As filed with the Securities and Exchange Commission January 29, 1998
File Nos.
2-11346
811-537
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post Effective Amendment No. 77 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 23 (X)
FRANKLIN CUSTODIAN FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (650) 312-2000
HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on February 1, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (Date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (Date) pursuant to paragraph (a)(2)of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date
for a previously filed post-effective amendment
Title of Securities Being Registered:
Shares of Common Stock of:
Franklin Custodian Funds, Inc.
Growth Series - Class I and II
Growth Series - Advisor Class
Utilities Series - Class I and II
Utilities Series - Advisor Class
DynaTech Series - Class I and II
Income Series - Class I and II
Income Series - Advisor Class
U.S. Government Securities Series - Class I and II
U.S. Government Securities Series - Advisor Class
FRANKLIN CUSTODIAN FUNDS, INC.
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
(All Series Class I and II)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Expense Summary
3. Condensed Financial Information "Financial Highlights"; "How Does
the Fund Measure Performance?"
4. General Description of "How Is the Fund Organized?"; "How
Registrant Does the Fund Invest Its Assets?";
"What Are the Risks of Investing in
the Fund"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How Is the Fund Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions Might
I Receive from the Fund?"; "How
Taxation Affects the Fund and Its
Shareholders"; "What If I Have
Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Who
Manages the Fund?"; "Useful Terms
and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"; "Useful Terms and
Definitions"
9. Pending Legal Proceedings Not Applicable
FRANKLIN CUSTODIAN FUNDS, INC.
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
(Growth Series - Advisor Class
Utilities Series - Advisor Class
Income Series - Advisor Class
U.S. Government Securities Series - Advisor Class)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Expense Summary
3. Condensed Financial "Financial Highlights"; "How Does
Information the Fund Measure Performance?"
4. General Description of "How Is the Fund Organized?"; "How
Registrant Does the Fund Invest its Assets?";
"What Are the Risks of Investing in
the Fund?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How Is the Fund Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions Might
I Receive From the Fund?"; "How
Taxation Affects the Fund and Its
Shareholders"; "What If I Have
Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Who
Manages the Fund?"; "Useful Terms
and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"; "Useful Terms and
Definitions"
9. Pending Legal Proceedings Not Applicable
FRANKLIN CUSTODIAN FUNDS, INC.
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in the
STATEMENT OF ADDITIONAL INFORMATION
(All Series Class I and II)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and Not Applicable
History
13. Investment Objectives and "How Does the Fund Invest Its
Policies Assets?"; "Investment
Restrictions"
14. Management of the Fund "Officers and Directors";
"Investment Management and Other
Services"
15. Control Persons and Principal "Officers and Directors";
Holders of Securities "Investment Management and Other
Services"; "Miscellaneous
Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's Underwriter"
17. Brokerage Allocation and Other "How Does the Fund Buy Securities
Practices for its Portfolio?"
18. Capital Stock and Other Not Applicable
Securities
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; "How Are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information About
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance "How Does the Fund Measure
Data Performance?"
23. Financial Statements "Financial Statements"
FRANKLIN CUSTODIAN FUNDS, INC.
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in the
STATEMENT OF ADDITIONAL INFORMATION
(Growth Series - Advisor Class
Utilities Series - Advisor Class
Income Series - Advisor Class
U.S. Government Securities Series - Advisor Class)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and Not Applicable
History
13. Investment Objectives and "How Does the Fund Invest Its
Policies Assets?"; "Investment Restrictions"
14. Management of the Fund "Officers and Directors";
"Investment Management and Other
Services"
15. Control Persons and Principal "Officers and Directors";
Holders of Securities "Investment Management and Other
Services"; "Miscellaneous
Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's Underwriter"
17. Brokerage Allocation and Other "How Does the Fund Purchase
Practices Securities for Its Portfolio?"
18. Capital Stock and Other Not Applicable
Securities
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; "How are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information About
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance "How does the Fund Measure
Data Performance?"
23. Financial Statements "Financial Statements"
PROSPECTUS & APPLICATION
FRANKLIN CUSTODIAN FUNDS, INC.
INVESTMENT STRATEGY
TAX-FREE INCOME
FEBRUARY 1, 1998 INVESTMENT STRATEGY
UTILITIES SERIES GROWTH & INCOME
INCOME SERIES GROWTH & INCOME
GROWTH SERIES GROWTH
DYNATECH SERIES GROWTH
U.S. GOVERNMENT SECURITIES SERIES INCOME
This prospectus describes Class I and Class II shares of the five series of
Franklin Custodian Funds, Inc. ("Custodian Funds"). Each series may individually
or together be referred to as the "Fund(s)." This prospectus contains
information you should know before investing in the Fund. Please keep it for
future reference.
