As filed with the Securities and Exchange Commission November 27, 1998
File Nos.2-11346
811-537
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post Effective Amendment No. 78 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 24 (X)
FRANKLIN CUSTODIAN FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404 (Address of
Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (650) 312-2000
Harmon E. Burns, 777 Mariners Island Blvd., San Mateo, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (Date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[x] on February 1, 1999 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (Date) pursuant to paragraph (a)(2)of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date
for a previously filed post-effective amendment
Title of Securities Being Registered:
Shares of Common Stock of:
Franklin Custodian Funds, Inc.
Growth Series - Class A
Growth Series - Class B
Growth Series - Class C
Growth Series - Advisor Class
Utilities Series - Class A
Utilities Series - Class B
Utilities Series - Class C
Utilities Series - Advisor Class
DynaTech Series - Class A
DynaTech Series - Class C
Income Series - Class A
Income Series - Class B
Income Series - Class C
Income Series - Advisor Class
U.S. Government Securities Series - Class A
U.S. Government Securities Series - Class B
U.S. Government Securities Series - Class C
U.S. Government Securities Series - Advisor Class
Prospectus
FRANKLIN
CUSTODIAN FUNDS, INC.
CLASS A, B & C
INVESTMENT STRATEGY DYNATECH - CLASS A & C
GROWTH GROWTH SERIES - CLASS A, B & C
INVESTMENT STRATEGY INCOME SERIES - CLASS A, B & C
GROWTH & INCOME UTILITIES SERIES - CLASS A, B & C
INVESTMENT STRATEGY U.S. GOVERNMENT
INCOME SECURITIES SERIES - CLASS A, B & C
FEBRUARY 1, 1999
[Insert Franklin Templeton Ben Head]
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
THE FUNDS
[Begin callout]
Information about each fund you should know before investing
[End callout]
page # DYNATECH SERIES
page # GROWTH SERIES
page # INCOME SERIES
page # UTILITIES SERIES
page # U.S. GOVERNMENT SECURITIES SERIES
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Choosing a Share Class
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
DYNATECH SERIES
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's goal is capital appreciation.
PRINCIPAL INVESTMENTS The fund will normally invest primarily in the common
stocks of companies that emphasize technological development, in fast-growing
industries, as well as in undervalued stocks. The fund's manager searches for
industry leaders and companies that it believes have a competitive advantage due
to their state-of-the-art products and technologies.
The fund may invest a significant portion of its assets in smaller companies.
Smaller company stocks are generally those with market capitalizations of less
than $1.5 billion. From time to time the fund may have a significant portion of
its assets invested in cash or cash equivalents. The fund generally invests less
than 10% of its assets in foreign securities.
[Begin callout]
The fund will normally invest primarily in common stocks of companies that
emphasize technological development, in fast-growing industries, as well as in
undervalued stocks.
[End callout]
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment goal
because it may not invest or may invest less in companies that emphasize
technological development, in fast growing industries or undervalued stocks.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
industries or the securities market as a whole.
SMALL COMPANIES Investing in stocks of small companies may involve greater risk
than investing in larger company stocks. Historically, small company securities
have been more volatile in price than larger company securities, especially over
the short-term. Among the reasons for the greater price volatility are the less
certain growth prospects of smaller companies, the lower degree of liquidity in
the markets for such securities, and the greater sensitivity of smaller
companies to changing economic conditions.
Small company stocks may fluctuate independently of larger company stocks. Small
company stocks may decline in price as large company stocks rise or vice versa.
In addition, small companies may lack depth of management, they may be unable to
generate funds necessary for growth or development, or they may be developing or
marketing new products or services for which markets are not yet established and
may never become established.
While smaller companies may offer greater opportunities for capital growth than
larger, more established companies, they also involve greater risks and should
be considered speculative.
TECHNOLOGY COMPANIES Companies in the rapidly changing fields of science and
technology face special risks. For example, their products may not prove
commercially successful or may become obsolete quickly. Prices of technology
company securities historically have been more volatile than other securities,
especially over the short term.
[Begin callout]
Investors should be aware of the special risks of aggressively seeking capital
appreciation, including investment in securities of a more speculative nature
with a greater emphasis on short-term trading profits. Because the stocks the
fund holds fluctuate in price, the value of your investment in the fund will go
up and down. This means you could lose money over short or even extended
periods.
[End callout]
FOREIGN SECURITIES Securities of companies located outside the U.S. may offer
significant opportunities for gain, but they also involve additional risks that
can increase the potential for losses in the fund. Investments in depositary
receipts also involve some or all of the following risks.
COUNTRY RISK. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund owns
which trade in that country. These movements will affect the fund's share price.
COMPANY RISK. Foreign companies are not subject to the same accounting, auditing
and financial reporting standards and practices as U.S. companies and their
stocks may not be as liquid as stocks of similar U.S. companies. Foreign stock
exchanges, brokers and companies generally have less government supervision and
regulation than in the U.S.
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to introduce a
new single currency, the euro, which will replace the national currency for
participating member countries. If the fund holds investments in countries with
currencies replaced by the euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and accounting
will be impacted.
Because this change to a single currency is new and untested, the establishment
of the euro may result in market volatility. For the same reason, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on the value of fund shares. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is only one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by companies
about their Year 2000 readiness. Issuers in countries outside the U.S. may not
be required to make the same level of disclosure about Year 2000 readiness as is
required in the U.S. The manager, of course, cannot audit each company and its
major suppliers to verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the possible
loss of principal. [End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 10 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS1
[Insert bar graph]
6.49% 29.76% 3.18% 35.45% 4.20% 7.43% 5.21% 26.13% 28.79% 14.62%
88 89 90 91 92 93 94 95 96 97
YEAR
[Begin callout]
BEST QUARTER:
Q1 '91 18.07%
WORST QUARTER:
Q3 '90 -16.06%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1997
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Franklin Dynatech Series - Class 8.02% 14.67% 14.84%
A2
S&P 500(R)Index3 33.36% 20.27% 18.05%
SINCE
INCEPTION
1 YEAR (9/16/96)
- --------------------------------------------------------------------------
Franklin Dynatech Series - Class 11.43% 20.69%
C2
S&P 500(R)Index3 33.36% 35.73%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of September 30, 1998, the fund's year-to-date return was 9.25% for Class A.
2. Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains. May 1, 1994, Class A implemented a Rule 12b-1 plan,
which affects subsequent performance.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It includes
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's expenses for the fiscal year ended
September 30, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A1 CLASS C1
Maximum sales charge (load) as a 5.75% 1.99%
percentage of offering price
Paid at time of purchase 5.75% 1.00%
Paid at redemption None (2) 0.99% (3)
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A1 CLASS C1
Management fees 0.56% 0.56%
Distribution and service (12b-1) fees (4) 0.23% 1.00%
Other expenses 0.23% 0.23%
-----------------------
Total annual fund operating expenses 1.02% 1.79%
=======================
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. Except for investments of $1 million or more (see page #) and purchases by
certain retirement plans without an initial sales charge.
3. This is equivalent to a charge of 1% based on net asset value.
4. Because of the distribution and service (12b-1) fees, over the long term you
may indirectly pay more than the equivalent of the maximum permitted initial
sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------
CLASS A $673(1) $881 $1,106 $1,751
CLASS C $378(2) $658 $1,060 $2,184
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. For the same Class C investment, your costs would be $280 if you did not sell
your shares at the end of the first year. Your costs for the remaining periods
would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its affiliates
manage over $208 billion in assets.
The team responsible for the fund's management is:
RUPERT H. JOHNSON, JR., PRESIDENT OF ADVISERS
Mr. Johnson has been a manager on the fund since inception and has been with
the Franklin Templeton Group since 1965.
LISA COSTA CMT, VICE PRESIDENT OF ADVISERS
Ms. Costa has been a manager on the fund since 1983 and has been with the
Franklin Templeton Group since 1980.
KEVIN CARRINGTON CFA, VICE PRESIDENT OF ADVISERS
Ms. Carrington has been a manager on the fund since 1995 and has been with
the Franklin Templeton Group since 1992.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended September 30, 1998, the fund
paid 0.56% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide network
of computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the fund's
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others. The fund could
experience difficulties in effecting transactions if any of its foreign
subcustodians, or if foreign broker-dealers or foreign markets are not ready for
Year 2000.
The fund's manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the fund's ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least annually representing substantially all of its net investment income and
any net realized capital gains. The amount of this distribution will vary and
there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record date[s] for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the fund's distributions, please call 1-800/DIAL BEN.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional shares of the fund or receive them in cash. Any
capital gains the fund distributes are taxable to you as long-term capital gains
no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The tax rate on any gain from the sale or
exchange of your shares depends on how long you have held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes the
fund pays on its investments may be passed through to you as a foreign tax
credit. Non-U.S. investors may be subject to U.S. withholding and estate tax.
You should consult your tax professional about federal, state, local or
foreign tax consequences.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
CLASS A YEAR ENDED SEPTEMBER 30,
<S> <C> <C> <C> <C> <C>
1998 1997 1996(1) 1995 1994
- ----------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 18.48 14.03 12.78 9.85 10.29
--------------------------------------------------
Net investment income .27 .10 .06 .12 .07
Net realized and unrealized
gains (losses) .23 4.81 1.54 2.99 .21
--------------------------------------------------
Total from investment
Operations .50 4.91 1.60 3.11 .28
--------------------------------------------------
Dividends from net
investment income (.17) (.06) (.12) (.05) (.12)
In excess of net investment
income -- -- -- -- --
Distributions from net
realized gains (.97) (.40) (.23) (.13) (.60)
--------------------------------------------------
Total distributions (1.14) (.46) (.35) (.18) (.72)
--------------------------------------------------
Net asset value, end of year 17.84 18.48 14.03 12.78 9.85
==================================================
Total return (%)2 3.06 35.63 12.84 32.10 2.89
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 215,864 188,102 104,508 92,987 67,413
Ratios to average net
Assets: (%)
Expenses 1.02 1.04 1.05 1.01 1.00
Net investment income 1.55 .75 .43 1.11 .69
Portfolio turnover rate (%) 10.84 5.59 11.94 9.83 9.73
</TABLE>
CLASS C
PER SHARE DATA ($)
Net asset value,
beginning of year 18.30 14.03 13.57
-------------------------------
Net investment income
(loss) .15 .07 -
Net realized and unrealized
gains (losses) .17 4.66 .46
-------------------------------
Total from investment
operations .32 4.73 .46
-------------------------------
Dividends from net
investment income (.12) (.06) --
Distributions from net
realized gains (.97) (.40) --
-------------------------------
Total distributions (1.09) (.46) --
-------------------------------
Net asset value, end of year 17.53 18.30 14.03
===============================
Total return (%)2 2.03 34.32 3.39
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 12,358 3,386 --
Ratios to average net
assets: (%)
Expenses 1.79 1.82 1.85(3)
Net investment income
(loss) .81 .25 (.14)(3)
Portfolio turnover rate (%) 10.84 5.59 11.94
(1) For the period September 16, 1996 (effective date) to September 30, 1996
for Class C.
(2) Total return does not include sales charges, and is not annualized.
(3) Annualized.
GROWTH SERIES
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's goal is capital appreciation.
PRINCIPAL INVESTMENTS The fund will normally invest primarily in the common
stocks of companies that are leaders in their industries. The fund's manager
looks for securities it believes offer favorable possibilities for capital
appreciation.
The fund may invest up to 40% of its assets in smaller companies, as well as in
new and emerging industries where growth is expected to be above average. From
time to time the fund may have a significant portion of its assets invested in
cash or cash equivalents. The fund generally invests less than 10% of its assets
in foreign securities.
[Begin callout]
The fund will normally invest primarily in the common stocks of companies that
are leaders in their industries.
[End callout]
TEMPORARY INVESTMENTS The managers may take a temporary defensive position when
the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment goal
because it may not invest or may invest less in common stocks of companies that
are leaders in their industries.
[Insert graphic of chart with line going up and down] MAIN RISKS
[Begin callout]
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money over
short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
industries or the securities market as a whole.
SMALL COMPANIES Investing in stocks of small companies may involve greater risk
than investing in larger company stocks. Historically, small company securities
have been more volatile in price than larger company securities, especially over
the short-term. Among the reasons for the greater price volatility are the less
certain growth prospects of smaller companies, the lower degree of liquidity in
the markets for such securities, and the greater sensitivity of smaller
companies to changing economic conditions.
Small company stocks may fluctuate independently of larger company stocks. Small
company stocks may decline in price as large company stocks rise or vice versa.
In addition, small companies may lack depth of management, they may be unable to
generate funds necessary for growth or development, or they may be developing or
marketing new products or services for which markets are not yet established and
may never become established.
While smaller companies may offer greater opportunities for capital growth than
larger, more established companies, they also involve greater risks and should
be considered speculative.
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to introduce a
new single currency, the euro, which will replace the national currency for
participating member countries. If the fund holds investments in countries with
currencies replaced by the euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and accounting
will be impacted.
Because this change to a single currency is new and untested, the establishment
of the euro may result in market volatility. For the same reason, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on the value of fund shares. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is only one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by companies
about their Year 2000 readiness. Issuers in countries outside the U.S.,
particularly in emerging markets, may not be required to make the same level of
disclosure about Year 2000 readiness as is required in the U.S. The manager, of
course, cannot audit each company and its major suppliers to verify their Year
2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the possible
loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 10 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS1
[Insert bar graph]
9.14% 23.79% 2.07% 26.71% 2.96% 7.10% 2.92% 38.40% 16.68% 18.60%
88 89 90 91 92 93 94 95 96 97
YEAR
[Begin callout]
Best quarter:
Q1 '91 14.09%
Worst quarter:
Q3 '90 -12.73%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1997
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Franklin Growth Series - Class A2 11.78% 14.76% 13.60%
S&P 500(R)Index3 33.36% 20.27% 18.05%
SINCE
INCEPTION
1 YEAR (5/1/95)
- --------------------------------------------------------------------------
Franklin Growth Series - Class C2 15.53% 20.78%
S&P 500(R)Index3 33.36% 29.61%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of September 30, 1998, the fund's year-to-date return was 5.50% for Class A.
2. Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains. May 1, 1994, Class A implemented a Rule 12b-1 plan,
which affects subsequent performance.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It includes
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's expenses for the fiscal year ended
September 30, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A1 CLASS B2 CLASS C1
- ----------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 4.00% 1.99%
Paid at time of purchase 5.75% None 1.00%
Paid at redemption None3 4.00% 0.99%4
Exchange fee5 None None None
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A1 CLASS B2 CLASS C1
- ----------------------------------------------------------------------------
Management fees 0.46% 0.46% 0.46%
Distribution and service
(12b-1) fees(6) 0.23% 1.00% 1.00%
Other expenses 0.19% 0.19% 0.19%
------------------------------------
Total annual fund operating expenses
0.88% 1.65% 1.65%
------------------------------------
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended September 30, 1998. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page [#]) and purchases by
certain retirement plans without an initial sales charge.
4. This is equivalent to a charge of 1% based on net asset value.
5. There is a $5 fee for each exchange by a market timer (see page [#]).
6. Because of the distribution and service (12b-1) fees, over the long term you
may indirectly pay more than the equivalent of the maximum permitted initial
sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
CLASS A $6601 $840 $1,035 $1,597
CLASS B
Assuming you sold your shares
at the end of the period $568 $820 $1,097 $1,7492
Assuming you stayed in the fund
$168 $520 $897 $1,7492
CLASS C $3643 $615 $988 $2,035
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $266 if you did not sell
your shares at the end of the first year. Your costs for the remaining periods
would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Investment Advisory Services, Inc. (Investment Advisory), 16 South Main
Street, Suite 303, Norwalk, Connecticut 06854, is the fund's investment manager.
Together, Investment Advisory and its affiliates manage over $208 billion in
assets.
The team responsible for the fund's management is:
VIVIAN J. PALMIERI, VICE PRESIDENT OF INVESTMENT ADVISORY Mr. Palmieri has been
a manager on the fund since 1965 and has been with the Franklin Templeton Group
since 1965.
CONRAD B. HERRMANN CFA, PORTFOLIO MANAGER OF INVESTMENT ADVISORY Mr. Herrmann
has been a manager on the fund since 1993 and has been with the Franklin
Templeton Group since 1989.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended September 30, 1998, the fund
paid 0.56% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide network
of computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the fund's
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others. The fund could
experience difficulties in effecting transactions if any of its foreign
subcustodians, or if foreign broker-dealers or foreign markets are not ready for
Year 2000.
The fund's manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the fund's ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least annually representing substantially all of its net investment income and
any net realized capital gains. The amount of this distribution will vary and
there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record date[s] for the fund's distribution will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the fund's distributions, please call 1-800/DIAL BEN.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional shares of the fund or receive them in cash. Any
capital gains the fund distributes are taxable to you as long-term capital gains
no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The tax rate on any gain from the sale or
exchange of your shares depends on how long you have held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes the
fund pays on its investments may be passed through to you as a foreign tax
credit. Non-U.S. investors may be subject to U.S. withholding and estate tax.
You should consult your tax professional about federal, state, local or
foreign tax consequences.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
CLASS A YEAR ENDED SEPTEMBER 30,
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995(1) 1994
-----------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 27.09 22.82 19.38 14.96 14.25
-----------------------------------------------
Net investment income .49 .36 .22 .17 .19
Net realized and unrealized 1.71 4.34 3.53 4.43 .90
gains (loss) -----------------------------------------------
Total from investment operations 2.20 4.70 3.75 4.60 1.09
-----------------------------------------------
Dividends from net investment income (.47) (.23) (.16) (.14) (.30)
In excess of net investment income -- -- -- -- --
Distributions from net realized gains (.24) (.20) (.15) (.04) (.08)
-----------------------------------------------
Total distributions (.71) (.43) (.31) (.18) (.38)
-----------------------------------------------
Net asset value, end of year 28.58 27.09 22.82 19.38 14.96
===============================================
Total return (%)(2) 8.22 20.84 19.60 31.11 7.63
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 1,635,780 1,435,561 1,020,486 712,866 516,620
Ratios to average net assets: (%)
Expenses .88 .89 .87 .90 .77
Net investment income 1.78 1.60 1.16 1.08 1.23
Portfolio turnover rate (%) .58 1.77 2.03 1.39 6.52
</TABLE>
CLASS C
PER SHARE DATA ($)
Net asset value, beginning of year 26.70 22.60 19.33 16.88
--------------------------------------
Net investment income (loss) .29 .20 .12 .02
Net realized and unrealized gains (loss) 1.66 4.25 3.46 2.43
--------------------------------------
Total from investment operations 1.95 4.45 3.58 2.45
--------------------------------------
Dividends from net investment income (.30) (.15) (.16) --
Distributions from net realized gains (.24) (.20) (.15) --
--------------------------------------
Total distributions (.54) (.35) (.31) --
--------------------------------------
Net asset value, end of year 28.11 26.70 22.60 19.33
======================================
Total return (%)(2) 7.39 19.91 18.73 14.72
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 189,572 117,218 43,417 4,161
Ratios to average net assets: (%)
Expenses 1.65 1.66 1.63 1.79(3)
Net investment income (loss) 1.02 .85 .40 .37(3)
Portfolio turnover rate (%) .58 1.77 2.03 1.39
(1) For the period May 1, 1995 (effective date) to September 30, 1995 for Class
C.
(2) Total return does not include sales charges, and is not annualized.
(3) Annualized.
INCOME SERIES
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's goal is to maximize income while maintaining prospects for
capital appreciation.
PRINCIPAL INVESTMENTS The fund will normally invest in a diversified portfolio
of stocks, bonds and cash equivalents. The fund seeks income by selecting
investments such as corporate, foreign and U.S. Treasury bonds, as well as
stocks with attractive dividend yields. In its search for growth opportunities,
the fund invests in common stocks of companies from a variety of industries such
as utilities, oil, gas, real estate and consumer goods.
The fund may invest up to 100% of total assets in debt securities that are below
investment grade, but it is not currently expected that the fund will invest
more than 50% of its assets in these securities. Investment grade securities are
rated in the top four ratings categories by independent rating organizations
such as Standard & Poor's Corporation (S&P) and Moody's Investors Service, Inc.
(Moody's). The fund generally invests in securities rated at least Caa by
Moody's or CCC by S&P or unrated securities the fund's manager determines are
comparable. Generally, lower rated securities pay higher yields than more highly
rated securities to compensate investors for the higher risk.
The fund may invest up to 25% of its assets in foreign securities. It ordinarily
buys foreign securities that are traded in the U.S. or American Depositary
Receipts, which are certificates typically issued by a bank or trust company
that give their holders the right to receive securities issued by a foreign or a
domestic company. The fund may also invest in preferred stocks and debt
securities that pay dividends or interest and can be converted into common
stock.
The fund's manager searches for undervalued or out-of-favor securities it
believes offer opportunities for income today and significant growth tomorrow.
It performs independent analysis of the securities being considered for the
fund's portfolio, rather than relying principally on the ratings assigned by
rating agencies. In its analysis, the manager considers a variety of factors,
including:
o the experience and managerial strength of the company;
o responsiveness to changes in interest rates and business conditions;
o debt maturity schedules and borrowing requirements;
o the company's changing financial condition and market recognition of
the change; and
o a security's relative value based on such factors as anticipated cash
flow, interest or dividend coverage, asset coverage, and earnings
prospects.
[Begin callout]
The fund will normally invest in a diversified portfolio of stocks, bonds and
cash equivalents in the U.S. and abroad.
[End callout]
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt security prices fall. The opposite
is also true: debt security prices go up when interest rates fall. Generally,
interest rates rise during times of inflation or a growing economy, and will
fall during an economic slowdown or recession. Securities with longer maturities
usually are more sensitive to interest rate changes than securities with shorter
maturities.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT This is the possibility that an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength or in a
security's credit rating may affect its value and, thus, impact the value of
fund shares.
Securities rated below investment grade, sometimes called "junk bonds,"
generally have more risk than higher-rated securities. The principal risks of
investing in these securities include:
o SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are
not as strong financially as those with higher credit ratings. These
companies are more likely to encounter financial difficulties and are more
vulnerable to changes in the economy, such as a recession or a sustained
period of rising interest rates, that could prevent them from making interest
and principal payments.
o DEFAULTED DEBT RISK. If an issuer is not paying or stops paying interest
and/or principal on its securities, payments on the securities may never
resume. These securities may be worthless and the fund could lose its entire
investment.
o VOLATILITY RISK. The prices of high yield debt securities fluctuate more
than higher-quality securities. Prices are especially sensitive to
developments affecting the company's business and to changes in the ratings
assigned by ratings organizations. Prices are often closely linked with the
company's stock prices and typically rise and fall in response to factors
that affect stock prices. In addition, the entire high yield securities
market can experience sudden and sharp price swings due to changes in
economic conditions, stock market activity, large sustained sales by major
investors, a high-profile default, or other factors. High yield securities
are also generally less liquid than higher-quality bonds. Many of these
securities do not trade frequently, and when they do trade their prices may
be significantly higher or lower than expected. At times, it may be difficult
to sell these securities promptly at an acceptable price, which may limit the
fund's ability to sell securities in response to specific economic events or
to meet redemption requests.
STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
industries or the securities market as a whole. Utility company securities are
particularly sensitive to interest rate movements: when interest rates rise, the
stock prices of these companies tend to fall.
CONVERTIBLE SECURITIES The value of convertible securities may rise and fall
with the market value of the underlying stock or, like a debt security, vary
with changes in interest rates and the credit quality of the issuer. A
convertible security tends to perform more like a stock when the underlying
stock price is high (because it is assumed it will be converted) and more like a
debt security when the underlying stock price is low (because it is assumed it
will not be converted). Because its value can be influenced by many different
factors, a convertible security is not as sensitive to interest rate changes as
a similar non-convertible debt security, and generally has less potential for
gain or loss than the underlying stock.
[Begin callout]
If a security's credit rating is downgraded or a company's financial condition
deteriorates, the price of the security will fall and so too will the fund's
share price. If interest rates rise, the value of the fund's debt securities
will also fall. This means you could lose money.
[End callout]
FOREIGN SECURITIES Securities of companies located outside the U.S. may offer
significant opportunities for gain, but they also involve additional risks that
can increase the potential for losses in the fund. Investments in American,
European and Global Depositary Receipts also involve some or all of the
following risks.
COUNTRY RISK. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund owns
which trade in that country. These movements will affect the fund's share price.
The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of the imposition of
exchange controls, expropriation, restrictions on removal of currency or other
assets, nationalization of assets and punitive taxes.
The fund's investments in developing or emerging markets are subject to all of
the risks of foreign investing generally, and have additional heightened risks
due to a lack of legal, business and social frameworks to support securities
markets. While short-term volatility in these markets can be disconcerting,
declines of 40% to 50% are not unusual.
COMPANY RISK. Foreign companies are not subject to the same accounting, auditing
and financial reporting standards and practices as U.S. companies and their
stocks may not be as liquid as stocks of similar U.S. companies. Foreign stock
exchanges, brokers and companies generally have less government supervision and
regulation than in the U.S. The fund may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies and obtaining judgments
with respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value of
what the fund owns and the fund's share price. Generally, when the U.S. dollar
rises in value against a foreign currency, an investment in that country loses
value because the currency is worth fewer U.S. dollars.
EURO On January 1, 1999, the European Monetary Union (EMU) plans to introduce a
new single currency, the euro, which will replace the national currency for
participating member countries. If the fund holds investments in countries with
currencies replaced by the euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and accounting
will be impacted.
Because this change to a single currency is new and untested, the establishment
of the euro may result in market volatility. For the same reason, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on the value of fund shares. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is only one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by companies
about their Year 2000 readiness. Issuers in countries outside the U.S.,
particularly in emerging markets, may not be required to make the same level of
disclosure about Year 2000 readiness as is required in the U.S. The manager, of
course, cannot audit each company and its major suppliers to verify their Year
2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the possible
loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 10 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS1
......
[Insert bar graph]
8.81% 12.67% -8.77% 41.15% 15.24% 21.53% -6.38% 21.29% 10.45% 16.85%
88 89 90 91 92 93 94 95 96 97
YEAR
[Begin callout]
Best quarter:
Q1 '91 16.67%
Worst quarter:
Q3 '90 -8.58%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1997
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Franklin Income Series - Class A2 12.10% 11.25% 12.01%
S&P 500(R)Index3 33.36% 20.27% 18.05%
Lehman Bros. Gov't/Corp. Bond 9.76% 7.61% 9.15%
Index4
- --------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR (5/1/95)
- --------------------------------------------------------------------------
Franklin Income Series - Class C2 14.29% 14.34%
S&P 500(R)Index3 33.36% 29.61%
Lehman Bros. Gov't/Corp. Bond 9.76% 9.22%
Index4
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of September 30, 1998, the fund's year-to-date return was -2.30% for Class A.
2. Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains. May 1, 1994, Class A implemented a Rule 12b-1 plan,
which affects subsequent performance.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It includes
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
4. Lehman Brothers Government/Corporate Bond Index is an unmanaged index of
fixed-rate U.S. government and foreign and domestic corporate bonds that are
rated investment grade or higher and have maturities of one year or more and at
least $50 million outstanding. One cannot invest directly in an index, nor is an
index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's expenses for the fiscal year ended
September 30, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A1 CLASS B2 CLASS C1
- ----------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 4.25% 4.00% 1.99%
Paid at time of purchase 4.25% None 1.00%
Paid at redemption None3 4.00% 0.99%4
Exchange fee5 None None None
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A1 CLASS B2 CLASS C1
- ----------------------------------------------------------------------------
Management fees 0.45% 0.45% 0.45%
Distribution and service
(12b-1) fees(6) 0.15% 0.65% 0.65%
Other expenses 0.12% 0.12% 0.12%
------------------------------------
Total annual fund operating expenses
0.72% 1.22% 1.22%
------------------------------------
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended September 30, 1998. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page [#]) and purchases by
certain retirement plans without an initial sales charge.
4. This is equivalent to a charge of 1% based on net asset value.
5. There is a $5 fee for each exchange by a market timer (see page [#]).
6. Because of the distribution and service (12b-1) fees, over the long term you
may indirectly pay more than the equivalent of the maximum permitted initial
sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
CLASS A $4951 $645 $809 $1,281
CLASS B
Assuming you sold your shares
at the end of the period $524 $687 $870 $1,3392
Assuming you stayed in the fund
$124 $387 $670 $1,3392
CLASS C $3213 $483 $764 $1,563
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $223 if you did not sell
your shares at the end of the first year. Your costs for the remaining periods
would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its affiliates
manage over $208 billion in assets.
The team responsible for the fund's management is:
CHARLES B. JOHNSON, CHAIRMAN OF THE BOARD OF ADVISERS
Mr. Johnson has been a manager on the fund since 1957 and has been with the
Franklin Templeton Group since 1957.
MATTHEW F. AVERY, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Avery has been a manager on the fund since 1989 and has been with the
Franklin Templeton Group since 1987.
FREDERICK G. FROMM, VICE PRESIDENT OF ADVISERS
Mr. Fromm has been a manager on the fund since 1998 and has been with the
Franklin Templeton Group since 1992.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended September 30, 1998, the fund
paid 0.45% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide network
of computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the fund's
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others. The fund could
experience difficulties in effecting transactions if any of its foreign
subcustodians, or if foreign broker-dealers or foreign markets are not ready for
Year 2000.
The fund's manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the fund's ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least monthly, on or about the 15th day of each month, representing its net
investment income. Capital gains, if any, may be distributed annually. The
amount of these distributions will vary and there is no guarantee the fund will
pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record date[s] for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the fund's distributions, please call 1-800/DIAL BEN.
TAX CONSIDERATIONS
In general, fund distributions are taxable to you as either ordinary income or
capital gains. This is true whether you reinvest your distributions in
additional shares of the fund or receive them in cash. Any capital gains the
fund distributes are taxable to you as long-term capital gains no matter how
long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The tax rate on any gain from the sale or
exchange of your shares depends on how long you have held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes the fund
pays on its investments may be passed through to you as a foreign tax credit.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You should
consult your tax adviser about federal, state, local or foreign tax
consequencesof your investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED SEPTEMBER 30,
1998 1997 1996 19951 1994
--------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 2.49 2.30 2.30 2.22 2.46
--------------------------------------------------
Net investment income .17 .18 .19 .18 .17
Net realized and
unrealized
gains (losses) (.11) .20 .02 .11 (.20)
--------------------------------------------------
Total from investment
operations .06 .38 .21 .29 (.03)
--------------------------------------------------
Dividends from net
investment income (.18) (.18) (.18) (.18) (.18)
In excess of net
investment
income -- -- -- -- --
Distributions from net
realized gains (.03) (.01) (.03) (.03) (.03)
--------------------------------------------------
Total distributions (.21) (.19) (.21) (.21) (.21)
--------------------------------------------------
Net asset value, end of 2.34 2.49 2.30 2.30 2.22
year
==================================================
Total return (%)2 2.23 17.31 9.43 14.00 (1.52)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 7,704,983 7,738,7466,780,153 5,885,788 4,891,505
Ratios to average net
assets: (%)
Expenses .72 .72 .70 .71 .64
Net investment income 6.83 7.45 8.27 8.26 7.37
Portfolio turnover rate 22.01 16.15 25.29 58.64 23.37
(%)
CLASS C
PER SHARE DATA ($)
Net asset value,
beginning of year 2.49 2.30 2.30 2.18
----------------------------------------
Net investment income
(loss) .16 .16 .17 .08
Net realized and
unrealized
gains (losses) (.11) .21 .03 .11
----------------------------------------
Total from investment
operations .05 .37 .20 .19
----------------------------------------
Dividends from net
investment income (.17) (.17) (.17) (.07)
Distributions from net
realized gains (.03) (.01) (.03) --
----------------------------------------
Total distributions (.20) (.18) (.20) (.07)
----------------------------------------
Net asset value, end of 2.34 2.49 2.30 2.30
year
========================================
Total return (%)2 1.70 16.72 8.86 8.96
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 1,014,634 695,355 343,314 65,822
Ratios to average net
assets: (%)
Expenses 1.22 1.22 1.21 1.23(3)
Net investment income
(loss) 6.35 6.96 7.84 7.89(3)
Portfolio turnover rate 22.01 16.15 25.29 58.64
(%)
(1) For the period May 1, 1995 (effective date) to September 30, 1995 for Class
C.
(2) Total return does not include sales charges, and is not annualized.
(3) Annualized.
UTILITIES SERIES
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's goals are capital appreciation and current income.
PRINCIPAL INVESTMENTS The fund will normally invest substantially all of its
assets in the securities of public utilities companies. These are companies that
provide electricity, natural gas, water, and communications services to the
public and companies that provide services to public utilities companies. The
manager expects that more than 50% of the fund's assets will be invested in
electric utilities securities.
The fund invests primarily in common stocks and may invest up to 25% of its
assets in debt securities. Most of the fund's debt security investments are
"investment grade." These are issues rated in the top four ratings categories by
independent rating agencies such as Standard & Poor's Corporation or Moody's
Investor Service, Inc. or, if unrated, determined by the fund's managers to be
comparable. The fund may invest in preferred stocks and convertible securities.
The fund generally invests less than 10% of its assets in foreign securities.
[Begin callout]
The fund will normally invest substantially all of its assets in the securities
of utilities companies.
[End callout]
TEMPORARY INVESTMENTS The managers may take a temporary defensive position when
the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment goals
because it will not invest or will invest less in public utilities companies.
[Insert graphic of chart with line going up and down] MAIN RISKS
UTILITIES INDUSTRY The fund's performance is closely tied to conditions
affecting the public utilities industry, which may change rapidly. Utility
company securities are particularly sensitive to interest rate movements: when
interest rates rise, the stock prices of these companies tend to fall. On-going
regulatory changes have led to greater competition in the industry and the
emergence of non-regulated providers as a significant part of the industry which
may make some companies less profitable. In addition, the industry is subject to
risks associated with 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 due to environmental and safety regulations; 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 the effects of energy
conservation and other factors affecting the level of demand for services.
STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
industries or the securities market as a whole.
[Begin callout]
Utility company securities are particularly sensitive to interest rate
movements: when interest rates rise, the stock prices of these companies tend to
fall. Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money over
short or even extended periods.
[End callout]
INTEREST RATE When interest rates rise, debt security prices fall. The opposite
is also true: debt security prices go up when interest rates fall. Generally,
interest rates rise during times of inflation or a growing economy, and will
fall during an economic slowdown or recession. Securities with longer maturities
usually are more sensitive to interest rate changes than securities with shorter
maturities.
CREDIT This is the possibility that an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength or in a
security's credit rating may affect its value and, thus, impact the value of
fund shares.
FOREIGN SECURITIES Securities of companies located outside the U.S. may offer
significant opportunities for gain, but they also involve additional risks that
can increase the potential for losses in the fund. Investments in depositary
receipts also involve some or all of the following risks.
COUNTRY RISK. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund owns
which trade in that country. These movements will affect the fund's share price.
COMPANY RISK. Foreign companies are not subject to the same accounting, auditing
and financial reporting standards and practices as U.S. companies and their
stocks may not be as liquid as stocks of similar U.S. companies. Foreign stock
exchanges, brokers and companies generally have less government supervision and
regulation than in the U.S.
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to introduce a
new single currency, the euro, which will replace the national currency for
participating member countries. If the fund holds investments in countries with
currencies replaced by the euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and accounting
will be impacted.
Because this change to a single currency is new and untested, the establishment
of the euro may result in market volatility. For the same reason, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on the value of fund shares. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is only one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by companies
about their Year 2000 readiness. Issuers in countries outside the U.S.,
particularly in emerging markets, may not be required to make the same level of
disclosure about Year 2000 readiness as is required in the U.S. The manager, of
course, cannot audit each company and its major suppliers to verify their Year
2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the possible
loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 10 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS1
[Insert bar graph]
11.64% 25.83% 0.38% 24.18% 9.08% 11.52% -11.69% 30.68% 2.03% 24.90%
88 89 90 91 92 93 94 95 96 97
YEAR
[Begin callout]
Best quarter:
Q4 '97 15.02%
Worst quarter:
Q1 '94 -9.95%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1997
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Franklin Utilities Fund - Class 19.56% 9.44% 11.61%
A2
S&P 500(R)Index3 33.36% 20.27% 18.05%
SINCE
INCEPTION
1 YEAR (5/1/95)
- --------------------------------------------------------------------------
Franklin Utilities Fund - Class 21.95% 17.33%
C2
S&P 500(R)Index3 33.36% 29.61%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of September 30, 1998, the fund's year-to-date return was 5.81% for Class A.
2. Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains. May 1, 1994, Class A implemented a Rule 12b-1 plan,
which affects subsequent performance.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It includes
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's expenses for the fiscal year ended
September 30, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A1 CLASS B2 CLASS C1
- ----------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 4.25% 4.00% 1.99%
Paid at time of purchase 4.25% None 1.00%
Paid at redemption None3 4.00% 0.99%4
Exchange fee5 None None None
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A1 CLASS B2 CLASS C1
- ----------------------------------------------------------------------------
Management fees 0.46% 0.46% 0.46%
Distribution and service
(12b-1) fees(6) 0.13% 0.65% 0.65%
Other expenses 0.17% 0.17% 0.17%
------------------------------------
Total annual fund operating expenses
0.76% 1.28% 1.28%
------------------------------------
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended September 30, 1998. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page [#]) and purchases by
certain retirement plans without an initial sales charge.
4. This is equivalent to a charge of 1% based on net asset value.
5. There is a $5 fee for each exchange by a market timer (see page [#]).
6. Because of the distribution and service (12b-1) fees, over the long term you
may indirectly pay more than the equivalent of the maximum permitted initial
sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
CLASS A $4991 $658 $829 $1,327
CLASS B
Assuming you sold your shares
at the end of the period $530 $706 $902 $1,4022
Assuming you stayed in the fund
$130 $406 $702 $1,4022
CLASS C $3273 $502 $795 $1,630
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $229 if you did not sell
your shares at the end of the first year. Your costs for the remaining periods
would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its affiliates
manage over $208 billion in assets.
The team responsible for the fund's management is:
SALLY EDWARDS HAFF CFA, SENIOR VICE PRESIDENT OF ADVISERS Ms. Haff has been a
manager on the fund since 1990 and has been with the Franklin Templeton Group
since 1986.
GREGORY E. JOHNSON, VICE PRESIDENT OF ADVISERS
Mr. Johnson has been a manager on the fund since 1987 and has been with the
Franklin Templeton Group since 1986.
IAN LINK CFA, VICE PRESIDENT OF ADVISERS
Mr. Link has been a manager on the fund since 1995 and has been with the
Franklin Templeton Group since 1989.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended September 30, 1998, the fund
paid 0.46% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide network
of computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the fund's
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others. The fund could
experience difficulties in effecting transactions if any of its foreign
subcustodians, or if foreign broker-dealers or foreign markets are not ready for
Year 2000.
The fund's manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the fund's ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the fund and its manager may have no control.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least quarterly in March, June, September and December representing its net
investment income. Capital gains, if any, may be distributed annually. The
amount of these distributions will vary and there is no guarantee the fund will
pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record date[s] for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the fund's distributions, please call 1-800/DIAL BEN.
