PROSPECTUS & APPLICATION
FRANKLIN
CUSTODIAN
FUNDS, INC.
FEBRUARY 1, 1998 as amended AUGUST 3, 1998
INVESTMENT STRATEGY Utilities Series
GROWTH & INCOME Income Series
INVESTMENT STRATEGY Growth Series
GROWTH DynaTech Series
INVESTMENT STRATEGY U.S. Government Securities Series
INCOME
Please read this prospectus before investing, and keep it for future
reference. It contains important information, including how the fund invests
and the services available to shareholders.
This prospectus describes Class I and Class II shares of the five series of
Franklin Custodian Funds, Inc. ("Custodian Funds"). Utilities Series, Income
Series, Growth Series and U.S. Government Securities Series currently offer
another share class with a different sales charge and expense structure,
which affects performance.
To learn more about the fund and its policies, you may request a copy of the
fund's Statement of Additional Information ("SAI"), dated February 1, 1998,
which we may amend from time to time. We have filed the SAI with the SEC and
have incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus, or
to receive a free copy of the prospectus for the fund's other share class,
contact your investment representative or call 1-800/DIAL BEN.
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.
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.
INCOME SERIES MAY INVEST UP TO 100% OF ITS NET ASSETS IN NON-INVESTMENT GRADE
BONDS. THESE ARE COMMONLY KNOWN AS "JUNK BONDS." THEIR DEFAULT AND OTHER
RISKS ARE GREATER THAN THOSE OF HIGHER RATED SECURITIES. YOU SHOULD CAREFULLY
CONSIDER THESE RISKS BEFORE INVESTING IN THE FUND. PLEASE SEE "WHAT ARE THE
RISKS OF INVESTING IN THE FUND?"
FRANKLIN CUSTODIAN FUNDS, INC.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country in which the offering is not authorized. No
sales representative, dealer, or other person is authorized to give any
information or make any representations other than those contained in this
prospectus. Further information may be obtained from Distributors.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary ........................................................ 2
Financial Highlights ................................................... 4
How Does the Fund Invest Its Assets? ................................... 13
What Are the Risks of Investing in the Fund? ........................... 24
Who Manages the Fund? .................................................. 29
How Taxation Affects the Fund and Its Shareholders ..................... 34
How Is the Fund Organized? ............................................. 37
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ................................................... 38
May I Exchange Shares for Shares of Another Fund? ...................... 46
How Do I Sell Shares? .................................................. 49
What Distributions Might I Receive From the Fund? ...................... 52
Transaction Procedures and Special Requirements ........................ 53
Services to Help You Manage Your Account ............................... 57
What If I Have Questions About My Account? ............................. 60
GLOSSARY
Useful Terms and Definitions ........................................... 60
APPENDIX
Description of Ratings ................................................. 63
FRANKLIN CUSTODIAN FUNDS, INC.
FEBRUARY 1, 1998
AS AMENDED AUGUST 3, 1998
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN(R)
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in the
fund. It is based on the historical expenses of each class for the fiscal
year ended September 30, 1997. The funds' actual expenses may vary.
<TABLE>
<CAPTION>
U.S.
GOVERNMENT
GROWTH UTILITIES INCOME SECURITIES DYNATECH
SERIES SERIES SERIES SERIES SERIES
- ----------------------------------------------------------------------------------------
A.SHAREHOLDER TRANSACTION EXPENSES+
<S> <C> <C> <C> <C> <C>
CLASS I
Maximum Sales Charge (as a
percentage of Offering Price) 5.75% 4.25% 4.25% 4.25% 5.75%
Paid at time of purchase++ 5.75% 4.25% 4.25% 4.25% 5.75%
Paid at redemption++++ NONE NONE NONE NONE NONE
Exchange Fee (per transaction) $5.00* $5.00* $5.00* $5.00* NONE
CLASS II
Maximum Sales Charge (as a
percentage of Offering Price) 1.99% 1.99% 1.99% 1.99% 1.99%
Paid at time of purchase+++ 1.00% 1.00% 1.00% 1.00% 1.00%
Paid at redemption++++ 0.99% 0.99% 0.99% 0.99% 0.99%
Exchange Fee (per transaction) $5.00* $5.00* $5.00* $5.00* NONE
B.ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
CLASS I
Management Fees 0.48% 0.46% 0.46% 0.45% 0.60%
Rule 12b-1 Fees** 0.23% 0.13% 0.15% 0.09% 0.22%
Other Expenses 0.18% 0.16% 0.11% 0.10% 0.22%
------------------------------------------------
Total Fund Operating Expenses 0.89% 0.75% 0.72% 0.64% 1.04%
================================================
CLASS II
Management Fees 0.48% 0.46% 0.46% 0.45% 0.60%
Rule 12b-1 Fees** 1.00% 0.65% 0.65% 0.65% 1.00%
Other Expenses 0.18% 0.16% 0.11% 0.10% 0.22%
------------------------------------------------
Total Fund Operating Expenses 1.66% 1.27% 1.22% 1.20% 1.82%
================================================
</TABLE>
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the fund.
U.S.
GOVERNMENT
GROWTH UTILITIES INCOME SECURITIES DYNATECH
SERIES SERIES SERIES SERIES SERIES
- ------------------------------------------------------------------------------
CLASS I
1 Year*** .............. $ 66 $ 50 $ 50 $ 49 $ 67
3 Years ................ $ 84 $ 65 $ 65 $ 62 $ 89
5 Years ............... $104 $ 82 $ 81 $ 77 $112
10 Years ............... $161 $132 $128 $119 $177
CLASS II
1 Year ................. $ 37 $ 33 $ 32 $ 32 $ 38
3 Years ................ $ 62 $ 50 $ 48 $ 48 $ 67
5 Years ................ $ 99 $ 79 $ 76 $ 75 $108
10 Years ............... $205 $162 $156 $154 $222
For the same Class II investment, you would pay projected expenses of $27
(Growth Series), $23 (Utilities Series), $22 (Income Series), $22 (U.S.
Government Securities Series) and $28 (DynaTech Series) if you did not sell
your shares at the end of the first year. Your projected expenses for the
remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in
Class I shares.
+++Although Class II has a lower front-end sales charge than Class I, its
Rule 12b-1 fees are higher. Over time you may pay more for Class II shares.
Please see "How Do I Buy Shares? - Choosing a Share Class."
++++A Contingent Deferred Sales Charge may apply to any Class II purchase if
you sell the shares within 18 months and to Class I purchases of $1 million
or more if you sell the shares within one year. A Contingent Deferred Sales
Charge may also apply to purchases by certain retirement plans that qualify
to buy Class I shares without a front-end sales charge. The charge is 1% of
the value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. The number in the table shows the charge as a percentage
of Offering Price. While the percentage is different depending on whether the
charge is shown based on the Net Asset Value or the Offering Price, the
dollar amount you would pay is the same. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without
a fee.
**For Utilities, Income and U.S. Government Securities Series, these fees may
not exceed 0.15% for Class I and 0.65% for Class II. For Growth and DynaTech
Series, these fees may not exceed 0.25% for Class I and 1.00% for Class II.
The combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the
maximum front-end sales charge permitted under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes each fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the funds' independent auditors. Their
audit report covering each of the most recent five years appears in Custodian
Funds' Annual Report to Shareholders for the fiscal year ended September 30,
1997. The Annual Report to Shareholders also includes more information about
each fund's performance. For a free copy, please call Fund Information.
<TABLE>
<CAPTION>
Growth Series
Class I+++
Year Ended Sept. 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
(for a share outstanding throughout the year)
Net Asset Value,
beginning of year $22.82 $19.38 $14.96 $14.25 $13.70 $13.45 $10.69 $11.97 $ 9.64 $10.39
Income from investment
operations:
Net investment income .36 .22 .17 .19 .23 .23 .33 .32 .23 .21
Net realized and
unrealized gains (losses) 4.34 3.53 4.43 .90 .58 .52 2.70 (1.19) 2.33 (.57)
Total from investment
operations 4.70 3.75 4.60 1.09 .81 .75 3.03 (.87) 2.56 (.36)
Less distributions:
Dividends from net
investment income (.23) (.16) (.14) (.30) (.19) (.35) (.27) (.21) (.22) (.20)
Distributions from
net realized gains (.20) (.15) (.04) (.08) (.07) (.15) - (.20) (.01) (.19)
Total distributions (.43) (.31) (.18) (.38) (.26) (.50) (.27) (.41) (.23) (.39)
Net Asset Value, end of year $27.09 $22.82 $19.38 $14.96 $14.25 $13.70 $13.45 $10.69 $11.97 $ 9.64
Total return* 20.84% 19.60% 31.11% 7.63% 5.87% 5.73% 28.65% (7.55)% 27.02% (3.28)%
Ratios/Supplemental Data
Net assets, end of year
(in millions) $1,436 $1,020 $713 $517 $561 $533 $331 $170 $135 $107
Ratio to average net assets:
Expenses .89% .87% .90% .77% .64% .66% .70% .73% .76% .77%
Net investment income 1.60% 1.16% 1.08% 1.23% 1.64% 2.06% 2.58% 2.74% 1.94% 2.27%
Portfolio turnover rate 1.77% 2.03% 1.39% 6.52% 1.70% .81% 7.98% - 2.24% -
Average commission
rate paid*** $.0568 $.0543 - - - - - - - -
Class II
Year Ended Sept. 30,
1997 1996 1995+
<S> <C> <C> <C>
Per Share Operating Performance
(for a share outstanding throughout the year)
Net Asset Value, beginning of year ........................... $22.60 $19.33 $16.88
Income from investment operations:
Net investment income ....................................... .20 .12 .02
Net realized and unrealized gains ......................... 4.25 3.46 2.43
Total from investment operations ............................. 4.45 3.58 2.45
Less distributions:
Dividends from net investment income ........................ (.15) (.16) -
Distributions from net realized gains ....................... (.20) (.15) -
Total distributions .......................................... (.35) (.31) -
Net Asset Value, end of year ................................. $26.70 $22.60 $19.33
Total return* ................................................ 19.91% 18.73% 14.72%
Ratios/Supplemental Data
Net assets, end of year (in millions) ........................ $117 $43 $4
Ratio to average net assets:
Expenses .................................................... 1.66% 1.63% 1.79%**
Net investment income ....................................... .85% .40% .37%**
Portfolio turnover rate ...................................... 1.77% 2.03% 1.39%
Average commission rate paid*** .............................. $.0568 $ .0543 -
DynaTech Series
Class I+++
Year Ended Sept. 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
(for a share outstanding throughout the year)
Net Asset Value,
beginning of year $14.03 $12.78 $ 9.85 $10.29 $ 9.21 $8.68 $6.77 $7.63 $5.89 $7.08
Income from investment
operations:
Net investment income .10 .06 .12 .07 .10 .12 .13 .15 .06 .04
Net realized and
unrealized gains (losses) 4.81 1.54 2.99 .21 1.21 .52 1.95 (.35) 1.72 (1.20)
Total from investment
operations 4.91 1.60 3.11 .28 1.31 .64 2.08 (.20) 1.78 (1.16)
Dividends from net
investment income (.06) (.12) (.05) (.12) (.12) (.11) (.17) (.06) (.04) (.03)
Distributions from
net realized gains (.40) (.23) (.13) (.60) (.11) - - (.60) - -
Total distributions (.46) (.35) (.18) (.72) (.23) (.11) (.17) (.66) (.04) (.03)
Net Asset Value, end of year $18.48 $14.03 $12.78 $ 9.85 $10.29 $9.21 $8.68 $6.77 $7.63 $5.89
Total return* 35.63% 12.84% 32.10% 2.89% 14.36% 7.29% 31.21% (2.71)% 30.26% (16.41)%
Ratios/Supplemental Data
Net assets, end of year
(in millions) $188 $105 $93 $67 $71 $65 $49 $37 $38 $34
Ratio to average net assets:
Expenses 1.04% 1.05% 1.01% 1.00% .81% .81% .93% .79% .83% .87%
Net investment income .75% .43% 1.11% .69% 1.03% 1.42% 1.57% 2.09% .90% .68%
Portfolio turnover rate 5.59% 11.94% 9.83% 9.73% 26.56% 10.70% 7.12% 11.34% - 3.68%
Average commission
rate paid*** $.0536 $.0551 - - - - - - - -
Class II
Year Ended Sept. 30,
1997 1996++
<S> <C> <C>
Per Share Operating Performance
(for a share outstanding throughout the year)
Net Asset Value, beginning of year ........................... $14.03 $13.57
