 $11,260 $12,113
Ratio to average net assets:
Expenses .64% .61% .61% .55% .52% .53% .52% .52% .52% .53%
Net investment income 7.01% 7.18% 7.50% 7.37% 7.71% 8.46% 9.26% 9.72% 9.99% 9.85%
Portfolio turnover rate++++ 1.74% 8.01% 5.48% 18.28% 43.10% 38.75% 22.14% 18.23% 25.70% 34.14%
</TABLE>
CLASS II
YEAR ENDED SEPT. 30,
1997 1996 1995+
-----------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $6.70 $ 6.85 $ 6.67
-----------------------------
Income from investment operations:
Net investment income .44 .45 .21
Net realized and unrealized gains (losses) .17 (.15) .16
---------------------------
Total from investment operations .61 .30 .37
===========================
Less distributions:
Dividends from net investment income (.44) (.45) (.19)
Net Asset Value, end of year $6.87 $ 6.70 $ 6.85
Total return* 9.48% 4.55% 5.66%
============================
Ratios/Supplemental Data
Net assets, end of year (in millions) $121 $58 $12
Ratio to average net assets:
Expenses 1.20% 1.17% 1.18%**
Net investment income 6.44% 6.80% 6.48%**
Portfolio turnover rate++++ 1.74% 8.01% 5.48%
*Total return does not reflect sales commissions or the Continent Deferred Sales
Charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the Offering Price.
**Annualized.
***Relates to purchases and sale of equity securities. Prior to September 30,
1996 disclosure of average commission rate was not required.
+For the period May 1, 1995 (effective date) to September 30, 1995.
++For the period September 16, 1996 (effective date) to September 30, 1996.
+++Data before 1992 has been adjusted to reflect a two-for-one stock split in
the form of a 100% stock dividend to shareholders of record effective the
beginning of business on June 1, 1992.
++++Maturity of U.S. government issues and the reinvestment of the proceeds
thereof are considered as purchases and sales of securities in computing the
portfolio turnover rate.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
Each Fund's investment objective is a fundamental policy of the Fund and may not
be changed without shareholder approval. Of course, there is no assurance that
the Fund will achieve its objective.
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. The Fund may
keep a significant portion of its assets in cash or cash equivalents from time
to time. As a fundamental policy, the Fund may not concentrate or invest more
than 25% of its total assets in any one industry.
To the extent that the Fund may invest in smaller capitalization companies (in
general, companies with a market capitalization of less than $1 billion at the
time of the Fund's investment), the Fund may place greater emphasis upon
investments in relatively new or unseasoned companies that are in their early
stages of development, or in new and emerging industries where the opportunity
for rapid growth is expected to be above average. Securities of unseasoned
companies present greater risks than securities of larger, more established
companies. Please see "What are the Risks of Investing in the Fund? - Small
Companies."
DYNATECH SERIES
The investment objective of this Fund is capital appreciation. The Fund is
designed for investors who understand and are willing to accept the risk of loss
involved in seeking capital appreciation. The Fund's investments tend to be more
speculative in nature, and there can be greater emphasis on short-term trading
profits. Certain investments may be based on market fluctuations caused by
excessive optimism or pessimism of investors, with little or no basis in
fundamental economic conditions.
The Fund seeks to achieve its objective by investing primarily in companies that
emphasize technological development, in fast-growing industries, or in the
securities of companies that Advisers considers undervalued. 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. It is thought that most of the Fund's assets will
be invested in common stocks, including securities convertible into common
stocks. The Fund, however, may also invest in debt securities or preferred
stocks that Advisers believes will further the Fund's investment objective. The
Fund may keep a significant portion of its assets in cash or cash equivalents
from time to time. The Fund may not concentrate or invest more than 25% of its
total assets in any one industry. From time to time, concentration in a few
issues may develop due to market appreciation of certain issues.
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 and companies
involved in providing services related to these activities. The industry also
includes issuers engaged in the communications field, such as telephone,
cellular, paging, telegraph, satellite, microwave and other companies that
provide communication facilities or services 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. Most of the Fund's investments, however, are rated at least Baa by
Moody's or BBB by S&P. 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 the
Fund's rated securities and 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.
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 Risks of Investing in the Fund? - High Yield 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 deemed by the Fund's
manager to be 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 Risks of Investing in the
Fund?" 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 Yield 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 To-Be-Announced 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 also be able to acquire loan
participations 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 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'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, generally within 30 to 60
days. 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. U.S. Government Securities Series may not buy securities of
foreign issuers. Income Series may invest up to 25% of its assets in foreign
securities and Growth, DynaTech 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
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. DynaTech and Utilities Series
presently have no intention of investing more than 10% of their net assets in
foreign securities not publicly traded in the U.S. Growth Series presently has
no intention of investing more than 25% of its net assets in foreign securities
not publicly traded in the U.S. 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 a foreign market, and current
market quotations are readily available.
OPTIONS. Each Fund, except U.S. Government Securities Series, may write covered
call options that are listed for trading on a national securities exchange. This
means that the Fund will only write options on securities that it actually owns.
A call option gives the buyer the right to buy the security on which the option
is written for a specified period of time and at a price agreed to at the time
the Fund sells the option, even though that price may be less than the value of
the security at the time the option is exercised. When the Fund sells covered
call options, it will receive a cash premium that can be used in whatever way is
felt to be most beneficial to the Fund. The risks associated with covered call
writing are that in the event of a price increase on the underlying security,
which would likely trigger the exercise of the call option, the Fund will not
participate in the increase in price beyond the exercise price. If the Fund
determines that it does not wish to deliver the underlying securities from its
portfolio, it would have to enter into a "closing purchase transaction," the
premium on which may be higher or lower than that received by the Fund for
writing the option. There is no assurance that a closing purchase transaction
will be available in every instance.
Transactions in options are generally considered "derivative securities."
CONVERTIBLE SECURITIES. Each Fund, except 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 U.S. Government
Securities Series, may lend its portfolio securities to qualified securities
dealers or other institutional investors, if 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 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 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 U.S. Government Securities Series, may
engage in repurchase transactions. In a repurchase agreement, the Fund buys U.S.
government securities from a bank or broker-dealer at one price and agrees to
sell them back to the bank or broker-dealer at a higher price on a specified
date. The securities subject to resale are held on behalf of the Fund by a
custodian bank approved by the Board. The bank or broker-dealer must transfer to
the custodian securities with an initial market value of at least 102% of the
repurchase price to help secure the obligation to repurchase the securities at a
later date. The securities are then marked-to-market daily to maintain coverage
of at least 100%. If the bank or broker-dealer does not repurchase the
securities as agreed, the Fund may experience a loss or delay in the liquidation
of the securities underlying the repurchase agreement and may also incur
liquidation costs. The Fund, however, intends to enter into repurchase
agreements only with banks or broker-dealers that are considered creditworthy by
the investment manager.
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 in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them. Subject to this
limitation, the Board has authorized each Fund, except 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 the investment manager
determines on a daily basis that there is a liquid institutional or other market
for the securities. Notwithstanding the investment manager's 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.
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.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
TAX CONSIDERATIONS. The investment of the Fund, except the U.S. Government
Securities Series, in options, foreign securities and other complex securities
are subject to special tax rules that may affect the amount, timing or character
of the income earned by the Fund and distributed to you. The Fund may also be
subject to withholding taxes on earnings from certain of its foreign securities.
These special tax rules are discussed under "Additional Information on
Distributions and Taxes" in the SAI.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
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 YIELD SECURITIES. Income Series may invest up to 100% of its net assets in
non-investment grade securities. Because the Fund may invest in securities below
investment grade, an investment in the Fund is subject to a higher degree of
risk than an investment in a fund that invests primarily in higher-quality
securities. You should 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. 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. Utilities
Series may also invest a portion of its assets in non-investment grade
securities.
The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with buying the securities of these issuers is generally
greater than the risk associated with higher-quality securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the Fund's portfolio defaults, the Fund may have unrealized losses on the
security, which may lower the Fund's Net Asset Value. Defaulted securities tend
to lose much of their value before they default. Thus, the Fund's Net Asset
Value may be adversely affected before an issuer defaults. In addition, the Fund
may incur additional expenses if it must try to recover principal or interest
payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the Fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities 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 for the Fund. The premature disposition of a high yield
security due to a call or buy-back feature, the deterioration of an issuer's
creditworthiness, or a default by an issuer may make it more difficult for the
Fund to manage the timing of its income. Under the Code and U.S. Treasury
regulations, the Fund may have to accrue income on defaulted securities and
distribute the income to shareholders for tax purposes, even though the Fund is
not currently receiving interest or principal payments on the defaulted
securities. To generate cash to satisfy these distribution requirements, the
Fund may have to sell portfolio securities that it otherwise may have continued
to hold or use cash flows from other sources, such as the sale of Fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on market price of a security and on the Fund's ability to sell a security in
response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, or if necessary to meet the Fund's liquidity
needs. Reduced liquidity may also make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
The Fund may buy high yield, 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 also incur special costs in disposing of restricted securities,
although the Fund will generally not incur any costs when the issuer is
responsible for registering the securities.
The Fund may buy high yield, 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 before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993 depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any security generally
reflects the true operating results of the issuer. Factors adversely impacting
the market value of high yield securities may lower the Fund's Net Asset Value.
The Fund relies on Advisers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, Advisers takes 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 above also apply to lower-quality zero-coupon, deferred
interest and pay-in-kind securities. These securities have an additional risk,
however, because unlike securities that pay interest throughout the time until
maturity, the Fund will not receive any cash until the cash payment date. If the
issuer defaults, the Fund may not obtain any return on its investment.
Zero-coupon or deferred interest securities are debt obligations that make no
periodic interest payments before 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 amount
or par value. The discount varies depending on the time remaining until maturity
or the cash payment date, as well as 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 approaches.
The value of zero-coupon securities is generally more volatile than the value of
other fixed-income securities that pay interest periodically. Zero-coupon
securities are also likely to respond to changes in interest rates to a greater
degree than other fixed-income securities having similar maturities and credit
quality. The Fund is not limited in the amount of its assets that may be
invested in these types of securities.
The table below shows the percentage of Income Series' assets invested in
securities rated in each of the rating categories shown. A credit rating by a
rating agency evaluates the safety of principal and interest based on an
evaluation of the security's credit quality, but does not consider the market
risk or the risk of fluctuation in the price of the security. The information
shown is 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, 1997. The Appendix to this prospectus includes a description of
each rating category.
AVERAGE WEIGHTED
MOODY'S RATING PERCENTAGE OF ASSETS
- ------------------------------------------
Aaa 9.05%
Aa 0.32%
A 0.00%
Baa 4.47%
Ba 6.95%
B 26.68%
Caa 6.35%*
Ca 0.15%
C 0.00%
*2.28% of these securities, which are unrated by Moody's, have been included in
the Caa rating category.
PUBLIC UTILITIES INDUSTRY SECURITIES. Utilities Series' investments in the
public utilities industry entail certain characteristics and risks that you
should consider. These characteristics include: risks associated with regulatory
changes including deregulation 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.
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 U.S. Government Securities Series will have a direct impact
on the Net Asset Value per share of the Fund.
SMALL COMPANIES. Growth Series may invest in companies that have relatively
small revenues, limited product lines, and a small share of the market for their
products or services. Small companies may lack depth of management, they may be
unable to internally generate funds necessary for growth or potential
development or to generate such funds through external financing on favorable
terms, and they may be developing or marketing new products or services for
which markets are not yet established and may never become established. Due to
these and other factors, small companies may suffer significant losses, as well
as realize substantial growth.
Historically, small capitalization stocks have been more volatile than larger
capitalization stocks and are therefore more speculative than investments in
larger companies. Among the reasons for the greater price volatility are the
less certain growth prospects of smaller firms, the lower degree of liquidity in
the markets for such stocks and the greater sensitivity of small companies to
changing economic conditions. Besides exhibiting greater volatility, small
company stocks may, to a degree, fluctuate independently of larger company
stocks. Small company stocks may decline in price as large company stocks rise
or rise in price as large company stocks decline.
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 NYSE and some
foreign government securities may be less liquid and more volatile than U.S.
government securities. Transaction costs on foreign securities exchanges may be
higher than in the U.S. and foreign securities settlements may, in some
instances, be subject to delays and related administrative uncertainties.
INTEREST RATE, CURRENCY AND MARKET RISK. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline, 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 cause the value of what the Fund
owns, and thus the Fund's share price to decline. Changes in currency valuations
may also affect the price of Fund shares. The value of stock markets, currency
valuations and interest rates throughout the world have increased and decreased
in the past. These changes are unpredictable.
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 Fund's classes of shares. While none is expected, the Board will
act appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers is the investment manager of each of the Funds,
except Growth Series. As of July 1, 1997, Investment Advisory is the investment
manager of Growth Series. Investment Advisory employs the same individuals to
manage the Fund's portfolio as the previous investment manager and the
management services provided to the Fund are also the same. The terms and
conditions of the investment management agreement with Investment Advisory are
substantially the same as those in the investment management agreement with
Advisers.
The investment manager manages the Fund's assets and makes its investment
decisions. The investment manager 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 $215 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
Portfolio Manager of Investment Advisory
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 Investment Advisory
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
Vice President 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.
DynaTech Series - Rupert H. Johnson, Jr. since inception, Lisa Costa since 1983
and Kevin Carrington since 1995.
Rupert H. Johnson, Jr.
President of Advisers
Mr. Johnson is a graduate of Washington and Lee University. He has been with the
Franklin Templeton Group since 1965 and prior thereto was an officer in the U.S.
Marine Corps. Mr. Johnson is a member of several securities industry-related
associations.
Lisa Costa
Portfolio Manager of Advisers
Ms. Costa holds a Master of Business Administration degree from Golden Gate
University and a Bachelor of Science degree in Finance from California State
University at Hayward. She has been with the Franklin Templeton Group since
1983. Ms. Costa is a Chartered Market Technician and a member of several
securities industry-related committees and associations.
Kevin Carrington
Portfolio Manager of Advisers
Mr. Carrington is a Chartered Financial Analyst and holds a Bachelor of Science
degree in Business Administration from California State University at Chico. He
has been with the Franklin Templeton Group since 1992.
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
Vice President 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.
T. 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 degree in 1991.
Management Fees. During the fiscal year ended September 30, 1997, management
fees paid to the investment manager, as a percentage of average monthly net
assets, and total expenses of Class I and Class II shares were as follows:
TOTAL
MANAGEMENT OPERATING EXPENSES
FEES CLASS I CLASS II
Growth Series* 0.48% 0.89% 1.66%
DynaTech Series 0.60% 1.04% 1.82%
Utilities Series 0.46% 0.75% 1.27%
Income Series 0.46% 0.72% 1.22%
U.S. Government Securities
Series 0.45% 0.64% 1.20%
*Prior to July 1, 1997, the fee was paid to Advisers.
PORTFOLIO TRANSACTIONS. The investment manager tries to obtain the best
execution on all transactions. If the investment manager believes more than one
broker or dealer can provide the best execution, it may consider research and
related services and the sale of Fund shares, 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 the investment manager, FT
Services provides certain administrative services and facilities for the Fund.
Please see "Investment Management and Other Services" in the SAI for more
information.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
Fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by Growth and DynaTech Series under the Class I plan may not exceed
0.25% per year of Class I's average daily net assets. Payments by Utilities,
Income and U.S. Government Securities Series under the Class I plan may not
exceed 0.15% per year of Class I's average daily net assets. All distribution
expenses over this amount will be borne by those who have incurred them. During
the first year after certain Class I purchases made without a sales charge,
Securities Dealers may not be eligible to receive the Rule 12b-1 fees associated
with the purchase.
Under the Class II plan, Growth and DynaTech Series may pay Distributors up to
0.75% per year and Utilities, Income and U.S. Government Securities Series may
pay Distributors up to 0.50% per year of Class II's average daily net assets to
pay Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them. During the first year after a
purchase of Class II shares, Securities Dealers may not be eligible to receive
this portion of the Rule 12b-1 fees associated with the purchase.
Growth and DynaTech Series may also pay a servicing fee of up to 0.25% per year
and Utilities, Income and U.S. Government Securities Series may pay a servicing
fee of up to 0.15% per year of Class II's average daily net assets under the
Class II plan. This fee may be used to pay Securities Dealers or others for,
among other things, helping to establish and maintain customer accounts and
records, helping with requests to buy and sell shares, receiving and answering
correspondence, monitoring dividend payments from the Fund on behalf of
customers, and similar servicing and account maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. Commonly
used measures of performance include total return, current yield and current
distribution rate. Performance figures are usually calculated using the maximum
sales charges, but certain figures may not include sales charges.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not 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 TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
ON AUGUST 5, 1997, PRESIDENT CLINTON SIGNED INTO LAW THE TAXPAYER RELIEF ACT OF
1997 (THE "1997 ACT"). THIS NEW LAW MAKES SWEEPING CHANGES IN THE CODE. BECAUSE
MANY OF THESE CHANGES ARE COMPLEX THEY ARE DISCUSSED IN THE SAI.
The Fund invests your money in the stocks, bonds and other securities that are
described in the section "How Does the Fund Invest Its Assets?" Special tax
rules may apply in determining the income and gains that the Fund earns on its
investments. These rules may, in turn, affect the amount of distributions that
the Fund pays to you. These special tax rules are discussed in the SAI.
TAXATION OF THE FUND. As a regulated investment company, the Fund generally pays
no federal income tax on the income and gains that it distributes to you.
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains from
the investments of the Fund, other than the U.S. Government Securities Series,
in foreign stocks and bonds. These taxes will reduce the amount of the Fund's
distributions to you. The Fund may also invest in the securities of foreign
companies that are "passive foreign investment companies" ("PFICs"). These
investments in PFICs may cause the Fund to pay income taxes and interest
charges. If possible, the Fund will adopt strategies to avoid PFIC taxes and
interest charges.
HOW DOES THE FUND EARN INCOME AND GAINS?
The Fund earns dividends and interest (the Fund's "income") on its investments.
When the Fund sells a security for a price that is higher than it paid, it has a
gain. When the Fund sells a security for a price that is lower than it paid, it
has a loss. If the Fund has held the security for more than one year, the gain
or loss will be a long-term capital gain or loss. If the Fund has held the
security for one year or less, the gain or loss will be a short-term capital
gain or loss. The Fund's gains and losses are netted together, and, if the Fund
has a net gain (the Fund's "gains"), that gain will generally be distributed to
you.
TAXATION OF SHAREHOLDERS.
DISTRIBUTIONS. Distributions from the Fund, whether you receive them in cash or
in additional shares, are generally subject to income tax. The Fund will send
you a statement in January of the current year that reflects the amount of
ordinary dividends, capital gain distributions and non-taxable distributions you
received from the Fund in the prior year. This statement will include
distributions declared in December and paid to you in January of the current
year, but which are taxable as if paid on December 31 of the prior year. The IRS
requires you to report these amounts on your income tax return for the prior
year. The Fund's statement for the prior year will tell you how much of your
capital gain distribution represents 28% rate gain property. The remainder of
the capital gain distribution represents 20% rate gain.
WHAT IS A DISTRIBUTION?
As a shareholder, you will receive your share of the Fund's income and gains on
its investments in stocks, bonds and other securities. The Fund's income and
short term capital gains are paid to you as ordinary dividends. The Fund's
long-term capital gains are paid to you as capital gain distributions. If the
Fund pays you an amount in excess of its income and gains, this excess will
generally be treated as a non-taxable distribution. These amounts, taken
together, are what we call the Fund's distributions to you.
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan, such as a Section 401(k) plan or IRA, are generally
tax-deferred; this means that you are not required to report Fund distributions
on your income tax return when paid to your plan, but, rather, when your plan
makes payments to you.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors of the Fund, except the U.S.
Government Securities Series, may be entitled to a dividends-received deduction
on a portion of the ordinary dividends they receive from the Fund. No portion of
the distributions from the U.S. Government Securities Series will qualify for
the corporate dividends-received deduction.
REDEMPTIONS AND EXCHANGES. If you redeem your shares or if you exchange your
shares in the Fund for shares in another Franklin Templeton Fund, you will
generally have a gain or loss that the IRS requires you to report on your income
tax return. If you exchange Fund shares held for 90 days or less and pay no
sales charge, or a reduced sales charge, for the new shares, all or a portion of
the sales charge you paid on the purchase of the shares you exchanged is not
included in their cost for purposes of computing gain or loss on the exchange.
If you hold your shares for six months or less, any loss you have will be
treated as a long-term capital loss to the extent of any capital gain
distributions received by you from the Fund. All or a portion of any loss on the
redemption or exchange of your shares will be disallowed by the IRS if you
purchase other shares in the Fund within 30 days before or after your redemption
or exchange.
WHAT IS A REDEMPTION?
A redemption is a sale by you to the Fund of some or all of your shares in the
Fund. The price per share you receive when you redeem Fund shares may be more or
less than the price at which you purchased those shares. An exchange of shares
in the Fund for shares of another Franklin Templeton Fund is treated as a
redemption of Fund shares and then a purchase of shares of the other fund. When
you redeem or exchange your shares, you will generally have a gain or loss,
depending upon whether the basis in your shares is more or less than your cost
or other basis in the shares. Call Fund Information for a free shareholder Tax
Information Handbook if you need more information in calculating the gain or
loss on the redemption or exchange of your shares.
U.S. GOVERNMENT AND STATE OBLIGATION INTEREST. Many states grant tax-free status
to dividends paid from interest earned on direct obligations of the U.S.
Government, subject to certain restrictions. Investments in state and local
obligations also may qualify for tax-free treatment. The Fund will provide you
with information after the end of each calendar year on the amounts of such
dividends that may qualify for exemption from reporting on your individual
income tax returns.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income
tax withholding. Your home country may also tax ordinary dividends, capital gain
distributions and gains arising from redemptions or exchanges of your Fund
shares. Fund shares held by the estate of a non-U.S. investor may be subject to
U.S. estate tax. You may wish to contact your tax advisor to determine the U.S.
and non-U.S. tax consequences of your investment in the Fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive
from the Fund, and gains arising from redemptions or exchanges of your Fund
shares will generally be subject to state and local income tax. The holding of
Fund shares may also be subject to state and local intangibles taxes. You may
wish to contact your tax advisor to determine the state and local tax
consequences of your investment in the Fund.
BACKUP WITHHOLDING. When you open an account, IRS regulations require that you
provide your taxpayer identification number ("TIN"), certify that it is correct,
and certify that you are not subject to backup withholding under IRS rules. If
you fail to provide a correct TIN or the proper tax certifications, the Fund is
required to withhold 31% of all the distributions (including ordinary dividends
and capital gain distributions), and redemption proceeds paid to you. The Fund
is also required to begin backup withholding on your account if the IRS
instructs the Fund to do so. The Fund reserves the right not to open your
account, or, alternatively, to redeem your shares at the current Net Asset
Value, less any taxes withheld, if you fail to provide a correct TIN, fail to
provide the proper tax certifications, or the IRS instructs the Fund to begin
backup withholding on your account.
WHAT IS A BACKUP WITHHOLDING?
Backup withholding occurs when the Fund is required to withhold and pay over to
the IRS 31% of your distributions and redemption proceeds. You can avoid backup
withholding by providing the Fund with your TIN, and by completing the tax
certifications on your shareholder application that you were asked to sign when
you opened your account. However, if the IRS instructs the Fund to begin backup
withholding, it is required to do so even if you provided the Fund with your TIN
and these tax certifications, and backup withholding will remain in place until
the Fund is instructed by the IRS that it is no longer required.
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS IS CONTAINED IN THE SECTION
ENTITLED "ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI. THE TAX
TREATMENT TO YOU OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, FOREIGN TAXES PAID
AND INCOME TAXES WITHHELD IS ALSO DISCUSSED IN A FREE FRANKLIN TEMPLETON TAX
INFORMATION HANDBOOK WHICH IS AVAILABLE BY CONTACTING FUND INFORMATION.
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. The Custodian Funds was
incorporated under the laws of Delaware in 1947, reincorporated under the laws
of Maryland in 1979, and is registered with the SEC. As of January 1, 1997, each
Fund, except the DynaTech Series, began offering a new class of shares
designated Income Series - Advisor Class, Utilities Series - Advisor Class,
Growth Series - Advisor Class and U.S. Government Securities Series - Advisor
Class. All shares outstanding before the offering of Advisor Class shares have
been designated Income Series Class I, Utilities Series - Class I, Growth Series
- - Class I, U.S. Government Securities Series - Class I, and DynaTech Series -
Class I and Income Series Class II, Utilities Series - Class II, Growth Series -
Class II, U.S. Government Securities Series - Class II and DynaTech Series -
Class II. Additional series and classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any 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 affecting only that class, or expressly required
to be voted on separately by state or federal law. 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. Custodian
Funds or a series of Custodian Funds may hold special meetings, however, for
matters requiring shareholder approval. A meeting may also be called by the
Board in its discretion or by shareholders holding at least 10% of the
outstanding shares. In certain circumstances, we are required to help you
communicate with other shareholders about the removal of a Board member. A
special meeting may also be called by a majority of the Board or by the written
request of shareholders holding at least 25% of the shares entitled to vote at
the meeting.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
PLEASE KEEP IN MIND THAT DYNATECH SERIES DOES NOT CURRENTLY ALLOW INVESTMENTS BY
MARKET TIMERS.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The Fund's minimum investments
are:
o To open your account: $100*
o To add to your account: $25*
*We may waive these minimums for retirement plans. We also reserve the right to
refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application, including
the optional shareholder privileges section. By applying for privileges now,
you can avoid the delay and inconvenience of having to send an additional
application to add privileges later. Please also indicate which class of
shares you want to buy. IF YOU DO NOT SPECIFY A CLASS, WE WILL AUTOMATICALLY
INVEST YOUR PURCHASE IN CLASS I SHARES. It is important that we receive a
signed application since we will not be able to process any redemptions from
your account until we receive your signed application.
4. Make your investment using the table below.
METHOD STEPS TO FOLLOW
BY MAIL For an initial investment: Return the
application to the Fund with your check made
payable to the Fund.
For additional investments:
Send a check made payable to the Fund.
Please include your account number on the
check.
BY WIRE 1. Call Shareholder Services or, if that number
is busy, call 1-650/312-2000 collect, to
receive a wire control number and wire
instructions. You need a new wire control
number every time you wire money into your
account. If you do not have a currently
effective wire control number, we will
return the money to the bank, and we will
not credit the purchase to your account.
2. For initial investments you must also
return your signed shareholder
application to the Fund.
IMPORTANT DEADLINES: If we receive your call
before 1:00 p.m. Pacific time and the bank
receives the wired funds and reports the
receipt of wired funds to the Fund by 3:00
p.m. Pacific time, we will credit the
purchase to your account that day. If we
receive your call after 1:00 p.m. or the
bank receives the wire after 3:00 p.m., we
will credit the purchase to your account the
following business day.
THROUGH YOUR DEALER CALL YOUR INVESTMENT REPRESENTATIVE
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. The class that may be best for
you depends on a number of factors, including the amount and length of time you
expect to invest. Generally, Class I shares may be more attractive for long-term
investors or investors who qualify to buy Class I shares at a reduced sales
charge. Your financial representative can help you decide.
CLASS I
o Higher front-end sales charges than Class II shares. There are several ways
to reduce these charges, as described below. There is no front-end sales
charge for purchases of $1 million or more.*
o Contingent Deferred Sales Charge on purchases of $1 million or more sold
within one year
o Lower annual expenses than Class II shares
CLASS II
o Lower front-end sales charges than Class I shares
o Contingent Deferred Sales Charge on purchases sold within 18 months
o Higher annual expenses than Class I shares
*If you are investing $1 million or more, it is generally more beneficial for
you to buy Class I shares because there is no front-end sales charge and the
annual expenses are lower. Therefore, any purchase of $1 million or more is
automatically invested in Class I shares. You may accumulate more than $1
million in Class II shares through purchases over time. If you plan to do this,
however, you should determine if it would be better for you to buy Class I
shares through a Letter of Intent.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I - GROWTH AND DYNATECH SERIES
Under $100,000 4.50% 4.71% 4.00%
$100,000 but less than
$250,000 3.75% 3.90% 3.25%
$250,000 but less than
$500,000 2.75% 2.83% 2.50%
$500,000 but less than
$1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more* None None None
CLASS I - INCOME, UTILITIES AND U.S. GOVERNMENT SECURITIES SERIES
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than
$250,000 3.50% 3.63% 3.25%
$250,000 but less than
$500,000 2.75% 2.83% 2.50%
$500,000 but less than
$1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more* None None None
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS II - ALL FUNDS
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Choosing a Share
Class."
SALES CHARGE REDUCTIONS AND WAIVERS
- - IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't include
this statement, we cannot guarantee that you will receive the sales charge
reduction or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds, as well as those of your spouse, children under the
age of 21 and grandchildren under the age of 21. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts. Companies with one or more retirement plans may add together the total
plan assets invested in the Franklin Templeton Funds to determine the sales
charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other 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.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased Class I shares of the Fund at a reduced sales
charge under the group purchase privilege before February 1, 1998, however, may
continue to do so.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of Fund shares, you may buy shares of the Fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the sales
charge waivers listed below apply to purchases of Class I shares only, except
for items 1 and 2 which also apply to Class II purchases.
Certain distributions, payments or redemption proceeds that you receive may be
used to buy shares of the Fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same class of shares.
Certain exceptions apply, however, to Class II shareholders who chose to
reinvest their distributions in Class I shares of the Fund before November
17, 1997, and to Advisor Class or Class Z shareholders of a Franklin
Templeton Fund who may reinvest their distributions in Class I shares of the
Fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton Fund
if you originally paid a sales charge on the shares and you reinvest the
money in the same class of shares. This waiver does not apply to exchanges.
If you paid a Contingent Deferred Sales Charge when you redeemed your shares
from a Franklin Templeton Fund, a Contingent Deferred Sales Charge will
apply to your purchase of Fund shares and a new Contingency Period will
begin. We will, however, credit your Fund account with additional shares
based on the Contingent Deferred Sales Charge you paid and the amount of
redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Bank CD,
you may reinvest them as described above. The proceeds must be reinvested
within 365 days from the date the CD matures, including any rollover.
3. Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
4. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, the Templeton Variable Annuity Fund,
or the Templeton Variable Products Series Fund. You should contact your tax
advisor for information on any tax consequences that may apply.
5. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
6. Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor. If you paid a
contingent deferred sales charge when you redeemed your Class A shares from
a Templeton Global Strategy Fund, a Contingent Deferred Sales Charge will
apply to your purchase of Fund shares and a new Contingency Period will
begin. We will, however, credit your Fund account with additional shares
based on the contingent deferred sales charge you paid and the amount of
the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
Various individuals and institutions also may buy Class I shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
2. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
4. Registered Securities Dealers and their affiliates, for their investment
accounts only
5. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
6. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
7. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
8. Accounts managed by the Franklin Templeton Group
9. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
10. Group annuity separate accounts offered to retirement plans
11. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with at
least 100 employees, or (ii) have plan assets of $1 million or more, or (iii)
agree to invest at least $500,000 in the Franklin Templeton Funds over a 13
month period may buy Class I shares without a front-end sales charge. Retirement
plans that are not Qualified Retirement Plans, SIMPLEs or SEPs must also meet
the requirements described under "Group Purchases - Class I Only" above to be
able to buy Class I shares without a front-end sales charge. We may enter into a
special arrangement with a Securities Dealer, based on criteria established by
the Fund, to add together certain small Qualified Retirement Plan accounts for
the purpose of meeting these requirements.
For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the retirement plan is transferred out of the
Franklin Templeton Funds or terminated within 365 days of the retirement plan
account's initial purchase in the Franklin Templeton Funds. Please see "How Do I
Sell Shares?
- - Contingent Deferred Sales Charge" for details.
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, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. For Class I purchases of the Growth and DynaTech Series of $1 million or
more up to 1% of the amount invested. For Class I purchases of the Income,
Utilities and U.S. Government Securities Series of $1 million or more - up
to 0.75% of the amount invested.
3. Class I purchases made without a front-end sales charge by certain
retirement plans described under "Sales Charge Reductions and Waivers -
Retirement Plans" above - up to 1% of the amount invested.
4. Class I purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.
5. Class I purchases by Chilean retirement plans - up to 1% of the amount
invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1, 2 or 5 above or a payment of up to 1% for investments
described in paragraph 3 will be eligible to receive the Rule 12b-1 fee
associated with the purchase starting in the thirteenth calendar month after the
purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
FOR INVESTORS OUTSIDE THE U.S.
The distribution of this prospectus and the offering of Fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the Fund
should determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums. Some Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for the
shares you want to exchange
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by
phone to apply to your account, please let us
know.
THROUGH YOUR DEALER CALL YOUR INVESTMENT REPRESENTATIVE
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE. For accounts with shares subject to a
Contingent Deferred Sales Charge, we will first exchange any shares in your
account that are not subject to the charge. If there are not enough of these to
meet your exchange request, we will exchange shares subject to the charge in the
order they were purchased.
If you exchange Class I shares into one of our money funds, the time your shares
are held in that fund will not count towards the completion of any Contingency
Period. If you exchange your Class II shares for shares of Money Fund II,
however, the time your shares are held in that fund will count towards the
completion of any Contingency Period.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, 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. 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 Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the Fund more than twice in a calendar
quarter, or (iii) exchanged 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 have exchanged 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 DynaTech Series does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations 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.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Growth, Utilities, Income and U.S. Government Securities Series,
such as "Class Z" shares or the DynaTech Series, such as "Advisor Class" or
"Class Z" shares. Because the DynaTech Series does not currently offer an
Advisor Class, you may exchange Advisor Class shares of any Franklin Templeton
Fund for Class I shares of the Fund at Net Asset Value. If you do so and you
later decide you would like to exchange into a fund that offers an Advisor
Class, you may exchange your Class I shares for Advisor Class shares of that
fund. Certain shareholders of Class Z shares of Franklin Mutual Series Fund Inc.
may also exchange their Class Z shares for Class I shares of each Fund at Net
Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us signed written instructions. If you would like
your redemption proceeds wired to a bank account, your
instructions should include:
o The name, address and telephone number of the bank
where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union,
the name of the corresponding bank and the account
number
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 other requirements.
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other than an
escrow account, you must first sign up for the wire
feature. To sign up, send us written instructions, with a
signature guarantee. To avoid any delay in processing, the
instructions should include the items listed in "By Mail"
above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts
may exceed $50,000 by completing a separate agreement.
Call Institutional Services to receive a copy.
o If there are no share certificates issued for the
shares you want to sell or you have already returned
them to the Fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by phone
within the last 15 days
- If you do not want the ability to redeem by phone to
apply to your account, please let us know.
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 would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently 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
591/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, if you did not pay a front-end sales charge because you
invested $1 million or more or agreed to invest $1 million or more under a
Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell all
or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make without
a sales charge may also be subject to a Contingent Deferred Sales Charge if they
are sold within the Contingency Period. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares within the Contingency
Period. The charge is 1% of the value of the shares sold or the Net Asset Value
at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan account is
transferred out of the Franklin Templeton Funds or terminated within 365 days of
the account's initial purchase in the Franklin Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Account fees
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997,
or (ii) the Securities Dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the Securities Dealer of
record has entered into a supplemental agreement with Distributors
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, at a rate of up to 1% a month of an account's Net Asset
Value. For example, if you maintain an annual balance of $1 million in
Class I shares, you can redeem up to $120,000 annually through a systematic
withdrawal plan free of charge. Likewise, if you maintain an annual balance
of $10,000 in Class II shares, $1,200 may be redeemed annually free of
charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit
plans serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
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. The
Utilities Series generally declares dividends from its net investment income
quarterly in February, May, August and November, and the Growth and DynaTech
Series generally declare dividends annually in November.
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 Rule 12b-1 fees of Class I and Class II.
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 and you will then receive a portion of the price you paid back in
the form of a taxable 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 Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge) by
reinvesting capital gain distributions, or both dividend and capital gain
distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy shares of another Franklin Templeton Fund (without a sales
charge or imposition of a Contingent Deferred Sales Charge). Many shareholders
find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers - Class I
Only" under "Services to Help You Manage Your Account."
Distributions may be reinvested only in the same class of shares, except as
follows: (i) Class II shareholders who chose to reinvest their distributions in
Class I shares of the Fund or another Franklin Templeton Fund before November
17, 1997, may continue to do so; and (ii) Class II shareholders may reinvest
their distributions in shares of any Franklin Templeton money fund.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the record date for us
to process the new option. For Trust Company retirement plans, special forms are
required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share of the class you wish to purchase, plus any applicable sales charges. When
you sell shares, you receive the Net Asset Value per share minus any applicable
Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one 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.
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the close of the NYSE, normally 1:00
p.m. Pacific time. You can find the prior day's closing Net Asset Value and
Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
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 are 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.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of transactions
or account changes. These include transactions or account changes that you could
also make by phone, such as certain redemptions of $50,000 or less, exchanges
between identically registered accounts, and changes to the address of record.
For most other types of transactions or changes, written instructions must be
signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed by
all registered owners on the account.
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. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. 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 and to send the certificate and assignment form in separate
envelopes.
Telephone Transactions
You may initiate many transactions and changes to your account 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 may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to ask
your investment representative for assistance or send us written instructions,
as described elsewhere in this prospectus.
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. We also will not be liable for any loss if we
follow instructions by phone that we reasonably believe are genuine or if you
are unable to execute a transaction by phone.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to 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 Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you 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, we cannot accept instructions to change owners on the account unless ALL
owners agree in writing, even if the law in your state says otherwise. 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. You should register your account as a trust only if you have a valid
written trust document. This avoids 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 cannot 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.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have told us that
you do not want telephone privileges to apply to your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION - CLASS I ONLY
You may have money transferred from your paycheck to the Fund to buy additional
Class I shares. Your investments will continue automatically until you instruct
the Fund and your employer to discontinue the plan. To process your investment,
we must receive both the check and payroll deduction information in required
form. Due to different procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time we receive the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers - Class I Only" below.
Once your plan is established, any distributions paid by the Fund will be
automatically reinvested in your account.
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.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
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.
ELECTRONIC FUND TRANSFERS - CLASS I ONLY
You may choose to have dividend and capital gain distributions from Class I
shares of the Fund or payments under a systematic withdrawal plan sent directly
to a checking account. If the checking account is with a bank that is a member
of the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If you choose this option, please allow at least
fifteen days for initial processing. We will send any payments made during that
time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the code numbers for each class to use TeleFACTS(R). The code
numbers for Class I and Class II are:
CODE NUMBER
FUND NAME CLASS I CLASS II
- --------------------------------------------------
Growth Series 106 206
DynaTech Series 108 208
Utilities Series 107 207
Income Series 109 209
U.S. Government
Securities Series 110 210
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. Investment
Advisory is located at 16 South Main Street, Suite 303, Norwalk, Connecticut
06854. 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 Plan Services 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.
1TDD (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
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager, except Growth
Series
BOARD - The Board of Directors of Custodian Funds
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - Each Fund, except the DynaTech Series
offer three classes of shares, designated "Class I," "Class II" and "Advisor
Class." The three classes have proportionate interests in the Fund's portfolio.
They differ, however, primarily in their sales charge and expense structures.
The DynaTech Series offers two classes of shares, designated "Class I" and
"Class II". The two classes have proportionate interests in the DynaTech Series
portfolio. They differ, however primarily in their sales charge structure and
Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
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
INVESTMENT ADVISORY - Franklin Investment Advisory Services, Inc., the Growth
Series' investment manager
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
Market Timers - Market Timers generally include market timing or asset
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 or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
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. The maximum
front-end sales charge for the Growth and DynaTech Series is 4.50% for Class I
and 1% for Class II. The maximum front-end sales charge for the Utilities,
Income and U.S. Government Series is 4.25% for Class I and 1% for Class II.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
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 that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
SIMPLE (SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES) - An employer sponsored
salary deferral plan established under section 408(p) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
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.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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.
EXHIBIT C: CUSTODIAN FUNDS ANNUAL REPORT DATED SEPTEMBER 30, 1997
Annual
Report
September 30, 1997
Franklin Custodian Funds, Inc.
Franklin Growth Fund
Franklin Utilities Fund
Franklin Income Fund
Franklin DynaTech Fund
Franklin U.S. Government Securities Fund
CONTENTS
Shareholder's Letter 1
Fund Reports
Franklin Growth Fund 3
Franklin Utilities Fund 12
Franklin Income Fund 22
Franklin DynaTech Fund 34
Franklin U.S. Government Securities Fund 40
Financial Highlights and
Statement of Investments 50
Financial Statements 80
Notes to
Financial Statements 85
Report of Independent
Accountants 91
Tax Designation 92
SHAREHOLDER'S LETTER
Dear Shareholder:
It's a pleasure to bring you the Franklin Custodian Funds, Inc. annual report
for the period ended September 30, 1997.
UP, UP AND AWAY?
The big news over the 12-month reporting period has been the large flow of
capital into the U.S. equity markets. The Dow Jones(R) Industrial Average gained
roughly 2100 points over the one-year period, and pushed through the 8000-point
mark for the first time in July. Strong economic growth (second and third
quarter GDP posted annualized rates of 3.3% and 3.5%, respectively), combined
with the stock market's meteoric rise, prompted some degree of caution on the
part of the Federal Reserve Board (the Fed). The chief topic on Wall Street was
whether the Federal Open Market Committee would increase the federal funds rate.
To no one's surprise, the Fed nudged the rate higher in March 1997, citing
heightened inflation risk as the reason for the quarter-point increase from
5.25% to 5.50%. Although the market experienced a roughly 10% correction, stock
prices rebounded sharply. Despite such a recovery, recent reports show
relatively few signs of inflationary pressure. In fact, some economists have
dubbed the current, benign U.S. economic environment as being a "Goldilocks
Economy," as it is neither "too hot" (growing fast enough to generate higher
prices and inflation) nor "too cold" (slowing down at a rate that threatens to
throw us into recession); rather, the economy -- at this time -- appears to be
"just right."
THE TALE OF THE TORTOISE AND THE HARE
We can't promise this positive economic environment will continue. It is
important to remember, then, that markets correct -- in our opinion, it is
desirable for them to do so. Consequently, investor concern about market
volatility and its long-term direction prompts us to comment on the importance
of having your own long-term investment strategy. And when you consider your
investment strategy, are you a tortoise or a hare?
"Much like the tortoise, successful investors historically have achieved good
results through setting goals, diversifying their assets, and having patience."
We all know that familiar story: the tortoise won the race because he had a plan
and stuck to it, not allowing the hare's fast start to distract him. Much like
the tortoise, successful investors historically have achieved good results
through setting goals, diversifying their assets, and having patience. Smart
investors think like the tortoise. They know mutual fund investments are long
term, so daily market fluctuations and short-term volatility have minimal impact
on their overall investment goals. They understand that patience and discipline
are keys to successful investing. Remember, it's time -- not timing -- that
makes the difference.
We encourage you to speak with your investment representative about your
financial goals. To help reduce concern about volatility, stay focused on the
long term and diversify your investments. Mutual funds offer a level of
diversification that is almost impossible for individual investors to achieve on
their own.
Regardless of the market's direction, Franklin Templeton's disciplined
investment strategy remains the same: all of our portfolio managers are
dedicated to providing shareholders like you with careful selection, broad
diversification and constant professional supervision. As always, we appreciate
your support, welcome your questions and comments, and look forward to serving
your investment needs in the years ahead.
Sincerely,
Charles B. Johnson
President
Franklin Custodian Funds, Inc.
FRANKLIN GROWTH FUND
Your Fund's Objective: Seeks capital appreciation by investing primarily in
common stocks or convertible securities believed to offer favorable
possibilities for capital appreciation.
The economy was quite positive during the 12 months ended September 30, 1997.