TAX CONSIDERATIONS
In general, fund distributions are taxable to you as either ordinary income or
capital gains. This is true whether you reinvest your distributions in
additional shares of the fund or receive them in cash. Any capital gains the
fund distributes are taxable to you as long-term capital gains no matter how
long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The tax rate on any gain from the sale or
exchange of your shares depends on how long you have held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes the fund
pays on its investments may be passed through to you as a foreign tax credit.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You should
consult your tax adviser about federal, state, local or foreign tax consequences
of your investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED SEPTEMBER 30,
1998 1997 1996 19951 1994
----------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 10.04 9.73 9.75 8.33 10.78
----------------------------------------------------
Net investment income .52 .53 .54 .53 .55
Net realized and unrealized
gains (losses) 1.58 .73 .03 1.42 (2.44)
----------------------------------------------------
Total from investment
operations 2.10 1.26 .57 1.95 (1.890
----------------------------------------------------
Dividends from net
investment income (.52) (.52) (.52) (.52) (.52)
Distributions from net
realized gains (.26) (.43) (.07) (.01) (.04)
----------------------------------------------------
Total distributions (.78) (.95) (.59) (.53) (.56)
----------------------------------------------------
Net asset value, end of 11.36 10.04 9.73 9.75 8.33
year
====================================================
Total return (%)2 21.71 13.72 5.94 24.19 (17.94)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 2,054,546 1,953,273 2,400,561 2,765,976 2,572,508
Ratios to average net
assets: (%)
Expenses .76 .75 .71 .73 .64
Net investment income 4.73 5.26 5.24 5.88 5.76
Portfolio turnover rate (%) 11.77 7.24 17.05 5.55 6.34
CLASS C
PER SHARE DATA ($)
Net asset value,
beginning of year 10.02 9.72 9.75 8.89
------------------------------------------
Net investment income
(loss) .46 .45 .46 .23
Net realized and unrealized
gains (losses) 1.60 .76 .06 .88
------------------------------------------
Total from investment
operations 2.06 1.21 .52 1.11
------------------------------------------
Dividends from net
investment income (.47) (.48) (.48) (.25)
Distributions from net
realized gains (.26) (.43) (.07) --
------------------------------------------
Total distributions (.73) (.91) (.55) (.25)
------------------------------------------
Net asset value, end of 11.35 10.02 9.72 9.75
year
==========================================
Total return (%)2 21.24 13.06 5.39 13.01
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 40,628 21,906 19,655 8,369
Ratios to average net
assets: (%)
Expenses 1.28 1.27 1.23 1.21(3)
Net investment income
(loss) 4.19 4.78 4.86 5.15(3)
Portfolio turnover rate (%) 11.77 7.24 17.05 5.55
(1) For the period May 1, 1995 (effective date) to September 30, 1995 for Class
C
(2) Total return does not include sales charges, and is not annualized.
(3) Annualized.
U.S. GOVERNMENT SECURITIES SERIES
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's goal is income.
PRINCIPAL INVESTMENTS The fund will normally invest in a portfolio limited to
U.S. government securities. These securities include U.S. Treasury bonds, notes
and bills, and securities issued by U.S. government agencies. The fund currently
invests solely in Government National Mortgage Association obligations ("Ginnie
Maes"), except for its investments in U.S. Treasury securities and cash. The
fund may buy and sell Ginnie Maes on a "to-be-announced" and "delayed delivery"
basis.
Ginnie Maes represent an ownership interest in mortgage loans made by banks and
other financial institutions to finance purchases of homes. The mortgage loans
may have either fixed or adjustable interest rates. The individual loans are
packaged or "pooled" together for sale to investors. As the underlying mortgage
loans are paid off, investors receive principal and interest payments.
Ginnie Maes carry a guarantee backed by the full faith and credit of the U.S.
government. The guarantee applies only to the timely repayment of principal and
interest and not to the market prices and yields of the Ginnie Maes or to the
net asset value or performance of the fund, which will vary with changes in
interest rates and other market conditions.
[Begin callout]
The fund normally invests in a portfolio limited to U.S. government
securities. The fund currently invests solely in Ginnie Maes, except for its
investments in U.S. Treasury securities and cash.
[End callout]
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment goal
because it will not invest or will invest less in Ginnie Maes.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt security prices fall. The opposite
is also true: debt security prices go up when interest rates fall. Generally,
interest rates rise during times of inflation or a growing economy, and will
fall during an economic slowdown or recession. Securities with longer maturities
usually are more sensitive to interest rate changes than securities with shorter
maturities.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
GINNIE MAES Ginnie Maes differ from conventional debt securities because
principal is paid back over the life of the security rather than at maturity.
The fund may receive unscheduled prepayments of principal due to voluntary
prepayments, refinancing or foreclosure on the underlying mortgage loans. During
periods of declining interest rates, the volume of principal prepayments
generally increases as borrowers refinance their mortgages at lower rates. The
fund may be forced to reinvest returned principal at lower interest rates,
reducing the fund's income. For this reason, Ginnie Maes may be less effective
than other types of securities as a means of "locking in" long-term interest
rates and may have less potential for capital appreciation during periods of
falling interest rates than other investments with similar maturities. A
reduction in the anticipated rate of principal prepayments, especially during
periods of rising interest rates, may increase the effective maturity of Ginnie
Maes, making them more susceptible than other debt securities to a decline in
market value when interest rates rise. This could increase the volatility of the
fund's returns and share price.
[Begin callout]
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of the fund's debt securities will fall and so too will
the fund's shares price. This means you would lose money over short or even
extended periods. If rates fall, mortgage holders will refinance their mortgage
loans at lower interest rates, which will reduce the fund's income and yield.
[End callout]
YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is only one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by issuers
about their Year 2000 readiness. The manager, of course, cannot audit each
issuer and its major suppliers to verify their Year 2000 readiness.
If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the possible
loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 10 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS1
[Insert bar graph]
7.45% 13.11% 10.78% 13.71% 7.40% 6.92% -2.69% 16.73% 4.60% 9.46%
88 89 90 91 92 93 94 95 96 97
YEAR
[Begin callout]
Best quarter:
Q2 '89 6.72%
Worst quarter:
Q1 '94 -2.84%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1997
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Franklin U.S. Government 4.82% 5.89% 8.15%
Securities Series - Class A2
Lehman Bros. Interm. Gov't Bond 7.72% 6.39% 8.13%
Index3
SINCE
INCEPTION
1 YEAR (5/1/95)
- --------------------------------------------------------------------------
Franklin U.S. Government 6.76% 7.76%
Securities Series - Class C2
Lehman Bros. Interm. Gov't Bond 7.72% 7.65%
Index3
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of September 30, 1998, the fund's year-to-date return was 6.13% for Class A.
2. Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains. May 1, 1994, Class A implemented a Rule 12b-1 plan,
which affects subsequent performance.
3. Lehman Brothers Intermediate Government Bond Index is an unmanaged index of
fixed-rate bonds issued by the U.S. government and its agencies that are rated
investment grade or higher and have one to ten years remaining until maturity
and at least $100 million outstanding. One cannot invest directly in an index,
nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's expenses for the fiscal year ended
September 30, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A1 CLASS B2 CLASS C1
- ----------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 4.25% 4.00% 1.99%
Paid at time of purchase 4.25% None 1.00%
Paid at redemption None3 4.00% 0.99%4
Exchange fee5 None None None
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A1 CLASS B2 CLASS C1
- ----------------------------------------------------------------------------
Management fees 0.45% 0.45% 0.45%
Distribution and service
(12b-1) fees(6) 0.09% 0.65% 0.65%
Other expenses 0.11% 0.11% 0.11%
------------------------------------
Total annual fund operating expenses
0.65% 1.21% 1.21%
------------------------------------
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended September 30, 1998. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page [#]) and purchases by
certain retirement plans without an initial sales charge.
4. This is equivalent to a charge of 1% based on net asset value.
5. There is a $5 fee for each exchange by a market timer (see page [#]).
6. Because of the distribution and service (12b-1) fees, over the long term you
may indirectly pay more than the equivalent of the maximum permitted initial
sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
CLASS A $4891 $624 $772 $1,201
CLASS B
Assuming you sold your shares
at the end of the period $523 $684 $865 $1,3102
Assuming you stayed in the fund
$123 $384 $665 $1,3102
CLASS C $3203 $480 $758 $1,551
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $222 if you did not sell
your shares at the end of the first year. Your costs for the remaining periods
would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its affiliates
manage over $208 billion in assets.
The team responsible for the fund's management is:
JACK LEMEIN, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Lemein has been a manager on the fund since 1984 and has been with the
Franklin Templeton Group since 1984.
T. ANTHONY COFFEY CFA, PORTFOLIO MANAGER OF ADVISERS
Mr. Coffey has been a manager on the fund since 1989 and has been with the
Franklin Templeton Group since 1989.
ROGER BAYSTON CFA, PORTFOLIO MANAGER OF ADVISERS
Mr. Bayston has been a manager on the fund since 1991 and has been with the
Franklin Templeton Group since 1991.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended September 30, 1998, the fund
paid 0.45% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide network
of computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the fund's
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others.
The fund's manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the fund's ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least monthly, on or about the 15th day of each month, representing its net
investment income. Capital gains, if any, may be distributed annually. The
amount of these distributions will vary and there is no guarantee the fund will
pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record date[s] for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the fund's distributions, please call 1-800/DIAL BEN.
TAX CONSIDERATIONS
In general, fund distributions are taxable to you as either ordinary income or
capital gains. This is true whether you reinvest your distributions in
additional shares of the fund or receive them in cash. Any capital gains the
fund distributes are taxable to you as long-term capital gains no matter how
long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The tax rate on any gain from the sale or
exchange of your shares depends on how long you have held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Non-U.S. investors may
be subject to U.S. withholding and estate tax. You should consult your tax
adviser about federal, state, local or foreign tax consequences of your
investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED SEPTEMBER 30,
1998 1997 1996 19951 1994
---------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 6.89 6.72 6.87 6.51 7.20
---------------------------------------------------
Net investment income .46 .48 .49 .50 .50
Net realized and
unrealized
---------------------------------------------------
gains (losses) .10 .17 (.15) .35 (.68)
---------------------------------------------------
Total from investment
operations .56 .65 .34 .85 (.18)
---------------------------------------------------
Dividends from net
investment income (.46) (.48) (.49) (.49) (.51)
Net asset value, end of 6.99 6.89 6.72 6.87 6.51
year
===================================================
Total return (%)2 8.41 10.08 5.15 13.56 (2.75)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 9,049,829 9,350,751 10,129,483 11,101,60 511,668,747
Ratios to average net
assets: (%)
Expenses .65 .64 .61 .61 .55
Net investment income 6.67 7.01 7.18 7.50 7.37
Portfolio turnover rate 25.98 1.74 8.01 5.48 18.28
(%)
CLASS C
PER SHARE DATA ($)
Net asset value,
beginning of year 6.87 6.70 6.85 6.67
----------------------------------------
Net investment income
(loss) .42 .44 .45 .21
Net realized and
unrealized
gains (losses) .10 .17 (.15) .16
----------------------------------------
Total from investment
operations .52 .61 .30 .37
----------------------------------------
Dividends from net
investment income (.42) (.44) (.45) (.19)
Net asset value, end of 6.97 6.87 6.70 6.85
year
========================================
Total return (%)2 7.85 9.48 4.55 5.66
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 271,665 120,818 57,657 11,695
Ratios to average net
assets: (%)
Expenses 1.21 1.20 1.17 1.18(3)
Net investment income
(loss) 6.10 6.44 6.80 6.48(3)
Portfolio turnover rate 25.98 1.74 8.01 5.48
(%)
(1) For the period May 1, 1995 (effective date) to September 30, 1995 for Class
C.
(2) Total return does not include sales charges, and is not annualized.
(3) Annualized.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"] 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. Your investment representative
can help you decide.
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------
o Initial sales o No initial sales o Initial sales
charge of 5.75% charge charge of 1%
(DynaTech and Growth
Series), 4.25%
(Income, Utilities
and U.S. Government
Securities Series)
or less
o Deferred sales o Deferred sales o Deferred sales
charge of 1% on charge of 4% or charge of 1% on
purchases of $1 less on shares you shares you sell
million or more sold sell within six within 18 months
within 12 months years
o Lower annual o Higher annual o Higher annual
expenses than Class expenses than Class expenses than Class
B or C due to lower A (same as Class C) A (same as Class B)
distribution fees due to higher due to higher
distribution fees. distribution fees.
Automatic No conversion to
conversion to Class Class A shares, so
A shares after annual expenses do
eight years, not decrease.
reducing future
annual expenses.
BEFORE JANUARY 1, 1999, CLASS A SHARES WERE DESIGNATED CLASS I AND CLASS C
SHARES WERE DESIGNATED CLASS II. GROWTH, INCOME, UTILITIES AND U.S.
GOVERNMENT SECURITIES SERIES BEGAN OFFERING CLASS B SHARES ON JANUARY 1,
1999.]
SALES CHARGES - CLASS A - DYNATECH AND GROWTH SERIES
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
SALES CHARGES - CLASS A - INCOME, UTILITIES AND U.S. GOVERNMENT SECURITIES
SERIES
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $100,000 4.25 6.10
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.75 2.83
$500,000 but under $1 million 2.15 2.20
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as a
lump sum or through our cumulative quantity discount or letter of intent
programs (see page [#]), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC is
the same for each class (please see page [#]).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the fund to pay distribution fees of up
to 0.25% per year to those who sell and distribute Class A shares and provide
other services to shareholders. Because these fees are paid out of Class A's
assets on an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS B
IF YOU SELL YOUR SHARES
WITHIN THIS MANY YEARS AFTER BUYING THIS % IS DEDUCTED FROM
THEM YOUR PROCEEDS AS A CDSC
- --------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
With Class B shares, there is no initial sales charge. However, there is a CDSC
if you sell your shares within six years, as described in the table above. The
way we calculate the CDSC is the same for each class (please see page [#]).
After 8 years, your Class B shares automatically convert to Class A shares,
lowering your annual expenses from that time on.
MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares at
one time is $249,999. We invest any investment of $250,000 or more in Class A
shares, since a reduced initial sales charge is available and Class A's annual
expenses are lower.
RETIREMENT PLANS Class B shares are not available to all retirement plans. Class
B shares are only available to IRAs (of any type), Franklin Templeton Trust
Company 403(b) plans, and Franklin Templeton Trust Company qualified
plans with participant or earmarked accounts.
DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows Growth Series to pay distribution and
other fees of up to 1% per year and Income, Utilities and U.S. Government
Securities Series to pay distribution and other fees of up to 0.65% per year for
the sale of Class B shares and for services provided to shareholders. Because
these fees are paid out of Class B's assets on an on-going basis, over time
these fees will increase the cost of your investment and may cost you more than
paying other types of sales charges.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $1 million 1.00 1.01
WE INVEST ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE IS
NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C shares
you sell within 18 months of purchase. The way we calculate the CDSC is the same
for each class (please see below).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows DynaTech and Growth Series to pay
distribution and other fees of up to 1% per year and Income, Utilities and U.S.
Government Securities Series to pay distribution and other fees of up to 0.65%
per year for the sale of Class C shares and for services provided to
shareholders. Because these fees are paid out of Class C's assets on an on-going
basis, over time these fees will increase the cost of your investment and may
cost you more than paying other types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A, B & C
The CDSC for each class is based on the current value of the shares being sold
or their net asset value when purchased, whichever is less. There is no CDSC on
shares you acquire by reinvesting your dividends.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one month
on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to a
CDSC. If there are not enough of these to meet your request, we will sell the
shares in the order they were purchased. We will use this same method if you
exchange your shares into another Franklin Templeton Fund (please see page [#]
for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below, please
let us know at the time you make your investment to help ensure you receive the
lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in
the Franklin Templeton Funds to take advantage of the lower sales charges for
large purchases of Class A shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
may also combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts may also be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar amount
of shares over a 13-month period and lets you receive the same sales charge
as if all shares had been purchased at one time. We will reserve a portion of
your shares to cover any additional sales charge that may apply if you do not
buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE
APPROPRIATE SECTION OF YOUR ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you may
reinvest some or all of the proceeds within 365 days without an initial sales
charge. The proceeds must be reinvested within the same share class, except
proceeds from the sale of Class B shares will be reinvested in Class A shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit your
account with the amount of the CDSC paid but a new CDSC will apply. For Class B
shares reinvested in Class A, a new CDSC will not apply, although your account
will not be credited with the amount of any CDSC paid when you sold your Class B
shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD) also
may be reinvested without an initial sales charge if you reinvest them within
365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject to
a sales charge.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS Class A shares may be purchased
without an initial sales charge or CDSC by investors who reinvest within 365
days:
o certain payments received under an annuity contract that offers a
Franklin Templeton insurance fund option
o distributions from an existing retirement plan invested in the Franklin
Templeton Funds
o dividend or capital gain distributions from a real estate investment trust
sponsored or advised by Franklin Properties, Inc.
o redemption proceeds from a repurchase of Franklin Floating Rate Trust shares
held continuously for at least 12 months
o redemption proceeds from Class A of any Templeton Global Strategy Fund, if
you are a qualified investor. If you paid a CDSC when you sold your shares,
we will credit your account with the amount of the CDSC paid but a new CDSC
will apply.
WAIVERS FOR CERTAIN INVESTORS Class A shares also may be purchased without an
initial sales charge or CDSC by various individuals and institutions, including:
o certain trust companies and bank trust departments investing $1 million or
more in assets over which they have full or shared investment discretion
o government entities that are prohibited from paying mutual fund sales
charges
o certain unit investment trusts and their holders reinvesting trust
distributions
o group annuity separate accounts offered to retirement plans
o employees and other associated persons or entities of Franklin Templeton
or of certain dealers
o Chilean retirement plans that meet the requirements for retirement plans
described below.
IF YOU THINK YOU MAY BE ELIGIBLE FOR A SALES CHARGE WAIVER, CALL YOUR
INVESTMENT REPRESENTATIVE OR CALL SHAREHOLDER SERVICES
AT 1-800/632-2301 FOR MORE INFORMATION.
CDSC WAIVERS The CDSC for each class generally will be waived:
o to pay account fees
o to make payments through systematic withdrawal plans, up to 1% monthly, 3%
quarterly, 6% semiannually or 12% annually depending on the frequency of your
plan
o for redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R) (not applicable to Class B)
o for IRA distributions due to death or disability or upon periodic
distributions based on life expectancy (for Class B, this applies to all
retirement plan accounts, not only IRAs)
o to return excess contributions (and earnings, if applicable) from
retirement plan accounts
o for redemptions following the death of the shareholder or beneficial owner
o for participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans (not applicable to Class B)
RETIREMENT PLANS Certain retirement plans may buy Class A shares without an
initial sales charge. To qualify, the plan must be sponsored by an employer:
o with at least 100 employees, or
o with retirement plan assets of $1 million or more, or
o that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13-month period
A CDSC may apply. Retirement plans other than SIMPLEs, SEPs, or plans that
qualify under section 401 of the tax code also must qualify under our group
investment program to buy Class A shares without an initial sales charge.
FOR MORE INFORMATION, CALL YOUR INVESTMENT REPRESENTATIVE OR
RETIREMENT PLAN SERVICES AT 1-800/527-2020.
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to
invest as a group. For sales charge purposes, the group's investments are added
together. There are certain other requirements and the group must have a purpose
other than buying fund shares at a discount.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
MINIMUM INVESTMENTS
- --------------------------------------------------------------------------
INITIAL ADDITIONAL
- --------------------------------------------------------------------------
Regular accounts $1,000 $50
- --------------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- --------------------------------------------------------------------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education
IRAs or Roth IRAs)
- --------------------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or Roth
IRAs $250 $50
- --------------------------------------------------------------------------
Broker-dealer sponsored wrap account
programs $250 $50
- --------------------------------------------------------------------------
Full-time employees, officers,
trustees and directors of
Franklin Templeton entities,
and their immediate family members
$100 $50
- --------------------------------------------------------------------------
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
the enclosed account application. Make sure you indicate the share class you
have chosen. If you do not indicate a class, we will invest your purchase in
Class A shares. To save time, you can sign up now for services you may want on
your account by completing the appropriate sections of the application (see the
next page).
BUYING SHARES
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
Make your check payable to Make your check payable to
[Insert graphic of the fund in which you are the fund in which you are
envelope] investing. investing. Include your
account number on the check.
BY MAIL Mail the check and your
signed application to Fill out the deposit slip
Investor Services. from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and your
account number.
Mail the check and deposit
slip or note to Investor
Services.
- --------------------------------------------------------------------------------
[Insert graphic of Call to receive a wire Call to receive a wire
3 wires with sparks] control number and wire control number and wire
instructions. instructions.
Mail your signed application To make a same day wire
BY WIRE to Investor Services. Please investment, please call us
include the wire control by 1:00 p.m. pacific time
1-800/632-2301 number or your new account and make sure your wire
(or 1-650/312-2000 number on the application. arrives by 3:00 p.m.
collect)
To make a same day wire
investment, please call us
by 1:00 p.m. pacific time
and make sure your wire
arrives by 3:00 p.m.
- --------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services at Call Shareholder Services at
two arrows pointing the number below, or send the number below or our
in opposite signed written instructions. automated TeleFACTS system,
directions] The TeleFACTS system cannot or send signed written
be used to open a new instructions.
BY EXCHANGE account.
(Please see page # for (Please see page # for
TeleFACTS(R) information on exchanges.) information on exchanges.)
1-800/247-1753
(around-the-clock
access)
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX
7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
the fund by automatically transferring money from your checking or savings
account each month to buy shares. The minimum investment to open an account with
an automatic investment plan is $50 ($25 for an Education IRA). To sign up,
complete the appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in Class A
or B shares of the fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your application
that you would like to receive an Automatic Payroll Deduction Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the fund in
an existing account in the same share class* of the fund or another Franklin
Templeton Fund. Initial sales charges and CDSCs will not apply if you reinvest
your distributions within 365 days. You can also have your distributions
deposited in a bank account, or mailed by check. Deposits to a bank account may
be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
*Class B and C shareholders may reinvest their distributions in Class A shares
of any Franklin Templeton money fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require a separate application and their
policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure or
application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to sell
or exchange your shares and make certain other changes to your account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class*, generally without paying any additional sales charges.
If you exchange shares held for less than six months, however, you may be
charged the difference between the initial sales charge of the two funds if the
difference is more than 0.25%. If you exchange shares from a money fund, a sales
charge may apply no matter how long you have held the shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC will
continue to be calculated from the date of your initial investment and will not
be charged at the time of the exchange. The purchase price for determining a
CDSC on exchanged shares will be the price you paid for the original shares. If
you exchange shares subject to a CDSC into a Class A money fund, the time your
shares are held in the money fund will not count towards the CDSC holding
period.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton Fund, the time your shares are held in that fund will count
towards the eight year period for automatic conversion to Class A shares.
Frequent exchanges can interfere with fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the
number and amount of exchanges you may make (please see "Market Timers" on page
[#]).
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange
into Class A without a sales charge. Advisor Class shareholders of another
Franklin Templeton Fund may also exchange into Class A shares of DynaTech Series
without any sales charge. Advisor Class shareholders who exchange their shares
for DynaTech Series Class A shares and later decide they would like to exchange
into another fund that offers Advisor Class may do so.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the fund we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
o you have changed the address on your account by phone within the last 15
days
We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the fund
against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
RETIREMENT PLANS Before you can sell shares in a Franklin Templeton Trust
Company retirement plan, you may need to complete additional forms. For
participants under age 591/2, tax penalties may apply. Call Retirement Plan
Services at 1-800/527-2020 for details.
SELLING SHARES
- -------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the dollar
value or number of shares you wish to sell. If you own
both Class A and B shares, also specify the class of
shares, otherwise we will sell your Class A shares
first. Be sure to include all necessary signatures and
any additional documents, as well as signature
guarantees if required.
A check will be mailed to the name(s) and address on
the account, or otherwise according to your written
instructions.
- -------------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or
phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your shares
by phone.
1-800/632-2301
A check will be mailed to the name(s) and address on
the account. Written instructions, with a signature
guarantee, are required to send the check to another
address or to make it payable to another person.
- -------------------------------------------------------------------------
[Insert graphic of 3 You can call or write to have redemption
wires with sparks] proceeds of $1,000 or more wired to a bank or
escrow account. See the policies above for
selling shares by mail or phone.
Before requesting a wire, please make sure we
BY WIRE have your bank account information on file. If
we do not have this information, you will need
to send written instructions with your bank's
name and address, your bank account number,
the ABA routing number, and a signature
guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- -------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you
arrows pointing in are considering.
opposite directions]
Call Shareholder Services at the number below
BY EXCHANGE or our automated TeleFACTS system, or send
signed written instructions. See the policies
TeleFACTS(R) above for selling shares by mail or phone.
1-800/247-1753
(around-the-clock If you hold share certificates, you will need
access) to return them to the fund before your
exchange can be processed.
- -------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX
7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. pacific time). Each class's NAV is calculated by dividing
its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the NAV
plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
the fund holds securities listed primarily on a foreign exchange that trades on
days when the fund is not open for business, the value of your shares may change
on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee and UGMA/UTMA accounts) because you sell some of your shares, we
may mail you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record. You will not
be charged a CDSC if your account is closed for this reason.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You will also receive the fund's financial
reports every six months. To reduce fund expenses, we try to identify related
shareholders in a household and send only one copy of the financial reports. If
you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she will also receive confirmations, account statements and other
information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The funds may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5. DynaTech Series
does not allow investments by market timers. You will be considered a market
timer if you have (i) requested an exchange out of a fund within two weeks of an
earlier exchange request, or (ii) exchanged shares out of a fund more than twice
in a calendar quarter, or (iii) exchanged shares equal to at least $5 million,
or more than 1% of a fund's net assets, or (iv) otherwise made large or frequent
exchanges. Shares under common ownership or control are combined for these
limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies and
reserve certain rights, including:
o The funds may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the funds may change its investment minimums or waive or lower
its minimums for certain purchases.
o The funds may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, each fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. from sales charges, distribution and service (12b-1) fees and
its other resources.
DYNATECH (CLASS A AND CLASS C ONLY) AND GROWTH SERIES
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
COMMISSION (%) --- 4.00 2.00
Investment under $50,000 5.00 --- ---
$50,000 but under $100,000 3.75 --- ---
$100,000 but under $250,000 2.80 --- ---
$250,000 but under $500,000 2.00 --- ---
$500,000 but under $1 million 1.60 --- ---
$1 million or more up to 1.001 --- ---
12B-1 FEE TO DEALER 0.252 1.003
INCOME, UTILITIES AND U.S. GOVERNMENT SECURITIES SERIES
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
COMMISSION (%) --- 3.00 2.00
Investment under $100,000 4.00 --- ---
$100,000 but under $250,000 3.25 --- ---
$250,000 but under $500,000 2.50 --- ---
$500,000 but under $1 million 2.00 --- ---
$1 million or more up to 0.751 --- ---
12B-1 FEE TO DEALER 0.152 0.653
A dealer commission of up to 1% may be paid on Class A NAV purchases by certain
retirement plans1 and up to 0.25% on Class A NAV purchases by certain trust
companies and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive fee
programs.
1. During the first year after purchase, dealers may not be eligible to receive
the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.25% for Growth Series and 0.15%
for the Income, Utilities and U.S. Government Securities Series from the date of
purchase. After 8 years, Class B shares convert to Class A shares and dealers
may then receive the 12b-1 fee applicable to Class A.
3. Dealers may be eligible to receive up to 0.25% for the DynaTech and Growth
Series and 0.15% for the Income, Utilities and U.S. Government Securities Series
during the first year after purchase and may be eligible to receive the full
12b-1 fee starting in the 13th month.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the funds or your account, you can write to us
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You can
also call us at one of the following numbers. For your protection and to help
ensure we provide you with quality service, all calls may be monitored or
recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- ---------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 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.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section, Washington,
DC 20549-6009. You can also visit the SEC's Internet site at http://www.sec.gov.
Investment Company Act file #811-537 FCF P
Prospectus
FRANKLIN
CUSTODIAN FUNDS, INC.
ADVISOR CLASS
INVESTMENT STRATEGY GROWTH SERIES
GROWTH
INVESTMENT STRATEGY INCOME SERIES
GROWTH & INCOME UTILITIES SERIES
INVESTMENT STRATEGY U.S. GOVERNMENT
INCOME SECURITIES SERIES
FEBRUARY 1, 1999
[Insert Franklin Templeton Ben Head]
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
THE FUNDS
[Begin callout]
Information about each fund you should know before investing
[End callout]
page # GROWTH SERIES
page # INCOME SERIES
page # UTILITIES SERIES
page # U.S. GOVERNMENT SECURITIES SERIES
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Qualified Investors
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
GROWTH SERIES
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's goal is capital appreciation.
PRINCIPAL INVESTMENTS The fund will normally invest primarily in the common
stocks of companies that are leaders in their industries. The fund's manager
looks for securities it believes offer favorable possibilities for capital
appreciation.
The fund may invest up to 40% of its assets in smaller companies, as well as in
new and emerging industries where growth is expected to be above average. From
time to time the fund may have a significant portion of its assets invested in
cash or cash equivalents. The fund generally invests less than 10% of its assets
in foreign securities.
[Begin callout]
The fund will normally invest primarily in the common stocks of companies that
are leaders in their industries.
[End callout]
TEMPORARY INVESTMENTS The managers may take a temporary defensive position when
the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment goal
because it may not invest or may invest less in common stocks of companies that
are leaders in their industries.
[Insert graphic of chart with line going up and down] MAIN RISKS
[Begin callout]
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money over
short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
industries or the securities market as a whole.
SMALL COMPANIES Investing in stocks of small companies may involve greater risk
than investing in larger company stocks. Historically, small company securities
have been more volatile in price than larger company securities, especially over
the short-term. Among the reasons for the greater price volatility are the less
certain growth prospects of smaller companies, the lower degree of liquidity in
the markets for such securities, and the greater sensitivity of smaller
companies to changing economic conditions.
Small company stocks may fluctuate independently of larger company stocks. Small
company stocks may decline in price as large company stocks rise or vice versa.
In addition, small companies may lack depth of management, they may be unable to
generate funds necessary for growth or development, or they may be developing or
marketing new products or services for which markets are not yet established and
may never become established.
While smaller companies may offer greater opportunities for capital growth than
larger, more established companies, they also involve greater risks and should
be considered speculative.
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to introduce a
new single currency, the euro, which will replace the national currency for
participating member countries. If the fund holds investments in countries with
currencies replaced by the euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and accounting
will be impacted.
Because this change to a single currency is new and untested, the establishment
of the euro may result in market volatility. For the same reason, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on the value of fund shares. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is only one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by companies
about their Year 2000 readiness. Issuers in countries outside the U.S.,
particularly in emerging markets, may not be required to make the same level of
disclosure about Year 2000 readiness as is required in the U.S. The manager, of
course, cannot audit each company and its major suppliers to verify their Year
2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the possible
loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 10 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS1,2
[Insert bar graph]
9.14% 23.79% 2.07% 26.71% 2.96% 7.10% 2.92% 38.40% 16.68% 18.85%
88 89 90 91 92 93 94 95 96 97
YEAR
[Begin callout]
Best Quarter:
Q1 '91 14.09%
Worst Quarter:
Q3 '90 -12.73%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1997
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Franklin Growth Series - Advisor Class2 18.85% 16.17% 14.30%
S&P 500(R)Index3 33.36% 20.27% 18.05%
1. As of September 30, 1998, the fund's year-to-date return was 5.68%.
2. Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class A performance, excluding the effect of
Class A's maximum initial sales charge and including the effect of the Class A
distribution and service (12b-1) fees; and (b) for periods after January 1,
1997, an actual Advisor Class figure is used reflecting a deduction of all
applicable charges and fees for that class. This blended figure assumes
reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It includes
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's expenses for the fiscal year ended
September 30, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
---------------
Maximum sales charge (load) imposed on purchases None
Exchange fee1 None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
ADVISOR CLASS
---------------
Management fees 0.46%
Distribution and service (12b-1) fees None
Other expenses 0.19%
---------------
Total annual fund operating expenses 0.65%
===============
1. There is a $5 fee for each exchange by a market timer (see page #).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
$66 $208 $362 $810
[Insert graphic of briefcase] MANAGEMENT
Franklin Investment Advisory Services, Inc. (Investment Advisory), 16 South Main
Street, Suite 303, Norwalk, Connecticut 06854, is the fund's investment manager.
Together, Investment Advisory and its affiliates manage over $208 billion in
assets.
The team responsible for the fund's management is:
VIVIAN J. PALMIERI, VICE PRESIDENT OF INVESTMENT ADVISORY Mr. Palmieri has been
a manager on the fund since 1965 and has been with the Franklin Templeton Group
since 1965.
CONRAD B. HERRMANN CFA, PORTFOLIO MANAGER OF INVESTMENT ADVISORY Mr. Herrmann
has been a manager on the fund since 1993 and has been with the Franklin
Templeton Group since 1989.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended September 30, 1998, the fund
paid 0.56% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide network
of computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the fund's
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others. The fund could
experience difficulties in effecting transactions if any of its foreign
subcustodians, or if foreign broker-dealers or foreign markets are not ready for
Year 2000.
The fund's manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the fund's ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least annually representing substantially all of its net investment income and
any net realized capital gains. The amount of this distribution will vary and
there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record date[s] for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the fund's distributions, please call 1-800/DIAL BEN.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional shares of the fund or receive them in cash. Any
capital gains the fund distributes are taxable to you as long-term capital gains
no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The tax rate on any gain from the sale or
exchange of your shares depends on how long you have held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes the fund
pays on its investments may be passed through to you as a foreign tax credit.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You should
consult your tax adviser about federal, state, local or foreign tax consequences
of your investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Advisor Class for the past two
years. This information has been audited by PricewaterhouseCoopers LLP.
ADVISOR CLASS
YEAR ENDED SEPTEMBER 30,
1998 1997(1)
------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 27.13 23.24
------------------------
Net investment income .57 .25
Net realized and unrealized gains 1.69 3.64
------------------------
Total from investment operations 2.26 3.89
------------------------
Less distributions from:
Net investment income (.52) --
Net realized gains (.24) --
------------------------
Total distributions (.76) --
------------------------
Net asset value, end of year 28.63 27.13
========================
Total return (%)(2) 8.47 16.74
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) 41,871 25,823
Ratios to average net assets: (%)
Expenses .65 .66(3)
Net investment income 2.01 1.93(3)
Portfolio turnover rate (%) .58 1.77
(1) For the period January 2, 1997 (effective date) to September 30, 1997.
(2) Total return is not annualized.
(3) Annualized.
INCOME SERIES
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's goal is to maximize income while maintaining prospects for
capital appreciation.
PRINCIPAL INVESTMENTS The fund will normally invest in a diversified portfolio
of stocks, bonds and cash equivalents. The fund seeks income by selecting
investments such as corporate, foreign and U.S. Treasury bonds, as well as
stocks with attractive dividend yields. In its search for growth opportunities,
the fund invests in common stocks of companies from a variety of industries such
as utilities, oil, gas, real estate and consumer goods.
The fund may invest up to 100% of total assets in debt securities that are below
investment grade, but it is not currently expected that the fund will invest
more than 50% of its assets in these securities. Investment grade securities are
rated in the top four ratings categories by independent rating organizations
such as Standard & Poor's Corporation (S&P) and Moody's Investors Service, Inc.
(Moody's). The fund generally invests in securities rated at least Caa by
Moody's or CCC by S&P or unrated securities the fund's manager determines are
comparable. Generally, lower rated securities pay higher yields than more highly
rated securities to compensate investors for the higher risk.
The fund may invest up to 25% of its assets in foreign securities. It ordinarily
buys foreign securities that are traded in the U.S. or American Depositary
Receipts, which are certificates typically issued by a bank or trust company
that give their holders the right to receive securities issued by a foreign or a
domestic company. The fund may also invest in preferred stocks and debt
securities that pay dividends or interest and can be converted into common
stock.
The fund's manager searches for undervalued or out-of-favor securities it
believes offer opportunities for income today and significant growth tomorrow.
It performs independent analysis of the securities being considered for the
fund's portfolio, rather than relying principally on the ratings assigned by
rating agencies. In its analysis, the manager considers a variety of factors,
including:
o the experience and managerial strength of the company;
o responsiveness to changes in interest rates and business conditions;
o debt maturity schedules and borrowing requirements;
o the company's changing financial condition and market recognition of
the change; and
o a security's relative value based on such factors as anticipated cash
flow, interest or dividend coverage, asset coverage, and earnings
prospects.
[Begin callout]
The fund will normally invest in a diversified portfolio of stocks, bonds and
cash equivalents in the U.S. and abroad.
[End callout]
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt security prices fall. The opposite
is also true: debt security prices go up when interest rates fall. Generally,
interest rates rise during times of inflation or a growing economy, and will
fall during an economic slowdown or recession. Securities with longer maturities
usually are more sensitive to interest rate changes than securities with shorter
maturities.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT This is the possibility that an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength or in a
security's credit rating may affect its value and, thus, impact the value of
fund shares.
Securities rated below investment grade, sometimes called "junk bonds,"
generally have more risk than higher-rated securities. The principal risks of
investing in these securities include:
o SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are
not as strong financially as those with higher credit ratings. These
companies are more likely to encounter financial difficulties and are more
vulnerable to changes in the economy, such as a recession or a sustained
period of rising interest rates, that could prevent them from making interest
and principal payments.
o DEFAULTED DEBT RISK. If an issuer is not paying or stops paying interest
and/or principal on its securities, payments on the securities may never
resume. These securities may be worthless and the fund could lose its entire
investment.
o VOLATILITY RISK. The prices of high yield debt securities fluctuate more
than higher-quality securities. Prices are especially sensitive to
developments affecting the company's business and to changes in the ratings
assigned by ratings organizations. Prices are often closely linked with the
company's stock prices and typically rise and fall in response to factors
that affect stock prices. In addition, the entire high yield securities
market can experience sudden and sharp price swings due to changes in
economic conditions, stock market activity, large sustained sales by major
investors, a high-profile default, or other factors. High yield securities
are also generally less liquid than higher-quality bonds. Many of these
securities do not trade frequently, and when they do trade their prices may
be significantly higher or lower than expected. At times, it may be difficult
to sell these securities promptly at an acceptable price, which may limit the
fund's ability to sell securities in response to specific economic events or
to meet redemption requests.
STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
industries or the securities market as a whole. Utility company securities are
particularly sensitive to interest rate movements: when interest rates rise, the
stock prices of these companies tend to fall.
CONVERTIBLE SECURITIES The value of convertible securities may rise and fall
with the market value of the underlying stock or, like a debt security, vary
with changes in interest rates and the credit quality of the issuer. A
convertible security tends to perform more like a stock when the underlying
stock price is high (because it is assumed it will be converted) and more like a
debt security when the underlying stock price is low (because it is assumed it
will not be converted). Because its value can be influenced by many different
factors, a convertible security is not as sensitive to interest rate changes as
a similar non-convertible debt security, and generally has less potential for
gain or loss than the underlying stock.
[Begin callout]
If a security's credit rating is downgraded or a company's financial condition
deteriorates, the price of the security will fall and so too will the fund's
share price. If interest rates rise, the value of the fund's debt securities
will also fall. This means you could lose money.
[End callout]
FOREIGN SECURITIES Securities of companies located outside the U.S. may offer
significant opportunities for gain, but they also involve additional risks that
can increase the potential for losses in the fund. Investments in American,
European and Global Depositary Receipts also involve some or all of the
following risks.
COUNTRY RISK. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund owns
which trade in that country. These movements will affect the fund's share price.
The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of the imposition of
exchange controls, expropriation, restrictions on removal of currency or other
assets, nationalization of assets and punitive taxes.