Income from investment operations:
Net investment income ....................................... .07 -
Net realized and unrealized gains ........................... 4.66 .46
Total from investment operations ............................. 4.73 .46
Less distributions:
Dividends from net investment income ........................ (.06) -
Distributions from net realized gains ....................... (.40) -
Total distributions .......................................... (.46) -
Net Asset Value, end of year ................................. $18.30 $14.03
Total return* ................................................ 34.32% 3.39%
Ratios/Supplemental Data
Net assets, at end of year (in millions) ..................... $3 -
Ratios to average net assets:
Expenses .................................................... 1.82% 1.85%**
Net investment income ....................................... .25% (.14)%**
Portfolio turnover rate ...................................... 5.59% 11.94%
Average commission rate paid*** .............................. $.0536 $.0551
Utilities Series
Class I
Year Ended Sept. 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
(for a share outstanding throughout the year)
Net Asset Value,
beginning of year $ 9.73 $9.75 $8.33 $10.78 $ 9.63 $8.81 $7.48 $8.10 $7.46 $7.72
Income from investment
operations:
Net investment income .53 .54 .53 .55 .53 .53 .54 .53 .55 .55
Net realized and
unrealized gains (losses) .73 .03 1.42 (2.44) 1.17 .85 1.38 (.56) .67 (.24)
Total from investment
operations 1.26 .57 1.95 (1.89) 1.70 1.38 1.92 (.03) 1.22 .31
Less distributions:
Dividends from net
investment income (.52) (.52) (.52) (.52) (.55) (.56) (.59) (.58) (.58) (.57)
Distributions from
net realized gains (.43) (.07) (.01) (.04) - - - (.01) - -
Total distributions (.95) (.59) (.53) (.56) (.55) (.56) (.59) (.59) (.58) (.57)
Net Asset Value, end of year $10.04 $9.73 $9.75 $ 8.33 $10.78 $9.63 $8.81 $7.48 $8.10 $7.46
Total return* 13.72% 5.94% 24.19%(17.94)% 17.83% 15.89% 26.15% (.93)% 16.71% 4.03%
Ratios/Supplemental Data
Net assets, end of year
(in millions) $1,953 $2,401 $2,766 $2,573 $3,627 $2,191 $1,226 $ 749 $ 652 $ 616
Ratio to average net assets:
Expenses .75% .71% .73% .64% .55% .57% .59% .60% .62% .64%
Net investment income 5.26% 5.24% 5.88% 5.76% 5.30% 5.90% 6.44% 6.50% 7.10% 7.36%
Portfolio turnover rate 7.24% 17.05% 5.55% 6.34% 7.81% 1.39% .89% 2.07% 4.02% 1.68%
Average commission
rate paid*** $.0505 $.0486 - - - - - - - -
Class II
Year Ended Sept. 30,
1997 1996 1995+
<S> <C> <C> <C>
Per Share Operating Performance
(for a share outstanding throughout the year)
Net Asset Value, beginning of year ........................... $ 9.72 $9.75 $8.89
Income from investment operations:
Net investment income ....................................... .45 .46 .23
Net realized and unrealized gains ........................... .76 .06 .88
Total from investment operations ............................. 1.21 .52 1.11
Less distributions:
Dividends from net investment income ........................ (.48) (.48) (.25)
Distributions from net realized gains ....................... (.43) (.07) -
Total distributions .......................................... (.91) (.55) (.25)
Net Asset Value, at end of year .............................. $10.02 $9.72 $9.75
Total return* ................................................ 13.06% 5.39% 13.01%
Ratios/Supplemental Data
Net assets, end of year (in millions) ........................ $22 $20 $8
Ratio to average net assets:
Expenses .................................................... 1.27% 1.23% 1.21%**
Net investment income ....................................... 4.78% 4.86% 5.15%**
Portfolio turnover rate ...................................... 7.24% 17.05% 5.55%
Average commission rate paid*** .............................. $.0505 $.0486 -
Income Series
Class I
Year Ended Sept. 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
(for a share outstanding throughout the year)
Net Asset Value,
beginning of year $2.30 $2.30 $2.22 $2.46 $2.25 $2.08 $1.76 $2.11 $2.11 $2.22
Income from investment
operations:
Net investment income .18 .19 .18 .17 .18 .19 .19 .21 .22 .23
Net realized and
unrealized gains (losses) .20 .02 .11 (.20) .23 .19 .35 (.32) .01 (.10)
Total from investment
operations .38 .21 .29 (.03) .41 .38 .54 (.11) .23 .13
Less distributions:
Dividends from net
investment income (.18) (.18) (.18) (.18) (.19) (.20) (.22) (.22) (.22) (.22)
Distributions from
net realized gains (.01) (.03) (.03) (.03) (.01) (.01) - (.02) (.01) (.02)
Total distributions (.19) (.21) (.21) (.21) (.20) (.21) (.22) (.24) (.23) (.24)
Net Asset Value, end of year $2.49 $2.30 $2.30 $2.22 $2.46 $2.25 $2.08 $1.76 $2.11 $2.11
Total return* 17.31% 9.43 14.00% (1.52)% 18.76% 18.80% 32.60% (6.37)% 11.16% 6.00%
Ratios/Supplemental Data
Net assets, end of year
(in millions) $7,739 $6,780 $5,886 $4,892 $3,935 $2,484 $1,673 $1,299 $1,190 $727
Ratio to average net assets:
Expenses .72% .70% .71% .64% .54% .55% .56% .55% .57% .61%
Net investment income 7.45% 8.27% 8.26% 7.37% 7.84% 9.11% 10.17% 10.73% 10.46% 10.50%
Portfolio turnover rate 16.15% 25.29% 58.64% 23.37% 25.41% 23.30% 33.92% 12.14% 12.05% 10.01%
Average commission
rate paid*** $.0498 $.0518 - - - - - - - -
Class II
Year Ended Sept. 30,
1997 1996 1995+
<S> <C> <C> <C>
Per Share Operating Performance
(for a share outstanding throughout the year)
Net Asset Value, beginning of year ........................... $2.30 $2.30 $2.18
Income from investment operations:
Net investment income ....................................... .16 .17 .08
Net realized and unrealized gains ........................... .21 .03 .11
Total from investment operations ............................. .37 .20 .19
Less distributions:
Dividends from net investment income ........................ (.17) (.17) (.07)
Distributions from net realized gains ....................... (.01) (.03) -
Total distributions .......................................... (.18) (.20) (.07)
Net Asset Value, end of year ................................. $2.49 $2.30 $2.30
Total return* ................................................ 16.72% 8.86% 8.96%
Ratios/Supplemental Data
Net assets, end of year (in millions) ........................ $695 $343 $66
Ratio to average net assets:
Expenses .................................................... 1.22% 1.21% 1.23%**
Net Investment Income ....................................... 6.96% 7.84% 7.89%**
Portfolio turnover rate ...................................... 16.15% 25.29% 58.64%
Average commission rate*** ................................... $.0498 $.0518 -
U.S. Government Securities Series
Class I
Year Ended Sept. 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
(for a share outstanding throughout the year)
Net Asset Value,
beginning of year $6.72 $6.87 $6.51 $7.20 $7.26 $7.14 $6.86 $6.90 $6.98 $6.87
Income from investment
operations:
Net investment income .48 .49 .50 .50 .56 .61 .65 .67 .69 .69
Net realized and
unrealized gains (losses) .17 (.15) .35 (.68) (.06) .11 .29 (.02) (.07) .12
Total from investment
operations .65 .34 .85 (.18) .50 .72 .94 .65 .62 .81
Less distributions:
Dividends from net
investment income (.48) (.49) (.49) (.51) (.56) (.60) (.66) (.69) (.70) (.70)
Net Asset Value, end of year $6.89 $6.72 $6.87 $6.51 $7.20 $7.26 $7.14 $6.86 $6.90 $6.98
Total return* 10.08% 5.15% 13.56% (2.75%) 6.86% 10.14% 13.97% 9.47% 8.95% 11.77%
Ratios/Supplemental Data
Net assets, end of year
(in millions) $9,351 $10,129 $11,102$11,669 $14,269 $13,617$12,427 $11,143 $11,260 $12,113
Ratio to average net assets:
Expenses .64% .61% .61% .55% .52% .53% .52% .52% .52% .53%
Net investment income 7.01% 7.18% 7.50% 7.37% 7.71% 8.46% 9.26% 9.72% 9.99% 9.85%
Portfolio turnover rate++++ 1.74% 8.01% 5.48% 18.28% 43.10% 38.75% 22.14% 18.23% 25.70% 34.14%
Class II
Year Ended Sept. 30,
1997 1996 1995+
<S> <C> <C> <C>
Per Share Operating Performance
(for a share outstanding throughout the year)
Net Asset Value, beginning of year .......................... $6.70 $ 6.85 $ 6.67
Income from investment operations:
Net investment income ....................................... .44 .45 .21
Net realized and unrealized gains (losses) .................. .17 (.15) .16
Total from investment operations ............................. .61 .30 .37
Less distributions:
Dividends from net investment income ........................ (.44) (.45) (.19)
Net Asset Value, end of year ................................. $6.87 $ 6.70 $ 6.85
Total return* ................................................ 9.48% 4.55% 5.66%
Ratios/Supplemental Data
Net assets, end of year (in millions) ........................ $121 $58 $12
Ratio to average net assets:
Expenses .................................................... 1.20% 1.17% 1.18%**
Net investment income ....................................... 6.44% 6.80% 6.48%**
Portfolio turnover rate++++ .................................. 1.74% 8.01% 5.48%
</TABLE>
*Total return does not reflect sales commissions or the Continent Deferred
Sales Charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the Offering Price.
**Annualized.
***Relates to purchases and sale of equity securities. Prior to September 30,
1996 disclosure of average commission rate was not required.
+For the period May 1, 1995 (effective date) to September 30, 1995.
++For the period September 16, 1996 (effective date) to September 30, 1996.
+++Data before 1992 has been adjusted to reflect a two-for-one stock split in
the form of a 100% stock dividend to shareholders of record effective the
beginning of business on June 1, 1992.
++++Maturity of U.S. government issues and the reinvestment of the proceeds
thereof are considered as purchases and sales of securities in computing the
portfolio turnover rate.
HOW DOES THE FUND INVEST ITS ASSETS?
The Fund's Investment Objective
Each fund's investment objective is a fundamental policy of the fund and may
not be changed without shareholder approval. Of course, there is no assurance
that the fund will achieve its objective.
Growth Series
The primary investment objective of this fund is capital appreciation. The
fund seeks to achieve its objective by investing primarily in common stocks
or convertible securities believed to offer favorable possibilities for
capital appreciation, some of which may yield little or no current income.
Current income is only a secondary consideration when selecting portfolio
securities.
The fund's assets may be invested in shares of common stock traded on any
national securities exchange or issued by a corporation, association or
similar legal entity with total assets of at least $1,000,000, according to
its latest published annual report. The fund's assets may also be invested in
bonds or preferred stock convertible into shares of common stock listed for
trading on a national securities exchange or held in cash or cash
equivalents. The fund may keep a significant portion of its assets in cash or
cash equivalents from time to time. As a fundamental policy, the fund may not
concentrate or invest more than 25% of its total assets in any one industry.
To the extent that the fund may invest in smaller capitalization companies
(in general, companies with a market capitalization of less than $1 billion
at the time of the fund's investment), the fund may place greater emphasis
upon investments in relatively new or unseasoned companies that are in their
early stages of development, or in new and emerging industries where the
opportunity for rapid growth is expected to be above average. Securities of
unseasoned companies present greater risks than securities of larger, more
established companies. Please see "What Are the Risks of Investing in the
Fund? - Small Companies."
DynaTech Series
The investment objective of this fund is capital appreciation. The fund is
designed for investors who understand and are willing to accept the risk of
loss involved in seeking capital appreciation. The fund's investments tend to
be more speculative in nature, and there can be greater emphasis on
short-term trading profits. Certain investments may be based on market
fluctuations caused by excessive optimism or pessimism of investors, with
little or no basis in fundamental economic conditions.