GDP grew at an annualized rate of 3.5% during the third quarter of 1997, and
could likely rise 2.5% to 3% by the end of the calendar year. A good business
climate combined with stock buy-backs, corporate re-structuring, and continued
corporate cost-consciousness contributed to market strength. In addition, there
was a very favorable supply-demand balance for common stocks: As the market
continued to rise, there was an increasing reluctance to sell and pay huge
capital gains taxes. Although the stock market experienced record highs
throughout the year, this meteoric rise prompted us to remain cautious in our
investment selections. Short-term investments rose from 18.8% of total net
assets on September 30, 1996, to 32.5% at the end of the fiscal year. And while
this didn't necessarily harm the fund -- the fund's Class I shares posted a
return of +20.84%, as shown in the Performance Summary on page 5 -- total
returns on short-term investments were just over 5%, and much lower than the
returns of rapidly rising stocks.
On September 30, 1997, the fund owned stocks of 92 companies in a diverse group
of industries, including transportation, health care, entertainment, aerospace,
communications, and energy and energy services. Broad diversification can help
soften the effects of market volatility because strong performance in one sector
may offset weak performance in another.
Market volatility over the year did affect the value of some of the fund's
holdings. For example, the stock of Cisco Systems, Inc., a bellwether of the
networking sector, dropped to a low for the reporting period of $46 on April
25th, reached a high of $81 on August 5th, and then declined to $73 at the close
of the period. This represented a fall of almost 40% from its high, and a bounce
of over 58% from its low. And while Cisco isn't quite living up to our
expectations at this time, it does have a dominant worldwide market share and
strong fundamentals. As such, we feel the stock has potential.
Franklin Growth Fund
Top 10 Holdings
9/30/97
Company % of Total
INDUSTRY Net Assets
- --------------------------------------------------
Schering-Plough Corp.
PHARMACEUTICALS 2.94%
Pfizer, Inc.
PHARMACEUTICALS 2.44%
Minnesota Manufacturing
& Mining, Co.
DIVERSIFIED MANUFACTURERS 2.18%
AMR Corp.
TRANSPORTATION 2.17%
Computer Sciences Corp.
DATA SERVICES 2.02%
IBM Corp.
COMPUTER HARDWARE 1.88%
UAL Corp.
TRANSPORTATION 1.88%
Bristol Meyers Squibb
PHARMACEUTICALS 1.68%
Raytheon Co.
AEROSPACE & DEFENSE 1.66%
Hewlett-Packard Co.
COMPUTER HARDWARE 1.59%
For a complete list of portfolio holdings, please see page 53 of this report.
Over the year under review, many individual companies performed well, and we saw
four newcomers to our top ten list: Hewlett-Packard, IBM, UAL, and Bristol
Meyers Squibb. While we couldn't really point to any one sector as being
exceptionally strong, the pharmaceutical sector's performance is particularly
noteworthy. Pharmaceutical stocks continued to post gains during the reporting
period, moving higher on strengthening industry fundamentals. As a result, this
sector remained one of the fund's largest on September 30, 1997, at
approximately 11.2% of total net assets. Schering-Plough Corp.'s healthy
earnings helped it remain the number one portfolio holding at the end of the
period (2.94%). And Pfizer rose to the #2 position on the top ten (from the #4
spot a year ago) on the back of increased corporate earnings growth.
Please note that this discussion reflects the strategies we employed for the
fund over the one-year reporting period, and includes our opinions as of the
close of the period. Since economic and market conditions are constantly
changing, our strategies and our evaluations, conclusions, and decisions
regarding portfolio holdings may change as new circumstances arise. Although
past performance of a specific investment or sector cannot guarantee future
performance, such information can be useful in analyzing securities we purchase
or sell for the fund.
Looking forward, we believe that, although corporate earnings will vary by
industry sector, the economy should grow moderately and inflation should remain
under control. It is our job to adjust to all types of economic environments,
and we are confident that our value-oriented long-term approach to investing
should position the fund to perform well in the future.
PERFORMANCE SUMMARY
CLASS I
Franklin Growth Fund - Class I reported a cumulative total return of +20.84% for
the one-year period ended September 30, 1997. Cumulative total return measures
the change in value of an investment, assuming reinvestment of all
distributions, and does not include the sales charge. We always maintain a
long-term perspective when managing the fund, and we encourage our shareholders
to view their investments in a similar manner. As you can see from the table on
page 6, the fund's Class I shares delivered a cumulative total return of more
than 235.43% for the 10-year period ended September 30, 1997.
The fund's share price, as measured by net asset value, increased $4.27, from
$22.82 on September 30, 1996, to $27.09 on September 30, 1997. During the
reporting period, shareholders received distributions of 22.7 cents ($0.227) per
share in dividend income and 20.2 cents ($0.202) per share in long-term capital
gains. Distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio. Past
distributions are not indicative of future trends.
The graph on page 6 compares the performance of the fund's Class I shares over
the past 10 years, with the performance of the unmanaged Standard & Poor's(R)
500 Stock Index (S&P 500(R)). The S&P 500 is a broad market index that
represents stocks from a variety of industries.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they need to have cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin Growth Fund's had been applied to the index, its performance would have
been lower. Please remember that an index is simply a measure of performance,
and one cannot invest in it directly.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
<TABLE>
<CAPTION>
Franklin Growth Fund -- Class I
Periods ended 9/30/97
Since
Inception
1-Year 5-Year 10-Year (3/31/48)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return1 20.84% 116.18% 235.43% 19,878.00%
Average Annual Total Return2 15.38% 15.59% 12.35% 11.19%
Value of $10,000 Investment3 $11,538 $20,638 $32,032 $1,909,176
9/30/93 9/30/94 9/30/95 9/30/96 9/30/97
Total Return4 5.92% 7.71% 31.11% 19.70% 20.84%
</TABLE>
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge.
2. Average annual total returns represent the average annual change in value of
an investment over the periods indicated and include the current, maximum 4.5%
initial sales charge. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the specified periods and include the sales charge.
4. One-year total returns represent the change in value of an investment over
the periods ended on the specified dates and do not include the sales charge.
Note: Prior to July 1, 1994, fund shares were offered at a lower initial sales
charge with dividends reinvested at the offering price; thus, actual total
returns would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Your investment return and principal value will fluctuate
with market conditions, and you may have a gain or loss when you sell your
shares.
CLASS II
Franklin Growth Fund - Class II reported a cumulative total return of +19.91%
for the one-year period ended September 30, 1997. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges. We always maintain a
long-term perspective when managing the fund, and we encourage our shareholders
to view their investments in a similar manner. As you can see from the table on
page 8, as of September 30, 1997, the fund's Class II shares delivered a
cumulative total return of more than 63.32% since the shares became available on
May 1, 1995.
The fund's share price, as measured by net asset value, increased $4.10, from
$22.60 on September 30, 1996, to $26.70 on September 30, 1997. During the
reporting period, shareholders received distributions of 15.32 cents ($0.1532)
per share in dividend income and 20.2 cents ($0.202) per share in long-term
capital gains. Distributions will vary depending on income earned by the fund
and any profits realized from the sale of securities in the portfolio. Past
distributions are not indicative of future trends.
The graph on page 8 compares the performance of the fund's Class II shares since
inception, with the performance of the unmanaged Standard & Poor's(R) 500 Stock
Index (S&P 500(R)). The S&P 500 is a broad market index representing stocks from
a variety of industries.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they need to have cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin Growth Fund's had been applied to the index, its performance would have
been lower. Please remember that an index is simply a measure of performance,
and one cannot invest in it directly.
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Growth Fund -- Class II
Periods ended 9/30/97
Since
Inception
1-Year (5/1/95)
- ------------------------------------------------------------------------
Cumulative Total Return1 19.91% 63.32%
Average Annual Total Return2 12.77% 21.99%
Value of $10,000 Investment3 $11,761 $16,169
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include sales charges.
2. Average annual total returns represent the average annual change in value of
an investment over the periods indicated and include the 1.0% initial sales
charge and 1.0% contingent deferred sales charge, applicable to shares redeemed
within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the specified periods and include sales charges.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Your investment return and principal value will fluctuate
with market conditions, and you may have a gain or loss when you sell your
shares.
ADVISOR CLASS
Franklin Growth Fund - Advisor Class reported a cumulative total return of
+16.74% for the period from January 2, 1997 (commencement of sales), through
September 30, 1997. Cumulative total return measures the change in value of an
investment, assuming reinvestment of all distributions.
The fund's share price, as measured by net asset value, increased $3.89, to
$27.13 on September 30, 1997, from $23.24 at inception on January 2, 1997, the
day Advisor Class shares became available.
The graph on page 10 compares the performance of the fund's Advisor Class shares
over the past 10 years, with the performance of the unmanaged Standard &
Poor's(R) 500 Stock Index (S&P 500(R)). The S&P 500 is a broad market index that
represents stocks from a variety of industries.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they need to have cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin Growth Fund's had been applied to the index, its performance would have
been lower. Please remember that an index is simply a measure of performance,
and one cannot invest in it directly.
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
<TABLE>
<CAPTION>
Franklin Growth Fund -- Advisor Class
Periods ended 9/30/97
Since
Inception
of the Fund
1-Year 5-Year 10-Year (3/31/48)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return1 20.91% 116.50% 235.90% 19,907.54%
Average Annual Total Return1 20.91% 16.71% 12.88% 11.30%
Value of $10,000 Investment2 $12,091 $21,650 $33,592 $2,000,754
9/30/93 9/30/94 9/30/95 9/30/96 9/30/97
Total Return3 5.92% 7.71% 31.11% 19.70% 20.91%
</TABLE>
Effective January 2, 1997, the fund began offering Advisor Class shares to
certain eligible investors as described in its prospectus. This share class does
not have sales charges nor Rule 12b-1 plans. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I maximum
initial sales charge, but including the effect of Class I expenses, including
Rule 12b-1 fees; and (b) for periods after January 1, 1997, figures reflect
actual Advisor Class performance including the deduction of all charges and fees
applicable only to that class. Since January 2, 1997 (commencement of sales),
the cumulative total return of Advisor Class shares was 16.74%.
1. Cumulative total return measures the change in value of an investment over
the periods indicated. Average annual total return represents the average annual
change in value of an investment over the indicated periods.
2. These figures represent the value of an hypothetical $10,000 investment in
fund over the specified dates.
3. One-year total return represents the change in value of an investment over
the periods ended on the specified dates.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Your investment return and principal value will fluctuate
with market conditions, and you may have a gain or loss when you sell your
shares.
Past performance is not predictive of future results.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
FRANKLIN UTILITIES FUND
Your Fund's Objective: Seeks both capital appreciation and current income from a
portfolio of public utility industry securities.
Electric utility stock prices lagged the broader stock market over the 12-month
reporting period, impacting the fund's performance. Interest rates, a key driver
of electric utility stock performance, experienced volatility throughout the
year under review, with the 30-year U.S. Treasury bond's yield bouncing between
a low of 5.95% and a high of 7.15%. This type of volatility created some
uncertainty regarding electric utility stock prices and, as a result, their
prices remained relatively flat. Nevertheless, the Franklin Utilities Fund's
Class I shares turned in a one-year total return of +13.72% as shown in the
Performance Summary on page 14.
Although electric utility stock prices did not perform as impressively as the
rest of the market, they still offered attractive current income and lower
volatility than many other investments. For this reason, these securities
comprised 87% of the fund's holdings on September 30, 1997. We continue to
emphasize the attractive long-term investment characteristics and the currently
low, relative valuations of the stocks, believing that these combined factors
make electric utility stocks an appealing segment of a stock market that is
otherwise experiencing record-high valuation levels.
Deregulation is a complicated issue facing the U.S. electric utility industry.
Several significant developments in the past year have offered some
clarification: California announced a final restructuring plan, and several
other key states are close to completing plans designed to guide electric
utilities into a competitive environment. Increased concern over future
competition has had a strong impact on the price performance of some electric
utilities in the last few years, and resolution of such issues should allow
these securities' market valuations to appreciate in accordance with their
future growth prospects.
As with deregulation in any industry, regulatory changes will create winners and
losers within the electric utility industry. On a positive note, the
restructuring plans presented in most states allow for an orderly transition
that should assure the financial health of the companies involved, and should
help companies prepare for a more competitive market. Additionally, the trend
toward deregulation has encouraged industry consolidation in the form of mergers
and acquisitions, and we believe we are only at the beginning of this phase.
Chances are, there will be not only a continuation of electric
company-to-electric company merger activity, but also a convergence of gas and
electric utility companies. We feel that strong investment selections in this
area will depend on identifying those companies with strong management teams,
attractive service territories, and efficient, low-cost operations.
Although the Franklin Utilities Fund is invested primarily in domestic electric
utility stocks, the stocks and bonds of telephone and natural gas utility
companies comprised approximately 10% of the fund's total net assets on
September 30, 1997. In addition, over the past year, we have built a convertible
securities position of approximately 5.3% of total net assets. These positions
serve to diversify the portfolio to some degree and allow us to participate in
the growth of other industry segments. Also, they offer many of the same
characteristics that we look for when purchasing the securities of electric
utility companies, including consistent, predictable earnings growth and steady
demand fundamentals.
Please note that this discussion reflects the strategies we employed for the
fund over the one-year reporting period, and includes our opinions as of the
close of the period. Since economic and market conditions are constantly
changing, our strategies and our evaluations, conclusions, and decisions
regarding portfolio holdings may change as new circumstances arise. Although
past performance of a specific investment or sector cannot guarantee future
performance, such information can be useful in analyzing securities we purchase
or sell for the fund.
In spite of the potential for regulatory change in the industry, utilities
continue to provide services that are an essential part of everyday life, and we
believe they will continue to play an important role in a well-diversified
investment portfolio. As always, we remain committed to our long-term objective
of income and capital growth.
Franklin Utilities Fund
Top 10 Holdings
9/30/97
% of Total
Company Net Assets
- ---------------------------------------
FPL Group 4.1%
Duke Power Co. 3.9%
Southern Co. 3.9%
Pacific Gas & Electric 3.9%
New Century Energies 3.7%
TECO Energy, Inc. 3.6%
Florida Progress Corp. 3.6%
CINergy Corp. 3.5%
Dominion Resources 3.4%
ENOVA Corp. 3.2%
For a complete list of portfolio holdings, please see page 65 of this report.
PERFORMANCE SUMMARY
CLASS I
Franklin Utilities Fund - Class I reported a cumulative total return of +13.72%
for the one-year period ended September 30, 1997. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the sales charge. We always maintain a
long-term perspective when managing the fund, and we encourage our shareholders
to view their investments in a similar manner. As you can see from the table on
page 15, the fund's Class I shares delivered a cumulative total return of more
than 158.89% for the 10-year period ended September 30, 1997.
The fund's share price, as measured by net asset value, increased 31.0 cents,
from $9.73 on September 30, 1996, to $10.04 on September 30, 1997. During the
reporting period, shareholders received distributions of 52.4 cents ($0.524) per
share in dividend income and 42.7 cents ($0.427) per share in long-term capital
gains. Distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio. Past
distributions are not indicative of future trends.
Based on the maximum offering price of $10.49 on September 30, 1997, and an
annualization of the most recent quarterly dividend of 13.1 cents ($0.131) per
share, the fund's distribution rate was 5.00%.
The graph on page 15 compares the performance of the fund's Class I shares over
the past 10 years, with the performance of the unmanaged Standard & Poor's(R)
500 Stock Index (S&P 500(R)).
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they need to have cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin Utilities Fund's had been applied to the index, its performance would
have been lower. Please remember that an index is simply a measure of
performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Utilities Fund -- Class I
Periods ended 9/30/97
Since
Inception
1-Year 5-Year 10-Year (9/30/48)
- --------------------------------------------------------------------------
Cumulative Total Return1 13.72% 45.14% 158.89% 11,676.39%
Average Annual Total Return2 8.91% 6.80% 9.51% 10.12%
Value of $10,000 Investment3 $10,891 $13,894 $24,797 $1,125,530
Distribution Rate4 5.00%
30-Day Standardized Yield5 4.73%
9/30/93 9/30/94 9/30/95 9/30/96 9/30/97
Total Return6 18.08% -17.85% 24.19% 5.94% 13.72%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the current, maximum 4.25%
initial sales charge. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the sales charge.
4. Distribution rate is based on an annualization of the current 13.1 cent per
share quarterly dividend and the maximum offering price of $10.49 on September
30, 1997.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1997.
6. Total returns represent the change in value of an investment over the
one-year periods ended on the specified dates and do not include the sales
charge.
Note: Prior to July 1, 1994, fund shares were offered at a lower initial sales
charge with dividends reinvested at the offering price; thus, actual total
returns would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Your investment return and principal value will fluctuate
with market conditions, and you may have a gain or loss when you sell your
shares.
CLASS II
Franklin Utilities Fund - Class II reported a cumulative total return of +13.06%
for the one-year period ended September 30, 1997. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the sales charges. We always maintain a
long-term perspective when managing the fund, and we encourage our shareholders
to view their investments in a similar manner. As you can see from the table on
page 17, for the period ended September 30, 1997, the fund's Class II shares
delivered a cumulative total return of more than 34.66%, since the shares became
available on May 1, 1995.
The fund's share price, as measured by net asset value, increased 30.0 cents,
from $9.72 on September 30, 1996, to $10.02 on September 30, 1997. During the
reporting period, shareholders received distributions of 47.63 cents ($0.4763)
per share in dividend income and 42.7 cents ($0.427) per share in long-term
capital gains. Distributions will vary depending on income earned by the fund
and any profits realized from the sale of securities in the portfolio. Past
distributions are not indicative of future trends.
Based on the maximum offering price of $10.12 on September 30, 1997 and an
annualization of a quarterly dividend of 12.67 cents ($0.1267) per share, the
fund's distribution rate was 5.00%.
The graph on page 17 compares the performance of the fund's Class II shares
since inception, with the performance or the unmanaged Standard & Poor's(R) 500
Stock Index (S&P 500(R)).
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. And, unlike an index, mutual funds are
never 100% invested because they need to have cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin Utilities Fund's had been applied to either index, their performance
would have been lower. Please remember that an index is simply a measure of
performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 6 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Utilities Fund -- Class II
Periods ended 9/30/97
Since
Inception
1-Year (5/1/95)
- ---------------------------------------------------------------------
Cumulative Total Return1 13.06% 34.66%
Average Annual Total Return2 10.92% 12.63%
Value of $10,000 Investment3 $11,092 $13,331
Distribution Rate4 5.00%
30-Day Standardized Yield5 4.36%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include sales charges.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge, applicable to shares
redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include sales charges.
4. Distribution rate is based on an annualization of the current 12.67 cent per
share quarterly dividend and the offering price of $10.12 on September 30, 1997.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1997.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Your investment return and principal value will fluctuate
with market conditions, and you may have a gain or loss when you sell your
shares.
ADVISOR CLASS
Franklin Utilities Fund - Advisor Class reported a cumulative total return of
+9.61% for the period from January 2, 1997 (commencement of sales), through
September 30, 1997. Cumulative total return measures the change in value of an
investment, assuming reinvestment of all distributions.
The fund's share price, as measured by net asset value, increased 49.0 cents,
from $9.55 on January 2, 1997, to $10.04 on September 30, 1997. During the
reporting period, Advisor Class shareholders received distributions of 40.27
cents ($0.4027) per share in dividend income. Distributions will vary depending
on income earned by the fund and any profits realized from the sale of
securities in the portfolio. Past distributions are not indicative of future
trends.
Based on the fund's net asset value price of $10.04 on September 30, 1997 and an
annualization of September's dividend of 13.44 cents ($0.1344) per share, the
fund's distribution rate was 5.35%.
The graph on page 20 compares the performance of the fund's Advisor Class I over
the past 10 years, with the performance of the unmanaged Standard & Poor's(R)
500 Stock Index (S&P 500(R)).
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they need to have cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin Utilities Fund's had been applied to the index, its performance would
have been lower. Please remember that an index is simply a measure of
performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Utilities Fund -- Advisor Class
Periods ended 9/30/97
Since
Inception
of the Fund
1-Year 5-Year 10-Year (9/30/48)
- --------------------------------------------------------------------------------
Cumulative Total Return1 13.83% 45.29% 159.15% 11,688.14%
Average Annual Total Return1 13.83% 7.76% 9.99% 10.22%
Value of $10,000 Investment2 $11,383 $14,529 $25,915 $1,178,814
Distribution Rate3 5.35%
30-Day Standardized Yield4 5.05%
9/30/93 9/30/94 9/30/95 9/30/96 9/30/97
Total Return5 18.08% -17.85% 24.19% 5.94% 13.83%
Effective January 2, 1997, the fund began offering Advisor Class shares to
certain eligible investors as described in its prospectus. This share class does
not have sales charges nor Rule 12b-1 plans. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I maximum
initial sales charge, but including the effect of Class I expenses, including
Rule 12b-1 fees; and (b) for periods after January 1, 1997, figures reflect
actual Advisor Class performance including the deduction of all charges and fees
applicable only to that class. Since January 2, 1997 (commencement of sales),
the cumulative total return of Advisor Class shares was 9.61%.
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge. Average annual total
returns represent the average annual change in value of an investment over the
specified periods.
2. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the sales charge.
3. Distribution rate is based on an annualization of the current 13.44 cent per
share quarterly dividend and the fund's price of $10.04 on September 30, 1997.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1997.
5. Total returns represent the change in value of an investment over the
one-year periods ended on the specified dates and do not include the sales
charge.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Your investment return and principal value will fluctuate
with market conditions, and you may have a gain or loss when you sell your
shares.
Past performance is not predictive of future results.
FRANKLIN INCOME FUND
Your Fund's Objective: Seeks to maximize income while maintaining prospects for
capital appreciation through a diversified portfolio of securities.
The U.S. stock market appreciated during the year under review, driven by steady
economic growth and low inflation. The bond market, however, experienced
volatility during the period due to concerns over the possibility of higher
inflation. Many of the fund's sectors performed well over its fiscal year, with
energy, real estate, and foreign bonds leading the way. In fact, the fund's
Class I shares posted a one-year cumulative total return of +17.31%, as shown in
the performance summary on page 25.
Overall sector weightings in the portfolio did not change significantly during
the reporting period. However, we did increase the fund's stock holdings
slightly, to 40.2% of total net assets on September 30, 1997, from 37.1% a year
earlier. As of September 30, 1997, 53.0% of the fund's net assets were invested
in bonds, 40.2% in stocks, and 6.8% in cash and equivalents.
The fund's bond holdings consisted of corporate, foreign, and U.S. Treasury
bonds. Corporate bonds, which continue to represent our largest fixed-income
weighting (29.2% of total net assets), performed well over the period despite
interest rate volatility. Although corporate bond valuations were at relatively
high levels during the past twelve months, we were able to find some attractive
investments in new and existing positions. We initiated several corporate bond
positions during the period, including Del Monte (Food & Beverage), Paging
Network (Telecommunications), Tjiwi Kimia International (Paper & Forest
Products), and ICN Pharmaceuticals (Pharmaceuticals). In addition, we sold or
tendered several bond positions at levels that we believed represented full
value.
The fund's foreign bond positions performed exceptionally well during the period
due to positive economic and political developments and the overall decline in
U.S. interest rates. Over the year, we consolidated our foreign
dollar-denominated Brady bond positions by swapping out of our Ecuadorian and
Mexican Brady bonds for Brazilian Brady bonds which, along with our Argentina
Brady bonds, appeared to offer greater total return potential. We also sold the
fund's Canadian bond position in May due to valuation concerns and currency
risk.
Over the year, we added to our Treasury holdings amid weakness in March and
August, as we believed subdued inflation and prospects for a balanced budget
would allow interest rates to fall. As a result, U.S. Treasuries represented
11.4% of total net assets on September 30, 1997, up from 7.4% last year.
Most of the fund's equity sectors performed well during the period with the
energy and pharmaceutical stocks experiencing the greatest appreciation. We took
advantage of weak energy prices in February by initiating convertible positions
in Nuevo Energy and Swift Energy as we believe the long-term outlook for the
energy sector remains positive. Following significant appreciation, we sold the
fund's remaining pharmaceutical holdings, as we believed appreciation potential
for these stocks was limited at current valuations. These pharmaceutical
positions were initiated as a contrarian investment when the sector was out of
favor due to health care reform discussions in 1993 and 1994.
Utility stocks turned in a steady performance over the past twelve months -- in
line with the fund's overall return. We initiated positions in MidAmerica Energy
and Northern States Power -- both are mid-western electric and natural gas
utilities. On September 30, 1997, utility stocks comprised 21.2% of the fund's
portfolio, up from 19.9% on September 30, 1996. We increased our weighting in
these securities because we believe many of the stocks are undervalued and offer
attractive, high current income. In addition, many utility companies have made
significant progress in adapting to industry deregulation through cost cutting,
consolidation, and diversifying into related business lines that are
unregulated.
Franklin Income Fund
Portfolio Breakdown
9/30/97
% of Total
Sector Net Assets
- -------------------------------------------
Corporate Bonds 29.2%
Utilities Stocks 21.2%
U.S. Treasury
Bonds & Notes 11.4%
Foreign Bonds 8.9%
Energy/Energy Services 6.9%
Metals 2.8%
REITs 2.2%
Consumer Products 1.9%
Telecommunications Stocks 1.7%
Cable & Media Stocks 0.9%
Other Stocks 2.6%
Other Bonds 3.5%
Cash & Equivalents 6.8%
For a complete list of portfolio holdings, please see page 70 of this report.
Looking at other sectors, we purchased several new convertible positions in the
real estate sector, including Host Marriott (Lodging),Vornado Realty Trust
(REIT), and Macerich (REIT). These securities provide attractive income and
downside protection while offering equity upside potential related to positive
fundamental trends in the industry. We took advantage of strength in the
technology sector by recognizing significant gains on our Altera and Xilinx
holdings, which we purchased last year during the technology sell-off. Finally,
we sold several stock positions that no longer fit our valuation criteria.
Please note that this discussion reflects the strategies we employed for the
fund over the one-year reporting period, and includes our opinions as of the
close of the period. Since economic and market conditions are constantly
changing, our strategies and our evaluations, conclusions, and decisions
regarding portfolio holdings may change as new circumstances arise. Although
past performance of a specific investment or sector cannot guarantee future
performance, such information can be useful in analyzing securities we purchase
or sell for the fund.
With the stock market near all-time highs, we remain selective and continually
search for attractive investments for our shareholders. We are comfortable with
the portfolio's 6.8% cash position, and feel that it will allow us to take
advantage of investment opportunities as they arise. Of course, we continue to
follow our value-oriented approach, searching for income and growth from a
diversified mix of stocks, bonds, and cash.
PERFORMANCE SUMMARY
CLASS I
Franklin Income Fund - Class I reported a cumulative total return of +17.31% for
the one-year period ended September 30, 1997. Cumulative total return measures
the change in value of an investment, assuming reinvestment of all
distributions, and does not include the sales charge. We always maintain a
long-term perspective when managing the fund, and we encourage our shareholders
to view their investments in a similar manner. As you can see from the table on
page 27, the fund's Class I shares delivered a cumulative total return of more
than 205.21% for the 10-year period ended September 30, 1997.
The fund's share price, as measured by net asset value, increased 19.0 cents,
from $2.30 on September 30, 1996, to $2.49 on September 30, 1997. During the
reporting period, shareholders received distributions of 18.0 cents ($0.18) per
share in dividend income and 1.0 cents ($0.010) per share in long-term capital
gains. Distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio. Past
distributions are not indicative of future trends.
Based on the maximum offering price of $2.60 on September 30, 1997, and an
annualization of September's dividend of 1.5 cents ($0.015) per share, the
fund's distribution rate was 6.92%.
The graph on page 26 compares the performance of the fund's Class I shares with
the performance of two unmanaged indices, the Standard & Poor's(R) 500 Stock
Index (S&P 500(R)) and the Lehman Brothers Government/Corporate Bond Index. It
also compares the fund's performance with the average performance of 22 other
income funds, as measured by Lipper Analytical Services, Inc. As the graph
illustrates, the fund's performance has closely followed that of the indices.
GRAPHIC MATERIAL 8 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they need to have cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin Income Fund's had been applied to the index, its performance would have
been lower. Please remember that an index is simply a measure of performance,
and one cannot invest in it directly.
Franklin Income Fund -- Class I
Periods ended 9/30/97
Since
Inception
1-Year 5-Year 10-Year (8/31/48)
- ----------------------------------------------------------------------------
Cumulative Total Return1 17.31% 72.00% 205.21% 20,761.68%
Average Annual Total Return2 12.43% 10.49% 11.31% 11.40%
Value of $10,000 Investment3 $11,243 $16,468 $29,206 $1,999,246
Distribution Rate4 6.92%
30-Day Standardized Yield5 6.45%
9/30/93 9/30/94 9/30/95 9/30/96 9/30/97
Total Return6 19.13% -1.35% 14.00% 9.43% 17.31%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the current, maximum 4.25%
initial sales charge. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the sales charge.
4. Distribution rate is based on an annualization of the current 1.5 cent per
share monthly dividend and the maximum offering price of $2.60 on September 30,
1997.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1997. High yields reflect
the higher credit risks associated with certain lower-rated securities in the
fund's portfolio and, in some cases, the lower market prices for these
instruments.
6. Total returns represent the change in value of an investment over the
one-year periods ended on the specified dates and do not include the sales
charge.
Note: Prior to July 1, 1994, fund shares were offered at a lower initial sales
charge with dividends reinvested at the offering price; thus, actual total
returns would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Your investment return and principal value will fluctuate
with market conditions, and you may have a gain or loss when you sell your
shares.
CLASS II
Franklin Income Fund - Class II reported a cumulative total return of +16.72%
for the one-year period ended September 30, 1997. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the sales charges. We always maintain a
long-term perspective when managing the fund, and we encourage our shareholders
to view their investments in a similar manner. As you can see from the table on
page 29, the fund's Class II shares delivered a cumulative total return of more
than 38.13% since the shares became available on May 1, 1995.
The fund's share price, as measured by net asset value, increased 19.0 cents,
from $2.30 on September 30, 1996, to $2.49 on September 30, 1997. During the
reporting period, Class II shareholders received distributions of 16.82 cents
($0.1682) per share in dividend income and 1.0 cents ($0.010) per share in
long-term capital gains. Distributions will vary depending on income earned by
the fund and any profits realized from the sale of securities in the portfolio.
Past distributions are not indicative of future trends.
Based on the offering price of $2.52 on September 30, 1997, and an annualization
of September's dividend of 1.40 cents ($0.0140) per share, plus a 12b-1
differential adjustment of .05 cents ($0.0005), the fund's distribution rate was
6.69%.
The graph on page 29 compares the performance of the fund's Class II shares
since inception, with the performance of two unmanaged indices, the Standard &
Poor's(R) 500 Stock Index (S&P 500(R)) and the Lehman Brothers
Government/Corporate Bond Index. It also compares the fund's performance with
the average performance of 22 other income funds, as measured by Lipper
Analytical Services, Inc. As the graph illustrates, the fund's performance has
closely followed that of the indices.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they need to have cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin Income Fund's had been applied to the index, their performance would
have been lower. Please remember that an index is simply a measure of
performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 9 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Income Fund -- Class II
Periods ended 9/30/97
Since
Inception
1-Year (5/1/95)
- ------------------------------------------------------------------------
Cumulative Total Return1 16.72% 38.13%
Average Annual Total Return2 14.73% 13.86%
Value of $10,000 Investment3 $11,473 $13,686
Distribution Rate4 6.69%
30-Day Standardized Yield5 6.16%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include sales charges.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge, applicable to shares
redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include sales charges.
4. Distribution rate is based on an annualization of the current 1.45 cent per
share monthly dividend, which includes a 12b-1 differential adjustment, and the
offering price of $2.52 on September 30, 1997.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1997. High yields reflect
the higher credit risks associated with certain lower-rated securities in the
fund's portfolio and, in some cases, the lower market prices for these
instruments.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Your investment return and principal value will fluctuate
with market conditions, and you may have a gain or loss when you sell your
shares.
ADVISOR CLASS
Franklin Income Fund - Advisor Class reported a cumulative total return of
+12.31% for the period from January 2, 1997 (commencement of sales), through
September 30, 1997. Cumulative total return measures the change in value of an
investment, assuming reinvestment of all distributions.
The fund's share price, as measured by net asset value, increased 14.0 cents,
from $2.34 on January 2, 1997, to $2.48 on September 30, 1997. During the
reporting period, Advisor Class shareholders received distributions of 13.74
cents ($0.1374) per share in dividend income. Distributions will vary depending
on income earned by the fund and any profits realized from the sale of
securities in the portfolio. Past distributions are not indicative of future
trends.
Based on the fund's net asset value price of $2.48 on September 30, 1997 and an
annualization of September's dividend of 1.53 cents ($0.0153) per share, the
fund's distribution rate was 7.40%.
The graph on page 32 compares the performance of the fund's Advisor Class shares
with the performance of two unmanaged indices, the Standard & Poor's(R) 500
Stock Index (S&P 500(R)) and the Lehman Brothers Government/Corporate Bond
Index. It also compares the fund's performance with the average performance of
22 other income funds, as measured by Lipper Analytical Services, Inc. As the
graph illustrates, the fund's performance has closely followed that of the
indices.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they need to have cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin Income Fund's had been applied to the index, its performance would have
been lower. Please remember that an index is simply a measure of performance,
and one cannot invest in it directly.
GRAPHIC MATERIAL 10 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Income Fund -- Advisor Class
Periods ended 9/30/97
Since
Inception
of the Fund
- -----------------------------------------------------------------------------
1-Year 5-Year 10-Year (8/31/48)
Cumulative Total Return1 16.99% 71.51% 204.36% 20,703.29%
Average Annual Total Return1 16.99% 11.39% 11.77% 11.49%
Value of $10,000 Investment2 $11,699 $17,151 $30,436 $2,080,329
Distribution Rate3 7.40%
30-Day Standardized Yield4 6.88%
9/30/93 9/30/94 9/30/95 9/30/96 9/30/97
Total Return5 19.13% -1.35% 14.00% 9.43% 16.99%
Effective January 2, 1997, the fund began offering Advisor Class shares to
certain eligible investors as described in its prospectus. This share class does
not have sales charges nor Rule 12b-1 plans. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I maximum
initial sales charge, but including the effect of Class I expenses, including
Rule 12b-1 fees; and (b) for periods after January 1, 1997, figures reflect
actual Advisor Class performance including the deduction of all charges and fees
applicable only to that class. Since January 2, 1997 (commencement of sales),
the cumulative total return of Advisor Class shares was 12.31%.
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge. Average annual total
returns represent the average annual change in value of an investment over the
specified periods.
2. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the sales charge.
3. Distribution rate is based on an annualization of the current 1.53 cent per
share monthly dividend and the fund's price of $2.48 on September 30, 1997.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1997.
5. Total returns represent the change in value of an investment over the
one-year periods ended on the specified dates and do not include the sales
charge.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Your investment return and principal value will fluctuate
with market conditions, and you may have a gain or loss when you sell your
shares.
Past performance is not predictive of future results.
FRANKLIN DYNATECH FUND
Your Fund's Objective: Seeks capital appreciation by investing primarily in
companies emphasizing technological development .
Franklin DynaTech Fund
Portfolio Breakdown
9/30/97
% of Total
Sector Net Assets
- ---------------------------------------
Semiconductor
Manufacturers 14.1%
Computer Hardware 9.0%
Computer Software 7.8%
Telecommunications 6.3%
Pharmaceuticals 4.0%
Networking 3.9%
Medical Services 3.4%
Retail 2.7%
Precision Instruments/
Test Equipment 2.1%
Environmental Services 2.1%
Business Services 1.7%
Other 4.9%
Short-Term Obligations
& Other Net Assets 38.0%
For a complete list of portfolio holdings, please see page 59 of this report.
During the 12-month reporting period, the economy showed healthy growth with
relatively little inflationary pressure -- creating an excellent environment for
owning stocks. Particularly, large capitalization (large cap) stocks seemed to
be the favored group with investors. Within this environment, the Franklin
DynaTech Fund's Class I shares provided a cumulative total return of +35.63% for
the one-year period ended September 30, 1997, as discussed in the performance
summary on page 36. Over this same period of time, the Hambrecht & Quist
Technology Index produced a return of 49.10%.
Some of our large cap holdings contributed to the fund's total return for the
year, including Compaq Computer, Intel, Microsoft, and Warner-Lambert. Other
holdings that factored into the positive total return were Lucent Technologies,
Newbridge Networks, Schlumberger, Linear Technology, and Xilinx. We purchased a
few of these companies during our previous fiscal year (ended September 30,
1996), when the market corrected; however, a majority of these companies have
been in the portfolio for a number of years -- supporting the benefit of a "buy
and hold" strategy.
Our strategy involves constantly searching the vast spectrum of companies for
the next "diamond in the rough." We look for companies that have, in our
opinion, compelling valuations, a potential for leadership positioning, and a
niche or unique product offering. We also search for opportunities in exciting
growth areas such as semiconductors, computer software and hardware, networking
and data services. When any of these requirements cannot be met and we are
unable to invest, the portfolio's cash position may increase, allowing us to
have the resources available to take advantage of opportunities when they do
arise.
Over the one-year period, we found opportunities in selective companies with
unique market positions. For example, we purchased shares in U.S. Filter
Corporation, a company whose product and services are employed in water
filtration and purification processes. It is an industry leader in the growing
trend worldwide for better water quality, ranging from industrial to municipal
water treatment systems. Another unique company we purchased, AES Corporation,
operates unregulated power generation plants, fueled mainly by coal and natural
gas. AES should benefit from the increased demand for electricity, especially in
emerging market countries where they are the leading independent power producer.
In the technology sector, we purchased shares of Parametric Technology. This
company has a global leadership position in software products that automate the
design -- often called mechanical computer-aided design (MCAD) -- for the
engineering and manufacturing industries. Currently, Parametric has no debt on
its balance sheet and is expected to grow more than 30% in revenues and earnings
into the year 2000.
Based on declining fundamentals and/or excessive valuations, we also sold a
number of holdings over the period. We sold Broderbund Software and Forrester
Research due to rich valuations compared with other companies in their
industries. Another of our holdings we sold was Electronic Data Systems because
it experienced deteriorating fundamentals in its outsourcing business which
negatively impacted the profit margins on certain contracts.
Please note that this discussion reflects the strategies we employed for the
fund over the one-year reporting period, and includes our opinions as of the
close of the period. Since economic and market conditions are constantly
changing, our strategies and our evaluations, conclusions, and decisions
regarding portfolio holdings may change as new circumstances arise. Although
past performance of a specific investment or sector cannot guarantee future
performance, such information can be useful in analyzing securities we purchase
or sell for the fund.
Looking forward, we remain cautiously optimistic due to excessive valuations we
believe the market is currently exhibiting. As market opportunities present
themselves, we are committed to our investment criteria of seeking companies
that exemplify strong leadership potential, technological developments, and
productivity enhancements.
Franklin DynaTech Fund
Top 10 Holdings
9/30/97
Company % of Total
INDUSTRY Net Assets
- ------------------------------------------
Intel Corp.
SEMICONDUCTOR/
MANUFACTURER 13.5%
Microsoft Corp.
COMPUTER SOFTWARE 6.2%
Motorola, Inc.
TELECOMMUNICATIONS 5.3%
Compaq Computer Corp.
COMPUTER HARDWARE 4.9%
Hewlett-Packard Co.
COMPUTER HARDWARE 3.6%
Cisco Systems Inc.
NETWORKING 2.3%
Warner-Lambert Co.
PHARMACEUTICALS 2.1%
Toys Us, Inc.
RETAIL 2.0%
Thermo Electron Corp.
PRECISION INSTRUMENTS/
TEST EQUIPMENT 1.8%
Waste Management, Inc.
ENVIRONMENTAL SERVICES 1.5%
For a complete list of portfolio holdings, please see page 59 of this report.
PERFORMANCE SUMMARY
CLASS I
Franklin DynaTech Fund - Class I reported a cumulative total return of +35.63%
for the one-year period ended September 30, 1997. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the sales charge. We always maintain a
long-term perspective when managing the fund, and we encourage our shareholders
to view their investments in a similar manner. As you can see from the table on
page 37, the fund's Class I shares delivered a cumulative total return of more
than 256.62% for the 10-year period ended September 30, 1997.
The fund's share price, as measured by net asset value, increased $4.45, from
$14.03 on September 30, 1996, to $18.48 on September 30, 1997. During the
reporting period, shareholders received distributions of 5.5 cents ($0.055) per
share in dividend income and 39.9 cents ($0.399) per share in capital gains, of
which .33 cents ($0.0033) represented short-term gains and 39.57 cents ($0.3957)
represented long-term gains. Distributions will vary depending on income earned
by the fund and any profits realized from the sale of securities in the
portfolio. Past distributions are not indicative of future trends.
The graph on page 37 compares the performance of the fund's Class I shares over
the past 10 years, with the performance of the Standard & Poor's(R) 500 Stock
Index (S&P 500(R)) and the Hambrecht & Quist Technology Index. Please note, the
S&P 500 is a broad market index that represents stocks from a variety of
industries, not just the technology sector. The Hambrecht & Quist Technology
Index is composed of approximately 200 communications, health care, and computer
hardware and software stocks, and more closely represents the securities held by
the fund.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they need to have cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin DynaTech Fund's had been applied to either index, their performance
would have been lower. Please remember that an index is simply a measure of
performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 11 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin DynaTech Fund -- Class I
Periods ended 9/30/97
Since
Inception
1-Year 5-Year 10-Year (1/1/68)
- --------------------------------------------------------------------------------
Cumulative Total Return1 35.63% 138.12% 256.62% 1504.83%
Average Annual Total Return2 29.53% 17.87% 13.04% 9.61%
Value of $10,000 Investment3 $12,953 $22,750 $34,074 $153,066
9/30/93 9/30/94 9/30/95 9/30/96 9/30/97
Total Return4 14.41% 2.94% 32.10% 12.84% 35.63%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge.
2. Average annual total returns represent the average annual change in value of
an investment over the periods indicated and include the current, maximum 4.5%
initial sales charge. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the specified periods and include the sales charge.
4. One-year total returns represent the change in value of an investment over
the one-year periods ended on the specified dates and do not include the sales
charge.
Note: Prior to July 1, 1994, fund shares were offered at a lower initial sales
charge with dividends reinvested at the offering price; thus, actual total
returns would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Your investment return and principal value will fluctuate
with market conditions, and you may have a gain or loss when you sell your
shares.
CLASS II
Franklin DynaTech Fund - Class II reported a cumulative total return of +34.32%
for the one-year period ended September 30, 1997. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges. We always maintain a
long-term perspective when managing the fund, and we encourage our shareholders
to view their investments in a similar manner. As you can see from the table on
page 39, the fund's Class II shares delivered a cumulative total return of more
than 37.86% since the shares became available on September 16, 1996.
The fund's share price, as measured by net asset value, increased $4.27, from
$14.03 on September 30, 1996, to $18.30 on September 30, 1997. During the
reporting period, shareholders received distributions of 5.63 cents ($0.0563)
per share in dividend income and 39.9 cents ($0.399) per share in capital gains,
of which .33 cents ($0.0033) represented short-term gains and 39.57 cents
($0.3957) represented long-term gains. Distributions will vary depending on
income earned by the fund and any profits realized from the sale of securities
in the portfolio. Past distributions are not indicative of future trends.
The graph on page 39 compares the performance of the fund's Class II shares over
the period since inception,with the performance of the Standard & Poor's(R) 500
Stock Index (S&P 500(R)) and the Hambrecht & Quist Technology Index. Please note
the S&P 500 is a broad market index that represents stocks from a variety of
industries, not just the technology sector. The Hambrecht & Quist Technology
Index is composed of approximately 200 communications, health care, and computer
hardware and software stocks, and more closely represents the securities held by
the fund.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they need to have cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin DynaTech Fund's had been applied to either index, their performance
would have been lower. Please remember that an index is simply a measure of
performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 12 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin DynaTech Fund -- Class II
Periods ended 9/30/97
Since
Inception
1-Year (9/16/96)
- ------------------------------------------------------------------------
Cumulative Total Return1 34.32% 37.86%
Average Annual Total Return2 32.01% 33.99%
Value of $10,000 Investment3 $13,201 $13,547
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include sales charges.