Utilities Series, Income Series, Growth Series and U.S. Government Securities
Series currently offer another class of shares with a different sales charge and
expense structure, which affects performance. This class is described in a
separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Custodian Funds has a Statement of Additional Information ("SAI") for its
Class I and Class II shares, dated February 1, 1998, which may be amended from
time to time. It includes more information about the Custodian Funds' procedures
and policies. It has been filed with the SEC and is incorporated by reference
into this prospectus. For a free copy or a larger print version of this
prospectus, call 1-800/DIAL BEN.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INCOME SERIES MAY INVEST UP TO 100% OF ITS NET ASSETS IN NON-INVESTMENT GRADE
BONDS. THESE ARE COMMONLY KNOWN AS "JUNK BONDS." THEIR DEFAULT AND OTHER RISKS
ARE GREATER THAN THOSE OF HIGHER RATED SECURITIES. YOU SHOULD CAREFULLY CONSIDER
THESE RISKS BEFORE INVESTING IN THE FUND. PLEASE SEE "WHAT ARE THE RISKS OF
INVESTING IN THE FUND?"
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN CUSTODIAN FUNDS, INC.
February 1, 1998
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary ............................................................2
Financial Highlights .......................................................4
How Does the Fund Invest Its Assets? ......................................13
What Are the Risks of Investing in the Fund? ..............................24
Who Manages the Fund? .....................................................29
How Does the Fund Measure Performance? ....................................33
How Taxation Affects the Fund and Its Shareholders ........................34
How Is the Fund Organized? ................................................37
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ......................................................38
May I Exchange Shares for Shares of Another Fund? .........................46
How Do I Sell Shares? .....................................................49
What Distributions Might I Receive From the Fund? .........................52
Transaction Procedures and Special Requirements ...........................53
Services to Help You Manage Your Account ..................................57
What If I Have Questions About My Account? ................................60
GLOSSARY
Useful Terms and Definitions ..............................................60
APPENDIX
Description of Ratings ....................................................63
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended September 30, 1997. The Fund's actual expenses may vary.
<TABLE>
<CAPTION>
GROWTH UTILITIES INCOME U.S. GOVERNMENT DYNATECH
SERIES SERIES SERIES SECURITIES SERIES SERIES
A. SHAREHOLDER TRANSACTION EXPENSES+
CLASS I
Maximum Sales Charge (as a percentage
<S> <C> <C> <C> <C> <C>
of Offering Price) 4.50% 4.25% 4.25% 4.25% 4.50%
Paid at time of purchase++ 4.50% 4.25% 4.25% 4.25% 4.50%
Paid at redemption++++ NONE NONE NONE NONE NONE
Exchange Fee (per transaction) $5.00* $5.00* $5.00* $5.00* NONE
Class II
Maximum Sales Charge (as a
percentage of Offering Price) 1.99% 1.99% 1.99% 1.99% 1.99%
Paid at time of purchase+++ 1.00% 1.00% 1.00% 1.00% 1.00%
Paid at redemption++++ 0.99% 0.99% 0.99% 0.99% 0.99%
Exchange Fee (per transaction) $5.00* $5.00* 5.00* $5.00* NONE
B.Annual Fund Operating Expenses (as a percentage of average net assets)
Class I
Management Fees 0.48% 0.46% 0.46% 0.45% 0.60%
Rule 12b-1 Fees** 0.23% 0.13% 0.15% 0.09% 0.22%
Other Expenses 0.18% 0.16% 0.11% 0.10% 0.22%
------------------------------------------------------------------
Total Fund Operating Expenses 0.89% 0.75% 0.72% 0.64% 1.04%
==================================================================
Class II
Management Fees 0.48% 0.46% 0.46% 0.45% 0.60%
Rule 12b-1 Fees** 1.00% 0.65% 0.65% 0.65% 1.00%
Other Expenses 0.18% 0.16% 0.11% 0.10% 0.22%
------------------------------------------------------------------
Total Fund Operating Expenses 1.66% 1.27% 1.22% 1.20% 1.82%
==================================================================
</TABLE>
C. Example
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the Fund.