The fund seeks to achieve its objective by investing primarily in companies
that emphasize technological development, in fast-growing industries, or in
the securities of companies that Advisers considers undervalued. The fund's
assets may be invested in securities traded on any national securities
exchange or issued by a corporation, association or similar legal entity with
total assets of at least $1,000,000, according to its latest published annual
report, or held in cash or cash equivalents. It is thought that most of the
fund's assets will be invested in common stocks, including securities
convertible into common stocks. The fund, however, may also invest in debt
securities or preferred stocks that Advisers believes will further the fund's
investment objective. The fund may keep a significant portion of its assets
in cash or cash equivalents from time to time. The fund may not concentrate
or invest more than 25% of its total assets in any one industry. From time to
time, concentration in a few issues may develop due to market appreciation of
certain issues.
Utilities Series
The investment objectives of this fund are both capital appreciation and
current income. As a fundamental policy, the fund's assets may be invested in
securities of an issuer engaged in the public utilities industry, or held in
cash or cash equivalents. The public utilities industry includes the
manufacture, production, generation, transmission and sale of gas, water and
electricity and companies involved in providing services related to these
activities. The industry also includes issuers engaged in the communications
field, such as telephone, cellular, paging, telegraph, satellite, microwave
and other companies that provide communication facilities or services for the
public's benefit. As required by the SEC, at least 65% of the fund's
investments will be in the securities of issuers engaged in the public
utilities industry. Under normal circumstances, the fund expects to have
substantially all of its assets invested in securities issued by these types
of issuers.
To achieve its investment objectives, the fund invests primarily in common
stocks, including, from time to time, non-dividend paying common stocks if,
in the opinion of Advisers, these securities appear to offer attractive
opportunities for capital appreciation. The fund may also invest in preferred
stocks and bonds issued by issuers engaged in the public utilities industry.
When buying fixed-income debt securities, the fund may invest in securities
regardless of their rating depending upon prevailing market and economic
conditions, including securities in the lowest rating categories and unrated
securities. Most of the fund's investments, however, are rated at least Baa
by Moody's or BBB by S&P. These ratings represent the opinions of the rating
services with respect to the securities and are not absolute standards of
quality. They will be considered in connection with the investment of the
fund's assets but will not be a determining or limiting factor. Please see
the Appendix to this prospectus for a discussion of the ratings.
With respect to unrated securities, it is also the fund's intent to buy
securities that, in the view of Advisers, would be comparable in quality to
the fund's rated securities and have been determined to be consistent with
the fund's objectives without exposing the fund to excessive risk. The fund
will not buy issues that are in default or that Advisers believes involve
excessive risk.
Like all debt securities, the value of the fund's fixed-income debt
securities generally has an inverse relationship with market interest rates.
For example, when interest rates rise, the value of the fund's debt
securities tends to fall. On the other hand, when interest rates fall, the
value of these securities tends to rise. Likewise, because securities issued
by utility companies are particularly sensitive to movements in interest
rates, the equity securities of these companies are more affected by
movements in interest rates than are the equity securities of other issuers.
Income Series
The investment objective of this fund is to maximize income while maintaining
prospects for capital appreciation. The fund invests in a diversified
portfolio of securities selected with particular consideration of current
income production. The fund's assets may be invested in securities traded on
any national securities exchange or issued by a corporation, association or
similar legal entity with total assets of at least $1,000,000, according to
its latest published annual report, or held in cash or cash equivalents. The
fund may also invest in preferred stocks. There are no restrictions as to the
proportion of investments that may be made in a particular type of security
and the determination is entirely within Advisers' discretion.
Lower Rated Securities. The fund may invest up to 100% of its net assets in
non-investment grade bonds. As of September 30, 1997, approximately 37.2% of
the fund's net assets were invested in non-investment grade bonds and in
unrated bonds with comparable credit characteristics. These are commonly
known as "junk bonds." Their default and other risks are greater than those
of higher rated securities. You should carefully consider these risks before
investing in the fund. Please see "What Are the Risks of Investing in the
Fund? - High Yield Securities."
Various investment services publish ratings of some of the types of
securities in which the fund may invest. Higher yields are ordinarily
available from securities in the lower rating categories, such as securities
rated Ba or lower by Moody's or BB or lower by S&P or from unrated securities
deemed by the fund's manager to be of comparable quality. These ratings
represent the opinions of the rating services with respect to the issuer's
ability to pay interest and repay principal. They do not purport to reflect
the risk of fluctuations in market value and are not absolute standards of
quality. These ratings will be considered in connection with the investment
of the fund's assets but will not be a determining or limiting factor. Please
see the Appendix to this prospectus for a description of these ratings.
The fund may invest in securities regardless of their rating or in securities
that are unrated, including up to 5% of its assets in securities that are in
default at the time of purchase.
As an operating policy, however, the fund will generally invest in securities
that are rated at least Caa by Moody's or CCC by S&P, except for defaulted
securities as noted below, or that are unrated but of comparable quality as
determined by Advisers. Unrated debt securities are not necessarily of lower
quality than rated securities, but they may not be attractive to as many
buyers. A breakdown of the ratings for the bonds in the fund's portfolio is
included under "What Are the Risks of Investing in the Fund?" below.
The fund may also buy debt securities of issuers that are not currently
paying interest, as well as issuers who are in default, and may keep an issue
that has defaulted. The fund will buy defaulted debt securities if, in the
opinion of Advisers, they may present an opportunity for later price
recovery, the issuer may resume interest payments, or other advantageous
developments appear likely in the near future. In general, securities that
default lose much of their value before the actual default so that the
security, and thus the fund's Net Asset Value, would be impacted before the
default. Defaulted debt securities may be illiquid and, as such, will be part
of the 10% limit discussed under "Illiquid Investments."
If the rating on an issue held in the fund's portfolio is changed by the
rating service or the security goes into default, this event will be
considered by the fund in its evaluation of the overall investment merits of
that security but will not generally result in an automatic sale of the
security.
Rather than relying principally on the ratings assigned by rating services,
the investment analysis of securities being considered for the fund's
portfolio may also include, among other things, consideration of relative
values based on such factors as anticipated cash flow, interest or dividend
coverage, asset coverage, earnings prospects, the experience and managerial
strength of the issuer, responsiveness to changes in interest rates and
business conditions, debt maturity schedules and borrowing requirements, and
the issuer's changing financial condition and the public recognition of such
change.
Certain of the high yielding, fixed-income securities in which the fund may
invest may be purchased at a discount. When held to maturity or retired,
these securities may include an element of capital gain. Capital losses may
be realized when securities purchased at a premium, that is, in excess of
their stated or par value, are held to maturity or are called or redeemed at
a price lower than their purchase price. Capital gains or losses also may be
realized upon the sale of securities.
Zero Coupon and Pay-In-Kind Bonds. The fund may buy certain bonds issued at a
discount that defer the payment of interest or pay no interest until
maturity, known as zero coupon bonds, or which pay interest through the
issuance of additional bonds, known as pay-in-kind bonds. For federal tax
purposes, holders of these bonds, such as the fund, are deemed to receive
interest over the life of the bonds and are taxed as if interest were paid on
a current basis although no cash interest payments are in fact received by
the holder until the bonds mature. See "What Are the Risks of Investing in
the Fund? - High Yield Securities" for more information about these bonds.
When-Issued and Delayed Delivery Transactions. The fund may buy debt
obligations on a "when-issued" or "delayed delivery" basis. These
transactions are subject to market fluctuation before delivery to the fund
and generally do not earn interest until their scheduled delivery date.
Therefore, the value or yields at delivery may be more or less than those
available when the transaction was entered into. When the fund is the buyer,
it will maintain, in a segregated account with its custodian bank, cash or
high-grade marketable securities having an aggregate value equal to the
amount of its purchase commitments until payment is made. To the extent the
fund engages in when-issued and delayed delivery transactions, it will do so
only for the purpose of acquiring portfolio securities consistent with its
investment objective and policies, and not for the purpose of investment
leverage. See "How Does the Fund Invest Its Assets? - When-Issued, Delayed
Delivery and To-Be-Announced Transactions" in the SAI for a more complete
discussion of these transactions.
Loan Participations. The fund may invest up to 5% of its assets in loan
participations and other related direct or indirect bank obligations. These
instruments are interests in floating or variable rate senior loans to U.S.
corporations, partnerships and other entities. While loan participations
generally trade at par value, the fund will also be able to acquire loan
participations that sell at a discount because of the borrower's credit
problems. To the extent the borrower's credit problems are resolved, the loan
participation may appreciate in value. Advisers may acquire loan
participations for the fund when it believes that over the long term
appreciation will occur. An investment in these securities, however, carries
substantially the same risks as those for defaulted debt securities and may
cause the loss of the entire investment to the fund. Most loan participations
are illiquid and, to that extent, will be included in the 10% limitation
described under "Illiquid Investments."
Trade Claims. The fund may invest a portion of its assets in trade claims.
Trade claims are purchased from creditors of companies in financial
difficulty. For buyers, such as the fund, trade claims offer the potential
for profits since they are often purchased at a significantly discounted
value and, consequently, may generate capital appreciation if the value of
the claim increases as the debtor's financial position improves. If the
debtor is able to pay the full obligation on the face of the claim as a
result of a restructuring or an improvement in the debtor's financial
condition, trade claims offer the potential for higher income due to the
difference in the face value of the claim as compared to the discounted
purchase price.
An investment in trade claims is speculative and carries a high degree of
risk. There can be no guarantee that the debtor will ever be able to satisfy
the obligation on the trade claim. Trade claims are not regulated by federal
securities laws or the SEC. Currently, trade claims are regulated primarily
by bankruptcy laws. Because trade claims are unsecured, holders of trade
claims may have a lower priority in terms of payment than most other
creditors in a bankruptcy proceeding. In light of the nature and risk of
trade claims, the fund's investment in these instruments will not exceed 5%
of its net assets at the time of acquisition.
Concentration. As market conditions change, it is conceivable that all of the
assets of the fund could be invested in common stocks or, conversely, in debt
securities. It is a fundamental policy of the fund that concentration of
investment in a single industry may not exceed 25% of the total assets of the
fund.
U.S. Government Securities Series
The investment objective of this fund is income through investment in a
portfolio limited to securities that are obligations of the U.S. government
or its instrumentalities. U.S. government securities include, but are not
limited to, U.S. Treasury bonds, notes and bills, Treasury certificates of
indebtedness and securities issued by instrumentalities of the U.S.
government. Other than investments in U.S. Treasury securities or assets held
in cash pending investment, the assets of the fund are currently invested
solely in obligations of the Government National Mortgage Association
("GNMA(s)" or "Ginnie Maes").
The fund's investments are continually monitored and changes are made as
market conditions warrant. The fund does not, however, engage in the trading
of securities for the purpose of realizing short-term profits.
GNMAs. GNMAs are mortgage-backed securities representing part ownership of a
pool of mortgage loans. GNMAs differ from other bonds in that principal may
be paid back on an unscheduled basis rather than returned in a lump sum at
maturity. The fund will buy GNMAs whose principal and interest are
guaranteed. The fund also buys adjustable rate GNMAs and other types of
securities that may be issued with the guarantee of the Government National
Mortgage Association (the "Association").
The Association's guarantee of payment of principal and interest on GNMAs is
backed by the full faith and credit of the U.S. government. The Association
may borrow U.S. Treasury funds to the extent needed to make payments under
its guarantee. Of course, this guarantee does not extend to the market value
or yield of the GNMAs or the Net Asset Value or performance of the fund,
which will fluctuate daily with market conditions.
Payments to holders of GNMAs consist of the monthly distributions of interest
and principal less the Association's and issuers' fees. The portion of the
monthly payment that represents a return of principal will be reinvested by
the fund in securities that may have interest rates that are higher or lower
than the obligation from which the principal payment was received.
When mortgages in the pool underlying a GNMA are prepaid by borrowers or as a
result of foreclosure, the principal payments are passed through to the GNMA
holders, such as the fund. Accordingly, a GNMA's life is likely to be
substantially shorter than the stated maturity of the mortgages in the
underlying pool. Because of the variation in prepayment rates, it is not
possible to accurately predict the life of a particular GNMA.
To-Be-Announced and Delayed Delivery Transactions. The fund may buy and sell
GNMAs on a "To-Be-Announced" ("TBA") and "delayed delivery" basis. These
transactions are arrangements under which the fund may buy securities with
payment and delivery scheduled for a future time, generally within 30 to 60
days. These transactions are subject to market fluctuation and the risk that
the value or yields at delivery may be more or less than those available when
the transaction was entered into. In TBA and delayed delivery transactions,
the fund relies on the seller to complete the transaction. The seller's
failure to do so may cause the fund to miss a price or yield considered
advantageous. Securities purchased on a TBA or delayed delivery basis do not
generally earn interest until their scheduled delivery date. The fund is not
subject to any percentage limit on the amount of its assets that may be
invested in delayed delivery and TBA purchase obligations. For more
information about these transactions, please see the SAI.