2. Average annual total returns represent the average annual change in value of
an investment over the periods indicated and include the 1.0% initial sales
charge and 1.0% contingent deferred sales charge, applicableeto shares redeemed
within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the specified periods and include sales charges.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Your investment return and principal value will fluctuate
with market conditions, and you may have a gain or loss when you sell your
shares.
Past performance is not predictive of future results.
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
Your Fund's Objective: Seeks high current income from a portfolio of U.S.
government securities.
During the 12-month reporting period, economic conditions in the U.S. were
extremely favorable for investors. Economic growth in the fourth quarter of 1996
began on a slow note, but by the end of the year and into the first quarter of
1997, it increased. Interest rates -- which had declined between the third and
fourth quarters of 1996 -- reversed course and nudged higher. Investors feared
that tight labor markets, combined with strong growth, would continue to push
wages higher. This increase could eventually be passed on to consumers in the
form of higher prices.
To no one's surprise, the Federal Reserve Board (the Fed) bumped the federal
funds rate to 5.50% from 5.25% at its Open Market Committee Meeting in March,
citing heightened inflation risk as the reason for the quarter-point increase.
Through this pre-emptive strike, the Fed hoped to slow economic growth and
inflationary pressures. Second quarter growth did decline relative to the first
quarter's; however, early indications are that the economy is regaining momentum
on the back of strong consumer spending during the third quarter of 1997.
The most remarkable aspect of the current economic expansion is that inflation,
despite the strong growth, has not accelerated. This, combined with a rapidly
declining U.S. budget deficit, allowed interest rates to shift lower during the
past twelve months. In addition, interest rate volatility declined during the
period as well. These phenomena led to strong performance from the Government
National Mortgage Association (GNMA) pass-through sector, which offers yield
spread and income advantages over U.S. Treasury securities.
The chart to the right illustrates the fund's volatility risk/return profile
relative to 10- and 30-year U.S. Treasuries and one-year certificates of
deposit. Using volatility as a measure of risk, the fund's risk-adjusted return
performed better than that of 10-year Treasuries.
Over the 12 months under review, we continued our strategy of investing the
fund's assets in high credit quality, GNMA mortgage pass-through securities. Our
disciplined approach of remaining fully invested, while reducing transaction
costs, has allowed shareholders to participate in the favorable market
conditions of the past year. Throughout the fiscal period, we have invested
portfolio cashflows across a variety of GNMA programs and coupons to help
diversify the fund's exposure to GNMA market risks. In addition, the portfolio's
large exposure to seasoned GNMA pass-through bonds works to insulate the
portfolio from increased prepayment risks that generally result from lower
market interest rates.
GRAPHIC MATERIAL 13 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Please note that this discussion reflects the strategies we employed for the
fund over the one-year reporting period, and includes our opinions as of the
close of the period. Since economic and market conditions are constantly
changing, our strategies and our evaluations, conclusions, and decisions
regarding portfolio holdings may change as new circumstances arise. Although
past performance of a specific investment or sector cannot guarantee future
performance, such information can be useful in analyzing securities we purchase
or sell for the fund.
For the remainder of 1997, we anticipate that interest-rate volatility should
remain relatively subdued, which will continue to benefit mortgage pass-through
securities. However, overall yield levels may move to the higher end of their
recent trading range if consumer activity and economic growth continue their
rebound in the second half of 1997.
GRAPHIC MATERIAL 14 OMITTED - SEE APPENDIX AT END OF DOCUMENT
PERFORMANCE SUMMARY
CLASS I
Franklin U.S. Government Securities Fund - Class I reported a cumulative total
return of +10.08% for the one-year period ended September 30, 1997. Cumulative
total return measures the change in value of an investment, assuming
reinvestment of all distributions, and does not include the sales charge. We
always maintain a long-term perspective when managing the fund, and we encourage
our shareholders to view their investments in a similar manner. As you can see
from the table on page 44, the fund's Class I shares delivered a cumulative
total return of more than 134.13%, for the 10-year period ended September 30,
1997.
The fund's share price, as measured by net asset value, increased 17.0 cents,
from $6.72 on September 30, 1996, to $6.89 on September 30, 1997. During the
reporting period, shareholders received distributions of 48.2 cents ($0.482) per
share in dividend income. Distributions will vary depending on income earned by
the fund and any profits realized from the sale of securities in the portfolio.
Past distributions are not indicative of future trends.
Based on the maximum offering price of $7.20 on September 30, 1997 and an
annualization of September's dividend of 3.9 cents ($0.039) per share, the
fund's distribution rate was 6.50%. A comparable rate based on the redemption
value (or net asset value price) on the same day was 6.79%.
The graph on page 44 compares the performance of the fund's Class I shares over
the past 10 years with the Consumer Price Index (CPI) and the Lehman Brothers
Intermediate U.S. Government Bond Index. As the graph illustrates, the fund's
performance has closely followed that of the Lehman Brother's index.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they need to have cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin U.S. Government Securities Fund's had been applied to the index, its
performance would have been lower. Please remember that an index is simply a
measure of performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 15 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin U.S. Government Securities Fund -- Class I
Periods ended 9/30/97
Since
Inception
1-Year 5-Year 10-Year (2/1/77)
- ----------------------------------------------------------------------------
Cumulative Total Return1 10.08% 37.28% 134.13% 640.01%
Average Annual Total Return2 5.38% 5.63% 8.42% 7.43%
Distribution Rate3 6.50%
30-Day Standardized Yield4 6.36%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the current, maximum 4.25%
initial sales charge. See Note below.
3. Distribution rate is based on an annualization of the current 3.9 cent per
share monthly dividend and the maximum offering price of $7.20 on September 30,
1997.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1997.
Note: Prior to July 1, 1994, fund shares were offered at a lower initial sales
charge with dividends reinvested at the offering price; thus, actual total
returns would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Your investment return and principal value will fluctuate
with market conditions, and you may have a gain or loss when you sell your
shares.
CLASS II
Franklin U.S. Government Securities Fund - Class II reported a cumulative total
return of +9.48% for the one-year period ended September 30, 1997. Cumulative
total return measures the change in value of an investment, assuming
reinvestment of all distributions, and does not include the sales charges. We
always maintain a long-term perspective when managing the fund, and we encourage
our shareholders to view their investments in a similar manner. As you can see
from the table on page 46, as of September 30, 1997, the fund's Class II shares
delivered a cumulative total return of 20.92% since the shares became available
on May 1, 1995.
The fund's share price, as measured by net asset value, increased 17.0 cents,
from $6.70 on September 30, 1996, to $6.87 on September 30, 1997. During the
reporting period, shareholders received distributions of 44.33 cents ($0.4433)
per share in dividend income. Distributions will vary depending on income earned
by the fund and any profits realized from the sale of securities in the
portfolio. Past distributions are not indicative of future trends.
Based on the offering price of $6.94 on September 30, 1997 and an annualization
of September's dividend of 3.57 cents ($0.0357) per share, plus a 12b-1
differential adjustment of .09 cents ($0.0009), the fund's distribution rate was
6.19%.
The graph on page 46 compares the performance of the fund's Class II shares with
the Lehman Brothers Intermediate U.S. Government Bond Index. As the graph
illustrates, the fund's performance has closely followed that of the Lehman
Brothers Index.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they need to have cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin U.S. Government Securities Fund's had been applied to the index, its
performance would have been lower. Please remember that an index is simply a
measure of performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 16 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin U.S. Government Securities Fund -- Class II
Periods ended 9/30/97
Since
Inception
1-Year (5/1/95)
- ------------------------------------------------------------------------
Cumulative Total Return1 9.48% 20.92%
Average Annual Total Return2 7.36% 7.71%
Distribution Rate3 6.19%
30-Day Standardized Yield4 6.04%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include sales charges.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge, applicable to shares
redeemed within 18 months of investment.
3. Distribution rate is based on an annualization of the current 3.66 cent per
share monthly dividend, which includes a 12b-1 differential adjustment, and the
offering price of $6.94 on September 30, 1997.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1997.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Your investment return and principal value will fluctuate
with market conditions, and you may have a gain or loss when you sell your
shares.
ADVISOR CLASS
Franklin U.S. Government Securities Fund - Advisor Class reported a cumulative
total return of +7.68% for the period from January 2, 1997 (commencement of
sales), through September 30, 1997. Cumulative total return measures the change
in value of an investment, assuming reinvestment of all distributions.
The fund's share price, as measured by net asset value, increased 14.0 cents,
from $6.76 on January 2, 1997, to $6.90 on September 30, 1997. During the
reporting period, Advisor Class shareholders received distributions of 36.31
cents ($0.3631) per share in dividend income. Distributions will vary depending
on income earned by the fund and any profits realized from the sale of
securities in the portfolio. Past distributions are not indicative of future
trends.
Based on the fund's net asset value price of $6.90 on September 30, 1997 and an
annualization of September's dividend of 3.95 cents ($0.0395) per share, the
fund's distribution rate was 6.87%.
The graph on page 48 compares the performance of the fund's Advisor Class shares
over the past 10 years with the Consumer Price Index (CPI) and the Lehman
Brothers Intermediate U.S. Government Bond Index. As the graph illustrates, the
fund's performance has closely followed that of the Lehman Brother's index.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they need to have cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin U.S. Government Securities Fund's had been applied to the index, its
performance would have been lower. Please remember that an index is simply a
measure of performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 17 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin U.S. Government Securities Fund -- Advisor Class
Periods ended 9/30/97
Since
Inception
of the Fund
- --------------------------------------------------------------------------------
1-Year 5-Year 10-Year (2/1/77)
Cumulative Total Return1 10.30% 37.55% 134.60% 641.50%
Average Annual Total Return1 10.30% 6.58% 8.90% 7.60%
Distribution Rate2 6.87%
30-Day Standardized Yield3 6.75%
Effective January 2, 1997, the fund began offering Advisor Class shares to
certain eligible investors as described in its prospectus. This share class does
not have sales charges nor Rule 12b-1 plans. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I maximum
initial sales charge, but including the effect of Class I expenses, including
Rule 12b-1 fees; and (b) for periods after January 1, 1997, figures reflect
actual Advisor Class performance including the deduction of all charges and fees
applicable only to that class. Since January 2, 1997 (commencement of sales),
the cumulative total return of Advisor Class shares was 7.68%.
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge. Average annual total
returns represent the average annual change in value of an investment over the
specified periods.
2. Distribution rate is based on an annualization of the current 3.95 cent per
share monthly dividend and the fund's price of $6.90 on September 30, 1997.
3. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1997.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Your investment return and principal value will fluctuate
with market conditions, and you may have a gain or loss when you sell your
shares.
Past performance is not predictive of future results.
<TABLE>
<CAPTION>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights
Franklin Growth Fund
Class I
------------------------------------------------------
Year Ended September 30,
------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $22.82 $19.38 $14.96 $14.25 $13.70
------------------------------------------------------
Income from investment operations:
Net investment income .36 .22 .17 .19 .23
Net realized and unrealized gains 4.34 3.53 4.43 .90 .58
------------------------------------------------------
Total from investment operations 4.70 3.75 4.60 1.09 .81
------------------------------------------------------
Less distributions:
Dividends from net investment income (.23) (.16) (.14) (.30) (.19)
Distributions from net realized gains (.20) (.15) (.04) (.08) (.07)
------------------------------------------------------
Total distributions (.43) (.31) (.18) (.38) (.26)
------------------------------------------------------
Net asset value, end of year $27.09 $22.82 $19.38 $14.96 $14.25
======================================================
Total return* 20.84% 19.60% 31.11% 7.63% 5.87%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $1,435,561 $1,020,486 $712,866 $516,620 $560,824
Ratio to average net assets:
Expenses .89% .87% .90% .77% .64%
Net investment income 1.60% 1.16% 1.08% 1.23% 1.64%
Portfolio turnover rate 1.77% 2.03% 1.39% 6.52% 1.70%
Average commission rate paid** $.0568 $.0543 -- -- --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Relates to purchases and sales of equity securities. Prior to September 30,
1996 disclosure of average commission rate was not required.
<TABLE>
<CAPTION>
Class II
---------------------------------
Year Ended September 30,
---------------------------------
1997 1996 1995****
---------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $22.60 $19.33 $16.88
---------------------------------
Income from investment operations:
Net investment income .20 .12 .02
Net realized and unrealized gains 4.25 3.46 2.43
---------------------------------
Total from investment operations 4.45 3.58 2.45
---------------------------------
Less distributions:
Dividends from net investment income (.15) (.16) --
Distributions from net realized gains (.20) (.15) --
---------------------------------
Total distributions (.35) (.31) --
---------------------------------
Net asset value, end of year $26.70 $22.60 $19.33
=================================
Total return* 19.91% 18.73% 14.72%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $117,218 $43,417 $4,161
Ratio to average net assets:
Expenses 1.66% 1.63% 1.79%**
Net investment income .85% .40% .37%**
Portfolio turnover rate 1.77% 2.03% 1.39%
Average commission rate paid*** $.0568 $.0543 --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
***Relates to purchases and sales of equity securities. Prior to September 30,
1996 disclosure of average commission rate was not required.
****For the period May 1, 1995 (effective date) to September 30, 1995.
Advisor Class
-------------
1997****
-------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period $23.24
-------------
Income from investment operations:
Net investment income .25
Net realized and unrealized gains 3.64
-------------
Total from investment operations 3.89
-------------
Net asset value, end of period $27.13
=============
Total return* 16.74%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $25,823
Ratio to average net assets:
Expenses .66%**
Net investment income 1.93%**
Portfolio turnover rate 1.77%
Average commission rate paid*** $.0568
*Total return is not annualized.
**Annualized
***Relates to purchases and sales of equity securities.
****For the period January 2, 1997 (effective date) to September 30, 1997.
See notes to financial statements.
<TABLE>
<CAPTION>
FRANKLIN CUSTODIAN FUNDS, INC.
Statement of Investments, September 30, 1997
SHARES/
Growth Fund WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stocks & Warrants 67.5%
Aerospace & Defense 6.0%
<S> <C> <C>
Boeing Co. 404,200 $ 22,003,638
Lockheed Martin Corp. 162,600 17,337,225
Raytheon Co. 442,000 26,133,250
Rockwell International Corp. 50,000 3,146,875
Thiokol Corp. 120,000 10,320,000
United Technologies Corp. 200,000 16,200,000
-------------
95,140,988
-------------
Auto Parts .3%
Genuine Parts Co. 135,000 4,159,688
-------------
Biotechnology 1.4%
aAmgen, Inc. 200,000 9,587,500
aGenentech, Inc. 200,000 11,625,000
aImmunex Corp. 20,000 1,345,000
aTherapeutic Discovery Corp. 8,000 97,500
-------------
22,655,000
-------------
Business Services 3.5%
Avery Dennison Corp. 220,000 8,800,000
aChoicePoint, Inc. 40,000 1,495,000
Cognizant Corp. 244,000 9,943,000
Dun & Bradstreet Corp. 244,000 6,923,500
Equifax, Inc. 400,000 12,575,000
Kelly Services, Inc., Class A 250,000 8,375,000
a,e,gProgramming & Systems, Inc. 345,300 6,906
Wallace Computer Services, Inc. 200,000 7,375,000
-------------
55,493,406
-------------
Chemicals 3.7%
Air Products & Chemicals, Inc. 200,000 16,587,500
Eastman Chemical Co. 25,000 1,550,000
International Flavors and Fragrances, Inc. 300,000 14,700,000
Mallinckrodt Group, Inc. 116,000 4,176,000
NCH Corp. 200,000 14,200,000
Sigma-Aldrich Corp. 200,000 6,587,500
-------------
57,801,000
-------------
Communications & Entertainment 2.4%
aACNielsen Corp. 81,333 1,951,992
American Greetings Corp., Class A 300,000 11,062,500
Disney (Walt) Co. 304,932 24,585,143
aIntervisual Books, Inc. 100,000 168,750
aKing World Productions, Inc. 10,000 432,500
-------------
38,200,885
-------------
Computer Hardware 3.5%
Hewlett-Packard Co. 360,000 25,042,500
International Business Machines Corp. 280,000 29,662,500
-------------
54,705,000
-------------
Computer Software .2%
aMicrosoft Corp. 20,000 2,646,250
-------------
Data Services 3.3%
Automatic Data Processing, Inc. 400,000 20,000,000
aComputer Sciences Corp. 450,000 31,837,500
-------------
51,837,500
-------------
Diversified Manufacturers 2.8%
Deltic Timber Corp. 11,428 $ 373,553
Minnesota Mining & Manufacturing Co. 372,000 34,410,000
National Service Industries, Inc. 100,000 4,393,750
Teleflex, Inc. 139,200 4,819,800
-------------
43,997,103
-------------
Electronics & Electrical Equipment 3.3%
AMP, Inc. 400,000 21,425,000
Emerson Electric Co. 80,000 4,610,000
aImation Corp. 37,200 992,775
Molex, Inc. 93,750 4,160,156
Molex, Inc., Class A 93,750 3,820,313
Raychem Corp. 200,000 16,900,000
-------------
51,908,244
-------------
Energy/Energy Services 3.8%
Atlantic Richfield Co. 180,000 15,378,750
Coastal Co. 300,000 18,375,000
Murphy Oil Corp. 40,000 2,285,000
Royal Dutch Petroleum Co., New York Shares 280,000 15,540,000
Schlumberger, Ltd. 60,000 5,051,250
Union Pacific Resources Group, Inc. 101,633 2,661,514
-------------
59,291,514
-------------
Environmental Services 4.7%
Betzdearborn, Inc. 200,000 13,675,000
Browning-Ferris Industries, Inc. 165,000 6,280,313
aIonics, Inc. 230,000 10,191,875
Millipore Corp. 400,000 19,650,000
aOsmonics, Inc. 256,500 4,216,219
Pall Corp. 382,000 8,236,875
Waste Management, Inc. 210,000 7,336,875
Wheelabrator Technology, Inc. 270,000 4,320,000
-------------
73,907,157
-------------
Food/Confectionery .9%
Hershey Foods Corp. 258,200 14,588,300
-------------
Health Care - Diversified 5.1%
Abbott Laboratories 200,000 12,787,500
Allegiance Corp 50,000 1,550,000
Allergan, Inc. 200,000 7,237,500
aAlza Corp., Class A 100,000 2,900,000
aAlza Corp., warrants 8,000 1,500
Baxter International, Inc. 250,000 13,062,500
Johnson & Johnson, Inc. 400,000 23,050,000
aMedPartners, Inc. 75,625 1,621,211
Nature's Sunshine Products, Inc. 33,000 779,625
aPerrigo Co. 200,000 3,150,000
aRespironics, Inc. 98,000 2,695,000
U.S. Surgical Corp. 400,000 11,675,000
-------------
80,509,836
-------------
Imaging/Photography .9%
Eastman Kodak Co. 200,000 12,987,500
Polaroid Corp. 38,000 1,945,125
-------------
14,932,625
-------------
Media & Broadcasting 1.8%
aHSN, Inc. 100,000 $ 4,062,500
Time Warner, Inc. 450,000 24,384,375
-------------
28,446,875
-------------
Networking 1.6%
aCabletron Systems, Inc. 500,000 16,000,000
aCisco Systems, Inc. 135,000 9,863,437
-------------
25,863,437
-------------
Pharmaceuticals 11.2%
American Home Products Corp. 300,000 21,900,000
Bristol-Myers Squibb Co. 320,000 26,480,000
Lilly (Eli) & Co. 200,000 24,087,500
Merck & Co., Inc. 200,000 19,987,500
Pfizer, Inc. 640,000 38,440,000
Schering-Plough Corp. 900,000 46,350,000
-------------
177,245,000
-------------
Real Estate - Diversified
a,bFRM Nexus 115,100 115
-------------
Retail .5%
Tiffany & Co. 123,900 5,265,750
Weis Markets, Inc. 58,218 2,037,630
-------------
7,303,380
-------------
Toy Manufacturing .6%
Mattel, Inc. 300,000 9,937,500
-------------
Transportation 6.0%
aAMR Corp. 310,000 34,313,124
Delta Air Lines, Inc. 250,000 23,546,874
aUAL Corp. 350,000 29,618,750
Union Pacific Corp. 120,000 7,515,000
-------------
94,993,748
-------------
Total Long Term Investments (Cost $433,324,038) 1,065,564,551
-------------
fRepurchase Agreements 32.5%
Joint Repurchase Agreement, 6.010%, 10/01/97
(Maturity Value $513,654,651)(Cost $513,568,914) $513,568,914 $ 513,568,914
-------------
Collateralized by U.S. Treasury Bills & Notes
Aubrey G. Lanston & Co., Inc., (Maturity Value $39,075,895)
BA Securities, Inc., (Maturity Value $39,075,895)
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $44,743,911)
Bear, Stearns & Co., Inc., (Maturity Value $39,075,895)
CIBC Wood Gundy Securities Corp., (Maturity Value $39,075,895)
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $39,075,895)
Dresdner Kleinwort Benson North America, L.L.C., (Maturity Value $39,075,895)
Fuji Securities, Inc., (Maturity Value $39,075,895)
Lehman Brothers, Inc., (Maturity Value $39,075,895)
Sanwa Securities (USA) Co., L.P., (Maturity Value $39,075,895)
SBC Warburg, Inc., (Maturity Value $39,075,895)
The Nikko Securities Co. International, Inc., (Maturity Value $39,075,895)
UBS Securities, L.L.C., (Maturity Value $39,075,895)
Total Investments (Cost $946,892,952) 100.0% 1,579,133,465
Other Assets, less Liabilities (531,953)
-------------
Net Assets 100.0% $1,578,601,512
=============
aNon-income producing.
bSee Note 6 regarding restricted securities.
eThe Investment Company Act of 1940 defines "affiliated companies" as investments in portfolio companies in which the Fund owns 5%
or more of the outstanding voting securities. Investments in "affiliated companies" at 9/30/97 were $6,906.
fSee Note 1(f) regarding joint repurchase agreement.
gTrading suspended.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Franklin DynaTech Fund
Class I
-----------------------------------------------------------------
Year Ended September 30,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $14.03 $12.78 $9.85 $10.29 $9.21
Income from investment operations:
Net investment income .10 .06 .12 .07 .10
Net realized and unrealized gains 4.81 1.54 2.99 .21 1.21
Total from investment operations 4.91 1.60 3.11 .28 1.31
Less distributions:
Dividends from net investment income (.06) (.12) (.05) (.12) (.12)
Distributions from net realized gains (.40) (.23) (.13) (.60) (.11)
Total distributions (.46) (.35) (.18) (.72) (.23)
Net asset value, end of year $18.48 $14.03 $12.78 $9.85 $10.29
Total return* 35.63% 12.84% 32.10% 2.89% 14.36%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $188,102 $104,508 $92,987 $67,413 $71,469
Ratio to average net assets:
Expenses 1.04% 1.05% 1.01% 1.00% .81%
Net investment income .75% .43% 1.11% .69% 1.03%
Portfolio turnover rate 5.59% 11.94% 9.83% 9.73% 26.56%
Average commission rate paid** $.0536 $.0551 -- -- --
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized. Prior to May 1,
1994, dividends from net investment income were reinvested at the offering price.
**Relates to purchases and sales of equity securities. Prior to September 30, 1996 disclosure of average commission rate was not
required.
</TABLE>
Class II
--------------------------------
Year Ended September 30,
--------------------------------
1997 1996****
--------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $14.03 $13.57
--------------------------------
Income from investment operations:
Net investment income .07 --
Net realized and unrealized gains 4.66 .46
--------------------------------
Total from investment operations 4.73 .46
--------------------------------
Less distributions:
Dividends from net investment income (.06) --
Distributions from net realized gains (.40) --
--------------------------------
Total distributions (.46) --
--------------------------------
Net asset value, end of year $18.30 $14.03
================================
Total return* 34.32% 3.39%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $3,386 $ --
Ratio to average net assets:
Expenses 1.82% 1.85%**
Net investment income .25% (.14%)**
Portfolio turnover rate 5.59% 11.94%
Average commission rate paid*** $.0536 $.0551
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
***Relates to purchases and sales of equity securities.
****For the period September 16, 1996 (effective date) to September 30, 1996.
See notes to financial statements.
<TABLE>
<CAPTION>
Statement of Investments, September 30, 1997
DynaTech Fund SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stocks 62.0%
Biotechnology .3%
<S> <C> <C>
aAmgen, Inc. 10,000 $ 479,375
-------------
Business Services 1.7%
aChoicePoint, Inc. 2,000 74,750
Cognizant Corp. 10,000 407,500
Equifax, Inc. 20,000 628,750
First Data Corp. 50,000 1,878,125
aSABRE Group Holdings, Inc. 11,800 422,588
-------------
3,411,713
-------------
Chemicals .8%
Sigma-Aldrich Corp. 50,000 1,646,874
-------------
Computer Hardware 9.0%
aCompaq Computer Corp. 125,000 9,343,750
Hewlett-Packard Co. 100,000 6,956,250
aKomag, Inc. 45,000 916,875
-------------
17,216,875
-------------
Computer Software 7.8%
Adobe Systems, Inc. 20,000 1,007,500
aElectronic Arts, Inc. 10,000 386,250
aIntuit, Inc. 25,000 800,000
aMetaCreations Corp. 11,235 165,716
aMicrosoft Corp. 90,000 11,908,125
aNetscape Communications Corp. 200 7,200
aParametric Technology Co. 10,000 441,250
aScopus Technology, Inc. 11,250 178,594
-------------
14,894,635
-------------
Data Services .3%
aComputer Sciences Corp. 10,000 707,500
-------------
Energy/Energy Services 1.8%
aAES Corp. 20,000 875,000
Schlumberger, Ltd. 30,000 2,525,625
-------------
3,400,625
-------------
Environmental Services 2.1%
Browning-Ferris Industries, Inc. 20,000 761,250
aUS Filter Corp. 10,000 430,625
Waste Management, Inc. 80,000 2,795,000
-------------
3,986,875
-------------
Financial Services .1%
Associates First Capital Corp. 3,600 224,100
-------------
Lodging .1%
aHost Marriott Corp. 10,000 227,500
-------------
Media & Broadcasting 1.1%
Liberty Media Group, Class A 37,312 1,117,028
News Corp., Ltd., Sponsored ADR 20,000 408,750
Time Warner, Inc. 10,000 541,875
-------------
2,067,653
-------------
Medical Services 3.4%
Bard (C.R.), Inc. 20,000 678,750
Columbia/HCA Healthcare Corp. 22,500 646,875
HBO & Co. 30,000 1,132,500
Medtronic, Inc. 20,000 940,000
Mentor Corp. 5,000 158,750
Medical Services (cont.)
aPacifiCare Health Systems, Inc., Class B 15,000 $ 1,021,875
aSt. Jude Medical, Inc. 10,000 350,625
United Healthcare Corp. 30,000 1,500,000
-------------
6,429,375
Networking 3.9% -------------
a3Com Corp. 20,000 1,025,000
aAscend Communications, Inc. 5,000 161,875
aCisco Systems, Inc. 60,000 4,383,750
aInternational Network Services 35,000 717,500
aNewbridge Networks Corp. 20,000 1,197,500
-------------
7,485,625
-------------
Pharmaceuticals 4.0%
Merck & Co., Inc. 15,000 1,499,063
Schering-Plough Corp. 40,000 2,060,000
Warner-Lambert Co. 30,000 4,048,125
-------------
7,607,188
-------------
Precision Instruments/Test Equipment 2.1%
aThermo Electron Corp. 84,375 3,375,000
aWaters Corp. 13,800 609,788
-------------
3,984,788
-------------
Retail 2.7%
Estee Lauder Cos., Class A 20,000 925,000
aFederated Department Stores, Inc. 10,000 431,250
aToys R Us, Inc. 108,000 3,834,000
-------------
5,190,250
-------------
Semiconductor/Manufacturer 14.1%
Intel Corp. 280,000 25,847,500
Linear Technology Corp. 10,000 687,500
aXilinx, Inc. 10,000 506,250
-------------
27,041,250
-------------
Specialty Pharmaceuticals .1%
aNoven Pharmaceuticals, Inc. 23,000 161,000
-------------
Telecommunications 6.3%
aAirTouch Communications, Inc. 20,000 708,750
AT&T Corp. 15,000 664,687
Lucent Technologies, Inc. 8,102 659,300
Motorola, Inc. 140,000 10,062,500
-------------
12,095,237
-------------
Transportation .3%
Air Express International Corp. 15,000 547,500
-------------
Total Long Term Investments (Cost $31,963,323) 118,805,938
-------------
fRepurchase Agreements 37.6%
Joint Repurchase Agreement, 6.010%, 10/01/97
(Maturity Value $71,953,228)(Cost $71,941,218) $71,941,218 $ 71,941,218
-------------
Collateralized by U.S. Treasury Bills & Notes
Aubrey G. Lanston & Co., Inc., (Maturity Value $5,473,788)
BA Securities, Inc., (Maturity Value $5,473,788)
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $6,267,772)
Bear, Stearns & Co., Inc., (Maturity Value $5,473,788)
CIBC Wood Gundy Securities Corp., (Maturity Value $5,473,788)
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $5,473,788)
Dresdner Kleinwort Benson North America, L.L.C., (Maturity Value $5,473,788)
Fuji Securities, Inc., (Maturity Value $5,473,788)
Lehman Brothers, Inc., (Maturity Value $5,473,788)
Sanwa Securities (USA) Co., L.P., (Maturity Value $5,473,788)
SBC Warburg, Inc., (Maturity Value $5,473,788)
The Nikko Securities Co. International, Inc., (Maturity Value $5,473,788)
UBS Securities, L.L.C., (Maturity Value $5,473,788)
Total Investments (Cost $103,904,541) 99.6% 190,747,156
Other Assets, less Liabilities .4% 740,189
-------------
Net Assets 100.0% $191,487,345
=============
aNon-income producing.
fSee Note 1(f) regarding joint repurchase agreement.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Franklin Utilities Fund
Class I
---------------------------------------------------------------
Year Ended September 30,
---------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 9.73 $9.75 $8.33 $10.78 $ 9.63
---------------------------------------------------------------
Income from investment operations:
Net investment income .53 .54 .53 .55 .53
Net realized and unrealized gains (losses) .73 .03 1.42 (2.44) 1.17
---------------------------------------------------------------
Total from investment operations 1.26 .57 1.95 (1.89) 1.70
---------------------------------------------------------------
Less distributions:
Dividends from net investment income (.52) (.52) (.52) (.52) (.55)
Distributions from net realized gains (.43) (.07) (.01) (.04) --
---------------------------------------------------------------
Total distributions (.95) (.59) (.53) (.56) (.55)
---------------------------------------------------------------
Net asset value, end of year $10.04 $9.73 $9.75 $ 8.33 $10.78
===============================================================
Total return* 13.72% 5.94% 24.19% (17.94%) 17.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $1,953,273 $2,400,561 $2,765,976 $2,572,508 $3,626,774
Ratio to average net assets:
Expenses .75% .71% .73% .64% .55%
Net investment income 5.26% 5.24% 5.88% 5.76% 5.30%
Portfolio turnover rate 7.24% 17.05% 5.55% 6.34% 7.81%
Average commission rate paid** $.0505 $.0486 -- -- --
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized. Prior to May 1,
1994, dividends from net investment income were reinvested at the offering price.
**Relates to purchases and sales of equity securities. Prior to September 30, 1996 disclosure of average commission rate was not
required.
</TABLE>
<TABLE>
<CAPTION>
Class II
-------------------------------------
Year Ended September 30,
-------------------------------------
1997 1996 1995****
-------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $ 9.72 $9.75 $8.89
Income from investment operations:
Net investment income .45 .46 .23
Net realized and unrealized gains .76 .06 .88
Total from investment operations 1.21 .52 1.11
Less distributions:
Dividends from net investment income (.48) (.48) (.25)
Distributions from net realized gains (.43) (.07) --
Total distributions (.91) (.55) (.25)
Net asset value, end of year $10.02 $9.72 $9.75
Total return* 13.06% 5.39% 13.01%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $21,906 $19,655 $8,369
Ratio to average net assets:
Expenses 1.27% 1.23% 1.21%**
Net investment income 4.78% 4.86% 5.15%**
Portfolio turnover rate 7.24% 17.05% 5.55%
Average commission rate paid*** $.0505 $.0486 --
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized.
**Annualized
***Relates to purchases and sales of equity securities. Prior to September 30, 1996 disclosure of average commission rate was not
required.
****For the period May 1, 1995 (effective date) to September 30, 1995.
</TABLE>
Advisor Class
---------------------
1997****
---------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period $ 9.55
---------------------
Income from investment operations:
Net investment income .36
Net realized and unrealized gains .53
---------------------
Total from investment operations .89
Less distributions: ---------------------
Dividends from net investment income (.40)
---------------------
Net asset value, end of period $10.04
=====================
Total return* 9.61%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $8,719
Ratio to average net assets:
Expenses .62%**
Net investment income 5.33%**
Portfolio turnover rate 7.24%
Average commission rate paid*** $.0505
*Total return is not annualized.
**Annualized
***Relates to purchases and sales of equity securities.
****For the period January 2, 1997 (effective date) to September 30, 1997.
See notes to financial statements.
<TABLE>
<CAPTION>
Statement of Investments, September 30, 1997
Utilities Fund SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stocks 78.5%
<S> <C> <C>
AGL Resources, Inc. 350,000 $ 6,628,125
aAirTouch Communications, Inc. 203,200 7,200,900
Allegheny Energy, Inc. 1,800,000 54,450,000
American Electric Power Co., Inc. 1,276,100 58,062,550
AT&T Corp. 150,000 6,646,875
Central & South West Corp. 2,178,100 48,326,594
CINergy Corp. 2,059,800 68,874,563
Delmarva Power & Light Co. 2,359,800 44,541,225
Dominion Resources, Inc. 1,783,950 67,567,106
Duke Power Co. 1,585,000 78,358,438
Edison International 1,120,800 28,300,200
Enova Corp. 2,505,600 63,266,400
Entergy Corp. 1,875,400 48,877,613
Florida Progress Corp. 2,135,175 70,460,775
FPL Group, Inc. 1,601,000 82,051,250
GPU, Inc. 937,000 33,614,875
GTE Corp. 800,000 36,300,000
Hawaiian Electric Industries, Inc. 1,188,480 44,493,720
MidAmerican Energy Co. 2,059,800 35,531,550
Montana Power Co. 28,000 745,500
Nevada Power Co. 661,700 14,557,400
New Century Energies, Inc. 1,748,445 72,669,745
New Jersey Resources Corp. 245,500 7,948,063
NIPSCO Industries, Inc. 1,010,300 42,558,888
Northern States Power Co. 342,100 17,019,475
OGE Energy Corp. 444,300 20,965,406
Pacific Enterprises 560,800 18,997,100
PG&E Corp. 3,328,000 77,168,000
PacifiCorp 1,695,900 37,945,763
Pinnacle West Capital Corp. 518,485 17,434,058
Puget Sound Power & Light Co. 900,000 23,962,500
SBC Communications 182,100 11,176,388
SCANA Corp. 2,398,500 60,112,406
Sierra Pacific Resources 350,000 11,221,875
SIGCORP, Inc. 787,665 20,085,458
Southern Co. 3,463,500 78,145,219
TECO Energy, Inc. 2,900,400 71,059,800
Texas Utilities Co. 1,162,750 41,859,000
Western Resources, Inc. 806,200 27,662,738
-------------
Total Common Stocks (Cost $1,375,936,243) 1,556,847,541
-------------
Preferred Stocks 5.3%
AES Trust I, Series A, 5.375%, 3/31/27, cvt. pfd. 400,000 27,300,000
bCMS Energy Trust I, 7.75%, cvt. pfd. 705,000 38,360,601
MCN Financing III, 8.00%, 5/16/00, cvt. pfd. 108,400 5,860,375
Nortel Inversora, SA, 10.00% cvt. pfd., MEDS 650,000 35,100,000
-------------
Total Preferred Stocks (Cost $87,231,042) 106,620,976
-------------
PRINCIPAL
AMOUNT
-----------
Corporate Bonds 13.6%
<S> <C> <C>
Alabama Power Co., 8.75%, 12/01/21 $ 9,900,000 10,314,482
Alabama Power Co., 8.50%, 5/01/22 4,950,000 5,259,073
Arizona Public Service Co., 10.25%, 5/15/20 10,500,000 11,547,835
Arizona Public Service Co., 9.00%, 12/15/21 14,500,000 15,950,173
Cincinnati Gas & Electric Co., 8.50%, 9/01/22 10,000,000 10,639,850
Commonwealth Edison Co., 8.875%, 10/01/21 2,000,000 2,115,166
Commonwealth Edison Co., 8.50%, 7/15/22 5,000,000 5,301,794
Commonwealth Edison Co., 8.375%, 9/15/22 10,000,000 10,422,060
Duquesne Light Co., 8.375%, 5/15/24 $ 5,000,000 $ 5,277,689
Enron Corp., 7.00%, 8/15/23 19,000,000 18,350,313
Gulf States Utilities Co., 9.72%, 7/01/98 1,185,000 1,206,192
Illinois Power Co., 8.00%, 2/15/23 10,000,000 10,240,749
Itron, Inc., cvt., 144A, 6.75%, 3/31/04 10,000,000 12,450,000
Long Island Lighting Co., 9.75%, 5/01/21 10,000,000 10,337,849
Louisiana Power & Light Co., 8.50%, 7/01/22 10,000,000 10,236,378
Midland CoGeneration Venture, 10.33%, 7/23/02 11,831,875 13,223,836
Niagara Mohawk Power Corp., 9.50%, 3/01/21 7,500,000 8,005,634
Niagara Mohawk Power Corp., 8.75%, 4/01/22 5,000,000 5,299,400
Northwest Pipeline Corp., 7.125%, 12/01/25 3,000,000 2,903,628
Ohio Edison Co., 8.75%, 6/15/22 8,000,000 8,441,111
Pacific Bell, 7.75%, 9/15/32 10,000,000 10,332,599
Pacific Bell, 7.50%, 2/01/33 10,000,000 10,115,659
Panhandle Eastern Co., 7.20%, 8/15/24 20,000,000 19,087,180
Philadelphia Electric Co., 8.75%, 4/01/22 15,000,000 15,857,143
Texas Utilities Co., 8.75%, 11/01/23 10,000,000 11,055,769
Texas Utilities Co., 8.50%, 8/01/24 10,000,000 10,852,339
US West Communications Group, 6.875%, 9/15/33 16,000,000 14,912,958
-------------
Total Corporate Bonds (Cost $255,913,519) 269,736,859
-------------
Total Long Term Investments (Cost $1,719,080,804) 1,933,205,376
-------------
fRepurchase Agreements 1.1%
Joint Repurchase Agreement, 6.010%, 10/01/97
(Maturity Value $21,787,124) (Cost $21,783,487) 21,783,487 21,783,487
-------------
Collateralized by U.S. Treasury Bills & Notes
Aubrey G. Lanston & Co., Inc., (Maturity Value $1,655,821)
BA Securities, Inc., (Maturity Value $1,655,821)
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $1,917,272)
Bear, Stearns & Co., Inc., (Maturity Value $1,655,821)
CIBC Wood Gundy Securities Corp., (Maturity Value $1,655,821)
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $1,655,821)
Dresdner Kleinwort Benson North America, L.L.C., (Maturity Value $1,655,821)
Fuji Securities, Inc., (Maturity Value $1,655,821)
Lehman Brothers, Inc., (Maturity Value $1,655,821)
Sanwa Securities (USA) Co., L.P., (Maturity Value $1,655,821)
SBC Warburg, Inc., (Maturity Value $1,655,821)
The Nikko Securities Co. International, Inc., (Maturity Value $1,655,821)
UBS Securities, L.L.C., (Maturity Value $1,655,821)
Total Investments (Cost $1,740,864,291) 98.5% 1,954,988,863
Other Assets, less Liabilities 1.5% 28,909,798
-------------
Net Assets 100.0% $1,983,898,661
=============
PORTFOLIO ABBREVIATIONS:
MEDS - Mandatorially Exchangeable Debt Security
aNon-income producing.
bSee Note 6 regarding restricted securities.
fSee Note 1(f) regarding joint repurchase agreement.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Franklin Income Fund
Class I
----------------------------------------------------------------
Year Ended September 30,
----------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $2.30 $2.30 $2.22 $2.46 $2.25
----------------------------------------------------------------
Income from investment operations:
Net investment income .18 .19 .18 .17 .18
Net realized and unrealized gains (losses) .20 .02 .11 (.20) .23
----------------------------------------------------------------
Total from investment operations .38 .21 .29 (.03) .41
----------------------------------------------------------------
Less distributions:
Dividends from net investment income (.18) (.18) (.18) (.18) (.19)
Distributions from net realized gains (.01) (.03) (.03) (.03) (.01)
----------------------------------------------------------------
Total distributions (.19) (.21) (.21) (.21) (.20)
----------------------------------------------------------------
Net asset value, end of year $2.49 $2.30 $2.30 $2.22 $2.46
================================================================
Total return* 17.31% 9.43% 14.00% (1.52%) 18.76%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $7,738,746 $6,780,153 $5,885,788 $4,891,505 $3,935,444
Ratio to average net assets:
Expenses .72% .70% .71% .64% .54%
Net investment income 7.45% 8.27% 8.26% 7.37% 7.84%
Portfolio turnover rate 16.15% 25.29% 58.64% 23.37% 25.41%
Average commission rate paid** $.0498 $.0518 -- -- --
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized. Prior to May 1,
1994, dividends from net investment income were reinvested at the offering price.
**Relates to purchases and sales of equity securities. Prior to September 30, 1996 disclosure of average commission rate was not
required.
</TABLE>
<TABLE>
<CAPTION>
Class II
------------------------------------------
Year Ended September 30,
------------------------------------------
1997 1996 1995****
------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $2.30 $2.30 $2.18
------------------------------------------
Income from investment operations:
Net investment income .16 .17 .08
Net realized and unrealized gains .21 .03 .11
------------------------------------------
Total from investment operations .37 .20 .19
------------------------------------------
Less distributions:
Dividends from net investment income (.17) (.17) (.07)
Distributions from net realized gains (.01) (.03) --
------------------------------------------
Total distributions (.18) (.20) (.07)
------------------------------------------
Net asset value, end of year $2.49 $2.30 $2.30
==========================================
Total return* 16.72% 8.86% 8.96%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $695,355 $343,314 $65,822
Ratio to average net assets:
Expenses 1.22% 1.21% 1.23%**
Net investment income 6.96% 7.84% 7.89%**
Portfolio turnover rate 16.15% 25.29% 58.64%
Average commission rate paid*** $.0498 $.0518 --
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized.
**Annualized
***Relates to purchases and sales of equity securities. Prior to September 30, 1996 disclosure of average commission rate was not
required.
****For the period May 1, 1995 (effective date) to September 30, 1995.
</TABLE>
<TABLE>
<CAPTION>
Advisor Class
----------------
1997****
----------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C>
Net asset value, beginning of period $2.34
----------------
Income from investment operations:
Net investment income .14
Net realized and unrealized gains .14
----------------
Total from investment operations .28
----------------
Less distributions:
Dividends from net investment income (.14)
----------------
Net asset value, end of period $2.48
================
Total return* 12.31%
Ratios/Supplemental Data
Net assets, end of period (000's) $13,318
Ratio to average net assets:
Expenses .57%**
Net investment income 7.58%**
Portfolio turnover rate 16.15%
Average commission rate paid*** $.0498
*Total return is not annualized.