The fund's investments in developing or emerging markets are subject to all of
the risks of foreign investing generally, and have additional heightened risks
due to a lack of legal, business and social frameworks to support securities
markets. While short-term volatility in these markets can be disconcerting,
declines of 40% to 50% are not unusual.
COMPANY RISK. Foreign companies are not subject to the same accounting, auditing
and financial reporting standards and practices as U.S. companies and their
stocks may not be as liquid as stocks of similar U.S. companies. Foreign stock
exchanges, brokers and companies generally have less government supervision and
regulation than in the U.S. The fund may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies and obtaining judgments
with respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value of
what the fund owns and the fund's share price. Generally, when the U.S. dollar
rises in value against a foreign currency, an investment in that country loses
value because the currency is worth fewer U.S. dollars.
EURO On January 1, 1999, the European Monetary Union (EMU) plans to introduce a
new single currency, the euro, which will replace the national currency for
participating member countries. If the fund holds investments in countries with
currencies replaced by the euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and accounting
will be impacted.
Because this change to a single currency is new and untested, the establishment
of the euro may result in market volatility. For the same reason, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on the value of fund shares. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is only one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by companies
about their Year 2000 readiness. Issuers in countries outside the U.S.,
particularly in emerging markets, may not be required to make the same level of
disclosure about Year 2000 readiness as is required in the U.S. The manager, of
course, cannot audit each company and its major suppliers to verify their Year
2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the possible
loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 10 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS1,2
[Insert bar graph]
8.81% 12.67% -8.77% 41.15% 15.24% 21.53% -6.38% 21.29% 10.45% 17.04%
88 89 90 91 92 93 94 95 96 97
YEAR
[Begin callout]
Best Quarter:
Q1 '91 16.67%
Worst Quarter:
Q3 '90 -8.58%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1997
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Franklin Income Series - Advisor Class2 17.04% 12.28% 12.49%
S&P 500(R)Index3 33.36% 20.27% 18.05%
Lehman Bros. Gov't/Corp. Bond Index4 9.76% 7.61% 9.15%
1. As of September 30, 1998, the fund's year-to-date return was -2.18%.
2. Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class A performance, excluding the effect of
Class A's maximum initial sales charge and including the effect of the Class A
distribution and service (12b-1) fees; and (b) for periods after January 1,
1997, an actual Advisor Class figure is used reflecting a deduction of all
applicable charges and fees for that class. This blended figure assumes
reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It includes
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
4. Lehman Brothers Government/Corporate Bond Index is an unmanaged index of
fixed-rate U.S. government and foreign and domestic corporate bonds that are
rated investment grade or higher and have maturities of one year or more and at
least $50 million outstanding. One cannot invest directly in an index, nor is an
index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's expenses for the fiscal year ended
September 30, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
---------------
Maximum sales charge (load) imposed on purchases None
Exchange fee1 None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
ADVISOR CLASS
---------------
Management fees 0.45%
Distribution and service (12b-1) fees None
Other expenses 0.12%
---------------
Total annual fund operating expenses 0.57%
===============
1. There is a $5 fee for each exchange by a market timer (see page #).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
$58 $183 $318 $714
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its affiliates
manage over $208 billion in assets.
The team responsible for the fund's management is:
CHARLES B. JOHNSON, CHAIRMAN OF THE BOARD OF ADVISERS
Mr. Johnson has been a manager on the fund since 1957 and has been with the
Franklin Templeton Group since 1957.
MATTHEW F. AVERY, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Avery has been a manager on the fund since 1989 and has been with the
Franklin Templeton Group since 1987.
FREDERICK G. FROMM, VICE PRESIDENT OF ADVISERS
Mr. Fromm has been a manager on the fund since 1998 and has been with the
Franklin Templeton Group since 1992.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended September 30, 1998, the fund
paid 0.45% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide network
of computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the fund's
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others. The fund could
experience difficulties in effecting transactions if any of its foreign
subcustodians, or if foreign broker-dealers or foreign markets are not ready for
Year 2000.
The fund's manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the fund's ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least monthly, on or about the 15th day of each month, representing its net
investment income. Capital gains, if any, may be distributed annually. The
amount of these distributions will vary and there is no guarantee the fund will
pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record date[s] for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the fund's distributions, please call 1-800/DIAL BEN.
TAX CONSIDERATIONS
In general, fund distributions are taxable to you as either ordinary income or
capital gains. This is true whether you reinvest your distributions in
additional shares of the fund or receive them in cash. Any capital gains the
fund distributes are taxable to you as long-term capital gains no matter how
long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The tax rate on any gain from the sale or
exchange of your shares depends on how long you have held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes the fund
pays on its investments may be passed through to you as a foreign tax credit.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You should
consult your tax adviser about federal, state, local or foreign tax consequences
of your investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Advisor Class for the past two
years. This information has been audited by PricewaterhouseCoopers LLP.
ADVISOR
CLASS
YEAR ENDED SEPTEMBER 30,
1998 1997(1)
------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 2.48 2.34
------------------------
Net investment income .17 .14
Net realized and unrealized gains (.10) .14
------------------------
Total from investment operations .07 .28
------------------------
Less distributions from:
Net investment income (.18) (.14)
Net realized gains (.03) --
------------------------
Total distributions (.21) (.14)
------------------------
Net asset value, end of year 2.34 2.48
========================
Total return (%)(2) 2.82 12.31
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) 21,851 13,318
Ratios to average net assets: (%)
Expenses .57 .57(3)
Net investment income 7.02 7.58(3)
Portfolio turnover rate (%) 22.01 16.15
(1) For the period January 2, 1997 (effective date) to September 30, 1997.
(2) Total return is not annualized.
(3) Annualized.
UTILITIES SERIES
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's goals are capital appreciation and current income.
PRINCIPAL INVESTMENTS The fund will normally invest substantially all of its
assets in the securities of public utilities companies. These are companies that
provide electricity, natural gas, water, and communications services to the
public and companies that provide services to public utilities companies. The
manager expects that more than 50% of the fund's assets will be invested in
electric utilities securities.
The fund invests primarily in common stocks and may invest up to 25% of its
assets in debt securities. Most of the fund's debt security investments are
"investment grade." These are issues rated in the top four ratings categories by
independent rating agencies such as Standard & Poor's Corporation or Moody's
Investor Service, Inc. or, if unrated, determined by the fund's managers to be
comparable. The fund may invest in preferred stocks and convertible securities.
The fund generally invests less than 10% of its assets in foreign securities.
[Begin callout]
The fund will normally invest substantially all of its assets in the securities
of utilities companies.
[End callout]
TEMPORARY INVESTMENTS The managers may take a temporary defensive position when
the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment goals
because it will not invest or will invest less in public utilities companies.
[Insert graphic of chart with line going up and down] MAIN RISKS
UTILITIES INDUSTRY The fund's performance is closely tied to conditions
affecting the public utilities industry, which may change rapidly. Utility
company securities are particularly sensitive to interest rate movements: when
interest rates rise, the stock prices of these companies tend to fall. On-going
regulatory changes have led to greater competition in the industry and the
emergence of non-regulated providers as a significant part of the industry which
may make some companies less profitable. In addition, the industry is subject to
risks associated with 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 due to environmental and safety regulations; 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 the effects of energy
conservation and other factors affecting the level of demand for services.
STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
industries or the securities market as a whole.
[Begin callout]
Utility company securities are particularly sensitive to interest rate
movements: when interest rates rise, the stock prices of these companies tend to
fall. Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money over
short or even extended periods.
[End callout]
INTEREST RATE When interest rates rise, debt security prices fall. The opposite
is also true: debt security prices go up when interest rates fall. Generally,
interest rates rise during times of inflation or a growing economy, and will
fall during an economic slowdown or recession. Securities with longer maturities
usually are more sensitive to interest rate changes than securities with shorter
maturities.
CREDIT This is the possibility that an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength or in a
security's credit rating may affect its value and, thus, impact the value of
fund shares.
FOREIGN SECURITIES Securities of companies located outside the U.S. may offer
significant opportunities for gain, but they also involve additional risks that
can increase the potential for losses in the fund. Investments in depositary
receipts also involve some or all of the following risks.
COUNTRY RISK. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund owns
which trade in that country. These movements will affect the fund's share price.
COMPANY RISK. Foreign companies are not subject to the same accounting, auditing
and financial reporting standards and practices as U.S. companies and their
stocks may not be as liquid as stocks of similar U.S. companies. Foreign stock
exchanges, brokers and companies generally have less government supervision and
regulation than in the U.S.
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to introduce a
new single currency, the euro, which will replace the national currency for
participating member countries. If the fund holds investments in countries with
currencies replaced by the euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and accounting
will be impacted.
Because this change to a single currency is new and untested, the establishment
of the euro may result in market volatility. For the same reason, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on the value of fund shares. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is only one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by companies
about their Year 2000 readiness. Issuers in countries outside the U.S.,
particularly in emerging markets, may not be required to make the same level of
disclosure about Year 2000 readiness as is required in the U.S. The manager, of
course, cannot audit each company and its major suppliers to verify their Year
2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the possible
loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 10 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS1,2
[Insert bar graph]
11.64% 25.83% 0.38% 24.18% 9.08% 11.52% -11.69% 30.68% 2.03% 25.07%
88 89 90 91 92 93 94 95 96 97
YEAR
[Begin callout]
Best Quarter:
Q4 '97 15.06%
Worst Quarter:
Q1 '94 -9.95%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1997
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Franklin Utilities Series - Advisor 25.07% 10.43% 12.11%
Class2
S&P 500(R)Index3 33.36% 20.27% 18.05%
1. As of September 30, 1998, the fund's year-to-date return was 6.20%.
2. Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class A performance, excluding the effect of
Class A's maximum initial sales charge and including the effect of the Class A
distribution and service (12b-1) fees; and (b) for periods after January 1,
1997, an actual Advisor Class figure is used reflecting a deduction of all
applicable charges and fees for that class. This blended figure assumes
reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It includes
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's expenses for the fiscal year ended
September 30, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
---------------
Maximum sales charge (load) imposed on purchases None
Exchange fee1 None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
ADVISOR CLASS
---------------
Management fees 0.46%
Distribution and service (12b-1) fees None
Other expenses 0.17%
---------------
Total annual fund operating expenses 0.63%
===============
1. There is a $5 fee for each exchange by a market timer (see page #).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
$64 $202 $351 $786
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its affiliates
manage over $208 billion in assets.
The team responsible for the fund's management is:
SALLY EDWARDS HAFF CFA, SENIOR VICE PRESIDENT OF ADVISERS Ms. Haff has been a
manager on the fund since 1990 and has been with the Franklin Templeton Group
since 1986.
GREGORY E. JOHNSON, VICE PRESIDENT OF ADVISERS
Mr. Johnson has been a manager on the fund since 1987 and has been with the
Franklin Templeton Group since 1986.
IAN LINK CFA, VICE PRESIDENT OF ADVISERS
Mr. Link has been a manager on the fund since 1995 and has been with the
Franklin Templeton Group since 1989.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended September 30, 1998, the fund
paid 0.46% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide network
of computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the fund's
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others. The fund could
experience difficulties in effecting transactions if any of its foreign
subcustodians, or if foreign broker-dealers or foreign markets are not ready for
Year 2000.
The fund's manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the fund's ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the fund and its manager may have no control.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least quarterly in March, June, September and December representing its net
investment income. Capital gains, if any, may be distributed annually. The
amount of these distributions will vary and there is no guarantee the fund will
pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record date[s] for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the fund's distributions, please call 1-800/DIAL BEN.
TAX CONSIDERATIONS
In general, fund distributions are taxable to you as either ordinary income or
capital gains. This is true whether you reinvest your distributions in
additional shares of the fund or receive them in cash. Any capital gains the
fund distributes are taxable to you as long-term capital gains no matter how
long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The tax rate on any gain from the sale or
exchange of your shares depends on how long you have held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes the fund
pays on its investments may be passed through to you as a foreign tax credit.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You should
consult your tax adviser about federal, state, local or foreign tax consequences
of your investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Advisor Class for the past two
years. This information has been audited by PricewaterhouseCoopers LLP.
ADVISOR
CLASS
YEAR ENDED SEPTEMBER 30,
1998 1997(1)
------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 10.04 9.55
------------------------
Net investment income .58 .36
Net realized and unrealized gains 1.57 .53
------------------------
Total from investment operations 2.15 .89
------------------------
Less distributions from:
Net investment income (.54) (.40)
Net realized gains (.26) --
------------------------
Total distributions (.80) (.40)
------------------------
Net asset value, end of year 11.39 10.04
========================
Total return (%)(2) 22.20 9.61
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) 13,651 8,719
Ratios to average net assets: (%)
Expenses .63 .62(3)
Net investment income 4.93 5.33(3)
Portfolio turnover rate (%) 11.77 7.24
(1) For the period January 2, 1997 (effective date) to September 30, 1997.
(2) Total return is not annualized.
(3) Annualized.
U.S. GOVERNMENT SECURITIES SERIES
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's goal is income.
PRINCIPAL INVESTMENTS The fund will normally invest in a portfolio limited to
U.S. government securities. These securities include U.S. Treasury bonds, notes
and bills, and securities issued by U.S. government agencies. The fund currently
invests solely in Government National Mortgage Association obligations ("Ginnie
Maes"), except for its investments in U.S. Treasury securities and cash. The
fund may buy and sell Ginnie Maes on a "to-be-announced" and "delayed delivery"
basis.
Ginnie Maes represent an ownership interest in mortgage loans made by banks and
other financial institutions to finance purchases of homes. The mortgage loans
may have either fixed or adjustable interest rates. The individual loans are
packaged or "pooled" together for sale to investors. As the underlying mortgage
loans are paid off, investors receive principal and interest payments.
Ginnie Maes carry a guarantee backed by the full faith and credit of the U.S.
government. The guarantee applies only to the timely repayment of principal and
interest and not to the market prices and yields of the Ginnie Maes or to the
net asset value or performance of the fund, which will vary with changes in
interest rates and other market conditions.
[Begin callout]
The fund normally invests in a portfolio limited to U.S. government
securities. The fund currently invests solely in Ginnie Maes, except for its
investments in U.S. Treasury securities and cash.
[End callout]
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment goal
because it will not invest or will invest less in Ginnie Maes.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt security prices fall. The opposite
is also true: debt security prices go up when interest rates fall. Generally,
interest rates rise during times of inflation or a growing economy, and will
fall during an economic slowdown or recession. Securities with longer maturities
usually are more sensitive to interest rate changes than securities with shorter
maturities.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
GINNIE MAES Ginnie Maes differ from conventional debt securities because
principal is paid back over the life of the security rather than at maturity.
The fund may receive unscheduled prepayments of principal due to voluntary
prepayments, refinancing or foreclosure on the underlying mortgage loans. During
periods of declining interest rates, the volume of principal prepayments
generally increases as borrowers refinance their mortgages at lower rates. The
fund may be forced to reinvest returned principal at lower interest rates,
reducing the fund's income. For this reason, Ginnie Maes may be less effective
than other types of securities as a means of "locking in" long-term interest
rates and may have less potential for capital appreciation during periods of
falling interest rates than other investments with similar maturities. A
reduction in the anticipated rate of principal prepayments, especially during
periods of rising interest rates, may increase the effective maturity of Ginnie
Maes, making them more susceptible than other debt securities to a decline in
market value when interest rates rise. This could increase the volatility of the
fund's returns and share price.
[Begin callout]
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of the fund's debt securities will fall and so too will
the fund's shares price. This means you would lose money over short or even
extended periods. If rates fall, mortgage holders will refinance their mortgage
loans at lower interest rates, which will reduce the fund's income and yield.
[End callout]
YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is only one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by issuers
about their Year 2000 readiness. The manager, of course, cannot audit each
issuer and its major suppliers to verify their Year 2000 readiness.
If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the possible
loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 10 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS1,2
[Insert bar graph]
7.45% 13.11% 10.78% 13.71% 7.40% 6.92% -2.69% 16.73% 4.60% 9.71%
88 89 90 91 92 93 94 95 96 97
YEAR
[Begin callout]
Best Quarter:
Q2 '89 6.72%
Worst Quarter:
Q1 '94 -2.84%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1997
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Franklin U.S. Government Securities 9.71% 6.86% 8.64%
Series - Advisor Class2
Lehman Bros. Interm. Gov't Bond Index3 7.72% 6.39% 8.13%
1. As of September 30, 1998, the fund's year-to-date return was 6.19%.
2. Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class A performance, excluding the effect of
Class A's maximum initial sales charge and including the effect of the Class A
distribution and service (12b-1) fees; and (b) for periods after January 1,
1997, an actual Advisor Class figure is used reflecting a deduction of all
applicable charges and fees for that class. This blended figure assumes
reinvestment of dividends and capital gains.
3. Lehman Brothers Intermediate Government Bond Index is an unmanaged index of
fixed-rate bonds issued by the U.S. government and its agencies that are rated
investment grade or higher and have one to ten years remaining until maturity
and at least $100 million outstanding. One cannot invest directly in an index,
nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's expenses for the fiscal year ended
September 30, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
---------------
Maximum sales charge (load) imposed on purchases None
Exchange fee1 None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
ADVISOR CLASS
---------------
Management fees 0.45%
Distribution and service (12b-1) fees None
Other expenses 0.11%
---------------
Total annual fund operating expenses 0.56%
===============
1. There is a $5 fee for each exchange by a market timer (see page #).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
$57 $179 $313 $701
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its affiliates
manage over $208 billion in assets.
The team responsible for the fund's management is:
JACK LEMEIN, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Lemein has been a manager on the fund since 1984 and has been with the
Franklin Templeton Group since 1984.
T. ANTHONY COFFEY CFA, PORTFOLIO MANAGER OF ADVISERS
Mr. Coffey has been a manager on the fund since 1989 and has been with the
Franklin Templeton Group since 1989.
ROGER BAYSTON CFA, PORTFOLIO MANAGER OF ADVISERS
Mr. Bayston has been a manager on the fund since 1991 and has been with the
Franklin Templeton Group since 1991.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended September 30, 1998, the fund
paid 0.45% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide network
of computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the fund's
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others.
The fund's manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the fund's ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least monthly, on or about the 15th day of each month, representing its net
investment income. Capital gains, if any, may be distributed annually. The
amount of these distributions will vary and there is no guarantee the fund will
pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record date[s] for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the fund's distributions, please call 1-800/DIAL BEN.
TAX CONSIDERATIONS
In general, fund distributions are taxable to you as either ordinary income or
capital gains. This is true whether you reinvest your distributions in
additional shares of the fund or receive them in cash. Any capital gains the
fund distributes are taxable to you as long-term capital gains no matter how
long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The tax rate on any gain from the sale or
exchange of your shares depends on how long you have held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Non-U.S. investors may
be subject to U.S. withholding and estate tax. You should consult your tax
adviser about federal, state, local or foreign tax consequences of your
investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Advisor Class for the past two
years. This information has been audited by PricewaterhouseCoopers LLP.
ADVISOR
CLASS
YEAR ENDED SEPTEMBER 30,
1998 1997(1)
------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 6.90 6.76
------------------------
Net investment income .47 .38
Net realized and unrealized gains .10 .12
------------------------
Total from investment operations .57 .50
------------------------
Less distributions from net investment income (.47) (.36)
------------------------
Net asset value, end of year 7.00 6.90
========================
Total return (%)(2) 8.51 7.68
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) 36,308 14,469
Ratios to average net assets: (%)
Expenses .56 .56(3)
Net investment income 6.75 7.01(3)
Portfolio turnover rate (%) 25.98 1.74
(1) For the period January 2, 1997 (effective date) to September 30, 1997.
(2) Total return is not annualized.
(3) Annualized.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"] QUALIFIED INVESTORS
The following investors may qualify to buy Advisor Class shares of the funds.
o Qualified registered investment advisors or certified financial planners
with clients invested in any series of Franklin Mutual Series Fund Inc. on
October 31, 1996, or who buy through a broker-dealer or service agent who
has an agreement with Franklin Templeton Distributors, Inc.
(Distributors). Minimum investments: $1,000 initial and $50 additional.
o Broker-dealers, registered investment advisors or certified financial
planners who have an agreement with Distributors for clients participating in
comprehensive fee programs. Minimum investments: $250,000 initial ($100,000
initial for an individual client) and $25 additional.
o Officers, trustees, directors and full-time employees of Franklin
Templeton and their immediate family members. Minimum investments: $100
initial and $25 additional.
o Each series of the Franklin Templeton Fund Allocator Series. Minimum
investments: $1,000 initial and $1,000 additional.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund
[End callout]
o Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under section 501 of the tax code. Minimum
investments: $1 million initial investment in Advisor Class or Class Z shares
of any of the Franklin Templeton Funds and $25 additional.
o Accounts managed by the Franklin Templeton Group. Minimum investments: No
initial minimum and $25 additional.
o The Franklin Templeton Profit Sharing 401(k) Plan. Minimum investments:
No initial minimum and $25 additional.
o Defined contribution plans such as employer stock, bonus, pension or profit
sharing plans that meet the requirements for qualification under section 401
of the tax code, including salary reduction plans qualified under section
401(k) of the tax code, and that are sponsored by an employer (i) with at
least 10,000 employees, or (ii) with retirement plan assets of $100 million
or more. Minimum investments: No initial minimum and $25 additional.
o Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a fiduciary,
agency, advisory, custodial or similar capacity and over which the trust
companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. Minimum investments: No initial minimum and $25
additional.
o Individual investors. Minimum investments: $5 million initial and $25
additional. You may combine all of your shares in the Franklin Templeton
Funds for purposes of determining whether you meet the $5 million minimum, as
long as $1 million is in Advisor Class or Class Z shares of any of the
Franklin Templeton Funds.
o Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of an established group of 11 or more
investors. Minimum investments: $5 million initial and $25 additional. For
minimum investment purposes, the group's investments are added together. The
group may combine all of its shares in the Franklin Templeton Funds for
purposes of determining whether it meets the $5 million minimum, as long as
$1 million is in Advisor Class or Class Z shares of any of the Franklin
Templeton Funds. There are certain other requirements and the group must have
a purpose other than buying fund shares without a sales charge.
Please note that Advisor Class shares of the funds are no longer available to
retirement plans through Franklin Templeton's ValuSelect(R) program. Retirement
plans in the ValuSelect program before January 1, 1998, however, may continue to
invest in the funds' Advisor Class shares.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
the enclosed account application. To save time, you can sign up now for services
you may want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
[Insert graphic
of hands shaking]
Contact your investment Contact your investment
representative representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
Make your check payable to Make your check payable to the
[Insert graphic the fund in which you are fund in which you are
of envelope] investing. investing. Include your account
number on the check.
BY MAIL Mail the check and your Fill out the deposit slip from
signed application to your account statement. If you
Investor Services. do not have a slip, include a
note with your name, the fund
name, and your account number.
Mail the check and deposit slip
or note to Investor Services.
- --------------------------------------------------------------------------------
[Insert graphic Call to receive a wire Call to receive a wire control
of 3 lightening control number and wire number and wire instructions.
bolts] instructions.
Mail your signed application To make a same day wire
BY WIRE to Investor Services. Please investment, please call
include the wire control us by 1:00 p.m. pacific
1-800/632-2301 number or your new account time and make sure your wire
(or number on the application. arrives by 3:00 p.m.
1-650/312-2000
collect) To make a same day wire
investment, please call us
by 1:00 p.m. pacific time
and make sure your wire
arrives by 3:00 p.m.
- --------------------------------------------------------------------------------
[Insert graphic Call Shareholder Services at Call Shareholder Services at
of two arrows the number below, or send the number below, or send
pointing in signed written instructions. signed written instructions.
opposite (Please see page [#] for (Please see page [#]
directions] information on exchanges.) for information on exchanges.)
BY EXCHANGE
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX
7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
a fund by automatically transferring money from your checking or savings account
each month to buy shares. To sign up, complete the appropriate section of your
account application. DISTRIBUTION OPTIONS You may reinvest distributions you
receive from a fund in an existing account in the same share class of the fund
or in Advisor Class or Class A shares of another Franklin Templeton Fund. To
reinvest your distributions in Advisor Class shares of another Franklin
Templeton Fund, you must qualify to buy that fund's Advisor Class shares. For
distributions reinvested in Class A shares of another Franklin Templeton Fund,
initial sales charges and contingent deferred sales charges (CDSCs) will not
apply if you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require a separate application and their
policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure or
application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to sell
or exchange your shares and make certain other changes to your account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the funds to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class. You also may exchange your Advisor Class shares for Class
A shares of a fund that does not currently offer an Advisor Class (without any
sales charge)* or for Class Z shares of Franklin Mutual Series Fund Inc.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
If you do not qualify to buy Advisor Class shares of Templeton Developing
Markets Trust, Templeton Foreign Fund or Templeton Growth Fund, you also may
exchange your shares for Class A shares of those funds (without any sales
charge)* or for shares of Templeton Institutional Funds, Inc.
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee.
Frequent exchanges can interfere with fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the
number and amount of exchanges you may make (please see "Market Timers" on page
[#] ).
*If you exchange into Class A shares and you later decide you would like to
exchange into a fund that offers an Advisor Class, you may exchange your Class A
shares for Advisor Class shares if you otherwise qualify to buy the fund's
Advisor Class.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. Certain terms and
minimums apply. To sign up, complete the appropriate section of your
application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the funds we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
o you have changed the address on your account by phone within the last 15
days
We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the funds
against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
RETIREMENT PLANS Before you can sell shares in a Franklin Templeton Trust
Company retirement plan, you may need to complete additional forms. For
participants under age 591/2, tax penalties may apply. Call Retirement Plan
Services at 1-800/527-2020 for details.
SELLING SHARES
TO SELL SOME OR ALL OF YOUR SHARES
[Insert graphic
of hands shaking]
Contact your investment representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------------
[Insert graphic Send written instructions and endorsed share
of envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the dollar value or
number of shares you wish to sell. Be sure to include all
necessary signatures and any additional documents, as well as
signature guarantees if required.
A check will be mailed to the name(s) and address on the
account, or otherwise according to your written instructions.
- -------------------------------------------------------------------------------
[Insert graphic As long as your transaction is for $100,000 or
of phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and address on the
account. Written instructions, with a signature guarantee,
are required to send the check to another address or to make
it payable to another person.
- -------------------------------------------------------------------------------
[Insert graphic You can call or write to have redemption
of 3 lightening proceeds of $1,000 or more wired to a bank or
bolts] escrow account. See the policies above for
selling shares by mail or phone.
Before requesting a wire, please make sure we have your bank
account information on file. If we do not have this
information, you will need to send written instructions
BY WIRE with your bank's name and address, your bank account number,
the ABA routing number, and a signature guarantee.
Requests received in proper form by 1:00 p.m. pacific time
will be wired the next business day.
- -------------------------------------------------------------------------------
[Insert graphic Obtain a current prospectus for the fund you
of two arrows are considering.
pointing in
opposite Call Shareholder Services at the number below, or send signed
directions] written instructions. See the policies above for selling
BY EXCHANGE shares by mail or phone.
If you hold share certificates, you will need to return them
to the fund before your exchange can be processed.
- -------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX
7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE Each fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. pacific time). The NAV for Advisor Class is calculated by
dividing its net assets by the number of its shares outstanding.
The funds' assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
a fund holds securities listed primarily on a foreign exchange that trades on
days when the fund is not open for business, the value of your shares may change
on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee accounts) because you sell some of your shares, we may mail you a
notice asking you to bring the account back up to its applicable minimum
investment amount. If you choose not to do so within 30 days, we may close your
account and mail the proceeds to the address of record.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You will also receive the funds' financial
reports every six months. To reduce fund expenses, we try to identify related
shareholders in a household and send only one copy of the financial reports. If
you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she will also receive confirmations, account statements and other
information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The funds may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5. You will be
considered a market timer if you have (i) requested an exchange out of a fund
within two weeks of an earlier exchange request, or (ii) exchanged shares out of
a fund more than twice in a calendar quarter, or (iii) exchanged shares equal to
at least $5 million, or more than 1% of a fund's net assets, or (iv) otherwise
made large or frequent exchanges. Shares under common ownership or control are
combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies and
reserve certain rights, including:
o The funds may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the funds may change their investment minimums or waive or
lower their minimums for certain purchases.
o The funds may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, each fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell Advisor Class shares may
receive up to 0.25% of the amount invested. This amount is paid by Franklin
Templeton Distributors, Inc. from its own resources.
[Insert graphic of question mark]QUESTIONS
If you have any questions about the funds or your account, you can write to us
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You can
also call us at one of the following numbers. For your protection and to help
ensure we provide you with quality service, all calls may be monitored or
recorded.
HOURS (PACIFIC TIME, MONDAY
DEPARTMENT NAME TELEPHONE NUMBER THROUGH FRIDAY)
- --------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 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.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section, Washington,
DC 20549-6009. You can also visit the SEC's Internet site at http://www.sec.gov.
Investment Company Act file #811-537
Lit. Code #FCF PA
FRANKLIN
CUSTODIAN
FUNDS, INC.
CLASS A, B & C
STATEMENT OF
ADDITIONAL INFORMATION
FEBRUARY 1, 1999
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
The Franklin Custodian Funds, Inc. (the "Custodian Funds") is an open-end
management investment company consisting of the following five series: DynaTech
Series, Growth Series, Income Series, U.S. Government Securities Series and
Utilities Series. This Statement of Additional Information (SAI) is not a
prospectus. It contains information in addition to the information in the funds'
prospectus. The funds' prospectus, dated February 1, 1999, which we may amend
from time to time, contains the basic information you should know before
investing in a fund. You should read this SAI together with the funds'
prospectus.
The audited financial statements and auditor's report in the Custodian Funds'
Annual Report to Shareholders, for the fiscal year ended September 30, 1998, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies
Risks
Officers and Directors
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Bond Ratings
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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.
- ------------------------------------------------------------------------------
GOALS AND STRATEGIES
- ------------------------------------------------------------------------------
DYNATECH SERIES The fund's goal is capital appreciation. The fund will normally
invest primarily in the common stocks of companies that emphasize technological
development in fast-growing industries, as well in undervalued securities. 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 the manager believes will further the fund's
investment goal.
GROWTH SERIES The fund's goal is capital appreciation. The fund will normally
invest primarily in the common stocks of companies that are leaders in their
industries. Current income is a secondary consideration when selecting portfolio
investments. 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.
INCOME SERIES The fund's goal is to maximize income while maintaining prospects
for capital appreciation. The fund will normally invest in a diversified
portfolio of stocks, bonds and cash equivalents. 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. The fund may
invest in debt 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. 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 the manager, 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 securities." 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 the managers' discretion.
U.S. GOVERNMENT SECURITIES SERIES The fund's goal is income. The fund normally
invests in a portfolio limited to U.S. government securities. These securities
include U.S. Treasury bonds, notes and bills, and securities issued by U.S.
government agencies. The fund currently invests solely in Government National
Mortgage Association obligations ("Ginnie Maes"), except for its investments in
U.S. Treasury securities and cash. The fund's manager monitors the fund's
investments 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.
Ginnie Maes and the other securities 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. 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.
UTILITIES SERIES The fund's goals are capital appreciation and current income.
The fund will normally invest substantially all of its assets in the securities
of public utilities companies. These are companies that provide electricity,
natural gas, water, and communications services to the public and companies that
provide services to public utilities companies. The manager expects that more
than 50% of the fund's assets will be invested in electric utilities securities.
The fund invests primarily in common stocks, including, from time to time,
non-dividend paying common stocks if, in the opinion of the manager, these
securities appear to offer attractive opportunities for capital appreciation.
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
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 the manager, 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 the manager believes involve excessive
risk.
INVESTMENT STRATEGIES AND POLICIES
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. The purchaser of an equity security typically
receives an ownership interest in the company as well as certain voting rights.
The owner of an equity security may participate in a company's success through
the receipt of dividends, which are distributions of earnings by the company to
its owners. Equity security owners may also participate in a company's success
or lack of success through increases or decreases in the value of the company's
shares as traded in the public trading market for such shares. Equity securities
generally take the form of common stock or preferred stock, as well as
securities convertible into common stocks. Preferred stockholders typically
receive greater dividends but may receive less appreciation than common
stockholders and may have greater voting rights as well. Equity securities may
also include convertible securities, warrants, or rights. Warrants or rights
give the holder the right to buy a common stock at a given time for a specified
price.
DEBT SECURITIES A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures, and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value per share.
RATINGS Various investment services publish ratings of some of the debt
securities in which the funds 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 a
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. Please see the appendix
for a discussion of the ratings.
If the rating on an issue held in a 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.
ZERO COUPON AND PAY-IN-KIND BONDS Income Series 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 "The Funds' Risks - High yield securities" for more information
about these bonds.
LOAN PARTICIPATIONS Income Series 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. The manager may acquire loan
participations for the fund when it believes that over the long term
appreciation will occur. Most loan participations are illiquid and, to that
extent, will be included in the 10% limitation described under "Illiquid
securities."
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 these securities, however, carries substantially the same risks as those for
defaulted debt securities. Interest payments on these securities may be reduced,
deferred, suspended or eliminated and 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 The manager may consider such ratings in determining whether
to invest in a particular Loan, such ratings, will not be the determinative
factor in The manager analysis.
The Loans are not readily marketable and may be subject to restrictions on
resale. Participation interests in the Loans generally are not listed on any
national securities exchange or automated quotation system and no regular market
has developed for such interests. Any secondary purchases and sales of loan
participations generally are conducted in private transactions between buyers
and sellers. Many of the Loans in which the Income Series expects to purchase
interests are of a relatively large principal amount and are held by a
relatively large number of owners which, in The manager' 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.
TRADE CLAIMS Income Series 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.
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 Series, DynaTech Series and Utilities Series may invest
without restriction in foreign securities, if the investments are consistent
with their objectives and comply with their concentration and diversification
policies. The funds 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 funds may also buy the
securities of foreign issuers directly in foreign markets. DynaTech Series 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
a 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 a 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.
DEPOSITARY RECEIPTS American Depositary Receipts (ADRs) are typically issued by
a U.S. bank or trust company and evidence ownership of underlying securities
issued by a foreign corporation. European Depositary Receipts (EDRs) and Global
Depositary Receipts (GDRs) are typically issued by foreign banks or trust
companies, although they may be issued by U.S. banks or trust companies, and
evidence ownership of underlying securities issued by either a foreign or a U.S.
corporation. Generally, depositary receipts in registered form are designed for
use in the U.S. securities market and depositary receipts in bearer form are
designed for use in securities markets outside the U.S. Depositary receipts may
not necessarily be denominated in the same currency as the underlying securities
into which they may be converted.
Depositary receipts may be issued pursuant to sponsored or unsponsored programs.
In sponsored programs, an issuer has made arrangements to have its securities
traded in the form of depositary receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs, and there may not be a correlation
between such information and the market value of the depositary receipts.
Depositary receipts also involve the risks of other investments in foreign
securities, as discussed below. For purposes of the fund's investment policies,
the fund will consider its investments in depositary receipts to be investments
in the underlying 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.
ENHANCED CONVERTIBLE SECURITIES The funds, 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 funds (except U.S. Government Securities Series) 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.
STRIPPED SECURITIES U.S. Government Securities Series may buy stripped
securities that are issued or guaranteed by the U.S. Treasury or by an agency or
instrumentality of the U.S. government. Stripped securities are the separate
income and principal components of a debt security. Once the securities have
been stripped they are referred to as zero coupon securities. Their risks are
similar to those of other U.S. government securities, although they may be more
volatile. Stripped securities do not make periodic payments of interest prior to
maturity and the stripping of the interest coupons causes them to be offered at
a discount from their face amount. This results in the security being subject to
greater fluctuations in response to changing interest rates than interest-paying
securities of similar maturities.
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 Ginnie Mae 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.
ILLIQUID SECURITIES 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 a fund.
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. 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, Custodian Funds' Board has authorized each fund, except U.S.
Government Securities Series, 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 to the extent the investment
manager determines on a daily basis 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. Notwithstanding the managers' determinations
in this regard, the Board will remain responsible for such determinations and
will consider appropriate action, consistent with the fund's objectives and
policies, if the security should become illiquid after purchase. 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.
REPURCHASE AGREEMENTS 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. A
custodian bank approved by the fund's Board of Directors holds the securities
subject to resale on behalf of the fund. 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 funds, however, intend to enter into repurchase
agreements only with banks or broker-dealers that are considered creditworthy
(I.E., banks or broker-dealers that have been determined by each fund's manager
to present no serious risk of becoming involved in bankruptcy proceedings within
the time frame contemplated by the repurchase transaction). U.S. Government
Securities Series does not engage in repurchase agreements.
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. Such loans
must be secured by collateral (consisting of any combination of cash, U.S.
government securities or irrevocable letters of credit) in an amount equal (on a
daily marked-to-market basis) to the current market value of the securities
loaned. The funds retain all or a portion of the interest received on the
investment of the cash collateral or receive a fee from the borrower. The funds
will continue to receive any interest or dividends paid on any loaned securities
and will continue to have voting rights with respect to the securities. However,
as with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower fail.
OPTIONS Each fund, except U.S. Government Securities Series, may write covered
call options that trade on national securities exchanges. A call option gives
the purchaser of the option the right to buy the security from the writer of the
option at a set price during the term of the option. 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 fund receives a premium when it writes a call option. A decline in the price
of the security during the option period would offset the amount of the premium.
If a call option the fund has written is exercised, the fund incurs 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 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 of the
option.
A fund generally may terminate its obligation under an option by entering into 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.
When a fund has written an option, the fund will realize a profit from a closing
transaction if the price of the transaction is less than the premium and will
realize a loss if the price is more than the premium. 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 managers of the funds do 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 a 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, 1998, 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.
Transactions in options are generally considered "derivative securities."
INVESTMENT RESTRICTIONS
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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 a fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments 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.
THE FUNDS' RISKS
The value of your shares will increase as the value of the securities owned by
the fund increases and will decrease as the value of the fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the fund. In addition to the factors that affect the value
of any particular security that the fund owns, the value of fund shares may also
change with movements in the stock and bond markets as a whole.
INTEREST RATE RISK To the extent a fund invests in debt securities, changes in
interest rates in any country where the fund is invested will affect the value
of the fund's portfolio and its share price. Rising interest rates, which often
occur during times of inflation or a growing economy, are likely to have a
negative effect on the value of the fund's shares. Of course, interest rates
throughout the world have increased and decreased, sometimes very dramatically,
in the past. These changes are likely to occur again in the future at
unpredictable times.
HIGH YIELD SECURITIES RISK 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, The manager 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. The manager 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 The manager' judgment, analysis and experience in evaluating
the creditworthiness of an issuer. In this evaluation, The manager 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.
Certain of the high yielding, fixed-income securities in which the funds 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.
GINNIE MAE RISK Ginnie Mae 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
Ginnie Mae will generally decline. In a period of declining interest rates, it
is more likely that mortgages contained in Ginnie Mae 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
Ginnie Maes as compared to the increases experienced by noncallable debt
securities over the same periods. In addition, any premium paid on the purchase
of a Ginnie Mae will be lost if the obligation is prepaid. Of course, price
changes of Ginnie Maes 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.
FOREIGN SECURITIES RISK The value of foreign (and U.S.) securities is affected
by general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in the fund. These risks can be significantly greater for investments in
emerging markets. Many of the risks described below also apply to investments in
depositary receipts.