<TABLE>
<CAPTION>
GROWTH UTILITIES INCOME U.S. GOVERNMENT DYNATECH
SERIES SERIES SERIES SECURITIES SERIES SERIES
CLASS I
<S> <C> <C> <C> <C> <C>
1 Year*** $ 54 $ 50 $ 50 $ 49 $ 55
3 Years $ 72 $ 65 $ 65 $ 62 $ 77
5 Years $ 92 $ 82 $ 81 $ 77 $100
10 Years $150 $132 $128 $119 $166
CLASS II
1 Year $ 37 $ 33 $ 32 $ 32 $ 38
3 Years $ 62 $ 50 $ 48 $ 48 $ 67
5 Years $ 99 $ 79 $ 76 $ 75 $108
10 Years $205 $162 $156 $154 $222
</TABLE>
For the same Class II investment, you would pay projected expenses of $27
(Growth Series), $23 (Utilities Series), $22 (Income Series), $22 (U.S.
Government Securities Series) and $28 (DynaTech Series) if you did not sell
your shares at the end of the first year. Your projected expenses for the
remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service. ++There is no
front-end sales charge if you invest $1 million or more in Class I shares.
+++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Choosing a Share Class." ++++A Contingent Deferred
Sales Charge may apply to any Class II purchase if you sell the shares within 18
months and to Class I purchases of $1 million or more if you sell the shares
within one year. A Contingent Deferred Sales Charge may also apply to purchases
by certain retirement plans that qualify to buy Class I shares without a
front-end sales charge. The charge is 1% of the value of the shares sold or the
Net Asset Value at the time of purchase, whichever is less. The number in the
table shows the charge as a percentage of Offering Price. While the percentage
is different depending on whether the charge is shown based on the Net Asset
Value or the Offering Price, the dollar amount paid by you would be the same.
See "How Do I Sell Shares? - Contingent Deferred Sales Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**For Utilities, Income and U.S. Government Securities Series, these fees may
not exceed 0.15% for Class I and 0.65% for Class II. For Growth and DynaTech
Series, these fees may not exceed 0.25% for Class I and 1.00% for Class II. The
combination of front-end sales charges and Rule 12b-1 fees could cause long-term
shareholders to pay more than the economic equivalent of the maximum front-end
sales charge permitted under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes each Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Funds' independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in Custodian Funds' Annual Report to Shareholders for the
fiscal year ended September 30, 1997. The Annual Report to Shareholders also
includes more information about each Fund's performance. For a free copy, please
call Fund Information.
GROWTH SERIES
<TABLE>
<CAPTION>
CLASS I+++
YEAR ENDED SEPT. 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $22.82 $19.38 $14.96 $14.25 $13.70 $13.45 $10.69 $11.97 $ 9.64 $10.39
----------------------------------------------------------------------------------
Income from investment operations:
Net investment income .36 .22 .17 .19 .23 .23 .33 .32 .23 .21
Net realized and unrealized
gains (losses) 4.34 3.53 4.43 .90 .58 .52 2.70 (1.19) 2.33 (.57)
---------------------------------------------------------------------------------
Total from investment operations 4.70 3.75 4.60 1.09 .81 .75 3.03 (.87) 2.56 (.36)
=================================================================================
Less distributions:
Dividends from net investment income (.23) (.16) (.14) (.30) (.19) (.35) (.27) (.21) (.22) (.20)
Distributions from net realized gains (.20) (.15) (.04) (.08) (.07) (.15) - (.20) (.01) (.19)
---------------------------------------------------------------------------------
Total distributions (.43) (.31) (.18) (.38) (.26) (.50) (.27) (.41) (.23) (.39)
---------------------------------------------------------------------------------
Net Asset Value, end of year $27.09 $22.82 $19.38 $14.96 $14.25 $13.70 $13.45 $10.69 $11.97 $ 9.64
===================================================================================
Total return* 20.84% 19.60% 31.11% 7.63% 5.87% 5.73% 28.65% (7.55)% 27.02% (3.28)%
Ratios/Supplemental Data
Net assets, end of year
(in millions) $1,436 $1,020 $713 $517 $561 $533 $331 $170 $135 $107