**Annualized
***Relates to purchases and sales of equity securities.
****For the period January 2, 1997 (effective date) to September 30, 1997.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Investments, September 30, 1997
SHARES/
Income Fund WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
a,b,fCommon Stocks 28.4%
Apparel/Textiles .2%
<S> <C> <C>
a,b,eBibb Co. 2,097,122 $ 15,728,415
-------------
Automotive .1%
General Motors Corp. ............................................................ 100,000 6,693,750
-------------
Computer/Technology .2%
a,e Anacomp, Inc. ................................................................... 1,233,882 19,125,171
-------------
Consumer Products 1.8%
Philip Morris Cos., Inc. ........................................................ 3,300,000 137,156,250
RJR Nabisco Holdings Corp. ...................................................... 600,000 20,625,000
-------------
................................................................................. 157,781,250
-------------
Energy/Energy Services 2.8%
Athabasca Oil Sands Trust, (Canada).............................................. 2,700,000 52,759,182
Atlantic Richfield Co. .......................................................... 300,000 25,631,250
Canadian Oil Sands Trust, (Canada), 144A......................................... 2,300,000 46,607,563
Energy Group, Plc., Sponsored ADR................................................ 237,500 9,885,938
Monterey Resources, Inc.......................................................... 812,540 17,063,340
Pioneer Natural Resources Co. ................................................... 1,200,015 50,250,628
aSanta Fe Energy Resources, Inc................................................... 1,122,805 14,035,063
Ultramar Diamond Shamrock Corp. ................................................. 625,000 20,195,313
-------------
............................................................................... 236,428,277
-------------
Metals 1.0%
Anglo American Platinum Corp., Ltd., ADR......................................... 943,691 16,350,862
Driefontein Consolidated, Ltd., Sponsored ADR ................................... 700,000 5,162,500
Free State Consolidated Gold Mines, Ltd., ADR ................................... 2,525,000 15,386,845
Freeport-McMoRan Copper & Gold, Inc., Class A.................................... 408,329 11,254,568
Impala Platinum Holdings, Ltd., ADR ............................................. 1,184,200 13,784,562
Samancor, Ltd., ADR ............................................................. 300,000 2,252,970
St. Helena Gold Mines, Ltd., ADR ................................................ 187,500 773,438
Vaal Reefs Exploration & Mining Co., Ltd., ADR .................................. 1,500,000 8,062,500
Western Deep Levels, Ltd., ADR .................................................. 350,000 8,968,750
-------------
............................................................................... 81,996,995
-------------
Real Estate Investment Trusts .3%
Meditrust Corp. ................................................................. 600,000 24,900,000
-------------
Telecommunications .8%
US West Communications Group .................................................... 1,700,000 65,450,000
-------------
Utilities 21.2%
American Electric Power Co., Inc. ............................................... 2,200,000 100,100,000
Central & South West Corp. ...................................................... 3,800,000 84,312,500
CINergy Corp. ................................................................... 2,400,000 80,250,000
Delmarva Power & Light Co. ...................................................... 2,800,000 52,850,000
Dominion Resources, Inc. ........................................................ 2,400,000 90,900,000
Edison International ............................................................ 3,100,000 78,275,000
Enova Corp. ..................................................................... 3,000,000 75,750,000
Entergy Corp. ................................................................... 3,500,000 91,218,750
Florida Progress Corp. .......................................................... 2,700,000 89,100,000
FPL Group, Inc. ................................................................. 1,400,000 71,750,000
GPU, Inc......................................................................... 1,700,000 60,987,500
Hawaiian Electric Industries, Inc. .............................................. 610,000 22,836,875
Houston Industries, Inc. ........................................................ 1,900,000 41,325,000
Long Island Lighting Co. ........................................................ 1,800,000 46,125,000
MidAmerican Energy Holdings Co. ................................................. 1,776,600 30,646,350
Nevada Power Co. ................................................................ 825,000 18,150,000
New Century Energies, Inc........................................................ 1,805,000 75,020,313
New England Electric System ..................................................... 1,900,000 74,575,000
New York State Electric & Gas Corp. ............................................. 1,000,000 26,875,000
Utilities (cont.)
Northern States Power Co. ....................................................... 949,600 $ 47,242,600
Ohio Edison Co. ................................................................. 2,100,000 49,218,750
PacifiCorp ...................................................................... 525,000 11,746,875
PECO Energy Co. ................................................................. 3,000,000 70,312,500
PG&E Corp. ...................................................................... 3,200,000 74,200,000
Potomac Electric Power Co. ...................................................... 1,600,000 36,400,000
Public Service Enterprise Group, Inc. ........................................... 2,350,000 60,512,500
SCANA Corp. ..................................................................... 800,000 20,050,000
Southern Co. .................................................................... 2,700,000 60,918,750
Texas Utilities Co. ............................................................. 2,400,000 86,400,000
Western Resources, Inc........................................................... 1,900,000 65,193,750
-------------
............................................................................... 1,793,243,013
-------------
Total Common Stocks (Cost $2,030,817,301) ....................................... 2,401,346,871
-------------
Preferred Stocks 11.6%
Apparel/Textiles .3%
Fieldcrest Cannon, Inc., $3.00 cvt. pfd., Series A .............................. 400,000 23,600,000
-------------
Cable Systems .4%
Cablevision Systems Corp., 8.50% cvt. pfd., Series I............................. 1,300,000 38,025,000
-------------
Consumer Products .1%
Pantry Pride, Inc., $14.875 pfd., Series B ...................................... 75,000 7,621,875
-------------
Energy/Energy Services 4.1%
bCMS Energy Trust I, 7.75% cvt. pfd............................................... 1,600,000 87,059,520
Devon Financing Trust, $3.25 cvt. pfd., 144A..................................... 600,000 48,375,000
Enron Corp., 6.25% cvt. pfd...................................................... 2,150,000 48,240,625
McDermott International, Inc., $2.875 cvt. pfd., Series C, 144A ................. 1,100,000 61,325,000
Nuevo Energy Co., 5.75% cvt. pfd., Series A...................................... 1,200,000 61,500,000
Occidental Petroleum Corp., $3.875 cvt. pfd., 144A............................... 490,000 28,787,500
Patina Oil & Gas Corp., 7.125% cvt. pfd.......................................... 158,100 5,118,488
Snyder Oil Corp., $1.50 cvt. exch. pfd. ......................................... 178,900 4,942,113
-------------
................................................................................ 345,348,246
-------------
Lodging .9%
Host Marriott Corp., 6.75% cvt. pfd., 144A....................................... 1,100,000 74,800,000
-------------
Metals 1.8%
Amax Gold, Inc., $3.75 cvt. pfd., Series B ...................................... 650,000 35,100,000
Armco, Inc., $3.625 cum. cvt. pfd., Series A .................................... 300,000 15,262,500
Armco, Inc., $4.50 cvt. pfd., Class B ........................................... 114,200 5,781,375
Battle Mountain Gold Co., $3.25 cvt. pfd. ....................................... 295,000 14,879,063
Coeur D'Alene Mines Corp., 7.00% cvt. pfd........................................ 600,000 11,137,500
Cyprus Minerals, $4.00 cvt. pfd., Series A ...................................... 120,000 6,615,000
Freeport-McMoRan, Inc., 4.375% cvt. exch. pfd., 144A ............................ 450,000 29,250,000
Freeport-McMoRan, Inc., 8.75% cvt. pfd. ......................................... 400,000 12,200,000
Hecla Mining Co., $3.50 cvt. pfd., Series B ..................................... 375,000 18,234,375
-------------
............................................................................... 148,459,813
-------------
Media & Broadcasting .5%
Time Warner, Inc., 10.25% pfd., Series M......................................... 34,800 39,715,500
-------------
Paper & Forest Products .7%
Asia Pulp & Paper Co., Ltd., 12.00% pfd.......................................... 60,000,000 61,200,000
-------------
Real Estate Investment Trusts 1.9%
FelCor Suite Hotels, Inc., $1.95 cvt. pfd., Series A ............................ 1,800,000 58,500,000
Security Capital Industrial Trust, 7.00% cvt. pfd................................ 800,000 24,200,000
Security Capital Pacific Trust, $1.75 cvt. pfd., Series A........................ 1,040,000 33,085,000
Vornado Realty Trust, 6.50%, cvt. pfd., Series A................................. 700,000 43,750,000
-------------
............................................................................... 159,535,000
-------------
Telecommunications .9%
Nortel Inversora, SA, 10.00% cvt. pfd............................................ 1,200,000 $ 64,800,000
Nortel Inversora, SA, ADR, cvt. pfd., Series B................................... 504,000 14,049,000
-------------
............................................................................... 78,849,000
-------------
Total Preferred Stocks (Cost $835,940,260) ..................................... 977,154,434
-------------
Partnership Units .2%
BP Prudhoe Bay Royalty Trust .................................................... 500,000 9,000,000
Freeport-McMoRan Resource Partners, Ltd., depository units ...................... 300,000 3,843,750
a,bJewel Recovery, L.P. ............................................................ 59,258 28,444
-------------
Total Partnership Units (Cost $18,730,667) ...................................... 12,872,194
-------------
Warrants
a,bBoardwalk Casino, Inc............................................................ 1,281,869 1,874,092
aSecurity Capital Group .......................................................... 121,476 971,808
-------------
Total Warrants (Cost $2,643,855) ................................................ 2,845,900
-------------
Total Common Stocks, Preferred Stocks, Partnership Units, and Warrants (Cost $2,88 8,132,083) 3,394,219,399
-------------
PRINCIPAL
AMOUNT*
------------
Corporate Bonds 29.2%
Apparel/Textiles 1.6%
<S> <C> <C>
Consoltex Group, Inc., senior sub. notes, Series B, 11.00%, 10/01/03 ................ $ 50,000,000 52,500,000
Hartmarx Corp., senior sub. notes, 10.875%, 1/15/02 ................................. 35,000,000 35,875,000
Polysindo International Finance Co., secured notes, 11.375%, 6/15/06 ................ 13,000,000 14,137,500
Westpoint Stevens, Inc., senior sub. deb., 9.375%, 12/15/05 ......................... 25,000,000 26,500,000
The William Carter Co., senior sub. notes, Series A, 10.375%, 12/01/06 .............. 6,000,000 6,300,000
-------------
135,312,500
-------------
Automotive 1.0%
Collins & Aikman Corp., senior sub. notes., 11.50%, 4/15/06 ......................... 35,000,000 40,206,250
Exide Corp., cvt. sub. notes, 144A, 2.90%, 12/15/05 ................................. 30,000,000 18,937,500
Exide Corp., senior notes, 10.75%, 12/15/02 ......................................... 4,000,000 4,250,000
cHarvard Industries, Inc., senior notes, 11.125%, 8/01/05 ........................... 50,000,000 19,750,000
-------------
83,143,750
-------------
Biotechnology .2%
Centocor, Inc., Eurobonds, cvt. sub. deb., 6.75%, 10/16/01 .......................... 16,500,000 16,665,000
-------------
Building Products .4%
American Standard, Inc., S.F., senior sub. deb., 9.25%, 12/01/16 .................... 5,000,000 5,250,000
Inter-City Products Corp., senior notes, 9.75%, 3/01/00 ............................. 30,000,000 30,900,000
-------------
36,150,000
-------------
Cable Systems 1.3%
Cablevision Systems Corp., senior sub. deb., 9.875%, 4/01/23 ........................ 40,000,000 43,200,000
Continental Cablevision, Inc., senior sub. deb., 9.50%, 8/01/13 ..................... 30,000,000 35,183,519
Helicon Group, L.P. Corp., senior notes, Series B, 11.00%, 11/01/03 ................. 35,000,000 37,012,500
-------------
115,396,019
-------------
Chemicals .7%
Applied Extrusion Technology, senior notes, Series B, 11.50%, 4/01/02 ............... 29,000,000 30,885,000
Uniroyal Chemical Co., senior notes, 10.50%, 5/01/02 ................................ 8,900,000 9,745,500
Uniroyal Chemical Co., senior sub. notes, 11.00%, 5/01/03 ........................... 20,000,000 21,600,000
-------------
62,230,500
-------------
Computer/Technology 1.2%
Acclaim Entertainment, Inc., cvt. sub. notes, 10.00%, 3/01/02 ....................... 29,000,000 32,770,000
Anacomp, Inc., senior sub. notes, Series B, 10.875%, 4/01/04 ........................ 60,000,000 63,300,000
Maxtor Corp., cvt. sub. deb., 5.75%, 3/01/12 ........................................ 11,750,000 8,166,250
-------------
104,236,250
-------------
Consumer Products 1.9%
E&S Holdings Corp., senior sub. notes, Series B, 10.375%, 10/01/06 .................. $ 20,000,000 $ 19,550,000
Mafco, Inc., senior sub. deb., 11.875%, 11/15/02 .................................... 18,000,000 19,260,000
Playtex Family Products Corp., senior sub. notes, 9.00%, 12/15/03 ................... 38,500,000 39,270,000
Revlon Consumer Products Corp., senior sub. notes, Series B, 10.50%, 2/15/03 ........ 30,000,000 31,950,000
RJR Nabisco, Inc., notes, 9.25%, 8/15/13 ............................................ 35,000,000 38,097,390
Sealy Corp., senior sub. notes, 10.25%, 5/01/03 ..................................... 8,650,000 9,125,750
-------------
157,253,140
-------------
Containers & Packaging 1.0%
Calmar, Inc., senior sub notes, Series B, 11.50%, 8/15/05 ........................... 30,000,000 32,100,000
Packaging Resources, Inc., senior notes, 11.625%, 5/01/03 ........................... 28,000,000 29,190,000
Printpack, Inc., senior sub. notes, Series B, 10.625%, 8/15/06 ...................... 15,000,000 16,275,000
U.S. Can Corp., company guaranteed, Series B, 10.125%, 10/15/06 ..................... 6,000,000 6,405,000
-------------
83,970,000
-------------
Electrical Equipment .1%
Trans-Lux Corp., cvt. sub. notes, 7.50%, 12/01/06 ................................... 8,000,000 9,600,000
-------------
Energy/Energy Services 2.6%
Bellwether Exploration Co., senior sub. notes, 10.875%, 4/01/07 ..................... 12,000,000 12,975,000
Energy Ventures, senior notes, 10.25%, 3/15/04 ...................................... 10,000,000 10,850,000
Falcon Drilling, senior sub. notes, 12.50%, 3/15/05 ................................. 15,000,000 17,306,250
Gerrity Oil & Gas Corp., senior sub. notes, 11.75%, 7/15/04 ......................... 40,000,000 43,800,000
Global Marine, Inc., senior secured notes, 12.75%, 12/15/99 ......................... 19,000,000 19,570,000
Mesa Operating Co., company guaranteed, unsecured senior sub. notes, 10.625%, 7/01/06 5,000,000 5,781,250
Oryx Energy Co., cvt. sub. deb., 7.50%, 5/15/14 ..................................... 45,000,000 45,393,750
Plains Resources, Inc., senior sub. notes, 10.25%, 3/15/06 .......................... 8,000,000 8,640,000
Swift Energy Co., cvt. sub. notes, 6.25%,11/15/06 ................................... 50,000,000 54,375,000
-------------
218,691,250
-------------
Entertainment .2%
AMF Group, Inc., Series B, 10.875%, 3/15/06 ......................................... 12,000,000 13,350,000
-------------
Financial Services .1%
First Nationwide Holdings, Inc., senior sub. notes, 10.625%, 10/01/03 ............... 10,000,000 11,075,000
-------------
Food & Beverages 2.9%
Chock Full O'Nuts Corp., S.F., cvt. sub. deb., 8.00%, 9/15/06 ....................... 3,902,000 4,360,485
Curtice-Burns Foods, Inc., senior sub. notes, 12.25%, 2/01/05 ....................... 45,000,000 50,175,000
Del Monte Corp., senior sub. notes, Series B, 12.25%, 4/15/07 ....................... 46,000,000 50,140,000
Doane Products Co., senior notes, 10.625%, 3/01/06 .................................. 21,000,000 22,575,000
Dr. Pepper Bottling Co. of Texas, senior sub. notes, 10.25%, 2/15/00 ................ 6,600,000 6,963,000
International Home Foods, company guaranteed, senior sub. notes, 10.375%, 11/01/06 .. 30,000,000 33,300,000
PMI Acquisition Corp., senior sub. notes, 10.25%, 9/01/03 ........................... 32,500,000 34,531,250
Specialty Foods Corp., senior sub. notes, Series B, 11.25%, 8/15/03 ................. 25,000,000 22,875,000
Specialty Foods Corp., senior unsecured notes, Series B, 10.25%, 8/15/01 ............ 20,000,000 19,800,000
-------------
244,719,735
-------------
Food Chains 1.8%
Americold Corp., senior sub. notes, 12.875%, 5/01/08 ................................ 18,000,000 20,700,000
Americold Corp., senior sub. notes, Series B, 11.50%, 3/01/05 ....................... 33,000,000 35,805,000
Bruno's, Inc., senior sub. notes, 10.50%, 8/01/05 ................................... 60,000,000 36,000,000
Grand Union Capital Corp., senior notes, 12.00%, 9/01/04 ............................ 33,000,000 15,345,000
Ralphs Grocery Co., senior sub notes, 11.00%, 6/15/05 ............................... 40,000,000 44,000,000
-------------
151,850,000
-------------
Gaming & Leisure 1.4%
Aztar Corp., senior sub. notes, 11.00%, 10/01/02 .................................... 60,000,000 62,100,000
Eldorado Resorts, L.L.C., senior sub. notes, 10.50%, 8/15/06 ........................ 8,000,000 8,800,000
Harveys Casino Resorts, senior sub. notes, 10.625%, 6/01/06 ......................... 11,000,000 12,100,000
Rio Hotel & Casino, Inc., senior sub. notes, 10.625%, 7/15/05 ....................... 35,000,000 38,237,500
-------------
121,237,500
-------------
Health Care .6%
Dade International, Inc., senior sub. notes, 11.125%, 5/01/06 ....................... $ 22,000,000 $ 24,777,500
Medical Care International, Inc., cvt. sub. deb., 144A, 6.75%, 10/01/06 ............. 15,000,000 14,100,000
Sola Group, Ltd., senior sub. notes, 6.00% coupon to 12/15/98, 9.625% thereafter,
12/15/03 ........................................................................... 10,000,000 9,900,000
-------------
48,777,500
-------------
Industrial Products 1.4%
Nortek, Inc., senior sub. notes, 9.875%, 3/01/04 .................................... 18,500,000 19,124,375
RBX Corp., senior sub. notes, Series B, 11.25%, 10/15/05 ............................ 60,000,000 53,100,000
RHI Holdings, Inc., senior sub. deb., 11.875%, 3/01/99 .............................. 21,849,000 21,794,378
Thermadyne Industries, Inc., senior sub. notes, 10.25%, 5/01/02 ..................... 7,393,000 7,725,685
Thermadyne Industries, Inc., sub. notes, 10.75%, 11/01/03 ........................... 14,500,000 15,587,500
-------------
117,331,938
-------------
Media & Broadcasting .2%
Benedek Broadcasting, senior notes, 11.875%, 3/01/05 ................................ 12,250,000 13,811,875
-------------
Metals 2.2%
Armco Steel, Inc., senior notes, 11.375%, 10/15/99 .................................. 7,000,000 7,210,000
Armco Steel, Inc., senior notes, 9.375%, 11/01/00 ................................... 5,000,000 5,175,000
Ashanti Capital, Ltd., cvt. notes, 5.50%, 3/15/03 ................................... 48,000,000 39,360,000
Coeur D' Alene Mines Corp., cvt. senior sub. deb., 6.00%, 6/10/02 ................... 900,000 774,000
Coeur D' Alene Mines Corp., cvt. sub. deb., 6.375%, 1/31/04 ......................... 20,000,000 18,750,000
FMC Corp., Eurobonds, cvt. senior sub. deb., 6.75%, 1/16/05 ......................... 13,020,000 12,694,500
Jorgensen, Earle M. Co., senior notes, 10.75%, 3/01/00 .............................. 50,000,000 51,250,000
Republic Engineered Steel Co., first mortgage, 9.875%, 12/15/01 ..................... 50,000,000 48,625,000
UCAR Global Enterprises, senior sub. notes, Series B, 12.00%, 1/15/05 ............... 4,805,000 5,483,706
-------------
189,322,206
-------------
Paper & Forest Products 1.7%
Four M Corp., senior notes, Series B, 12.00%, 6/01/06 ............................... 30,000,000 32,325,000
Riverwood International, senior sub. notes, 10.875%, 4/01/08 ........................ 60,000,000 60,225,000
Tjiwi Kimia International, company guaranteed, senior unsecured notes, 144A, 10.00%,
8/01/04 ............................................................................ 50,000,000 49,437,500
-------------
141,987,500
-------------
Pharmaceuticals .5%
ICN Pharmaceuticals, Inc., senior notes, 144A, 9.25%, 8/15/05 ....................... 37,000,000 39,035,000
-------------
Pollution Control .2%
Air & Water Technology Corp., cvt. sub. deb., 8.00%, 5/15/15 ........................ 21,000,000 16,721,250
-------------
Publishing .2%
Bell & Howell Co., senior sub. notes, Series B, 10.75%, 10/01/02 .................... 12,500,000 13,125,000
-------------
Real Estate Development .1%
Rouse Co., cvt. sub. deb., 5.75%, 7/23/02 ........................................... 10,000,000 11,100,000
-------------
Real Estate Investment Trusts .6%
Macerich Co., cvt. sub. notes, 144A, 7.25%, 12/15/02 ................................ 50,000,000 49,562,500
-------------
Retail .1%
Drug Emporium, Inc., cvt. sub. deb., 7.75%, 10/01/14 ................................ 9,000,000 7,875,000
-------------
Telecommunications .6%
CommNet Cellular, Inc., sub. notes, 11.25%, 7/01/05 ................................. 25,000,000 28,875,000
Paging Network, senior sub. notes, 10.125%, 8/01/07 ................................. 25,000,000 26,187,500
-------------
55,062,500
-------------
Utilities 2.4%
ESCOM, E168, utility deb., 11.00%, 6/01/08 .......................................... 975,837,500 ZAR 172,700,519
Midland CoGeneration Venture, deb. notes, Series C-91, 10.33%, 7/23/02 .............. 6,278,954 7,017,642
Midland CoGeneration Venture, S.F., sub. deb., Series C, 10.33%, 7/23/02 ............ 12,169,929 13,601,660
Texas-New Mexico Power Co., secured deb., 10.75%, 9/15/03 ........................... 6,000,000 6,535,104
-------------
199,854,925
-------------
Total Corporate Bonds (Cost $2,426,897,205) ......................................... 2,468,447,838
-------------
U.S. Government Securities 11.4%....................................................
U.S. Treasury Bonds, 6.25% - 7.125%, 2/15/23 - 8/15/23 .............................. $831,000,000 $ 834,087,562
U.S. Treasury Notes, 6.00% - 6.375%, 12/31/97 - 8/15/02 ............................. 128,000,000 129,758,233
-------------
Total U.S. Government Securities (Cost $928,239,501) ................................ 963,845,795
-------------
Foreign Government Securities 8.9%
Republic of Argentina, FRN, 5.50%, 3/31/23 .......................................... 520,000,000 393,120,000
Republic of Brazil, 5.25%, 4/15/24 .................................................. 200,000,000 147,750,000
Republic of Brazil, FRN deb., 6.875%, 4/15/06 ....................................... 64,350,000 60,328,126
Republic of Brazil, FRN, Series A, 6.8125%, 1/01/01 ................................. 47,296,250 46,894,233
Republic of South Africa, 12.00%, 2/28/05 ........................................... 515,000,000 ZAR 100,789,938
-------------
Total Foreign Government Securities (Cost $617,371,329) ............................. 748,882,297
-------------
hZero Coupon/Step-up Bonds 3.5%
AMF Group, Inc., senior disc. notes, Series B, zero coupon to 3/15/01 (original accretion rate 12.25%), 12.25% thereafter,
3/15/06............................................................................. 38,000,000 28,880,000
Bell & Howell Co., senior deb., zero coupon to 3/01/00 (original accretion rate 11.50%), 11.50%, thereafter, 3/01/05
65,000,000 54,925,000
Dr Pepper Bottling Holdings Co., S.F., senior sub. disc. notes, zero coupon to 2/15/98 (original accretion rate 11.625%),
11.625% thereafter, 2/15/03 ......................................................... 11,000,000 11,165,000
Food 4 Less, Inc., senior disc. deb., zero coupon to 6/15/00, (original accretion rate 13.625%), 13.625% thereafter,
7/15/05.............................................................................. 50,000,000 40,750,000
Marcus Cable Co., senior disc. notes, zero coupon to 6/15/00, (original accretion rate 14.25%), 14.25% thereafter, 12/15/05
75,000,000 62,812,500
Mesa Operating Co., company guaranteed, unsecured senior sub. notes, zero coupon to 7/01/01, (original accretion rate
11.625%), 11.625% thereafter, 7/01/06................................................ 15,000,000 12,000,000
Revlon Worldwide Corp., senior disc. notes, Series B, (original accretion rate 10.75%), 0.00%, 3/15/01
50,000,000 36,375,000
Revlon Worldwide Corp., senior secured disc. notes, Series B (original accretion rate 12.00%), 0.00%, 3/15/98
40,000,000 38,999,640
Uniroyal Chemical Co. Investors, discount notes, zero coupon to 5/01/98, (original accretion rate 12.00%),
12.00% thereafter, 5/01/05 .......................................................... 12,000,000 11,520,000
-------------
Total Zero Coupon/Step-up Bonds (Cost $268,792,356) 297,427,140
-------------
Total Long Term Investments (Cost $7,129,432,474) 7,872,822,469
-------------
fRepurchase Agreements 5.2%
Joint Repurchase Agreement, 6.010%, 10/01/97, (Maturity Value $435,757,846)
(Cost $435,685,111) .................................................................. 435,685,111 435,685,111
-------------
Collateralized by U.S. Treasury Bills & Notes
Aubrey G. Lanston & Co., Inc., (Maturity Value $33,117,596)
BA Securities, Inc., (Maturity Value $33,117,596)
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $38,346,694)
Bear, Stearns & Co., Inc., (Maturity Value $33,117,596)
CIBC Wood Gundy Securities Corp., (Maturity Value $33,117,596)
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $33,117,596)
Dresdner Kleinwort Benson North America, L.L.C., (Maturity Value $33,117,596)
Fuji Securities, Inc., (Maturity Value $33,117,596)
Lehman Brothers, Inc., (Maturity Value $33,117,596)
Sanwa Securities (USA) Co., L.P., (Maturity Value $33,117,596)
SBC Warburg, Inc., (Maturity Value $33,117,596)
The Nikko Securities Co. International, Inc., (Maturity Value $33,117,596)
UBS Securities, L.L.C., (Maturity Value $33,117,596)
Total Investments (Cost $7,565,117,585) 98.4% 8,308,507,580
Other Assets, less Liabilities 1.6% 138,911,657
-------------
Net Assets 100.0% $8,447,419,237
=============
CURRENCY ABBREVIATIONS: ZAR - South African Rand
*Securities traded in U.S. dollars unless otherwise indicated.
aNon-income producing.
bSee Note 6 regarding restricted securities.
cSee Note 7 regarding defaulted securities.
eThe Investment Company Act of 1940 defines "affiliated companies" as investments in portfolio companies in which the Fund owns 5%
or more of the outstanding voting securities. Investments in "affiliated companies" at 9/30/97 were $34,853,586.
fSee Note 1(f) regarding joint repurchase agreement.
hZero coupon/step-up bonds. The current effective yield may vary. The original accretion rate will remain constant.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Franklin U.S. Government Securities Fund
Class I
----------------------------------------------------------------
Year Ended September 30,
----------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $6.72 $6.87 $6.51 $7.20 $7.26
----------------------------------------------------------------
Income from investment operations:
Net investment income .48 .49 .50 .50 .56
Net realized and unrealized gains (losses) .17 (.15) .35 (.68) (.06)
----------------------------------------------------------------
Total from investment operations .65 .34 .85 (.18) .50
----------------------------------------------------------------
Less distributions:
Dividends from net investment income (.48) (.49) (.49) (.51) (.56)
----------------------------------------------------------------
Net asset value, end of year $6.89 $6.72 $6.87 $6.51 $7.20
================================================================
Total return* 10.08% 5.15% 13.56% (2.75%) 6.86%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $9,350,751 $10,129,483 $11,101,605 $11,668,747 $14,268,516
Ratio to average net assets:
Expenses .64% .61% .61% .55% .52%
Net investment income 7.01% 7.18% 7.50% 7.37% 7.71%
Portfolio turnover rate** 1.74% 8.01% 5.48% 18.28% 43.10%
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized. Prior to May 1,
1994, dividends from net investment income were reinvested at the offering price.
**Maturity of U.S. government issues and the reinvestment of the proceeds thereof are considered as purchases and sales of
securities in computing the portfolio turnover rate.
</TABLE>
<TABLE>
<CAPTION>
Class II
-------------------------------
Year Ended September 30,
-------------------------------
1997 1996 1995***
-------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $6.70 $6.85 $6.67
-------------------------------
Income from investment operations:
Net investment income .44 .45 .21
Net realized and unrealized gains (losses) .17 (.15) .16
-------------------------------
Total from investment operations .61 .30 .37
-------------------------------
Less distributions:
Dividends from net investment income (.44) (.45) (.19)
-------------------------------
Net asset value, end of year $6.87 $6.70 $6.85
===============================
Total return* 9.48% 4.55% 5.66%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $120,818 $57,657 $11,695
Ratio to average net assets:
Expenses 1.20% 1.17% 1.18%**
Net investment income 6.44% 6.80% 6.48%**
Portfolio turnover rate**** 1.74% 8.01% 5.48%
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized.
**Annualized
***For the period May 1, 1995 (effective date) to September 30, 1995.
****Maturity of U.S. government issues and the reinvestment of the proceeds thereof are considered as purchases and sales of
securities in computing the portfolio turnover rate.
</TABLE>
Advisor Class
--------------------
1997***
--------------------
Per Share Operating Performance
(for a share outstanding throughout the period)
Net asset value, beginning of period $6.76
--------------------
Income from investment operations:
Net investment income .38
Net realized and unrealized gains .12
--------------------
Total from investment operations .50
--------------------
Less distributions:
Dividends from net investment income (.36)
--------------------
Net asset value, end of period $6.90
====================
Total return* 7.68%
Ratios/Supplemental Data
Net assets, end of period (000's) $14,469
Ratio to average net assets:
Expenses .56%**
Net investment income 7.01%**
Portfolio turnover rate**** 1.74%
*Total return is not annualized.
**Annualized
***For the period January 2, 1997 (effective date) to September 30, 1997.
****Maturity of U.S. government issues and the reinvestment of the proceeds
thereof are considered as purchases and sales of securities in computing the
portfolio turnover rate.
See notes to financial statements.
<TABLE>
<CAPTION>
Statement of Investments, September 30, 1997
PRINCIPAL
U.S. Government Securities Fund AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Government National Mortgage Association (GNMA) 96.2%
<S> <C> <C>
GNMA I, SF, 6.00%, 9/15/23 - 11/15/23 $ 22,074,854 $ 21,183,910
GNMA I, SF, 6.50%, 3/15/03 - 3/15/24 1,092,073,836 1,072,839,335
GNMA PL, 6.50%, 5/15/24 31,543,580 30,492,861
GNMA II, 6.50%, 6/20/24 - 5/20/26 68,369,075 66,678,681
GNMA PL, 6.75%, 1/15/34 36,165,053 35,556,754
GNMA I, SF, 6.75%, 3/15/26 - 5/15/26 3,638,886 3,591,689
GNMA II, 7.00%, 3/20/24 - 1/20/27 361,599,298 360,721,829
GNMA PL, 7.00%, 9/15/35 8,972,828 8,952,818
GNMA I, SF, 7.00%, 4/15/16 - 12/15/26 1,947,488,993 1,957,194,527
GNMA SF, 7.25%, 10/15/25 - 1/15/26 8,453,141 8,507,038
GNMA PL, 7.375%, 4/15/29 35,197,401 35,420,199
GNMA PL, 7.425%, 7/15/29 21,060,952 21,350,540
GNMA I, SF, 7.50%, 6/15/05 - 9/15/27 1,427,246,695 1,460,906,630
GNMA II, 7.50%, 10/20/22 - 2/20/27 399,840,629 406,046,213
GNMA PL, 7.75%, 10/15/12 5,563,384 5,891,011
GNMA I, SF, 8.00%, 10/15/07 - 5/15/26 1,212,728,959 1,264,106,310
GNMA II, 8.00%, 8/20/16 - 10/20/26 92,723,709 95,960,711
GNMA PL, 8.00%, 4/15/22 - 5/15/32 47,421,733 49,079,673
GNMA I, GPM, 8.25%, 3/15/17 - 11/15/17 7,257,348 7,619,997
GNMA PL, 8.25%, 12/15/20 - 2/15/28 24,501,491 25,169,614
GNMA I, SF, 8.50%, 5/15/16 - 11/15/24 288,787,583 305,521,461
GNMA II, 8.50%, 4/20/16 - 6/20/25 55,583,113 58,723,875
GNMA I, GPM, 8.75%, 3/20/17 - 7/20/17 1,203,395 1,282,302
GNMA I, SF, 9.00%, 10/15/04 - 7/15/23 349,371,808 378,212,840
GNMA II, 9.00%, 11/17/20 - 11/20/21 18,816,641 20,254,966
GNMA I, GPM, 9.25%, 5/15/16 - 1/15/17 5,447,035 5,869,291
GNMA I, SF, 9.50%, 5/15/09 - 2/15/23 189,286,077 206,041,045
GNMA II, 9.50%, 9/20/15 - 4/20/25 18,847,438 20,364,468
GNMA I, GPM, 10.00%, 11/15/09 - 11/15/13 6,122,668 6,698,217
GNMA I, SF, 10.00%, 4/15/12 - 4/15/25 228,602,882 251,232,858
GNMA II, 10.00%, 8/20/15 - 3/20/21 27,896,102 30,358,976
GNMA I, GPM, 10.25%, 2/15/16 - 2/15/21 2,963,121 3,249,058
GNMA I, SF, 10.50%, 8/15/00 - 10/15/21 162,633,641 180,806,169
GNMA II, 10.50%, 10/20/13 - 3/20/21 43,751,757 47,971,676
GNMA I, GPM, 11.00%, 12/15/09 - 3/15/11 10,995,013 12,265,801
GNMA I, SF, 11.00%, 1/15/01 - 5/15/21 136,944,687 154,094,584
GNMA II, 11.00%, 1/20/15 - 1/20/21 12,677,536 13,982,908
GNMA I, GPM, 11.25%, 6/15/13 - 1/15/16 5,340,480 6,056,499
GNMA I, GPM, 11.50%, 3/15/10 - 6/15/13 2,035,766 2,319,575
GNMA I, SF, 11.50%, 2/15/13 - 12/15/17 28,933,813 33,230,430
GNMA II, GPM, 11.50%, 7/20/13 - 1/20/14 200,135 227,145
GNMA II, 11.50%, 10/20/13 - 4/20/18 2,001,752 2,289,805
GNMA I, GPM, 11.75%, 7/15/13 - 12/15/15 1,100,108 1,259,028
GNMA I, GPM, 12.00%, 10/15/10 - 3/15/13 573,880 659,811
GNMA I, SF, 12.00%, 5/15/11 - 8/15/19 135,158,860 156,901,538
GNMA II, 12.00%, 9/20/13 - 2/20/16 6,336,343 7,331,195
GNMA I, GPM, 12.50%, 4/15/10 - 10/15/12 1,020,236 1,180,410
GNMA I, SF, 12.50%, 1/15/10 - 8/15/18 117,995,423 137,948,490
GNMA II, 12.50%, 9/20/13 - 11/20/15 5,327,791 6,259,020
GNMA I, GPM, 12.75%, 11/15/13 - 6/15/15 61,085 71,515
GNMA I, SF, 13.00%, 7/15/10 - 1/15/16 110,563,204 130,897,073
GNMA II, 13.00%, 11/20/13 - 9/20/15 3,371,681 4,019,709
-------------
Total Long Term Investments (Cost $8,945,001,786) 9,124,852,078
-------------
dShort Term Investments 3.5%
U.S. Treasury Bills, 5.20% - 5.385%, 10/16/97 - 12/18/97 (Cost $330,270,612) 330,355,770
-------------
Total Investments (Cost $9,275,272,398) 99.7% 9,455,207,848
Other Assets, less Liabilities .3% 30,830,707
-------------
Net Assets 100.0% $9,486,038,555
=============
dSecurities are traded on a discount basis; the rates shown are the discount
rates at the time of purchase by the Fund.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Statements
Statements of Assets and Liabilities
September 30, 1997
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
-------------------------------------------------------------------------------
Assets
Investments in securities:
<S> <C> <C> <C> <C> <C>
Cost $ 433,324,038 $ 31,963,323 $1,719,080,804 $7,129,432,474 $9,275,272,398
===============================================================================
Value 1,065,564,551 118,805,938 1,933,205,376 7,872,822,469 9,455,207,848
Repurchase agreements, at value and cost 513,568,914 71,941,218 21,783,487 435,685,111 --
Cash 520,401 268,120 -- 953,208 25,678
Receivables:
Investment securities sold -- 474,321 25,659,026 28,780,521 --
Capital shares sold 1,863,355 510,771 293,257 10,775,726 6,063,947
Dividends and interest 911,926 69,010 11,098,550 116,430,808 58,123,502
Other assets 44,235 -- -- -- --
-------------------------------------------------------------------------------
Total assets 1,582,473,382 192,069,378 1,992,039,696 8,465,447,843 9,519,420,975
-------------------------------------------------------------------------------
Liabilities
Payables:
Investment securities purchased 780,632 -- 39,690 879,535 --
Capital shares redeemed 519,698 119,888 2,911,972 3,101,173 10,723,287
To affiliates 1,557,135 187,480 1,474,481 6,403,110 5,902,063
To shareholders 976,951 150,552 3,646,246 7,303,888 16,476,455
Other liabilities 37,454 124,113 68,646 340,900 280,615
-------------------------------------------------------------------------------
Total liabilites 3,871,870 582,033 8,141,035 18,028,606 33,382,420
-------------------------------------------------------------------------------
Net assets, at value $1,578,601,512 $191,487,345 $1,983,898,661 $8,447,419,237 $9,486,038,555
===============================================================================
Net assets consist of:
Undistributed net investment income $ 19,890,444 $ 1,031,642 $ 8,991,193 $ 69,436,365 $ 7,036,041
Net unrealized appreciation 632,240,513 86,842,615 214,124,572 743,299,655 179,935,450
Accumulated net realized gain (loss) 14,022,601 6,947,409 49,733,605 92,009,348 (391,695,649)
Capital shares 912,447,954 96,665,679 1,711,049,291 7,542,673,869 9,690,762,713
-------------------------------------------------------------------------------
Net assets, at value $1,578,601,512 $191,487,345 $1,983,898,661 $8,447,419,237 $9,486,038,555
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
---------------------------------------------------------------------------------
Class I:
<S> <C> <C> <C> <C> <C>
Net assets, at value $1,435,560,588 $188,101,718 $1,953,272,944 $7,738,746,176 $9,350,751,451
---------------------------------------------------------------------------------
Shares outstanding 52,996,093 10,177,494 194,534,988 3,106,620,788 1,357,281,977
---------------------------------------------------------------------------------
Net asset value per share* $27.09 $18.48 $10.04 $2.49 $6.89
---------------------------------------------------------------------------------
Maximum offering price per share (NAV / 95.50%,
NAV / 95.50%, NAV / 95.75%, NAV / 95.75%,
NAV / 95.75%, respectively) $28.37 $19.35 $10.49 $2.60 $7.20
---------------------------------------------------------------------------------
Class II:
Net assets, at value $ 117,217,991 $ 3,385,627 $ 21,906,391 $ 695,354,981 $ 120,817,740
---------------------------------------------------------------------------------
Shares outstanding 4,391,009 184,978 2,185,554 278,951,410 17,586,866
---------------------------------------------------------------------------------
Net asset value per share* $26.70 $18.30 $10.02 $2.49 $6.87
---------------------------------------------------------------------------------
Maximum offering price per share (NAV / 99%) $26.97 $18.48 $10.12 $2.52
---------------------------------------------------------------------------------
$6.94
Advisor Class:
Net assets, at value $ 25,822,933 -- $ 8,719,326 $ 13,318,080 $ 14,469,364
---------------------------------------------------------------------------------
Shares outstanding 951,931 -- 868,767 5,366,210 2,097,990
---------------------------------------------------------------------------------
Net asset value and maximum
offering price per share $27.13 -- $10.04 $2.48 $6.90
---------------------------------------------------------------------------------
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
</TABLE>
<TABLE>
<CAPTION>
Statements of Operations
for the year ended September 30, 1997
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
---------------------------------------------------------------------------------
Investment income:
<S> <C> <C> <C> <C> <C>
Dividends $ 12,800,457 $ 455,107 $108,058,105 $ 178,110,067 $--
Interest 20,234,726 2,060,661 23,367,984 454,852,746 753,095,315
---------------------------------------------------------------------------------
Total investment income 33,035,183 2,515,768 131,426,089 632,962,813 753,095,315
---------------------------------------------------------------------------------
Expenses:
Management fees (Note 5) 6,295,304 840,480 9,987,693 35,364,027 44,411,776
Distribution fees (Note 5)
Class I 2,834,842 302,229 2,770,430 10,521,856 8,581,200
Class II 882,927 11,669 141,957 3,355,689 560,866
Transfer agent fees (Note 5) 1,870,864 223,924 2,747,071 6,044,086 6,601,725
Custodian fees 13,393 1,340 22,117 553,545 98,364
Reports to shareholders 408,393 57,076 683,112 1,528,428 2,398,393
Registration and filing fees 136,852 29,358 103,228 329,335 117,909
Professional fees (Note 5) 22,800 2,514 35,878 157,555 187,992
Directors' fees and expenses 7,662 1,446 12,502 40,882 49,872
Other 30,906 2,496 55,779 157,753 227,010
---------------------------------------------------------------------------------
Total expenses 12,503,943 1,472,532 16,559,767 58,053,156 63,235,107
---------------------------------------------------------------------------------
Net investment income 20,531,240 1,043,236 114,866,322 574,909,657 689,860,208
---------------------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments 14,065,272 6,949,626 49,829,022 134,145,372 (29,505,613)
Foreign currency transactions -- -- -- (228,340) --
---------------------------------------------------------------------------------
Net realized gain (loss) 14,065,272 6,949,626 49,829,022 133,917,032 (29,505,613)
Net unrealized appreciation on:
Investments 215,960,743 33,474,575 112,850,805 523,936,056 285,289,807
Translation of assets and liabilities denominated in
foreign currencies -- -- -- 78,920 --
---------------------------------------------------------------------------------
Net unrealized appreciation 215,960,743 33,474,575 112,850,805 524,014,976 285,289,807
---------------------------------------------------------------------------------
Net realized and unrealized gains 230,026,015 40,424,201 162,679,827 657,932,008 255,784,194
---------------------------------------------------------------------------------
Net increase in net assets resulting
from operations $250,557,255 $41,467,437 $277,546,149 $1,232,841,665 $945,644,402
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
for the years ended September 30, 1997 and 1996
Growth Fund DynaTech Fund Utilities Fund
----------------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996
----------------------------------------------------------------------------------------------
Increase (decrease) in
net assets:
Operations:
Net investment
<S> <C> <C> <C> <C> <C> <C>
income $ 20,531,240 $ 10,213,551 $ 1,043,236 $ 413,044 $ 114,866,322 $ 141,159,184
Net realized gain from
investments 14,065,272 13,376,673 6,949,626 3,012,745 49,829,022 101,323,796
Net unrealized appre-
ciation (depreciation)
on investments 215,960,743 131,354,444 33,474,575 8,557,033 112,850,805 (76,822,756)
----------------------------------------------------------------------------------------------
Net increase in net
assets resulting
from operations 250,557,255 154,944,668 41,467,437 11,982,822 277,546,149 165,660,224
Distributions to shareholders
from:
Net investment income:
Class I (10,432,896) (6,279,423) (415,339) (854,965) (113,914,994) (138,119,821)
Class II (420,404) (57,905) (177) -- (1,067,340) (747,247)
Advisor Class -- -- -- -- (277,630) --
Net realized gains:
Class I (9,283,568) (5,915,536) (3,013,708) (1,652,070) (100,515,956) (19,902,855)
Class II (554,318) (56,415) (1,254) -- (903,261) (78,972)
Capital share transactions
(Note 2):
Class I 202,804,236 167,861,410 45,863,685 2,045,538 (507,188,024) (372,680,729)
Class II 58,785,996 36,380,327 3,078,539 199 1,602,454 11,740,921
Advisor Class 23,241,991 -- -- -- 8,401,319 --
----------------------------------------------------------------------------------------------
Net increase
(decrease) in
net assets 514,698,292 346,877,126 86,979,183 11,521,524 (436,317,283) (354,128,479)
Net assets:
Beginning of year 1,063,903,220 717,026,094 104,508,162 92,986,638 2,420,215,944 2,774,344,423
----------------------------------------------------------------------------------------------
End of year $1,578,601,512 $1,063,903,220 $191,487,345 $104,508,162 $1,983,898,661 $2,420,215,944
----------------------------------------------------------------------------------------------
Ending undistributed net
investment income included
in net assets $ 19,890,444 $ 10,212,504 $ 1,031,642 $ 403,922 $ 8,991,193 $ 9,384,835
==============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Income Fund U.S. Government Securities Fund
-------------------------------------------------------------------
1997 1996 1997 1996
-------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income $ 574,909,657 $ 521,625,487 $ 689,860,208 $ 767,312,081
Net realized gain (loss) from investments and foreign currency
transactions 133,917,032 54,450,898 (29,505,613) (50,886,927)
Net unrealized appreciation (depreciation) on investments and
translation of assets and liabilities denominated in foreign
currencies 524,014,976 12,739,334 285,289,807 (183,394,082)
-------------------------------------------------------------------
Net increase in net assets resulting from operations 1,232,841,665 588,815,719 945,644,402 533,031,072
Distributions to shareholders from:
Net investment income:
Class I (545,342,618) (496,461,082) (694,284,790) (772,347,077)
Class II (35,350,218) (14,090,940) (5,467,178) (2,259,432)
Advisor Class (498,714) -- (363,656) --
Net realized gains:
Class I (29,741,890) (70,836,803) -- --
Class II (1,712,633) (1,197,351) -- --
Capital share transactions (Note 2):
Class I 382,416,473 888,950,957 (1,021,750,769) (731,361,799)
Class II 308,632,125 276,676,397 60,845,500 46,777,619
Advisor Class 12,707,793 -- 14,274,791 --
-------------------------------------------------------------------
Net increase (decrease) in net assets 1,323,951,983 1,171,856,897 (701,101,700) (926,159,617)
Net assets:
Beginning of year 7,123,467,254 5,951,610,357 10,187,140,255 11,113,299,872
-------------------------------------------------------------------
End of year $8,447,419,237 $7,123,467,254 $ 9,486,038,555 $10,187,140,255
-------------------------------------------------------------------
Ending undistributed net investment income included
in net assets $ 69,436,365 $ 34,315,598 $ 7,036,041 $ 17,291,457
===================================================================
</TABLE>
See notes to financial statements.