The political, economic and social structures of some countries in which a fund
invests may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of the imposition of
exchange controls, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, and punitive taxes.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs on
foreign securities markets are generally higher than in the U.S. The settlement
practices may be cumbersome and result in delays that may affect portfolio
liquidity. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with respect
to foreign investments in foreign courts than with respect to domestic issuers
in U.S. courts.
o Some of the countries in which the funds invest are considered developing or
emerging markets. Investments in these markets are subject to all of the
risks of foreign investing generally, and have additional and heightened
risks due to a lack of legal, business and social frameworks to support
securities markets.
Emerging markets involve additional significant risks, including:
o political and social uncertainty (for example, regional conflicts and
risk of war)
o currency exchange rate volatility
o pervasiveness of corruption and crime
o delays in settling portfolio transactions
o risk of loss arising out of the system of share registration and custody
o comparatively smaller and less liquid than developed markets
o dependency upon foreign economic assistance and international trade
o less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the U.S.
All of these factors make developing market equity and fixed-income securities'
prices generally more volatile than securities issued in developed countries.
CURRENCY RISK Some of the funds' investments may be denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value of
what a fund owns and a fund's share price. Generally, when the U.S. dollar rises
in value against a foreign currency, an investment in that country loses value
because that currency is worth fewer U.S. dollars.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. The transition and the elimination
of currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect on
the fund, the fund's manager and its affiliated services providers are taking
steps that they believe are reasonably designed to address the euro issue.
REPURCHASE AGREEMENT RISK The use of repurchase agreements involves certain
risks. For example, if the other party to the agreement defaults on its
obligation to repurchase the underlying security at a time when the value of the
security has declined, the fund may incur a loss upon disposition of the
security. If the other party to the agreement becomes insolvent and subject to
liquidation or reorganization under the bankruptcy code or other laws, a court
may determine that the underlying security is collateral for a loan by the fund
not within the control of the fund, and therefore the realization by the fund on
the collateral may be automatically stayed. Finally, it is possible that the
fund may not be able to substantiate its interest in the underlying security and
may be deemed an unsecured creditor of the other party to the agreement. While
the manager acknowledges these risks, it is expected that if repurchase
agreements are otherwise deemed useful to the fund, these risks can be
controlled through careful monitoring procedures.
OFFICERS AND DIRECTORS
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The funds have a board of directors. The board is responsible for the overall
management of the Custodian Funds, including general supervision and review of
each fund's investment activities. The board, in turn, elects the officers of
the Custodian Funds who are responsible for administering each fund's day-to-day
operations. The board also monitors each fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
POSITIONS AND PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS OFFICES WITH THE FUND DURING THE PAST FIVE YEARS
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Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
Director
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Director
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 51 of the investment companies in the Franklin Templeton
Group of Funds.
Edith E. Holiday (46)
3239 38th Street, N.W.
Washington, DC 20016
Director
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and H.J.
Heinz Company (packaged foods and allied products) (1994-present); director or
trustee, as the case may be, of 25 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and Trustee
(1993-1997), 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).
*Charles B. Johnson (66)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Director
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. and Franklin Templeton Services, Inc.; officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of Franklin Resources,
Inc. and of 50 of the investment companies in the Franklin Templeton Group of
Funds.
*Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Director
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 53 of
the investment companies in the Franklin Templeton Group of Funds.
Gordon S. Macklin (70)
8212 Burning Tree Road
Bethesda, MD 20817
Director
Director, Fund American Enterprises Holdings, Inc., MCI WorldCom, MedImmune,
Inc. (biotechnology), Spacehab, Inc. (aerospace services) and Real 3D
(software); director or trustee, as the case may be, of 49 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman,
White River Corporation (financial services) and Hambrecht and Quist Group
(investment banking), and President, National Association of Securities Dealers,
Inc.
*Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc., 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 53 of the
investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief 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.; Executive Vice President and Chief Financial Officer, Franklin Advisers,
Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and Franklin
Investment Advisory Services, Inc.; President and Director, Franklin Templeton
Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some of
the other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee, as the case may be, of 53 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal Officer
and Chief Operating Officer, Franklin Investment Advisory Services, Inc.; and
officer of 53 of the investment companies in the Franklin Templeton Group of
Funds.
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32 of
the investment companies in the Franklin Templeton Group of Funds.
Brian E. Lorenz (59)
One North Lexington Avenue
White Plains, NY 10001-1700
Secretary
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.
* This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
The Custodian Funds pay noninterested board members $1,550 per month plus $1,500
per meeting attended. Noninterested board members may also serve as directors or
trustees of other funds in the Franklin Templeton Group of Funds and may receive
fees from these funds for their services. The fees payable to noninterested
board members by the Custodian Funds are subject to reductions resulting from
fee caps limiting the amount of fees payable to board members who serve on other
boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the Custodian
Funds and by other funds in the Franklin Templeton Group of Funds.
TOTAL FEES NUMBER OF BOARDS IN
RECEIVED TOTAL FEES RECEIVED THE FRANKLIN
FROM THE FROM THE FRANKLIN TEMPLETON GROUP OF
NAME CUSTODIAN TEMPLETON GROUP OF FUNDS ON WHICH EACH
FUNDS(1) FUNDS(2) SERVES(3)
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Harris J. Ashton ..... $29,476 $344,642 49
S. Joseph Fortunato .. 28,844 361,562 51
Edith Holiday ........ 20,704 72,875 25
Gordon S. Macklin .... 30,072 337,292 49
(1)For the fiscal year ended September 30, 1998. During the period from October
1, 1997, through May 31, 1998, fees at the rate of $1,350 per month plus $1,300
per meeting attended were in effect.
(2)For the calendar year ended December 31, 1997.
(3)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 54 registered investment companies, with approximately 168 U.S. based
funds or series.
Noninterested board members 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 funds or other funds in the Franklin
Templeton Group of Funds. Certain officers or board members who are shareholders
of Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED Franklin Advisers, Inc. is the manager of the
funds, except for Growth Series. Growth Series' manager is Franklin
Investment Advisory, Inc. Each manager is wholly owned by Franklin Resources,
Inc. (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.
The managers provide investment research and portfolio management services, and
selects the securities for the funds to buy, hold or sell. The managers also
select the brokers who execute the funds' portfolio transactions. The managers
provide periodic reports to the board, which reviews and supervises the
managers' investment activities. To protect the funds, the managers and their
officers, directors and employees are covered by fidelity insurance.
The managers and their affiliates manage numerous other investment companies and
accounts. Each 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 manager on behalf of the funds. Similarly, with respect to the
funds, the managers are not obligated to recommend, buy or sell, or to refrain
from recommending, buying or selling any security that the managers and access
persons, as defined by applicable federal securities laws, may buy or sell for
their own account or for the accounts of any other fund. The managers are not
obligated to refrain from investing in securities held by the funds or other
funds they manage. Of course, any transactions for the accounts of the managers
and other access persons will be made in compliance with the funds' code of
ethics.
Under the funds' code of ethics, employees of the Franklin Templeton Group who
are access persons may 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 and statements must be sent to a compliance officer;
(iii) all brokerage accounts must be disclosed on an annual basis; and (iv)
access persons involved in preparing and making investment decisions must, in
addition to (i), (ii) and (iii) 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.
MANAGEMENT FEES Each fund pays the manager a fee equal to a monthly rate of:
o 5/96 of 1% of the value of net assets up to and including $100 million; 1/24
of 1% of the value of net assets over $100 million and not over $250 million;
o 9/240 of 1% of the value of net assets over $250 million and not over $10
billion;
o 11/300 of 1% of the value of net assets over $10 billion and not over $12.50
billion;
o 7/200 of 1% of the value of net assets over $12.5 billion and not over $15
billion;
o 1/30 of 1% of the value of net assets over $15 billion and not over $17.5
billion;
o 19/600 of 1% of the value of net assets over $17.5 billion and not over $20
billion; and
o 3/100 of 1% of the value of net assets in excess of $20 billion.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of the
funds' shares pays its proportionate share of the fee.
For the last three fiscal years ended September 30, the funds paid the following
management fees:
Management Fees Paid ($)
- ------------------------------------------------------------------------------
1998 1997 1996
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DynaTech Series 1,166,790 840,480 601,568
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Growth Series 8,291,109 6,295,304 4,329,460
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Utilities Series 9,617,382 9,987,693 12,335,820
- ------------------------------------------------------------------------------
Income Series 40,167,205 35,364,027 30,075,761
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U.S. Government 42,190,481 44,411,776 48,138,799
Securities Series
- ------------------------------------------------------------------------------
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the managers to provide certain administrative
services and facilities for the funds. FT Services is wholly owned by Resources
and is an affiliate of the funds' manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The managers pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended September 30, the manager paid FT
Services the following administration fees:
Administration Fees Paid ($)
- -------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------
DynaTech Series 309,337 210,734
- -------------------------------------------------------------------------
Growth Series 1,913,636 1,567,377
- -------------------------------------------------------------------------
Utilities Series 2,127,219 2,210,121
- -------------------------------------------------------------------------
Income Series 7,226,547 6,381,600
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U.S. Government Securities
Series 7,561,475 7,950,675
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SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the funds' shareholder servicing agent and acts as
the funds' transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.
For its services, Investor Services receives a fixed fee per account. The 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 funds. The amount of reimbursements
for these services per benefit plan participant fund account per year may not
exceed the per account fee payable by the funds to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the funds' securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105,
is the Custodian Funds' independent auditor. The auditor gives an opinion on the
financial statements included in the Custodian Funds' Annual Report to
Shareholders and reviews the Custodian Funds' registration statement filed with
the U.S. Securities and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
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The manager selects brokers and dealers to execute the funds' 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 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 is negotiated between
the 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 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
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 manager may pay certain brokers commissions that are higher than those
another broker may charge, if the 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 manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the 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 manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the funds. They
must, however, be of value to the manager in carrying out its overall
responsibilities to its clients.
Since most purchases by the U.S. Government Securities Series are principal
transactions at net prices, the U.S. Government Securities Series incurs little
or no brokerage costs. 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 manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the 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 manager and its affiliates may use this research and
data in their investment advisory capacities with other clients. If the funds'
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 funds' portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when a fund tenders portfolio securities pursuant to a tender-offer
solicitation. To recapture brokerage for the benefit of a 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
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 funds and one or more other
investment companies or clients supervised by the 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 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
funds are concerned. In other cases it is possible that the ability to
participate in volume transactions may improve execution and reduce transaction
costs to the funds.
During the last three fiscal years ended September 30, the funds paid the
following brokerage commissions:
Brokerage Commissions ($)
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
DynaTech Series 27,869 11,855 18,930
- -------------------------------------------------------------------------------
Growth Series 187,647 78,178 105,528
- -------------------------------------------------------------------------------
Utilities Series 811,152 1,146,668 1,525,621
- -------------------------------------------------------------------------------
Income Series 549,013 848,922 1,220,342
- -------------------------------------------------------------------------------
U.S. Government
Securities Series -0- -0- -0-
- -------------------------------------------------------------------------------
[As of September 30, 1998, the funds did not own securities of its regular
broker-dealers].
DISTRIBUTIONS AND TAXES
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The funds calculate dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in the distribution and service (Rule 12b-1) fees of each class.
The funds do not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME. The funds receive income generally in
the form of dividends and interest on their investments. This income, less
expenses incurred in the operation of a fund, constitute 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 funds may derive capital gains and losses in
connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in a fund. Any net capital gains realized by a fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. The funds, other than the U.S.
Government Securities Series, are authorized to invest in foreign currency
denominated securities. Most foreign exchange gains realized on the sale of debt
instruments are treated as ordinary income by a fund. Similarly, 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.
A fund may be subject to foreign withholding taxes on income from certain of its
foreign securities. If more than 50% of a fund's total assets at the end of the
fiscal year are invested in securities of foreign corporations, a fund may elect
to pass-through to you your pro rata share of foreign taxes paid by the fund. If
this election is made, the year-end statement you receive from a fund will show
more taxable income than was actually distributed to you. However, you will be
entitled to either deduct your share of such taxes in computing your taxable
income or claim a foreign tax credit for such taxes against your U.S. federal
income tax. A fund will provide you with the information necessary to complete
your individual income tax return if it makes this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The funds will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, you may have designated and distributed to
you 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 your investment
in a fund.
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 Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As regulated investment companies,
the funds generally pay no federal income tax on the income and gains they
distribute to you. The Board reserves the right not to maintain the
qualification of a fund as a regulated investment company if it determines 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 fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS. In order to avoid federal excise taxes,
the Internal Revenue Code requires a fund to distribute to you by December 31 of
each year, at a minimum, the following amounts:
o 98% of its taxable ordinary income earned during the calendar year;
o 98% of its capital gain net income earned during the twelve month period
ending October 31; and
o 100% of any undistributed amounts from the prior year.
Each fund intends to declare and pay these amounts in December (or in January
that are treated by you as received in December) to avoid these excise taxes,
but can give no assurances that its distributions will be sufficient to
eliminate all taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your fund
shares, or exchange your shares in one fund for shares in another Franklin
Templeton fund, the IRS will require that you report a gain or loss on your
redemption or exchange. If you hold your shares as a capital asset, the gain or
loss that you realize will be capital gain or loss. 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.
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. If you redeem some or all of your shares in a fund, and then
reinvest the sales proceeds in such fund or in another Franklin Templeton fund
within 90 days of purchasing the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. You will be
required by the IRS to report gain or loss on the redemption of your original
shares in a fund. In so doing, all or a portion of the sales charge that you
paid for your original shares in a fund will be excluded from your tax basis in
the shares sold (for the purpose of determining gain or loss upon the sale of
such shares). The portion of the sales charge excluded 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.
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 the fund. Investments 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.
The rules on exclusion of this income are different for corporations.
DIVIDENDS RECEIVED DEDUCTION FOR CORPORATIONS. As a corporate shareholder, you
should note that 23.34% of the dividends paid by the DynaTech Series, 46.92% of
the dividends paid by the Growth Series, 25.92% of the dividends paid by the
Income Series and 88.24% of the dividends paid by the Utilities Series for the
most recent fiscal 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 only with respect to
dividends designated by a fund as eligible for such treatment. All dividends
(included the deducted portion) must be included in your alternative minimum
taxable income calculations. Because the U.S. Government Securities Series'
income consists of interest rather than dividends, no portion of its
distributions will generally be eligible for the intercorporate
dividends-received deduction. None of the dividends paid by the U.S. Government
Securities Series for the most recent calendar year qualified for such
deduction, and it is anticipated that none of the current year's dividends will
so qualify.
INVESTMENT IN COMPLEX SECURITIES. The funds may invest in complex securities.
Such investments may be subject to numerous special and complex tax rules. These
rules could affect whether gains and losses recognized by a fund are treated as
ordinary income or capital gain, accelerate the recognition of income to a fund
and/or defer a fund's ability to recognize losses and, in limited cases, subject
a fund to U.S. federal income tax on income from certain of its foreign
securities. In turn, these rules may affect the amount, timing or character of
the income distributed to you by a fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
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Each fund is a diversified series of Custodian Funds, an open-end management
investment company, commonly called a mutual fund. Custodian Funds was organized
as a Delaware corporation in 1947, reincorporated as a Maryland corporation in
1979, and is registered with the SEC.
The funds currently offer four classes of shares, Class A, Class B, Class C and
Advisor Class, except the DynaTech Series which offers two classes of shares,
Class A and Class C. Before January 1, 1999, Class A shares were designated
Class I and Class C shares were designated Class II. The Growth, Income, U.S.
Government Securities and Utilities Series began offering Class B shares on
January 1, 1999. The funds may offer additional classes of shares in the future.
The full title of each class is:
o DynaTech Series - Class A
o DynaTech Series - Class C
o Income Series - Class A
o Income Series - Class B
o Income Series - Class C
o Income Series - Advisor Class
o Utilities Series - Class A
o Utilities Series - Class B
o Utilities Series - Class C
o Utilities Series - Advisor Class
o Growth Series - Class A
o Growth Series - Class B
o Growth Series - Class C
o Growth Series - Advisor Class
o U.S. Government Securities Series - Class A
o U.S. Government Securities Series - Class B
o U.S. Government Securities Series - Class C
o U.S. Government Securities Series - Advisor Class
Shares of each class represent proportionate interests in each fund's assets. On
matters that affect the fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes 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
the Custodian Funds for matters that affect the Custodian Funds as a whole.
Additional series may be offered in the future.
Custodian Funds has noncumulative voting rights. For board member elections,
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 be called by the board to
consider the removal of a board member if requested in writing 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 the board in its
discretion.
As of November 5, 1998, the principal shareholders of the funds, 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 7.8%
FTTC Trust Services FBO
Rupert Johnson IRA
P.O. Box 7519
San Mateo, CA 94403-7519 171,574.019 11.2%
FTTC TTEE For ValuSelect
Franklin Templeton 401K
P.O. Box 2438
Rancho Cordova, CA 95741-2438 208,616.473 13.6%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 175,176.159 11.4%
Franklin Templeton Fund Allocator-
Franklin Templeton Conservative Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 85,306.752 5.5%
Franklin Templeton Fund Allocator-
Franklin Templeton Moderate Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 207,365.020 13.5%
Franklin Templeton Fund Allocator-
Franklin Templeton Growth Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 320,999.479 20.9%
UTILITIES SERIES
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- ------------------------------------------------------------------------------
ADVISOR CLASS
First Mar & Co.
101 W. Washington St.
P.O. Box 580
Marquette, MI 49855 150,934.463 11.8%
The Washington Trust Company
23 Broad St.
Westerly, RI 02891 132,668.980 10.4%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 396,390.662 31.0%
Franklin Templeton Fund Allocator-
Franklin Templeton Moderate Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 110,251.118 8.6%
Franklin Templeton Fund Allocator-
Franklin Templeton Growth Target Fund 1810
Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 296,796.689 23.2%
INCOME SERIES
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- ------------------------------------------------------------------------------
ADVISOR CLASS
FTTC TTEE For ValuSelect
Franklin Templeton 401K
P.O. Box 2438
Rancho Cordova, CA 95741-2438 2,047,177.911 22.0%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 2,514,979.615 27.0%
U.S. GOVERNMENT SECURITIES SERIES
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- ------------------------------------------------------------------------------
ADVISOR CLASS
Franklin Templeton Fund Allocator-
Franklin Templeton Conservative Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 987,255.696 19.1%
Franklin Templeton Fund Allocator-
Franklin Templeton Moderate Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 1,561,212.395 30.2%
Franklin Templeton Fund Allocator-
Franklin Templeton Growth Target Fund 1810
Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 892,758.541 17.3%
FTTC TTEE For ValuSelect
Franklin Templeton 401K
P.O. Box 2438
Rancho Cordova, CA 95741-2438 277,677.088 5.4%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 762,199.039 14.8%
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.
As of November 5, 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 A, 3,301.229 shares of Growth Series -
Advisor Class, 106.220 shares of Utilities Series - Class A, 13,335.561 shares
of DynaTech Series - Class A, 85,618.868 shares of Income Series - Class A,
4,204.823 shares of Income Series - Advisor Class, 51,358.339 shares of U.S.
Government Securities Series - Class A and 16,413.692 shares of U.S. Government
Securities Series - Advisor Class, or less than 1% of the total outstanding
Class A and Advisor Class shares of each Fund and 22,114.148 shares of Utilities
Series - Advisor Class, or less than 3% of the total outstanding Advisor Class
shares of Utilities Series. The board members may own shares in other funds in
the Franklin Templeton Group of Funds.
During the fiscal year ended September 30, 1998, legal fees and expenses of
$111,457 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.
BUYING AND SELLING SHARES
- ------------------------------------------------------------------------------
The funds continuously offers their shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with the funds. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the funds may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the funds 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.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the funds 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.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the funds we may impose a $10 charge against your account for each returned
item.
If you buy shares through the reinvestment of dividends, the shares 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.
INITIAL SALES CHARGES For the Growth and DynaTech Series, the maximum initial
sales charge is 5.75% for Class A and 1% for Class C. For the Income, Utilities
and U.S. Government Securities Series, the maximum initial sales charge is 4.25%
for Class A and 1% for Class C. There is no initial sales charge for Class B.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of the
lower sales charges for large purchases. The Franklin Templeton Funds include
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., and Templeton Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You may also combine the shares of your spouse,
children under the age of 21 or 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 (LOI). You may buy Class A shares at a reduced sales charge by
completing the letter of intent section of your account 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. By completing the letter of intent section of the application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares you
own, and we will pay or reinvest dividend and capital gain distributions on
the reserved shares according to the distribution option you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the sales
charge applicable to the amount specified in your LOI. 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. Any Class A purchases you made within 90 days before you filed your
LOI may also qualify for a retroactive reduction in the sales charge. If you
file your LOI with the fund before a change in the fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days before
you filed your LOI will be counted towards the completion of the LOI, but they
will not be entitled to a retroactive reduction 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 LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of your
total purchases, less redemptions, is more than the amount specified in your LOI
and is an amount that would qualify for a further sales charge reduction, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made. The price adjustment will be made on
purchases made within 90 days before and on those made after you filed your LOI
and will be applied towards the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount of the total
purchases.
If the amount of your total purchases, less redemptions, is less than the amount
specified in your LOI, the sales charge will be adjusted upward, depending on
the actual amount purchased (less redemptions) during the period. You will need
to send Distributors an amount equal to the difference in the actual dollar
amount of sales charge paid and the amount of sales charge that would have
applied to the total purchases if the total of the purchases had been made at
one time. Upon payment of this amount, 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, we will redeem an appropriate number of reserved shares to realize
the difference. If you redeem the total amount in your account before you
fulfill your LOI, we will deduct the additional sales charge due from the sale
proceeds and forward the balance to you.
For LOIs filed 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 LOI. These plans are not subject to the requirement to reserve 5% of
the total intended purchase or to the policy on upward adjustments in sales
charges described above, 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 LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class A
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 funds, 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, although any such plan that purchased the funds' Class A
shares at a reduced sales charge under the group purchase privilege before
February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders who chose to
reinvest their distributions in Class A shares of a fund before November 17,
1997, and to Advisor Class or Class Z shareholders of a Franklin Templeton
Fund who may reinvest their distributions in a fund's Class A shares. This
waiver category also applies to Class B and C shares.
o Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option the
Franklin Valuemark Funds or the Templeton Variable Products Series Fund. You
should contact your tax advisor for information on any tax consequences that
may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or a
Franklin Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date the CD matures,
including any rollover, or the date you redeem your money fund shares.
o 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 CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously 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.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares may also be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:
o 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.
o Any state or local government or any instrumentality, department, authority
or agency thereof that has determined a fund is a legally permissible
investment and that can only buy fund shares without paying sales charges.
Please consult your legal and investment advisors to determine if an
investment in a fund is permissible and suitable for you and the effect, if
any, of payments by the fund on arbitrage rebate calculations.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o 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
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales charge.
Retirement plans that are not qualified retirement plans (employer sponsored
pension or profit-sharing plans that qualify under section 401 of the tax code,
including 401(k), money purchase pension, profit sharing and defined benefit
plans), SIMPLEs (savings incentive match plans for employees) or SEPs (employer
sponsored simplified employee pension plans established under section 408(k) of
the tax code) must also meet the group purchase requirements described above to
be able to buy Class A shares without an initial sales charge. We may enter into
a special arrangement with a securities dealer, based on criteria established by
the funds, 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 CDSC 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.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, the 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.
The funds' Class A shares 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 A
shares may be offered with the following schedule of sales charges:
For the Growth Series and DynaTech Series:
Size of Purchase - U.S. Dollars Sales Charge (%)
- ---------------------------------------------------------------------
Under $30,000 3.0
$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:
Size of Purchase - U.S. Dollars Sales Charge (%)
- ---------------------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $100,000 2.0
$100,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge. A securities dealer who receives 90% or more of the sales charge may be
deemed an underwriter under the Securities Act of 1933, as amended. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the dealer compensation table in the funds'
prospectus.
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 A 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 A 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 A shares by certain retirement plans without an initial sales
charge: 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 rules of the National Association of Securities Dealers,
Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity discount
or letter of intent programs, a CDSC may apply on any shares you sell within 12
months of purchase. For Class C shares, a CDSC may apply if you sell your shares
within 18 months of purchase. The CDSC 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 A shares without an initial sales charge may also be
subject to a CDSC if the retirement plan is transferred out of the Franklin
Templeton Funds or terminated within 365 days of the account's initial purchase
in the Franklin Templeton Funds.
For Class B shares, there is a CDSC if you sell your shares within six years, as
described in the table below. The charge is based on the value of the shares
sold or the net asset value at the time of purchase, whichever is less.]
IF YOU SELL YOUR CLASS B SHARES
WITHIN THIS MANY YEARS AFTER BUYING THIS % IS DEDUCTED FROM
THEM YOUR PROCEEDS AS A CDSC
- --------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class will generally be waived for:
o Account fees
o Sales of Class Ashares purchased without an initial 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 funds when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February
1, 1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12% annually of
your account's net asset value depending on the frequency of your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R) (not applicable to Class B)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy (for Class
B, this applies to all retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans (not applicable to Class B)
EXCHANGE PRIVILEGE 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 invested at net asset value. Backup
withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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 funds' 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 funds' investment goals exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing 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 seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh 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.
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. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 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. 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 CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. The funds 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.
REDEMPTIONS IN KIND Each 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 Securities and Exchange
Commission (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 funds do 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.
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.
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 funds nor their
affiliates will be liable for any loss caused by your failure to cash such
checks. The funds are not responsible for tracking down uncashed checks, unless
a check is returned as undeliverable.
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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the funds are not bound to
meet any redemption request in less than the seven day period prescribed by law.
Neither the funds nor their 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 the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay certain
financial institutions that maintain omnibus accounts with the funds on behalf
of numerous beneficial owners for recordkeeping operations performed with
respect to such owners. For each beneficial owner in the omnibus account, a 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.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. 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. 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. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority to
control your account, each 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.
PRICING SHARES
- ------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria. When you sell shares, you
receive the NAV minus any applicable CDSC.
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.
The funds calculate the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, each fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. Each fund values over-the-counter portfolio securities
within the range of the most recent quoted bid and ask prices. If portfolio
securities trade both in the over-the-counter market and on a stock exchange,
each fund values them according to the broadest and most representative market
as determined by the manager.
Each fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option a
fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.
Each fund determines the value of a foreign security as of the close of trading
on the foreign exchange on which the security 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 NAV. If events materially
affecting the values of these foreign securities occur during this period, the
securities will be valued in accordance with procedures established by the
board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
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 NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, the
funds may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- ------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the funds' shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
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. Each fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the funds' shares, the net
underwriting discounts and commissions Distributors retained after allowances to
dealers, and the amounts Distributors received in connection with redemptions or
repurchases of shares for the last three fiscal years ended September 30:
AMOUNT AMOUNT RECEIVED IN
TOTAL RETAINED BY CONNECTION WITH
COMMISSIONS DISTRIBUTORS REDEMPTIONS AND
RECEIVED ($) ($) REPURCHASES ($)
------------------------------------------------------------------------------
1998
DynaTech Series 726,687 71,933 6,857
Growth Series 6,106,577 627,929 83,796
Utilities Series 1,800,127 100,078 12,642
Income Series 38,432,701 2,191,540 403,597
U.S. Government 12,066,960 756,299 111,036
Securities Series
1997
DynaTech Series 682,911 67,617 1,344
Growth Series 7,068,758 708,574 47,529
Utilities Series 1,698,314 99,703 19,661
Income Series 39,253,724 1,822,592 293,033
U.S. Government 10,252,511 620,114 56,854
Securities Series
1996
DynaTech Series 285,074 32,125 -0-
Growth Series 4,835,570 505,111 7,930
Utilities Series 3,913,659 228,611 11,242
Income Series 46,806,723 1,739,086 136,828
U.S. Government 13,160,355 834,565 23,231
Securities Series
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the funds for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution or
"Rule 12b-1" plan. Under each plan, a fund shall pay or may 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 funds, 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.
The distribution and service (12b-1) fees charged to each class are based only
on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by the Growth Series and DynaTech Series under the
Class A plan may not exceed 0.25% per year of Class A's average daily net
assets, and Income Series, Utilities and U.S. Government Securities Series under
the Class A plan may not exceed 0.15% per year of Class I's average daily net
assets, payable quarterly. All distribution expenses over this amount will be
borne by those who have incurred them.
In implementing the Class A plan, the board has determined that the annual fees
payable under the Growth Series' and DynaTech Series' Class A plans will be
equal to the sum of: (i) the amount obtained by multiplying 0.25% by the average
daily net assets represented by the fund's Class A shares 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 the fund's Class A shares 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 the Growth Series' and DynaTech Series' Class A plans. With
respect to the Income and Utilities Series, the annual fees payable under their
respective Class A 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 A 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 A shares. With respect to U.S. Government Securities Series, the annual
fees payable under its Class A plan 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 A shares and (ii) the amount obtained by
multiplying 0.05% by the average daily net assets represented by the old assets
of the fund's Class A shares. 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 A 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 A expense. This means that all Class A 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 A and, as Class A shares are sold on or
after May 1, 1994, will increase over time. Thus, as the proportion of Class A
shares purchased on or after May 1, 1994, increases in relation to outstanding
Class A shares, the expenses attributable to payments under the plan will also
increase (but will not exceed the maximum allowable under each Class A plan).
While this is the currently anticipated calculation for fees payable under the
Class A plan, the plan permits the board to allow the 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
A plan.
The Class A plan does not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
THE CLASS B AND C PLANS. Under the Class B and C plans, the DynaTech and Growth
Series pays Distributors up to 0.75% per year of the class's average daily net
assets, and Utilities Series, Income Series and U.S. Government Securities
Series pays Distributors up to 0.50% per year of the class's average daily net
assets, payable quarterly, to pay Distributors or others for providing
distribution and related services and bearing certain expenses. All distribution
expenses over this amount will be borne by those who have incurred them. The
DynaTech and Growth Series may also pay a servicing fee of up to 0.25% per year
of the class's average daily net assets and Utilities Series, Income Series and
U.S. Government Securities Series also pay a servicing fee of up to 0.15% per
year of the class's average daily net assets, payable quarterly. 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 expenses relating to each of the Class B and C plans are also used to pay
Distributors for advancing the commission costs to securities dealers with
respect to the initial sale of Class B and C shares. Further, the expenses
relating to the Class B plan may be used by Distributors to pay third party
financing entities that have provided financing to Distributors in connection
with advancing commission costs to securities dealers.
THE CLASS A, B AND C 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 manager or Distributors or other parties on behalf of the
fund, the manager or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of fund
shares within the context of Rule 12b-1 under the Investment Company Act of
1940, 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 National Association of Securities Dealers, Inc.
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 the fund 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 noninterested
members of the fund's board. The plans and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
noninterested 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 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 noninterested board
members, 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, 1998, Distributors eligible expenditures
for advertising, printing, and payments to underwriters and broker-dealers
pursuant to the plans and the amounts the fund paid Distributors under the plans
were:
DISTRIBUTORS' AMOUNT PAID BY
ELIGIBLE THE FUND ($)
EXPENSES ($)
- --------------------------------------------------------------------
DynaTech Series - Class C 106,273 62,288
Growth Series - Class C 1,736,604 1,449,870
Utilities Series - Class C 280,336 178,180
Income Series - Class A 13,604,237 11,793,854
Income Series - Class C 8,779,825 5,455,896
U.S. Government Securities 8,687,657 8,494,991
Series - Class A
U.S. Government Securities 1,937,329 999,690
Series -Class C
DYNATECH SERIES - CLASS A $
- --------------------------------------------------------------------
Advertising 10,273
Printing and mailing prospectuses 55,878
other than to current shareholders
Payments to underwriters 9,104
Payments to broker-dealers 358,659
Other --
-----------------------------
Total 433,914
GROWTH SERIES - CLASS A
- --------------------------------------------------------------------
Advertising 189,714
Printing and mailing prospectuses 277,801
other than to current shareholders
Payments to underwriters 92,335
Payments to broker-dealers 2,944,839
Other --
-----------------------------
Total 3,504,689
UTILITIES SERIES - CLASS A
- --------------------------------------------------------------------
Advertising 51,255
Printing and mailing prospectuses 307,576
other than to current shareholders
Payments to underwriters 18,922
Payments to broker-dealers 2,292,177
Other --
-----------------------------
Total 2,669,930
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 a 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 funds 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 funds 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.
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 initial 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 initial sales
charge currently in effect.
When considering the average annual total return quotations, you should keep in
mind that the maximum initial sales charge reflected in each quotation is a one
time fee charged on all direct purchases, which will have its greatest impact
during the early stages of your investment. This charge will affect actual
performance less the longer you retain your investment in the fund. The average
annual total returns for the indicated periods ended September 30, 1998, were:
- ------------------------------------------------------------------------------
CLASS A 1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
DynaTech Series -2.87% 15.11% 15.28%
- ------------------------------------------------------------------------------
Growth Series 2.01% 15.79% 13.45%
- ------------------------------------------------------------------------------
Utilities Series 16.49% 7.45% 11.20%
- ------------------------------------------------------------------------------
Income Series -2.10% 7.15% 10.89%
- ------------------------------------------------------------------------------
U.S. Government Securities Series 3.75% 5.86% 8.03%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
CLASS C 1 YEAR SINCE INCEPTION
INCEPTION DATE
- ------------------------------------------------------------------------------
DynaTech Series 0.09% 17.64% 9/16/96
- ------------------------------------------------------------------------------
Growth Series 5.32% 17.53% 5/1/95
- ------------------------------------------------------------------------------
Utilities Series 19.05% 15.09% 5/1/95
- ------------------------------------------------------------------------------
Income Series -0.44% 10.16% 5/1/95
- ------------------------------------------------------------------------------
U.S. Government Securities Series 5.77% 7.75% 5/1/95
- ------------------------------------------------------------------------------
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 initial 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 returns for the indicated periods
ended September 30, 1998, were:
- ------------------------------------------------------------------------------
CLASS A 1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
DynaTech Series -2.87% 102.12% 314.59%
- ------------------------------------------------------------------------------
Growth Series 2.01% 108.16% 253.37%
- ------------------------------------------------------------------------------
Utilities Series 16.49% 43.22% 189.16%
- ------------------------------------------------------------------------------
Income Series -2.10% 41.27% 181.15%
- ------------------------------------------------------------------------------
U.S. Government Securities Series 3.75% 32.92% 116.58%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
CLASS C 1 YEAR SINCE INCEPTION
INCEPTION DATE
- ------------------------------------------------------------------------------
DynaTech Series 0.09% 39.23% 9/16/96
- ------------------------------------------------------------------------------
Growth Series 5.32% 73.63% 5/1/95
- ------------------------------------------------------------------------------
Utilities Series 19.05% 63.27% 5/1/95
- ------------------------------------------------------------------------------
Income Series -0.44% 39.19% 5/1/95
- ------------------------------------------------------------------------------
U.S. Government Securities Series 5.77% 29.05% 5/1/95
- ------------------------------------------------------------------------------
CURRENT YIELD Current yield shows the income per share earned by a fund. It is
calculated by dividing the net investment income per share 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 yields for the 30-day period ended September 30, 1998, were:
- -----------------------------------------------------------------------
CLASS A YIELD
- -----------------------------------------------------------------------
Utilities Series 4.34%
- -----------------------------------------------------------------------
Income Series 7.31%
- -----------------------------------------------------------------------
U.S. Government Securities Series 5.98%
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------
Utilities Series 3.98%
- -----------------------------------------------------------------------
Income Series 7.10%
- -----------------------------------------------------------------------
U.S. Government Securities Series 5.64%
- -----------------------------------------------------------------------
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 value per share on the last day
of the period
CURRENT DISTRIBUTION RATE Current yield, which is calculated according to a
formula prescribed by the SEC, is not indicative of the amounts which were or
will be paid to shareholders. 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 rates for the 30-day period ended September 30, 1998, were:
- -------------------------------------------------------------------------
CLASS A DISTRIBUTION RATE
- -------------------------------------------------------------------------
Utilities Series 4.42%
- -------------------------------------------------------------------------
Income Series 7.38%
- -------------------------------------------------------------------------
U.S. Government Securities Series 6.08%
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------
Utilities Series 4.42%
- -------------------------------------------------------------------------
Income Series 7.08%
- -------------------------------------------------------------------------
U.S. Government Securities Series 5.76%
- -------------------------------------------------------------------------
VOLATILITY Occasionally statistics may be used to show a fund's volatility or
risk. Measures of volatility or risk are generally used to compare a 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 cumulative
total return, average annual total return and other measures of performance with
the substitution of net asset value for the public offering price.
Sales literature referring to the use of the funds as a potential investment for
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 funds may include in their advertising or sales material information
relating to investment goals and performance results of funds belonging to the
Franklin Templeton Group of Funds. Franklin Resources, Inc. 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 funds may
satisfy your investment goal, advertisements and other materials about the funds
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:
o Dow Jones(R) Composite Average and its component averages - a price-weighted
average of 65 stocks that trade on the New York Stock Exchange. The average
is a combination of the Dow Jones Industrial Average (30 blue-chip stocks
that are generally leaders in their industry), the Dow Jones Transportation
Average (20 transportation stocks), and the Dow Jones Utilities Average (15
utility stocks involved in the production of electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500 stocks
representing all major industries.
o The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed
on the NYSE.
o 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.
o 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.
o 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.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
o 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.
o 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.
o 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.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o 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.
o 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.
o 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:
o Hambrecht & Quist Technology Index - an unmanaged index of technology-based
companies published by Hambrecht & Quist.
o Pacific Stock Exchange Technology Index - an unmanaged index representing a
wide variety of technology-based companies ranging from established companies
to emerging growth companies.
o 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:
o Salomon Brothers Broad Bond Index or its component indices - measures yield,
price and total return for Treasury, agency, corporate and mortgage bonds.
o Lehman Brothers Aggregate Bond Index or its component indices measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o Standard & Poor's(R) Bond Indices - measures yield and price of corporate,
municipal and government bonds.
o 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 funds may include a
discussion of certain attributes or benefits to be derived from an investment in
the funds. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
1. Franklin pioneered the concept of Ginnie Mae funds, and the U.S. Government
Securities Series, with over [$9.4] billion in assets and more than [390,000]
shareholders as of September 30, 1998, 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 funds' performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in a 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, if any, 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 a 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 funds' 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 funds to calculate its figures. In
addition, there can be no assurance that the funds will continue their
performance as compared to these other averages.
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MISCELLANEOUS INFORMATION
The funds 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 a fund
cannot guarantee that these goals will be met.
Each 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 is one of the
oldest mutual fund organizations and now services more than 3 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 $208 billion in assets under management for more than 6 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 117 U.S. based open-end investment companies to the public. Each
fund may identify itself by its NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the funds are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues to
seek reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources is
also beginning to develop a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice and
data lines are limited.
ADVISOR CLASS
STATEMENT OF
ADDITIONAL INFORMATION
FEBRUARY 1, 1999
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
The Franklin Custodian Funds, Inc. (the "Custodian Funds") is an open-end
management investment company consisting of the following five series: This
Statement of Additional Information (SAI) describes the four series of
Custodian Funds offering Advisor Class shares: Growth Series, Income Series,
U.S. Government Securities Series and Utilities Series.
This SAI is not a prospectus. It contains information in addition to the
information in the funds' prospectus. The funds' prospectus, dated February 1,
1999, which we may amend from time to time, contains the basic information you
should know before investing in a fund. You should read this SAI together with
the funds' prospectus.
The audited financial statements and auditor's report in the Custodian Funds'
Annual Report to Shareholders, for the fiscal year ended September 30, 1998, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies
Risks
Officers and Directors
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
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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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GOALS AND STRATEGIES
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GROWTH SERIES The fund's goal is capital appreciation. The fund will normally
invest primarily in the common stocks of companies that are leaders in their
industries. Current income is a secondary consideration when selecting portfolio
investments. 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.