The price per share you receive when you sell your shares may be more or less
than the price you paid for the shares. The dividends per share paid by the
fund may also vary.
Other Investment Policies of the Fund
Foreign Securities. U.S. Government Securities Series may not buy securities
of foreign issuers. Income Series may invest up to 25% of its assets in
foreign securities and Growth, DynaTech and Utilities Series may invest
without restriction in foreign securities, if the investments are consistent
with their objectives and comply with their concentration and diversification
policies. The fund will ordinarily buy foreign securities that are traded in
the U.S. or buy American Depositary Receipts, which are certificates issued
by U.S. banks representing the right to receive securities of a foreign
issuer deposited with that bank or a correspondent bank. The fund may also
buy the securities of foreign issuers directly in foreign markets. DynaTech
and Utilities Series presently have no intention of investing more than 10%
of their net assets in foreign securities not publicly traded in the U.S.
Growth Series presently has no intention of investing more than 25% of its
net assets in foreign securities not publicly traded in the U.S. Investments
in foreign securities where delivery takes place outside the U.S. will be
made in compliance with any applicable U.S. and foreign currency restrictions
and tax and other laws limiting the amount and types of foreign investments.
Changes of governmental administrations or economic or monetary policies in
the U.S. or abroad, changed circumstances in dealings between nations, or
changes in currency convertibility or exchange rates could result in
investment losses for the fund.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Securities that are acquired by the fund outside the U.S. and that are
publicly traded in the U.S. or on a foreign securities exchange or in a
foreign securities market are not considered by the fund to be illiquid
assets so long as the fund acquires and holds the securities with the
intention of reselling them in the foreign trading market, the fund
reasonably believes it can readily dispose of the securities for cash in the
U.S. or a foreign market, and current market quotations are readily available.
Options. Each fund, except U.S. Government Securities Series, may write
covered call options that are listed for trading on a national securities
exchange. This means that the fund will only write options on securities that
it actually owns. A call option gives the buyer the right to buy the security
on which the option is written for a specified period of time and at a price
agreed to at the time the fund sells the option, even though that price may
be less than the value of the security at the time the option is exercised.
When the fund sells covered call options, it will receive a cash premium that
can be used in whatever way is felt to be most beneficial to the fund. The
risks associated with covered call writing are that in the event of a price
increase on the underlying security, which would likely trigger the exercise
of the call option, the fund will not participate in the increase in price
beyond the exercise price. If the fund determines that it does not wish to
deliver the underlying securities from its portfolio, it would have to enter
into a "closing purchase transaction," the premium on which may be higher or
lower than that received by the fund for writing the option. There is no
assurance that a closing purchase transaction will be available in every
instance.
Transactions in options are generally considered "derivative securities."
Convertible Securities. Each fund, except U.S. Government Securities Series,
may invest in convertible securities. A convertible security is generally a
debt obligation or preferred stock that may be converted within a specified
period of time into a certain amount of common stock of the same or a
different issuer. A convertible security provides a fixed-income stream and
the opportunity, through its conversion feature, to participate in the
capital appreciation resulting from a market price advance in its underlying
common stock. As with a straight fixed-income security, a convertible
security tends to increase in market value when interest rates decline and
decrease in value when interest rates rise. Like a common stock, the value of
a convertible security also tends to increase as the market value of the
underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both
interest rate and market movements, a convertible security is not as
sensitive to interest rates as a similar fixed-income security, nor is it as
sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by
an investment bank. When issued by an operating company, a convertible
security tends to be senior to common stock, but subordinate to other types
of fixed-income securities issued by that company. When a convertible
security issued by an operating company is "converted," the operating company
often issues new stock to the holder of the convertible security but, if the
parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the
convertible security is issued by an investment bank, the security is an
obligation of and is convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the fund's financial
reporting, credit rating, and investment limitation purposes. A preferred
stock is subordinated to all debt obligations in the event of insolvency, and
an issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred stock
generally has no maturity date, so that its market value is dependent on the
issuer's business prospects for an indefinite period of time. In addition,
distributions from preferred stock are dividends, rather than interest
payments, and are usually treated as such for corporate tax purposes.
Loans of Portfolio Securities. Consistent with procedures approved by the
Board and subject to the following conditions, each fund, except U.S.
Government Securities Series, may lend its portfolio securities to qualified
securities dealers or other institutional investors, if such loans do not
exceed 10% of the value of the fund's total assets at the time of the most
recent loan. The borrower must deposit with the fund's custodian bank
collateral with an initial market value of at least 102% of the market value
of the securities loaned, including any accrued interest, with the value of
the collateral and loaned securities marked-to-market daily to maintain
collateral coverage of at least 100%. This collateral shall consist of cash,
securities issued by the U.S. government, its agencies or instrumentalities,
or irrevocable letters of credit. The lending of securities is a common
practice in the securities industry. The fund may engage in security loan
arrangements with the primary objective of increasing the fund's income
either through investing cash collateral in short-term interest-bearing
obligations or by receiving a loan premium from the borrower. Under the
securities loan agreement, the fund continues to be entitled to all dividends
or interest on any loaned securities. As with any extension of credit, there
are risks of delay in recovery and loss of rights in the collateral should
the borrower of the security fail financially.
Repurchase Agreements. Each fund, except U.S. Government Securities Series,
may engage in repurchase transactions. In a repurchase agreement, the fund
buys U.S. government securities from a bank or broker-dealer at one price and
agrees to sell them back to the bank or broker-dealer at a higher price on a
specified date. The securities subject to resale are held on behalf of the
fund by a custodian bank approved by the Board. The bank or broker-dealer
must transfer to the custodian securities with an initial market value of at
least 102% of the repurchase price to help secure the obligation to
repurchase the securities at a later date. The securities are then
marked-to-market daily to maintain coverage of at least 100%. If the bank or
broker-dealer does not repurchase the securities as agreed, the fund may
experience a loss or delay in the liquidation of the securities underlying
the repurchase agreement and may also incur liquidation costs. The fund,
however, intends to enter into repurchase agreements only with banks or
broker-dealers that are considered creditworthy by the investment manager.
Borrowing. None of the funds borrow money or mortgage or pledge any of their
assets, except that each fund may borrow for temporary or emergency purposes
in an amount up to 5% of its total asset value.
Illiquid Investments. Each fund's policy is not to invest more than 10% of
its net assets in illiquid securities. Illiquid securities are generally
securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which the fund has valued them.
Subject to this limitation, the Board has authorized each fund, except U.S.
Government Securities Series, to invest in restricted securities where such
investment is consistent with the fund's investment objective and has
authorized such securities to be considered liquid to the extent the
investment manager determines on a daily basis that there is a liquid
institutional or other market for the securities. Notwithstanding the
investment manager's determinations in this regard, the Board will remain
responsible for such determinations and will consider appropriate action,
consistent with the fund's objective and policies, if the security should
become illiquid after its purchase. To the extent the fund invests in
restricted securities that are deemed liquid, the general level of
illiquidity in the fund may be increased if qualified institutional buyers
become uninterested in buying these securities, or the market for these
securities contracts.
Other Policies and Restrictions. Each fund has a number of additional
investment restrictions that limit its activities to some extent. Some of
these restrictions may only be changed with shareholder approval. For a list
of these restrictions and more information about the fund's investment
policies, please see "How Does the Fund Invest Its Assets?" and "Investment
Restrictions" in the SAI.
Each of the fund's policies and restrictions discussed in this prospectus and
in the SAI is considered at the time the fund makes an investment. The fund
is generally not required to sell a security because of a change in
circumstances.
Tax Considerations. The investment of the fund, except the U.S. Government
Securities Series, in options, foreign securities and other complex
securities are subject to special tax rules that may affect the amount,
timing or character of the income earned by the fund and distributed to you.
The fund may also be subject to withholding taxes on earnings from certain of
its foreign securities. These special tax rules are discussed under
"Additional Information on Distributions and Taxes" in the SAI.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
The value of your shares will increase as the value of the securities owned
by the fund increases and will decrease as the value of the fund's
investments decrease. In this way, you participate in any change in the value
of the securities owned by the fund. In addition to the factors that affect
the value of any particular security that the fund owns, the value of fund
shares may also change with movements in the stock and bond markets as a
whole.
High Yield Securities. Income Series may invest up to 100% of its net assets
in non-investment grade securities. Because the fund may invest in securities
below investment grade, an investment in the fund is subject to a higher
degree of risk than an investment in a fund that invests primarily in
higher-quality securities. You should consider the increased risk of loss to
principal that is present with an investment in higher risk securities, such
as those in which the fund invests. Accordingly, an investment in the fund
should not be considered a complete investment program and should be
carefully evaluated for its appropriateness in light of your overall
investment needs and goals. Utilities Series may also invest a portion of its
assets in non-investment grade securities.
The market value of high yield, lower-quality fixed-income securities,
commonly known as junk bonds, tends to reflect individual developments
affecting the issuer to a greater degree than the market value of
higher-quality securities, which react primarily to fluctuations in the
general level of interest rates. Lower-quality securities also tend to be
more sensitive to economic conditions than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them.
Therefore, the risk associated with buying the securities of these issuers is
generally greater than the risk associated with higher-quality securities.
For example, during an economic downturn or a sustained period of rising
interest rates, issuers of lower-quality securities may experience financial
stress and may not have sufficient cash flow to make interest payments. The
issuer's ability to make timely interest and principal payments may also be
adversely affected by specific developments affecting the issuer, including
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the fund's portfolio defaults, the fund may have unrealized losses on the
security, which may lower the fund's Net Asset Value. Defaulted securities
tend to lose much of their value before they default. Thus, the fund's Net
Asset Value may be adversely affected before an issuer defaults. In addition,
the fund may incur additional expenses if it must try to recover principal or
interest payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three
to five years from the date of issue, if an issuer calls its securities
during periods of declining interest rates, Advisers may find it necessary to
replace the securities with lower-yielding securities, which could result in
less net investment income for the fund. The premature disposition of a high
yield security due to a call or buy-back feature, the deterioration of an
issuer's creditworthiness, or a default by an issuer may make it more
difficult for the fund to manage the timing of its income. Under the Code and
U.S. Treasury regulations, the fund may have to accrue income on defaulted
securities and distribute the income to shareholders for tax purposes, even
though the fund is not currently receiving interest or principal payments on
the defaulted securities. To generate cash to satisfy these distribution
requirements, the fund may have to sell portfolio securities that it
otherwise may have continued to hold or use cash flows from other sources,
such as the sale of fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse
impact on market price of a security and on the fund's ability to sell a
security in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, or if necessary to meet the fund's
liquidity needs. Reduced liquidity may also make it more difficult to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio.
The fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry
restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if the fund is required to sell restricted securities before
the securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The fund may also incur special costs in
disposing of restricted securities, although the fund will generally not
incur any costs when the issuer is responsible for registering the securities.
The fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other
characteristics. The fund has no arrangement with its underwriter or any
other person concerning the acquisition of these securities.
The high yield securities market is relatively new and much of its growth
before 1990 paralleled a long economic expansion. The recession that began in
1990 disrupted the market for high yield securities and adversely affected
the value of outstanding securities, as well as the ability of issuers of
high yield securities to make timely principal and interest payments.
Although the economy has improved and high yield securities have performed
more consistently since that time, the adverse effects previously experienced
may reoccur. For example, the highly publicized defaults on some high yield
securities during 1989 and 1990 and concerns about a sluggish economy that
continued into 1993 depressed the prices of many of these securities. While
market prices may be temporarily depressed due to these factors, the ultimate
price of any security generally reflects the true operating results of the
issuer. Factors adversely impacting the market value of high yield securities
may lower the fund's Net Asset Value. The fund relies on Advisers' judgment,
analysis and experience in evaluating the creditworthiness of an issuer. In
this evaluation, Advisers takes into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters.
The credit risk factors above also apply to lower-quality zero-coupon,
deferred interest and pay-in-kind securities. These securities have an
additional risk, however, because unlike securities that pay interest
throughout the time until maturity, the fund will not receive any cash until
the cash payment date. If the issuer defaults, the fund may not obtain any
return on its investment.