Ratio to average net assets:
Expenses .89% .87% .90% .77% .64% .66% .70% .73% .76% .77%
Net investment income 1.60% 1.16% 1.08% 1.23% 1.64% 2.06% 2.58% 2.74% 1.94% 2.27%
Portfolio turnover rate 1.77% 2.03% 1.39% 6.52% 1.70% .81% 7.98% - -2.24% -
Average commission rate paid*** $.0568 $.0543 - - - - - - - -
</TABLE>
CLASS II
YEAR ENDED SEPT. 30,
1997 1996 1995+
-----------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the year)
Net Asset Value, beginning of year $22.60 $19.33 $16.88
------------------------
Income from investment operations:
Net investment income .20 .12 .02
---------------------
Net realized and unrealized gains 4.25 3.46 2.43
Total from investment operations 4.45 3.58 2.45
======================
Less distributions:
Dividends from net investment income (.15) (.16) -
Distributions from net realized gains (.20) (.15) -
-------------------
Total distributions (.35) (.31) -
-------------------
Net Asset Value, end of year $26.70 $22.60 $19.33
========================
Total return* 19.91% 18.73% 14.72%
Ratios/Supplemental Data
Net assets, end of year (in millions) $117 $43 $4
Ratio to average net assets:
Expenses 1.66% 1.63% 1.79%**
Net investment income .85% .40% .37%**
Portfolio turnover rate 1.77% 2.03% 1.39%
Average commission rate paid*** $.0568 $ .0543 -
DYNATECH SERIES
<TABLE>
<CAPTION>
CLASS I+++
YEAR ENDED SEPT. 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance
(for a share outstanding throughout
the year)
Net Asset Value, beginning of year $14.03 $12.78 $ 9.85 $10.29 $9.21 $8.68 $6.77 $7.63 $5.89 $7.08
------------------------------------------------------------------------------
Income from investment operations:
Net investment income .10 .06 .12 .07 .10 .12 .13 .15 .06 .04
Net realized and unrealized gains (losses) 4.81 1.54 2.99 .21 1.21 .52 1.95 (.35) 1.72 (1.20)
-----------------------------------------------------------------------------
Total from investment operations 4.91 1.60 3.11 .28 1.31 .64 2.08 (.20) 1.78 (1.16)
=============================================================================
Dividends from net investment income (.06) (.12) (.05) (.12) (.12) (.11) (.17) (.06) (.04) (.03)
Distributions from net realized gains (.40) (.23) (.13) (.60) (.11) - - (.60) - -
---------------------------------------------------------------------------
Total distributions (.46) (.35) (.18) (.72) (.23) (.11) (.17) (.66) (.04) (.03)
-----------------------------------------------------------------------------
Net Asset Value, end of year $18.48 $14.03 $12.78 $ 9.85 $10.29 $9.21 $8.68 $6.77 $7.63 $5.89
==============================================================================
Total return* 35.63% 12.84% 32.10% 2.89% 14.36% 7.29% 31.21% (2.71)% 30.26% (16.41)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in millions) $188 $105 $93 $67 $71 $65 $49 $37 $38 $34
Ratio to average net assets:
Expenses 1.04% 1.05% 1.01% 1.00% .81% .81% .93% .79% .83% .87%
Net investment income .75% .43% 1.11% .69% 1.03% 1.42% 1.57% 2.09% .90% .68%
Portfolio turnover rate 5.59% 11.94% 9.83% 9.73% 26.56% 10.70% 7.12% 11.34% - 3.68%
Average commission rate paid*** $.0536 $.0551 - - - - - - - -
</TABLE>
CLASS II
<TABLE>
<CAPTION>
YEAR ENDED SEPT. 30
<S> <C> <C>
1997 1996++
-------------------------
Per Share Operating Performance
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $14.03 $13.57
-------------------
Income from investment operations:
Net investment income .07 -
Net realized and unrealized gains 4.66 .46
-----------------
Total from investment operations 4.73 .46
=================
Less distributions: Dividends from net investment income (.06) -
Distributions from net realized gains (.40) -
----------------
Total distributions (.46) -
----------------
Net Asset Value, end of year $18.30 $14.03
===================
Total return* 34.32% 3.39%
RATIOS/SUPPLEMENTAL DATA
Net assets, at end of year (in millions) $3 -
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.82% 1.85%**
Net investment income .25% (.14)%**
Portfolio turnover rate 5.59% 11.94%
Average commission rate paid*** $.0536 $.0551
</TABLE>
<TABLE>
<CAPTION>