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Custodian Funds, Inc. (the Company) is registered under the Investment
Company Act of 1940 as an open-end, diversified investment company, consisting
of five series (the Funds). The Funds and their investment policies are:
Capital Growth Growth and Income Current Income
- -------------------------------------------------------------------------
Growth Fund Utilities Fund U.S. Government Securities Fund
DynaTech Fund Income Fund
The following summarizes the Funds' significant accounting policies.
a. Security Valuation:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Directors.
b. Income Taxes:
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute all of its taxable income.
c. Security Transactions, Investment Income, Expenses and Distributions:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount is
amortized on an income tax basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
Common expenses incurred by the Company are allocated among the Funds based on
the ratio of net assets of each Fund to the combined net assets. Other expenses
are charged to each Fund on a specific identification basis.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
d. Accounting Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
e. Foreign Currency Translation:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gains or losses from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the recorded
amounts of dividends, interest, and foreign withholding taxes, and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange rates
on foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
f. Repurchase Agreement:
The Funds, except the U.S. Government Securities Fund, may enter into a joint
repurchase agreement whereby their uninvested cash balance is deposited into a
joint cash account to be used to invest in one or more repurchase agreements.
The value and face amount of the joint repurchase agreement are allocated to the
Funds based on their pro-rata interest. A repurchase agreement is accounted for
as a loan by the Fund to the seller, collateralized by securities which are
delivered to the Fund's custodian. The market value, including accrued interest,
of the initial collateralization is required to be at least 102% of the dollar
amount invested by the Funds, with the value of the underlying securities marked
to market daily to maintain coverage of at least 100%. At September 30, 1997,
all outstanding repurchase agreements held by the Funds had been entered into on
that date.
2. CAPITAL STOCK
Effective September 16, 1996, the Dynatech Fund offered two classes of shares:
Class I and Class II. Outstanding shares before that date were designated as
Class I shares. Effective January 2, 1997, the Funds, except the Dynatech Fund,
offered Advisor Class shares to qualified investors. The shares have the same
rights except for their initial sales load, distribution fees, voting rights on
matters affecting a single class and the exchange privilege of each class.
At September 30, 1997, there were 19 billion shares authorized ($0.01 par
value), allocated to the Funds as follows:
<TABLE>
<CAPTION>
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class I 250,000,000 250,000,000 400,000,000 4,600,000,000 2,500,000,000
Class II 250,000,000 250,000,000 400,000,000 3,600,000,000 2,500,000,000
Advisor Class 1,000,000,000 -- 1,000,000,000 1,000,000,000 1,000,000,000
</TABLE>
Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
Growth Fund DynaTech Fund
------------------------------------------------------------
Shares Amount Shares Amount
------------------------------------------------------------
Class I Shares
1997
<S> <C> <C> <C> <C>
Shares sold 19,647,652 $ 486,355,148 7,207,685 $118,420,191
Shares issued in reinvestment of distributions 742,458 17,759,635 199,095 3,046,165
Shares redeemed (12,109,484) (301,310,547) (4,675,913) (75,602,671)
------------------------------------------------------------
Net increase 8,280,626 $ 202,804,236 2,730,867 $ 45,863,685
------------------------------------------------------------
1996
Shares sold 14,573,392 $ 309,789,082 3,079,877 $ 39,604,883
Shares issued in reinvestment of distributions 540,805 10,967,608 177,727 2,205,599
Shares redeemed (7,187,477) (152,895,280) (3,085,060) (39,764,944)
------------------------------------------------------------
Net increase 7,926,720 $ 167,861,410 172,544 $ 2,045,538
------------------------------------------------------------
Class II Shares
1997
Shares sold 3,570,458 $ 86,687,120 275,202 $ 4,648,946
Shares issued in reinvestment of distributions 38,528 914,269 94 1,430
Shares redeemed (1,139,059) (28,815,393) (90,332) (1,571,837)
------------------------------------------------------------
Net increase 2,469,927 $ 58,785,996 184,964 $ 3,078,539
------------------------------------------------------------
1996+
Shares sold 1,925,516 $ 41,102,731 14 $ 199
Shares issued in reinvestment of distributions 4,957 100,242 -- --
Shares redeemed (224,665) (4,822,646) -- --
------------------------------------------------------------
Net increase 1,705,808 $ 36,380,327 14 $ 199
------------------------------------------------------------
</TABLE>
2. CAPITAL STOCK (cont.)
<TABLE>
<CAPTION>
Growth Fund
----------------------------
Shares Amount
----------------------------
Advisor Class Shares
1997++
<S> <C> <C>
Shares sold 1,309,960 $ 32,540,802
Shares issued in reinvestment of distributions -- --
Shares redeemed (358,029) (9,298,811)
----------------------------
Net increase 951,931 $ 23,241,991
============================
Utilities Fund Income Fund U.S. Government Securities Fund
----------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
Class I Shares
1997
<S> <C> <C> <C> <C> <C> <C>
Shares sold 12,100,694 $ 117,393,777 538,060,045 $ 1,275,083,285 78,194,660 $ 530,758,896
Shares issued in
reinvestment of
distributions 17,222,762 165,255,047 145,251,547 342,526,929 47,930,052 324,058,840
Shares redeemed (81,440,706) (789,836,848) (520,661,763) (1,235,193,741) (276,583,345) (1,876,568,505)
----------------------------------------------------------------------------------------------------------
Net increase
(decrease) (52,117,250) $(507,188,024) 162,649,829 $ 382,416,473 (150,458,633) $(1,021,750,769)
==========================================================================================================
1996
Shares sold 21,426,300 $ 215,939,345 642,104,925 $1,473,287,913 85,184,579 $ 579,402,859
Shares issued in
reinvestment of
distributions 11,952,242 118,303,240 150,894,313 344,863,416 51,937,467 352,406,036
Shares redeemed (70,389,767) (706,923,314) (405,681,073) (929,200,372) (245,065,339) (1,663,170,694)
----------------------------------------------------------------------------------------------------------
Net increase
(decrease) (37,011,225) $(372,680,729) 387,318,165 $ 888,950,957 (107,943,293) $ (731,361,799)
==========================================================================================================
Class II Shares:
1997
Shares sold 853,797 $ 8,267,730 151,188,247 $ 359,348,533 11,765,224 $ 79,728,970
Shares issued in
reinvestment of
distributions 164,131 1,574,635 9,605,212 22,720,777 527,102 3,558,535
Shares redeemed (854,260) (8,239,911) (30,837,863) (73,437,185) (3,311,245) (22,442,005)
----------------------------------------------------------------------------------------------------------
Net increase 163,668 $ 1,602,454 129,955,596 $ 308,632,125 8,981,081 $ 60,845,500
==========================================================================================================
1996
Shares sold 1,459,417 $ 14,693,105 126,159,539 $ 289,827,410 7,668,930 $ 51,954,655
Shares issued in
reinvestment of
distributions 67,296 663,744 4,108,044 9,379,710 212,412 1,428,321
Shares redeemed (363,584) (3,615,929) (9,852,944) (22,530,723) (982,730) (6,605,357)
----------------------------------------------------------------------------------------------------------
Net increase 1,163,129 $ 11,740,920 120,414,639 $ 276,676,397 6,898,612 $ 46,777,619
==========================================================================================================
Advisor Class Shares
1997++
Shares sold 1,303,704 $ 12,598,164 $ 5,630,896 $ 13,341,229 2,433,391 $ 16,553,387
Shares issued in
reinvestment of
distributions 23,787 228,226 198,471 470,649 40,139 272,353
Shares redeemed (458,724) (4,425,071) (463,157) (1,104,085) (375,540) (2,550,949)
----------------------------------------------------------------------------------------------------------
Net increase 868,767 $ 8,401,319 5,366,210 $ 12,707,793 2,097,990 $ 14,274,791
==========================================================================================================
</TABLE>
+For the period September 16, 1996 to September 30, 1996 for the DynaTech Fund.
++For the period January 2, 1997 to September 30, 1997 for the Advisor Class of
shares.
3. INCOME TAXES
At September 30, 1997, the U.S. Government Securities Fund had tax basis capital
losses which may be carried over to offset future capital gains. Such losses
expire as follows:
U.S. Government
Securities Fund
-------------------
Capital loss carryovers expiring in: 1998 $ 74,910,973
1999 67,082,683
2002 111,364,839
2003 3,698,366
2004 57,539,178
2005 50,163,272
------------------
$364,759,311
==================
At September 30, 1997, the U.S. Government Securities Fund has deferred capital
losses occurring subsequent to October 31, 1996 of $26,936,338. For tax
purposes, such losses will be reflected in the year ending September 30, 1998.
At September 30, 1997, the net unrealized appreciation based on the cost of
investments for income tax purposes were as follows:
<TABLE>
<CAPTION>
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost $946,892,952 $103,904,541 $1,740,866,691 $7,565,117,585 $9,275,272,398
=======================================================================================
Unrealized appreciation 636,362,182 87,927,057 276,918,447 952,185,112 228,149,762
Unrealized depreciation (4,121,669) (1,084,442) (62,796,275) (208,795,117) (48,214,312)
---------------------------------------------------------------------------------------
Net unrealized appreciation $632,240,513 $ 86,842,615 $ 214,122,172 $ 743,389,995 $ 179,935,450
=======================================================================================
</TABLE>
On September 30, 1997, the U.S. Government Securities Fund had expired capital
loss carryovers of $92,974,800, which were reclassified to paid-in capital.
Net realized capital gains (losses) differ for financial statement and tax
purposes primarily due to differing treatment of wash sales and foreign currency
transactions.
4. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended September 30, 1997 were as follows:
<TABLE>
<CAPTION>
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases $16,813,002 $ 5,686,527 $154,865,918 $1,818,477,788 $ 166,498,741
Sales $41,064,242 $14,415,668 $708,395,259 $1,163,969,287 $1,223,668,692
</TABLE>
5. TRANSACTIONS WITH AFFILIATES
Certain officers and directors of the Funds are also officers and/or directors
of Franklin Advisers, Inc. (Advisers), Franklin/Templeton Distributors, Inc.
(Distributors), Franklin Templeton Services, Inc. (FT Services) and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Funds'
investment manager, principal underwriter, administrative manager and transfer
agent, respectively.
Under an agreement with Advisers, FT Services provides administrative services
to the Funds. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Funds.
5. TRANSACTIONS WITH AFFILIATES (cont.)
The Funds pay an investment management fee to Advisers based on the average net
assets of the Funds as follows:
Annualized
Fee Rate Month End Net Assets
---------------------------------------------------------------------------
0.625% First $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $10 billion
0.440% Over $10 billion, up to and including $12.5 billion
Fees are further reduced on net assets over $12.5 billion.
The Income, Utilities and U.S. Government Securities Funds reimburse
Distributors up to 0.15% and 0.65% per year of the average daily net assets of
Class I and Class II, respectively, for costs incurred in marketing the Funds'
shares. The Growth and DynaTech Funds reimburse Distributors up to 0.25% and
1.00% per year of the average daily net assets of Class I and Class II,
respectively, for costs incurred in marketing the Funds' shares.
Distributors received (paid) net commissions on sales of the Funds shares, and
received contingent deferred sales charges for the year as follows:
<TABLE>
<CAPTION>
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net commissions received (paid) $(638,760) $6,197 $ 3,400 $(2,163,815) $(540,705)
Contingent deferred sales charges $ 47,529 $1,344 $19,661 $ 293,033 $ 56,854
</TABLE>
During the year ended September 30, 1997, legal fees of $74,098 were paid to a
law firm in which an officer of the Company is a partner.
6. RESTRICTED SECURITIES
The Funds may purchase securities through a private offering that generally
cannot be sold to the public without prior registration under the Securities Act
of 1933. The costs of registering such securities are paid by the issuer.
Restricted securities held in the Funds at September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Shares/
Warrants Issuer Acquisition Date Cost Value
-------------------------------------------------------------------------------------------------------------------------
Income Fund
<S> <C> <C> <C>
2,097,122 Bibb Co. 9/27/96 $29,681,742 $ 15,728,415
1,281,869 Boardwalk Casino, Inc., Warrants 4/12/95 2,643,855 1,874,092
1,600,000 CMS Energy Trust I, 7.75%, cvt. pfd. 6/18/97 80,000,000 87,059,520
59,258 Jewel Recovery, L.P. 7/30/93 42,074 28,444
-------------
Total Restricted Securities Held in the Income Fund (1.24% of Net Assets) $104,690,471
=============
Utilities Fund
705,000 CMS Energy Trust I, 7.75%, cvt. pfd. (1.93% of Net Assets) 6/18/97 35,250,000 $ 38,360,601
=============
Growth Fund
115,100 FRM Nexus (0.00% of Net Assets) 8/1/89 421,013 $ 115
=============
</TABLE>
7. CREDIT RISK AND DEFAULTED SECURITIES
The Income Fund has 37.2% of its portfolio invested in lower rated and
comparable quality unrated high yield securities, which tend to be more
sensitive to economic conditions than higher rated securities. The risk of loss
due to default by the issuer may be significantly greater for the holders of
high yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer. At September 30, 1997, the
Income Fund held one defaulted security with a value of $19,750,000 representing
0.2% of the Fund's net assets. For information as to specific securities, see
the accompanying Statement of Investments.
7. CREDIT RISK AND DEFAULTED SECURITIES (cont.)
For financial reporting purposes, the Funds discontinue accruing income on
defaulted bonds and provide estimates for losses on interest receivable.
The Utilities Fund has investments in excess of 10% of its total net assets in
the Utilities industry. Such concentration may subject the Funds more
significantly to economic changes occurring within that industry.
8. OTHER CONSIDERATIONS
Advisers, as the Funds' manager, may serve as a member of various credit
committees, representing credit interests in certain corporate restructuring
negotiations. Currently, the manager serves on the credit committees for Harvard
Industries. As a result of this involvement, Advisers may be in possession of
certain material non-public information. The Funds' manager has not nor does it
intend to sell any of its holdings in these securities while in possession of
this information.
Report of Independent Accountants
To the Shareholders and Board of Directors
of Franklin Custodian Funds:
We have audited the accompanying statements of assets and liabilities of the
five Funds comprising the Franklin Custodian Funds, Inc. including each Fund's
statement of investments, as of September 30, 1997, and the related statements
of operations for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for each of the periods presented. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1997, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
five Funds comprising the Franklin Custodian Funds, Inc. as of September 30,
1997, the results of their operations for the year then ended, the changes in
their net assets for each of the two years in the period then ended, and their
financial highlights for the periods presented, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
October 28, 1997
Tax Designation
Under Section 854(b)(2) of the Internal Revenue Code, the Funds hereby designate
the ordinary income dividends as income qualifying the dividends received
deduction for the fiscal year ended September 30, 1997 as follows:
Growth Fund 100.00% DynaTech Fund 100.00%
Utilities Fund 91.13% Income Fund 25.98%
Franklin Custodian Funds Annual Report September 30, 1997
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM
304(a) OF REGULATION S-T)
GRAPHIC MATERIAL (1)
The following line graph hypothetically compares the performance of the Franklin
Growth Fund - Class I shares to that of the S&P 500, based on a $10,000
investment from 10/1/87 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index
<S> <C> <C>
10/1/1987 $9,550 $10,000
10/31/1987 $8,525 $7,846
11/30/1987 $7,918 $7,199
12/31/1987 $8,650 $7,747
1/31/1988 $8,798 $8,074
2/29/1988 $9,268 $8,450
3/31/1988 $9,062 $8,189
4/30/1988 $9,086 $8,280
5/31/1988 $9,005 $8,351
6/30/1988 $9,479 $8,734
7/31/1988 $9,335 $8,701
8/31/1988 $8,904 $8,405
9/30/1988 $9,244 $8,763
10/31/1988 $9,345 $9,007
11/30/1988 $9,263 $8,878
12/31/1988 $9,440 $9,033
1/31/1989 $10,054 $9,695
2/28/1989 $9,823 $9,453
3/31/1989 $9,917 $9,673
4/30/1989 $10,432 $10,175
5/31/1989 $10,658 $10,588
6/30/1989 $10,545 $10,527
7/31/1989 $11,394 $11,478
8/31/1989 $11,817 $11,703
9/30/1989 $11,753 $11,655
10/31/1989 $11,345 $11,384
11/30/1989 $11,483 $11,617
12/31/1989 $11,686 $11,895
1/31/1990 $11,158 $11,097
2/28/1990 $11,315 $11,240
3/31/1990 $11,681 $11,538
4/30/1990 $11,610 $11,251
5/31/1990 $12,465 $12,348
6/30/1990 $12,459 $12,265
7/31/1990 $12,363 $12,226
8/31/1990 $11,275 $11,121
9/30/1990 $10,873 $10,579
10/31/1990 $10,873 $10,534
11/30/1990 $11,514 $11,214
12/31/1990 $11,929 $11,527
1/31/1991 $12,626 $12,030
2/28/1991 $13,495 $12,890
3/31/1991 $13,610 $13,202
4/30/1991 $13,688 $13,233
5/31/1991 $14,188 $13,804
6/30/1991 $13,579 $13,171
7/31/1991 $14,052 $13,785
8/31/1991 $14,240 $14,112
9/30/1991 $14,000 $13,876
10/31/1991 $14,302 $14,062
11/30/1991 $13,823 $13,496
12/31/1991 $15,115 $15,039
1/31/1992 $14,969 $14,760
2/29/1992 $15,228 $14,950
3/31/1992 $14,850 $14,659
4/30/1992 $14,915 $15,090
5/31/1992 $14,828 $15,163
6/30/1992 $14,525 $14,938
7/31/1992 $14,882 $15,548
8/31/1992 $14,558 $15,230
9/30/1992 $14,817 $15,408
10/31/1992 $15,001 $15,460
11/30/1992 $15,358 $15,986
12/31/1992 $15,563 $16,183
1/31/1993 $15,397 $16,319
2/28/1993 $15,188 $16,540
3/31/1993 $15,420 $16,889
4/30/1993 $15,464 $16,481
5/31/1993 $15,849 $16,921
6/30/1993 $15,519 $16,970
7/31/1993 $15,331 $16,902
8/31/1993 $15,860 $17,543
9/30/1993 $15,695 $17,407
10/31/1993 $16,179 $17,768
11/30/1993 $16,213 $17,599
12/31/1993 $16,668 $17,812
1/31/1994 $16,905 $18,418
2/28/1994 $16,397 $17,918
3/31/1994 $15,583 $17,137
4/30/1994 $15,911 $17,357
5/31/1994 $16,182 $17,641
6/30/1994 $16,058 $17,209
7/31/1994 $16,510 $17,773
8/31/1994 $17,357 $18,502
9/30/1994 $16,905 $18,051
10/31/1994 $17,256 $18,457
11/30/1994 $16,804 $17,785
12/31/1994 $17,155 $18,048
1/31/1995 $17,418 $18,516
2/28/1995 $18,127 $19,238
3/31/1995 $18,767 $19,805
4/30/1995 $19,305 $20,388
5/31/1995 $19,728 $21,203
6/30/1995 $20,494 $21,695
7/31/1995 $21,512 $22,415
8/31/1995 $21,478 $22,471
9/30/1995 $22,164 $23,420
10/31/1995 $22,290 $23,335
11/30/1995 $23,548 $24,360
12/31/1995 $23,743 $24,830
1/31/1996 $24,428 $25,674
2/29/1996 $24,951 $25,913
3/31/1996 $25,044 $26,162
4/30/1996 $25,555 $26,546
5/31/1996 $26,043 $27,231
6/30/1996 $25,857 $27,335
7/31/1996 $24,521 $26,126
8/31/1996 $25,207 $26,678
9/30/1996 $26,531 $28,180
10/31/1996 $26,601 $28,957
11/30/1996 $28,273 $31,146
12/31/1996 $27,704 $30,530
1/31/1997 $28,402 $32,438
2/28/1997 $28,461 $32,691
3/31/1997 $27,752 $31,347
4/30/1997 $28,745 $33,219
5/31/1997 $30,329 $35,242
6/30/1997 $30,897 $36,821
7/31/1997 $32,127 $39,752
8/31/1997 $31,051 $37,525
9/30/1997 $32,032 $39,582
</TABLE>
GRAPHIC MATERIAL (2)
The following line graph hypothetically compares the performance of the Franklin
Growth Fund - Class II shares to that of the S&P 500, based on a $10,000
investment from 5/1/95 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index
<S> <C> <C>
5/1/1995 $9,900 $10,000
5/31/1995 $10,135 $10,400
6/30/1995 $10,517 $10,641
7/31/1995 $11,040 $10,995
8/31/1995 $11,011 $11,022
9/30/1995 $11,357 $11,487
10/31/1995 $11,410 $11,446
11/30/1995 $12,051 $11,948
12/31/1995 $12,142 $12,179
1/31/1996 $12,482 $12,593
2/29/1996 $12,744 $12,710
3/31/1996 $12,786 $12,832
4/30/1996 $13,037 $13,021
5/31/1996 $13,281 $13,357
6/30/1996 $13,180 $13,407
7/31/1996 $12,488 $12,815
8/31/1996 $12,828 $13,085
9/30/1996 $13,496 $13,822
10/31/1996 $13,526 $14,203
11/30/1996 $14,367 $15,277
12/31/1996 $14,068 $14,975
1/31/1997 $14,407 $15,911
2/28/1997 $14,431 $16,035
3/31/1997 $14,061 $15,376
4/30/1997 $14,558 $16,294
5/31/1997 $15,351 $17,286
6/30/1997 $15,624 $18,060
7/31/1997 $16,242 $19,498
8/31/1997 $15,678 $18,406
9/30/1997 $16,169 $19,415
</TABLE>
GRAPHIC MATERIAL (3)
The following line graph hypothetically compares the performance of the Franklin
Growth Fund - Advisor Class shares to that of the S&P 500, based on a $10,000
investment from 10/1/87 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index
<S> <C> <C>
10/1/1987 $10,000 $10,000
10/31/1987 $8,927 $7,846
11/30/1987 $8,292 $7,199
12/31/1987 $9,058 $7,747
1/31/1988 $9,213 $8,074
2/29/1988 $9,705 $8,450
3/31/1988 $9,489 $8,189
4/30/1988 $9,515 $8,280
5/31/1988 $9,429 $8,351
6/30/1988 $9,926 $8,734
7/31/1988 $9,776 $8,701
8/31/1988 $9,324 $8,405
9/30/1988 $9,680 $8,763
10/31/1988 $9,786 $9,007
11/30/1988 $9,700 $8,878
12/31/1988 $9,886 $9,033
1/31/1989 $10,528 $9,695
2/28/1989 $10,287 $9,453
3/31/1989 $10,384 $9,673
4/30/1989 $10,924 $10,175
5/31/1989 $11,161 $10,588
6/30/1989 $11,042 $10,527
7/31/1989 $11,932 $11,478
8/31/1989 $12,374 $11,703
9/30/1989 $12,307 $11,655
10/31/1989 $11,880 $11,384
11/30/1989 $12,024 $11,617
12/31/1989 $12,238 $11,895
1/31/1990 $11,684 $11,097
2/28/1990 $11,849 $11,240
3/31/1990 $12,232 $11,538
4/30/1990 $12,158 $11,251
5/31/1990 $13,052 $12,348
6/30/1990 $13,047 $12,265
7/31/1990 $12,946 $12,226
8/31/1990 $11,806 $11,121
9/30/1990 $11,386 $10,579
10/31/1990 $11,386 $10,534
11/30/1990 $12,057 $11,214
12/31/1990 $12,491 $11,527
1/31/1991 $13,222 $12,030
2/28/1991 $14,132 $12,890
3/31/1991 $14,252 $13,202
4/30/1991 $14,334 $13,233
5/31/1991 $14,857 $13,804
6/30/1991 $14,219 $13,171
7/31/1991 $14,715 $13,785
8/31/1991 $14,911 $14,112
9/30/1991 $14,661 $13,876
10/31/1991 $14,977 $14,062
11/30/1991 $14,475 $13,496
12/31/1991 $15,828 $15,039
1/31/1992 $15,675 $14,760
2/29/1992 $15,947 $14,950
3/31/1992 $15,550 $14,659
4/30/1992 $15,618 $15,090
5/31/1992 $15,528 $15,163
6/30/1992 $15,210 $14,938
7/31/1992 $15,584 $15,548
8/31/1992 $15,244 $15,230
9/30/1992 $15,516 $15,408
10/31/1992 $15,709 $15,460
11/30/1992 $16,083 $15,986
12/31/1992 $16,297 $16,183
1/31/1993 $16,124 $16,319
2/28/1993 $15,905 $16,540
3/31/1993 $16,147 $16,889
4/30/1993 $16,193 $16,481
5/31/1993 $16,597 $16,921
6/30/1993 $16,251 $16,970
7/31/1993 $16,054 $16,902
8/31/1993 $16,608 $17,543
9/30/1993 $16,435 $17,407
10/31/1993 $16,943 $17,768
11/30/1993 $16,977 $17,599
12/31/1993 $17,454 $17,812
1/31/1994 $17,703 $18,418
2/28/1994 $17,170 $17,918
3/31/1994 $16,318 $17,137
4/30/1994 $16,661 $17,357
5/31/1994 $16,945 $17,641
6/30/1994 $16,815 $17,209
7/31/1994 $17,289 $17,773
8/31/1994 $18,176 $18,502
9/30/1994 $17,703 $18,051
10/31/1994 $18,070 $18,457
11/30/1994 $17,596 $17,785
12/31/1994 $17,964 $18,048
1/31/1995 $18,239 $18,516
2/28/1995 $18,982 $19,238
3/31/1995 $19,652 $19,805
4/30/1995 $20,215 $20,388
5/31/1995 $20,658 $21,203
6/30/1995 $21,461 $21,695
7/31/1995 $22,527 $22,415
8/31/1995 $22,491 $22,471
9/30/1995 $23,209 $23,420
10/31/1995 $23,341 $23,335
11/30/1995 $24,658 $24,360
12/31/1995 $24,863 $24,830
1/31/1996 $25,580 $25,674
2/29/1996 $26,128 $25,913
3/31/1996 $26,225 $26,162
4/30/1996 $26,760 $26,546
5/31/1996 $27,271 $27,231
6/30/1996 $27,077 $27,335
7/31/1996 $25,678 $26,126
8/31/1996 $26,395 $26,678
9/30/1996 $27,782 $28,180
10/31/1996 $27,855 $28,957
11/30/1996 $29,607 $31,146
12/31/1996 $29,011 $30,530
1/31/1997 $29,742 $32,438
2/28/1997 $29,816 $32,691
3/31/1997 $29,086 $31,347
4/30/1997 $30,126 $33,219
5/31/1997 $31,785 $35,242
6/30/1997 $32,379 $36,821
7/31/1997 $33,679 $39,752
8/31/1997 $32,553 $37,525
9/30/1997 $33,592 $39,582
</TABLE>
GRAPHIC MATERIAL (4)
This chart shows in pie format the fund's portfolio breakdown by type of
security as a percentage of the fund's total net assets.
<TABLE>
<CAPTION>
Portfolio Breakdown
<S> <C>
Utilities Stocks 78.5%
Utilities Bonds 13.6%
Convertible Securities 5.3%
Short-term Obligations & Other Net Assets 2.6%
</TABLE>
GRAPHIC MATERIAL (5)
The following line graph hypothetically compares the performance of the Franklin
Utilities Fund - Class I shares to that of the S&P 500, based on a $10,000
investment from 10/1/87 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index
<S> <C> <C>
10/1/1987 $9,578 $10,000
10/31/1987 $9,318 $7,846
11/30/1987 $9,057 $7,199
12/31/1987 $9,104 $7,747
1/31/1988 $10,041 $8,074
2/29/1988 $9,775 $8,450
3/31/1988 $9,454 $8,189
4/30/1988 $9,415 $8,280
5/31/1988 $9,750 $8,351
6/30/1988 $9,919 $8,734
7/31/1988 $9,827 $8,701
8/31/1988 $9,775 $8,405
9/30/1988 $9,995 $8,763
10/31/1988 $10,169 $9,007
11/30/1988 $10,062 $8,878
12/31/1988 $10,163 $9,033
1/31/1989 $10,314 $9,695
2/28/1989 $10,122 $9,453
3/31/1989 $10,129 $9,673
4/30/1989 $10,394 $10,175
5/31/1989 $10,895 $10,588
6/30/1989 $11,167 $10,527
7/31/1989 $11,876 $11,478
8/31/1989 $11,649 $11,703
9/30/1989 $11,700 $11,655
10/31/1989 $11,844 $11,384
11/30/1989 $12,191 $11,617
12/31/1989 $12,789 $11,895
1/31/1990 $12,186 $11,097
2/28/1990 $12,259 $11,240
3/31/1990 $12,162 $11,538
4/30/1990 $11,608 $11,251
5/31/1990 $12,192 $12,348
6/30/1990 $12,289 $12,265
7/31/1990 $12,396 $12,226
8/31/1990 $11,679 $11,121
9/30/1990 $11,624 $10,579
10/31/1990 $12,432 $10,534
11/30/1990 $12,665 $11,214
12/31/1990 $12,838 $11,527
1/31/1991 $12,711 $12,030
2/28/1991 $13,186 $12,890
3/31/1991 $13,375 $13,202
4/30/1991 $13,487 $13,233
5/31/1991 $13,439 $13,804
6/30/1991 $13,335 $13,171
7/31/1991 $13,827 $13,785
8/31/1991 $14,188 $14,112
9/30/1991 $14,706 $13,876
10/31/1991 $14,889 $14,062
11/30/1991 $15,207 $13,496
12/31/1991 $15,942 $15,039
1/31/1992 $15,298 $14,760
2/29/1992 $15,264 $14,950
3/31/1992 $15,195 $14,659
4/30/1992 $15,574 $15,090
5/31/1992 $15,970 $15,163
6/30/1992 $16,177 $14,938
7/31/1992 $17,034 $15,548
8/31/1992 $16,982 $15,230
9/30/1992 $17,084 $15,408
10/31/1992 $16,907 $15,460
11/30/1992 $16,925 $15,986
12/31/1992 $17,390 $16,183
1/31/1993 $17,714 $16,319
2/28/1993 $18,668 $16,540
3/31/1993 $18,810 $16,889
4/30/1993 $18,810 $16,481
5/31/1993 $18,792 $16,921
6/30/1993 $19,249 $16,970
7/31/1993 $19,656 $16,902
8/31/1993 $20,248 $17,543
9/30/1993 $20,174 $17,407
10/31/1993 $20,061 $17,768
11/30/1993 $19,144 $17,599
12/31/1993 $19,394 $17,812
1/31/1994 $19,013 $18,418
2/28/1994 $18,081 $17,918
3/31/1994 $17,464 $17,137
4/30/1994 $17,715 $17,357
5/31/1994 $16,731 $17,641
6/30/1994 $16,182 $17,209
7/31/1994 $16,906 $17,773
8/31/1994 $17,004 $18,502
9/30/1994 $16,573 $18,051
10/31/1994 $16,871 $18,457
11/30/1994 $17,070 $17,785
12/31/1994 $17,127 $18,048
1/31/1995 $18,138 $18,516
2/28/1995 $18,118 $19,238
3/31/1995 $17,856 $19,805
4/30/1995 $18,246 $20,388
5/31/1995 $19,293 $21,203
6/30/1995 $19,296 $21,695
7/31/1995 $19,233 $22,415
8/31/1995 $19,525 $22,471
9/30/1995 $20,582 $23,420
10/31/1995 $21,004 $23,335
11/30/1995 $21,342 $24,360
12/31/1995 $22,381 $24,830
1/31/1996 $22,747 $25,674
2/29/1996 $22,166 $25,913
3/31/1996 $22,145 $26,162
4/30/1996 $21,403 $26,546
5/31/1996 $21,643 $27,231
6/30/1996 $22,796 $27,335
7/31/1996 $21,536 $26,126
8/31/1996 $21,846 $26,678
9/30/1996 $21,805 $28,180
10/31/1996 $22,522 $28,957
11/30/1996 $22,836 $31,146
12/31/1996 $22,835 $30,530
1/31/1997 $22,954 $32,438
2/28/1997 $23,144 $32,691
3/31/1997 $22,497 $31,347
4/30/1997 $22,329 $33,219
5/31/1997 $23,026 $35,242
6/30/1997 $23,784 $36,821
7/31/1997 $24,345 $39,752
8/31/1997 $23,809 $37,525
9/30/1997 $24,797 $39,582
</TABLE>
GRAPHIC MATERIAL (6)
The following line graph hypothetically compares the performance of the Franklin
Utilities Fund - Class II shares to that of the S&P 500, based on a $10,000
investment from 5/1/95 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index
<S> <C> <C>
5/1/1995 $9,899 $10,000
5/31/1995 $10,492 $10,400
6/30/1995 $10,500 $10,641
7/31/1995 $10,454 $10,995
8/31/1995 $10,613 $11,022
9/30/1995 $11,188 $11,487
10/31/1995 $11,406 $11,446
11/30/1995 $11,578 $11,948
12/31/1995 $12,150 $12,179
1/31/1996 $12,325 $12,593
2/29/1996 $12,021 $12,710
3/31/1996 $12,005 $12,832
4/30/1996 $11,603 $13,021
5/31/1996 $11,721 $13,357
6/30/1996 $12,331 $13,407
7/31/1996 $11,648 $12,815
8/31/1996 $11,816 $13,085
9/30/1996 $11,791 $13,822
10/31/1996 $12,167 $14,203
11/30/1996 $12,337 $15,277
12/31/1996 $12,333 $14,975
1/31/1997 $12,397 $15,911
2/28/1997 $12,487 $16,035
3/31/1997 $12,125 $15,376
4/30/1997 $12,034 $16,294
5/31/1997 $12,398 $17,286
6/30/1997 $12,804 $18,060
7/31/1997 $13,106 $19,498
8/31/1997 $12,804 $18,406
9/30/1997 $13,331 $19,415
</TABLE>
GRAPHIC MATERIAL (7)
The following line graph hypothetically compares the performance of the Franklin
Utilities Fund - Advisor Class shares to that of the S&P 500, based on a $10,000
investment from 10/1/87 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index
<S> <C> <C>
10/1/1987 $10,000 $10,000
10/30/1987 $9,728 $7,846
11/30/1987 $9,456 $7,199
12/31/1987 $9,505 $7,747
1/29/1988 $10,483 $8,074
2/29/1988 $10,205 $8,450
3/31/1988 $9,870 $8,189
4/29/1988 $9,830 $8,280
5/31/1988 $10,180 $8,351
6/30/1988 $10,356 $8,734
7/29/1988 $10,260 $8,701
8/31/1988 $10,205 $8,405
9/30/1988 $10,435 $8,763
10/31/1988 $10,617 $9,007
11/30/1988 $10,505 $8,878
12/30/1988 $10,611 $9,033
1/31/1989 $10,768 $9,695
2/28/1989 $10,568 $9,453
3/31/1989 $10,575 $9,673
4/28/1989 $10,851 $10,175
5/31/1989 $11,375 $10,588
6/30/1989 $11,659 $10,527
7/31/1989 $12,399 $11,478
8/31/1989 $12,162 $11,703
9/29/1989 $12,215 $11,655
10/31/1989 $12,366 $11,384
11/30/1989 $12,728 $11,617
12/29/1989 $13,352 $11,895
1/31/1990 $12,722 $11,097
2/28/1990 $12,799 $11,240
3/30/1990 $12,697 $11,538
4/30/1990 $12,119 $11,251
5/31/1990 $12,729 $12,348
6/29/1990 $12,830 $12,265
7/31/1990 $12,942 $12,226
8/31/1990 $12,194 $11,121
9/28/1990 $12,136 $10,579
10/31/1990 $12,980 $10,534
11/30/1990 $13,223 $11,214
12/31/1990 $13,403 $11,527
1/31/1991 $13,271 $12,030
2/28/1991 $13,767 $12,890
3/29/1991 $13,964 $13,202
4/30/1991 $14,081 $13,233
5/31/1991 $14,031 $13,804
6/28/1991 $13,922 $13,171
7/31/1991 $14,436 $13,785
8/30/1991 $14,813 $14,112
9/30/1991 $15,354 $13,876
10/31/1991 $15,545 $14,062
11/29/1991 $15,876 $13,496
12/31/1991 $16,644 $15,039
1/31/1992 $15,971 $14,760
2/28/1992 $15,936 $14,950
3/31/1992 $15,864 $14,659
4/30/1992 $16,260 $15,090
5/29/1992 $16,673 $15,163
6/30/1992 $16,890 $14,938
7/31/1992 $17,784 $15,548
8/31/1992 $17,729 $15,230
9/30/1992 $17,837 $15,408
10/30/1992 $17,651 $15,460
11/30/1992 $17,670 $15,986
12/31/1992 $18,156 $16,183
1/29/1993 $18,494 $16,319
2/26/1993 $19,490 $16,540
3/31/1993 $19,639 $16,889
4/30/1993 $19,639 $16,481
5/31/1993 $19,620 $16,921
6/30/1993 $20,097 $16,970
7/30/1993 $20,522 $16,902
8/31/1993 $21,140 $17,543
9/30/1993 $21,062 $17,407
10/29/1993 $20,945 $17,768
11/30/1993 $19,988 $17,599
12/31/1993 $20,248 $17,812
1/31/1994 $19,850 $18,418
2/28/1994 $18,877 $17,918
3/31/1994 $18,233 $17,137
4/29/1994 $18,495 $17,357
5/31/1994 $17,467 $17,641
6/30/1994 $16,894 $17,209
7/29/1994 $17,651 $17,773
8/31/1994 $17,753 $18,502
9/30/1994 $17,303 $18,051
10/31/1994 $17,614 $18,457
11/30/1994 $17,822 $17,785
12/30/1994 $17,881 $18,048
1/31/1995 $18,937 $18,516
2/28/1995 $18,916 $19,238
3/31/1995 $18,643 $19,805
4/28/1995 $19,050 $20,388
5/31/1995 $20,143 $21,203
6/30/1995 $20,146 $21,695
7/31/1995 $20,080 $22,415
8/31/1995 $20,385 $22,471
9/29/1995 $21,488 $23,420
10/31/1995 $21,929 $23,335
11/30/1995 $22,282 $24,360
12/29/1995 $23,367 $24,830
1/31/1996 $23,749 $25,674
2/29/1996 $23,142 $25,913
3/29/1996 $23,120 $26,162
4/30/1996 $22,346 $26,546
5/31/1996 $22,596 $27,231
6/28/1996 $23,800 $27,335
7/31/1996 $22,484 $26,126
8/30/1996 $22,808 $26,678
9/30/1996 $22,765 $28,180
10/31/1996 $23,514 $28,957
11/29/1996 $23,842 $31,146
12/31/1996 $23,841 $30,530
1/31/1997 $23,965 $32,438
2/28/1997 $24,163 $32,691
3/31/1997 $23,496 $31,347
4/30/1997 $23,320 $33,219
5/30/1997 $24,048 $35,242
6/30/1997 $24,848 $36,821
7/31/1997 $25,434 $39,752
8/29/1997 $24,848 $37,525
9/30/1997 $25,915 $39,582
</TABLE>
GRAPHIC MATERIAL (8)
The following line graph hypothetically compares the performance of the Franklin
Income Fund - Class I shares to that of the S&P 500, Lehman Brothers
Intermediate Government Bond Index, and the Lipper Income Average, based on a
$10,000 investment from 10/1/87 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index Index Index
<S> <C> <C> <C> <C>
10/1/1987 $9,569 $10,000 $10,000 $10,000
12/31/1987 $9,432 $7,747 $10,584 $9,371
3/31/1988 $9,901 $8,188 $10,963 $9,875
6/30/1988 $10,114 $8,733 $11,071 $10,125
9/30/1988 $10,185 $8,763 $11,278 $10,284
12/31/1988 $10,262 $9,034 $11,387 $10,406
3/31/1989 $10,586 $9,674 $11,511 $10,753
6/30/1989 $11,186 $10,528 $12,436 $11,345
9/30/1989 $11,370 $11,656 $12,553 $11,798
12/31/1989 $11,562 $11,896 $13,006 $11,958
3/31/1990 $11,307 $11,538 $12,858 $11,767
6/30/1990 $11,692 $12,264 $13,321 $12,123
9/30/1990 $10,689 $10,579 $13,401 $11,465
12/31/1990 $10,548 $11,526 $14,084 $11,975
3/31/1991 $12,306 $13,201 $14,463 $13,013
6/30/1991 $13,058 $13,171 $14,682 $13,244
9/30/1991 $14,241 $13,876 $15,526 $14,156
12/31/1991 $14,888 $15,038 $16,353 $14,936
3/31/1992 $15,884 $14,658 $16,108 $15,092
6/30/1992 $16,687 $14,936 $16,762 $15,539
9/30/1992 $16,981 $15,407 $17,580 $16,089
12/31/1992 $17,157 $16,182 $17,592 $16,401
3/31/1993 $18,530 $16,889 $18,412 $17,241
6/30/1993 $19,373 $16,972 $18,966 $17,627
9/30/1993 $20,229 $17,410 $19,596 $18,198
12/31/1993 $20,852 $17,813 $19,539 $18,388
3/31/1994 $19,775 $17,138 $18,924 $17,823
6/30/1994 $19,468 $17,210 $18,689 $17,745
9/30/1994 $19,956 $18,052 $18,783 $18,107
12/31/1994 $19,523 $18,048 $18,852 $17,859
3/31/1995 $20,325 $19,806 $19,791 $18,853
6/30/1995 $21,815 $21,698 $21,073 $19,986
9/30/1995 $22,750 $23,423 $21,476 $20,928
12/31/1995 $23,680 $24,833 $22,477 $21,868
3/31/1996 $23,827 $26,166 $21,951 $22,287
6/30/1996 $24,515 $27,341 $22,054 $22,693
9/30/1996 $24,895 $28,186 $22,444 $23,138
12/31/1996 $26,154 $30,537 $23,131 $24,230
3/31/1997 $26,203 $31,355 $22,932 $24,218
6/30/1997 $27,749 $36,830 $23,764 $26,121
9/30/1997 $29,206 $39,582 $24,599 $27,694
</TABLE>
GRAPHIC MATERIAL (9)
The following line graph hypothetically compares the performance of the Franklin
Income Fund - Class II shares to that of the S&P 500, Lehman Brothers
Intermediate Government Bond Index, and the Lipper Income Average, based on a
$10,000 investment from 5/1/95 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index Index Index
<S> <C> <C> <C> <C>
5/1/1995 $9,909 $10,000 $10,000 $10,000
6/30/1995 $10,338 $10,641 $10,502 $10,403
9/30/1995 $10,771 $11,487 $10,703 $10,893
12/31/1995 $11,197 $12,178 $11,201 $11,382
3/31/1996 $11,301 $12,832 $10,939 $11,601
6/30/1996 $11,561 $13,409 $10,991 $11,812
9/30/1996 $11,725 $13,823 $11,185 $12,043
12/31/1996 $12,302 $14,976 $11,527 $12,612
3/31/1997 $12,362 $15,377 $11,428 $12,605
6/30/1997 $13,071 $18,062 $11,843 $13,596
9/30/1997 $13,686 $19,415 $12,259 $14,415
</TABLE>
GRAPHIC MATERIAL (10)
The following line graph hypothetically compares the performance of the Franklin
Income Fund - Advisor Class shares to that of the S&P 500, Lehman Brothers
Intermediate Government Bond Index, and the Lipper Income Average, based on a
$10,000 investment from 10/1/87 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index Index Index
<S> <C> <C> <C> <C>
10/1/1987 $10,000 $10,000 $10,000 $10,000
12/31/1987 $9,856 $7,747 $10,584 $9,371
3/31/1988 $10,347 $8,188 $10,963 $9,875
6/30/1988 $10,570 $8,733 $11,071 $10,125
9/30/1988 $10,644 $8,763 $11,278 $10,284
12/31/1988 $10,724 $9,034 $11,387 $10,406
3/31/1989 $11,063 $9,674 $11,511 $10,753
6/30/1989 $11,690 $10,528 $12,436 $11,345
9/30/1989 $11,882 $11,656 $12,553 $11,798
12/31/1989 $12,083 $11,896 $13,006 $11,958
3/31/1990 $11,817 $11,538 $12,858 $11,767
6/30/1990 $12,219 $12,264 $13,321 $12,123
9/30/1990 $11,171 $10,579 $13,401 $11,465
12/31/1990 $11,023 $11,526 $14,084 $11,975
3/31/1991 $12,860 $13,201 $14,463 $13,013
6/30/1991 $13,646 $13,171 $14,682 $13,244
9/30/1991 $14,882 $13,876 $15,526 $14,156
12/31/1991 $15,559 $15,038 $16,353 $14,936
3/31/1992 $16,600 $14,658 $16,108 $15,092
6/30/1992 $17,438 $14,936 $16,762 $15,539
9/30/1992 $17,745 $15,407 $17,580 $16,089
12/31/1992 $17,930 $16,182 $17,592 $16,401
3/31/1993 $19,365 $16,889 $18,412 $17,241
6/30/1993 $20,246 $16,972 $18,966 $17,627
9/30/1993 $21,141 $17,410 $19,596 $18,198
12/31/1993 $21,791 $17,813 $19,539 $18,388