Zero-coupon or deferred interest securities are debt obligations that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the "cash payment date"), and
therefore are generally issued and traded at a discount from their face
amount or par value. The discount varies depending on the time remaining
until maturity or the cash payment date, as well as prevailing interest
rates, liquidity of the security, and the perceived credit quality of the
issuer. The discount, in the absence of financial difficulties of the issuer,
typically decreases as the final maturity or cash payment date approaches.
The value of zero-coupon securities is generally more volatile than the value
of other fixed-income securities that pay interest periodically. Zero-coupon
securities are also likely to respond to changes in interest rates to a
greater degree than other fixed-income securities having similar maturities
and credit quality. The fund is not limited in the amount of its assets that
may be invested in these types of securities.
The table below shows the percentage of Income Series' assets invested in
securities rated in each of the rating categories shown. A credit rating by a
rating agency evaluates the safety of principal and interest based on an
evaluation of the security's credit quality, but does not consider the market
risk or the risk of fluctuation in the price of the security. The information
shown is based on a dollar-weighted average of the fund's portfolio
composition based on month-end assets for each of the 12 months in the fiscal
year ended September 30, 1997. The Appendix to this prospectus includes a
description of each rating category.
AVERAGE WEIGHTED
MOODY'S RATING PERCENTAGE OF ASSETS
- ----------------------------------------------------------
Aaa .......................... 9.05%
Aa ........................... 0.32%
A ............................ 0.00%
Baa .......................... 4.47%
Ba ........................... 6.95%
B............................. 26.68%
Caa .......................... 6.35%*
Ca ........................... 0.15%
C ............................ 0.00%
*2.28% of these securities, which are unrated by Moody's, have been included
in the Caa rating category.
Public Utilities Industry Securities. Utilities Series' investments in the
public utilities industry entail certain characteristics and risks that you
should consider. These characteristics include: risks associated with
regulatory changes including deregulation and interest rate fluctuations; the
difficulty of obtaining adequate returns on invested capital in spite of
frequent rate increases and of financing large construction programs during
inflationary periods; restrictions on operations and increased costs and
delays attributable to environmental considerations; difficulties of the
capital markets in absorbing utility debt and equity securities; difficulties
in obtaining fuel for electric generation at reasonable prices; risks
associated with the operation of nuclear power plants; and general effects of
energy conservation.
GNMAs. GNMA yields (interest income as a percentage of price) have
historically exceeded the current yields on other types of U.S. government
securities with comparable maturities. The effects of interest rate
fluctuations and unpredictable prepayments of principal, however, can greatly
change realized yields. As with most bonds, in a period
of rising interest rates, the value of a GNMA will generally decline. In a
period of declining interest rates, it is more likely that mortgages
contained in GNMA pools will be prepaid, thus reducing the effective yield.
This potential for prepayment during periods of declining interest rates may
reduce the general upward price increases of GNMAs as compared to the
increases experienced by noncallable debt securities over the same periods.
In addition, any premium paid on the purchase of a GNMA will be lost if the
obligation is prepaid. Of course, price changes of GNMAs and other securities
held by U.S. Government Securities Series will have a direct impact on the
Net Asset Value per share of the fund.
Small Companies. Growth Series may invest in companies that have relatively
small revenues, limited product lines, and a small share of the market for
their products or services. Small companies may lack depth of management,
they may be unable to internally generate funds necessary for growth or
potential development or to generate such funds through external financing on
favorable terms, and they may be developing or marketing new products or
services for which markets are not yet established and may never become
established. Due to these and other factors, small companies may suffer
significant losses, as well as realize substantial growth.
Historically, small capitalization stocks have been more volatile than larger
capitalization stocks and are therefore more speculative than investments in
larger companies. Among the reasons for the greater price volatility are the
less certain growth prospects of smaller firms, the lower degree of liquidity
in the markets for such stocks and the greater sensitivity of small companies
to changing economic conditions. Besides exhibiting greater volatility, small
company stocks may, to a degree, fluctuate independently of larger company
stocks. Small company stocks may decline in price as large company stocks
rise or rise in price as large company stocks decline.
Foreign Securities. Investment in the shares of foreign issuers requires
consideration of certain factors that are not normally involved in
investments solely in U.S. issuers. Among other things, the financial and
economic policies of some foreign countries in which the fund may invest are
not as stable as in the U.S. Furthermore, foreign issuers are not generally
subject to uniform accounting, auditing and financial standards and
requirements comparable to those applicable to U.S. corporate issuers. There
may also be less government supervision and regulation of foreign securities
exchanges, brokers and issuers than exist in the U.S. Restrictions and
controls on investment in the securities markets of some countries may have
an adverse effect on the availability and costs to the fund of investments in
those countries. In addition, there may be the possibility of expropriations,
foreign withholding taxes, confiscatory taxation, political, economic or
social instability or diplomatic developments that could affect assets of the
fund invested in issuers in foreign countries.
There may be less publicly available information about foreign issuers than
is contained in reports and reflected in ratings published for U.S. issuers.
Some foreign securities markets have substantially less volume than the NYSE
and some foreign government securities may be less liquid and more volatile
than U.S. government securities. Transaction costs on foreign securities
exchanges may be higher than in the U.S. and foreign securities settlements
may, in some instances, be subject to delays and related administrative
uncertainties.
Interest Rate, Currency and Market Risk. To the extent the fund invests in
debt securities, changes in interest rates in any country where the fund is
invested will affect the value of the fund's portfolio and its share price.
Rising interest rates, which often occur during times of inflation or a
growing economy, are likely to have a negative effect on the value of the
fund's shares. To the extent the fund invests in common stocks, a general
market decline, shown for example by a drop in the Dow Jones Industrials or
other equity based index, in any country where the fund is invested may cause
the value of what the fund owns, and thus the fund's share price, to decline.
Changes in currency valuations may also affect the price of fund shares. The
value of stock markets, currency valuations and interest rates throughout the
world have increased and decreased in the past. These changes are
unpredictable.
WHO MANAGES THE FUND?
The Board. The Board oversees the management of the Custodian Funds and
elects its officers. The officers are responsible for each fund's day-to-day
operations. The Board also monitors each fund to ensure no material conflicts
exist among the fund's classes of shares. While none is expected, the Board
will act appropriately to resolve any material conflict that may arise.
Investment Manager. Advisers is the investment manager of each of the funds,
except Growth Series. As of July 1, 1997, Investment Advisory is the
investment manager of Growth Series. Investment Advisory employs the same
individuals to manage the fund's portfolio as the previous investment manager
and the management services provided to the fund are also the same. The terms
and conditions of the investment management agreement with Investment
Advisory are substantially the same as those in the investment management
agreement with Advisers.
The investment manager manages the fund's assets and makes its investment
decisions. The investment manager also performs similar services for other
funds. It is wholly owned by Resources, a publicly owned company engaged in
the financial services industry through its subsidiaries. Charles B. Johnson
and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
Together, Advisers and its affiliates manage over $243 billion in assets.
Please see "Investment Management and Other Services" and "Miscellaneous
Information" in the SAI for information on securities transactions and a
summary of the fund's Code of Ethics.
Management Team. The teams responsible for the day-to-day management of each
fund's portfolio are:
Growth Series - Vivian J. Palmieri since 1965 and Conrad B. Herrmann since
1991.
Vivian J. Palmieri
Vice President of Investment Advisory
Mr. Palmieri holds a Bachelor of Arts degree in Economics from Williams
College. He has been with the Franklin Templeton Group since 1965. Mr.
Palmieri is a member of several securities industry-related associations.
Conrad B. Herrmann, CFA
Portfolio Manager of Investment Advisory
Mr. Herrmann is a Chartered Financial Analyst and holds a Master of Business
Administration degree from Harvard University. He earned his Bachelor of Arts
degree from Brown University. Mr. Herrmann has been with the Franklin
Templeton Group since 1989 and is a member of several securities
industry-related associations.
Utilities Series - Sally Edwards Haff since 1990, Gregory E. Johnson since
1987 and Ian Link since 1995.
Sally Edwards Haff
Senior Vice President of Advisers
Ms. Haff is a Chartered Financial Analyst and holds a Bachelor of Arts degree
in Economics from the University of California at Santa Barbara. She has been
with the Franklin Templeton Group since 1986. Ms. Haff is a member of several
securities industry-related associations.
Gregory E. Johnson
Vice President of Advisers
Mr. Johnson holds a Bachelor of Science degree in Accounting and Business
Administration from Washington and Lee University and a certificate as a
Certified Public Accountant. He has been with the Franklin Templeton Group since
1986. Mr. Johnson is a member of several securities industry-related
associations.
Ian Link
Vice President of Advisers
Mr. Link is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the Haas School at the University of California,
Berkeley and a Bachelor of Arts degree in Economics from the University of
California at Davis. He has been with the Franklin Templeton Group since
1989. He is a member of several securities industry-related associations.
DynaTech Series - Rupert H. Johnson, Jr. since inception, Lisa Costa since
1983 and Kevin Carrington since 1995.
Rupert H. Johnson, Jr.
President of Advisers
Mr. Johnson is a graduate of Washington and Lee University. He has been with
the Franklin Templeton Group since 1965 and prior thereto was an officer in
the U.S. Marine Corps. Mr. Johnson is a member of several securities
industry-related associations.
Lisa Costa
Vice President of Advisers
Ms. Costa holds a Master of Business Administration degree from Golden Gate
University and a Bachelor of Science degree in Finance from California State
University at Hayward. She has been with the Franklin Templeton Group since
1983. Ms. Costa is a Chartered Market Technician and a member of several
securities industry-related committees and associations.
Kevin Carrington
Vice President of Advisers
Mr. Carrington is a Chartered Financial Analyst and holds a Bachelor of
Science degree in Business Administration from California State University at
Chico. He has been with the Franklin Templeton Group since 1992. He is a
member of several securities industry-related associations.
Income Series - Charles B. Johnson since 1957, Matthew F. Avery since 1989
and Frederick G. Fromm since January, 1998.
Charles B. Johnson
Chairman of the Board of Advisers
Mr. Johnson holds a Bachelor of Arts degree in Economics and Political
Science from Yale University. He has been with the Franklin Templeton Group
since 1957. Mr. Johnson is a member of several securities industry-related
associations.
Matthew F. Avery
Senior Vice President of Advisers
Mr. Avery holds a Master of Business Administration degree from the
University of California at Los Angeles and a Bachelor of Science degree in
Industrial Engineering from Stanford University. He has been in the
securities industry since 1982 and with the Franklin Templeton Group since
1987.
Frederick G. Fromm
Vice President of Advisers
Mr. Fromm holds a Bachelor of Arts degree in Business Economics from the
University of California, Santa Barbara. He has been with the Franklin
Templeton Group since 1992.
U.S. Government Securities Series - Jack Lemein since 1984, Anthony Coffey
since 1989 and Roger Bayston since 1993.
Jack Lemein
Executive Vice President of Advisers
Mr. Lemein holds a Bachelor of Science degree in Finance from the University
of Illinois. He has been in the securities industry since 1967 and with the
Franklin Templeton Group since 1984. He is a member of several securities
industry-related associations.
T. Anthony Coffey
Portfolio Manager of Advisers
Mr. Coffey is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned a Bachelor of Arts degree in Applied Mathematics and Economics from
Harvard University. Mr. Coffey has been with the Franklin Templeton Group
since 1989. He is a member of several securities industry-related
associations.
Roger Bayston
Portfolio Manager of Advisers
Mr. Bayston is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned his Bachelor of Science degree from the University of Virginia. He has
been with the Franklin Templeton Group since 1991.
Management Fees. During the fiscal year ended September 30, 1997, management
fees paid to the investment manager, as a percentage of average monthly net
assets, and total expenses of Class I and Class II shares were as follows:
TOTAL
MANAGEMENT OPERATING EXPENSES
FEES CLASS I CLASS II
Growth Series* ........... 0.48% 0.89% 1.66%
DynaTech Series .......... 0.60% 1.04% 1.82%
Utilities Series ......... 0.46% 0.75% 1.27%
Income Series ............ 0.46% 0.72% 1.22%
U.S. Government
Securities Series ....... 0.45% 0.64% 1.20%
*Prior to July 1, 1997, the fee was paid to Advisers.
Portfolio Transactions. The investment manager tries to obtain the best
execution on all transactions. If the investment manager believes more than
one broker or dealer can provide the best execution, it may consider research
and related services and the sale of fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "How Does the Fund Buy Securities for Its Portfolio?" in
the SAI for more information.
Administrative Services. Under an agreement with the investment manager, FT
Services provides certain administrative services and facilities for the
fund. Please see "Investment Management and Other Services" in the SAI for
more information.