UTILITIES SERIES
CLASS I
YEAR ENDED SEPT. 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the year)
Net Asset Value, beginning of year $ 9.73 $9.75 $8.33 $10.78 $ 9.63 $8.81 $7.48 $8.10 $7.46 $7.72
------------------------------------------------------------------------------
Income from investment operations:
Net investment income .53 .54 .53 .55 .53 .53 .54 .53 .55 .55
Net realized and unrealized gains
(losses) .73 .03 1.42 (2.44) 1.17 .85 1.38 (.56) .67 (.24)
----------------------------------------------------------------------------
Total from investment operations 1.26 .57 1.95 (1.89) 1.70 1.38 1.92 (.03) 1.22 .31
============================================================================
Less distributions:
Dividends from net investment income (.52) (.52) (.52) (.52) (.55) (.56) (.59) (.58) (.58) (.57)
Distributions from net realized gains (.43) (.07) (.01) (.04) - - - (.01) - -
----------------------------------------------------------------------------
Total distributions (.95) (.59) (.53) (.56) (.55) (.56) (.59) (.59) (.58) (.57)
-----------------------------------------------------------------------------
Net Asset Value, end of year $10.04 $9.73 $9.75 $ 8.33 $10.78 $9.63 $8.81 $7.48 $8.10 $7.46
===============================================================================
Total return* 13.72% 5.94% 24.19% (17.94)% 17.83% 15.89% 26.15% (.93)% 16.71% 4.03%
Ratios/Supplemental Data
Net assets, end of year (in millions) $1,953 $2,401 $2,766 $2,573 $3,627 $2,191 $1,226$ 749 $ 652 $ 616
Ratio to average net assets:
Expenses .75% .71% .73% .64% .55% .57% .59% .60% .62% .64%
Net investment income 5.26% 5.24% 5.88% 5.76% 5.30% 5.90% 6.44% 6.50% 7.10% 7.36%
Portfolio turnover rate 7.24% 17.05% 5.55% 6.34% 7.81% 1.39% .89% 2.07% 4.02% 1.68%
Average commission rate paid*** $.0505 $.0486 - - - - - - - -
</TABLE>
CLASS II
YEAR ENDED SEPT. 30,
1997 1996 1995+
------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the year)
Net Asset Value, beginning of year $ 9.72 $9.75 $8.89
---------------------------------
Income from investment operations:
Net investment income .45 .46 .23
Net realized and unrealized gains .76 .06 .88
------------------------------
Total from investment operations 1.21 .52 1.11
===============================
Less distributions:
Dividends from net investment income (.48) (.48) (.25)
Distributions from net realized gains (.43) (.07) -
--------------------------------
Total distributions (.91) (.55) (.25)
--------------------------------
Net Asset Value, at end of year $10.02 $9.72 $9.75
=================================
Total return* 13.06% 5.39% 13.01%
Ratios/Supplemental Data
Net assets, end of year (in millions) $22 $20 $8
Ratio to average net assets:
Expenses 1.27% 1.23% 1.21%**
Net investment income 4.78% 4.86% 5.15%**
Portfolio turnover rate 7.24% 17.05% 5.55%
Average commission rate paid*** $.0505 $.0486 -
INCOME SERIES
CLASS I
<TABLE>
<CAPTION>
YEAR ENDED SEPT. 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $2.30 $2.30 $2.22 $2.46 $2.25 $2.08 $1.76 $2.11 $2.11 $2.22
------------------------------------------------------------------------------
Income from investment operations:
Net investment income .18 .19 .18 .17 .18 .19 .19 .21 .22 .23
Net realized and unrealized gains (losses) .20 .02 .11 (.20) .23 .19 .35 (.32) .01 (.10)
-----------------------------------------------------------------------------
Total from investment operations .38 .21 .29 (.03) .41 .38 .54 (.11) .23 .13
=============================================================================
Less distributions:
Dividends from net investment income (.18) (.18) (.18) (.18) (.19) (.20) (.22) (.22) (.22) (.22)
Distributions from net realized gains (.01) (.03) (.03) (.03) (.01) (.01) - (.02) (.01) (.02)
------------------------------------------------------------------------------
Total distributions (.19) (.21) (.21) (.21) (.20) (.21) (.22) (.24) (.23) (.24)
------------------------------------------------------------------------------
Net Asset Value, end of year $2.49 $2.30 $2.30 $2.22 $2.46 $2.25 $2.08 $1.76 $2.11 $2.11
==============================================================================