3/31/1994 $20,666 $17,138 $18,924 $17,823
6/30/1994 $20,345 $17,210 $18,689 $17,745
9/30/1994 $20,855 $18,052 $18,783 $18,107
12/31/1994 $20,402 $18,048 $18,852 $17,859
3/31/1995 $21,241 $19,806 $19,791 $18,853
6/30/1995 $22,798 $21,698 $21,073 $19,986
9/30/1995 $23,774 $23,423 $21,476 $20,928
12/31/1995 $24,746 $24,833 $22,477 $21,868
3/31/1996 $24,901 $26,166 $21,951 $22,287
6/30/1996 $25,619 $27,341 $22,054 $22,693
9/30/1996 $26,017 $28,186 $22,444 $23,138
12/31/1996 $27,332 $30,537 $23,131 $24,230
3/31/1997 $27,392 $31,355 $22,932 $24,218
6/30/1997 $29,022 $36,830 $23,764 $26,121
9/30/1997 $30,436 $39,582 $24,599 $27,694
</TABLE>
GRAPHIC MATERIAL (11)
The following line graph hypothetically compares the performance of the Franklin
DynaTech Fund - Class I shares to that of the S&P 500, and the H&Q Technology
Index, based on a $10,000 investment from 10/1/87 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index Index
<S> <C> <C> <C>
10/1/1987 $9,548 $10,000 $10,000
10/31/1987 $7,593 $7,846 $6,946
11/30/1987 $6,966 $7,199 $6,222
12/31/1987 $7,586 $7,747 $7,294
1/31/1988 $7,712 $8,074 $7,013
2/29/1988 $8,254 $8,450 $7,623
3/31/1988 $8,051 $8,189 $7,191
4/30/1988 $8,200 $8,280 $7,378
5/31/1988 $8,132 $8,351 $7,190
6/30/1988 $8,743 $8,734 $7,766
7/31/1988 $8,349 $8,701 $7,230
8/31/1988 $7,820 $8,405 $6,611
9/30/1988 $7,983 $8,763 $6,863
10/31/1988 $7,875 $9,007 $6,661
11/30/1988 $7,610 $8,878 $6,392
12/31/1988 $8,078 $9,033 $6,849
1/31/1989 $8,683 $9,695 $7,339
2/28/1989 $8,506 $9,453 $7,120
3/31/1989 $8,540 $9,673 $6,873
4/30/1989 $9,079 $10,175 $7,366
5/31/1989 $9,686 $10,588 $7,841
6/30/1989 $9,475 $10,527 $7,238
7/31/1989 $10,103 $11,478 $7,543
8/31/1989 $10,219 $11,703 $7,678
9/30/1989 $10,410 $11,655 $7,588
10/31/1989 $10,151 $11,384 $7,371
11/30/1989 $10,335 $11,617 $7,338
12/31/1989 $10,482 $11,895 $7,345
1/31/1990 $10,167 $11,097 $6,987
2/28/1990 $10,272 $11,240 $7,252
3/31/1990 $10,714 $11,538 $7,576
4/30/1990 $10,677 $11,251 $7,290
5/31/1990 $11,949 $12,348 $8,340
6/30/1990 $12,077 $12,265 $8,202
7/31/1990 $11,800 $12,226 $7,504
8/31/1990 $10,692 $11,121 $6,475
9/30/1990 $10,137 $10,579 $5,779
10/31/1990 $10,040 $10,534 $5,517
11/30/1990 $10,549 $11,214 $6,049
12/31/1990 $10,815 $11,527 $6,525
1/31/1991 $11,903 $12,030 $7,543
2/28/1991 $12,693 $12,890 $8,183
3/31/1991 $12,770 $13,202 $8,525
4/30/1991 $12,823 $13,233 $8,542
5/31/1991 $13,521 $13,804 $8,884
6/30/1991 $12,647 $13,171 $8,033
7/31/1991 $13,283 $13,785 $8,444
8/31/1991 $13,705 $14,112 $8,679
9/30/1991 $13,314 $13,876 $8,274
10/31/1991 $13,490 $14,062 $8,645
11/30/1991 $13,222 $13,496 $8,329
12/31/1991 $14,649 $15,039 $9,485
1/31/1992 $14,991 $14,760 $10,226
2/29/1992 $15,076 $14,950 $10,784
3/31/1992 $14,486 $14,659 $10,024
4/30/1992 $14,479 $15,090 $9,799
5/31/1992 $14,378 $15,163 $9,724
6/30/1992 $14,176 $14,938 $9,046
7/31/1992 $14,579 $15,548 $9,517
8/31/1992 $14,222 $15,230 $9,091
9/30/1992 $14,300 $15,408 $9,498
10/31/1992 $14,409 $15,460 $10,045
11/30/1992 $14,874 $15,986 $10,757
12/31/1992 $15,264 $16,183 $11,257
1/31/1993 $15,487 $16,319 $12,195
2/28/1993 $15,312 $16,540 $11,779
3/31/1993 $15,614 $16,889 $11,961
4/30/1993 $15,296 $16,481 $11,251
5/31/1993 $16,059 $16,921 $12,425
6/30/1993 $15,852 $16,970 $12,266
7/31/1993 $15,534 $16,902 $11,562
8/31/1993 $16,155 $17,543 $12,301
9/30/1993 $16,361 $17,407 $12,526
10/31/1993 $16,425 $17,768 $12,741
11/30/1993 $16,186 $17,599 $12,928
12/31/1993 $16,398 $17,812 $13,217
1/31/1994 $16,808 $18,418 $14,033
2/28/1994 $16,757 $17,918 $14,497
3/31/1994 $16,295 $17,137 $13,704
4/30/1994 $16,039 $17,357 $13,352
5/31/1994 $16,261 $17,641 $13,391
6/30/1994 $15,663 $17,209 $12,537
7/31/1994 $16,158 $17,773 $13,005
8/31/1994 $17,133 $18,502 $14,343
9/30/1994 $16,842 $18,051 $14,296
10/31/1994 $17,543 $18,457 $15,606
11/30/1994 $17,219 $17,785 $15,472
12/31/1994 $17,252 $18,048 $15,877
1/31/1995 $17,409 $18,516 $15,645
2/28/1995 $17,879 $19,238 $17,001
3/31/1995 $18,279 $19,805 $17,779
4/30/1995 $19,028 $20,388 $19,111
5/31/1995 $19,585 $21,203 $19,795
6/30/1995 $21,117 $21,695 $22,179
7/31/1995 $22,075 $22,415 $24,204
8/31/1995 $21,831 $22,471 $24,481
9/30/1995 $22,249 $23,420 $25,065
10/31/1995 $22,684 $23,335 $25,417
11/30/1995 $22,371 $24,360 $25,105
12/31/1995 $21,760 $24,830 $23,740
1/31/1996 $21,778 $25,674 $24,091
2/29/1996 $22,547 $25,913 $25,298
3/31/1996 $22,100 $26,162 $24,197
4/30/1996 $23,907 $26,546 $27,541
5/31/1996 $24,766 $27,231 $27,956
6/30/1996 $23,979 $27,335 $25,920
7/31/1996 $22,547 $26,126 $23,256
8/31/1996 $23,371 $26,678 $24,664
9/30/1996 $25,106 $28,180 $27,515
10/31/1996 $25,572 $28,957 $27,122
11/30/1996 $28,023 $31,146 $30,319
12/31/1996 $28,026 $30,530 $29,505
1/31/1997 $30,108 $32,438 $32,665
2/28/1997 $28,412 $32,691 $29,997
3/31/1997 $27,694 $31,347 $28,124
4/30/1997 $28,928 $33,219 $29,164
5/31/1997 $30,550 $35,242 $33,554
6/30/1997 $30,826 $36,821 $33,851
7/31/1997 $33,830 $39,752 $39,296
8/31/1997 $33,222 $37,525 $39,408
9/30/1997 $34,074 $39,582 $41,024
</TABLE>
GRAPHIC MATERIAL (12)
The following line graph hypothetically compares the performance of the Franklin
DynaTech Fund - Class II shares to that of the S&P 500, and the H&Q Technology
Index, based on a $10,000 investment from 9/16/96 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index Index
<S> <C> <C> <C>
9/16/1996 $9,899 $10,000 $10,000
9/30/1996 $10,159 $10,263 $10,539
10/31/1996 $10,333 $10,546 $10,388
11/30/1996 $11,318 $11,344 $11,613
12/31/1996 $11,312 $11,119 $11,301
1/31/1997 $12,155 $11,814 $12,511
2/28/1997 $11,461 $11,906 $11,490
3/31/1997 $11,163 $11,417 $10,772
4/30/1997 $11,648 $12,098 $11,171
5/31/1997 $12,289 $12,835 $12,852
6/30/1997 $12,386 $13,410 $12,966
7/31/1997 $13,587 $14,478 $15,051
8/31/1997 $13,326 $13,667 $15,094
9/30/1997 $13,547 $14,416 $15,713
</TABLE>
GRAPHIC MATERIAL (13)
This point graph demonstrates the fund's Class I shares volatility risk vs.
return in comparison with the risk/return factors of the 1-year CD, Merrill
Lynch 10-Year Treasury, and the Merrill Lynch 30-Year Treasury, from 10/92 to
9/97.
<TABLE>
<CAPTION>
Franklin U.S. Government Securities Fund vs. Comparable
Investments
<S> <C> <C>
RISK RETURN
---------------------------
ML10YR 6.84 6.12
ML30YR 10.30 7.77
CD 1 YR. 0.32 4.76
USG FUND 3.46 6.54
---------------------------
</TABLE>
GRAPHIC MATERIAL (14)
This bar chart shows the comparison between the fund's yield of 6.36%, the
average ginnie mae fund yield of 5.94%, a one-year CD yield of 5.83%, and the
average money market fund yield of 5.02%.
GRAPHIC MATERIAL (15)
The following line graph hypothetically compares the performance of the Franklin
U.S. Government Securities Fund - Class I shares to that of the Lehman Brothers
Intermediate Government Bond Index and the Consumer Price Index (CPI), based on
a $10,000 investment from 10/1/87 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index Index
<S> <C> <C> <C>
10/1/1987 9582 10000 10000
Oct-87 9,789 10,298 10,026
Nov-87 9,928 10,360 10,035
Dec-87 10,026 10,460 10,035
Jan-88 10,340 10,720 10,061
Feb-88 10,424 10,833 10,087
Mar-88 10,406 10,788 10,131
Apr-88 10,403 10,769 10,183
May-88 10,386 10,718 10,218
Jun-88 10,608 10,892 10,262
Jul-88 10,574 10,860 10,305
Aug-88 10,571 10,874 10,348
Sep-88 10,752 11,062 10,418
Oct-88 10,935 11,215 10,452
Nov-88 10,838 11,118 10,460
Dec-88 10,772 11,129 10,478
Jan-89 10,913 11,241 10,531
Feb-89 10,893 11,191 10,574
Mar-89 10,890 11,244 10,635
Apr-89 11,082 11,471 10,704
May-89 11,343 11,692 10,765
Jun-89 11,621 11,990 10,791
Jul-89 11,769 12,234 10,817
Aug-89 11,715 12,069 10,834
Sep-89 11,762 12,127 10,869
Oct-89 11,947 12,381 10,921
Nov-89 12,083 12,504 10,947
Dec-89 12,184 12,540 10,965
Jan-90 12,127 12,462 11,078
Feb-90 12,195 12,509 11,130
Mar-90 12,228 12,524 11,191
Apr-90 12,206 12,482 11,209
May-90 12,494 12,749 11,235
Jun-90 12,633 12,918 11,295
Jul-90 12,866 13,098 11,338
Aug-90 12,840 13,051 11,443
Sep-90 12,927 13,167 11,539
Oct-90 13,071 13,350 11,608
Nov-90 13,312 13,552 11,633
Dec-90 13,497 13,739 11,633
Jan-91 13,683 13,881 11,703
Feb-91 13,753 13,965 11,721
Mar-91 13,864 14,042 11,738
Apr-91 13,991 14,187 11,756
May-91 14,120 14,266 11,791
Jun-91 14,189 14,278 11,825
Jul-91 14,401 14,432 11,843
Aug-91 14,573 14,706 11,878
Sep-91 14,788 14,956 11,930
Oct-91 14,984 15,126 11,948
Nov-91 15,071 15,303 11,982
Dec-91 15,348 15,675 11,991
Jan-92 15,243 15,525 12,009
Feb-92 15,353 15,573 12,052
Mar-92 15,312 15,511 12,113
Apr-92 15,423 15,650 12,130
May-92 15,657 15,883 12,147
Jun-92 15,849 16,112 12,191
Jul-92 15,997 16,422 12,217
Aug-92 16,214 16,589 12,251
Sep-92 16,342 16,818 12,285
Oct-92 16,222 16,616 12,328
Nov-92 16,283 16,548 12,345
Dec-92 16,483 16,762 12,337
Jan-93 16,706 17,073 12,397
Feb-93 16,885 17,324 12,441
Mar-93 16,972 17,388 12,484
Apr-93 17,059 17,524 12,519
May-93 17,146 17,477 12,537
Jun-93 17,330 17,730 12,554
Jul-93 17,419 17,766 12,554
Aug-93 17,508 18,030 12,589
Sep-93 17,518 18,104 12,616
Oct-93 17,552 18,148 12,668
Nov-93 17,489 18,059 12,676
Dec-93 17,623 18,133 12,676
Jan-94 17,782 18,312 12,711
Feb-94 17,617 18,061 12,754
Mar-94 17,122 17,798 12,797
Apr-94 17,007 17,682 12,815
May-94 17,017 17,694 12,824
Jun-94 16,940 17,698 12,868
Jul-94 17,250 17,930 12,902
Aug-94 17,302 17,982 12,954
Sep-94 17,066 17,832 12,989
Oct-94 17,014 17,836 12,998
Nov-94 16,988 17,758 13,015
Dec-94 17,148 17,816 13,015
Jan-95 17,497 18,107 13,067
Feb-95 17,930 18,456 13,119
Mar-95 18,011 18,558 13,163
Apr-95 18,257 18,773 13,206
May-95 18,866 19,302 13,233
Jun-95 18,979 19,426 13,259
Jul-95 19,009 19,435 13,259
Aug-95 19,209 19,595 13,293
Sep-95 19,381 19,726 13,320
Oct-95 19,582 19,943 13,364
Nov-95 19,784 20,186 13,355
Dec-95 20,017 20,386 13,345
Jan-96 20,135 20,557 13,424
Feb-96 19,963 20,340 13,467
Mar-96 19,878 20,246 13,537
Apr-96 19,793 20,187 13,590
May-96 19,736 20,177 13,616
Jun-96 19,977 20,383 13,624
Jul-96 20,040 20,446 13,650
Aug-96 20,042 20,469 13,676
Sep-96 20,379 20,733 13,719
Oct-96 20,748 21,073 13,763
Nov-96 21,058 21,328 13,789
Dec-96 20,937 21,213 13,789
Jan-97 21,065 21,293 13,834
Feb-97 21,130 21,327 13,876
Mar-97 21,070 21,206 13,911
Apr-97 21,389 21,445 13,929
May-97 21,576 21,613 13,921
Jun-97 21,829 21,798 13,938
Jul-97 22,244 22,200 13,954
Aug-97 22,176 22,115 13,981
Sep-97 22,434 22,356 14,016
TOTAL RETURN 124.34% 123.56% 40.16%
</TABLE>
GRAPHIC MATERIAL (16)
The following line graph hypothetically compares the performance of the Franklin
U.S. Government Securities Fund - Class II shares to that of the Lehman Brothers
Intermediate Government Bond Index and the Consumer Price Index (CPI), based on
a $10,000 investment from 5/1/95 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index Index
<S> <C> <C> <C>
5/1/1995 9896 10000 10,000
5/31/1995 10,194 10,282 10,020
6/30/1995 10,249 10,348 10,040
7/31/1995 10,260 10,353 10,040
8/31/1995 10,362 10,438 10,066
9/30/1995 10,454 10,508 10,086
10/31/1995 10,557 10,623 10,120
11/30/1995 10,661 10,753 10,112
12/31/1995 10,780 10,859 10,105
1/31/1996 10,853 10,951 10,165
2/29/1996 10,754 10,835 10,198
3/31/1996 10,687 10,785 10,251
4/30/1996 10,652 10,753 10,291
5/31/1996 10,616 10,748 10,310
6/30/1996 10,725 10,858 10,316
7/31/1996 10,754 10,891 10,336
8/31/1996 10,766 10,903 10,356
9/30/1996 10,930 11,044 10,389
10/31/1996 11,123 11,225 10,422
11/30/1996 11,301 11,361 10,442
12/31/1996 11,214 11,300 10,442
1/31/1997 11,294 11,343 10,475
2/28/1997 11,307 11,361 10,508
3/31/1997 11,269 11,296 10,534
4/30/1997 11,434 11,424 10,548
5/31/1997 11,546 11,513 10,541
6/30/1997 11,675 11,612 10,554
7/31/1997 11,892 11,825 10,567
8/31/1997 11,833 11,780 10,587
9/30/1997 11,966 11,909 10,613
TOTAL RETURN 19.66% 19.09% 6.13%
</TABLE>
GRAPHIC MATERIAL (17)
The following line graph hypothetically compares the performance of the Franklin
U.S. Government Securities Fund - Advisor Class shares to that of the Lehman
Brothers Intermediate Government Bond Index and the Consumer Price Index (CPI),
based on a $10,000 investment from 10/1/87 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index Index
<S> <C> <C> <C>
Oct 1-87 10000 10000 10000
Oct-87 10217 10,298 10,026
Nov-87 10362 10,360 10,035
Dec-87 10463 10,460 10,035
Jan-88 10791 10,720 10,061
Feb-88 10879 10,833 10,087
Mar-88 10861 10,788 10,131
Apr-88 10858 10,769 10,183
May-88 10839 10,718 10,218
Jun-88 11071 10,892 10,262
Jul-88 11036 10,860 10,305
Aug-88 11033 10,874 10,348
Sep-88 11222 11,062 10,418
Oct-88 11413 11,215 10,452
Nov-88 11312 11,118 10,460
Dec-88 11243 11,129 10,478
Jan-89 11389 11,241 10,531
Feb-89 11369 11,191 10,574
Mar-89 11365 11,244 10,635
Apr-89 11566 11,471 10,704
May-89 11838 11,692 10,765
Jun-89 12129 11,990 10,791
Jul-89 12283 12,234 10,817
Aug-89 12226 12,069 10,834
Sep-89 12276 12,127 10,869
Oct-89 12469 12,381 10,921
Nov-89 12610 12,504 10,947
Dec-89 12716 12,540 10,965
Jan-90 12657 12,462 11,078
Feb-90 12728 12,509 11,130
Mar-90 12761 12,524 11,191
Apr-90 12739 12,482 11,209
May-90 13040 12,749 11,235
Jun-90 13185 12,918 11,295
Jul-90 13428 13,098 11,338
Aug-90 13401 13,051 11,443
Sep-90 13491 13,167 11,539
Oct-90 13642 13,350 11,608
Nov-90 13893 13,552 11,633
Dec-90 14086 13,739 11,633
Jan-91 14281 13,881 11,703
Feb-91 14353 13,965 11,721
Mar-91 14469 14,042 11,738
Apr-91 14602 14,187 11,756
May-91 14736 14,266 11,791
Jun-91 14808 14,278 11,825
Jul-91 15030 14,432 11,843
Aug-91 15210 14,706 11,878
Sep-91 15434 14,956 11,930
Oct-91 15639 15,126 11,948
Nov-91 15729 15,303 11,982
Dec-91 16018 15,675 11,991
Jan-92 15909 15,525 12,009
Feb-92 16023 15,573 12,052
Mar-92 15981 15,511 12,113
Apr-92 16096 15,650 12,130
May-92 16341 15,883 12,147
Jun-92 16541 16,112 12,191
Jul-92 16696 16,422 12,217
Aug-92 16922 16,589 12,251
Sep-92 17056 16,818 12,285
Oct-92 16930 16,616 12,328
Nov-92 16995 16,548 12,345
Dec-92 17203 16,762 12,337
Jan-93 17436 17,073 12,397
Feb-93 17623 17,324 12,441
Mar-93 17713 17,388 12,484
Apr-93 17804 17,524 12,519
May-93 17895 17,477 12,537
Jun-93 18087 17,730 12,554
Jul-93 18179 17,766 12,554
Aug-93 18273 18,030 12,589
Sep-93 18283 18,104 12,616
Oct-93 18319 18,148 12,668
Nov-93 18252 18,059 12,676
Dec-93 18392 18,133 12,676
Jan-94 18559 18,312 12,711
Feb-94 18386 18,061 12,754
Mar-94 17870 17,798 12,797
Apr-94 17749 17,682 12,815
May-94 17760 17,694 12,824
Jun-94 17680 17,698 12,868
Jul-94 18004 17,930 12,902
Aug-94 18058 17,982 12,954
Sep-94 17811 17,832 12,989
Oct-94 17757 17,836 12,998
Nov-94 17730 17,758 13,015
Dec-94 17897 17,816 13,015
Jan-95 18261 18,107 13,067
Feb-95 18713 18,456 13,119
Mar-95 18798 18,558 13,163
Apr-95 19054 18,773 13,206
May-95 19689 19,302 13,233
Jun-95 19808 19,426 13,259
Jul-95 19839 19,435 13,259
Aug-95 20047 19,595 13,293
Sep-95 20227 19,726 13,320
Oct-95 20437 19,943 13,364
Nov-95 20648 20,186 13,355
Dec-95 20891 20,386 13,345
Jan-96 21014 20,557 13,424
Feb-96 20835 20,340 13,467
Mar-96 20746 20,246 13,537
Apr-96 20657 20,187 13,590
May-96 20598 20,177 13,616
Jun-96 20850 20,383 13,624
Jul-96 20915 20,446 13,650
Aug-96 20918 20,469 13,676
Sep-96 21269 20,733 13,719
Oct-96 21654 21,073 13,763
Nov-96 21977 21,328 13,789
Dec-96 21852 21,213 13,789
Jan-97 22017 21,293 13,834
Feb-97 22054 21,327 13,876
Mar-97 21993 21,206 13,911
Apr-97 22361 21,445 13,929
May-97 22558 21,613 13,921
Jun-97 22824 21,798 13,938
Jul-97 23259 22,200 13,954
Aug-97 23156 22,115 13,981
Sep-97 23460 22,356 14,016
TOTAL RETURN 134.60% 123.56% 40.16%
</TABLE>
PROXY FRANKLIN PRINCIPAL MATURITY TRUST
SPECIAL MEETING OF SHAREHOLDERS JUNE 5, 1998
The undersigned hereby revokes all previous proxies for his shares and
appoints Harmon E. Burns, Rupert H. Johnson, Jr., Deborah R. Gatzek and Larry L.
Greene, and each of them, proxies of the undersigned with full power of
substitution to vote all shares of Franklin Principal Maturity Trust (the
"Fund") which the undersigned is entitled to vote at the Fund's Special Meeting
to be held at 777 Mariners Island Blvd., San Mateo, California at 2:00 p.m.
Pacific time on the 5th day of June, 1998, including any adjournment thereof,
upon such business as may properly be brought before the Special Meeting.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES. IT WILL BE VOTED
AS SPECIFIED. IF NO SPECIFICATION IS MADE, THIS PROXY SHALL BE VOTED WITH
RESPECT TO IN FAVOR OF THE PROPOSAL REGARDING THE REORGANIZATION OF THE FUND
PURSUANT TO THE AGREEMENT AND PLAN OF REORGANIZATION WITH CUSTODIAN FUNDS. IF
ANY OTHER MATTERS PROPERLY COME BEFORE THE MEETING ABOUT WHICH THE PROXYHOLDERS
WERE NOT AWARE PRIOR TO THE TIME OF THE SOLICITATION, AUTHORIZATION IS GIVEN THE
PROXY HOLDERS TO VOTE IN ACCORDANCE WITH THE VIEWS OF MANAGEMENT THEREON. THE
MANAGEMENT IS NOT AWARE OF ANY SUCH MATTERS.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
SEE REVERSE SIDE
X Pleas mark votes as in this example.
FOR AGAINST ABSTAIN
--- ------- -------
No. 1 To approve or disapprove an Agreement
and Plan of Reorganization between
the Fund and Franklin Custodian Funds,
Inc. ("Custodian Funds") on behalf of the
Income Series (the "Income Series") that
provides for the acquisition of substantially
all of the assets of the Fund in H exchange
for Class I shares of the Income Series,
the distribution of such shares to the
shareholders of the Fund, and the
dissolution of the Fund.
GRANT WITHHOLD
----- --------
No. 2 To grant the proxy holders the authority
to vote upon any other business that may
legally come before the meeting.
____
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT
PLEASE SIGN AND PROMPTLY RETURN IN THE ACCOMPANYING
ENVELOPE. NO POSTAGE REQUIRED IF MAILED IN THE U.S.
Note: Please sign exactly as your name appears on the
proxy. If signing for estates, trusts or corporations,
title or capacity should be stated. If shares are held
jointly, each holder must sign.
Signature: _____________ Date:______ Signature: _______________ Date: ________
STATEMENT OF ADDITIONAL INFORMATION
FOR
FRANKLIN CUSTODIAN FUNDS, INC.
RELATING TO THE ACQUISITION OF THE
ASSETS OF
FRANKLIN PRINCIPAL MATURITY TRUST
DATED APRIL __, 1998
This Statement of Additional Information relates specifically to the proposed
acquisition of substantially all of the assets of Franklin Principal Maturity
Trust by Franklin Custodian Funds, Inc. ("Custodian Funds") on behalf of the
Income Series ("Income Series").
This Statement of Additional Information consists of this Cover Page and the
following documents which are attached and incorporated by reference:
o Exhibit A: Statement of Additional Information relating to the Prospectus
of Custodian Funds, dated February 1, 1998, which Prospectus is included
as an exhibit to the Prospectus/Proxy Statement dated April ___, 1998
relating to the Reorganization.
o Exhibit B: Annual Report of Franklin Principal Maturity Trust dated
November 30, 1997.
This Statement of Additional Information is not a Prospectus; a Prospectus/Proxy
Statement dated April __, 1998, relating to the above-referenced transaction may
be obtained from Custodian Funds. This document should be read in conjunction
with such Prospectus/Proxy Statement, a copy of which may be obtained without
charge by calling 1-800/DIAL BEN or by writing to Custodian Funds at 777
Mariners Island Boulevard, San Mateo, CA 94404.
EXHIBIT A: SAI OF CUSTODIAN FUNDS
FRANKLIN
CUSTODIAN
FUNDS, INC.
STATEMENT OF
ADDITIONAL INFORMATION
FEBRUARY 1, 1998
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 ....................................... 5
Officers and Directors ........................................ 6
Investment Management
and Other Services ........................................... 9
How Does the Fund Buy
Securities for Its Portfolio? ................................ 11
How Do I Buy, Sell
and Exchange Shares? ......................................... 12
How Are Fund Shares Valued? ................................... 15
Additional Information on
Distributions and Taxes ...................................... 16
The Fund's Underwriter ........................................ 22
How Does the Fund
Measure Performance? ......................................... 25
Miscellaneous Information ..................................... 28
Financial Statements .......................................... 31
Useful Terms and Definitions .................................. 31
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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 "Custodian Funds") is an open-end
management investment company consisting of the following five series
(individually or collectively referred to as the "Fund(s)"): Growth Series,
Utilities Series, Income Series, U.S. Government Securities Series and DynaTech
Series.
Growth Series' investment objective is capital appreciation. 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. DynaTech Series'
investment objective is capital appreciation. DynaTech Series seeks to achieve
its objective by investing primarily in companies that emphasize technological
development, in fast-growing industries, or in the securities of companies that
Advisers considers undervalued. Utilities Series' investment objectives are both
capital appreciation and current income. 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. Utilities Series may also invest in preferred stocks and bonds; at
least 65% of the Fund's investments will be in securities of issuers engaged in
the public utilities industry. Income Series' investment objective is to
maximize income while maintaining prospects for capital appreciation. Income
Series invests in a diversified portfolio of securities selected with particular
consideration of current income production. U.S. Government Securities Series'
investment objective is income. 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.
The Prospectus, dated February 1, 1998, 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.
- -------------------------------------------------------------------------------
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.
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This SAI describes the Fund's Class I and Class II shares. Growth Series,
Utilities Series, Income Series and U.S. Government Securities Series offer
another class of shares with a different sales charge and expense structure,
which affects performance. This class is described in a separate SAI and
prospectus. For more information, contact your investment representative or call
1-800/DIAL BEN.
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 Funds 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?"
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 Fund's manager does not currently intend to write options which would cause
the market value of any Fund's open options to exceed 5% of the Fund's 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 federal regulations. As of the fiscal year ended
September 30, 1997, there were no open options transactions in any Fund. U.S.
Government Securities Series does not presently engage in option transactions,
as discussed in investment 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 Stocks
("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. PERCS
are preferred stocks that generally feature 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, after three
years PERCS convert into one share of the issuer's common stock if the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, and into less than one full share if the issuer's common stock is trading
at a price above that set by the capital appreciation limit. The amount of that
fractional share of common stock is determined by dividing the price set by the
capital appreciation limit 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. If called early, however, 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.
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 creditworthiness 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. U.S. Government Securities Series does not invest in convertible
preferred stocks.
LOAN PARTICIPATIONS - 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, when the fund's investment manager believes such
investments offer the possibility of long-term appreciation in value.
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. 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 Income Series from a bank, finance company or other
similar financial services entity ("Lender").
Loans in which 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 CD
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, 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. 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 Advisers may consider such ratings in determining whether to
invest in a particular Loan, such ratings, will not be the determinative factor
in Advisers 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 Advisers' opinion, should enhance
the relative liquidity of such interests.
When acquiring a loan participation, 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. 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, 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, 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, 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.
GNMA CERTIFICATES. Securities of the type to be included in 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 Fund. 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 U.S. Government
Securities Series.
WHEN-ISSUED, DELAYED DELIVERY AND TO-BE-ANNOUNCED ("TBA") Transactions. Income
Series may purchase debt obligations and 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 Fund 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 Funds 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 Fund 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 Fund engages in
when-issued, delayed delivery or TBA transactions, it will do so only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objectives and policies, and not for the purpose of investment leverage. In
when-issued, delayed delivery and TBA transactions, the Fund relies on the
seller to complete the transaction. The other party's failure to do so may cause
the Fund to miss a price or yield considered advantageous. Securities purchased
on a when-issued, delayed delivery or TBA basis do not generally earn interest
until their scheduled delivery date. Neither Fund 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.
OTHER POLICIES - As discussed in the Prospectus, the Funds, other than 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, 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. 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 Fund be
retained in cash as is deemed desirable or expedient under then-existing market
conditions.
Each Fund, other than 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, 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 Fund.
As noted in the Prospectus, it is also the policy of each 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 Fund 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. Custodian Funds' Board has authorized the Funds to
invest in restricted securities where such investment is consistent with each
Fund's 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 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 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 Fund invests
in restricted securities that are deemed liquid, the general level of
illiquidity in the Fund may be increased if qualified institutional buyers
become uninterested in purchasing these securities or the market for these
securities contracts.
INVESTMENT RESTRICTIONS
Custodian Funds 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 Custodian Funds. Under the 1940 Act, this means
the approval of (i) more than 50% of the outstanding shares of Custodian Funds
or (ii) 67% or more of the shares of Custodian Funds present at a shareholder
meeting if more than 50% of the outstanding shares of Custodian Funds are
represented at the meeting in person or by proxy, whichever is less.
Custodian Funds 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 Fund, other than the U.S.
Government Securities Series, may be loaned to broker-dealers or other
institutional investors as discussed in the Fund's Prospectus 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 Fund 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. (Growth, DynaTech, Income and Utilities Series also have
policies that concentration of investments in a single industry may not exceed
25% of their assets, except that Utilities Series will concentrate its
investments in the utilities industry.)
6. Purchase the securities of any issuer which would result in any Fund 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 Fund.
11. Invest in companies for the purpose of exercising control or management.
12. Purchase securities of other investment companies; except to the extent each
Fund invests its uninvested daily cash balances in shares of the Franklin Money
Fund and other money market funds in the Franklin Templeton 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 Fund's shares (as determined under Rule 12b-1, as
amended, under the federal securities laws) and (iii) provided aggregate
investments by a Fund in any such money market fund do not exceed (A) the
greater of (i) 5% of each Fund's total net assets or (ii) $2.5 million, or (B)
more than 3% of the outstanding shares of any such money market fund.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the Fund, the Fund may receive stock, real estate, or other
investments that the Fund would not, or could not, buy. In this case, the Fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity 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 Custodian Funds,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of Custodian Funds who are responsible for
administering each 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 Custodian Funds under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME, AGE AND ADDRESS OFFICES WITH THE FUND DURING THE PAST FIVE YEARS
Harris J. Ashton (65) 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 (a meat packing company); and director or
trustee, as the case may be, of 52 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (65) 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, General Host
Corporation (nursery and craft centers); and director or trustee, as the case
may be, of 54 of the investment companies in the Franklin Templeton Group of
Funds.
*Edith E. Holiday (45) Director
3239 38th Street, N.W.
Washington, DC 20016
Director (1993-present) of Amerada Hess Corporation and Hercules Incorporated;
Director of Beverly Enterprises, Inc. (1995-present) and H.J. Heinz Company
(1994-present; formerly, chairman (1995-1997) and trustee (1993-1997) of
National Child Research Center; assistant to the President of the United States
and Secretary of the Cabinet (1990-1993), general counsel to the United States
Treasury Department (1989-1990) and counselor to the Secretary and Assistant
Secretary for Public Affairs and Public Liaison-United States Treasury
Department (1988-1989); and trustee or director of 24 of the investment
companies in the Franklin Templeton Group of Funds.
*Charles B. Johnson (65) President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc., Franklin Templeton Services, Inc. and General Host Corporation (nursery
and craft centers); and officer and/or director or trustee, as the case may be,
of most of the other subsidiaries of Franklin Resources, Inc. and of 53 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (57) 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.;
Senior Vice President and Director, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case may
be, of most of the other subsidiaries of Franklin Resources, Inc. and of 57 of
the investment companies in the Franklin Templeton Group of Funds.
Gordon S. Macklin (69) 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),
Shoppers Express (home shopping), and Spacehab, Inc. (aerospace services); and
director or trustee, as the case may be, of 51 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 (52) 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. and
Franklin Templeton Services, Inc.; Executive Vice President, Franklin Advisers,
Inc.; Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 57 of the investment companies in the Franklin
Templeton Group of Funds.
Martin L. Flanagan (37) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and Director, Templeton Investment Counsel,
Inc.; Senior Vice President and Treasurer, Franklin Advisers, Inc.; Treasurer,
Franklin Advisory Services, Inc.; Treasurer and Chief Financial Officer,
Franklin Investment Advisory Services, Inc.; President, Franklin Templeton
Services, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; and officer and/or director or trustee, as the case may be, of 57 of the
investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief Operating
Officer, Franklin Investment Advisory Services, Inc.; and officer of 57 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (58) Treasurer
777 Mariners Island Blvd. and Principal
San Mateo, CA 94404 Accounting
Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 34 of
the investment companies in the Franklin Templeton Group of Funds.
Brian E. Lorenz (58) Secretary
One North Lexington Avenue
White Plains, NY 10001-1700
Attorney, member of the law firm of Bleakley Platt & Schmidt; and officer of
three of the investment companies in the Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors, Advisers and Investment Advisory. Nonaffiliated members of the
Board are currently paid $1,350 per month plus $1,300 per meeting attended. As
shown above, the nonaffiliated Board members also serve as directors or trustees
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 Custodian Funds and by
other funds in the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN THE
TOTAL FEES FRANKLIN
TOTAL FEES RECEIVED FROM THE TEMPLETON GROUP
RECEIVED FROM FRANKLIN TEMPLETON OF FUNDS ON
THE FUND* GROUP OF FUNDS** WHICH EACH SERVES***
Harris J. Ashton $30,500 $344,642 52
S. Joseph Fortunato 30,500 361,562 54
Edith E. Holiday 0 72,875 24
Gordon S. Macklin 30,500 337,292 51
*For the fiscal year ended September 30, 1997.
**For the calendar year ended December 31, 1997.
***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 58 registered investment companies, with approximately 171 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 or trustee.
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.
During the fiscal year ended September 30, 1997, legal fees and expenses of
$74,098 were paid to the law firm of which Mr. Lorenz, an officer of Custodian
Funds, is a partner, and which acts as counsel to the Fund.
As of January 2, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately
4,428.423 shares of Growth Series - Class I, 4,094.172 shares of Growth Series -
Advisor Class, 102.460 shares of Utilities Series - Class I, 13,603.842 shares
of DynaTech Series - Class I, 439.436 shares of Income Series - Class I,
12,633.274 shares of Income Series - Advisor Class, 48,364.879 shares of U.S.
Government Securities Series Class I and 9,716.923 shares of U.S. Government
Securities Series - Advisor Class, or less than 1% of the total outstanding
Class I and Advisor Class shares of each Fund and 29,290.179 shares of Utilities
Series - Advisor Class, or less than 3% of the total outstanding Advisor Class
shares of Utilities Series. Many of the Board members also own shares in other
funds in the Franklin Templeton Group of Funds. Charles B. Johnson and Rupert H.
Johnson, Jr. are brothers.
INVESTMENT MANAGEMENT
AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. Advisers is the investment manager of
the Funds, except for Growth Series. Growth Series' investment manager is
Investment Advisory. The investment manager 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. The investment manager's activities are
subject to the review and supervision of the Board to whom the investment
manager renders periodic reports of the Fund's investment activities. Each
investment manager and its officers, directors and employees are covered by
fidelity insurance for the protection of the Funds.
The investment managers and their affiliates act as investment manager to
numerous other investment companies and accounts. The investment manager 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 the investment
manager on behalf of the Fund. Similarly, with respect to the Fund, the
investment manager is not obligated to recommend, buy or sell, or to refrain
from recommending, buying or selling any security that the investment manager
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. The investment manager 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 the
investment manager 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, each Fund pays the investment
manager a management fee equal to a monthly rate of 5/96 of 1% of the value of
net assets up to and including $100 million; and 1/24 of 1% of the value of net
assets over $100 million and not over $250,000,000; and 9/240 of 1% of the value
of net assets over $250 million and not over $10 billion; and 11/300 of 1% of
the value of net assets over $10 billion and not over $12.5 billion; and 7/200
of 1% of the value of net assets over $12.5 billion and not over $15 billion;
and 1/30 of 1% of the value of net assets over $15 billion and not over $17.5
billion; and 19/100 of 1% of the value of net assets over $17.5 billion and not
over $20 billion; and 3/100 of 1% of the value of net assets in excess of $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.