The Rule 12b-1 Plans
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses
of activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by Growth and DynaTech Series under the Class I plan may not exceed
0.25% per year of Class I's average daily net assets. Payments by Utilities,
Income and U.S. Government Securities Series under the Class I plan may not
exceed 0.15% per year of Class I's average daily net assets. All distribution
expenses over this amount will be borne by those who have incurred them.
During the first year after certain Class I purchases made without a sales
charge, Securities Dealers may not be eligible to receive the Rule 12b-1 fees
associated with the purchase.
Under the Class II plan, Growth and DynaTech Series may pay Distributors up to
0.75% per year and Utilities, Income and U.S. Government Securities Series may
pay Distributors up to 0.50% per year of Class II's average daily net assets to
pay Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them. During the first year after a
purchase of Class II shares, Securities Dealers may not be eligible to receive
this portion of the Rule 12b-1 fees associated with the purchase.
Growth and DynaTech Series may also pay a servicing fee of up to 0.25% per
year and Utilities, Income and U.S. Government Securities Series may pay a
servicing fee of up to 0.15% per year of Class II's average daily net assets
under the Class II plan. This fee may be used to pay Securities Dealers or
others for, among other things, helping to establish and maintain customer
accounts and records, helping with requests to buy and sell shares, receiving
and answering correspondence, monitoring dividend payments from the fund on
behalf of customers, and similar servicing and account maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act of
1997 (the "1997 Act"). This new law makes sweeping changes in the Code. Because
many of these changes are complex they are discussed in the SAI.
The fund invests your money in the stocks, bonds and other securities that
are described in the section "How Does the Fund Invest Its Assets?" Special
tax rules may apply in determining the income and gains that the fund earns
on its investments. These rules may, in turn, affect the amount of
distributions that the fund pays to you. These special tax rules are
discussed in the SAI.
Taxation of the Fund. As a regulated HOW DOES THE FUND
investment company, the fund generally EARN INCOME AND GAINS?
pays no federal income tax on the
income and gains that it distributes to The fund earns dividends and interest
you. (the fund's "income") on its
investments. When the fund sells a
Foreign Taxes. Foreign governments may security for a price that is higher
impose taxes on the income and gains than it paid, it has a gain. When the
from the investments of the fund, other fund sells a security for a price
than the U.S. Government Securities that is lower than it paid, it has a
Series, in foreign stocks and bonds. loss. If the fund has held the
These taxes will reduce the amount of security for more than one year, the
the fund's distributions to you. The gain or loss will be a long-term
fund may also invest in the securities capital gain or loss. If the fund has
of foreign companies that are "passive held the security for one year or
foreign investment companies" less, the gain or loss will be a
("PFICs"). These investments in PFICs short-term capital gain or loss. The
may cause the fund to pay income taxes fund's gains and losses are netted
and interest charges. If possible, the together, and, if the fund has a net
fund will adopt strategies to avoid gain (the fund's "gains"), that gain
PFIC taxes and interest charges. will generally be distributed to you.
Taxation of Shareholders.
Distributions. Distributions from the WHAT IS A DISTRIBUTION?
fund, whether you receive them in cash
or in additional shares, are generally As a shareholder, you will receive
subject to income tax. The fund will your share of the fund's income and
send you a statement in January of the gains on its investments in stocks,
current year that reflects the amount bonds and other securities. The
of ordinary dividends, capital gain fund's income and short term capital
distributions and non-taxable gains are paid to you as ordinary
distributions you received from the dividends. The fund's long-term
fund in the prior year. This statement capital gains are paid to you as
will include distributions declared in capital gain distributions. If the
December and paid to you in January of fund pays you an amount in excess of
the current year, but which are taxable its income and gains, this excess
as if paid on December 31 of the prior will generally be treated as a
year. The IRS requires you to report non-taxable distribution. These
these amounts on your income tax return amounts, taken together, are what we
for the prior year. The fund's call the fund's distributions to you.
statement for the prior year will tell
you how much of your capital gain
distribution represents 28% rate gain
property. The remainder of the capital
gain distribution represents 20% rate
gain.
Distributions to Retirement Plans. Fund distributions received by your
qualified retirement plan, such as a Section 401(k) plan or IRA, are
generally tax-deferred; this means that you are not required to report fund
distributions on your income tax return when paid to your plan, but, rather,
when your plan makes payments to you.
Dividends-Received Deduction. Corporate investors of the fund, except the
U.S. Government Securities Series, may be entitled to a dividends-received
deduction on a portion of the ordinary dividends they receive from the fund.
No portion of the distributions from the U.S. Government Securities Series
will qualify for the corporate dividends-received deduction.
Redemptions and Exchanges. If you WHAT IS A REDEMPTION?
redeem your shares or if you exchange
your shares in the fund for shares in A redemption is a sale by you to the
another Franklin Templeton Fund, you fund of some or all of your shares in
will generally have a gain or loss that the fund. The price per share you
the IRS requires you to report on your receive when you redeem fund shares
income tax return. If you exchange fund may be more or less than the price at
shares held for 90 days or less and pay which you purchased those shares. An
no sales charge, or a reduced sales exchange of shares in the fund for
charge, for the new shares, all or a shares of another Franklin Templeton
portion of the sales charge you paid on Fund is treated as a redemption of
the purchase of the shares you fund shares and then a purchase of
exchanged is not included in their cost shares of the other fund. When you
for purposes of computing gain or loss redeem or exchange your shares, you
on the exchange. If you hold your will generally have a gain or loss,
shares for six months or less, any loss depending upon whether the basis in
you have will be treated as a long-term your shares is more or less than your
capital loss to the extent of any cost or other basis in the shares.
capital gain distributions received by Call Fund Information for a free
you from the fund. All or a portion of shareholder Tax Information Handbook
any loss on the redemption or exchange if you need more information in
of your shares will be disallowed by calculating the gain or loss on the
the IRS if you purchase other shares in redemption or exchange of your shares.
the fund within 30 days before or after
your redemption or exchange.
U.S. Government and State Obligation Interest. Many states grant tax-free
status to dividends paid from interest earned on direct obligations of the
U.S. Government, subject to certain restrictions. Investments in state and
local obligations also may qualify for tax-free treatment. The fund will
provide you with information after the end of each calendar year on the
amounts of such dividends that may qualify for exemption from reporting on
your individual income tax returns.
Non-U.S. Investors. Ordinary dividends generally will be subject to U.S.
income tax withholding. Your home country may also tax ordinary dividends,
capital gain distributions and gains arising from redemptions or exchanges of
your fund shares. Fund shares held by the estate of a non-U.S. investor may
be subject to U.S. estate tax. You may wish to contact your tax advisor to
determine the U.S. and non-U.S. tax consequences of your investment in the
fund.
State Taxes. Ordinary dividends and capital gain distributions that you
receive from the fund, and gains arising from redemptions or exchanges of
your fund shares will generally be subject to state and local income tax. The
holding of fund shares may also be subject to state and local intangibles
taxes. You may wish to contact your tax advisor to determine the state and
local tax consequences of your investment in the fund.
Backup Withholding. When you open an WHAT IS A BACKUP WITHHOLDING?
account, IRS regulations require that
you provide your taxpayer Backup withholding occurs when the
identification number ("TIN"), certify fund is required to withhold and pay
that it is correct, and certify that over to the IRS 31% of your
you are not subject to backup distributions and redemption
withholding under IRS rules. If you proceeds. You can avoid backup
fail to provide a correct TIN or the withholding by providing the fund
proper tax certifications, the fund is with your TIN, and by completing the
required to withhold 31% of all the tax certifications on your
distributions (including ordinary shareholder application that you were
dividends and capital gain asked to sign when you opened your
distributions), and redemption proceeds account. However, if the IRS
paid to you. The fund is also required instructs the fund to begin backup
to begin backup withholding on your withholding, it is required to do so
account if the IRS instructs the fund even if you provided the fund with
to do so. The fund reserves the right your TIN and these tax
not to open your account, or, certifications, and backup
alternatively, to redeem your shares at withholding will remain in place
the current Net Asset Value, less any until the fund is instructed by the
taxes withheld, if you fail to provide IRS that it is no longer required.
a correct TIN, fail to provide the
proper tax certifications, or the IRS
instructs the fund to begin backup
withholding on your account.
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS IS CONTAINED IN THE SECTION
ENTITLED "ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI. THE
TAX TREATMENT TO YOU OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, FOREIGN TAXES
PAID AND INCOME TAXES WITHHELD IS ALSO DISCUSSED IN A FREE FRANKLIN TEMPLETON
TAX INFORMATION HANDBOOK WHICH IS AVAILABLE BY CONTACTING FUND INFORMATION.
HOW IS THE FUND ORGANIZED?
Each fund is a diversified series of Custodian Funds, an open-end management
investment company, commonly called a mutual fund. The Custodian Funds was
incorporated under the laws of Delaware in 1947, reincorporated under the
laws of Maryland in 1979, and is registered with the SEC. As of January 1,
1997, each fund, except the DynaTech Series, began offering a new class of
shares designated Income Series - Advisor Class, Utilities Series - Advisor
Class, Growth Series - Advisor Class and U.S. Government Securities Series -
Advisor Class. All shares outstanding before the offering of Advisor Class
shares have been designated Income Series - Class I, Utilities Series - Class
I, Growth Series - Class I, U.S. Government Securities Series - Class I, and
DynaTech Series - Class I and Income Series - Class II, Utilities Series -
Class II, Growth Series - Class II, U.S. Government Securities Series - Class
II and DynaTech Series - Class II. Additional series and classes of shares
may be offered in the future.
Shares of each class represent proportionate interests in the assets of the
fund and have the same voting and other rights and preferences as any other
class of the fund for matters that affect the fund as a whole. For matters
that only affect one class, however, only shareholders of that class may
vote. Each class will vote separately on matters affecting only that class,
or expressly required to be voted on separately by state or federal law.
Custodian Funds has noncumulative voting rights. This gives holders of more
than 50% of the shares voting the ability to elect all of the members of the
Board. If this happens, holders of the remaining shares voting will not be
able to elect anyone to the Board.
Custodian Funds does not intend to hold annual shareholder meetings.
Custodian Funds or a series of Custodian Funds may hold special meetings,
however, for matters requiring shareholder approval. A meeting may also be
called by the Board in its discretion or by shareholders holding at least 10%
of the outstanding shares. In certain circumstances, we are required to help
you communicate with other shareholders about the removal of a Board member.
A special meeting may also be called by a majority of the Board or by the
written request of shareholders holding at least 25% of the shares entitled
to vote at the meeting.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
Opening Your Account
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
PLEASE KEEP IN MIND THAT DYNATECH SERIES DOES NOT CURRENTLY ALLOW INVESTMENTS
BY MARKET TIMERS.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The fund's minimum
investments are:
o To open a regular,
non-retirement account ................................... $1,000
o To open an IRA, IRA Rollover,
Roth IRA, or Education IRA .............................. $ 250*
o To open a custodial account for a minor
(an UGMA/UTMA account) ................................... $ 100
o To open an account with an automatic
investment plan ......................................... $ 50**
o To add to an account ........................................ $ 50***
*For all other retirement accounts, there is no minimum investment
requirement.
**$25 for an Education IRA.
***For all retirement accounts except IRAs, IRA Rollovers, Roth IRAs, or
Education IRAs, there is no minimum to add to an account.
We reserve the right to change the amount of these minimums from time to time
or to waive or lower these minimums for certain purchases. We also reserve
the right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to
send an additional application to add privileges later. PLEASE ALSO
INDICATE WHICH CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT SPECIFY A
CLASS, WE WILL AUTOMATICALLY INVEST YOUR PURCHASE IN CLASS I SHARES. It is
important that we receive a signed application since we will not be able
to process any redemptions from your account until we receive your signed
application.
4. Make your investment using the table below.
Method Steps to Follow
By Mail For an initial investment:
Return the application to the fund with your check made payable to
the fund.
For additional investments:
Send a check made payable to the fund. Please include your account
number on the check.
By Wire 1. Call Shareholder Services or, if that number is busy, call
1-650/312-2000 collect, to receive a wire control number and wire
instructions. You need a new wire control number every time you wire
money into your account. If you do not have a currently effective
wire control number, we will return the money to the bank, and we
will not credit the purchase to your account.
2. For initial investments you must also return your signed
shareholder application to the fund.