INCOME SERIES The fund's goal is to maximize income while maintaining prospects
for capital appreciation. The fund will normally invest in a diversified
portfolio of stocks, bonds and cash equivalents. 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. The fund may
invest in debt 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. 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 the manager, 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 securities." 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 the managers' discretion.
U.S. GOVERNMENT SECURITIES SERIES The fund's goal is income. The fund normally
invests in a portfolio limited to U.S. government securities. These securities
include U.S. Treasury bonds, notes and bills, and securities issued by U.S.
government agencies. The fund currently invests solely in Government National
Mortgage Association obligations ("Ginnie Maes"), except for its investments in
U.S. Treasury securities and cash. The fund's manager monitors the fund's
investments 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.
Ginnie Maes and the other securities 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. 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.
UTILITIES SERIES The fund's goals are capital appreciation and current income.
The fund will normally invest substantially all of its assets in the securities
of public utilities companies. These are companies that provide electricity,
natural gas, water, and communications services to the public and companies that
provide services to public utilities companies. The manager expects that more
than 50% of the fund's assets will be invested in electric utilities securities.
The fund invests primarily in common stocks, including, from time to time,
non-dividend paying common stocks if, in the opinion of the manager, these
securities appear to offer attractive opportunities for capital appreciation.
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
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 the manager, 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 the manager believes involve excessive
risk.
INVESTMENT STRATEGIES AND POLICIES
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. The purchaser of an equity security typically
receives an ownership interest in the company as well as certain voting rights.
The owner of an equity security may participate in a company's success through
the receipt of dividends, which are distributions of earnings by the company to
its owners. Equity security owners may also participate in a company's success
or lack of success through increases or decreases in the value of the company's
shares as traded in the public trading market for such shares. Equity securities
generally take the form of common stock or preferred stock, as well as
securities convertible into common stocks. Preferred stockholders typically
receive greater dividends but may receive less appreciation than common
stockholders and may have greater voting rights as well. Equity securities may
also include convertible securities, warrants, or rights. Warrants or rights
give the holder the right to buy a common stock at a given time for a specified
price.
DEBT SECURITIES A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures, and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value per share.
RATINGS Various investment services publish ratings of some of the debt
securities in which the funds 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 a
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. Please see the appendix
for a discussion of the ratings.
If the rating on an issue held in a 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.
ZERO COUPON AND PAY-IN-KIND BONDS Income Series 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 "The Funds' Risks - High yield securities" for more information
about these bonds.
LOAN PARTICIPATIONS Income Series 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. The manager may acquire loan
participations for the fund when it believes that over the long term
appreciation will occur. Most loan participations are illiquid and, to that
extent, will be included in the 10% limitation described under "Illiquid
securities."
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 these securities, however, carries substantially the same risks as those for
defaulted debt securities. Interest payments on these securities may be reduced,
deferred, suspended or eliminated and 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 The manager may consider such ratings in determining whether
to invest in a particular Loan, such ratings, will not be the determinative
factor in The manager analysis.
The Loans are not readily marketable and may be subject to restrictions on
resale. Participation interests in the Loans generally are not listed on any
national securities exchange or automated quotation system and no regular market
has developed for such interests. Any secondary purchases and sales of loan
participations generally are conducted in private transactions between buyers
and sellers. Many of the Loans in which the Income Series expects to purchase
interests are of a relatively large principal amount and are held by a
relatively large number of owners which, in The manager' 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.
TRADE CLAIMS Income Series 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.
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 Series and Utilities Series may invest without restriction
in foreign securities, if the investments are consistent with their objectives
and comply with their concentration and diversification policies. The funds 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 funds may also buy the securities of foreign issuers
directly in foreign markets. 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 a 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 a 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.
DEPOSITARY RECEIPTS American Depositary Receipts (ADRs) are typically issued by
a U.S. bank or trust company and evidence ownership of underlying securities
issued by a foreign corporation. European Depositary Receipts (EDRs) and Global
Depositary Receipts (GDRs) are typically issued by foreign banks or trust
companies, although they may be issued by U.S. banks or trust companies, and
evidence ownership of underlying securities issued by either a foreign or a U.S.
corporation. Generally, depositary receipts in registered form are designed for
use in the U.S. securities market and depositary receipts in bearer form are
designed for use in securities markets outside the U.S. Depositary receipts may
not necessarily be denominated in the same currency as the underlying securities
into which they may be converted.
Depositary receipts may be issued pursuant to sponsored or unsponsored programs.
In sponsored programs, an issuer has made arrangements to have its securities
traded in the form of depositary receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs, and there may not be a correlation
between such information and the market value of the depositary receipts.
Depositary receipts also involve the risks of other investments in foreign
securities, as discussed below. For purposes of the fund's investment policies,
the fund will consider its investments in depositary receipts to be investments
in the underlying 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.
ENHANCED CONVERTIBLE SECURITIES The funds, 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 funds (except U.S. Government Securities Series) 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.
STRIPPED SECURITIES U.S. Government Securities Series may buy stripped
securities that are issued or guaranteed by the U.S. Treasury or by an agency or
instrumentality of the U.S. government. Stripped securities are the separate
income and principal components of a debt security. Once the securities have
been stripped they are referred to as zero coupon securities. Their risks are
similar to those of other U.S. government securities, although they may be more
volatile. Stripped securities do not make periodic payments of interest prior to
maturity and the stripping of the interest coupons causes them to be offered at
a discount from their face amount. This results in the security being subject to
greater fluctuations in response to changing interest rates than interest-paying
securities of similar maturities.
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 Ginnie Mae 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.
ILLIQUID SECURITIES 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 a fund.
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. 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, Custodian Funds' Board has authorized each fund, except U.S.
Government Securities Series, 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 to the extent the investment
manager determines on a daily basis 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. Notwithstanding the managers' determinations
in this regard, the Board will remain responsible for such determinations and
will consider appropriate action, consistent with the fund's objectives and
policies, if the security should become illiquid after purchase. 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.
REPURCHASE AGREEMENTS 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. A
custodian bank approved by the fund's Board of Directors holds the securities
subject to resale on behalf of the fund. 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 funds, however, intend to enter into repurchase
agreements only with banks or broker-dealers that are considered creditworthy
(I.E., banks or broker-dealers that have been determined by each fund's manager
to present no serious risk of becoming involved in bankruptcy proceedings within
the time frame contemplated by the repurchase transaction). U.S. Government
Securities Series does not engage in repurchase agreements.
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. Such loans
must be secured by collateral (consisting of any combination of cash, U.S.
government securities or irrevocable letters of credit) in an amount equal (on a
daily marked-to-market basis) to the current market value of the securities
loaned. The funds retain all or a portion of the interest received on the
investment of the cash collateral or receive a fee from the borrower. The funds
will continue to receive any interest or dividends paid on any loaned securities
and will continue to have voting rights with respect to the securities. However,
as with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower fail.
OPTIONS Each fund, except U.S. Government Securities Series, may write covered
call options that trade on national securities exchanges. A call option gives
the purchaser of the option the right to buy the security from the writer of the
option at a set price during the term of the option. 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 fund receives a premium when it writes a call option. A decline in the price
of the security during the option period would offset the amount of the premium.
If a call option the fund has written is exercised, the fund incurs 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 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 of the
option.
A fund generally may terminate its obligation under an option by entering into 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.
When a fund has written an option, the fund will realize a profit from a closing
transaction if the price of the transaction is less than the premium and will
realize a loss if the price is more than the premium. 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 managers of the funds do 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 a 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, 1998, 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.
Transactions in options are generally considered "derivative securities."
INVESTMENT RESTRICTIONS
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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, 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 a fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments 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.
THE FUNDS' RISKS
The value of your shares will increase as the value of the securities owned by
the fund increases and will decrease as the value of the fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the fund. In addition to the factors that affect the value
of any particular security that the fund owns, the value of fund shares may also
change with movements in the stock and bond markets as a whole.
INTEREST RATE RISK To the extent a fund invests in debt securities, changes in
interest rates in any country where the fund is invested will affect the value
of the fund's portfolio and its share price. Rising interest rates, which often
occur during times of inflation or a growing economy, are likely to have a
negative effect on the value of the fund's shares. Of course, interest rates
throughout the world have increased and decreased, sometimes very dramatically,
in the past. These changes are likely to occur again in the future at
unpredictable times.
HIGH YIELD SECURITIES RISK 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, The manager 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. The manager 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 The manager' judgment, analysis and experience in evaluating
the creditworthiness of an issuer. In this evaluation, The manager 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.
Certain of the high yielding, fixed-income securities in which the funds 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.
GINNIE MAE RISK Ginnie Mae 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
Ginnie Mae will generally decline. In a period of declining interest rates, it
is more likely that mortgages contained in Ginnie Mae 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
Ginnie Maes as compared to the increases experienced by noncallable debt
securities over the same periods. In addition, any premium paid on the purchase
of a Ginnie Mae will be lost if the obligation is prepaid. Of course, price
changes of Ginnie Maes 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.
FOREIGN SECURITIES RISK The value of foreign (and U.S.) securities is affected
by general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in the fund. These risks can be significantly greater for investments in
emerging markets. Many of the risks described below also apply to investments in
depositary receipts.
The political, economic and social structures of some countries in which a fund
invests may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of the imposition of
exchange controls, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, and punitive taxes.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs on
foreign securities markets are generally higher than in the U.S. The settlement
practices may be cumbersome and result in delays that may affect portfolio
liquidity. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with respect
to foreign investments in foreign courts than with respect to domestic issuers
in U.S. courts.
o Some of the countries in which the funds invest are considered developing or
emerging markets. Investments in these markets are subject to all of the
risks of foreign investing generally, and have additional and heightened
risks due to a lack of legal, business and social frameworks to support
securities markets.
Emerging markets involve additional significant risks, including:
o political and social uncertainty (for example, regional conflicts and
risk of war)
o currency exchange rate volatility
o pervasiveness of corruption and crime
o delays in settling portfolio transactions
o risk of loss arising out of the system of share registration and custody
o comparatively smaller and less liquid than developed markets dependency upon
foreign economic assistance and international trade
o less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the U.S.
All of these factors make developing market equity and fixed-income securities'
prices generally more volatile than securities issued in developed countries.
CURRENCY RISK Some of the funds' investments may be denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value of
what a fund owns and a fund's share price. Generally, when the U.S. dollar rises
in value against a foreign currency, an investment in that country loses value
because that currency is worth fewer U.S. dollars.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. The transition and the elimination
of currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect on
the fund, the fund's manager and its affiliated services providers are taking
steps that they believe are reasonably designed to address the euro issue.
REPURCHASE AGREEMENT RISK The use of repurchase agreements involves certain
risks. For example, if the other party to the agreement defaults on its
obligation to repurchase the underlying security at a time when the value of the
security has declined, the fund may incur a loss upon disposition of the
security. If the other party to the agreement becomes insolvent and subject to
liquidation or reorganization under the bankruptcy code or other laws, a court
may determine that the underlying security is collateral for a loan by the fund
not within the control of the fund, and therefore the realization by the fund on
the collateral may be automatically stayed. Finally, it is possible that the
fund may not be able to substantiate its interest in the underlying security and
may be deemed an unsecured creditor of the other party to the agreement. While
the manager acknowledges these risks, it is expected that if repurchase
agreements are otherwise deemed useful to the fund, these risks can be
controlled through careful monitoring procedures.
OFFICERS AND DIRECTORS
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The funds have a board of directors. The board is responsible for the overall
management of the Custodian Funds, including general supervision and review of
each fund's investment activities. The board, in turn, elects the officers of
the Custodian Funds who are responsible for administering each fund's day-to-day
operations. The board also monitors each fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
POSITIONS AND PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS OFFICES WITH THE FUND DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
Director
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Director
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 51 of the investment companies in the Franklin Templeton
Group of Funds.
Edith E. Holiday (46)
3239 38th Street, N.W.
Washington, DC 20016
Director
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and H.J.
Heinz Company (packaged foods and allied products) (1994-present); director or
trustee, as the case may be, of 25 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and Trustee
(1993-1997), 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).
*Charles B. Johnson (66)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Director
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. and Franklin Templeton Services, Inc.; officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of Franklin Resources,
Inc. and of 50 of the investment companies in the Franklin Templeton Group of
Funds.
*Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Director
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 53 of
the investment companies in the Franklin Templeton Group of Funds.
Gordon S. Macklin (70)
8212 Burning Tree Road
Bethesda, MD 20817
Director
Director, Fund American Enterprises Holdings, Inc., MCI WorldCom, MedImmune,
Inc. (biotechnology), Spacehab, Inc. (aerospace services) and Real 3D
(software); director or trustee, as the case may be, of 49 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman,
White River Corporation (financial services) and Hambrecht and Quist Group
(investment banking), and President, National Association of Securities Dealers,
Inc.
*Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc., 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 53 of the
investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief 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.; Executive Vice President and Chief Financial Officer, Franklin Advisers,
Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and Franklin
Investment Advisory Services, Inc.; President and Director, Franklin Templeton
Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some of
the other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee, as the case may be, of 53 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal Officer
and Chief Operating Officer, Franklin Investment Advisory Services, Inc.; and
officer of 53 of the investment companies in the Franklin Templeton Group of
Funds.
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32 of
the investment companies in the Franklin Templeton Group of Funds.
Brian E. Lorenz (59)
One North Lexington Avenue
White Plains, NY 10001-1700
Secretary
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.
* This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
The Custodian Funds pay noninterested board members $1,550 per month plus $1,500
per meeting attended. Noninterested board members may also serve as directors or
trustees of other funds in the Franklin Templeton Group of Funds and may receive
fees from these funds for their services. The fees payable to noninterested
board members by the Custodian Funds are subject to reductions resulting from
fee caps limiting the amount of fees payable to board members who serve on other
boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the Custodian
Funds and by other funds in the Franklin Templeton Group of Funds.
TOTAL FEES NUMBER OF BOARDS IN
RECEIVED TOTAL FEES RECEIVED THE FRANKLIN
FROM THE FROM THE FRANKLIN TEMPLETON GROUP OF
NAME CUSTODIAN TEMPLETON GROUP OF FUNDS ON WHICH EACH
FUNDS(1) FUNDS(2) SERVES(3)
- --------------------------------------------------------------------------------
Harris J. Ashton ...... $29,476 $344,642 49
S. Joseph Fortunato ... 28,844 361,562 51
Edith Holiday ......... 20,704 72,875 25
Gordon S. Macklin ..... 30,072 337,292 49
(1)For the fiscal year ended September 30, 1998. During the period from October
1, 1997, through May 31, 1998, fees at the rate of $1,350 per month plus $1,300
per meeting attended were in effect.
(2)For the calendar year ended December 31, 1997.
(3)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 54 registered investment companies, with approximately 168 U.S. based
funds or series.
Noninterested board members 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 funds or other funds in the Franklin
Templeton Group of Funds. Certain officers or board members who are shareholders
of Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- ------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED Franklin Advisers, Inc. is the manager of the
funds, except for Growth Series. Growth Series' manager is Franklin
Investment Advisory, Inc. Each manager is wholly owned by Franklin Resources,
Inc. (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.
The managers provide investment research and portfolio management services, and
selects the securities for the funds to buy, hold or sell. The managers also
select the brokers who execute the funds' portfolio transactions. The managers
provide periodic reports to the board, which reviews and supervises the
managers' investment activities. To protect the funds, the managers and their
officers, directors and employees are covered by fidelity insurance.
The managers and their affiliates manage numerous other investment companies and
accounts. Each 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 manager on behalf of the funds. Similarly, with respect to the
funds, the managers are not obligated to recommend, buy or sell, or to refrain
from recommending, buying or selling any security that the managers and access
persons, as defined by applicable federal securities laws, may buy or sell for
their own account or for the accounts of any other fund. The managers are not
obligated to refrain from investing in securities held by the funds or other
funds they manage. Of course, any transactions for the accounts of the managers
and other access persons will be made in compliance with the funds' code of
ethics.
Under the funds' code of ethics, employees of the Franklin Templeton Group who
are access persons may 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 and statements must be sent to a compliance officer;
(iii) all brokerage accounts must be disclosed on an annual basis; and (iv)
access persons involved in preparing and making investment decisions must, in
addition to (i), (ii) and (iii) 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.
MANAGEMENT FEES Each fund pays the manager a fee equal to a monthly rate of:
o 5/96 of 1% of the value of net assets up to and including $100 million;
o 1/24 of 1% of the value of net assets over $100 million and not over
$250 million;
o 9/240 of 1% of the value of net assets over $250 million and not over $10
billion;
o 11/300 of 1% of the value of net assets over $10 billion and not over $12.50
billion;
o 7/200 of 1% of the value of net assets over $12.5 billion and not over $15
billion;
o 1/30 of 1% of the value of net assets over $15 billion and not over
$17.5 billion;
o 19/600 of 1% of the value of net assets over $17.5 billion and not over $20
billion; and
o 3/100 of 1% of the value of net assets in excess of $20 billion.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of the
funds' shares pays its proportionate share of the fee.
For the last three fiscal years ended September 30, the funds paid the following
management fees:
Management Fees Paid ($)
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
Growth Series 8,291,109 6,295,304 4,329,460
- ------------------------------------------------------------------------------
Utilities Series 9,617,382 9,987,693 12,335,820
- ------------------------------------------------------------------------------
Income Series 40,167,205 35,364,027 30,075,761
- ------------------------------------------------------------------------------
U.S. Government 42,190,481 44,411,776 48,138,799
Securities Series
- ------------------------------------------------------------------------------
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the managers to provide certain administrative
services and facilities for the funds. FT Services is wholly owned by Resources
and is an affiliate of the funds' manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The managers pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended September 30, the manager paid FT
Services the following administration fees:
Administration Fees Paid ($)
- -------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------
Growth Series 1,913,636 1,567,377
- -------------------------------------------------------------------------
Utilities Series 2,127,219 2,210,121
- -------------------------------------------------------------------------
Income Series 7,226,547 6,381,600
- -------------------------------------------------------------------------
U.S. Government Securities
Series 7,561,475 7,950,675
- -------------------------------------------------------------------------
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the funds' shareholder servicing agent and acts as
the funds' transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.
For its services, Investor Services receives a fixed fee per account. The 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 funds. The amount of reimbursements
for these services per benefit plan participant fund account per year may not
exceed the per account fee payable by the funds to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the funds' securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105,
is the Custodian Funds' independent auditor. The auditor gives an opinion on the
financial statements included in the Custodian Funds' Annual Report to
Shareholders and reviews the Custodian Funds' registration statement filed with
the U.S. Securities and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
- ------------------------------------------------------------------------------
The manager selects brokers and dealers to execute the funds' 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 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 is negotiated between
the 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 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
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 manager may pay certain brokers commissions that are higher than those
another broker may charge, if the 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 manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the 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 manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the funds. They
must, however, be of value to the manager in carrying out its overall
responsibilities to its clients.
Since most purchases by the U.S. Government Securities Series are principal
transactions at net prices, the U.S. Government Securities Series incurs little
or no brokerage costs. 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 manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the 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 manager and its affiliates may use this research and
data in their investment advisory capacities with other clients. If the funds'
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 funds' portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when a fund tenders portfolio securities pursuant to a tender-offer
solicitation. To recapture brokerage for the benefit of a 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
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 funds and one or more other
investment companies or clients supervised by the 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 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
funds are concerned. In other cases it is possible that the ability to
participate in volume transactions may improve execution and reduce transaction
costs to the funds.
During the last three fiscal years ended September 30, the funds paid the
following brokerage commissions:
Brokerage Commissions ($)
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Growth Series 187,647 78,178 105,528
- -------------------------------------------------------------------------------
Utilities Series 811,152 1,146,668 1,525,621
- -------------------------------------------------------------------------------
Income Series 549,013 848,922 1,220,342
- -------------------------------------------------------------------------------
U.S. Government
Securities Series -0- -0- -0-
- -------------------------------------------------------------------------------
[As of September 30, 1998, the funds did not own securities of its regular
broker-dealers].
DISTRIBUTIONS AND TAXES
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The funds calculate dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in the distribution and service (Rule 12b-1) fees of each class.
The funds do not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME. The funds receive income generally in
the form of dividends and interest on their investments. This income, less
expenses incurred in the operation of a fund, constitute 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 funds may derive capital gains and losses in
connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in a fund. Any net capital gains realized by a fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. The funds, other than the U.S.
Government Securities Series, are authorized to invest in foreign currency
denominated securities. Most foreign exchange gains realized on the sale of debt
instruments are treated as ordinary income by a fund. Similarly, 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.
A fund may be subject to foreign withholding taxes on income from certain of its
foreign securities. If more than 50% of a fund's total assets at the end of the
fiscal year are invested in securities of foreign corporations, a fund may elect
to pass-through to you your pro rata share of foreign taxes paid by the fund. If
this election is made, the year-end statement you receive from a fund will show
more taxable income than was actually distributed to you. However, you will be
entitled to either deduct your share of such taxes in computing your taxable
income or claim a foreign tax credit for such taxes against your U.S. federal
income tax. A fund will provide you with the information necessary to complete
your individual income tax return if it makes this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The funds will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, you may have designated and distributed to
you 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 your investment
in a fund.
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 Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As regulated investment companies,
the funds generally pay no federal income tax on the income and gains they
distribute to you. The Board reserves the right not to maintain the
qualification of a fund as a regulated investment company if it determines 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 fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS. In order to avoid federal excise taxes,
the Internal Revenue Code requires a fund to distribute to you by December 31 of
each year, at a minimum, the following amounts:
o 98% of its taxable ordinary income earned during the calendar year;
o 98% of its capital gain net income earned during the twelve month period
ending October 31; and
o 100% of any undistributed amounts from the prior year.
Each fund intends to declare and pay these amounts in December (or in January
that are treated by you as received in December) to avoid these excise taxes,
but can give no assurances that its distributions will be sufficient to
eliminate all taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your fund
shares, or exchange your shares in one fund for shares in another Franklin
Templeton fund, the IRS will require that you report a gain or loss on your
redemption or exchange. If you hold your shares as a capital asset, the gain or
loss that you realize will be capital gain or loss. 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.
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.
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 the fund. Investments 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.
The rules on exclusion of this income are different for corporations.
DIVIDENDS RECEIVED DEDUCTION FOR CORPORATIONS. As a corporate shareholder, you
should note that 46.92% of the dividends paid by the Growth Series, 25.92% of
the dividends paid by the Income Series and 88.24% of the dividends paid by the
Utilities Series for the most recent fiscal 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 only with respect to dividends designated by a fund
as eligible for such treatment. All dividends (included the deducted portion)
must be included in your alternative minimum taxable income calculations.
Because the U.S. Government Securities Series' income consists of interest
rather than dividends, no portion of its distributions will generally be
eligible for the intercorporate dividends-received deduction. None of the
dividends paid by the U.S. Government Securities Series for the most recent
calendar year qualified for such deduction, and it is anticipated that none of
the current year's dividends will so qualify.
INVESTMENT IN COMPLEX SECURITIES. The funds may invest in complex securities.
Such investments may be subject to numerous special and complex tax rules. These
rules could affect whether gains and losses recognized by a fund are treated as
ordinary income or capital gain, accelerate the recognition of income to a fund
and/or defer a fund's ability to recognize losses and, in limited cases, subject
a fund to U.S. federal income tax on income from certain of its foreign
securities. In turn, these rules may affect the amount, timing or character of
the income distributed to you by a fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- ------------------------------------------------------------------------------
Each fund is a diversified series of Custodian Funds, an open-end management
investment company, commonly called a mutual fund. Custodian Funds was organized
as a Delaware corporation in 1947, reincorporated as a Maryland corporation in
1979, and is registered with the SEC.
The funds currently offer four classes of shares, Class A, Class C and Advisor
Class. The funds may offer additional classes of shares in the future. The full
title of each class is:
o Income Series - Class A
o Income Series - Class B
o Income Series - Class C
o Income Series - Advisor Class
o Utilities Series - Class A
o Utilities Series - Class B
o Utilities Series - Class C
o Utilities Series - Advisor Class
o Growth Series - Class A
o Growth Series - Class B
o Growth Series - Class C
o Growth Series - Advisor Class
o U.S. Government Securities Series - Class A
o U.S. Government Securities Series - Class B
o U.S. Government Securities Series - Class C
o U.S. Government Securities Series - Advisor Class
Shares of each class represent proportionate interests in each fund's assets. On
matters that affect the fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes 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
the Custodian Funds for matters that affect the Custodian Funds as a whole.
Additional series may be offered in the future.
Custodian Funds has noncumulative voting rights. For board member elections,
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 be called by the board to
consider the removal of a board member if requested in writing 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 the board in its
discretion.
As of November 5, 1998, the principal shareholders of the funds, 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 7.8%
FTTC Trust Services FBO
Rupert Johnson IRA
P.O. Box 7519
San Mateo, CA 94403-7519 171,574.019 11.2%
FTTC TTEE For ValuSelect
Franklin Templeton 401K
P.O. Box 2438
Rancho Cordova, CA 95741-2438 208,616.473 13.6%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 175,176.159 11.4%
Franklin Templeton Fund Allocator-
Franklin Templeton Conservative Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 85,306.752 5.5%
Franklin Templeton Fund Allocator-
Franklin Templeton Moderate Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 207,365.020 13.5%
Franklin Templeton Fund Allocator- Franklin Templeton Growth Target Fund 1810
Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 320,999.479 20.9%
UTILITIES SERIES
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- ------------------------------------------------------------------------------
ADVISOR CLASS
First Mar & Co.
101 W. Washington St.
P.O. Box 580
Marquette, MI 49855 150,934.463 11.8%
The Washington Trust Company
23 Broad St.
Westerly, RI 02891 132,668.980 10.4%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 396,390.662 31.0%
Franklin Templeton Fund Allocator-
Franklin Templeton Moderate Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 110,251.118 8.6%
Franklin Templeton Fund Allocator-
Franklin Templeton Growth Target Fund 1810
Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 296,796.689 23.2%
INCOME SERIES
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- ------------------------------------------------------------------------------
ADVISOR CLASS
FTTC TTEE For ValuSelect
Franklin Templeton 401K
P.O. Box 2438
Rancho Cordova, CA 95741-2438 2,047,177.911 22.0%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 2,514,979.615 27.0%
U.S. GOVERNMENT SECURITIES SERIES
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- ------------------------------------------------------------------------------
ADVISOR CLASS
Franklin Templeton Fund Allocator-
Franklin Templeton Conservative Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 987,255.696 19.1%
Franklin Templeton Fund Allocator-
Franklin Templeton Moderate Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 1,561,212.395 30.2%
Franklin Templeton Fund Allocator-
Franklin Templeton Growth Target Fund 1810
Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 892,758.541 17.3%
FTTC TTEE For ValuSelect
Franklin Templeton 401K
P.O. Box 2438
Rancho Cordova, CA 95741-2438 277,677.088 5.4%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 762,199.039 14.8%
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.
As of November 5, 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 A, 3,301.229 shares of Growth Series -
Advisor Class, 106.220 shares of Utilities Series - Class A, 13,335.561 shares
of DynaTech Series - Class A, 85,618.868 shares of Income Series - Class A,
4,204.823 shares of Income Series - Advisor Class, 51,358.339 shares of U.S.
Government Securities Series - Class A and 16,413.692 shares of U.S. Government
Securities Series - Advisor Class, or less than 1% of the total outstanding
Class A and Advisor Class shares of each Fund and 22,114.148 shares of Utilities
Series - Advisor Class, or less than 3% of the total outstanding Advisor Class
shares of Utilities Series. The board members may own shares in other funds in
the Franklin Templeton Group of Funds.
During the fiscal year ended September 30, 1998, legal fees and expenses of
$111,457 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.
- ------------------------------------------------------------------------------
BUYING AND SELLING SHARES
The funds continuously offers their shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with the funds. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the funds may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the funds 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.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the funds 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.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the funds we may impose a $10 charge against your account for each returned
item.
If you buy shares through the reinvestment of dividends, the shares 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.
GROUP PURCHASES As described in the prospectus, members of a qualified group may
add the group's investments together for minimum investment purposes.
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 funds, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
DEALER COMPENSATION 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 rules of the National Association of Securities Dealers,
Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
EXCHANGE PRIVILEGE 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 invested at net asset value. Backup
withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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 funds' 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 funds' investment goals exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing 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 seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh 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.
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. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 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. When you sell your shares under a
systematic withdrawal plan, it is a taxable transaction.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. The funds 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.
REDEMPTIONS IN KIND Each 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 Securities and Exchange
Commission (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 funds do 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.
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.
GENERAL INFORMATION If dividend checks are returned to the funds 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 funds nor their
affiliates will be liable for any loss caused by your failure to cash such
checks. The funds are not responsible for tracking down uncashed checks, unless
a check is returned as undeliverable.
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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the funds are not bound to
meet any redemption request in less than the seven day period prescribed by law.
Neither the funds nor their 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 the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay certain
financial institutions that maintain omnibus accounts with the funds on behalf
of numerous beneficial owners for recordkeeping operations performed with
respect to such owners. For each beneficial owner in the omnibus account, a 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.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. 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. 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. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority to
control your account, each 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.
PRICING SHARES
- ------------------------------------------------------------------------------
When you buy and sell shares, you pay the net asset value (NAV) per share.
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.
The funds calculate the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, each fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. Each fund values over-the-counter portfolio securities
within the range of the most recent quoted bid and ask prices. If portfolio
securities trade both in the over-the-counter market and on a stock exchange,
each fund values them according to the broadest and most representative market
as determined by the manager.
Each fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option a
fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.
Each fund determines the value of a foreign security as of the close of trading
on the foreign exchange on which the security 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 NAV. If events materially
affecting the values of these foreign securities occur during this period, the
securities will be valued in accordance with procedures established by the
board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
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 NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, the
funds may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- ------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the funds' shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
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. Each fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Distributors does not receive compensation from the funds for acting as
underwriter of the funds' Advisor Class shares.
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 a 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 funds are
based on the standardized methods of computing performance mandated by the SEC.
For periods before January 2, 1997, Advisor Class standardized performance
quotations are calculated by substituting Class A performance for the relevant
time period, excluding the effect of Class A's maximum initial sales charge, and
including the effect of the distribution and service (Rule 12b-1) fees
applicable to the funds' Class A shares. For periods after January 2, 1997,
Advisor Class standardized performance quotations are calculated as described
below.
An explanation of these and other methods used by the funds 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.
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 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 initial sales
charge currently in effect.
The average annual total returns for the indicated periods ended September 30,
1998, were:
- ------------------------------------------------------------------------------
1 Year 5 Years 10 years
- ------------------------------------------------------------------------------
Growth Series 8.47% 17.26% 14.17%
- ------------------------------------------------------------------------------
Utilities Series 22.20% 8.50% 11.74%
- ------------------------------------------------------------------------------
Income Series 2.82% 8.16% 11.39%
- ------------------------------------------------------------------------------
U.S. Government Securities Series 8.51% 6.84% 8.54%
- ------------------------------------------------------------------------------
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 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 returns for the indicated periods ended
September 30, 1998, were:
- ----------------------------------------------------------------------------
1 Year 5 Years 10 years
- ----------------------------------------------------------------------------
Growth Series 8.47% 121.71% 276.42%
- ----------------------------------------------------------------------------
Utilities Series 22.20% 50.35% 203.47%
- ----------------------------------------------------------------------------
Income Series 2.82% 48.03% 194.01%
- ----------------------------------------------------------------------------
U.S. Government Securities Series 8.51% 39.24% 126.86%
- ----------------------------------------------------------------------------
CURRENT YIELD Current yield shows the income per share earned by a fund. It is
calculated by dividing the net investment income per share earned during a
30-day base period by the net asset value per share on the last day of the
period and annualizing the result. Expenses accrued for the period include any
fees charged to all shareholders of the class during the base period. The yields
for the 30-day period ended September 30, 1998, were:
- -----------------------------------------------------------------------
Yield
- -----------------------------------------------------------------------
Utilities Series 4.63%
- -----------------------------------------------------------------------
Income Series 7.78%
- -----------------------------------------------------------------------
U.S. Government Securities Series 6.35%
- -----------------------------------------------------------------------
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 net asset value per share on the last day of the period
CURRENT DISTRIBUTION RATE Current yield, which is calculated according to a
formula prescribed by the SEC, is not indicative of the amounts which were or
will be paid to shareholders. 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 net asset value. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gains, and is calculated over a different period of time. The current
distribution rates for the 30-day period ended September 30, 1998, were:
- -------------------------------------------------------------------------
Distribution Rate
- -------------------------------------------------------------------------
Utilities Series 4.73%
- -------------------------------------------------------------------------
Income Series 7.85%
- -------------------------------------------------------------------------
U.S. Government Securities Series 6.45%
- -------------------------------------------------------------------------
VOLATILITY Occasionally statistics may be used to show a fund's volatility or
risk. Measures of volatility or risk are generally used to compare a 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 Sales literature referring to the use of the funds
as a potential investment for 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 funds may include in their advertising or sales material information
relating to investment goals and performance results of funds belonging to the
Franklin Templeton Group of Funds. Franklin Resources, Inc. 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 funds may
satisfy your investment goal, advertisements and other materials about the funds
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:
o Dow Jones(R) Composite Average and its component averages - a price-weighted
average of 65 stocks that trade on the New York Stock Exchange. The average
is a combination of the Dow Jones Industrial Average (30 blue-chip stocks
that are generally leaders in their industry), the Dow Jones Transportation
Average (20 transportation stocks), and the Dow Jones Utilities Average (15
utility stocks involved in the production of electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500 stocks
representing all major industries.
o The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed
on the NYSE.
o 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.
o 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.
o 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.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
o 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.
o 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.
o 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.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o 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.
o 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.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its category.
In addition to the indices listed above, the following specific comparisons may
be appropriate:
Utilities Series may be compared to Moody's Utilities Stock Index, an unmanaged
index of utility stock performance.
Income Series and U.S. Government Securities Series may be compared to:
o Salomon Brothers Broad Bond Index or its component indices - measures yield,
price and total return for Treasury, agency, corporate and mortgage bonds.
o Lehman Brothers Aggregate Bond Index or its component indices measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o Standard & Poor's(R) Bond Indices - measures yield and price of corporate,
municipal and government bonds.
o 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 funds may include a
discussion of certain attributes or benefits to be derived from an investment in
the funds. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
1. Franklin pioneered the concept of Ginnie Mae funds, and the U.S. Government
Securities Series, with over [$9.4] billion in assets and more than [390,000]
shareholders as of September 30, 1998, 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 funds' performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in a 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, if any, 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 a 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 funds' 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 funds to calculate its figures. In
addition, there can be no assurance that the funds will continue their
performance as compared to these other averages.
- ------------------------------------------------------------------------------
MISCELLANEOUS INFORMATION
The funds 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 a fund
cannot guarantee that these goals will be met.
Each 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 is one of the
oldest mutual fund organizations and now services more than 3 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 $208 billion in assets under management for more than 6 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 117 U.S. based open-end investment companies to the public. Each
fund may identify itself by its NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the funds are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues to
seek reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources is
also beginning to develop a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice and
data lines are limited.
FRANKLIN CUSTODIAN FUNDS, INC.
File Nos.
2-11346
811-537
FORM N-1A
PART C
Other Information
Item 23 Exhibits
(a) Articles of Incorporation
(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
(b) By-Laws
(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
(c) Instruments Defining Rights of Security Holders
Not Applicable
(d) Investment Advisory Contracts
(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
(e) Underwriting Contracts
(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 Securities Dealers
(f) Bonus or Profit Sharing Contracts
Not Applicable
(g) Custodian Agreements
(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 the 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 the Registrant and Bank of New York
(v) Amendment dated February 27, 1998 to Exhibit A in the Master Custody
Agreement between the Registrant and Bank of New York dated February
16, 1996
(vi) Foreign Custody Manager Agreement between the Registrant and Bank
of New York dated July 30, 1998
(h) Other Material Contracts
(i) Subcontract for Fund Administrative Services between the
Registrant and Franklin Templeton Services, Inc., dated April 30,
1998
(i) Legal Opinion
(i) Opinion and Consent of Counsel dated November 6, 1998
(j) Other Opinions
(i) Consent of Independent Auditors
(k) Omitted Financial Statements
Not Applicable
(l) Initial Capital Agreements
(i) Letter of Understanding dated April 12, 1995
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Subscription Agreement for DynaTech Series - Class II
dated September 13, 1996
Filing: Post-Effective Amendment No. 75 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: December 31, 1996
(m) Rule 12b-1 Plan
(i) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the DynaTech Series and
Franklin/Templeton Distributors, Inc., dated May 1,
1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the Growth Series and
Franklin/Templeton Distributors, Inc., dated May 1,
1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the Income Series and
Franklin/Templeton Distributors, Inc., dated May 1,
1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iv) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the U.S. Government Securities
Series and Franklin/Templeton Distributors, Inc., dated May 1,
1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(v) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the Utilities Series and
Franklin/Templeton Distributors, Inc., dated May 1,
1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(vi) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the Utilities Series, Income
Series and U.S. Government Securities Series - Class
II and Franklin/Templeton Distributors, Inc., dated
March 30, 1995
Filing: Post-Effective Amendment No. 72 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 30, 1995
(vii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the Growth Series - Class II
and Franklin/Templeton Distributors, Inc., dated March
30, 1995
Filing: Post-Effective Amendment No. 72 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 30, 1995
(viii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the DynaTech Series - Class II
and Franklin/Templeton Distributors, Inc., dated
September 16, 1996
Filing: Post-Effective Amendment No. 75 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: December 31, 1996
(o) Rule 18f-3 Plan
(i) Multiple Class Plan for DynaTech Series Class II dated June 18,
1996
Filing: Post-Effective Amendment No. 77 to Registration
Statement on Form N-1A
File No. 2-11346
Filing Date: January 29, 1998
(ii) Multiple Class Plan for Growth Series dated June 18, 1996
Filing: Post-Effective Amendment No. 77 to Registration
Statement on Form N-1A
File No. 2-11346
Filing Date: January 29, 1998
(iii) Multiple Class Plan for Utilities Series dated June 18, 1996
Filing: Post-Effective Amendment No. 77 to Registration
Statement on Form N-1A
File No. 2-11346
Filing Date: January 29, 1998
(iv) Multiple Class Plan for Income Series dated
June 18, 1996
Filing: Post-Effective Amendment No. 77 to Registration
Statement on Form N-1A
File No. 2-11346
Filing Date: January 29, 1998
(v) Multiple Class Plan for U.S. Government Series dated
June 18, 1996
Filing: Post-Effective Amendment No. 77 to Registration
Statement on Form N-1A
File No. 2-11346
Filing Date: January 29, 1998
(p) Power of Attorney
(i) Power of Attorney dated February 16, 1995
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Certificate of Secretary dated February 16, 1995
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(27) Financial Data Schedule
(i) Financial Data Schedule for Growth Series - Class I
(ii) Financial Data Schedule for Growth Series - Class II
(iii) Financial Data Schedule for Growth Series - Advisor Class
(iv) Financial Data Schedule for Utilities Series - Class I
(v) Financial Data Schedule for Utilities Series - Class II
(vi) Financial Data Schedule for Utilities Series - Advisor Class
(vii) Financial Data Schedule for DynaTech Series - Class I
(viii) Financial Data Schedule for DynaTech Series - Class II
(ix) Financial Data Schedule for Income Series - Class I
(x) Financial Data Schedule for Income Series - Class II
(xi) Financial Data Schedule for Income Series - Advisor Class
(xii) Financial Data Schedule for U.S. Government Securities Series -
Class I
(xiii) Financial Data Schedule for U.S. Government Securities Series -
Class II
(xiv) Financial Data Schedule for U.S. Government Securities Series -
Advisor Class
Item 24 Persons Controlled by or Under Common Control with the Fund
None
Item 25 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.