Total return* 17.31% 9.43 14.00% (1.52)% 18.76% 18.80% 32.60% (6.37)%11.16% 6.00%
Ratios/Supplemental Data
Net assets, end of year (in millions) $7,739 $6,780 $5,886 $4,892 $3,935 $2,484 $1,673 $1,299$1,190 $727
Ratio to average net assets:
Expenses .72% .70% .71% .64% .54% .55% .56% .55% .57% .61%
Net investment income 7.45% 8.27% 8.26% 7.37% 7.84% 9.11% 10.17% 10.73% 10.46% 10.50%
Portfolio turnover rate 16.15% 25.29% 58.64% 23.37% 25.41% 23.30% 33.92% 12.14% 12.05 10.01%
Average commission rate paid*** $.0498 $.0518 - - - - - - - -
</TABLE>
CLASS II
YEAR ENDED SEPT. 30,
1997 1996 1995+
---------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the year)
Net Asset Value, beginning of year $2.30 $2.30 $2.18
--------------------------
Income from investment operations:
Net investment income .16 .17 .08
Net realized and unrealized gains .21 .03 .11
------------------------
Total from investment operations .37 .20 .19
========================
Less distributions:
Dividends from net investment income (.17) (.17) (.07)
Distributions from net realized gains (.01) (.03) -
--------------------------
Total distributions (.18) (.20) (.07)
--------------------------
Net Asset Value, end of year $2.49 $2.30 $2.30
===========================
Total return* 16.72% 8.86% 8.96%
Ratios/Supplemental Data
Net assets, end of year (in millions) $695 $343 $66
Ratio to average net assets:
Expenses 1.22% 1.21% 1.23%**
Net Investment Income 6.96% 7.84% 7.89%**
Portfolio turnover rate 16.15% 25.29% 58.64%
Average commission rate*** $.0498 $.0518 -
U.S. GOVERNMENT SECURITIES SERIES
CLASS I
<TABLE>
<CAPTION>
YEAR ENDED SEPT. 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the year)
Net Asset Value, beginning of year $6.72 $6.87 $6.51 $7.20 $7.26 $7.14 $6.86 $6.90 $6.98 $6.87
------------------------------------------------------------------------------
Income from investment operations:
Net investment income .48 .49 .50 .50 .56 .61 .65 .67 .69 .69
Net realized and unrealized gains (losses) .17 (.15) .35 (.68) (.06) .11 .29 (.02) (.07) .12
----------------------------------------------------------------------------
Total from investment operations .65 .34 .85 (.18) .50 .72 .94 .65 .62 .81
============================================================================
Less distributions:
Dividends from net investment income (.48) (.49) (.49) (.51) (.56) (.60) (.66) (.69) (.70) (.70)
------------------------------------------------------------------------------
Net Asset Value, end of year $6.89 $6.72 $6.87 $6.51 $7.20 $7.26 $7.14 $6.86 $6.90 $6.98
==============================================================================
Total return* 10.08% 5.15% 13.56% (2.75%) 6.86% 10.14% 13.97% 9.47% 8.95% 11.77%
Ratios/Supplemental Data
Net assets, end of year (in millions) $9,351 $10,12 $11,102 $11,669 $14,269 $13,617 $12,427 $11,143 $11,260 $12,113
Ratio to average net assets:
Expenses .64% .61% .61% .55% .52% .53% .52% .52% .52% .53%
Net investment income 7.01% 7.18% 7.50% 7.37% 7.71% 8.46% 9.26% 9.72% 9.99% 9.85%
Portfolio turnover rate++++ 1.74% 8.01% 5.48% 18.28% 43.10% 38.75% 22.14% 18.23% 25.70% 34.14%
</TABLE>
CLASS II
YEAR ENDED SEPT. 30,
1997 1996 1995+
-----------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the year)
Net Asset Value, beginning of year $6.70 $ 6.85 $ 6.67
--------------------------
Income from investment operations:
Net investment income .44 .45 .21
Net realized and unrealized gains (losses) .17 (.15) .16
------------------------
Total from investment operations .61 .30 .37
========================
Less distributions:
Dividends from net investment income (.44) (.45) (.19)
Net Asset Value, end of year $6.87 $ 6.70 $ 6.85
Total return* 9.48% 4.55% 5.66%
==========================
Ratios/Supplemental Data
Net assets, end of year (in millions) $121 $58 $12
Ratio to average net assets:
Expenses 1.20% 1.17% 1.18%**
Net investment income 6.44% 6.80% 6.48%**
Portfolio turnover rate++++ 1.74% 8.01% 5.48%
*Total return does not reflect sales commissions or the Continent Deferred Sales
Charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the Offering Price.