Important Deadlines: If we receive your call before 1:00 p.m. Pacific
time and the bank receives the wired funds and reports the receipt of
wired funds to the fund by 3:00 p.m. Pacific time, we will credit the
purchase to your account that day. If we receive your call after 1:00
p.m. or the bank receives the wire after 3:00 p.m., we will credit the
purchase to your account the following business day.
Through
Your Dealer Call your investment representative
Choosing a Share Class
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. The class that may be best
for you depends on a number of factors, including the amount and length of
time you expect to invest. Generally, Class I shares may be more attractive
for long-term investors or investors who qualify to buy Class I shares at a
reduced sales charge. Your financial representative can help you decide.
CLASS I CLASS II
- --------------------------------------------------------------------------------
o Higher front-end sales charges o Lower front-end sales charges than
than Class II shares. There are Class I shares
several ways to reduce these
charges, as described below. There
is no front-end sales charge for
purchases of $1 million or more.*
o Contingent Deferred Sales Charge o Contingent Deferred Sales Charge
on purchases of $1 million or more on purchases sold within 18 months
sold within one year
o Lower annual expenses than Class o Higher annual expenses than Class
II shares I shares
*If you are investing $1 million or more, it is generally more beneficial for
you to buy Class I shares because there is no front-end sales charge and the
annual expenses are lower. Therefore, ANY PURCHASE OF $1 MILLION OR MORE IS
AUTOMATICALLY INVESTED IN CLASS I SHARES. You may accumulate more than $1
million in Class II shares through purchases over time. If you plan to do this,
however, you should determine if it would be better for you to buy Class I
shares through a Letter of Intent.
Purchase Price of Fund Shares
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is
1% and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I - GROWTH AND DYNATECH SERIES
Under $50,000 ................ 5.75% 6.10% 5.00%
$50,000 but
less than $100,000 .......... 4.50% 4.71% 3.75%
$100,000 but
less than $250,000 .......... 3.50% 3.63% 2.80%
$250,000 but
less than $500,000 .......... 2.50% 2.56% 2.00%
$500,000 but
less than $1,000,000 ........ 2.00% 2.04% 1.60%
$1,000,000 or more* .......... None None None
CLASS I - INCOME, UTILITIES AND U.S. GOVERNMENT SECURITIES SERIES
Under $100,000 ............... 4.25% 4.44% 4.00%
$100,000 but
less than $250,000 .......... 3.50% 3.63% 3.25%
$250,000 but
less than $500,000 .......... 2.75% 2.83% 2.50%
$500,000 but
less than $1,000,000 ........ 2.15% 2.20% 2.00%
$1,000,000 or more* .......... None None None
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS II - All Funds
Under $1,000,000* ............ 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of
$1 million or more and any Class II purchase. Please see "How Do I Sell
Shares? - Contingent Deferred Sales Charge." Please also see "Other Payments
to Securities Dealers" below for a discussion of payments Distributors may
make out of its own resources to Securities Dealers for certain purchases.
Purchases of Class II shares are limited to purchases below $1 million.
Please see "Choosing a Share Class."
Sales Charge Reductions and Waivers
- - If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with
each purchase order explaining which privilege applies. If you don't
include this statement, we cannot guarantee that you will receive the
sales charge reduction or waiver.
Cumulative Quantity Discounts - Class I Only. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in
the Franklin Templeton Funds, as well as those of your spouse, children under
the age of 21 and grandchildren under the age of 21. If you are the sole
owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
Letter of Intent - Class I Only. You may buy Class I shares at a reduced
sales charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION,
YOU ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on
the reserved shares as you direct. Our policy of reserving shares does not
apply to certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
Group Purchases - Class I Only. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as
a whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased Class I shares of the fund at a reduced
sales charge under the group purchase privilege before February 1, 1998,
however, may continue to do so.
Sales Charge Waivers. If one of the following sales charge waivers applies to
you or your purchase of fund shares, you may buy shares of the fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the
sales charge waivers listed below apply to purchases of Class I shares only,
except for items 1 and 2 which also apply to Class II purchases.
Certain distributions, payments or redemption proceeds that you receive may
be used to buy shares of the fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the same class
of shares. Certain exceptions apply, however, to Class II shareholders
who chose to reinvest their distributions in Class I shares of the fund
before November 17, 1997, and to Advisor Class or Class Z shareholders
of a Franklin Templeton Fund who may reinvest their distributions in
Class I shares of the fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund if you originally paid a sales charge on the shares and you
reinvest the money in the same class of shares. This waiver does not
apply to exchanges.
If you paid a Contingent Deferred Sales Charge when you redeemed your
shares from a Franklin Templeton Fund, a Contingent Deferred Sales
Charge will apply to your purchase of fund shares and a new Contingency
Period will begin. We will, however, credit your fund account with
additional shares based on the Contingent Deferred Sales Charge you
paid and the amount of redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Bank
CD, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date the CD matures, including any
rollover.
3. Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
4. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any
tax consequences that may apply.
5. 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.
6. Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor. If you
paid a contingent deferred sales charge when you redeemed your Class A
shares from a Templeton Global Strategy Fund, a Contingent Deferred
Sales Charge will apply to your purchase of fund shares and a new
Contingency Period will begin. We will, however, credit your fund
account with additional shares based on the contingent deferred sales
charge you paid and the amount of the redemption proceeds that you
reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
7. Distributions from an existing retirement plan invested in the
Franklin Templeton Funds
Various individuals and institutions also may buy Class I shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. Trust companies and bank trust departments agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of
assets held in a fiduciary, agency, advisory, custodial or similar
capacity and over which the trust companies and bank trust departments
or other plan fiduciaries or participants, in the case of certain
retirement plans, have full or shared investment discretion. We will
accept orders for these accounts by mail accompanied by a check or by
telephone or other means of electronic data transfer directly from the
bank or trust company, with payment by federal funds received by the
close of business on the next business day following the order.
2. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the fund is
permissible and suitable for you and the effect, if any, of payments by
the fund on arbitrage rebate calculations.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs. The minimum
initial investment is $250.
4. Registered Securities Dealers and their affiliates, for their
investment accounts only
5. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
6. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family
members, consistent with our then-current policies. The minimum initial
investment is $100.
7. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
8. Accounts managed by the Franklin Templeton Group
9. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
10. Group annuity separate accounts offered to retirement plans
11. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
Retirement Plans. Retirement plans that (i) are sponsored by an employer with
at least 100 employees, or (ii) have plan assets of $1 million or more, or
(iii) agree to invest at least $500,000 in the Franklin Templeton Funds over
a 13 month period may buy Class I shares without a front-end sales charge.
Retirement plans that are not Qualified Retirement Plans, SIMPLEs or SEPs
must also meet the requirements described under "Group Purchases - Class I
Only" above to be able to buy Class I shares without a front-end sales
charge. We may enter into a special arrangement with a Securities Dealer,
based on criteria established by the fund, to add together certain small
Qualified Retirement Plan accounts for the purpose of meeting these
requirements.
For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the retirement plan is transferred out of
the Franklin Templeton Funds or terminated within 365 days of the retirement
plan account's initial purchase in the Franklin Templeton Funds. Please see
"How Do I Sell Shares? - Contingent Deferred Sales Charge" for details.
How Do I Buy Shares in Connection with Retirement Plans?
Your individual or employer-sponsored retirement plan may invest in the fund.
Plan documents are required for all retirement plans. Trust Company can
provide the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need
an application other than the one included in this prospectus. For a
retirement plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing
a retirement plan. Your investment representative or advisor can help you
make investment decisions within your plan.
Other Payments to Securities Dealers
The payments described below may be made to Securities Dealers who initiate
and are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not
by the fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. For Class I purchases of the Growth and DynaTech Series of $1 million
or more - up to 1% of the amount invested. For Class I purchases of the
Income, Utilities and U.S. Government Securities Series of $1 million
or more - up to 0.75% of the amount invested.
3. Class I purchases made without a front-end sales charge by certain
retirement plans described under "Sales Charge Reductions and Waivers -
Retirement Plans" above - up to 1% of the amount invested.
4. Class I purchases by trust companies and bank trust departments,
Eligible Governmental Authorities, and broker-dealers or others on
behalf of clients participating in comprehensive fee programs - up to
0.25% of the amount invested.
5. Class I purchases by Chilean retirement plans - up to 1% of the amount
invested.
A Securities Dealer may receive only one of these payments for each
qualifying purchase. Securities Dealers who receive payments in connection
with investments described in paragraphs 1, 2 or 5 above or a payment of up
to 1% for investments described in paragraph 3 will be eligible to receive
the Rule 12b-1 fee associated with the purchase starting in the thirteenth
calendar month after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES,
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI.
For Investors Outside the U.S.
The distribution of this prospectus and the offering of fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the
fund should determine, or have a broker-dealer determine, the applicable laws
and regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and
a purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds
except Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is
the only money fund exchange option available to Class II shareholders.
Unlike our other money funds, shares of Money Fund II may not be purchased
directly and no drafts (checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment
objective and policies, and its rules and requirements for exchanges. For
example, some Franklin Templeton Funds do not accept exchanges and others may
have different investment minimums. Some Franklin Templeton Funds do not
offer Class II shares.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share
certificates for the shares you want to
exchange
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to
exchange by phone to apply to your
account, please let us know.
THROUGH YOUR DEALER Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
Will Sales Charges Apply to My Exchange?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable
sales charge of the new fund, if the difference is more than 0.25%. If you
have never paid a sales charge on your shares because, for example, they have
always been held in a money fund, you will pay the fund's applicable sales
charge no matter how long you have held your shares. These charges may not
apply if you qualify to buy shares without a sales charge.
Contingent Deferred Sales Charge. We will not impose a Contingent Deferred
Sales Charge when you exchange shares. Any shares subject to a Contingent
Deferred Sales Charge at the time of exchange, however, will remain so in the
new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, we
will first exchange any shares in your account that are not subject to the
charge. If there are not enough of these to meet your exchange request, we
will exchange shares subject to the charge in the order they were purchased.
If you exchange Class I shares into one of our money funds, the time your
shares are held in that fund will not count towards the completion of any
Contingency Period. If you exchange your Class II shares for shares of Money
Fund II, however, the time your shares are held in that fund will count
towards the completion of any Contingency Period.
For more information about the Contingent Deferred Sales Charge, please see
"How Do I Sell Shares?"
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
You must meet the applicable minimum investment amount of the fund you are
exchanging into, or exchange 100% of your fund shares
o You may only exchange shares within the same class, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this
option to be available on your account. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares
as described above. Restrictions may apply to other types of retirement
plans. Please contact Retirement Plan Services for information on
exchanges within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the fund more than twice in a calendar
quarter, or (iii) exchanged shares equal to at least $5 million, or more
than 1% of the fund's net assets. Shares under common ownership or control
are combined for these limits. If you have exchanged shares as described
in this paragraph, you will be considered a Market Timer. Each exchange by
a Market Timer, if accepted, will be charged $5.00. Some of our funds do
not allow investments by Market Timers.
o Currently, the DynaTech Series does not allow investments by Market
Timers.
Because excessive trading can hurt fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the fund
would be harmed or unable to invest effectively, or (ii) the fund receives or
anticipates simultaneous orders that may significantly affect the fund.
Limited Exchanges Between Different Classes of Shares
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Growth, Utilities, Income and U.S. Government Securities
Series, such as "Class Z" shares or the DynaTech Series, such as "Advisor
Class" or "Class Z" shares. Because the DynaTech Series does not currently
offer an Advisor Class, you may exchange Advisor Class shares of any Franklin
Templeton Fund for Class I shares of the fund at Net Asset Value. If you do
so and you later decide you would like to exchange into a fund that offers an
Advisor Class, you may exchange your Class I shares for Advisor Class shares
of that fund. Certain shareholders of Class Z shares of Franklin Mutual
Series Fund Inc. may also exchange their Class Z shares for Class I shares of
each fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us signed written instructions. If
you would like your redemption proceeds wired
to a bank account, your instructions should
include:
o The name, address and telephone number
of the bank where you want the proceeds
sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or
credit union, the name of the
corresponding bank and the account
number
2. Include any outstanding share certificates
for the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts
may need to send additional documents.
Accounts under court jurisdiction may have
other requirements.
BY PHONE Call Shareholder Services. If you would like
your redemption proceeds wired to a bank
account, other than an escrow account, you
must first sign up for the wire feature. To
sign up, send us written instructions, with a
signature guarantee. To avoid any delay in
processing, the instructions should include
the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less.