Please see the By-Laws, Management, and Distribution Agreements previously filed
as exhibits and incorporated herein by reference.
Notwithstanding the provisions contained in the Registrant's By-Laws, in the
absence of authorization by the appropriate court on the merits pursuant to said
By-Laws, any indemnification under said By-Laws shall be made by Registrant only
if authorized in the manner provided by such By-Laws.
Item 26 Business and Other Connections of the Investment Adviser
The officers and directors of the Registrant's managers also serve as officers
and/or directors or trustees for (1) the advisor's corporate parent, Franklin
Resources, Inc., and/or (2) other investment companies in the Franklin Templeton
Group of Funds. In addition, Mr. Charles B. Johnson was formerly a director of
General Host Corporation. For additional information please see Part B and
Schedules A and D of Forms ADV of the Funds' investment advisors Franklin
Advisers, Inc.(SEC File 801-26292), Franklin Investment Advisory Services, Inc.
(SEC File 801-52152)incorporated herein by reference, which sets forth the
officers and directors of the investment advisor and information as to any
business, profession, vocation or employment of a substantial nature engaged in
by those officers and directors during the past two years.
Item 27 Principal Underwriters
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
b) The information required by this item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No.
8-5889)
c) Not applicable. Registrant's principal underwriter is an affiliated person of
an affiliated person of the Registrant.
Item 28 Location of Accounts and Records
The accounts, books or other documents required to be maintained by Section 31
(a) of the Investment Company Act of 1940 are kept by the Fund or its
shareholder services agent, Franklin/Templeton Investor Services, Inc., both of
whose address is 777 Mariners Island Blvd., San Mateo, California 94404-1585.
Item 29 Management Services
There are no management-related service contracts not discussed in Part A or
Part B.
Item 30 Undertakings
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of San Mateo and the State of California, on the 27th day of November,
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* Principal Executive
Charles B. Johnson Officer and Director
Dated: November 27, 1998
Martin L. Flanagan* Principal Financial Officer
Martin L. Flanagan Dated: November 27, 1998
Diomedes Loo-Tam* Principal Accounting Officer
Diomedes Loo-Tam Dated: November 27, 1998
Harris J. Ashton* Director
Harris J. Ashton Dated: November 27, 1998
S. Joseph Fortunato* Director
S. Joseph Fortunato Dated: November 27, 1998
Edith E. Holiday Director
Edith E. Holiday Dated: November 27, 1998
Rupert H. Johnson, Jr.* Director
Rupert H. Johnson, Jr. Dated: November 27, 1998
Gordon S. Macklin* Director
Gordon S. Macklin Dated: November 27, 1998
*By /s/ Larry L. Greene
Larry L. Greene, Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
FRANKLIN CUSTODIAN FUNDS
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.(a)(i) Articles of incorporation dated *
October 9, 1979
EX-99.(a)(ii) Agreement and Articles of Merger dated *
November 7, 1979
EX-99.(a)(iii) Certificate of Amendment to Articles *
of Incorporation dated October 4, 1985
EX-99.(a)(iv) Articles of Amendment dated October *
14, 1985
EX-99.(a)(v) Certificate of Amendment to Articles *
of Incorporation dated February 24,
1989
EX-99.(a)(vi) Certificate of Amendment to Articles *
of Incorporation dated March 21, 1995
EX-99.(a)(vii) Articles Supplementary to the Charter *
dated June 29, 1995
EX-99.(a)(viii) Articles Supplementary to the Charter *
dated July 19, 1996
EX-99.(a)(ix) Certificate of Correction to the *
Articles Supplementary to the Charter
dated August 22, 1996
EX-99.(a)(x) Articles Supplementary to the Charter *
dated November 4, 1996
EX-99.(a)(xi) Articles Supplementary to the Charter *
dated January 22, 1997
EX-99.(b)(i) By-Laws *
EX-99.(d)(i) Management Agreement between the *
Registrant on behalf of the DynaTech
Series and Franklin Advisers, Inc.,
dated May 1, 1994
EX-99.(d)(ii) Management Agreement between the *
Registrant on behalf of the Income
Series and Franklin Advisers, Inc.,
dated May 1, 1994
EX-99.(d)(iii) Management Agreement between the *
Registrant on behalf of the U.S.
Government Securities Series and
Franklin Advisers, Inc., dated May 1, 1994
EX-99.(d)(iv) Management Agreement between the *
Registrant on behalf of the Utilities
Series and Franklin Advisers, Inc.,
dated May 1, 1994
EX-99.(d)(v) Management Agreement between the *
Registrant on behalf of the Growth
Series and Franklin Investment
Advisory Services, Inc., dated July 1,
1997
EX-99.(e)(i) Amended and Restated Distribution *
Agreement between Registrant and
Franklin/Templeton Distributors, Inc.,
dated March 29, 1995
EX-99.(e)(ii) Forms of Dealer Agreements between Attached
Franklin/Templeton Distributors, Inc.
and Securities Dealers
EX-99.(g)(i) Master Custody Agreement between the *
Registrant and Bank of New York dated
February 16, 1996
EX-99.(g)(ii) Terminal Link Agreement between *
Registrant and Bank of New York dated
February 16, 1996
EX-99.(g)(iii) Amendment dated May 7, 1997 to the *
Master Custody Agreement dated February
16, 1996 between the Registrant and Bank
of New York
EX-99.(g)(iv) Amendment dated February 27, 1998 to Attached
Exhibit A in the Master Custody
Agreement between the Registrant and
Bank of New York dated February 16, 1996
EX-99.(g)(v) Foreign Custody Manager Agreement Attached
between the Registrant and Bank of New
York dated July 30, 1998
EX-99.(h)(i) Subcontract for Fund Administrative Attached
Services between the Registrant and
Franklin/Templeton Services, Inc.,
dated April 30, 1998
EX-99.(i)(i) Opinion and Consent of Counsel dated Attached
November 6, 1998
EX-99.(j)(i) Consent of Independent Auditors Attached
EX-99.(l)(i) Letter of Understanding dated April *
12, 1995
EX-99.(l)(ii) Subscription Agreement for DynaTech *
Series - Class II dated September 13,
1996
EX-99.(m)(i) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on behalf
of the DynaTech Series and Franklin/Templeton
Distributors, Inc., dated May 1, 1994
EX-99.(m)(ii) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on behalf
of the Growth Series and Franklin/Templeton
Distributors, Inc., dated May 1, 1994
EX-99.(m)(iii) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on behalf
of the Income Series and Franklin/Templeton
Distributors, Inc., dated May 1, 1994
EX-99.(m)(iv) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on behalf
of the U.S. Government Securities
Series and Franklin/Templeton
Distributors, Inc., dated May 1, 1994
EX-99.(m)(v) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on behalf
of the Utilities Series and
Franklin/Templeton Distributors, Inc.
dated May 1, 1994
EX-99.(m)(vi) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on behalf
of the Utilities Series, Income Series
and U.S. Government Securities Series
- Class II and Franklin/Templeton
Distributors, Inc., dated March 30, 1995
EX-99.(m)(vii) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on behalf
of the Growth Series - Class II and
Franklin/Templeton Distributors,
Inc., dated March 30, 1995
EX-99.(m)(viii) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on behalf
of the DynaTech Series - Class II and
Franklin/Templeton Distributors, Inc.,
dated September 16, 1996
EX-99.(o)(i) Multiple Class Plan for DynaTech *
Series Class II dated June 18, 1996
EX-99.(o)(ii) Multiple Class Plan for Growth Series *
dated June 18, 1996
EX-99.(o)(iii) Multiple Class Plan for Utilities *
Series dated June 18, 1996
EX-99.(o)(iv) Multiple Class Plan for Income Series *
dated June 18, 1996
EX-99.(o)(v) Multiple Class Plan for U.S. *
Government Series dated June 18, 1996
EX-99.(p)(i) Power of Attorney dated February 16, *
1995
EX-99.(p)(ii) Certificate of Secretary dated *
February 16, 1995
EX-27.(i) Financial Data Schedule for Growth Attached
Series - Class I
EX-27.(ii) Financial Data Schedule for Growth Attached
Series - Class II
EX-27.(iii) Financial Data Schedule for Growth Attached
Series - Advisor Class
EX-27.(iv) Financial Data Schedule for Utilities Attached
Series - Class I
EX-27.(v) Financial Data Schedule for Utilities Attached
Series - Class II
EX-27.(vi) Financial Data Schedule for Utilities Attached
Series - Advisor Class
EX-27.(vii) Financial Data Schedule for DynaTech Attached
Series - Class I
EX-27.(viii) Financial Data Schedule for DynaTech Attached
Series - Class II
EX-27.(ix) Financial Data Schedule for Income Attached
Series - Class I
EX-27.(x) Financial Data Schedule for Income Attached
Series - Class II
EX-27.(xi) Financial Data Schedule for Income Attached
Series - Advisor Class
EX-27.(xii) Financial Data Schedule for U.S. Attached
Government Income Fund - Class I
EX-27.(xiii) Financial Data Schedule for U.S. Attached
Government Securities Series - Class II
EX-27.(xiv) Financial Data Schedule for U.S. Attached
Government Securities Series - Advisor
Class
* Incorporated by reference
DEALER AGREEMENT
Effective: March 1, 1998
Dear Securities Dealer:
Franklin/Templeton Distributors, Inc. ("we" or "us") invites you to
participate in the distribution of shares of the Franklin Templeton
investment companies (the "Funds") for which we now or in the future serve as
principal underwriter, subject to the terms of this Agreement. We will notify
you from time to time of the Funds which are eligible for distribution and
the terms of compensation under this Agreement. This Agreement supersedes any
prior dealer agreements between us, as stated in Section 18, below.
1. LICENSING.
(a) You represent that you are (i) a member in good standing of the
National Association of Securities Dealers, Inc. ("NASD") and are presently
licensed to the extent necessary by the appropriate regulatory agency of each
jurisdiction in which you will offer and sell shares of the Funds, or (ii) a
broker, dealer or other company licensed, registered or otherwise qualified to
effect transactions in securities in a country (a "foreign country") other than
the United States of America (the "U.S.") where you will offer or sell shares of
the Funds. You agree that termination or suspension of such membership with the
NASD, or of your license to do business by any regulatory agency having
jurisdiction, at any time shall terminate or suspend this Agreement forthwith
and shall require you to notify us in writing of such action. If you are not a
member of the NASD but are a broker, dealer or other company subject to the laws
of a foreign country, you agree to conform to the Conduct Rules of the NASD.
This Agreement is in all respects subject to the Conduct Rules of the NASD,
particularly Conduct Rule 2830 of the NASD, which shall control any provision to
the contrary in this Agreement.
(b) You agree to notify us immediately in writing if at any time you are
not a member in good standing of the Securities Investor Protection Corporation
("SIPC").
2. SALES OF FUND SHARES. You may offer and sell shares of each Fund and class of
each Fund only at the public offering price which shall be applicable to, and in
effect at the time of, each transaction. The procedures relating to all orders
and the handling of them shall be subject to the terms of the applicable then
current prospectus and statement of additional information (hereafter, the
"prospectus") and new account application, including amendments, for each such
Fund and each class of such Fund, and our written instructions from time to
time. This Agreement is not exclusive, and either party may enter into similar
agreements with third parties.
3. DUTIES OF DEALER: You agree:
(a) To act as principal, or as agent on behalf of your customers, in all
transactions in shares of the Funds except as provided in Section 4 hereof. You
shall not have any authority to act as agent for the issuer (the Funds), for the
Principal Underwriter, or for any other dealer in any respect, nor will you
represent to any third party that you have such authority or are acting in such
capacity.
(b) To purchase shares only from us or from your customers.
(c) To enter orders for the purchase of shares of the Funds only from us
and only for the purpose of covering purchase orders you have already received
from your customers or for your own bona fide investment.
(d) To maintain records of all sales, redemptions and repurchases of shares
made through you and to furnish us with copies of such records on request.
(e) To distribute prospectuses and reports to your customers in compliance
with applicable legal requirements, except to the extent that we expressly
undertake to do so on your behalf.
(f) That you will not withhold placing customers' orders for shares so as
to profit yourself as a result of such withholding or place orders for shares in
amounts just below the point at which sales charges are reduced so as to benefit
from a higher sales charge applicable to an amount below the breakpoint.
(g) That if any shares confirmed to you hereunder are repurchased or
redeemed by any of the Funds within seven business days after such confirmation
of your original order, you shall forthwith refund to us the full concession,
allowed to you on such orders, including any payments we made to you from our
own resources as provided in Section 6(b) hereof with respect to such orders. We
shall forthwith pay to the appropriate Fund the share, if any, of the sales
charge we retained on such order and shall also pay to such Fund the refund of
the concession we receive from you as herein provided (other than the portion of
such concession we paid to you from our own resources as provided in Section
6(b) hereof). We shall notify you of such repurchase or redemption within a
reasonable time after settlement. Termination or suspension of this Agreement
shall not relieve you or us from the requirements of this subsection.
(h) That if payment for the shares purchased is not received within the
time customary or the time required by law for such payment, the sale may be
canceled without notice or demand and without any responsibility or liability on
our part or on the part of the Funds, or at our option, we may sell the shares
which you ordered back to the Funds, in which latter case we may hold you
responsible for any loss to the Funds or loss of profit suffered by us resulting
from your failure to make payment as aforesaid. We shall have no liability for
any check or other item returned unpaid to you after you have paid us on behalf
of a purchaser. We may refuse to liquidate the investment unless we receive the
purchaser's signed authorization for the liquidation.
(i) That you shall assume responsibility for any loss to the Funds caused
by a correction made subsequent to trade date, provided such correction was not
based on any error, omission or negligence on our part, and that you will
immediately pay such loss to the Funds upon notification.
(j) That if on a redemption which you have ordered, instructions in proper
form, including outstanding certificates, are not received within the time
customary or the time required by law, the redemption may be canceled forthwith
without any responsibility or liability on our part or on the part of any Fund,
or at our option, we may buy the shares redeemed on behalf of the Fund, in which
latter case we may hold you responsible for any loss to the Fund or loss of
profit suffered by us resulting from your failure to settle the redemption.
(k) To obtain from your customers all consents required by applicable
privacy laws to permit us, any of our affiliates or the Funds to provide you
either directly or through a service established for that purpose with
confirmations, account statements and other information about your customers'
investments in the Funds.
4. DUTIES OF DEALER: RETIREMENT ACCOUNTS. In connection with orders for the
purchase of shares on behalf of an Individual Retirement Account, Self-Employed
Retirement Plan or other retirement accounts, by mail, telephone, or wire, you
shall act as agent for the custodian or trustee of such plans (solely with
respect to the time of receipt of the application and payments), and you shall
not place such an order until you have received from your customer payment for
such purchase and, if such purchase represents the first contribution to such a
plan, the completed documents necessary to establish the plan and enrollment in
the plan. You agree to indemnify us and Franklin Templeton Trust Company and/or
Templeton Funds Trust Company as applicable for any claim, loss, or liability
resulting from incorrect investment instructions received from you which cause a
tax liability or other tax penalty.
5. CONDITIONAL ORDERS; CERTIFICATES. We will not accept from you any conditional
orders for shares of any of the Funds. Delivery of certificates or confirmations
for shares purchased shall be made by the Funds only against constructive
receipt of the purchase price, subject to deduction for your concession and our
portion of the sales charge, if any, on such sale. No certificates for shares of
the Funds will be issued unless specifically requested.
6. DEALER COMPENSATION.
(a) On each purchase of shares by you from us, the total sales charges and
your dealer concessions shall be as stated in each Fund's then current
prospectus, subject to NASD rules and applicable laws. Such sales charges and
dealer concessions are subject to reductions under a variety of circumstances as
described in the Funds' prospectuses. For an investor to obtain these
reductions, we must be notified at the time of the sale that the sale qualifies
for the reduced charge. If you fail to notify us of the applicability of a
reduction in the sales charge at the time the trade is placed, neither we nor
any of the Funds will be liable for amounts necessary to reimburse any investor
for the reduction which should have been effected.
(b) In accordance with the Funds' prospectuses, we or our affiliates may,
but are not obligated to, make payments to you from our own resources as
compensation for certain sales which are made at net asset value ("Qualifying
Sales"). If you notify us of a Qualifying Sale, we may make a contingent advance
payment up to the maximum amount available for payment on the sale. If any of
the shares purchased in a Qualifying Sale are repurchased or redeemed within
twelve months of the month of purchase, we shall be entitled to recover any
advance payment attributable to the repurchased or redeemed shares by reducing
any account payable or other monetary obligation we may owe to you or by making
demand upon you for repayment in cash. We reserve the right to withhold advances
to you, if for any reason we believe that we may not be able to recover unearned
advances from you. Termination or suspension of this Agreement shall not relieve
you or us from the requirements of this subsection.
7. REDEMPTIONS OR REPURCHASES. Redemptions or repurchases of shares of the Funds
will be made at the net asset value of such shares, less any applicable deferred
sales or redemption charges, in accordance with the applicable prospectuses.
Except as permitted by applicable law, you agree not to purchase any shares from
your customers at a price lower than the net asset value of such shares next
computed by the Funds after the purchase (the "Redemption/Repurchase Price").
You shall, however, be permitted to sell shares of the Funds for the account of
the record owner to the Funds at the Redemption/Repurchase Price for such
shares.
8. EXCHANGES. Telephone exchange orders will be effective only for
uncertificated shares or for which share certificates have been previously
deposited and may be subject to any fees or other restrictions set forth in the
applicable prospectuses. Exchanges from a Fund sold with no sales charge to a
Fund which carries a sales charge, and exchanges from a Fund sold with a sales
charge to a Fund which carries a higher sales charge may be subject to a sales
charge in accordance with the terms of the applicable Fund's prospectus. You
will be obligated to comply with any additional exchange policies described in
the applicable Fund's prospectus, including without limitation any policy
restricting or prohibiting "Timing Accounts" as therein defined.
9. TRANSACTION PROCESSING. All orders are subject to acceptance by us and by the
Fund or its transfer agent, and become effective only upon confirmation by us.
If required by law, each transaction shall be confirmed in writing on a fully
disclosed basis and if confirmed by us, a copy of each confirmation shall be
sent simultaneously to you if you so request. All sales are made subject to
receipt of shares by us from the Funds. We reserve the right in our discretion,
without notice, to suspend the sale of shares of the Funds or withdraw the
offering of shares of the Funds entirely. Orders will be effected at the
price(s) next computed on the day they are received if, as set forth in the
applicable Fund's current prospectus, the orders are received by us, an agent
appointed by us or the Funds prior to the time the price of the Fund's shares is
calculated. Orders received after that time will be effected at the price(s)
computed on the next business day. All orders must be accompanied by payment in
U.S. Dollars. Orders payable by check must be drawn payable in U.S. Dollars on a
U.S. bank, for the full amount of the investment.
10. MULTIPLE CLASSES. We may from time to time provide to you written compliance
guidelines or standards relating to the sale or distribution of Funds offering
multiple classes of shares (each, a "Class") with different sales charges and
distribution related operating expenses. In addition, you will be bound by any
applicable rules or regulations of government agencies or self-regulatory
organizations generally affecting the sale or distribution of shares of
investment companies offering multiple classes of shares.
11. RULE 12B-1 PLANS. You are invited to participate in all distribution plans
(each, a "Plan") adopted for a Class of a Fund or for a Fund that has only a
single Class (each, a "Plan Class") pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "1940 Act").
To the extent you provide administrative and other services, including, but
not limited to, furnishing personal and other services and assistance to your
customers who own shares of a Plan Class, answering routine inquiries regarding
a Fund or Class, assisting in changing account designations and addresses,
maintaining such accounts or such other services as a Fund may require, to the
extent permitted by applicable statutes, rules, or regulations, we shall pay you
a Rule 12b-1 servicing fee. To the extent that you participate in the
distribution of Fund shares that are eligible for a Rule 12b-1 distribution fee,
we shall also pay you a Rule 12b-1 distribution fee. All Rule 12b-1 servicing
and distribution fees shall be based on the value of shares attributable to
customers of your firm and eligible for such payment, and shall be calculated on
the basis and at the rates set forth in the compensation schedule then in effect
for the applicable Plan (the "Schedule"). Without prior approval by a majority
of the outstanding shares of a particular Class of a Fund which has a Plan, the
aggregate annual fees paid to you pursuant to such Plan shall not exceed the
amounts stated as the "annual maximums" in such Plan Class' prospectus, which
amount shall be a specified percent of the value of such Plan Class' net assets
held in your customers' accounts which are eligible for payment pursuant to this
Agreement (determined in the same manner as such Plan Class uses to compute its
net assets as set forth in its effective prospectus).
You shall furnish us and each Fund that has a Plan Class (each, a "Plan
Fund") with such information as shall reasonably be requested by the Board of
Directors, Trustees or Managing General Partners (hereinafter referred to as
"Directors") of such Plan Fund with respect to the fees paid to you pursuant to
the Schedule of such Plan Fund. We shall furnish to the Boards of Directors of
the Plan Funds, for their review on a quarterly basis, a written report of the
amounts expended under the Plans and the purposes for which such expenditures
were made.
Each Plan and the provisions of any agreement relating to such Plan must be
approved annually by a vote of the Directors of the Fund that has such Plan,
including such persons who are not interested persons of such Plan Fund and who
have no financial interest in such Plan or any related agreement ("Rule 12b-1
Directors"). Each Plan or the provisions of this Agreement relating to such Plan
may be terminated at any time by the vote of a majority of the Rule 12b-1
Directors, or by a vote of a majority of the outstanding shares of the Class
that has such Plan, on sixty (60) days' written notice, without payment of any
penalty. A Plan or the provisions of this Agreement may also be terminated by
any act that terminates the Underwriting Agreement between us and the Fund that
has such Plan, and/or the management or administration agreement between
Franklin Advisers, Inc. or Templeton Investment Counsel, Inc. or their
affiliates and such Plan Fund. In the event of the termination of a Plan for any
reason, the provisions of this Agreement relating to such Plan will also
terminate.
Continuation of a Plan and provisions of this Agreement relating to such
Plan are conditioned on Rule 12b-1 Directors being ultimately responsible for
selecting and nominating any new Rule 12b-1 Directors. Under Rule 12b-1,
Directors of any of the Plan Funds have a duty to request and evaluate, and
persons who are party to any agreement related to a Plan have a duty to furnish,
such information as may reasonably be necessary to an informed determination of
whether the Plan or any agreement should be implemented or continued. Under Rule
12b-1, a Plan Fund is permitted to implement or continue a Plan or the
provisions of this Agreement relating to such Plan from year-to-year only if,
based on certain legal considerations, the Board of Directors of such Plan Fund
is able to conclude that such Plan will benefit the Plan Class. Absent such
yearly determination, such Plan and the provisions of this Agreement relating to
such Plan must be terminated as set forth above. In addition, any obligation
assumed by a Fund pursuant to this Agreement shall be limited in all cases to
the assets of such Fund and no person shall seek satisfaction thereof from
shareholders of a Fund. You agree to waive payment of any amounts payable to you
by us under a Fund's Plan until such time as we are in receipt of such fee from
the Fund.
The provisions of the Plans between the Plan Funds and us shall control
over the provisions of this Agreement in the event of any inconsistency.
12. REGISTRATION OF SHARES. Upon request, we shall notify you of the states or
other jurisdictions in which each Fund's shares are currently noticed,
registered or qualified for offer or sale to the public. We shall have no
obligation to make notice filings of, register or qualify, or to maintain notice
filings of, registration of or qualification of, Fund shares in any state or
other jurisdiction. We shall have no responsibility, under the laws regulating
the sale of securities in any U.S. or foreign jurisdiction, for the
registration, qualification or licensed status of persons offering or selling
Fund shares or for the manner of offering or sale of Fund shares. If it is
necessary to file notice of, register or qualify Fund shares in any foreign
jurisdictions in which you intend to offer the shares of any Funds, it will be
your responsibility to arrange for and to pay the costs of such notice filing,
registration or qualification; prior to any such notice filing, registration or
qualification, you will notify us of your intent and of any limitations that
might be imposed on the Funds, and you agree not to proceed with such notice
filing, registration or qualification without the written consent of the
applicable Funds and of ourselves. Except as stated in this section, we shall
not, in any event, be liable or responsible for the issue, form, validity,
enforceability and value of such shares or for any matter in connection
therewith, and no obligation not expressly assumed by us in this Agreement shall
be implied. Nothing in this Agreement shall be deemed to be a condition,
stipulation or provision binding any person acquiring any security to waive
compliance with any provision of the Securities Act of 1933, as amended (the
"1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"),
the 1940 Act, the rules and regulations of the U.S. Securities and Exchange
Commission, or any applicable laws or regulations of any government or
authorized agency in the U.S. or any other country having jurisdiction over the
offer or sale of shares of the Funds, or to relieve the parties hereto from any
liability arising under such laws, rules and regulations.
13. CONTINUOUSLY OFFERED CLOSED-END FUNDS. This Section 13 relates solely to
shares of Funds that represent a beneficial interest in the Franklin Floating
Rate Trust and shares issued by any other continuously offered closed-end
investment company registered under the 1940 Act for which we or an affiliate of
ours serve as principal underwriter and that periodically repurchases its shares
(each, a "Trust"). Shares of a Trust that are offered to the public will be
registered under the 1933 Act, and are expected to be offered during an offering
period that may continue indefinitely ("Continuous Offering Period"). There is
no guarantee that such a continuous offering will be maintained by a Trust. The
Continuous Offering Period, shares of a Trust and certain of the terms on which
such shares are offered shall be as described in the prospectus of the Trust.
As set forth in a Trust's then current prospectus, we may, but are not
obligated to, provide you with appropriate compensation for selling shares of
the Trust. In addition, you may be entitled to a fee for servicing your clients
who are shareholders in a Trust, subject to applicable law and NASD Conduct
Rules. You agree that any repurchases of shares of a Trust that were originally
purchased as Qualifying Sales shall be subject to Subsection 6(b) hereof.
You expressly acknowledge and understand that, notwithstanding anything to
the contrary in this Agreement:
(a) No Trust has a Rule 12b-1 Plan and in no event will a Trust pay, or
have any obligation to pay, any compensation directly or indirectly to
you.
(b) Shares of a Trust will not be repurchased by either the Trust (other
than through repurchase offers by the Trust from time to time, if any)
or by us and no secondary market for such shares exists currently, or
is expected to develop. Any representation as to a repurchase or
tender offer by a Trust, other than that set forth in the Trust's then
current prospectus, notification letters, reports or other related
material provided by the Trust, is expressly prohibited.
(c) An early withdrawal charge payable by shareholders of a Trust to us
may be imposed on shares accepted for repurchase by the Trust that
have been held for less than a stated period, as set forth in the
Trust's then current Prospectus.
(d) In the event your customer cancels his or her order for shares of a
Trust after confirmation, such shares will not be repurchased,
remarketed or otherwise disposed of by or though us.
14. FUND INFORMATION. No person is authorized to give any information or make
any representations concerning shares of any Fund except those contained in the
Fund's then current prospectus or in materials issued by us as information
supplemental to such prospectus. We will supply reasonable quantities of
prospectuses, supplemental sales literature, sales bulletins, and additional
information as issued by the Fund or us. You agree not to use other advertising
or sales material relating to the Funds except that which (a) conforms to the
requirements of any applicable laws or regulations of any government or
authorized agency in the U.S. or any other country having jurisdiction over the
offering or sale of shares of the Funds, and (b) is approved in writing by us in
advance of such use. Such approval may be withdrawn by us in whole or in part
upon notice to you, and you shall, upon receipt of such notice, immediately
discontinue the use of such sales literature, sales material and advertising.
You are not authorized to modify or translate any such materials without our
prior written consent.
15. INDEMNIFICATION. You agree to indemnify, defend and hold harmless us, the
Funds, and the respective officers, directors and employees of the Funds and us
from any and all losses, claims, liabilities and expenses arising out of (1) any
alleged violation of any statute or regulation (including without limitation the
securities laws and regulations of the U.S. or any state or foreign country) or
any alleged tort or breach of contract, in or related to the offer or sale by
you of shares of the Funds pursuant to this Agreement (except to the extent that
our negligence or failure to follow correct instructions received from you is
the cause of such loss, claim, liability or expense), (2) any redemption or
exchange pursuant to telephone instructions received from you or your agents or
employees, or (3) the breach by you of any of the terms and conditions of this
Agreement. This Section 15 shall survive the termination of this Agreement.
16. TERMINATION; SUCCESSION; ASSIGNMENT; AMENDMENT. Each party to this Agreement
may terminate its participation in this Agreement by giving written notice to
the other parties. Such notice shall be deemed to have been given and to be
effective on the date on which it was either delivered personally to the other
parties or any officer or member thereof, or was mailed postpaid or delivered by
electronic transmission to the other parties' chief legal officers at the
addresses shown herein or in the most recent NASD Manual. This Agreement shall
terminate immediately upon the appointment of a Trustee under the Securities
Investor Protection Act or any other act of insolvency by you. The termination
of this Agreement by any of the foregoing means shall have no effect upon
transactions entered into prior to the effective date of termination. A trade
placed by you subsequent to your voluntary termination of this Agreement will
not serve to reinstate the Agreement. Reinstatement, except in the case of a
temporary suspension of a dealer, will be effective only upon written
notification by us to you. This Agreement will terminate automatically in the
event of its assignment by us. For purposes of the preceding sentence, the word
"assignment" shall have the meaning given to it in the 1940 Act. This Agreement
may not be assigned by you without our prior written consent. This Agreement may
be amended by us at any time by written notice to you and your placing of an
order or acceptance of payments of any kind after the effective date and receipt
of notice of any such Amendment shall constitute your acceptance of such
Amendment.
17. SETOFF; DISPUTE RESOLUTION. Should any of your concession accounts with us
have a debit balance, we may offset and recover the amount owed to us or the
Funds from any other account you have with us, without notice or demand to you.
In the event of a dispute concerning any provision of this Agreement, either
party may require the dispute to be submitted to binding arbitration under the
commercial arbitration rules of the NASD or the American Arbitration
Association. Judgment upon any arbitration award may be entered by any court
having jurisdiction. This Agreement shall be construed in accordance with the
laws of the State of California, not including any provision that would require
the general application of the law of another jurisdiction.
18. ACCEPTANCE; CUMULATIVE EFFECT. This Agreement is cumulative and supersedes
any agreement previously in effect. It shall be binding upon the parties hereto
when signed by us and accepted by you. If you have a current dealer agreement
with us, your first trade or acceptance of payments from us after your receipt
of this Agreement, as it may be amended pursuant to Section 16, above, shall
constitute your acceptance of its terms. Otherwise, your signature below shall
constitute your acceptance of its terms.
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By /s/ Greg Johnson
------------------------
Greg Johnson, President
777 Mariners Island Blvd.
San Mateo, CA 94404
Attention: Chief Legal Officer (for legal notices only)
415/312-2000
700 Central Avenue
St. Petersburg, Florida 33701-3628
813/823-8712
- --------------------------------------------------------------------------------
Dealer: If you have NOT previously signed a Dealer Agreement with us, please
complete and sign this section and return the original to us.
__________________________________
DEALER NAME:
By _______________________________
(Signature)
Name:_____________________________
Title: ___________________________
Address: ______________________________
_______________________________________
_______________________________________
Telephone: _______________________
NASD CRD # _______________________
- --------------------------------------------------------------------------------
Franklin Templeton Dealer # ______________________
(Internal Use Only)
- --------------------------------------------------------------------------------
Version 12/31/97
232567.4
Franklin Templeton Distributors, Inc.
777 Mariners Island Boulevard
San Mateo, CA 94403-7777
May 15, 1998
Re: Amendment of Dealer Agreement - Notice Pursuant to Section 16
Dear Securities Dealer:
This letter constitutes notice of amendment of the current Dealer Agreement (the
"Agreement") between Franklin/Templeton Distributors, Inc. ("we" or "us") and
you pursuant to Section 16 of the Agreement. The Agreement is hereby amended as
follows:
1. Defined terms in this amendment have the meanings as stated in the
Agreement unless otherwise indicated.
2. Section 6 is modified to add a subsection 6(c), as follows:
(c) The following limitations apply with respect to shares of each Trust as
described in Section 13 of this Agreement.
(1) Consistent with the NASD Conduct Rules, the total compensation to
be paid to us and selected dealers and their affiliates, including you and your
affiliates, in connection with the distribution of shares of a Trust will not
exceed the underwriting compensation limitation prescribed by NASD Conduct Rule
2710. The total underwriting compensation to be paid to us and selected dealers
and their affiliates, including you and your affiliates, may include: (i) at the
time of purchase of shares a payment to you or another securities dealer of 1%
of the dollar amount of the purchased shares by the Distributor; and (ii) a
quarterly payment at an annual rate of .50% to you or another securities dealer
based on the value of such remaining shares sold by you or such securities
dealer, if after twelve (12) months from the date of purchase, the shares sold
by you or such securities dealer remain outstanding.
(2) The maximum compensation shall be no more than as disclosed in the
section "Payments to Dealers" of the prospectus of the applicable Trust.
Pursuant to Section 16 of the Agreement, your placement of an order or
acceptance of payments of any kind after the effective date and receipt of
notice of this amendment shall constitute your acceptance of this amendment.
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By /s/ Greg Johnson
--------------------------
Greg Johnson, President
777 Mariners Island Blvd.
San Mateo, CA 94404
Attention: Chief Legal Officer (for legal notices only)
650/312-2000
100 Fountain Parkway
St. Petersburg, FL 33716
813/299-8712
MUTUAL FUND PURCHASE AND SALES AGREEMENT
FOR ACCOUNTS OF BANK AND TRUST COMPANY CUSTOMERS
EFFECTIVE: APRIL 1, 1998
1. INTRODUCTION
The parties to this Agreement are the undersigned bank or trust company
("Bank") and Franklin/Templeton Distributors, Inc. ("FTDI"). This Agreement sets
forth the terms and conditions under which FTDI will execute purchases and
redemptions of shares of the Franklin or Templeton investment companies or
series of such investment companies for which FTDI now or in the future serves
as principal underwriter (each, a "Fund"), at the request of the Bank upon the
order and for the account of Bank's customers ("Customers"). In this Agreement,
"Customer" shall include the beneficial owners of an account and any agent or
attorney-in-fact duly authorized or appointed to act on the owners' behalf with
respect to the account; and "redemptions" shall include redemptions of shares of
Funds that are open-end management investment companies and repurchases of
shares of Funds that are closed-end investment companies by the Fund that is the
issuer of such shares. FTDI will notify Bank from time to time of the Funds
which are eligible for distribution and the terms of compensation under this
Agreement. This Agreement is not exclusive, and either party may enter into
similar agreements with third parties.
2. REPRESENTATIONS AND WARRANTIES OF BANK
Bank warrants and represents to FTDI and the Funds that:
a) Bank is a "bank" as defined in section 3(a)(6) of the Securities
Exchange Act of 1934, as amended (the "1934 Act");
b) Bank is authorized to enter into this Agreement as agent for the
Customers, and Bank's performance of its obligations and receipt of
consideration under this Agreement will not violate any law,
regulation, charter, agreement, or regulatory restriction to which
Bank is subject; and
c) Bank has received all regulatory agency approvals and taken all legal
and other steps necessary for offering the services Bank will provide
to Customers and receiving any applicable compensation in connection
with this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL UNDERWRITER
FTDI warrants and represents to Bank that:
a) FTDI is a broker/dealer registered under the 1934 Act; and
b) FTDI is the principal underwriter of the Funds.
4. COVENANTS OF BANK
a) For each purchase or redemption transaction under this Agreement
(each, a "Transaction"), Bank will:
1) be authorized to engage in the Transaction;
2) act as agent for the Customer, unless Bank is the Customer;
3) act solely at the request of and for the account of the Customer,
unless Bank is the Customer;
4) not submit an order unless Bank has already received the order
from the Customer, unless Bank is the Customer;
5) not offer to sell shares of Fund(s) or submit a purchase order
unless Bank has already delivered to the Customer a copy of the
then current prospectuses for the Fund(s) whose shares are
offered or are to be purchased;
6) not withhold placing any Customer's order for the purpose of
profiting from the delay or place orders for shares in amounts
just below the point at which sales charges are reduced so as to
benefit from a higher Fee (as defined in Paragraph 5(e) below)
applicable to a Transaction in an amount below the breakpoint;
7) have no beneficial ownership of the securities in any purchase
Transaction (the Customer will have the full beneficial
ownership), unless Bank is the Customer (in which case, Bank will
not engage in the Transaction unless the Transaction is legally
permissible for Bank);
8) not accept or withhold any Fee (as defined in Paragraph 5(e) of
this Agreement) otherwise allowed under Paragraphs 5(d) and (e)
of this Agreement, if prohibited by the Employee Retirement
Income Security Act of 1974, as amended, or trust or similar laws
to which Bank is subject, in the case of Transactions of Fund
shares involving retirement plans, trusts, or similar accounts;
9) maintain records of all Transactions of Fund shares made through
Bank and furnish FTDI with copies of such records on request; and
10) distribute prospectuses, statements of additional information and
reports to Customers in compliance with applicable legal
requirements, except to the extent that FTDI expressly undertakes
to do so on behalf of Bank.
b) While this Agreement is in effect, Bank will:
1) not purchase any Fund shares from any person at a price lower
than the redemption or repurchase price as applicable next
determined by the applicable Fund;
2) repay FTDI the full Fee received by Bank under Paragraphs 5(d)
and (e) of this Agreement, and any payments FTDI or its
affiliates made to Bank from their own resources under Paragraph
5(e) of this Agreement ("FTDI Payments"), for any Fund shares
purchased under this Agreement which are redeemed or repurchased
by the Fund within 7 business days after the purchase; in turn,
FTDI shall pay to the Fund the amount repaid by Bank (other than
any portion of such repayment that is a repayment of FTDI
Payments) and will notify Bank of any such redemption within a
reasonable time (termination or suspension of this Agreement
shall not relieve Bank or FTDI from the requirements of this
subparagraph);
3) in connection with orders for the purchase of Fund shares on
behalf of an Individual Retirement Account, Self-Employed
Retirement Plan or other retirement accounts, by mail, telephone,
or wire, act as agent for the custodian or trustee of such plans
(solely with respect to the time of receipt of the application
and payments) and shall not place such an order until Bank has
received from its Customer payment for such purchase and, if such
purchase represents the first contribution to such a plan, the
completed documents necessary to establish the plan and
enrollment in the plan (Bank agrees to indemnify FTDI and
Franklin Templeton Trust Company and/or Templeton Funds Trust
Company as applicable for any claim, loss, or liability resulting
from incorrect investment instructions received from Bank which
cause a tax liability or other tax penalty);
4) be responsible for compliance with all laws and regulations,
including those of the applicable federal and state bank and
securities regulatory authorities, with regard to Bank and Bank's
Customers; and
5) obtain from its Customers any consents required by applicable
federal and/or state privacy laws to permit FTDI, any of its
affiliates or the Funds to provide Bank with confirmations,
account statements and other information about Customers'
investments in the Funds.
5. TERMS AND CONDITIONS FOR TRANSACTIONS
a) Price
Purchase orders for Fund shares received from Bank will be accepted only at
the public offering price and in compliance with procedures applicable to each
purchase order as set forth in the then current prospectus and statement of
additional information (hereinafter, collectively, "prospectus") for the
applicable Fund. All purchase orders must be accompanied by payment in U.S.