For the fiscal years ended September 30, 1995, 1996 and 1997, management fees
paid to the in vestment manager were as follows:
FUND 1995 1996 1997
- ------------------------------------------------------------------------------
Growth Series $ 2,969,094 $ 4,329,460 $6,295,304
DynaTech Series 491,673 601,568 840,480
Utilities Series 12,223,592 12,335,820 9,987,693
Income Series 23,887,430 30,075,761 35,364,027
U.S.Government Securities
Series 50,269,876 48,138,799 44,411,776
MANAGEMENT AGREEMENT. The management agreement for each Fund is in effect until
January 31, 1999. Each agreement 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 Custodian Funds'
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. Each management agreement may be
terminated without penalty at any time by the Board or by a vote of the holders
of a majority of Custodian Funds' outstanding voting securities on 30 days'
written notice to the investment manager, or by the investment manager on 30
days' written notice to Custodian Funds, and will automatically terminate in the
event of its assignment, as defined in the 1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with the investment manager, FT
Services provides certain administrative services and facilities for Custodian
Funds. 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, the investment manager 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 the investment manager. It is not a separate
expense of the Fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is Custodian Funds' 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. Custodian Funds may also
reimburse Investor Services for certain out-of-pocket expenses, which may
include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the Fund. The amount of reimbursements
for these services per benefit plan participant Fund account per year may not
exceed the per account fee payable by Custodian Funds to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN. 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
Custodian Funds. The custodian does 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 Custodian Funds' independent auditors. During the fiscal year ended
September 30, 1997, their auditing services consisted of rendering an opinion on
the financial statements of Custodian Funds included in Custodian Funds' Annual
Report to Shareholders for the fiscal year ended September 30, 1997.
HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
The investment manager selects brokers and dealers to execute the Fund's
portfolio transactions in accordance with criteria set forth in the management
agreement and any directions that the Board may give.
When placing a portfolio transaction, the investment manager seeks to obtain
prompt execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid by the Fund
is negotiated between the investment manager and the broker executing the
transaction. The determination and evaluation of the reasonableness of the
brokerage commissions paid are based to a large degree on the professional
opinions of the persons responsible for 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. The
investment manager 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 the investment manager, a better price and execution
can otherwise be obtained. Purchases of portfolio securities from underwriters
will include a commission or concession paid by the issuer to the underwriter,
and purchases from dealers will include a spread between the bid and ask price.
The investment manager may pay certain brokers commissions that are higher than
those another broker may charge, if the investment manager determines in good
faith that the amount paid is reasonable in relation to the value of the
brokerage and research services it receives. This may be viewed in terms of
either the particular transaction or the investment manager's overall
responsibilities to client accounts over which it exercises investment
discretion. The services that brokers may provide to the investment manager
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to the investment
manager in carrying out its investment advisory responsibilities. These services
may not always directly benefit the Fund. They must, however, be of value to the
investment manager in carrying out its overall responsibilities to its clients.
Since most purchases by U.S. Government Securities Series are principal
transactions at net prices, U.S. Government Securities Series incurs little or
no brokerage costs. The Fund deals directly with the selling or buying principal
or market maker without incurring charges for the services of a broker on its
behalf, unless it is determined that a better price or execution may be obtained
by using the services of a broker. 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 prices. The Fund seeks to obtain prompt execution of orders at the most
favorable net price. Transactions may be directed to dealers in return for
research and statistical information, as well as for special services provided
by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services the investment manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order to
obtain additional research services permits the investment manager to supplement
its own research and analysis activities and to receive the views and
information of individuals and research staffs of other securities firms. As
long as it is lawful and appropriate to do so, the investment manager 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, 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 the investment manager 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 the investment manager 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 the investment manager, 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, 1995, 1996 and 1997, the Fund paid
brokerage commissions as follows:
FUND 1995 1996 1997
- -----------------------------------------------------------------------------
Growth Series $ 50,102 $105,528 $ 78,178
DynaTech Series 11,850 18,930 11,855
Utilities Series 1,025,293 1,525,621 1,146,668
Income Series 895,111 1,220,342 848,922
U.S.Government Securities Series -0- -0- -0-
As of September 30, 1997, the Fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
Custodian Funds continuously offers its shares through Securities Dealers who
have an agreement with Distributors. Securities Dealers may at times receive the
entire sales charge. A Securities Dealer who receives 90% or more of the sales
charge may be deemed an underwriter under the Securities Act of 1933, as
amended.
Securities laws of states where Custodian Funds offers its shares may differ
from federal law. Banks and financial institutions that sell shares of the Funds
may be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectus.
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.
Under agreements with certain banks in Taiwan, Republic of China, Custodian
Funds' shares are available to these banks' trust accounts without a sales
charge. The banks may charge service fees to their customers who participate in
the trusts. A portion of these service fees may be paid to Distributors or one
of its affiliates to help defray expenses of maintaining a service office in
Taiwan, including expenses related to local literature fulfillment and
communication facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
For the Growth Series and DynaTech Series:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
- ---------------------------------------------
Under $30,000 3%
$30,000 but less than $50,000 2.5%
$50,000 but less than $100,000 2.0%
$100,000 but less than $200,000 1.5%
$200,000 but less than $400,000 1.0%
$400,000 or more 0%
For the Utilities Series, Income Series and U.S. Government Securities Series:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
- ----------------------------------------------
Under $30,000 3%
$30,000 but less than $100,000 2%
$100,000 but less than $400,000 1%
$400,000 or more 0%
OTHER PAYMENTS TO SECURITIES DEALERS. For Growth and DynaTech Series,
Distributors may pay the following commissions, out of its own resources, to
Securities Dealers who initiate and are responsible for purchases of Class I
shares of $1 million or more: 1% on sales of $1 million to $2 million, plus
0.80% on sales over $2 million to $3 million, plus 0.50% on sales over $3
million to $50 million, plus 0.25% on sales over $50 million to $100 million,
plus 0.15% on sales over $100 million. For Income, Utilities, and U.S.
Government Securities Series, Distributors may pay the following commissions,
out of its own resources, to Securities Dealers who initiate and are responsible
for purchases of Class I shares of $1 million or more: 0.75% on sales of $1
million to $2 million, plus 0.60% on sales over $2 million to $3 million, plus
0.50% on sales over $3 million to $50 million, plus 0.25% on sales over $50
million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases of Class I shares by certain retirement plans without a front-end
sales charge, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the 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 Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer'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 payments 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.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds acquired more than 90 days before the Letter is filed will be counted
towards completion of the Letter, but they will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the 13
month period, except in the case of certain retirement plans, will be subtracted
from the amount of the purchases for purposes of determining whether the terms
of the Letter have been completed. If the Letter is not completed within the 13
month period, there will be an upward adjustment of the sales charge, depending
on the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute a
Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name until you fulfill the Letter. This policy of reserving shares does not
apply to certain retirement plans. If total purchases, less redemptions, equal
the amount specified under the Letter, the reserved shares will be deposited to
an account in your name or delivered to you or as you direct. If total
purchases, less redemptions, exceed the amount specified under the Letter and is
an amount that would qualify for a further quantity discount, a retroactive
price adjustment will be made by Distributors and the Securities Dealer through
whom purchases were made pursuant to the Letter (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, you will remit to Distributors an amount equal to the difference in the
dollar amount of sales charge actually paid and the amount of sales charge that
would have applied to the aggregate purchases if the total of the purchases had
been made at a single time. Upon remittance, the reserved shares held for your
account will be deposited to an account in your name or delivered to you or as
you direct. If within 20 days after written request the difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize the difference will be made. In the event of a total redemption of
the account before fulfillment of the Letter, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
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. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the 25th day of the month in which a payment is scheduled. If the 25th falls
on a weekend or holiday, we will process the redemption on the next 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.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional 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. Investor Services may pay certain financial institutions that
maintain omnibus accounts with the Fund on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee 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 as of the close of the NYSE, normally
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, Martin Luther King Jr. 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 the investment manager.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange 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 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 foreign security is valued within the range of the most recent
quoted bid and ask prices. 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 at their fair value as determined by the
investment manager and approved in good faith 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 close of the NYSE that will not be reflected
in the computation of the Net Asset Value. If events materially affecting the
values of these securities occur during this period, the securities will be
valued at their fair value as determined by the investment manager and approved
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
DISTRIBUTIONS OF NET INVESTMENT INCOME. The Custodian Funds receive income
generally in the form of dividends, interest, original issue, market and
acquisition discount, and other income derived from its investments. This
income, less expenses incurred in the operation of a Fund, constitutes its net
investment income from which dividends may be paid to you. Any distributions by
a Fund from such income will be taxable to you as ordinary income, whether you
take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS. The Custodian Funds may derive capital gains and
losses in connection with sales or other dispositions of its portfolio
securities. Distributions derived from the excess of net short-term capital gain
over net long-term capital loss will be taxable to you as ordinary income.
Distributions paid from long-term capital gains realized by a Fund will be
taxable to you as long-term capital gain, regardless of how long you have held
your shares in a Fund. Any net short-term or long-term capital gains realized by
a Fund (net of any capital loss carryovers) generally will be distributed once
each year, and may be distributed more frequently, if necessary, in order to
reduce or eliminate federal excise or income taxes on a Fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Custodian Funds are
required to report the capital gain distributions paid to you from gains
realized on the sale of portfolio securities using the following categories:
"28% RATE GAINS": gains resulting from securities sold by a Fund after July 28,
1997 that were held for more than one year but not more than 18 months, and
securities sold by a Fund before May 7, 1997 that were held for more than one
year. These gains will be taxable to individual investors at a maximum rate of
28%.
"20% RATE GAINS" gains resulting from securities sold by a Fund after July 28,
1997 that were held for more than 18 months, and under a transitional rule,
securities sold by a Fund between May 7 and July 28, 1997 (inclusive) that were
held for more than one year. These gains will be taxable to individual investors
at a maximum rate of 20% for individual investors in the 28% or higher federal
income tax brackets, and at a maximum rate of 10% for investors in the 15%
federal income tax bracket.
The Act also provides for a new maximum rate of tax on capital gains of 18% for
individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket for "qualified 5-year gains."
For individuals in the 15% bracket, qualified 5-year gains are net gains on
securities held for more than 5 years which are sold after December 31, 2000.
For individuals who are subject to tax at higher rates, qualified 5-year gains
are net gains on securities which are purchased after December 31, 2000 and are
held for more than 5 years. Taxpayers subject to tax at the higher rates may
also make an election for shares held on January 1, 2001 to recognize gain on
their shares in order to qualify such shares as qualified 5-year property.
The Custodian Funds will advise you after the end of each calendar year of the
amount of its capital gain distributions paid during the calendar year that
qualify for these maximum federal tax rates. Additional information on reporting
these distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook. This handbook has been revised to include
1997 Act tax law changes. Questions concerning each investor's personal tax
reporting should be addressed to the investor's personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following year,
will be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. The Custodian Funds will report this
income to you on your Form 1099-DIV for the year in which these distributions
were declared.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by a
Fund. Similarly, you should be aware that any foreign exchange losses realized
by a Fund, on the sale of debt instruments, are generally treated as ordinary
losses by the Fund. These gains when distributed will be taxable to you as
ordinary dividends, and any losses will reduce a Fund's ordinary income
otherwise available for distribution to you. This treatment could increase or
reduce a Fund's ordinary income distributions to you, and may cause some or all
of a Fund's previously distributed income to be classified as a return of
capital.
The 1997 Act also simplifies the procedures by which investors in funds that
invest in foreign securities can claim tax credits on their individual income
tax returns for the foreign taxes paid by a Fund. These provisions will allow
investors who claim a credit for foreign taxes paid of $300 or less on a single
return or $600 or less on a joint return during any year (all of which must be
reported on IRS Form 1099-DIV from a Fund to the investor) to bypass the
burdensome and detailed reporting requirements on the supporting foreign tax
credit schedule (Form 1116) and report foreign taxes paid directly on page 2 of
Form 1040. YOU SHOULD NOTE THAT THIS SIMPLIFIED PROCEDURE WILL NOT BE AVAILABLE
UNTIL CALENDAR YEAR 1998.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The Custodian Funds will
inform you of the amount and character of your distributions at the time they
are paid, and will advise you of the tax status for federal income tax purposes
of such distributions shortly after the close of each calendar year.
Shareholders who have not held Fund shares for a full year may have designated
and distributed to them as ordinary income or capital gain a percentage of
income that is not equal to the actual amount of such income earned during the
period of their investment in a Fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. Each Fund has elected to
be treated as a regulated investment company under Subchapter M of the Code, has
qualified as such for its most recent fiscal year, and intends to so qualify
during the current fiscal year. The Directors reserve the right not to maintain
the qualification of a Fund as a regulated investment company if they determine
such course of action to be beneficial to you. In such case, a Fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of such a Fund's available earnings and profits.
In order to qualify as a regulated investment company for tax purposes, a Fund
must meet certain specific requirements, including:
o A Fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. Government securities and securities of other
regulated investment companies) can exceed 25% of a Fund's total assets, and,
with respect to 50% of a Fund's total assets, no investment (other than cash and
cash items, U.S. Government securities and securities of other regulated
investment companies) can exceed 5% of a Fund's total assets;
o A Fund must derive at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, and gains from the sale or
disposition of stock, securities or foreign currencies, or other income derived
with respect to its business of investing in such stock, securities, or
currencies; and
o A Fund must distribute to its shareholders at least 90% of its net investment
income and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires each Fund to distribute
at least 98% of its taxable ordinary income earned during the calendar year and
98% of the capital gain net income earned during the twelve month period ending
October 31 (in addition to undistributed amounts from the prior year) to you by
December 31 of each year in order to avoid federal excise taxes. Each Fund
intends to declare and pay sufficient dividends in December (or in January that
are treated by you as received in December) but does not guarantee and can give
no assurances that its distributions will be sufficient to eliminate all such
taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of Fund shares are taxable
transactions for federal and state income tax purposes. The tax law requires
that you recognize a gain or loss in an amount equal to the difference between
your tax basis and the amount you received in exchange for your shares, subject
to the rules described below. If you hold your shares as a capital asset, the
gain or loss that you realize will be capital gain or loss, and will be
long-term for federal income tax purposes if you have held your shares for more
than one year at the time of redemption or exchange. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by the Fund on those shares. The holding periods and
categories of capital gain that apply under the 1997 Act are described above the
"Distributions" section.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you purchase other shares in such
Fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis in the new shares you purchase.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for your
shares in a Fund will be excluded from your tax basis in any of the shares sold
within 90 days of their purchase (for the purpose of determining gain or loss
upon the sale of such shares) if you reinvest the sales proceeds in such Fund or
in another Fund in the Franklin Templeton Group of Funds, and the sales charge
that would otherwise apply to your reinvestment is reduced or eliminated because
of your reinvestment with Franklin Templeton. The portion of the sales charge
excluded from your tax basis in the shares sold will equal the amount that the
sales charge is reduced on your reinvestment. Any portion of the sales charge
excluded from your tax basis in the shares sold will be added to the tax basis
of the shares you acquire from your reinvestment in another Franklin Templeton
fund.
U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. Government,
subject in some states to minimum investment requirements that must be met by a
Fund. Investments by the U.S. Government Securities Series or other Fund in
GNMA/FNMA securities, bankers' acceptances, commercial paper and repurchase
agreements collateralized by U.S. Government securities do not generally qualify
for tax-free treatment. At the end of each calendar year, the Custodian Funds
will provide you with the percentage of any dividends paid that may qualify for
tax-free treatment on your personal income tax return. You should consult with
your own tax advisor to determine the application of your state and local laws
to these distributions. Because the rules on exclusion of this income are
different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of their distributions may be exempt
from corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. As a corporate shareholder, you
should note that, except for the U.S. Government Securities Series, a portion of
the dividends paid by each Fund for the most recent calendar year qualified for
the dividends-received deduction. You will be permitted in some circumstances to
deduct these qualified dividends, thereby reducing the tax that you would
otherwise be required to pay on these dividends. The dividends-received
deduction will be available with respect to dividends designated by a Fund as
eligible for such treatment. Dividends so designated by a Fund must be
attributable to dividends earned by such Fund from U.S. corporations that were
not debt financed.
Under the 1997 Act, the amount that a Fund may designate as eligible for the
dividends-received deduction will be reduced or eliminated if the shares on
which the dividends were earned by such Fund were debt-financed or held by such
Fund for less than a 46 day period during a 90 day period beginning 45 days
before the ex-dividend date of the corporate stock. Similarly, if your Fund
shares are debt-financed or held by you for less than this same 46 day period,
then the dividends-received deduction may also be reduced or eliminated. Even if
designated as dividends eligible for the dividends-received deduction, all
dividends (including the deducted portion) must be included in your alternative
minimum taxable income calculation.
No portion of the distributions from the U.S. Government Securities Series will
qualify for the corporate dividends-received deduction.
INVESTMENT IN COMPLEX SECURITIES. A Fund's investment in options, including
transactions involving actual or deemed short sales or foreign exchange gains or
losses are subject to many complex and special tax rules. Over-the-counter
options on debt securities and equity options, including options on stock and on
narrow-based stock indexes, will be subject to tax under Section 1234 of the
Code, generally producing a long-term or short-term capital gain or loss upon
exercise, lapse, or closing out of the option or sale of the underlying stock or
security. Certain other options entered into by a Fund are generally governed by
Section 1256 of the Code. These "Section 1256" positions generally include
listed options on debt securities, options on broad-based stock indexes, options
on securities indexes, options on futures contracts, regulated futures contracts
and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held by a
Fund will be marked-to-market (i.e., treated as if it were sold for fair market
value) on the last business day of the Fund's fiscal year (and on other dates as
prescribed by the Code), and all gain or loss associated with fiscal year
transactions and mark-to-market positions at fiscal year end (except certain
currency gain or loss covered by Section 988 of the Code) will generally be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. Under legislation pending in technical corrections to the 1997 Act, the
60% long-term capital gain portion will qualify as 20% rate gain and will be
subject to tax to individual investors at a maximum rate of 20% for investors in
the 28% or higher federal income tax brackets, or at a maximum rate of 10% for
investors in the 15% federal income tax bracket. While foreign currency is
marked-to-market at year end, gain or loss realized as a result will always be
ordinary. Even though marked-to-market, gains and losses realized on foreign
currency and foreign security investments will generally be treated as ordinary
income. The effect of Section 1256 mark-to-market rules may be to accelerate
income or to convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-capital losses
within a Fund. The acceleration of income on Section 1256 positions may require
a Fund to accrue taxable income without the corresponding receipt of cash. In
order to generate cash to satisfy the distribution requirements of the Code, a
Fund may be required to dispose of portfolio securities that it otherwise would
have continued to hold or to use cash flows from other sources such as the sale
of Fund shares. In these ways, any or all of these rules may affect the amount,
character and timing of income distributed to you by a Fund.
When a Fund holds an option or contract which substantially diminishes such
Fund's risk of loss with respect to another position of such Fund (as might
occur in some hedging transactions), this combination of positions could be
treated as a "straddle" for tax purposes, possibly resulting in deferral of
losses, adjustments in the holding periods and conversion of short-term capital
losses into long-term capital losses. A Fund may make certain tax elections for
mixed straddles (i.e., straddles comprised of at least one Section 1256 position
and at least one non-Section 1256 position) which may reduce or eliminate the
operation of these straddle rules.
The 1997 Act has also added new provisions for dealing with transactions that
are generally called "Constructive Sale Transactions." Under these rules, a Fund
must recognize gain (but not loss) on any constructive sale of an appreciated
financial position in stock, a partnership interest or certain debt instruments.
A Fund will generally be treated as making a constructive sale when it: 1)
enters into a short sale on the same property, 2) enters into an offsetting
notional principal contract, or 3) enters into a futures or forward contract to
deliver the same or substantially similar property. Other transactions
(including certain financial instruments called collars) will be treated as
constructive sales as provided in Treasury regulations to be published. There
are also certain exceptions that apply for transactions that are closed before
the end of the 30th day after the close of the taxable year.
Distributions paid to you by a Fund of ordinary income and short-term capital
gains arising from a Fund's investments, including investments in options, will
be taxable to you as ordinary income. The Custodian Funds will monitor their
transactions in such options and contracts and may make certain other tax
elections in order to mitigate the effect of the above rules.
INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. Each Fund, other than
the U.S. Government Securities Series, is authorized to invest in foreign
currency denominated securities. Such investments, if made, will have the
following additional tax consequences:
Under the Code, gains and losses attributable to fluctuations in foreign
currency exchange rates which occur between the time a Fund accrues income
(including dividends), or accrues expenses which are denominated in a foreign
currency, and the time a Fund actually collects such income or pays such
expenses generally are treated as ordinary income or loss. Similarly, on the
disposition of debt securities denominated in a foreign currency and on the
disposition of certain options, gain or loss attributable to fluctuations in the
value of foreign currency between the date of acquisition of the security or
contract and the date of its disposition are also treated as ordinary gain or
loss. These gains or losses, referred to under the Code as "Section 988" gains
or losses, may increase or decrease the amount of a Fund's net investment
company taxable income, which, in turn, will affect the amount of income to be
distributed to you by the Fund.
If a Fund's Section 988 losses exceed such Fund's other net investment company
taxable income during a taxable year, such Fund generally will not be able to
make ordinary dividend distributions to you for that year, or distributions made
before the losses were realized will be recharacterized as return of capital
distributions for federal income tax purposes, rather than as an ordinary
dividend or capital gain distribution. If a distribution is treated as a return
of capital, your tax basis in your Fund shares will be reduced by a like amount
(to the extent of such basis), and any excess of the distribution over your tax
basis in your Fund shares will be treated as capital gain to you.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES. Each Fund, other
than the U.S. Government Securities Series, may invest in shares of foreign
corporation which may be classified under the Code as passive foreign investment
companies ("PFICs"). In general, a foreign corporation is classified as a PFIC
if at least one-half of its assets constitute investment-type assets or 75% or
more of its gross income is investment-type income.
If a Fund receives an "excess distribution" with respect to PFIC stock, such
Fund itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by such
Fund to you. In general, under the PFIC rules, an excess distribution is treated
as having been realized ratably over the period during which a Fund held the
PFIC shares. A Fund itself will be subject to tax on the portion, if any, of an
excess distribution that is so allocated to prior Fund taxable years, and an
interest factor will be added to the tax, as if the tax had been payable in such
prior taxable years. In this case, you would not be permitted to claim a credit
on your own tax return for the tax paid by a Fund. Certain distributions from a
PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain. This may have the effect of increasing
Fund distributions to you that are treated as ordinary dividends rather than
long-term capital gain dividends.
A Fund may be eligible to elect alternative tax treatment with respect to PFIC
shares. Under an election that currently is available in some circumstances, a
Fund generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether distributions are
received from the PFIC during such period. If this election were made, the
special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, the 1997 Act provides for another
election that would involve marking-to-market a Fund's PFIC shares at the end of
each taxable year (and on certain other dates as prescribed in the Code), with
the result that unrealized gains would be treated as though they were realized.
A Fund would also be allowed an ordinary deduction for the excess, if any, of
the adjusted basis of its investment in the PFIC stock over its fair market
value at the end of the taxable year. This deduction would be limited to the
amount of any net mark-to-market gains previously included with respect to that
particular PFIC security. If a Fund were to make this second PFIC election, tax
at the Fund level under the PFIC rules would generally be eliminated.
The application of the PFIC rules may affect, among other things, the amount of
tax payable by a Fund (if any), the amounts distributable to you by a Fund, the
time at which these distributions must be made, and whether these distributions
will be classified as ordinary income or capital gain distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is a
PFIC, and that there is always a possibility that a foreign corporation will
become a PFIC after a Fund acquires shares in that corporation. While a Fund
will generally seek to avoid investing in PFIC shares to avoid the tax
consequences detailed above, there are no guarantees that it will do so and it
reserves the right to make such investments as a matter of its fundamental
investment policy.
CONVERSION TRANSACTIONS. Gains realized by a Fund from transactions that are
deemed to be "conversion transactions" under the Code, and that would otherwise
produce capital gain may be recharacterized as ordinary income to the extent
that such gain does not exceed an amount defined as the "applicable imputed
income amount." A conversion transaction is any transaction in which
substantially all of a Fund's expected return is attributable to the time value
of such Fund's net investment in such transaction, and any one of the following
criteria are met:
1) there is an acquisition of property with a substantially contemporaneous
agreement to sell the same or substantially identical property in the future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it would
have the economic characteristics of a loan but would be taxed as capital gain;
or
4) the transaction is specified in Treasury regulations to be promulgated in the
future.
The applicable imputed income amount, which represents the deemed return on the
conversion transaction based upon the time value of money, is computed using a
yield equal to 120 percent of the applicable federal rate, reduced by any prior
recharacterizations under this provision or the provisions of Section 263(g) of
the Code dealing with capitalized carrying costs.
STRIPPED PREFERRED STOCK. Occasionally, a Fund other than the U.S. Government
Securities Series may purchase "stripped preferred stock" that is subject to
special tax treatment. Stripped preferred stock is defined as certain preferred
stock issues where ownership of the stock has been separated from the right to
receive dividends that have not yet become payable. The stock must have a fixed
redemption price, must not participate substantially in the growth of the
issuer, and must be limited and preferred as to dividends. The difference
between the redemption price and purchase price is taken into Fund income over
the term of the instrument as if it were original issue discount. The amount
that must be included in each period generally depends on the original yield to
maturity, adjusted for any prepayments of principal.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS. A
Fund's investments in zero coupon bonds, bonds issued or acquired at a discount,
delayed interest bonds, or bonds that provide for payment of interest-in-kind
(PIK) may cause a Fund to recognize income and make distributions to you prior
to its receipt of cash payments. Zero coupon and delayed interest bonds are
normally issued at a discount and are therefore generally subject to tax
reporting as OID obligations. A Fund is required to accrue as income a portion
of the discount at which these securities were issued, and to distribute such
income each year (as ordinary dividends) in order to maintain its qualification
as a regulated investment company and to avoid income reporting and excise taxes
at the Fund level. PIK bonds are subject to similar tax rules concerning the
amount, character and timing of income required to be accrued by a Fund. Bonds
acquired in the secondary market for a price less than their stated redemption
price or revised issue price are said to have been acquired with market
discount. For these bonds, a Fund may elect to accrue market discount on a
current basis, in which case such Fund will be required to distribute any such
accrued discount. If a Fund does not elect to accrue market discount into income
currently, gain recognized on sale will be recharacterized as ordinary income
instead of capital gain to the extent of any accumulated market discount on the
obligation.
DEFAULTED OBLIGATIONS. A Fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy these distribution requirements, a 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'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the Funds' 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. Custodian Funds 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.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions received by Distributors and, after allowances to dealers, the
amounts retained by Distributors in net underwriting discounts and commissions,
and the amounts received by Distributors in connection with redemptions or
repurchases of shares, for the fiscal years ended September 30, 1995, 1996 and
1997 were as follows:
AMOUNT RECEIVED
IN CONNECTION
COMMISSIONS COMMISSIONS WITH REDEMPTIONS
RETAINED RECEIVED OR REPURCHASES
1995
Growth Series $ 2,112,855 $ 233,027 $ 227
DynaTech Series 231,256 25,733 280
Utilities Series 6,047,891 366,179 -0-
Income Series 37,121,561 2,117,539 4,700
U.S. Government
Securities Series 10,902,931 656,562 2,188
1996
Growth Series $ 4,835,570 $ 505,111 7,930
DynaTech Series 285,074 32,125 -0-
Utilities Series 3,913,659 228,611 11,242
Income Series 46,806,723 1,739,086 136,828
U.S. Government
Securities Series 13,160,355 834,565 23,231
1997
Growth Series $ 7,068,758 $ 708,574 $ 47,529
DynaTech Series 682,911 67,617 1,344
Utilities Series 1,698,314 99,703 19,661
Income Series 39,253,724 1,822,592 293,033
U.S. Government
Securities Series 10,252,511 620,114 56,854
Distributors may be entitled to reimbursement under the Rule 12b-1 plan for each
class, as discussed below. Except as noted, Distributors received no other
compensation from the Custodian Funds for acting as underwriter.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans" that
were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLANS. Under the Class I plans, Growth Series and DynaTech Series
may pay up to a maximum of 0.25% and Income Series, Utilities Series, and U.S.
Government Securities Series may pay up to a maximum of 0.15% per year of Class
I's average daily net assets, payable quarterly, for expenses incurred in the
promotion and distribution of Class I shares.
In implementing the Class I plans, the Board has determined that the annual fees
payable under the Growth Series' and DynaTech Series' Class I plans, will be
equal to the sum of: (i) the amount obtained by multiplying 0.25% by the average
daily net assets represented by Class I shares of the Fund that were acquired by
investors on or after May 1, 1994, the effective date of the plan ("New
Assets"), and (ii) the amount obtained by multiplying 0.15% by the average daily
net assets represented by Class I shares of the Fund that were acquired before
May 1, 1994 ("Old Assets"). These fees will be paid to the current Securities
Dealer of record on the account. In addition, until such time as the maximum
payment of 0.25% is reached on a yearly basis, up to an additional 0.05% will be
paid to Distributors under Growth Series' and DynaTech Series' Class I plans.
With respect to Income and Utilities Series, the annual fees payable under their
respective Class I plans will be equal to the sum of: (i) the amount obtained by
multiplying 0.15% by the average daily net assets represented by the New Assets
of such Fund's Class I shares, and (ii) the amount obtained by multiplying 0.10%
by the average daily net assets represented by the Old Assets of such Fund's
Class I shares. With respect to U.S. Government Securities Series, the annual
fees payable under it's Class I plan will be equal to the sum of: (i) the amount
obtained by multiplying 0.15% by the New Assets of such Fund's Class I shares,
and (ii) the amount obtained by multiplying 0.05% by the Old Assets of such
Fund. These fees will be paid to the current Securities Dealer of record on the
account. In addition, until such time as the maximum payment of 0.15% with
respect to Income, Utilities and U.S. Government Securities Series is reached on
a yearly basis, up to an additional 0.02% will be paid to Distributors under
their respective Class I plan. The payments made to Distributors will be used by
Distributors to defray other marketing expenses that have been incurred in
accordance with the plan, such as advertising.
The fee is a Class I expense. This means that all Class I shareholders,
regardless of when they purchased their shares, will bear Rule 12b-1 expenses at
the same rate. The initial rate will be at least 0.20% (0.15% plus 0.05%) for
Growth and DynaTech Series; 0.12% (0.10% plus 0.02%) for Income and Utilities
Series; and 0.07% (0.05% plus 0.02%) for U.S. Government Securities Series of
the average daily net assets of Class I and, as Class I shares are sold on or
after May 1, 1994, will increase over time. Thus, as the proportion of Class I
shares purchased on or after May 1, 1994, increases in relation to outstanding
Class I shares, the expenses attributable to payments under the plan will also
increase (but will not exceed the maximum allowable under each Class I plan).
While this is the currently anticipated calculation for fees payable under the
Class I plans, the plans permit the Board to allow Growth and DynaTech Series to
pay a full 0.25% and Income, Utilities, and U.S. Government Securities Series to
pay a full 0.15% on all assets at any time. The approval of the Board would be
required to change the calculation of the payments to be made under the Class I
plans.
The Class I plans do not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
THE CLASS II PLANS. Under the Class II plans, Growth Series and Dynatech Series
pay Distributors up to 0.75% per year of Class II's average daily net assets,
and Utilities Series, Income Series, and U.S. Government Securities Series pay
Distributors up to 0.50% per year of Class II's average daily net assets,
payable quarterly, for distribution and related expenses. These fees may be used
to compensate Distributors or others for providing distribution and related
services and bearing certain Class II expenses. All distribution expenses over
this amount will be borne by those who have incurred them without reimbursement
by the Fund.
Under the Class II Plans, Growth Series and Dynatech Series also pay an
additional 0.25% per year and Utilities Series, Income Series and U.S.
Government Securities Series also pay an additional 0.15% per year of Class II's
average daily net assets, payable quarterly, as a servicing fee.
THE CLASS I AND CLASS II PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the Fund, the investment manager or Distributors or other parties on
behalf of the Fund, the investment manager or Distributors make payments that
are deemed to be for the financing of any activity primarily intended to result
in the sale of shares of each class within the context of Rule 12b-1 under the
1940 Act, then such payments shall be deemed to have been made pursuant to the
plan. The terms and provisions of each plan relating to required reports, term,
and approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the Board, including a majority vote
of the Board members who are not interested persons of Custodian Funds and who
have no direct or indirect financial interest in the operation of the plans,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
management agreement with the investment manager or by vote of a majority of the
outstanding shares of the class. Distributors or any dealer or other firm may
also terminate their respective distribution or service agreement at any time
upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended September 30, 1997, for Growth Series, Distributors
had eligible expenditures of $2,709,835 and $1,140,104 for advertising,
printing, and payments to underwriters and broker-dealers pursuant to the Class
I and Class II plans respectively, of which the Fund paid Distributors
$2,637,475 and $754,727 under the Class I and Class II plans. For the fiscal
year ended September 30, 1997, for Utilities Series, Distributors had eligible
expenditures of $2,931,051 and $177,120 for advertising, printing, and payments
to underwriters and broker-dealers pursuant to the Class I and Class II plans,
respectively, of which the Fund paid Distributors $2,879,105 and $138,653 under
the Class I and Class II plans. For the fiscal year ended September 30, 1997,
for DynaTech Series, Distributors had eligible expenditures of $275,783 and
$38,067 for advertising, printing, and payments to underwriters and
broker-dealers pursuant to the Class I and Class II plans, respectively, of
which the Fund paid Distributors $268,706 and $6,189 under the Class I and Class
II plans. For the fiscal year ended September 30, 1997, for Income Series,
Distributors had eligible expenditures of $11,722,297 and $5,099,630 for
advertising, printing, and payments to underwriters and broker-dealers pursuant
to the Class I and Class II plans, respectively, of which the Fund paid
Distributors $10,187,627 and $2,962,518 under the Class I and Class II plans.
For the fiscal year ended September 30, 1997, for U.S. Government Securities
Series, Distributors had eligible expenditures of $8,778,798 and $723,673 for
advertising, printing, and payments to underwriters and broker-dealers pursuant
to the Class I and Class II plans, respectively, of which the Fund paid
Distributors $6,493,142 and $419,597 under the Class I and Class II plans.
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.
Average annual total return and current yield 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 follows. 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 the periods indicated below that
would equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes the maximum front-end sales charge is deducted
from the initial $1,000 purchase, and 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 period and the deduction of
all applicable charges and fees. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum front-end sales charge currently in effect.
The average annual total return for Class I for the one-, five- and ten-year
periods ended September 30, 1997 was as follows:
ONE-YEAR FIVE-YEAR TEN-YEAR
CLASS I PERIOD PERIOD PERIOD
Growth Series 15.38% 15.59% 12.35%
DynaTech Series 29.53% 17.87% 13.04%
Utilities Series 8.91% 6.80% 9.51%
Income Series 12.43% 10.49% 11.31%
U.S. Government
Securities Series 5 .38% 5.63% 8.42%
The average annual total return for Class II for the one-year period ended
September 30, 1997, and for the period from inception to September 30, 1997, was
as follows:
ONE-YEAR FROM
CLASS II PERIOD INCEPTION
Growth Series 17.71% 21.99%*
DynaTech Series 32.01% 33.99%**
Utilities Series 10.92% 12.63%*
Income Series 14.73% 13.86%*
U.S. Government
Securities Series 7.36% 7.71%*
*Inception date: May 1, 1995
**Inception date: September 16, 1996
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above. The cumulative total return for Class I for the one-,
five- and ten-year periods ended September 30, 1997 was as follows:
ONE-YEAR FIVE-YEAR TEN-YEAR
CLASS I PERIOD PERIOD PERIOD
Growth Series 15.38% 106.38% 220.32%
DynaTech Series 29.53% 127.50% 240.74%
Utilities Series 8.91% 38.94% 9.51%
Income Series 12.43% 64.88% 192.06%
U.S. Government
Securities Series 5.38% 31.48% 124.34%
The cumulative total return for Class II for the one-year period ended September
30, 1997, and for the period from inception to September 30, 1997 was as
follows:
ONE-YEAR FROM
CLASS II PERIOD INCEPTION
- -------------------------------------------------------
Growth Series 17.71% 61.69%*
DynaTech Series 32.01% 35.47%**
Utilities Series 10.92% 33.31%*
Income Series 14.73% 36.86%*
U.S. Government
Securities Series 7.36% 19.66%*
*Inception date: May 1, 1995
**Inception date: September 16, 1996
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 applicable maximum Offering
Price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders of
the class during the base period. The yield for each class for the 30-day period
ended September 30, 1997, was as follows:
30-DAY
CLASS I YIELD
Utilities Series 4.73%
Income Series 6.45%
U.S. Government
Securities Series 6.36%
CLASS II
Utilities Series 4.36%
Income Series 6.16%
U.S. Government
Securities Series 6.04%
These figures were obtained using the following SEC formula:
6
Yield = 2 [(a-b + 1) - 1]
---
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders.
Amounts paid to shareholders are reflected in the quoted current distribution
rate. The current distribution rate is usually computed by annualizing the
dividends paid per share by a class during a certain period and dividing that
amount by the current maximum Offering Price. The current distribution rate
differs from the current yield computation because it may include distributions
to shareholders from sources other than dividends and interest, such as premium
income from option writing and short-term capital gains, and is calculated over
a different period of time. The current distribution rate for each class for the
30-day period ended September 30, 1997, was as follows:
CURRENT
DISTRIBUTION
CLASS I RATE
- ---------------------------------------------
Utilities Series 5.00%
Income Series 6.92%
U.S. Government
Securities Series 6.50%
CLASS II
Utilities Series 5.00%
Income Series 6.69%
U.S. Government
Securities Series 6.19%
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
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising 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 with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
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 the Franklin 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 Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. 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(R) 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(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the 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, and 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 CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Standard & Poor's(R) 100 Stock Index - an unmanaged index based on the prices
of 100 blue-chip stocks, including 92 industrials, one utility, two
transportation companies, and 5 financial institutions. The S&P 100 Stock Index
is a smaller more flexible index for options trading.
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.
DynaTech Series may be compared to:
a) Hambrecht & Quist Technology Index - an unmanaged index of technology-based
companies published by Hambrecht & Quist.
b) Pacific Stock Exchange Technology Index - an unmanaged index representing a
wide variety of technology-based companies ranging from established companies to
emerging growth companies.
c) Over-the-Counter (OTC) Composite Stock Index - an unmanaged index of stock
performance of all stocks listed in the OTC market.
Income Series and U.S. Government Securities Series may be compared to:
a) Salomon Brothers Broad Bond Index or its component indices - measures yield,
price and total return for Treasury, agency, corporate and mortgage bonds.
b) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
c) Standard & Poor's(R) 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 U.S. Government
Securities Series, with over $9.4 billion in assets and more than 390,000
shareholders as of September 30, 1997, is one of the largest Ginnie Mae funds in
the U.S. and the world. Shareholders in this Fund, 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 may also compare the Fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares that are based upon
the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
3. Utilities Series has paid uninterrupted dividends for the past 48 years. Over
the life of Utilities Series, dividends have increased in 29 of the last 48
years. Historically, equity securities of utility companies have paid a higher
level of dividends than that paid by the general stock market. 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 Fund has been continuously managed by
the same portfolio manager since 1957.
4. Income Series has paid uninterrupted dividends for the past 48 years.
5. Growth Series offers investors a convenient way to invest in a diversified
portfolio focusing on companies with long-term growth prospects.
6. Growth Series made the 1990, 1991 and 1996 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 49 years and
now services more than 2.9 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, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $216 billion in assets under
management for more than 5.9 million U.S. based mutual fund shareholder and
other accounts. The Franklin Templeton Group of Funds offers 121 U.S. based
open-end investment companies to the public. The Fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment objectives, no two are exactly alike.
As noted in the Prospectus, shares of the Fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment.
As of January 2, 1998, the principal shareholders of the Fund, beneficial or of
record, were as follows:
GROWTH SERIES
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
ADVISOR CLASS
FTTC Trust Services FBO
Vivian J. Palmieri
P.O. Box 7519
San Mateo, CA 94403-7519 119,814.904 10.54%
FTTC Trust Services FBO
Rupert Johnson IRA
P.O. Box 7519
San Mateo, CA 94403-7519 156,272.041 13.75%
FTTC TTEE For ValuSelect
Franklin Templeton
P.O. Box 2438
Rancho Cordova, CA 95741-2438 179,171.631 15.77%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 175,176.159 15.41%
Franklin Templeton
Fund Allocator-
Franklin Templeton Moderate
Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 130,542.295 11.49%
Franklin Templeton
Fund Allocator-
Franklin Templeton Growth Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 136,770.684 12.03%
UTILITIES SERIES
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
ADVISOR CLASS
First Mar & Co.
101 W. Washington St.
P.O. Box 580
Marquette, MI 49855 149,441.469 14.02%
The Washington Trust Company
23 Broad St.
Westerly, RI 02891 172,648.669 16.20%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 381,957.762 35.85%
Franklin Templeton
Fund Allocator-
Franklin Templeton Moderate
Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 82,972.715 7.79%
INCOME SERIES
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
ADVISOR CLASS
FTTC TTEE For ValuSelect
Franklin Templeton
P.O. Box 2438
Rancho Cordova, CA 95741-2438 1,786,249.239 32.13%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 1,562,974.617 28.11%
U.S. GOVERNMENT SECURITIES SERIES
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
ADVISOR CLASS
FTTC Cust for the IRA of
John M. Lane
1840 Elmwood Rd.
Hillsborough, CA 94010-6363 262,740.431 10.53%
CAP & CO
P.O. Box 2887
Wilson, NC 27894-2887 133,067.037 5.33%
Franklin Templeton
Fund Allocator-
Franklin Templeton Conservative
Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 215,704.910 8.64%
Franklin Templeton
Fund Allocator-
Franklin Templeton
Moderate Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 307,624.951 12.33%
U.S. GOVERNMENT SECURITIES SERIES (CONT.)
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
Franklin Templeton
Fund Allocator-
Franklin Templeton Growth Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 383,738.676 15.38%
FTTC TTEE For ValuSelect
Franklin Templeton
P.O. Box 2438
Rancho Cordova, CA 95741-2438 239,159.442 9.58%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 433,490.892 17.37%
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.
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, before 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 the Franklin Templeton Group 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 by the close of the business day following the day clearance is
granted; (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 perons 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 Custodian Funds, for the fiscal year ended September 30, 1997, including the
auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., investment manager of the Funds, except
Growth Series
BOARD - The Board of Directors of Custodian Funds
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - Each Fund, except DynaTech Series offers
three classes of shares, designated "Class I", "Class II" and "Advisor Class."
The three classes have proportionate interests in the Fund's portfolio. They
differ, however, primarily in their sales charge and expense structures.
DynaTech Series offers two classes of shares, designated "Class I" and "Class
II." The two classes have proportionate interests in the Fund's portfolio. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
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
INVESTMENT ADVISORY - Franklin Investment Advisory Services, Inc., Growth
Series' investment manager
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
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. The maximum
front-end sales charge for the Growth and DynaTech Series 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 Securities Series is 4.25% for Class
I and 1% for Class II.
PROSPECTUS - The prospectus for the Funds' Class I and Class II shares dated
February 1, 1998, as may be amended from time to time
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.
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.
EXHIBIT B: ANNUAL REPORT OF FRANKLIN PRINCIPAL MATURITY TRUST DATED NOVEMBER
30, 1997
SHAREHOLDER LETTER
Dear Shareholder:
It is a pleasure to bring you Franklin Principal Maturity Trust's annual
report for the fiscal year ended November 30, 1997.
Benign inflation and low unemployment characterized the U.S. economy during
the fiscal one-year reporting period, painting a positive picture for
investors who continued to pour large amounts of capital into equity
securities. In December 1996, the Dow Jones(R) Industrial Average (the Dow)
hovered around 6500 points before climbing past the 7000-point mark in
February. At the same time, bond yields generally suffered a steady increase
due to fears that the expanding economy would also foster inflationary
pressures. Driven by these very same concerns, the Federal Open Market
Committee decided to raise interest rates by a quarter point at its March
meeting, from 5.25% to 5.50%. This action immediately sent bond yields rising
well into the next month, as the 30-year Treasury bond yield reached a peak
of 7.17% on April 14. Sympathetically, the Dow dipped down under 6500 in
April, but over the longer term, the Federal Reserve's (the Fed's) action
paved the way for a move through the 8000-point mark for the first time in
July.