Institutional accounts may exceed $50,000
by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued
for the shares you want to sell or you
have already returned them to the fund
o Unless you are selling shares in a Trust
Company retirement plan account
o Unless the address on your account was
changed by phone within the last 15 days
- If you do not want the ability to redeem by
phone to apply to your account, please let us
know.
THROUGH
YOUR DEALER Call your investment representative
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 1:00 p.m. Pacific time, your wire payment
will be sent the next business day. For requests received in proper form
after 1:00 p.m. Pacific time, the payment will be sent the second business
day. By offering this service to you, the fund is not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the fund nor its agents shall be liable to you or any other person
if, for any reason, a redemption request by wire is not processed as
described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds 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.
Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Trust Company Retirement Plan Accounts
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under
age 591/2, unless the distribution meets an exception stated in the Code. To
obtain the necessary forms, please call Retirement Plan Services.
Contingent Deferred Sales Charge
For Class I purchases, if you did not pay a front-end sales charge because
you invested $1 million or more or agreed to invest $1 million or more under
a Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell
all or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make
without a sales charge may also be subject to a Contingent Deferred Sales
Charge if they are sold within the Contingency Period. For any Class II
purchase, a Contingent Deferred Sales Charge may apply if you sell the shares
within the Contingency Period. The charge is 1% of the value of the shares
sold or the Net Asset Value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan is
transferred out of the Franklin Templeton Funds or terminated within 365 days
of the account's initial purchase in the Franklin Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT,
we will redeem additional shares to cover any Contingent Deferred Sales
Charge. For requests to sell a stated NUMBER OF SHARES, we will deduct the
amount of the Contingent Deferred Sales Charge, if any, from the sale
proceeds.
Waivers. We waive the Contingent Deferred Sales Charge for:
o Account fees
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997,
or (ii) the Securities Dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the Securities Dealer of
record has entered into a supplemental agreement with Distributors
o Redemptions by the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February
1, 1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, at a rate of up to 1% a month of an account's Net Asset
Value. For example, if you maintain an annual balance of $1 million in
Class I shares, you can redeem up to $120,000 annually through a
systematic withdrawal plan free of charge. Likewise, if you maintain an
annual balance of $10,000 in Class II shares, $1,200 may be redeemed
annually free of charge.
o Distributions from IRAs due to death or disability or upon periodic
distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit
plans serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Income and U.S. Government Securities Series declare dividends from their
net investment income monthly. The Utilities Series generally declares
dividends from its net investment income quarterly in February, May, August
and November, and the Growth and DynaTech Series generally declare dividends
annually in November. Each fund declares dividends to shareholders of record
on the last business day of that month and pays them on or about the 15th day
of the next month.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for
each class. The amount of any income dividends per share will differ,
however, generally due to the difference in the Rule 12b-1 fees of Class I
and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion
and may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE
ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will then receive a portion of the price you paid
back in the form of a taxable distribution.
Distribution Options
You may receive your distributions from the fund in any of these ways:
1. Buy additional shares of the fund - You may buy additional shares of the
fund (without a sales charge or imposition of a Contingent Deferred Sales
Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. This is a convenient way to accumulate additional
shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy shares of another Franklin Templeton Fund (without a
sales charge or imposition of a Contingent Deferred Sales Charge). Many
shareholders find this a convenient way to diversify their investments.
3. Receive distributions in cash - You may receive dividends, or both
dividend and capital gain distributions in cash. If you have the money sent
to another person or to a checking account, you may need a signature
guarantee. If you send the money to a checking account, please see
"Electronic Fund Transfers - Class I Only" under "Services to Help You Manage
Your Account."
Distributions may be reinvested only in the same class of shares, except as
follows: (i) Class II shareholders who chose to reinvest their distributions
in Class I shares of the fund or another Franklin Templeton Fund before
November 17, 1997, may continue to do so; and (ii) Class II shareholders may
reinvest their distributions in shares of any Franklin Templeton money fund.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE
WILL AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE
SAME CLASS OF THE FUND. You may change your distribution option at any time
by notifying us by mail or phone. Please allow at least seven days before the
record date for us to process the new option. For Trust Company retirement
plans, special forms are required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
Share Price
When you buy shares, you pay the Offering Price. This is the Net Asset Value
per share of the class you wish to purchase, plus any applicable sales
charges. When you sell shares, you receive the Net Asset Value per share
minus any applicable Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you
buy or sell shares through your Securities Dealer, however, we will use the
Net Asset Value next calculated after your Securities Dealer receives your
request, which is promptly transmitted to the fund. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents.
How and When Shares are Priced
The fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the close of the NYSE, normally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value
and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on
a pro rata basis. It is based on each class' proportionate participation in
the fund, determined by the value of the shares of each class. Each class,
however, bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To
calculate Net Asset Value per share of each class, the assets of each class
are valued and totaled, liabilities are subtracted, and the balance, called
net assets, is divided by the number of shares of the class outstanding. The
fund's assets are valued as described under "How Are Fund Shares Valued?" in
the SAI.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:
o Your name,
o The fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the
evening if preferred.
Joint Accounts. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of
transactions or account changes. These include transactions or account
changes that you could also make by phone, such as certain redemptions of
$50,000 or less, exchanges between identically registered accounts, and
changes to the address of record. For most other types of transactions or
changes, written instructions must be signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
A NOTARIZED SIGNATURE IS NOT SUFFICIENT.
Share Certificates
We will credit your shares to your fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate
is lost, stolen or destroyed, you may have to pay an insurance premium of up
to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
Telephone Transactions
You may initiate many transactions and changes to your account by phone.
Please refer to the sections of this prospectus that discuss the transaction
you would like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to
ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we
are not reasonably satisfied that the instructions are genuine. If this
occurs, we will not be liable for any loss. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
Trust Company Retirement Plan Accounts. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b)
retirement accounts by phone, certain restrictions may be imposed on other
retirement plans.
To obtain any required forms or more information about distribution or
transfer procedures, please call Retirement Plan Services.
Account Registrations and Required Documents
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights
and ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any account
with two or more owners, we cannot accept instructions to change owners on
the account unless all owners agree in writing, even if the law in your state
says otherwise. If you would like another person or owner to sign for you,
please send us a current power of attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this
form of registration, a minor may not be named as an account owner.
Trusts. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
Required Documents. For corporate, partnership and trust accounts, please
send us the following documents when you open your account. This will help
avoid delays in processing your transactions while we verify who may sign on
the account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
CORPORATION Corporate Resolution
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
TRUST 1. The pages from the trust document that
identify the trustees, or
2. A certification for trust
Street or Nominee Accounts. If you have fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we cannot process
the transfer. Contact your Securities Dealer to initiate the transfer. We
will process the transfer after we receive authorization in proper form from
your delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
Important Information If You Have an Investment Representative
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to
exchange or redeem your shares. Electronic instructions may be processed
through established electronic trading systems and programs used by the fund.
Telephone instructions directly from your representative will be accepted
unless you have told us that you do not want telephone privileges to apply to
your account.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $250, or less than $50
for employee accounts and custodial accounts for minors. We will only do this
if the value of your account fell below this amount because you voluntarily
sold your shares and your account has been inactive (except for the
reinvestment of distributions) for at least six months. Before we close your
account, we will notify you and give you 30 days to increase the value of
your account to $1,000, or $100 for employee accounts and custodial accounts
for minors. These minimums do not apply to IRAs and other retirement plan
accounts or to accounts managed by the Franklin Templeton Group.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the fund.
Under the plan, you can have money transferred automatically from your
checking account to the fund each month to buy additional shares. If you are
interested in this program, please refer to the automatic investment plan
application included with this prospectus or contact your investment
representative. The market value of the fund's shares may fluctuate and a
systematic investment plan such as this will not assure a profit or protect
against a loss. You may discontinue the program at any time by notifying
Investor Services by mail or phone.
Automatic Payroll Deduction - Class I Only
You may have money transferred from your paycheck to the fund to buy
additional Class I shares. Your investments will continue automatically until
you instruct the fund and your employer to discontinue the plan. To process
your investment, we must receive both the check and payroll deduction
information in required form. Due to different procedures used by employers
to handle payroll deductions, there may be a delay between the time of the
payroll deduction and the time we receive the money.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or
annual basis. The value of your account must be at least $5,000 and the
minimum payment amount for each withdrawal must be at least $50. For
retirement plans subject to mandatory distribution requirements, the $50
minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete
the systematic withdrawal plan section of the shareholder application
included with this prospectus and indicate how you would like to receive your
payments. You may choose to direct your payments to buy the same class of
shares of another Franklin Templeton Fund or have the money sent directly to
you, to another person, or to a checking account. If you choose to have the
money sent to a checking account, please see "Electronic Fund Transfers -
Class I Only" below. Once your plan is established, any distributions paid by
the fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan may
also be subject to a Contingent Deferred Sales Charge. Please see "Contingent
Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. Please see "How Do I Buy, Sell and Exchange
Shares? - Systematic Withdrawal Plan" in the SAI for more information.
Electronic Fund Transfers - Class I Only
You may choose to have dividend and capital gain distributions from Class I
shares of the fund or payments under a systematic withdrawal plan sent
directly to a checking account. If the checking account is with a bank that
is a member of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If you choose this option, please
allow at least fifteen days for initial processing. We will send any payments
made during that time to the address of record on your account.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton
Fund;
o exchange shares (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the code numbers for each class to use TeleFACTS(R). The code
numbers for Class I and Class II are:
CODE NUMBER
FUND NAME CLASS I CLASS II
Growth Series ............................ 106 206
DynaTech Series .......................... 108 208
Utilities Series ......................... 107 207
Income Series ............................ 109 209
U.S. Government
Securities Series ........................ 110 210
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the fund will be sent every six months. To reduce
fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if you
would like an additional free copy of the fund's financial reports.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more
information, call Institutional Services.
Availability of These Services
The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, the fund may not be able to offer these services
directly to you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777. The fund, Distributors and Advisers are also located at this
address. Investment Advisory is located at 16 South Main Street, Suite 303,
Norwalk, Connecticut 06854. You may also contact us by phone at one of the
numbers listed below.
Hours of Operation
(Pacific time)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
Advisers - Franklin Advisers, Inc., the fund's investment manager, except
Growth Series
Board - The Board of Directors of Custodian Funds
CD - Certificate of deposit
Class I, Class II and Advisor Class - Each fund, except the DynaTech Series,
offers three classes of shares, designated "Class I," "Class II," and
"Advisor Class." The three classes have proportionate interests in the fund's
portfolio. They differ, however, primarily in their sales charge and expense
structures. The DynaTech Series offers two classes of shares, designated
"Class I" and "Class II." The two classes have proportionate interests in the
DynaTech Series portfolio. They differ, however primarily in their sales
charge structure and Rule 12b-1 plans.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the
contingency period is 18 months. The holding period for Class I begins on the
first day of the month in which you buy shares. Regardless of when during the
month you buy Class I shares, they will age one month on the last day of that
month and each following month. The holding period for Class II begins on the
day you buy your shares. For example, if you buy Class II shares on the 18th
of the month, they will age one month on the 18th day of the next month and
each following month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply
if you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined
the fund is a legally permissible investment and that can only buy shares of
the fund without paying sales charges.
Franklin Templeton Funds - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products Series Fund
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the fund's administrator
Investment Advisory - Franklin Investment Advisory Services, Inc., the Growth
Series' investment manager
Investor Services - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRA - Individual retirement account or annuity qualified under section 408 of
the Code
IRS - Internal Revenue Service
Letter - Letter of Intent
Market Timers - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange
shares based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
Moody's - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
Offering Price - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge for the Growth and DynaTech Series is 5.75% for Class
I and 1% for Class II. The maximum front-end sales charge for the Utilities,
Income and U.S. Government Series is 4.25% for Class I and 1% for Class II.
Qualified Retirement Plans - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established
under section 408(k) of the Code
SIMPLE (Savings Incentive Match Plan for Employees) - An employer sponsored
salary deferral plan established under section 408(p) of the Code
TeleFACTS(R) - Franklin Templeton's automated customer servicing system
Trust Company - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly owned subsidiaries of Resources.
We/Our/Us - Unless the context indicates a different meaning, these terms
refer to the fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
Corporate Bond Ratings
MOODY'S
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong and, in the majority of
instances, differ from AAA issues only in a small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service
payments are continuing. The C1 rating is reserved for income bonds on which
no interest is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Commercial Paper Ratings
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually their promissory obligations not having an original maturity
in excess of nine months. Moody's employs the following designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