Dollars. Orders payable by check must be drawn payable in U.S. Dollars on a U.S.
bank, for the full amount of the investment. All sales are made subject to
receipt of shares by FTDI from the Funds. FTDI reserves the right in its
discretion, without notice, to suspend the sale of shares or withdraw the
offering of shares entirely.
b) Orders and Confirmations
All orders are subject to acceptance or rejection by FTDI and by the Fund
or its transfer agent at their sole discretion, and become effective only upon
confirmation by FTDI. Transaction orders shall be made using the procedures and
forms required by FTDI from time to time. Orders received by FTDI or an agent
appointed by FTDI or the Funds on any business day after the time for
calculating the price of Fund shares as set forth in each Fund's current
prospectus will be effected at the price determined on the next business day. No
order will be accepted unless Bank or the Customer shall have provided FTDI with
the Customer's full name, address and other information normally required by
FTDI to open a customer account, and FTDI shall be entitled to rely on the
accuracy of the information provided by Bank. A written confirming statement
will be sent to Bank and to Customer upon settlement of each Transaction.
c) Multiple Class Guidelines
FTDI may from time to time provide to Bank written compliance guidelines or
standards relating to the sale or distribution of Funds offering multiple
classes of shares (each, a "Class") with different sales charges and
distribution-related operating expenses. Bank will comply with FTDI's written
compliance guidelines and standards, as well as with any applicable rules or
regulations of government agencies or self-regulatory organizations generally
affecting the sale or distribution of investment companies offering multiple
classes of shares, whether or not Bank deems itself otherwise subject to such
rules or regulations.
d) Payments by Bank for Purchases
On the settlement date for each purchase, Bank shall either (i) remit the
full purchase price by wire transfer to an account designated by FTDI, or (ii)
following FTDI's procedures, wire the purchase price less the Fee allowed by
Paragraph 5(e) of this Agreement. Twice monthly, FTDI will pay Bank Fees not
previously paid to or withheld by Bank. Each calendar month, FTDI, as
applicable, will prepare and mail an activity statement summarizing all
Transactions.
e) Fees and Payments
Where permitted by the prospectus for a Fund, a charge, concession, or fee
(each of the foregoing forms of compensation, a "Fee") may be paid to Bank,
related to services provided by Bank in connection with Transactions in shares
of such Fund. The amount of the Fee, if any, is set by the relevant prospectus.
Adjustments in the Fee are available for certain purchases, and Bank is solely
responsible for notifying FTDI when any purchase or redemption order is
qualified for such an adjustment. If Bank fails to notify FTDI of the
applicability of a reduction in the sales charge at the time the trade is
placed, neither FTDI nor any of the Funds will be liable for amounts necessary
to reimburse any Customer for the reduction which should have been effected.
In accordance with the Funds' prospectuses, FTDI or its affiliates may, but
are not obligated to, make payments from their own resources to Bank as
compensation for certain sales that are made at net asset value ("Qualifying
Sales"). If Bank notifies FTDI of a Qualifying Sale, FTDI may make a contingent
advance payment up to the maximum amount available for payment on the sale. If
any of the shares purchased in a Qualifying Sale are redeemed or repurchased
within twelve months of the month of purchase, FTDI shall be entitled to recover
any advance payment attributable to the redeemed or repurchased shares by
reducing any account payable or other monetary obligation FTDI may owe to Bank
or by making demand upon Bank for repayment in cash. FTDI reserves the right to
withhold any one or more advances, if for any reason FTDI believes that FTDI may
not be able to recover unearned advances. Termination or suspension of this
Agreement does not relieve Bank from the requirements of this paragraph.
f) Rule 12b-1 Plans
Bank is also invited to participate in all distribution plans (each, a
"Plan") adopted for a Class of a Fund or for a Fund that has only a single Class
(each, a "Plan Class") pursuant to Rule 12b-1 under the Investment Company Act
of 1940, as amended (the "1940 Act").
To the extent Bank provides administrative and other services, including,
but not limited to, furnishing personal and other services and assistance to
Customers who own shares of a Plan Class, answering routine inquiries regarding
a Fund or Class, assisting in changing account designations and addresses,
maintaining such accounts or such other services as a Fund may require, to the
extent permitted by applicable statutes, rules, or regulations, FTDI shall pay
Bank a Rule 12b-1 servicing fee. To the extent that Bank participates in the
distribution of Fund shares that are eligible for a Rule 12b-1 distribution
fee,FTDI shall also pay Bank a Rule 12b-1 distribution fee. All Rule 12b-1
servicing and distribution fees shall be based on the value of shares
attributable to Customers and eligible for such payment, and shall be calculated
on the basis and at the rates set forth in the compensation schedule then in
effect for the applicable Plan (the "Schedule"). Without prior approval by a
majority of the outstanding shares of a particular Class of a Fund, the
aggregate annual fees paid to Bank pursuant to such Plan shall not exceed the
amounts stated as the "annual maximums" in such Plan Class' prospectus, which
amount shall be a specified percent of the value of such Plan Class' net assets
held in Customers' accounts which are eligible for payment pursuant to this
Agreement (determined in the same manner as such Plan Class uses to compute its
net assets as set forth in its effective Prospectus).
Bank shall furnish FTDI and each Fund that has a Plan Class (each, a "Plan
Fund") with such information as shall reasonably be requested by the Board of
Directors, Trustees or Managing General Partners (hereinafter referred to as
"Directors") of such Plan Fund with respect to the fees paid to Bank pursuant to
the Schedule of such Plan Fund. FTDI shall furnish to the Boards of Directors of
the Plan Funds, for their review on a quarterly basis, a written report of the
amounts expended under the Plans and the purposes for which such expenditures
were made.
Each Plan and the provisions of any agreement relating to such Plan must be
approved annually by a vote of the Directors of the Fund that has such Plan,
including such persons who are not interested persons of such Plan Fund and who
have no financial interest in such Plan or any related agreement ("Rule 12b-1
Directors"). Each Plan or the provisions of this Agreement relating to such Plan
may be terminated at any time by the vote of a majority of Rule 12b-1 Directors
of the Fund that has such Plan, or by a vote of a majority of the outstanding
shares of the Class that has such Plan on sixty (60) days' written notice,
without payment of any penalty. A Plan or the provisions of this Agreement may
also be terminated by any act that terminates the Underwriting Agreement between
FTDI and the Fund that has such Plan, and/or the management or administration
agreement between Franklin Advisers, Inc. or Templeton Investment Counsel, Inc.
or their affiliates and such Plan Fund. In the event of the termination of a
Plan for any reason, the provisions of this Agreement relating to such Plan will
also terminate.
Continuation of a Plan and the provisions of this Agreement relating to
such Plan are conditioned on Rule 12b-1 Directors being ultimately responsible
for selecting and nominating any new Rule 12b-1 Directors. Under Rule 12b-1,
Directors of any of the Plan Funds have a duty to request and evaluate, and
persons who are party to any agreement related to a Plan have a duty to furnish,
such information as may reasonably be necessary to an informed determination of
whether the Plan or any agreement should be implemented or continued. Under Rule
12b-1, a Plan Fund is permitted to implement or continue a Plan or the
provisions of this Agreement relating to such Plan from year-to-year only if,
based on certain legal considerations, the Board of Directors of such Plan Fund
is able to conclude that the Plan will benefit the Plan Class. Absent such
yearly determination, a Plan and the provisions of this Agreement relating to
such Plan must be terminated as set forth above. In addition, any obligation
assumed by a Fund pursuant to this Agreement shall be limited in all cases to
the assets of such Fund and no person shall seek satisfaction thereof from
shareholders of a Fund. Bank agrees to waive payment of any amounts payable to
Bank by FTDI under a Fund's Plan until such time as FTDI is in receipt of such
fee from the Fund.
The provisions of the Plans between the Plan Funds and FTDI shall control
over the provisions of this Agreement in the event of any inconsistency.
g) Other Distribution Services
From time to time, FTDI may offer telephone and other augmented services in
connection with Transactions under this Agreement. If Bank uses any such
service, Bank will be subject to the procedures applicable to the service,
whether or not Bank has executed any agreement required for the service.
h) Conditional Orders; Certificates
FTDI will not accept any conditional Transaction orders. Delivery of
certificates or confirmations for shares purchased shall be made by a Fund only
against constructive receipt of the purchase price, subject to deduction of any
Fee and FTDI's portion of the sales charge, if any, on such sale. No
certificates for shares of the Funds will be issued unless specifically
requested.
i) Cancellation of Orders
If payment for shares purchased is not received within the time customary
or the time required by law for such payment, the sale may be canceled without
notice or demand, and neither FTDI nor the Fund(s) shall have any responsibility
or liability for such a cancellation; alternatively, at FTDI's option, the
unpaid shares may be sold back to the Fund, and Bank shall be liable for any
resulting loss to FTDI or to the Fund(s). FTDI shall have no liability for any
check or other item returned unpaid to Bank after Bank has paid FTDI on behalf
of a purchaser. FTDI may refuse to liquidate the investment unless FTDI receives
the purchaser's signed authorization for the liquidation.
j) Order Corrections
Bank shall assume responsibility for any loss to a Fund(s) caused by a
correction made subsequent to trade date, provided such correction was not based
on any error, omission or negligence on FTDI's part, and Bank will immediately
pay such loss to the Fund(s) upon notification.
k) Redemptions; Cancellation
Redemptions or repurchases of shares will be made at the net asset value of
such shares, less any applicable deferred sales or redemption charges, in
accordance with the applicable prospectuses. If Bank sells shares for the
account of the record owner to the Funds, Bank shall be deemed to represent to
FTDI that Bank is doing so as agent for the Customer and that Bank is authorized
to do so in such capacity. Such sales to the Funds shall be at the redemption or
repurchase price then currently in effect for such shares. If on a redemption
which Bank has ordered, instructions in proper form, including outstanding
certificates, are not received within the time customary or the time required by
law, the redemption may be canceled forthwith without any responsibility or
liability on the part of FTDI or any Fund, or at the option of FTDI, FTDI may
buy the shares redeemed on behalf of the Fund, in which latter case FTDI may
hold Bank responsible for any loss to the Fund or loss of profit suffered by
FTDI resulting from Bank's failure to settle the redemption.
l) Exchanges
Telephone exchange orders will be effective only for uncertificated shares
or for which share certificates have been previously deposited and may be
subject to any fees or other restrictions set forth in the applicable
prospectuses. Exchanges from a Fund sold with no sales charge to a Fund which
carries a sales charge, and exchanges from a Fund sold with a sales charge to a
Fund which carries a higher sales charge may be subject to a sales charge in
accordance with the terms of the applicable Fund's prospectus. Bank will be
obligated to comply with any additional exchange policies described in the
applicable Fund's prospectus, including without limitation any policy
restricting or prohibiting "Timing Accounts" as therein defined.
m) Qualification of Shares; Indemnification
Upon request, FTDI shall notify Bank of the states or other jurisdictions
in which each Fund's shares are currently noticed, registered or qualified for
offer or sale to the public. FTDI shall have no obligation to make notice
filings of, register or qualify, or to maintain notice filings of, registration
of or qualification of, Fund shares in any state or other jurisdiction. FTDI
shall have no responsibility, under the laws regulating the sale of securities
in any U.S. or foreign jurisdiction, for the registration, qualification or
licensed status of Bank or any of its agents or sub-agents in connection with
the purchase or sale of Fund shares or for the manner of offering, sale or
purchase of Fund shares. Except as stated in this paragraph, FTDI shall not, in
any event, be liable or responsible for the issue, form, validity,
enforceability and value of such shares or for any matter in connection
therewith, and no obligation not expressly assumed by FTDI in this Agreement
shall be implied. If it is necessary to file notice of, register or qualify
shares of any Fund in any country, state or other jurisdiction having authority
over the purchase or sale of Fund shares that are purchased by a Customer, it
will be Bank's responsibility to arrange for and to pay the costs of such notice
filing, registration or qualification; prior to any such notice filing,
registration or qualification, Bank will notify FTDI of its intent and of any
limitations that might be imposed on the Funds, and Bank agrees not to proceed
with such notice filing, registration or qualification without the written
consent of the applicable Funds and of FTDI. Nothing in this Agreement shall be
deemed to be a condition, stipulation, or provision binding any person acquiring
any security to waive compliance with any provision of the Securities Act of
1933, as amended (the "1933 Act"), the 1934 Act, the 1940 Act, the rules and
regulations of the U.S. Securities and Exchange Commission, or any applicable
laws or regulations of any government or authorized agency in the U.S. or any
other country having jurisdiction over the offer or sale of shares of the Funds,
or to relieve the parties hereto from any liability arising under such laws,
rules or regulations.
Bank further agrees to indemnify, defend and hold harmless FTDI, the Funds,
their officers, directors and employees from any and all losses, claims,
liabilities and expenses, arising out of (1) any alleged violation of any
statute or regulation (including without limitation the securities laws and
regulations of the United States of America or any state or foreign country) or
any alleged tort or breach of contract, in or related to any offer, sale or
purchase of shares of the Funds involving Bank or any Customer pursuant to this
Agreement (except to the extent that FTDI's negligence or failure to follow
correct instructions received from Bank is the cause of such loss, claim,
liability or expense), (2) any redemption or exchange pursuant to telephone
instructions received from Bank or its agents or employees, or (3) the breach by
Bank of any of the terms and conditions of this Agreement. This Paragraph 5(m)
shall survive the termination of this Agreement.
n) Prospectus and Sales Materials; Limit on Advertising
No person is authorized to give any information or make any representations
concerning shares of any Fund except those contained in the Fund's current
prospectus or in materials issued by FTDI as information supplemental to such
prospectus. FTDI will supply prospectuses, reasonable quantities of supplemental
sale literature, sales bulletins, and additional information as issued. Bank
agrees not to use other advertising or sales material or other material or
literature relating to the Funds except that which (a) conforms to the
requirements of any applicable laws or regulations of any government or
authorized agency in the U.S. or any other country having jurisdiction over the
offering or sale of shares of the Funds, and (b) is approved in writing by FTDI
in advance of such use. Such approval may be withdrawn by FTDI in whole or in
part upon notice to Bank, and Bank shall, upon receipt of such notice,
immediately discontinue the use of such sales literature, sales material and
advertising. Bank is not authorized to modify or translate any such materials
without the prior written consent of FTDI.
o) Customer Information
1) DEFINITION. For purposes of this Paragraph 5(o), "Customer
Information" means customer names and other identifying
information pertaining to one or more Customers which is
furnished by Bank to FTDI in the ordinary course of business
under this Agreement. Customer Information shall not include any
information obtained from any sources other than the Customer or
the Bank.
2) PERMITTED USES. FTDI may use Customer Information to fulfill its
obligations under this Agreement, the Distribution Agreements
between the Funds and FTDI, the Funds' prospectuses, or other
duties imposed by law. In addition, FTDI or its affiliates may
use Customer Information in communications to shareholders to
market the Funds or other investment products or services,
including without limitation variable annuities, variable life
insurance, and retirement plans and related services. FTDI may
also use Customer Information if it obtains Bank's prior written
consent.
3) PROHIBITED USES. Except as stated above, FTDI shall not disclose
Customer Information to third parties, and shall not use Customer
Information in connection with any advertising, marketing or
solicitation of any products or services, provided that Bank
offers or soon expects to offer comparable products or services
to mutual fund customers and has so notified FTDI.
4) SURVIVAL; TERMINATION. The agreements described in this paragraph
5(o) shall survive the termination of this Agreement, but shall
terminate as to any account upon FTDI's receipt of valid
notification of either the termination of that account with Bank
or the transfer of that account to another bank or dealer.
6. CONTINUOUSLY OFFERED CLOSED-END FUNDS
This Paragraph 6 relates solely to shares of Funds that represent a
beneficial interest in the Franklin Floating Rate Trust or that are issued by
any other continuously offered closed-end investment company registered under
the 1940 Act for which FTDI or an affiliate of FTDI serves as principal
underwriter and that periodically repurchases its shares (each, a "Trust").
Shares of a Trust being offered to the public will be registered under the 1933
Act and are expected to be offered during an offering period that may continue
indefinitely ("Continuous Offering Period"). There is no guarantee that such a
continuous offering will be maintained by the Trust. The Continuous Offering
Period, shares of a Trust and certain of the terms on which such shares are
being offered are more fully described in the prospectus of the Trust.
As set forth in a Trust's then current prospectus, FTDI shall provide Bank
with appropriate compensation for purchases of shares of the Trust made by the
Bank for the account of Customers or by Customers. In addition, Bank may be
entitled to a fee for servicing Customers who are shareholders in a Trust,
subject to applicable law. Bank agrees that any repurchases of shares of a Trust
that were originally purchased as Qualifying Sales shall be subject to Paragraph
5(e) hereof.
Bank expressly acknowledges and understands that, notwithstanding anything
to the contrary in this Agreement:
a) No Trust has a Rule 12b-1 Plan and in no event will a Trust pay, or
have any obligation to pay, any compensation directly or indirectly to
Bank.
b) Shares of a Trust will not be repurchased by either the Trust (other
than through repurchase offers by the Trust from time to time, if any)
or by FTDI and no secondary market for such shares exists currently,
or is expected to develop. Any representation as to a repurchase or
tender offer by the Trust, other than that set forth in the Trust's
then current Prospectus, notification letters, reports or other
related material provided by the Trust, is expressly prohibited.
c) An early withdrawal charge payable by shareholders of a Trust to FTDI
may be imposed on shares accepted for repurchase by the Trust that
have been held for less than a stated period, as set forth in the
Trust's then current Prospectus.
d) In the event a Customer cancels his or her order for shares of a Trust
after confirmation, such shares will not be repurchased, remarketed or
otherwise disposed of by or though FTDI.
7. GENERAL
a) Successors and Assignments
This Agreement shall extend to and be binding upon the parties hereto and
their respective successors and assigns; provided that this Agreement will
terminate automatically in the event of its assignment by FTDI. For purposes of
the preceding sentence, the word "assignment" shall have the meaning given to it
in the 1940 Act. Bank may not assign this Agreement without the advance written
consent of FTDI.
b) Paragraph Headings
The paragraph headings of this Agreement are for convenience only, and
shall not be deemed to define, limit, or describe the scope or intent of this
Agreement.
c) Severability
Should any provision of this Agreement be determined to be invalid or
unenforceable under any law, rule, or regulation, that determination shall not
affect the validity or enforceability of any other provision of this Agreement.
d) Waivers
There shall be no waiver of any provision of this Agreement except a
written waiver signed by Bank and FTDI. No written waiver shall be deemed a
continuing waiver or a waiver of any other provision, unless the waiver
expresses such intention.
e) Sole Agreement
This Agreement is the entire agreement of Bank and FTDI and supersedes all
oral negotiations and prior writings.
f) Governing Law
This Agreement shall be construed in accordance with the laws of the State
of California, not including any provision which would require the general
application of the law of another jurisdiction, and shall be binding upon the
parties hereto when signed by FTDI and accepted by Bank, either by Bank's
signature in the space provided below or by Bank's first trade entered after
receipt of this Agreement.
g) Arbitration
Should Bank owe any sum of money to FTDI under or in relation to this
Agreement for the purchase, sale, redemption or repurchase of any Fund shares,
FTDI may offset and recover the amount owed by Bank to FTDI or the Funds from
any amount owed by FTDI to Bank or from any other account Bank has with FTDI,
without notice or demand to Bank. Either party may submit any dispute under this
Agreement to binding arbitration under the commercial arbitration rules of the
American Arbitration Association. Judgment upon any arbitration award may be
entered by any court having jurisdiction.
h) Amendments
FTDI may amend this Agreement at any time by depositing a written notice of
the amendment in the U.S. mail, first class postage pre-paid, addressed to
Bank's address given below. Bank's placement of any Transaction order or
acceptance of any payments after the effective date and receipt of notice of any
such amendment shall constitute Bank's acceptance of the amendment.
i) Term and Termination
This Agreement shall continue in effect until terminated and shall
terminate automatically in the event that Bank ceases to be a "bank" as set
forth in paragraph 2(a) of this Agreement. FTDI or Bank may terminate this
Agreement at any time by written notice to the other, but such termination shall
not affect the payment or repayment of Fees on Transactions prior to the
termination date. Termination also will not affect the indemnities given under
this Agreement.
j) Acceptance; Cumulative Effect
This Agreement is cumulative and supersedes any agreement previously in
effect. It shall be binding upon the parties hereto when signed by FTDI and
accepted by Bank. If Bank has a current agreement with FTDI, Bank's first trade
or acceptance of payments from FTDI after receipt of this Agreement, as it may
be amended pursuant to paragraph 7(h), above, shall constitute Bank's acceptance
of the terms of this Agreement.
Otherwise, Bank's signature below shall constitute Bank's acceptance of
these terms.
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: /s/ Greg Johnson
-----------------------
Greg Johnson, President
777 Mariners Island Blvd.
San Mateo, CA 94404
Attention: Chief Legal Officer (for legal
notices only)
650/312-2000
100 Fountain Parkway
St. Petersburg, Florida 33716
813/299-8712
- --------------------------------------------------------------------------------
To the Bank or Trust Company: If you have not previously signed an agreement
with FTDI for the sale of mutual fund shares to your customers, please complete
and sign this section and return the original to us.
BANK OR TRUST COMPANY:
____________________________________
(Bank's name)
By: ____________________________________
(Signature)
Name: _________________________________
Title: _________________________________
Franklin Templeton Distributors, Inc.
777 Mariners Island Boulevard
San Mateo, CA 94403-7777
May 15, 1998
Re: Amendment of Mutual Fund Purchase and Sales Agreement for Accounts of
Bank and Trust Company Customers - Notice Pursuant to Paragraph 7(h)
Dear Bank or Trust Company:
This letter constitutes notice of amendment of the current Mutual Fund Purchase
and Sales Agreement for Accounts of Bank and Trust Company Customers (the
"Agreement") between Franklin/Templeton Distributors, Inc. ("FTDI") and the bank
or trust company ("the Bank") pursuant to Paragraph 7(h) of the Agreement. The
Agreement is hereby amended as follows:
1. Defined terms in this amendment have the meanings as stated in the
Agreement unless otherwise indicated.
2. Paragraph 5(e) is modified to add the following language:
With respect to shares of each Trust as described in Paragraph 6 of this
Agreement, the total compensation to be paid to FTDI and selected dealers and
their affiliates, including the Bank and the Bank's affiliates, in connection
with the distribution of shares of a Trust will not exceed the underwriting
compensation limitation prescribed by NASD Conduct Rule 2710. The total
underwriting compensation to be paid to FTDI and selected dealers and their
affiliates, including the Bank and the Bank's affiliates, may include: (i) at
the time of purchase of shares a payment to the Bank or a securities dealer of
1% of the dollar amount of the purchased shares by FTDI; and (ii) a quarterly
payment at an annual rate of .50% to the Bank or a securities dealer based on
the value of such remaining shares sold by the Bank or such securities dealer,
if after twelve (12) months from the date of purchase, the shares sold by the
Bank or such securities dealer remain outstanding.
The maximum compensation shall be no more than as disclosed in the section
"Payments to Dealers" of the prospectus of the applicable Trust.
Pursuant to Paragraph 7(h) of the Agreement, the Bank's placement of an order or
acceptance of payments of any kind after the effective date and receipt of
notice of this amendment shall constitute the Bank's acceptance of this
amendment.
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By /s/ Greg Johnson
------------------------
Greg Johnson, President
777 Mariners Island Blvd.
San Mateo, CA 94404
Attention: Chief Legal Officer (for legal notices only)
650/312-2000
100 Fountain Parkway
St. Petersburg, FL 33716
813/299-8712
Amendment to Master Custody Agreement
Effective February 27, 1998, The Bank of New York and each of the Investment
Companies listed in the Attachment appended to this Amendment, for themselves
and each series listed in the Attachment, hereby amend the Master Custody
Agreement dated as of February 16, 1996 by:
1. Replacing Exhibit A with the attached; and
2. Only with respect to the Investment Companies and series thereof listed in
the Attachment, deleting paragraphs (a) and (b) of Subsection 3.5 and
replacing them with the following:
(a) Promptly after each purchase of Securities by the Fund, the Fund shall
deliver to the Custodian Proper Instructions specifying with respect to
each such purchase: (a) the Series to which such Securities are to be
specifically allocated; (b) the name of the issuer and the title of the
Securities; (c) the number of shares or the principal amount purchased and
accrued interest, if any; (d) the date of purchase and settlement; (e) the
purchase price per unit; (f) the total amount payable upon such purchase;
(g) the name of the person from whom or the broker through whom the
purchase was made, and the name of the clearing broker, if any; and (h) the
name of the broker to whom payment is to be made. The Custodian shall, upon
receipt of Securities purchased by or for the Fund, pay to the broker
specified in the Proper Instructions out of the money held for the account
of such Series the total amount payable upon such purchase, provided that
the same conforms to the total amount payable as set forth in such Proper
Instructions.
(b) Promptly after each sale of Securities by the Fund, the Fund shall
deliver to the Custodian Proper Instructions specifying with respect to
each such sale: (a) the Series to which such Securities were specifically
allocated; (b) the name of the issuer and the title of the Security; (c)
the number of shares or the principal amount sold, and accrued interest, if
any; (d) the date of sale; (e) the sale price per unit; (f) the total
amount payable to the Fund upon such sale; (g) the name of the broker
through whom or the person to whom the sale was made, and the name of the
clearing broker, if any; and (h) the name of the broker to whom the
Securities are to be delivered. The Custodian shall deliver the Securities
specifically allocated to such Series to the broker specified in the Proper
Instructions against payment of the total amount payable to the Fund upon
such sale, provided that the same conforms to the total amount payable as
set forth in such Proper Instructions.
Investment Companies The Bank of New York
By: /s/ Elizabeth N. Cohernour By: /s/ Stephen E. Grunston
-------------------------- -----------------------
Name: Elizabeth N. Cohernour Name: Stephen E. Grunston
Title: Authorized Officer Title: Vice President
Attachment
INVESTMENT COMPANY SERIES
Franklin Mutual Series Fund Inc. Mutual Shares Fund
Mutual Qualified Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual European Fund
Mutual Discovery Fund
Franklin Valuemark Funds Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Templeton Variable Products Series Fund Mutual Shares Investments Fund
Mutual Discovery Investments Fund
<TABLE>
<CAPTION>
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series for which the Custodian shall serve under the Master
Custody Agreement dated as of February 16, 1996.
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage Portfolio
Adjustable Rate Securities Portfolio
Franklin Asset Allocation Fund Delaware Business Trust
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Trust Franklin California Insured Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income Fund California Corporation
- ------------------------------------------- -------------------------------- -------------------------------------------------------
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business Trust
Franklin High Income Trust Delaware Business Trust AGE High Income Fund
Franklin Investors Securities Trust Massachusetts Business Trust Franklin Global Government Income Fund
Franklin Short-Intermediate U.S. Govt Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
Franklin Managed Trust Massachusetts Business Trust Franklin Corporate Qualified Dividend Fund
Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
- ------------------------------------------- -------------------------------- -------------------------------------------------------
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
Franklin Mutual Series Fund Inc. Maryland Corporation Mutual Shares Fund
Mutual Qualified Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual European Fund
Mutual Discovery Fund
Franklin New York Tax-Free Income Fund Delaware Business Trust
Franklin New York Tax-Free Trust Massachusetts Business Trust Franklin New York Tax-Exempt Money Fund
Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Business Trust
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Biotechnology Discovery Fund
Franklin Tax-Exempt Money Fund California Corporation
- ------------------------------------------- -------------------------------- -------------------------------------------------------
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
Franklin Tax-Free Trust Massachusetts Business Trust Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income
Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Michigan Tax-Free Income Fund
- ------------------------------------------- -------------------------------- -------------------------------------------------------
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
Franklin Templeton Fund Allocator Series Delaware Business Trust Franklin Templeton Conservative Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Global Trust Delaware Business Trust Franklin Templeton German Government Bond Fund
Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton International Trust Delaware Business Trust Templeton Pacific Growth Fund
Templeton Foreign Smaller Companies Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Trust Franklin Balance Sheet Investment Fund
Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Valuemark Funds Massachusetts Business Trust Money Market Fund
Growth and Income Fund
Natural Resources Securities Fund
Real Estate Securities Fund
Global Utilities Securities Fund
High Income Fund
Templeton Global Income Securities Fund
Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Rising Dividends Fund
- ------------------------------------------- -------------------------------- -------------------------------------------------------
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
Franklin Valuemark Funds (cont.) Massachusetts Business Trust Templeton Pacific Growth Fund
Templeton International Equity Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation Fund
Small Cap Fund
Capital Growth Fund
Templeton International Smaller Companies Fund
Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Global Health Care Securities Fund
Value Securities Fund
- ------------------------------------------- -------------------------------- -------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Business Trust Money Market Portfolio
Franklin U.S. Government Securities Money Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S. Government
Securities Fund
Franklin Institutional Adjustable Rate Securities Fund
Franklin U.S. Government Agency Money Market Fund
Franklin Cash Reserves Fund
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market Portfolio
Templeton Variable Products Series Fund Mutual Shares Investments Fund
Mutual Discovery Investments Fund
Franklin Growth Investments Fund
- ------------------------------------------- -------------------------------- -------------------------------------------------------
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business Trust
Franklin Principal Maturity Trust Massachusetts Business Trust
Franklin Universal Trust Massachusetts Business Trust
INTERVAL FUND
Franklin Floating Rate Trust Delaware Business Trust
- ------------------------------------------- -------------------------------- -------------------------------------------------------
</TABLE>
FOREIGN CUSTODY MANAGER AGREEMENT
AGREEMENT made as of July 30, 1998, effective as of February 27, 1998
(the "Effective Date"), between Each of the Investment Companies Listed on
Schedule I attached hereto (each a "Fund") and The Bank of New York ("BNY").
WITNESSETH:
WHEREAS, the Fund desires to appoint BNY as a Foreign Custody Manager
on the terms and conditions contained herein;
WHEREAS, BNY desires to serve as a Foreign Custody Manager and perform
the duties set forth herein on the terms and condition contained herein;
NOW THEREFORE, in consideration of the mutual promises hereinafter
contained in this Agreement, the Fund and BNY hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
1. "BOARD" shall mean the board of directors or board of trustees,
as the case may be, of the Fund.
2. "ELIGIBLE FOREIGN CUSTODIAN" shall have the meaning provided in
the Rule.
3. "MONITORING SYSTEM" shall mean a system established by BNY to
fulfill the Responsibilities specified in clauses l(b)(i) and l(b)(ii) and
l(d) of Article III of this Agreement.
4. "QUALIFIED FOREIGN BANK" shall have the meaning provided in the
Rule.
5. "RESPONSIBILITIES" shall mean the responsibilities delegated to
BNY as a Foreign Custody Manager with respect to each Specified Country and
each Eligible Foreign Custodian selected by BNY, as such responsibilities are
more fully described in Article III of this Agreement.
6. "RULE" shall mean Rule 17f-5 under the Investment Company Act of
1940, as amended, as such Rule became effective on June 16, 1997.
7. "SECURITIES DEPOSITORY" shall mean any securities depository or
clearing agency within the meaning of Section (a)(1)(ii) or (a)(1)(iii) of
the Rule.
8. "COMPULSORY DEPOSITORY" shall mean a Securities Depository the
use of which is mandatory by law or regulation or because securities cannot
be withdrawn from such Securities Depository, or because maintaining
securities outside the Securities Depository would not permit purchases and
sales of these securities to occur in accordance with routine settlement
timing and procedures in the relevant market.
9. "SPECIFIED COUNTRY" shall mean each country listed on Schedule 2
attached hereto and each country, other than the United States, constituting
the primary market for a security with respect to which the Fund has given
settlement instructions to The Bank of New York as custodian (the
"Custodian") under its Custody Agreement with the Fund.
ARTICLE II
BNY AS A FOREIGN CUSTODY MANAGER
1. The Fund on behalf of its Board hereby delegates to BNY with
respect to each Specified Country the Responsibilities.
2. BNY accepts the Board's delegation of Responsibilities with
respect to each Specified Country and agrees in performing the
Responsibilities as a Foreign Custody Manager to exercise reasonable care,
prudence and diligence such as a person having responsibility for the
safekeeping of the Fund's assets would exercise.
3. BNY shall provide to the Board at such times as the Board deems
reasonable and appropriate based on the circumstances of the Fund's foreign
custody arrangements written reports notifying the Board of the placement of
assets of the Fund with a particular Eligible Foreign Custodian within a
Specified Country and of any material change in the arrangements (including,
in the case of Qualified Foreign Banks, any material change in any contract
governing such arrangements and in the case of Securities Depositories, any
material change in the established practices or procedures of such Securities
Depositories) with respect to assets of the Fund with any such Eligible
Foreign Custodian.
ARTICLE III
RESPONSIBILITIES
1 . (a) Subject to the provisions of this Agreement, BNY shall with
respect to each Specified Country select an Eligible Foreign Custodian (other
than a Compulsory Depository) which is not functioning as the Fund's Eligible
Foreign Custodian as of the Effective Date. In connection therewith, BNY
shall: (i) determine that assets of the Fund held by such Eligible Foreign
Custodian will be subject to reasonable care, based on the standards
applicable to custodians in the relevant market in which such Eligible
Foreign Custodian operates, after considering all factors relevant to the
safekeeping of such assets, including, without limitation, those contained in
Section (c)(1) of the Rule; (ii) determine that the Fund's foreign custody
arrangements with each Qualified Foreign Bank are governed by a written
contract with the Custodian (or, in the case of a Securities Depository other
than a Compulsory Depository, by such a contract, by the rules or established
practices or procedures of the Securities Depository, or by any combination
of the foregoing) which will provide reasonable care for the Fund's assets
based on the standards specified in paragraph (c)(1) of the Rule; and (ii)
determine that each contract with a Qualified Foreign Bank shall include the
provisions specified in paragraph (c)(2)(i)(A) through (F) of the Rule or,
alternatively, in lieu of any or all of such (c)(2)(i)(A) through (F)
provisions, such other provisions as BNY determines will provide, in their
entirety, the same or a greater level of care and protection for the assets
of the Fund as such specified provisions.
(b) In addition, subject to the provisions of this Agreement, BNY
shall with respect to each Eligible Foreign Custodian (other than a
Compulsory Depository), regardless of when and by whom selected, (i)
monitor pursuant to the Monitoring System the appropriateness of
maintaining the assets of the Fund with a particular Eligible Foreign
Custodian pursuant to paragraph (c)(1) of the Rule and in the case of a
Qualified Foreign Bank, any material change in the contract governing such
arrangement and in the case of a Securities Depository, any material change
in the established practices or procedures of such Securities Depository;
and (ii) advise the Fund whenever an arrangement (including, in the case of
a Qualified Foreign Bank, any material change in the contract governing
such arrangement and in the case of a Securities Depository, any material
change in the established practices or procedures of such Securities
Depository) described in preceding clause (b)(i) no longer meets the
requirements of the Rule, it being understood that BNY shall provide such
advice promptly upon learning of such noncompliance.
(c) Subject to the provisions of this Agreement, after execution of
this Agreement with respect to each Compulsory Depository which has been
established, as of the Effective Date, in countries in which BNY has
appointed a Subcustodian and thereafter in connection with each new or
additional Compulsory Depository established in countries in which BNY
appoints, or has appointed, as the case may be, a Subcustodian, BNY shall
determine, with respect to each such Compulsory Depository, that:
(i) the Eligible Foreign Custodian which is utilizing the services of
the Compulsory Depository has undertaken to adhere to the rules,
practices and procedures of such Compulsory Depository;
(ii)no regulatory authority with oversight responsibility for the
Compulsory Depository has issued a public notice that the Compulsory
Depository is not in compliance with any material capital, solvency,
insurance or other similar financial strength requirements imposed by
such authority or, in the case of such notice having been issued,
that such notice has been withdrawn or the remedy of such
noncompliance has been publicly announced by the Compulsory
Depository;
(iii) no regulatory authority with oversight responsibility over
the Compulsory Depository has issued a public notice that the
Compulsory Depository is not in compliance with any material internal
controls requirement imposed by such authority or, in the case such
notice having been issued, that such notice has been withdrawn or the
remedy of such noncompliance has been publicly announced by the
Compulsory Depository;
(iv)the Compulsory Depository maintains the assets of the Fund's
Eligible Foreign Custodian which is utilizing the services of the
Compulsory Depository under no less favorable safekeeping conditions
than those that apply generally to other participants in the
Compulsory Depository;
(v) the Compulsory Depository maintains records that segregate the
Compulsory Depository's own assets from the assets of participants in
the Compulsory Depository;
(vi)the Compulsory Depository maintains records that identify the
assets of each of its participants;
(vii) the Compulsory Depository provides periodic reports to its
participants with respect to the safekeeping of assets maintained by
the Compulsory Depository, including, by way of example, notification
of any transfer to or from a participant's account; and
(viii) the Compulsory Depository is subject to periodic review,
such as audits by independent accountants or inspections by
regulatory authorities.
BNY shall make the foregoing determinations (i) with respect to each
Compulsory Depository which has been established as of the Effective Date in
countries in which BNY has appointed a Subcustodian by September 30, 1998 and
(ii) with respect to each new or additional Compulsory Depository established
in countries in which BNY appoints, or has appointed, as the case may be, a
Subcustodian, to the extent feasible in light of the circumstances then
prevailing within ninety (90) days of the date such Compulsory Depository
commences operations; and, in each case, shall advise the Fund and its
investment advisor promptly after each such determination is made.
In the event that the US Securities and Exchange Commission ("SEC")
adopts standards or criteria different from those set forth above, the
above provisions shall be deemed to be amended to conform to the standards
or criteria adopted by the SEC.
(d) Subject to the provisions of this Agreement, with respect to each
Compulsory Depository in which Fund's assets are maintained at any time
during the term of this Agreement, BNY shall monitor, pursuant to the
Monitoring System, each such Compulsory Depository's compliance with the
criteria set forth in clause l(c) of this Article III and, upon determining
that any Compulsory Depository is not in compliance with any of such
criteria, shall promptly advise the Fund and its investment advisor of such
non-compliance.
2. (a) For purposes of clauses (a)(i), (a)(ii) and (c) of preceding
Section I of this Article, BNY's determination with respect to each
Securities Depository will be based upon publicly available information,
which may be limited, plus any other information which is made available by
each such Securities Depository to BNY or its Qualified Foreign Bank.
(b) For purposes of clause (b)(i) of preceding Section I of
this Article, BNY's determination of appropriateness shall not include, nor
be deemed to include, any evaluation of Country Risks associated with
investment in a particular country. For purposes hereof, "Country Risks"
shall mean systemic risks of holding assets in a particular country
including, but not limited to, (i) the use of Compulsory Depositories, (ii)
such country's financial infrastructure, (iii) such country's prevailing
custody and settlement practices, (iv) nationalization, expropriation or
other governmental actions, (v) regulation of the banking or securities
industry, (vi) currency controls, restrictions, devaluations or
fluctuations, and (vii) market conditions which affect the orderly
execution of securities transactions or affect the value of securities.
ARTICLE IV
REPRESENTATIONS
1. The Fund hereby represents that: (a) this Agreement has been duly
authorized, executed and delivered by the Fund, constitutes a valid and
legally binding obligation of the Fund enforceable in accordance with its
terms, and no statute, regulation, rule, order, judgment or contract binding
on the Fund prohibits the Fund's execution or performance of this Agreement;
(b) this Agreement has been approved and ratified by the Board at a meeting
duly called and at which a quorum was at all times present; and (c) the Board
or its investment advisor has considered the Country Risks associated with
investment in each Specified Country and will have considered such risks
prior to any settlement instructions being given to the Custodian with
respect to any other Specified Country.