CONTENTS
Shareholder Letter ........... 1
Manager's Discussion ......... 4
Performance Summary .......... 9
Dividend
Reinvestment Plan ............ 11
Annual Meeting
of Shareholders .............. 13
Financial Highlights &
Statement of Investments...... 14
Notes to
Financial Statements.......... 22
Report of
Independent Accountants....... 25
Tax Designation............... 26
"Successful investors historically have achieved good results through setting
goals, diversifying their assets, and having patience."
Of course, no securities market can advance forever without a correction, and
many investors were asking, "When will this market correct?" The answer came
on October 27, when, fueled by concerns about currency crises in Southeast
Asia, the Dow dropped 7.18%. The decline probably was enough to keep the Fed
from acting to raise interest rates in the near term, but not enough to deter
investors from participating in the market. The morning after saw the market
gain back almost half its losses, surging ahead 4.7%. Although volatility
reigned through the second week in November, the Dow began an upward climb
and closed the reporting period at 7823.13, nearly 20% higher than it had
been at the beginning of the fiscal year. And with the threat of higher
interest rates laying by the wayside, bond yields enjoyed a significant
decline during the equity markets' roller coaster ride. At the end of the
reporting period, the yield on the 30-year Treasury stood at 6.05%, down 30
basis points from 6.35% on November 30, 1996.
With the volatility present in the markets near the end of the period, it is
important to remember, then, that markets correct -- in our opinion, it is
desirable for them to do so. Consequently, investor concern about market
volatility and questions about its direction prompt us to comment on the
importance of investing for the long term.
Successful investors historically have achieved good results through setting
goals, diversifying their assets, and having patience. They know mutual fund
investments are long term, so daily market fluctuations and short-term
volatility have minimal impact on their overall investment goals. They
understand that patience and discipline are keys to successful investing.
Remember, it's time -- not timing -- that makes the difference.
We encourage you to speak with your investment representative about your
financial goals. He or she can address concerns about volatility, and help
you stay focused on the long term and diversify your investments. Mutual
funds offer a level of diversification that is almost impossible for
individual investors to achieve on their own.
As always, we appreciate your support, welcome your questions and look
forward to serving your investment needs in the years to come.
Sincerely,
Charles B. Johnson
President
Franklin Principal Maturity Trust
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
MANAGER'S DISCUSSION
Your Fund's Objective: Franklin Principal Maturity Trust's primary objective
is to manage a portfolio of securities with the goal of returning $10.00 per
share to investors on or shortly before May 31, 2001, while providing high
monthly income. No assurances can be made that the fund will achieve this
goal.
We are pleased to report that the Franklin Principal Maturity Trust generated
a cumulative total return of +17.62% over the 12-month period, based on its
change in market price on the New York Stock Exchange. Additionally, the
Trust continued to pay a current monthly dividend of 4.5 cents per share, as
discussed in the Performance Summary on page 9.
OVERVIEW
In general, the Trust's portfolio consists of zero-coupon U.S. government
securities, corporate bonds, and preferred and common stocks. The chart to
the left shows the portfolio breakdown as of November 30, 1997. We constantly
search for securities which we believe are undervalued and have the potential
for attractive rates of return over the long term. We found such value
potential in common stocks and U.S. government securities during the fiscal
year, and the Trust's holdings have shifted toward these areas accordingly.
At the same time, we reduced our position in corporate bonds to 16.2% of
total net assets, from 24.8% a year ago.
PORTFOLIO UPDATE
ZERO-COUPON U.S. GOVERNMENT BONDS
As you may know, zero-coupon bonds issued by the U.S. government (also called
Treasury STRIPS1) do not pay any current interest. (For tax purposes,
however, interest is accrued on an annual basis.) Instead, the interest is
paid-in-full, along with the principal, when the bonds mature. This payment
is guaranteed by the U.S. government, but the prices of these bonds are very
sensitive to interest rate movements (i.e., typically when interest rates
rise, bond yields rise and their prices decline). Therefore, the value of our
zero-coupon bonds suffered when, as a preemptive strike against inflation,
the Federal Reserve raised short-term interest rates in late March 1997. The
yield on U.S. Treasury STRIPS due in 2001 reached a high for the year on
April 14, at 6.85%.2 Favorable economic conditions in the U.S. since then
have spurred a steady rise in bond prices, and these STRIPS went along for
the ride, with their yields closing the reporting period at 5.82%, near their
November 1996 levels.3
1. STRIPS is an acronym for Separate Trading of Registered Interest and
Principal of Securities.
2. Source: Bloomberg. U.S. Treasury STRIPS maturing January 15, 2001.
3. Source: Bloomberg.
CORPORATE BONDS
Several of the Trust's corporate bond holdings performed quite well during
the 12-month period. In May, we invested in Comcast Cellular, a subsidiary of
the Comcast Corporation that provides wireless telecommunication services.
Our position benefited when news broke that Microsoft was to pour a $1
billion investment into the parent company, which led to an improved credit
rating for these bonds. The bonds of Saberliner Corp., a diversified
aerospace company, also rose in value as the company was awarded substantial
long-term overhaul and maintenance contracts by the U.S. government and major
aircraft manufacturers.
"The primary reason for the Trust's positive total return over the reporting
period was the strong performance of equity securities."
EQUITIES
The primary reason for the Trust's positive total return over the reporting
period was the strong performance of equity securities. Three of our
holdings, in particular, highlight this contribution to the Trust's
performance. Lone Star Industries, the fifth largest domestic manufacturer of
cement, benefited from higher cement prices in key markets as well as
increased shipments due to improved production processes. The company
recently sold off a less profitable aggregates division, and expanded its
credit facilities. This, coupled with the initiation of a $25 million stock
buyback program and operational improvements in manufacturing facilities, led
to a substantial increase in stock price over the reporting period. In the
near term, the prospects are bright for the U.S. cement industry, as domestic
demand is expected to exceed capacity by about 20% this year.4 Some producers
have already announced preemptive price hikes for 1998. Along with price
increases and moderate capacity additions, this could position Lone Star for
further growth potential.
The stock price of Ladish Co., a leading manufacturer of components for the
commercial aerospace industry, also appreciated considerably over the fiscal
year. This company has made an impressive turnaround in its operations during
this time, driven by the sale of an unprofitable industrial products division
and increased production of high margin aerospace components. Future growth
fundamentals for the commercial aerospace industry appear to be favorable.
For example, Boeing and Airbus collectively booked 817 net orders for new
aircraft as of October 1997, compared with 898 for all of 1996.5
Additionally, Boeing plans to boost its production level from 34 to 43
aircraft per month over the next six to nine months, and capital spending at
the major airlines remains high.
5. Source: Merrill Lynch, November 13, 1997.
Another stock which contributed to the Trust's performance was Carson Pirie
Scott & Co., a leading Midwestern regional department store chain. During the
reporting period, Carson Pirie Scott improved its financial position by
reducing its net debt-to-capitalization ratio with excess cash flow, and
implemented a promotional strategy aimed at highlighting better brand name
products. In addition to improving fundamentals, the company's stock price
also benefited from an agreement to be acquired by Profitt's, a major
metropolitan department store operator.
Although the Trust enjoyed successes such as these over the period, not all
of our holdings performed as well as we had hoped. We elected to sell our
preferred and common stocks of Harvard Industries at a significant loss,
salvaging the remaining proceeds in order to reinvest in securities with
greater return potential. Its strong, past performance and the high yields of
its securities originally attracted us to the company. Unfortunately, Harvard
Industries was encumbered by unexpectedly heavy losses from an ill-advised
takeover of another company, Doehler-Jarvis. Upon the takeover, Harvard
assumed numerous non-performing contracts, eventually forcing it into Chapter
11 bankruptcy in May.
4. Source: SBC Warburg Dillon Read, November 19, 1997.
GOING FORWARD
During the fiscal year, the Trust achieved a net asset value of $10.00 per
share, meeting its investment objective three and a half years prior to the
scheduled date of May 31, 2001. We are currently taking steps to maintain the
net asset value at a level exceeding $10.00 per share by selling many of our
holdings with the objective of increasing the Trust's cash position and
lowering its investment risk profile.
Please remember, this discussion reflects our views and opinions as of
November 30, 1997, the end of the reporting period. However, market and
economic conditions are changing constantly which may affect our strategies
and portfolio holdings. Although historic performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
PERFORMANCE SUMMARY
The share price of Franklin Principal Maturity Trust on the New York Stock
Exchange (NYSE) increased 87.5 cents, from $8.25 on November 30, 1996, to
$9.125 on November 30, 1997. The Trust's net asset value per share increased
67 cents, from $9.56 on November 30, 1996, to $10.23 on November 30, 1997.
In addition to distributing 54.0 cents ($0.54) per share in dividend income
during the reporting period, the Trust also paid out a special distribution
of 0.5 cents ($0.005) per share in November 1997. Distributions will vary
based on the Trust's income and any profits realized from the sale of
securities in the portfolio. Past distributions are not indicative of future
trends.
Based on an annualization of November's monthly per share dividend of 4.5
cents ($0.045) and the NYSE closing price of $9.125 on November 30, 1997, the
Trust's distribution rate was 5.92%.
The Franklin Principal Maturity Trust reported a +17.62% cumulative total
return for the one-year period ended November 30, 1997. Total return reflects
the change in the Trust's share price on the NYSE. Based on the change in net
asset value (as opposed to the market price), the one-year total return for
the same period was +13.73%. All total returns assume the reinvestment of
dividends and capital gains at market price on the reinvestment date.
Dividend Distributions
12/1/96 - 11/30/97
Dividend
Month per share
December 4.5 cents
January 4.5 cents
February 4.5 cents
March 4.5 cents
April 4.5 cents
May 4.5 cents
June 4.5 cents
July 4.5 cents
August 4.5 cents
September 4.5 cents
October 4.5 cents
November 4.5 cents
Total 54.0 cents
We urge you to view your investment in Franklin Principal Maturity Trust with
a long-term perspective. As the table to the below shows, the Trust reported
a cumulative total return of +124.48%, based on net asset value, since its
inception on January 19, 1989.
Periods ended 11/30/97
Since
Inception
1-Year 5-Year (1/19/89)
Cumulative Total Return1
Based on change in net asset value 13.73% 79.93% 124.48%
Based on change in market price 17.62% 75.99% 87.31%
Average Annual Total Return1
Based on change in net asset value 13.73% 12.47% 9.65%
Based on change in market price 17.62% 11.97% 7.41%
Distribution Rate2 5.92%
1. Total return calculations represent the change in value of an investment
over the periods indicated and assume reinvestment of all distributions, at
market price on the reinvestment date.
2. Distribution rate is based on the annualization of the Trust's
November 4.5 cent per share monthly dividend and the New York Stock Exchange
closing price of $9.125 on November 30, 1997.
Past performance is not predictive of future results.
DIVIDEND REINVESTMENT PLAN
The Fund's Dividend Reinvestment Plan (the "Plan") offers you a prompt and
simple way to reinvest dividends and/or capital gain distributions in shares
of the Fund. First Data Investor Services Group (the "Plan Agent"), P.O. Box
8030, Boston, Massachusetts 02266-8030, acts as your Plan Agent in
administering the Plan. All reinvestments are in full and fractional shares,
carried to three decimal places. The complete terms and conditions of the
Plan are contained in the Fund's prospectus, dated January 19, 1989, used in
connection with its initial public offering. A copy of that prospectus may be
obtained from the Fund at the address on the cover of this report.
You are automatically enrolled in the Plan unless you elect to receive
dividends or distributions in cash. If you own shares in your own name, you
should notify the Plan Agent, in writing, if you wish to receive dividends or
distributions in cash.
If the Fund declares a dividend or capital gain distribution, you, as a
participant in the Plan, will automatically receive an equivalent amount of
shares of the Fund purchased on your behalf by the Plan Agent in the open
market. All reinvestments are in full and fractional shares. The Fund does
not issue new shares in connection with the Plan.
There is no direct charge to participants for reinvesting dividends and
distributions, since the Plan Agent's fees are paid by the Fund. Whenever
shares are purchased through the exchange on which they are listed, each
participant will pay a pro rata portion of brokerage commissions. The
automatic reinvestment of dividends and distributions does not relieve
shareholders of liability for any taxes which may be payable on dividends or
distributions. Generally, income and capital gains resulting from dividends
and distributions received in the form of shares of the Fund are realized
notwithstanding the fact that cash is not received by shareholders.
You will receive a monthly account statement from the Plan Agent, showing
total dividends and distributions, date of investment, shares acquired and
price per share, and total shares of record held by you and by the Plan Agent
for you. You are entitled to vote all shares of record, including shares
purchased for you by the Plan Agent, and, if you vote by proxy, your proxy
will include all such shares.
As long as you participate in the Plan, the Plan Agent will hold the shares
it has acquired for you in safekeeping, in non-certificated form. This
convenience provides added protection against loss, theft or inadvertent
destruction of certificates.
You may withdraw from the Plan at any time by notifying the Plan Agent in
writing. There is a $5 fee to withdraw from the reinvestment plan. If you
withdraw from the Plan, you will receive a certificate issued in your name
for all full shares and the Plan Agent will convert any fractional shares you
hold at the time of withdrawal to cash at the then current market price and
send you a check for the proceeds. If you prefer, the Plan Agent will sell
all of your full and fractional shares upon your withdrawal and send you the
proceeds.
If you hold shares in your own name, please address all notices,
correspondence, questions, or other communications regarding the Plan to the
Plan Agent at the address noted above. If shares are not held in your name,
you should contact your brokerage firm, bank, or other nominee for more
information.
ANNUAL MEETING OF SHAREHOLDERS
At an Annual Meeting of Shareholders of Franklin Principal Maturity Trust (the
Trust) held on July 16, 1997, shareholders of the Trust voted as follows:
1. Regarding the election of trustees who constitute the current Board of
Trustees.
<TABLE>
<CAPTION>
% of % of
Outstanding % of Outstanding % of
For Shares Voted Against Shares Voted
<S> <C> <C> <C> <C> <C> <C>
Frank H. Abbott, III 15,226,802.384 74.413% 98.307% 262,277.445 1.282% 1.693%
Harris J. Ashton 15,235,653.355 74.456% 98.364% 253,426.474 1.238% 1.636%
S. Joseph Fortunato 15,233,163.569 74.444% 98.348% 255,916.260 1.251% 1.652%
David W. Garbellano* 15,224,114.837 74.400% 98.289% 264,964.992 1.295% 1.711%
Edward B. Jamieson 15,237,542.158 74.465% 98.376% 250,967.457 1.226% 1.620%
Charles B. Johnson 15,237,845.158 74.670% 98.378% 251,234.671 1.228% 1.622%
Rupert H. Johnson, Jr. 15,237,542.158 74.465% 98.376% 251,537.671 1.229% 1.624%
Frank W. T. LaHaye 15,235,133.158 74.454% 98.360% 253,946.671 1.241% 1.640%
Gordon S. Macklin 15,230,603.167 74.431% 98.331% 258,467.662 1.263% 1.669%
2. Regarding the ratification of the selection of Coopers & Lybrand L.L.P.,
Certified Public Accountants, as the independent auditors for the Trust for the
fiscal year ending November 30, 1997.
% of % of
Outstanding % of Outstanding % of
For Shares Voted Against Shares Voted
<S> <C> <C> <C> <C> <C>
15,176,014.736 74.165% 97.979% 108,675.220 0.531% 0.702%
</TABLE>
*THE BOARD NOTES WITH DEEP REGRET THE PASSING OF DIRECTOR DAVID GARBELLANO, ON
SEPTEMBER 27, 1997. A SEARCH FOR A QUALIFIED CANDIDATE TO FILL THIS VACANCY IS
UNDERWAY.
<TABLE>
<CAPTION>
FRANKLIN PRINCIPAL MATURITY TRUST
Financial Highlights
Year Ended November 30,
-----------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $9.56 $8.54 $7.70 $9.62 $8.09
-----------------------------------------------
Income from investment operations:
Net investment income ............................... 0.57 0.56 0.52 0.54 0.52
Net realized and unrealized gains (losses) .......... 0.65 1.00 0.91 (1.77) 1.57
-----------------------------------------------
Total from investment operations ..................... 1.22 1.56 1.43 (1.23) 2.09
-----------------------------------------------
Less distributions from:
Net investment income ............................... (0.55) (0.53) (0.59) (0.59) (0.52)
In excess of net investment income .................. -- (0.01) -- -- (0.04)
Net realized gains .................................. -- -- -- (0.10) --
-----------------------------------------------
Total distributions .................................. (0.55) (0.54) (0.59) (0.69) (0.56)
-----------------------------------------------
Net asset value, end of year ......................... $10.23 $9.56 $8.54 $7.70 $9.62
================================================
Market value, end of year+ ........................... $9.125 $8.250 $7.500 $7.125 $8.500
================================================
Total return (based on market value per share)* ...... 17.62% 17.69% 14.21%(8.50)% 21.17%
Ratios/supplemental data
Net assets, end of year (000's) ...................... $209,231 $195,623 $174,805 $157,508 $196,895
Ratios to average net assets:
Expenses ............................................ 3.03% 3.06% 3.32% 2.60% 2.98%
Net investment income ............................... 5.98% 6.20% 6.33% 5.86% 5.74%
Portfolio turnover rate .............................. 15.79% 27.37% 30.57% 45.19% 70.91%
Average commission rate paid** ....................... $0.0600 $0.0564 -- -- --
Total senior securities outstanding
at end of year (000's omitted) ...................... -- $84,102 $70,727 $75,146 $83,920
Asset coverage per $1,000 of senior securities ....... -- $3,326 $3,472 $3,096 $3,346
</TABLE>
+Based on the last sale on the New York Stock Exchange.
*Total return is not annualized.
**Relates to purchases and sales of equity securities. Prior to November 30,
1996 disclosure of average commission rate was not required.
See notes to financial statements.
<TABLE>
<CAPTION>
FRANKLIN PRINCIPAL MATURITY TRUST
Statement of Investments, November 30, 1997
<S> <C> <C>
Aerospace/Defense 9.9%
a,d Ladish Co., Inc. ................................................. 2,144,000 $ 6,968,000
a,d Ladish Co., Inc., warrants ....................................... 895 13,653,554
a Sabreliner Corp., warrants ....................................... 5,000 35,000
-------------
20,656,554
-------------
Chemicals
a Lanesborough Corp. ............................................... 4,942 49
-------------
Commercial Services 2.2%
a Emcor Group, Inc. ................................................ 227,991 4,559,820
-------------
Electronics
a Ampex Group, Inc. ................................................ 27,620 70,776
-------------
Forest/Paper Products .4%
a WTD Industries, Inc. ............................................. 357,221 759,095
-------------
Industrial 6.6%
Lone Star Industries, Inc. .......................................... 265,075 13,817,034
-------------
Real Estate
a XRC Corp. ........................................................ 65,393 327
-------------
Retail 6.2%
a Carson Pirie Scott & Co. ......................................... 250,510 12,932,579
a Hills Stores Co. ................................................. 456 1,653
-------------
12,934,232
-------------
Technology/Information Systems .5%
a Wang Laboratories, Inc. .......................................... 48,081 1,063,792
-------------
Utilities .8%
a El Paso Electric Co. ............................................. 248,077 1,674,520
-------------
Wireless/Telecommunications .4%
a International Wireless Communication, warrants ................... 13,500 675,000
-------------
Orion Network System, warrants ...................................... 5,500 62,150
-------------
737,150
-------------
Total Common Stocks & Warrants (Cost $15,401,680)................. 56,273,349
-------------
Preferred Stocks 2.1%
Cable Television 1.9%
a Cablevision Systems Corp., Series M, 11.125% pfd., PIK ........... 34,085 3,902,733
-------------
Telecommunications .2%
Nortel, Inversora, SA, pfd., Series B ............................... 20,000 495,000
-------------
Total Preferred Stocks (Cost $3,150,782) ......................... 4,397,733
-------------
Convertible Preferred Stocks
a Hills Stores Co., cvt. pfd., Series A (Cost $392,397) ............ 19,498 70,680
-------------
Aerospace/Defense 1.5%
Sabreliner Corp., senior notes, 12.50%, 4/15/03 ..................... $ 3,000,000 $ 3,150,000
-------------
Automotive .3%
c Harvard Industries, Inc., senior notes, 12.00%, 7/15/04 .......... 2,000,000 620,000
-------------
Chemicals 2.6%
Huntsman Corp., senior sub. floating rate notes, 144A, 9.0937%, 7/01/07 1,500,000 1,545,000
c Lanesborough Corp., senior notes, 10.00%, 4/15/00 ................ 7,700,000 3,850,000
-------------
5,395,000
-------------
Consumer Products 6.0%
Liggett Group, senior notes, Series C, 19.75%, 2/01/99 .............. 2,000,000 1,480,000
Liggett Group, senior secured notes, Series C, 19.75%, 2/01/99 ...... 74,000 54,760
Liggett Group, S.F., senior notes, 11.50%, 2/01/99 .................. 6,750,000 4,691,250
Remington Products Co., L.L.C., Series B, senior sub. notes, 11.00%, 5/15/06 7,500,000 6,337,500
-------------
12,563,510
-------------
Food & Beverages 2.3%
American Rice, Inc., mortgage, secured notes, 13.00%, 7/31/02 ....... 5,000,000 4,925,000
-------------
Food Retailing .1%
Almacs, Inc., senior sub. notes, PIK, 11.50%, 11/18/04 .............. 2,528,000 176,960
-------------
Gaming & Leisure 2.4%
c Harrah's Jazz Co., first mortgage, 14.25%, 11/15/01 .............. 15,000,000 4,950,000
-------------
Oil/Gas 1.0%
TransAmerican Refining Corp., first mortgage, Series 2,
16.50% coupon to 8/15/98, 16.00% thereafter, 2/15/02 ................. 2,000,000 2,217,500
-------------
Total Corporate Bonds (Cost $42,955,594) ......................... 33,997,970
-------------
Foreign Government Bonds .3%
ESCOM, E168, utility deb. (South Africa),
11.00%, 6/01/08 (Cost $1,040,535) .................................... 4,350,000 ZAR 730,596
-------------
Zero Coupon Bonds 51.3%
FICO Strips, 3/07/01 ................................................ 10,850,000 8,915,011
FICO Strips, 4/06/01 ................................................ 12,520,000 10,234,662
FICO Strips, 5/02/01 ................................................ 5,211,000 4,240,034
FICO Strips, 5/11/01 ................................................ 1,116,000 906,628
FICO Strips, 5/30/01 ................................................ 5,253,000 4,253,801
FNMA Strips, 2/01/01 ................................................ 7,348,000 6,085,871
GTC Trust Certificates-Israel, Series 1D, 5/15/01 ................... 8,100,000 6,606,708
GTC Trust Certificates-Israel, Series 2F, 5/15/01 ................... 27,226,000 22,206,696
International Wireless Communication, senior disc. notes, 8/15/01 ... 13,500,000 7,020,000
c McCrory Corp., deb., 7/15/94 ..................................... 500,000 5
Orion Network Systems, Inc., units, zero coupon
to 1/15/02, 12.50%, thereafter, 1/15/07 .............................. 5,500,000 4,070,000
REFCO Strips, 4/15/01 ............................................... 30,250,000 24,871,217
San Joaquin Hills, California, Toll Road Revenue, 1/01/01 ........... 9,100,000 7,959,134
-------------
Total Zero Coupon Bonds (Cost $106,668,279) ......................... 107,369,767
-------------
Joint Repurchase Agreement, 5.691%, 12/01/97 (Maturity Value $6,657,437)
(Cost $6,654,281) ................................................... $ 6,654,281 $ 6,654,281
-------------
BA Securities, Inc.
Barclays de Zoete Wedd Securities, Inc.
Bear Sterns & Co. Inc.
Chase Securities, Inc.
CIBS Wood Gundy Securities Corp.
Deutsche Morgan Grenfell/C.J. Lawrence, Inc.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson North America, L.L.C.
Greenwich Capital Markets, Inc.
SBC Warburg, Inc.
UBS Securities, L.L.C.
Collateralized by U.S. Treasury Bills & Notes
Total Investments (Cost $176,263,548) 100.1% ........................ 209,494,376
Other Assets, less Liabilities (.1)% ................................ (263,109)
-------------
Net Assets 100.0% ................................................... $209,231,267
=============
</TABLE>
CURRENCY ABBREVIATIONS:
ZAR - South African Rand
*Securities traded in U.S. dollars unless otherwise stated.
aNon-income producing.
bInvestment is through participation in a joint account with other funds managed
by the investment advisor. At 11/30/97, all repurchase agreements held by the
Fund had been entered into on 11/28/97.
cSee Note 7 regarding defaulted securities.
dThe Investment Company Act of 1940 defines "affiliated companies" as
investments in portfolio companies in which the Fund owns 5% or more of the
outstanding voting securities. Investments in "affiliated companies" at 11/30/97
were $20,621,554.
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
1.12% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended November 30, 1997.
FRANKLIN PRINCIPAL MATURITY TRUST
Financial Statements
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
November 30, 1997
Assets:
<S> <C>
Investments in securities, at value (cost $176,263,548)............................... $209,494,376
Receivables:
Dividends and interest............................................................... 842,779
Other assets.......................................................................... 28,004
-------------
Total assets........................................................................... 210,365,159
-------------
Liabilities:
Payable to affiliates................................................................. 78,302
Distributions to shareholders......................................................... 1,023,130
Other liabilities..................................................................... 32,460
-------------
Total liabilities.................................................................... 1,133,892
-------------
Net assets, at value................................................................... $209,231,267
=============
Net assets consist of:
Undistributed net investment income................................................... $ 228,936
Net unrealized appreciation........................................................... 33,228,679
Accumulated net realized loss......................................................... (10,801,113)
Capital shares........................................................................ 186,574,765
-------------
Net assets, at value................................................................... $209,231,267
=============
Net asset value per share ($209,231,267 O 20,462,600 shares outstanding).............. $10.23
=============
See notes to financial statements.
FRANKLIN PRINCIPAL MATURITY TRUST
Financial Statements (continued)
Statement of Operations (continued)
for the year ended November 30, 1997
Investment income:
<S> <C> <C>
Dividends .............................................................. $ 141,115
Interest .............................................................. 17,386,847
------------
Total investment income ................................................ $17,527,962
Expenses:
Management fees (Note 3) ............................................... 1,016,622
Transfer agent fees ................................................... 78,762
Other .................................................................. 132,077
------------
Total expenses .......................................................... 1,227,461
Interest expense ........................................................ 4,659,768
-------------
Net expenses ........................................................... 5,887,229
-------------
Net investment income ................................................. 11,640,733
-------------
Realized and unrealized gains (losses):
Net realized loss from:
Investments ........................................................... (5,334,077)
Foreign currency transactions ......................................... (884)
------------
Net realized loss ....................................................... (5,334,961)
Net unrealized appreciation (depreciation) on:
Investments ........................................................... 18,455,924
Translation of assets and liabilities denominated in foreign currencies (833)
------------
Net unrealized appreciation ............................................. 18,455,091
-------------
Net realized and unrealized gain ........................................ 13,120,130
-------------
Net increase in net assets resulting from operations ................... $24,760,863
=============
See notes to financial statements.
FRANKLIN PRINCIPAL MATURITY TRUST
Financial Statements (continued)
Statements of Changes in Net Assets
for the years ended November 30, 1997 and 1996
1997 1996
--------------------------------
Increase in net assets:
<S> <C> <C>
Operations:
Net investment income ................................................. $ 11,640,733 $ 11,486,497
Net realized loss from investments and foreign currency transactions .. (5,334,961) (1,744,583)
Net unrealized appreciation on investments
and translation of assets and liabilities
denominated in foreign currencies .................................... 18,455,091 22,125,386
--------------------------------
Net increase in net assets resulting from operations .................... 24,760,863 31,867,300
Distributions to shareholders from:
Net investment income ................................................. (11,152,121) (10,791,012)
In excess of net investment income..................................... -- (258,792)
--------------------------------
Net increase in net assets............................................... 13,608,742 20,817,496
Net assets:
Beginning of year ...................................................... 195,622,525 174,805,029
--------------------------------
End of year ............................................................ $209,231,267 $195,622,525
================================
Undistributed net investment income
(accumulated distributions in excess of net investment income)
included in net assets:
End of year .......................................................... $ 228,936 $ (258,792)
================================
See notes to financial statements.
FRANKLIN PRINCIPAL MATURITY TRUST
Financial Statements (continued)
Statement of Cash Flows
for the year ended November 30, 1997
<S> <C>
Dividends and interest received .................................................... $ 5,239,793
Operating expenses paid ............................................................ (1,263,045)
Interest expense paid .............................................................. (4,976,319)
-------------
Cash used - operations ............................................................ (999,571)
=============
Investment purchases ............................................................... (1,763,589,312)
Investment sales ................................................................... 1,775,638,691
-------------
Cash provided - investments ....................................................... 12,049,379
=============
Distributions to shareholders ...................................................... (11,049,808)
-------------
Cash used - financing activities .................................................. (11,049,808)
=============
Net increase in cash ............................................................... --
-------------
Cash at beginning of year .......................................................... --
-------------
Cash at end of year ................................................................ $--
=============
</TABLE>
FRANKLIN PRINCIPAL MATURITY TRUST
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Principal Maturity Trust (the Fund) is registered under the Investment
Company Act of 1940 as a closed-end, diversified investment company. The Fund
seeks to provide investors with high current income. The following summarizes
the Fund's significant accounting policies.
a. Security Valuation
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Trustees.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, the difference between the recorded amounts of
dividends, interest, and foreign withholding taxes, and the U.S. dollars
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. Income Taxes:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute all of its taxable income.
d. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount is
amortized on an income tax basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
e. Accounting Estimates:
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.
2. TRUST SHARES
At November 30, 1997, there were an unlimited number of shares authorized ($0.01
par value). During the year ended November 30, 1997, there were no share
transactions; all reinvested distributions were satisfied with previously issued
shares purchased in the open market.
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Fund are also officers or directors of
Franklin Advisers, Inc. (Advisers), and Franklin Templeton Services, Inc. (FT
Services), the Fund's investment manager and administrative manager,
respectively.
Under an agreement with Advisers, FT Services provides administrative services
to the fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense to the fund.
The Fund paid an investment management fee to Advisers of 0.60% per year of the
average weekly net assets of the Fund from June 1, 1993 through May 31, 1997.
After May 31, 1997, the Fund pays fees of 0.45% per year of its average weekly
net assets from June 1, 1997 until May 31, 2001 (the anticipated termination of
the Fund).
4. INCOME TAXES
At November 30, 1997, the Fund had tax basis capital losses of $10,747,559 which
may be carried over to offset future capital gains. Such losses expire as
follows:
Capital loss carryovers expiring in: 2002 ... $ 121,933
2003 ... 3,346,388
2005 ... 7,279,238
------------
$10,747,559
============
At November 30, 1997, the net unrealized appreciation based on the cost of
investments for income tax purposes of $176,317,102 was as follows:
Unrealized appreciation ......... $ 46,113,956
Unrealized depreciation ......... (12,936,682)
------------
Net Unrealized appreciation ..... $ 33,177,274
------------
Net investment income differs for financial statement and tax purposes primarily
due to differing treatment of foreign currency transactions.
Net realized capital gains differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended November 30, 1997 aggregated $41,892,395 and $139,035,280,
respectively.
6. REVERSE REPURCHASE AGREEMENT
The Fund enters into reverse repurchase agreements, under which the Fund sells
securities and agrees to repurchase them at a mutually agreed-upon date and
price. Such a transaction is accounted for as a borrowing by the Fund,
collateralized by securities for which the Fund retains possession. The
difference between the selling price and the repurchase price is accounted for
as interest expense. At November 30, 1997, the Fund has no outstanding reverse
repurchase agreements.
7. CREDIT RISK AND DEFAULTED SECURITIES
The Fund has 21.52% of its portfolio invested in lower rated and comparable
quality unrated high yield securities, which tend to be more sensitive to
economic conditions than higher rated securities. The risk of loss due to
default by the issuer may be significantly greater for the holders of high
yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer. At November 30, 1997, the
Fund held defaulted securities with a value aggregating $9,420,005 representing
4.5% of the Fund's net assets. For information as to specific securities, see
the accompanying Statement of Investments.
For financial reporting purposes, the Fund discontinues accruing income on
defaulted bonds and provides an estimate for losses on interest receivable.
8. OTHER CONSIDERATIONS
Advisers, as the Fund's manager, may serve as a member of various credit
committees, representing credit interest in certain corporate restructuring
negotiations. Currently, the manager serves on the credit committees for Harvard
Industries, Inc. As a result of this involvement, Advisers may be in possession
of certain material non-public information. The Fund's manager has not nor does
it intend to sell any of its holdings in this security while in possession of
this information.
9. STATEMENT OF CASH FLOWS
Cash provided from operations differs from net investment income by $12,640,304
due to amortization of bond discount and note issuance costs, and year-end
income and expense accrual changes.
To the Shareholders and Board of Trustees
of Franklin Principal Maturity Trust:
We have audited the accompanying statement of assets and liabilities of the
Franklin Principal Maturity Trust (the Fund), including the Fund's statement of
investments as of November 30, 1997, and the related statements of operations
and cash flows for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for each of the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1997, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund as of November 30, 1997, the results of its operations and its cash flows
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and its financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
December 31, 1997
FRANKLIN PRINCIPAL MATURITY TRUST ANNUAL REPORT NOVEMBER 30, 1997
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM
304(a) OF REGULATION S-T)
GRAPHIC MATERIAL (1)
This chart shows in pie format the composition of the fund's portfolio on
11/30/97, based on total net assets.
Portfolio Composition
Zero-Coupon Bonds 51.3%
Common Stocks & Warrants 27.0%
Corporate Bonds 16.2%
Other 5.5%
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 16. EXHIBITS
(1) Copies of the charter as now in effect;
(i) Articles of Incorporation dated October 9, 1979
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Agreement and Articles of Merger dated November 7, 1979
Filing: Post-Effective Amendment No. 71 to Registration
Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iii) Certificate of Amendment to Articles of Incorporation
dated October 4, 1985 Filing: Post-Effective Amendment
No. 71 to Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iv) Articles of Amendment dated October 14, 1985
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(v) Certificate of Amendment to Articles of Incorporation
dated February 24, 1989 Filing: Post-Effective Amendment
No. 71 to Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(vi) Certificate of Amendment to Articles of Incorporation
dated March 21, 1995 Filing: Post-Effective Amendment
No. 71 to Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(vii) Articles Supplementary to the Charter dated June 29,
1995 Filing: Post-Effective Amendment No. 72 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 30, 1995
(viii) Articles Supplementary to the Charter dated July 19,
1996 Filing: Post-Effective Amendment No. 75 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: December 31, 1996
(ix) Certificate of Correction to the Articles Supplementary
to the Charter dated August 22, 1996 Filing:
Post-Effective Amendment No. 77 to Registration
Statement on Form N-1A
File No. 2-11346
Filing Date: January 29, 1998
(x) Articles Supplementary to the Charter dated November
4, 1996
Filing: Post-Effective Amendment No. 77 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: January 29, 1998
(xi) Articles Supplementary to the Charter dated January 22,
1997 Filing: Post-Effective Amendment No. 77 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: January 29, 1998
(2) Copies of the existing By-Laws or corresponding instruments of the
Registrant:
(i) By-Laws
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(3) Copies of any voting trust agreement with respect to more than five
percent of any class of equity securities of the Registrant:
Not applicable
(4) Copies of the Agreement and Plan of Reorganization are included in
this Registration Statement as Exhibit A to the Prospectus/Proxy
Statement.
(5) Copies of all instruments defining the rights of the securities
being registered:
(i) Not applicable
(6) Copies of all investment advisory contracts relating to the
management of the assets of the Registrant:
(i) Management Agreement between the Registrant on behalf
of the DynaTech Series and Franklin Advisers, Inc.
dated May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Management Agreement between the Registrant on behalf of
the Income Series and Franklin Advisers, Inc. dated May
1, 1994 Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iii) Management Agreement between the Registrant on behalf of
the U.S. Government Securities Series and Franklin
Advisers, Inc. dated May 1, 1994 Filing: Post-Effective
Amendment No. 71 to Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iv) Management Agreement between the Registrant on behalf of
the Utilities Series and Franklin Advisers, Inc. dated
May 1, 1994 Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(v) Management Agreement between Registrant on behalf of
the Growth Series and Franklin Investment Advisory
Services, Inc. dated July 1, 1997
Filing: Post-Effective Amendment No. 77 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: January 29, 1998
(7) Copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of
all agreements between principal underwriters and dealers:
(i) Amended and Restated Distribution Agreement between
Registrant and Franklin/Templeton Distributors, Inc.
dated March 29, 1995
Filing: Post-Effective Amendment No. 72 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 30, 1995
(ii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and dealers Registrant: Franklin
Tax-Free Trust
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(8) Copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
directors or officers of the Registrant in their capacity as such;
any such plan that is not set forth in a formal document, furnish a
reasonably detailed description thereof:
Not applicable
(9) Copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and
similar investments of the Registrant, including the schedule of
remuneration:
(i) Master Custody Agreement between Registrant and Bank
of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 74 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: August 19, 1996
(ii) Terminal Link Agreement between Registrant and Bank
of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 74 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: August 19, 1996
(iii) Amendment dated May 7, 1997 to the Master Custody
Agreement dated February 16, 1996 between Registrant and
Bank of New York Filing: Post-Effective Amendment No. 77
to Registration Statement on Form N-1A
File No. 2-11346
Filing Date: January 29, 1998
(iv) Amendment dated October 15, 1997 to the Master Custody
Agreement dated February 16, 1996 between Registrant and
Bank of New York Filing: Post-Effective Amendment No. 77
to Registration Statement on Form N-1A
File No. 2-11346
Filing Date: January 29, 1998
(10) A form of a plan entered into by Registrant pursuant to Rule 12b-1
under the 1940 Act and any agreements with any person relating to
implementation of the plan and copies of any plan entered into by
Registrant pursuant to Rule 18f-3 under the 1940 Act, any agreement
with any person relating to implementation of the plan, any
amendment to the plan, and a copy of the portion of the minutes of
the meeting of the Registrant's directors describing any action
taken to revoke the plan are attached hereto as Exhibit 10(i) and
10(ii).
(11) An opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will, when
sold, be legally issued, fully paid and nonassessable.
Not Applicable
(12) An opinion of counsel letter supporting the tax matters and
consequences to shareholders discussed in the Prospectus/Proxy
Statement. To be filed by pre-effective amendment.
(13) Copies of all material contracts of the Registrant not made in the
ordinary course of business which are to be performed in whole or in
part on or after the date of filing the registration statement:
Not applicable
(14) Copies of any other opinions, appraisals or rulings and consents to
the use thereof relied on in the preparation of this Registration
Statement and required by Section 7 of the 1933 Act:
(i) Consent of Independent Accountants is attached hereto
as Exhibit 14(i).
(15) All financial statements omitted from Item 14(a)(1):
Not applicable
(16) Manually signed copies of any power of attorney pursuant to which
the name of any person has been signed to the Registration Statement
are attached hereto as Exhibit 16 to the Registration Statement.
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant agrees that prior to any public
reoffering of the securities registered through the use of a
prospectus which is a part of this registration statement by any
person or party who is deemed to be an underwriter within the
meaning of Rule 145(c) of the Securities Act, the reoffering
prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other
items of the applicable form.
(2) The undersigned registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an
amendment to the registration statement and will not be used until
the amendment is effective, and that, in determining any liability
under the 1933 Act, each post-effective amendment shall be deemed to
be a new registration statement for the securities offered therein,
and the offering of the securities at that time shall be deemed to
be the initial bona fide offering of them.
(3) The undersigned Registrant agrees that it will file with the
Commission a Post-Effective Amendment to this Registration Statement
including the Opinion of Stradley, Ronon, Stevens & Young, LLP,
relating to federal tax matters, within a reasonable time after the
tax opinion that will be delivered in connection with the proposed
Reorganization has been received by the undersigned Registrant.
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has been
signed on behalf of the Registrant, by the undersigned, thereunto duly
authorized, in the City of San Mateo and the State of California, on the 12th
day of March, 1998.
FRANKLIN CUSTODIAN FUNDS, INC.
(Registrant)
By: Charles B. Johnson*
Charles B. Johnson
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
Charles B. Johnson* Chief Executive Officer and Director
Charles B. Johnson Dated: March 12, 1998
Martin L. Flanagan* Senior Vice President and Chief
Martin L. Flanagan Financial Officer
Dated: March 12, 1998
Diomedes Loo-Tam* Principal Accounting Officer
Diomedes Loo-Tam Dated: March 12, 1998
Harris J. Ashton* Director
Harris J. Ashton Dated: March 12, 1998
S. Joseph Fortunato* Director
S. Joseph Fortunato Dated: March 12, 1998
Edith E. Holiday* Director
Edith E. Holiday Dated: March 12, 1998
Rupert H. Johnson, Jr.* Director
Rupert H. Johnson, Jr. Dated: March 12, 1998
Gordon S. Macklin* Director
Gordon S. Macklin Dated: March 12, 1998
*By: Larry L. Greene
------------------------------
Larry L. Greene, Attorney-in-Fact
(Pursuant to Powers of Attorney filed herewith)
EXHIBIT INDEX
EXHIBIT NO. DOCUMENT
(14)(i) Consent of Independent Accountant
(16) Powers of Attorney
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Franklin Custodian Funds, Inc. on Form N-14 File No. 2-11346 of our reports
dated October 28, 1997 on our audit of the financial statements and financial
highlights of Franklin Custodian Funds, Inc., which report is included in the
Annual Report to Shareholders for the year ended September 30, 1997 and our
report dated December 31, 1997 on our audit of the financial statements and
financial highlights of Franklin Principal Maturity Trust, which report is
included in the Annual Report to Shareholders for the year ended November 30,
1997, which are included in the Registration Statement.
/s/Coopers & Lybrand L.L.P.
San Francisco, California
March 10, 1998
POWER OF ATTORNEY
The undersigned officers and directors of FRANKLIN CUSTODIAN FUNDS, INC.
hereby appoint BRIAN E. LORENZ, HARMON E. BURNS, DEBORAH R. GATZEK, LARRY L.
GREENE and KAREN L. SKIDMORE (with full power to each of them to act alone) his
attorney-in-fact and agent, in all capacities, to execute, and to file any of
the documents referred to below relating to the Company's Registration Statement
on Form N-14 under the Securities Act of 1933, or any amendment to such
Registration Statement, covering the sale of shares by the Company under a
propectus becoming effective after this date, with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority. Each of the undersigned grants to each of said attorneys full
authority to do every act necessary to be done in order to effectuate the same
as fully, to all intents and purposes as he could do if personally present,
thereby ratifying all that said attorneys-in-fact and agents may lawfully do or
cause to be done by virtue hereof.
The undersigned officers and directors hereby execute this Power of
Attorney as of this 26th day of February 1998.
/s/Charles B. Johnson /s/Rupert H. Johnson
Charles B. Johnson, Rupert H. Johnson, Jr.,
Executive Officer and Director Director
/s/Harris J. Ashton /s/S. Joseph Fortunato
Harris J. Ashton, Director S. Joseph Fortunato, Director
/s/Edith E. Holiday /s/Gordon S. Macklin
Edith E. Holiday, Director Gordon S. Macklin, Director
/s/Martin L. Flanagan /s/Diomedes Loo-Tam
Martin L. Flanagan Diomedes Loo-Tam,
Principal Financial Officer Principal Accounting Officer