2. BNY hereby represents that: (a) BNY is duly organized and
existing under the laws of the State of New York, with full power to carry on
its businesses as now conducted, and to enter into this Agreement and to
perform its obligations hereunder; (b) this Agreement has been duly
authorized, executed and delivered by BNY, constitutes a valid and legally
binding obligation of BNY enforceable in accordance with its terms, and no
statute, regulation, rule, order, judgment or contract binding on BNY
prohibits BNY's execution or performance of this Agreement; and (c) BNY has
established the Monitoring System.
ARTICLE V
CONCERNING BNY
1 . BNY shall not be liable for any costs, expenses, damages,
liabilities or claims, including attorneys' and accountants' fees, sustained
or incurred by, or asserted against, the Fund except to the extent the same
arises out of the failure of BNY to exercise the care, prudence and diligence
required by Section 2 of Article II hereof. In no event shall BNY be liable
to the Fund, the Board, or any third party for special, indirect or
consequential damages, or for lost profits or loss of business, arising in
connection with this Agreement.
2. The Fund shall indemnify BNY and hold it harmless from and
against any and all costs, expenses, damages, liabilities or claims,
including attorneys' and accountants' fees, sustained or incurred by, or
asserted against, BNY by reason or as a result of any action or inaction, or
arising out of BNY's performance hereunder, provided that the Fund shall not
indemnify BNY to the extent any such costs, expenses, damages, liabilities or
claims arises out of BNY's failure to exercise the reasonable care, prudence
and diligence required by Section 2 of Article II hereof.
3. For its services hereunder, the Fund agrees to pay to BNY such
compensation and out-of-pocket expenses as shall be mutually agreed.
4. BNY shall have only such duties as are expressly set forth
herein. In no event shall BNY be liable for any Country Risks associated
with investments in a particular country.
ARTICLE VI
MISCELLANEOUS
1 This Agreement constitutes the entire agreement between the Fund
and BNY, and no provision in the Custody Agreement between the Fund and the
Custodian shall affect the duties and obligations of BNY hereunder, nor shall
any provision in this Agreement affect the duties or obligations of the
Custodian under the Custody Agreement.
2. Any notice or other instrument in writing, authorized or required
by this Agreement to be given to BNY, shall be sufficiently given if received
by it at its offices at 90 Washington Street, New York, New York 10286, or at
such other place as BNY may from time to time designate in writing.
3. Any notice or other instrument in writing, authorized or required
by this Agreement to be given to the Fund shall be sufficiently given if
received by it at its offices at Franklin Resources, 777 Mariners Island
Boulevard, San Mateo, California, 94404, Attn: Deborah R. Gatzek, General
Counsel and Senior Vice President, or at such other place as the Fund may
from time to time designate in writing.
4. In case any provision in or obligation under this Agreement shall
be invalid, illegal or unenforceable in any jurisdiction, the validity,
legality and enforceability of the remaining provisions shall not in any way
be affected thereby. This Agreement may not be amended or modified in any
manner except by a written agreement executed by both parties. This
Agreement shall extend to and shall be binding upon the parties hereto, and
their respective successors and assigns; provided however, that this
Agreement shall not be assignable by either party without the written consent
of the other.
5. This Agreement shall be construed in accordance with the
substantive laws of the State of New York, without regard to conflicts of
laws principles thereof
6. The parties hereto agree that in performing hereunder, BNY is
acting solely on behalf of the Fund and no contractual or service
relationship shall be deemed to be established hereby between BNY and any
other person.
7. This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original, but such counterparts shall,
together, constitute only one instrument.
8. This Agreement shall terminate simultaneously with the
termination of the Custody Agreement between the Fund and the Custodian, and
may otherwise be terminated by either party giving to the other party a
notice in writing specifying the date of such termination, which shall be not
less than thirty (30) days after the date of such notice.
IN WITNESS WHEREOF, the Fund and BNY have caused this Agreement to be
executed by their respective officers, thereunto duly authorized, as of the
date first above written.
EACH INVESTMENT COMPANY
LISTED ON SCHEDULE 1 ATTACHED
HERETO.
By: Deborah R. Gatzek
Title: Vice President
Of Each Such Investment Company
THE BANK OF NEW YORK
By: Stephen E. Grunston
Title: Vice President
SUBCONTRACT FOR FUND ADMINISTRATIVE SERVICES
This Subcontract for Fund Administrative Services ("Subcontract") is
made as of October 1, 1996 between FRANKLIN ADVISERS, INC., a California
corporation, hereinafter called the "Investment Manager," and FRANKLIN TEMPLETON
SERVICES, INC. (the "Administrator").
In consideration of the mutual agreements herein made, the
Administrator and the Investment Manager understand and agree as follows:
I. Prime Contract.
This Subcontract is made in order to assist the Investment Manager in fulfilling
certain of the Investment Manager's obligations under each investment management
and investment advisory agreement ("Agreement") between the Investment Manager
and each Investment Company listed on Exhibit A, ("Investment Company") for
itself or on behalf of each of its series listed on Exhibit A (each, a "Fund").
This Subcontract is subject to the terms of each Agreement, which is
incorporated herein by reference.
II. Subcontractual Provisions.
(1) The Administrator agrees, during the life of this Agreement, to provide
the following services to each Fund:
(a) providing office space, telephone, office equipment and supplies
for the Fund;
(b) providing trading desk facilities for the Fund, unless these
facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment on behalf
of the Fund;
(d) supervising preparation of periodic reports to shareholders,
notices of dividends, capital gains distributions and tax credits; and attending
to routine correspondence and other communications with individual shareholders
when asked to do so by the Fund's shareholder servicing agent or other agents of
the Fund;
(e) coordinating the daily pricing of the Fund's investment portfolio,
including collecting quotations from pricing services engaged by the Fund;
providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data; and coordinating trade settlements;
(f) monitoring relationships with organizations serving the Fund,
including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping requirements
under the federal securities laws, including the 1940 Act and the rules and
regulations thereunder, and under other applicable state and federal laws; and
maintaining books and records for the Fund (other than those maintained by the
custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's income
tax returns, and monitoring the Fund's compliance with subchapter M of the
Internal Revenue Code, as amended, and other applicable tax laws and
regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other federal
securities laws, and rules and regulations thereunder; state and foreign laws
and regulations applicable to the operation of investment companies; the Fund's
investment objectives, policies and restrictions; and the Code of Ethics and
other policies adopted by the Investment Company's Board of Trustees or
Directors ("Board") or by the Fund's investment adviser and applicable to the
Fund;
(j) providing executive, clerical and secretarial personnel needed to
carry out the above responsibilities;
(k) preparing and filing regulatory reports, including without
limitation Forms N-1A and NSAR, proxy statements, information statements and
U.S. and foreign ownership reports; and
(l) providing support services incidental to carrying out these
duties.
Nothing in this Agreement shall obligate the Investment Company or any Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate the Administrator to pay for the services of third
parties, including attorneys, auditors, printers, pricing services or others,
engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Investment Manager agrees to pay to the Administrator as
compensation for such services a monthly fee equal on an annual basis to 0.15%
of the first $200 million of the average daily net assets of each Fund during
the month preceding each payment, reduced as follows: on such net assets in
excess of $200 million up to $700 million, a monthly fee equal on an annual
basis to 0.135%; on such net assets in excess of $700 million up to $1.2
billion, a monthly fee equal on an annual basis to 0.1%; and on such net assets
in excess of $1.2 billion, a monthly fee equal on an annual basis to 0.075%.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of each affected Fund's expenses, as if such waiver or limitation
were fully set forth herein.
(3) This Subcontract shall become effective on the date written above and
shall continue in effect as to each Investment Company and each Fund so long as
(1) the Agreement applicable to the Investment Company or Fund is in effect and
(2) this Subcontract is not terminated. This Subcontract will terminate as to
any Investment Company or Fund immediately upon the termination of the Agreement
applicable to the Investment Company or Fund, and may in addition be terminated
by either party at any time, without the payment of any penalty, on sixty (60)
days' written notice to the other party.
(4) In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Administrator, or of reckless disregard of its duties and
obligations hereunder, the Administrator shall not be subject to liability for
any act or omission in the course of, or connected with, rendering services
hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Subcontract to be
executed by their duly authorized officers.
FRANKLIN ADVISERS, INC.
By: /s/ Deborah R. Gatzek
---------------------
Deborah R. Gatzek
Title: Vice President
& Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By: /s/ Harmon E. Burns
---------------------
Harmon E. Burns
Title: Executive Vice President
TERMINATION OF AGREEMENT
- ------------------------
Franklin Advisers, Inc. and Templeton Global Investors, Inc., hereby agree that
the Subcontracts for Administrative Services between them dated: (1) August 28,
1996 for the Franklin Templeton Global Trust on behalf of all series of the
Trust; (2) July 24, 1995 for the Franklin Templeton International Trust on
behalf of its series Templeton Foreign Smaller Companies Fund (formerly known as
Franklin International Equity Fund); (3) July 18, 1995 for the Franklin
Templeton International Trust on behalf of its series Templeton Pacific Growth
Fund; and (4) July 14, 1995 for the Franklin Investors Securities Trust on
behalf of its series Franklin Global Government Income Fund are terminated
effective as of the date of the Subcontract for Fund Administrative Services
above.
FRANKLIN ADVISERS, INC.
By /s/ Harmon E. Burns
----------------------
Harmon E. Burns
Executive Vice President
Templeton Global Investors, Inc.
By /s/ Martin L. Flanagan
----------------------
Martin L. Flanagan
President, CEO
AMENDMENT TO SUBCONTRACT FOR
FUND ADMINISTRATIVE SERVICES
The Subcontract for Fund Administrative Services dated October 1, 1996
between FRANKLIN ADVISERS, INC. and FRANKLIN TEMPLETON SERVICES, INC. is hereby
amended, to replace Exhibit A with the attached Exhibit A.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their duly authorized officers.
FRANKLIN ADVISERS, INC.
By: /s/ Deborah R. Gatzek
---------------------
Deborah R. Gatzek
Vice President & Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By: /s/ Harmon E. Burns
---------------------
Harmon E. Burns
Executive Vice President
Date: April 30, 1998
<TABLE>
<CAPTION>
SUBCONTRACT FOR FUND ADMINISTRATIVE SERVICES
BETWEEN
FRANKLIN ADVISERS, INC.
AND
FRANKLIN TEMPLETON SERVICES, INC.
EXHIBIT A
- ----------------------------------------------------- ---------------------------------------------------------------------
INVESTMENT COMPANY SERIES ---(IF APPLICABLE)
- ----------------------------------------------------- ---------------------------------------------------------------------
<S> <C>
Franklin High Income Trust AGE High Income Fund
Franklin Asset Allocation Fund
Franklin California Tax-Free Income
Fund, Inc.
Franklin California Tax-Free Trust Franklin California Insured Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund
Franklin Federal Tax- Free Income Fund
Franklin Gold Fund
Franklin Investors Securities Trust Franklin Short-Intermediate U.S. Government Securities Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Municipal Securities Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Trust Franklin New York Tax-Exempt Money Fund
Franklin New York Insured Tax-Free Income Fund
Franklin New York Intermediate-Term Tax-Free
Income Fund*
- ----------------------------------------------------- ---------------------------------------------------------------------
- ----------------------------------------------------- ---------------------------------------------------------------------
INVESTMENT COMPANY SERIES ---(IF APPLICABLE)
- ----------------------------------------------------- ---------------------------------------------------------------------
<S> <C>
Franklin Real Estate Securities Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio**
Franklin Strategic Series Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income Fund
Franklin Michigan Tax-Free Income Fund
- ----------------------------------------------------- ---------------------------------------------------------------------
- ----------------------------------------------------- ---------------------------------------------------------------------
INVESTMENT COMPANY SERIES ---(IF APPLICABLE)
- ----------------------------------------------------- ---------------------------------------------------------------------
<S> <C>
Franklin Templeton International Trust Templeton Pacific Growth Fund
Templeton Foreign Smaller Companies Fund
Franklin Templeton Global Trust Franklin Templeton German Government Bond Fund
Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
CLOSED END FUNDS:
Franklin Multi-Income Trust
Franklin Principal Maturity Trust
Franklin Universal Trust
- ----------------------------------------------------- ---------------------------------------------------------------------
- -----------------------------------
* Effective as of March 19, 1998
**Effective as of February 26, 1998
</TABLE>
November 6, 1998
Franklin Custodian Funds, Inc.
777 Mariners Island Boulevard
San Mateo, CA 94404
Re: FRANKLIN CUSTODIAN FUNDS, INC. - LEGAL OPINION
Dear Sirs:
You have asked our opinion as to whether the shares of capital stock
(the "Shares") of Franklin Custodian Funds, Inc. (the "Fund") covered by the
Rule 24f-2 Notice for the fiscal year ending September 30, 1998, filed pursuant
to Section 24(f) of the Investment Company Act of 1940 pertaining to the Fund'
Registration Statement on Form N-1, File No. 2-11346 of the Securities and
Exchange Commission, in accordance with the Securities Act of 1933, as amended,
were duly authorized and validly issued, fully paid and non-assessable.
We have examined the originals or photostatic or certified copies of
such records of the Fund, certificates of officers of the Fund and of public
officials and other documents as we have deemed relevant and necessary as a
basis for the opinions set forth in this letter. In such examination, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted as originals, the conformity to the original documents of all
documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents.
Among the documents examined were the Certificate of Incorporation
of the Fund, its By-Laws and the Underwriting Agreement between the Fund and
Franklin/Templeton Distributors, Inc. pursuant to which the Shares were issued
and sold.
In furnishing such opinion we assume, and you have informed us, that
the Shares will continue to be sold in accordance with the Fund's usual method
of distributing its registered Shares under which prospectuses are delivered as
required under the Securities Act of 1933, as amended, and that all corporate
action necessary for authorization of such Shares shall be taken by the Fund's
Board of Directors in accordance with past practice.
Based upon our examination mentioned above, and relying upon the
statements of the Fund contained in the documents that we have examined, we are
of the opinion that the Shares were duly authorized and validly issued, fully
paid and non-assessable.
We hereby consent to the filing of this opinion with the Securities
and Exchange Commission as part of the Registration Statement filed on behalf of
the Fund.
Very truly yours,
/s/Bleakley Platt & Schmidt
Bleakley Platt & Schmidt
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 78
to the Registration Statement of Franklin Custodian Funds, Inc. on Form N-1A
File No. 2-11346 of our report dated October 30, 1998 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, 1998 which is incorporated by reference in the Registration
Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Francisco, California
November 20, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
CUSTODIAN FUNDS SEPTEMBER 30, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> FRANKLIN GROWTH SERIES - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 433,324,038
<INVESTMENTS-AT-VALUE> 1,065,564,551
<RECEIVABLES> 516,344,195
<ASSETS-OTHER> 564,636
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,582,473,382
<PAYABLE-FOR-SECURITIES> 780,632
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,091,238
<TOTAL-LIABILITIES> 3,871,870
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 912,447,954
<SHARES-COMMON-STOCK> 52,996,093
<SHARES-COMMON-PRIOR> 44,715,467
<ACCUMULATED-NII-CURRENT> 19,890,444
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,022,601
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 632,240,513
<NET-ASSETS> 1,578,601,512
<DIVIDEND-INCOME> 12,800,457
<INTEREST-INCOME> 20,234,726
<OTHER-INCOME> 0
<EXPENSES-NET> (12,503,943)
<NET-INVESTMENT-INCOME> 20,531,240
<REALIZED-GAINS-CURRENT> 14,065,272
<APPREC-INCREASE-CURRENT> 215,960,743
<NET-CHANGE-FROM-OPS> 250,557,255
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,432,896)
<DISTRIBUTIONS-OF-GAINS> (9,283,568)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19,647,652
<NUMBER-OF-SHARES-REDEEMED> (12,109,484)
<SHARES-REINVESTED> 742,458
<NET-CHANGE-IN-ASSETS> 514,698,292
<ACCUMULATED-NII-PRIOR> 10,212,504
<ACCUMULATED-GAINS-PRIOR> 9,795,215
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,295,304
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 12,503,943
<AVERAGE-NET-ASSETS> 1,321,892,182
<PER-SHARE-NAV-BEGIN> 22.820
<PER-SHARE-NII> .360
<PER-SHARE-GAIN-APPREC> 4.340
<PER-SHARE-DIVIDEND> (.230)
<PER-SHARE-DISTRIBUTIONS> (.200)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 27.090
<EXPENSE-RATIO> .890
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
CUSTODIAN FUNDS SEPTEMBER 30, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 012
<NAME> FRANKLIN GROWTH SERIES - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 433,324,038
<INVESTMENTS-AT-VALUE> 1,065,564,551
<RECEIVABLES> 516,344,195
<ASSETS-OTHER> 564,636
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,582,473,382
<PAYABLE-FOR-SECURITIES> 780,632
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,091,238
<TOTAL-LIABILITIES> 3,871,870
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 912,447,954
<SHARES-COMMON-STOCK> 4,391,009
<SHARES-COMMON-PRIOR> 1,921,082
<ACCUMULATED-NII-CURRENT> 19,890,444
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,022,601
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 632,240,513
<NET-ASSETS> 1,578,601,512
<DIVIDEND-INCOME> 12,800,457
<INTEREST-INCOME> 20,234,726
<OTHER-INCOME> 0
<EXPENSES-NET> (12,503,943)
<NET-INVESTMENT-INCOME> 20,531,240
<REALIZED-GAINS-CURRENT> 14,065,272
<APPREC-INCREASE-CURRENT> 215,960,743
<NET-CHANGE-FROM-OPS> 250,557,255
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (420,404)
<DISTRIBUTIONS-OF-GAINS> (554,318)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,570,458
<NUMBER-OF-SHARES-REDEEMED> (1,139,059)
<SHARES-REINVESTED> 38,528
<NET-CHANGE-IN-ASSETS> 514,698,292
<ACCUMULATED-NII-PRIOR> 10,212,504
<ACCUMULATED-GAINS-PRIOR> 9,795,215
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,295,304
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 12,503,943
<AVERAGE-NET-ASSETS> 1,321,892,182
<PER-SHARE-NAV-BEGIN> 22.600
<PER-SHARE-NII> .200
<PER-SHARE-GAIN-APPREC> 4.250
<PER-SHARE-DIVIDEND> (.150)
<PER-SHARE-DISTRIBUTIONS> (.200)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 26.700
<EXPENSE-RATIO> 1.660
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
CUSTODIAN FUNDS SEPTEMBER 30, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 013
<NAME> FRANKLIN GROWTH SERIES - ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 433,324,038
<INVESTMENTS-AT-VALUE> 1,065,564,551
<RECEIVABLES> 516,344,195
<ASSETS-OTHER> 564,636
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,582,473,382
<PAYABLE-FOR-SECURITIES> 780,632
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,091,238
<TOTAL-LIABILITIES> 3,871,870
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 912,447,954
<SHARES-COMMON-STOCK> 951,931
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 19,890,444
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,022,601
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 632,240,513
<NET-ASSETS> 1,578,601,512
<DIVIDEND-INCOME> 12,800,457
<INTEREST-INCOME> 20,234,726
<OTHER-INCOME> 0
<EXPENSES-NET> (12,503,943)
<NET-INVESTMENT-INCOME> 20,531,240
<REALIZED-GAINS-CURRENT> 14,065,272
<APPREC-INCREASE-CURRENT> 215,960,743
<NET-CHANGE-FROM-OPS> 250,557,255
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,309,960
<NUMBER-OF-SHARES-REDEEMED> (358,029)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 514,698,292
<ACCUMULATED-NII-PRIOR> 10,212,504
<ACCUMULATED-GAINS-PRIOR> 9,795,215
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,295,304
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 12,503,943
<AVERAGE-NET-ASSETS> 1,321,892,182
<PER-SHARE-NAV-BEGIN> 23.240
<PER-SHARE-NII> .250
<PER-SHARE-GAIN-APPREC> 3.640
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 27.130
<EXPENSE-RATIO> .660
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 031
<NAME> FRANKLIN UTILITIES SERIES - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 1,719,080,804
<INVESTMENTS-AT-VALUE> 1,933,205,376
<RECEIVABLES> 58,834,320
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,992,039,696
<PAYABLE-FOR-SECURITIES> 39,690
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,101,345
<TOTAL-LIABILITIES> 8,141,035
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,711,049,291
<SHARES-COMMON-STOCK> 194,534,988
<SHARES-COMMON-PRIOR> 246,652,238
<ACCUMULATED-NII-CURRENT> 8,991,193
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 49,733,605
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 214,124,572
<NET-ASSETS> 1,983,898,661
<DIVIDEND-INCOME> 108,058,105
<INTEREST-INCOME> 23,367,984
<OTHER-INCOME> 0
<EXPENSES-NET> (16,559,767)
<NET-INVESTMENT-INCOME> 114,866,322
<REALIZED-GAINS-CURRENT> 49,829,022
<APPREC-INCREASE-CURRENT> 112,850,805
<NET-CHANGE-FROM-OPS> 277,546,149
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (113,914,994)
<DISTRIBUTIONS-OF-GAINS> (100,515,956)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12,100,694
<NUMBER-OF-SHARES-REDEEMED> (81,440,706)
<SHARES-REINVESTED> 17,222,762
<NET-CHANGE-IN-ASSETS> (436,317,283)
<ACCUMULATED-NII-PRIOR> 9,384,835
<ACCUMULATED-GAINS-PRIOR> 101,323,800
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9,987,693
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 16,559,767
<AVERAGE-NET-ASSETS> 2,183,851,035
<PER-SHARE-NAV-BEGIN> 9.730
<PER-SHARE-NII> .530
<PER-SHARE-GAIN-APPREC> .730
<PER-SHARE-DIVIDEND> (.520)
<PER-SHARE-DISTRIBUTIONS> (.430)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.040
<EXPENSE-RATIO> .750
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 032
<NAME> FRANKLIN UTILITIES SERIES - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 1,719,080,804
<INVESTMENTS-AT-VALUE> 1,933,205,376
<RECEIVABLES> 58,834,320
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,992,039,696
<PAYABLE-FOR-SECURITIES> 39,690
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,101,345
<TOTAL-LIABILITIES> 8,141,035
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,711,049,291
<SHARES-COMMON-STOCK> 2,185,554
<SHARES-COMMON-PRIOR> 2,021,886
<ACCUMULATED-NII-CURRENT> 8,991,193
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 49,733,605
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 214,124,572
<NET-ASSETS> 1,983,898,661
<DIVIDEND-INCOME> 108,058,105
<INTEREST-INCOME> 23,367,984
<OTHER-INCOME> 0
<EXPENSES-NET> (16,559,767)
<NET-INVESTMENT-INCOME> 114,866,322
<REALIZED-GAINS-CURRENT> 49,829,022
<APPREC-INCREASE-CURRENT> 112,850,805
<NET-CHANGE-FROM-OPS> 277,546,149
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,067,340)
<DISTRIBUTIONS-OF-GAINS> (903,261)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 853,797
<NUMBER-OF-SHARES-REDEEMED> (854,260)
<SHARES-REINVESTED> 164,131
<NET-CHANGE-IN-ASSETS> (436,317,283)
<ACCUMULATED-NII-PRIOR> 9,384,835
<ACCUMULATED-GAINS-PRIOR> 101,323,800
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9,987,693
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 16,559,767
<AVERAGE-NET-ASSETS> 2,183,851,035
<PER-SHARE-NAV-BEGIN> 9.720
<PER-SHARE-NII> .450
<PER-SHARE-GAIN-APPREC> .760
<PER-SHARE-DIVIDEND> (.480)
<PER-SHARE-DISTRIBUTIONS> (.430)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.020
<EXPENSE-RATIO> 1.270
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 033
<NAME> FRANKLIN UTILITIES SERIES - ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 1,719,080,804
<INVESTMENTS-AT-VALUE> 1,933,205,376
<RECEIVABLES> 58,834,320
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,992,039,696
<PAYABLE-FOR-SECURITIES> 39,690
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,101,345
<TOTAL-LIABILITIES> 8,141,035
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,711,049,291
<SHARES-COMMON-STOCK> 868,767
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 8,991,193
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 49,733,605
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 214,124,572
<NET-ASSETS> 1,983,898,661
<DIVIDEND-INCOME> 108,058,105
<INTEREST-INCOME> 23,367,984
<OTHER-INCOME> 0
<EXPENSES-NET> (16,559,767)
<NET-INVESTMENT-INCOME> 114,866,322
<REALIZED-GAINS-CURRENT> 49,829,022
<APPREC-INCREASE-CURRENT> 112,850,805
<NET-CHANGE-FROM-OPS> 277,546,149
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (277,630)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,303,704
<NUMBER-OF-SHARES-REDEEMED> (458,724)
<SHARES-REINVESTED> 23,787
<NET-CHANGE-IN-ASSETS> (436,317,283)
<ACCUMULATED-NII-PRIOR> 9,384,835
<ACCUMULATED-GAINS-PRIOR> 101,323,800
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9,987,693
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 16,559,767
<AVERAGE-NET-ASSETS> 2,183,851,035
<PER-SHARE-NAV-BEGIN> 9.550
<PER-SHARE-NII> .360
<PER-SHARE-GAIN-APPREC> .530
<PER-SHARE-DIVIDEND> (.400)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.040
<EXPENSE-RATIO> .620
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERRENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 021
<NAME> FRANKLIN DYNATECH SERIES - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 31,963,323
<INVESTMENTS-AT-VALUE> 118,805,938
<RECEIVABLES> 72,995,320
<ASSETS-OTHER> 268,120
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 192,069,378
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 582,033
<TOTAL-LIABILITIES> 582,033
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 96,665,679
<SHARES-COMMON-STOCK> 10,177,494
<SHARES-COMMON-PRIOR> 7,446,627
<ACCUMULATED-NII-CURRENT> 1,031,642
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,947,409
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 86,842,615
<NET-ASSETS> 191,487,345
<DIVIDEND-INCOME> 455,107
<INTEREST-INCOME> 2,060,661
<OTHER-INCOME> 0
<EXPENSES-NET> (1,472,532)
<NET-INVESTMENT-INCOME> 1,043,236
<REALIZED-GAINS-CURRENT> 6,949,626
<APPREC-INCREASE-CURRENT> 33,474,575
<NET-CHANGE-FROM-OPS> 41,467,437
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (415,339)
<DISTRIBUTIONS-OF-GAINS> (3,013,708)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,207,685
<NUMBER-OF-SHARES-REDEEMED> (4,675,913)
<SHARES-REINVESTED> 199,095
<NET-CHANGE-IN-ASSETS> 86,979,183
<ACCUMULATED-NII-PRIOR> 403,922
<ACCUMULATED-GAINS-PRIOR> 3,012,745
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 840,480
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,472,532
<AVERAGE-NET-ASSETS> 140,139,612
<PER-SHARE-NAV-BEGIN> 14.030
<PER-SHARE-NII> .100
<PER-SHARE-GAIN-APPREC> 4.810
<PER-SHARE-DIVIDEND> (.060)
<PER-SHARE-DISTRIBUTIONS> (.400)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 18.480
<EXPENSE-RATIO> 1.040
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 022
<NAME> FRANKLIN DYNATECH SERIES - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 31,963,323
<INVESTMENTS-AT-VALUE> 118,805,938
<RECEIVABLES> 72,995,320
<ASSETS-OTHER> 268,120
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 192,069,378
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 582,033
<TOTAL-LIABILITIES> 582,033
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 96,665,679
<SHARES-COMMON-STOCK> 184,978
<SHARES-COMMON-PRIOR> 14
<ACCUMULATED-NII-CURRENT> 1,031,642
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,947,409
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 86,842,615
<NET-ASSETS> 191,487,345
<DIVIDEND-INCOME> 455,107
<INTEREST-INCOME> 2,060,661
<OTHER-INCOME> 0
<EXPENSES-NET> (1,472,532)
<NET-INVESTMENT-INCOME> 1,043,236
<REALIZED-GAINS-CURRENT> 6,949,626
<APPREC-INCREASE-CURRENT> 33,474,575
<NET-CHANGE-FROM-OPS> 41,467,437
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (177)
<DISTRIBUTIONS-OF-GAINS> (1,254)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 275,202
<NUMBER-OF-SHARES-REDEEMED> (90,332)
<SHARES-REINVESTED> 94
<NET-CHANGE-IN-ASSETS> 86,979,183
<ACCUMULATED-NII-PRIOR> 403,922
<ACCUMULATED-GAINS-PRIOR> 3,012,745
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 840,480
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,472,532
<AVERAGE-NET-ASSETS> 140,139,612
<PER-SHARE-NAV-BEGIN> 14.030
<PER-SHARE-NII> .070
<PER-SHARE-GAIN-APPREC> 4.660
<PER-SHARE-DIVIDEND> (.060)
<PER-SHARE-DISTRIBUTIONS> (.400)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 18.300
<EXPENSE-RATIO> 1.820
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 041
<NAME> FRANKLIN INCOME SERIES - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 7,129,432,474
<INVESTMENTS-AT-VALUE> 7,872,822,469
<RECEIVABLES> 591,672,166
<ASSETS-OTHER> 953,208
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8,465,447,843
<PAYABLE-FOR-SECURITIES> 879,535
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 17,149,071
<TOTAL-LIABILITIES> 18,028,606
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,542,673,869
<SHARES-COMMON-STOCK> 3,106,620,788
<SHARES-COMMON-PRIOR> 2,943,970,959
<ACCUMULATED-NII-CURRENT> 69,436,365
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 92,009,348
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 743,299,655
<NET-ASSETS> 8,447,419,237
<DIVIDEND-INCOME> 178,110,067
<INTEREST-INCOME> 454,852,746
<OTHER-INCOME> 0
<EXPENSES-NET> (58,053,156)
<NET-INVESTMENT-INCOME> 574,909,657
<REALIZED-GAINS-CURRENT> 133,917,032
<APPREC-INCREASE-CURRENT> 524,014,976
<NET-CHANGE-FROM-OPS> 1,232,841,665
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (545,342,618)
<DISTRIBUTIONS-OF-GAINS> (29,741,890)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 538,060,045
<NUMBER-OF-SHARES-REDEEMED> (520,661,763)
<SHARES-REINVESTED> 145,251,547
<NET-CHANGE-IN-ASSETS> 1,323,951,983
<ACCUMULATED-NII-PRIOR> 34,315,598
<ACCUMULATED-GAINS-PRIOR> 30,949,499
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 35,364,027
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 58,053,156
<AVERAGE-NET-ASSETS> 7,750,901,854
<PER-SHARE-NAV-BEGIN> 2.300
<PER-SHARE-NII> .180
<PER-SHARE-GAIN-APPREC> .200
<PER-SHARE-DIVIDEND> (.180)
<PER-SHARE-DISTRIBUTIONS> (.010)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 2.490
<EXPENSE-RATIO> .720
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 042
<NAME> FRANKLIN INCOME SERIES - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 7,129,432,474
<INVESTMENTS-AT-VALUE> 7,872,822,469
<RECEIVABLES> 591,672,166
<ASSETS-OTHER> 953,208
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8,465,447,843
<PAYABLE-FOR-SECURITIES> 879,535
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 17,149,071
<TOTAL-LIABILITIES> 18,028,606
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,542,673,869
<SHARES-COMMON-STOCK> 278,951,410
<SHARES-COMMON-PRIOR> 148,995,814
<ACCUMULATED-NII-CURRENT> 69,436,365
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 92,009,348
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 743,299,655
<NET-ASSETS> 8,447,419,237
<DIVIDEND-INCOME> 178,110,067
<INTEREST-INCOME> 454,852,746
<OTHER-INCOME> 0
<EXPENSES-NET> (58,053,156)
<NET-INVESTMENT-INCOME> 574,909,657
<REALIZED-GAINS-CURRENT> 133,917,032
<APPREC-INCREASE-CURRENT> 524,014,976
<NET-CHANGE-FROM-OPS> 1,232,841,665
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (35,350,218)
<DISTRIBUTIONS-OF-GAINS> (1,712,633)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 151,188,247
<NUMBER-OF-SHARES-REDEEMED> (30,837,863)
<SHARES-REINVESTED> 9,605,212
<NET-CHANGE-IN-ASSETS> 1,323,951,983
<ACCUMULATED-NII-PRIOR> 34,315,598
<ACCUMULATED-GAINS-PRIOR> 30,949,499
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 35,364,027
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 58,053,156
<AVERAGE-NET-ASSETS> 7,750,901,854
<PER-SHARE-NAV-BEGIN> 2.300
<PER-SHARE-NII> .160
<PER-SHARE-GAIN-APPREC> .210
<PER-SHARE-DIVIDEND> (.170)
<PER-SHARE-DISTRIBUTIONS> (.010)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 2.490
<EXPENSE-RATIO> 1.220
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 043
<NAME> FRANKLIN INCOME SERIES - ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 7,129,432,474
<INVESTMENTS-AT-VALUE> 7,872,822,469
<RECEIVABLES> 591,672,166
<ASSETS-OTHER> 953,208
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8,465,447,843
<PAYABLE-FOR-SECURITIES> 879,535
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 17,149,071
<TOTAL-LIABILITIES> 18,028,606
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,542,673,869
<SHARES-COMMON-STOCK> 5,366,210
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 69,436,365
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 92,099,348
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 743,299,655
<NET-ASSETS> 8,447,419,237
<DIVIDEND-INCOME> 178,110,067
<INTEREST-INCOME> 454,852,746
<OTHER-INCOME> 0
<EXPENSES-NET> (58,053,156)
<NET-INVESTMENT-INCOME> 574,909,657
<REALIZED-GAINS-CURRENT> 133,917,032
<APPREC-INCREASE-CURRENT> 524,014,976
<NET-CHANGE-FROM-OPS> 1,232,841,665
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (498,714)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,630,896
<NUMBER-OF-SHARES-REDEEMED> (463,157)
<SHARES-REINVESTED> 198,471
<NET-CHANGE-IN-ASSETS> 1,323,951,983
<ACCUMULATED-NII-PRIOR> 34,315,598
<ACCUMULATED-GAINS-PRIOR> 30,949,499
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 35,364,027
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 58,053,156
<AVERAGE-NET-ASSETS> 7,750,901,854
<PER-SHARE-NAV-BEGIN> 2.340
<PER-SHARE-NII> .140
<PER-SHARE-GAIN-APPREC> .140
<PER-SHARE-DIVIDEND> (.140)
<PER-SHARE-DISTRIBUTIONS> (.000)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 2.480
<EXPENSE-RATIO> .570
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 051
<NAME> FRANKLIN U.S. GOVERNMENT SECURITIES FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 9,275,272,398
<INVESTMENTS-AT-VALUE> 9,455,207,848
<RECEIVABLES> 64,187,449
<ASSETS-OTHER> 25,678
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,519,420,975
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 33,382,420
<TOTAL-LIABILITIES> 33,382,420
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,690,762,713
<SHARES-COMMON-STOCK> 1,357,281,977
<SHARES-COMMON-PRIOR> 1,507,740,610
<ACCUMULATED-NII-CURRENT> 7,036,041
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (391,695,649)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 179,935,450
<NET-ASSETS> 9,486,038,555
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 753,095,315
<OTHER-INCOME> 0
<EXPENSES-NET> (63,235,107)
<NET-INVESTMENT-INCOME> 689,860,208
<REALIZED-GAINS-CURRENT> (29,505,613)
<APPREC-INCREASE-CURRENT> 285,289,807
<NET-CHANGE-FROM-OPS> 945,644,402
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (694,284,790)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 78,194,660
<NUMBER-OF-SHARES-REDEEMED> (276,583,345)
<SHARES-REINVESTED> 47,930,052
<NET-CHANGE-IN-ASSETS> (701,101,700)
<ACCUMULATED-NII-PRIOR> 17,291,457
<ACCUMULATED-GAINS-PRIOR> (455,164,836)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 44,411,776
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 63,235,107
<AVERAGE-NET-ASSETS> 9,843,590,029
<PER-SHARE-NAV-BEGIN> 6.720
<PER-SHARE-NII> .480
<PER-SHARE-GAIN-APPREC> .170
<PER-SHARE-DIVIDEND> (.480)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 6.890
<EXPENSE-RATIO> .640
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 052
<NAME> FRANKLIN U.S. GOVERNMENT SECURITIES FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 9,275,272,398
<INVESTMENTS-AT-VALUE> 9,455,207,848
<RECEIVABLES> 64,187,449
<ASSETS-OTHER> 25,678
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,519,420,975
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 33,382,420
<TOTAL-LIABILITIES> 33,382,420
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,690,762,713
<SHARES-COMMON-STOCK> 17,586,866
<SHARES-COMMON-PRIOR> 8,605,785
<ACCUMULATED-NII-CURRENT> 7,036,041
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (391,695,649)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 179,935,450
<NET-ASSETS> 9,486,038,555
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 753,095,315
<OTHER-INCOME> 0
<EXPENSES-NET> (63,235,107)
<NET-INVESTMENT-INCOME> 689,860,208
<REALIZED-GAINS-CURRENT> (29,505,613)
<APPREC-INCREASE-CURRENT> 285,289,807
<NET-CHANGE-FROM-OPS> 945,644,402
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,467,178)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11,765,224
<NUMBER-OF-SHARES-REDEEMED> (3,311,245)
<SHARES-REINVESTED> 527,102
<NET-CHANGE-IN-ASSETS> (701,101,700)
<ACCUMULATED-NII-PRIOR> 17,291,457
<ACCUMULATED-GAINS-PRIOR> (455,164,836)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 44,411,776
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 63,235,107
<AVERAGE-NET-ASSETS> 9,843,590,029
<PER-SHARE-NAV-BEGIN> 6.700
<PER-SHARE-NII> .440
<PER-SHARE-GAIN-APPREC> .170
<PER-SHARE-DIVIDEND> (.440)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 6.870
<EXPENSE-RATIO> 1.200
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 053
<NAME> FRANKLIN U.S. GOVERNMENT SECURITIES FUND - ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 9,275,272,398
<INVESTMENTS-AT-VALUE> 9,455,207,848
<RECEIVABLES> 64,187,449
<ASSETS-OTHER> 25,678
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,519,420,975
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 33,382,420
<TOTAL-LIABILITIES> 33,382,420
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,690,762,713
<SHARES-COMMON-STOCK> 2,097,990
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 7,036,041
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (391,695,649)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 179,935,450
<NET-ASSETS> 9,486,038,555
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 753,095,315
<OTHER-INCOME> 0
<EXPENSES-NET> (63,235,107)
<NET-INVESTMENT-INCOME> 689,860,208
<REALIZED-GAINS-CURRENT> (29,505,613)
<APPREC-INCREASE-CURRENT> 285,289,807
<NET-CHANGE-FROM-OPS> 945,644,402
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (363,656)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,433,391
<NUMBER-OF-SHARES-REDEEMED> (375,540)
<SHARES-REINVESTED> 40,139
<NET-CHANGE-IN-ASSETS> (701,101,700)
<ACCUMULATED-NII-PRIOR> 17,291,457
<ACCUMULATED-GAINS-PRIOR> (455,164,836)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 44,411,776
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 63,235,107
<AVERAGE-NET-ASSETS> 9,843,590,029
<PER-SHARE-NAV-BEGIN> 6.760
<PER-SHARE-NII> .380
<PER-SHARE-GAIN-APPREC> .120
<PER-SHARE-DIVIDEND> (.360)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 6.900
<EXPENSE-RATIO> .550
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