**Annualized.
***Relates to purchases and sale of equity securities. Prior to September 30,
1996 disclosure of average commission rate was not required.
+For the period May 1, 1995 (effective date) to September 30, 1995. ++For the
period September 16, 1996 (effective date) to September 30, 1996.
+++Data before 1992 has been adjusted to reflect a two-for-one stock split in
the form of a 100% stock dividend to shareholders of record effective the
beginning of business on June 1, 1992. ++++Maturity of U.S. government issues
and the reinvestment of the proceeds thereof are considered as purchases and
sales of securities in computing the portfolio turnover rate.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
Each Fund's investment objective is a fundamental policy of the Fund and may not
be changed without shareholder approval. Of course, there is no assurance that
the Fund will achieve its objective.
GROWTH SERIES
The primary investment objective of this Fund is capital appreciation. The Fund
seeks to achieve its objective by investing primarily in common stocks or
convertible securities believed to offer favorable possibilities for capital
appreciation, some of which may yield little or no current income. Current
income is only a secondary consideration when selecting portfolio securities.
The Fund's assets may be invested in shares of common stock traded on any
national securities exchange or issued by a corporation, association or similar
legal entity with total assets of at least $1,000,000, according to its latest
published annual report. The Fund's assets may also be invested in bonds or
preferred stock convertible into shares of common stock listed for trading on a
national securities exchange or held in cash or cash equivalents. The Fund may
keep a significant portion of its assets in cash or cash equivalents from time
to time. As a fundamental policy, the Fund may not concentrate or invest more
than 25% of its total assets in any one industry.
To the extent that the Fund may invest in smaller capitalization companies (in
general, companies with a market capitalization of less than $1 billion at the
time of the Fund's investment), the Fund may place greater emphasis upon
investments in relatively new or unseasoned companies that are in their early
stages of development, or in new and emerging industries where the opportunity
for rapid growth is expected to be above average. Securities of unseasoned
companies present greater risks than securities of larger, more established
companies. Please see "What are the Risks of Investing in the Fund? - Small
Companies."
DYNATECH SERIES
The investment objective of this Fund is capital appreciation. The Fund is
designed for investors who understand and are willing to accept the risk of loss
involved in seeking capital appreciation. The Fund's investments tend to be more
speculative in nature, and there can be greater emphasis on short-term trading
profits. Certain investments may be based on market fluctuations caused by
excessive optimism or pessimism of investors, with little or no basis in
fundamental economic conditions.
The Fund seeks to achieve its objective by investing primarily in companies that
emphasize technological development, in fast-growing industries, or in the
securities of companies that Advisers considers undervalued. The Fund's assets
may be invested in securities traded on any national securities exchange or
issued by a corporation, association or similar legal entity with total assets
of at least $1,000,000, according to its latest published annual report, or held
in cash or cash equivalents. It is thought that most of the Fund's assets will
be invested in common stocks, including securities convertible into common
stocks. The Fund, however, may also invest in debt securities or preferred
stocks that Advisers believes will further the Fund's investment objective. The
Fund may keep a significant portion of its assets in cash or cash equivalents
from time to time. The Fund may not concentrate or invest more than 25% of its
total assets in any one industry. From time to time, concentration in a few
issues may develop due to market appreciation of certain issues.
UTILITIES SERIES
The investment objectives of this Fund are both capital appreciation and current
income. As a fundamental policy, the Fund's assets may be invested in securities
of an issuer engaged in the public utilities industry, or held in cash or cash
equivalents. The public utilities industry includes the manufacture, production,
generation, transmission and sale of gas, water and electricity and companies
involved in providing services related to these activities. The industry also
includes issuers engaged in the communications field, such as telephone,
cellular, paging, telegraph, satellite, microwave and other companies that
provide communication facilities or services for the public's benefit. As
required by the SEC, at least 65% of the Fund's investments will be in the
securities of issuers engaged in the public utilities industry. Under normal
circumstances, the Fund expects to have substantially all of its assets invested
in securities issued by these types of issuers.
To achieve its investment objectives, the Fund invests primarily in common
stocks, including, from time to time, non-dividend paying common stocks if, in
the opinion of Advisers, these securities appear to offer attractive
opportunities for capital appreciation. The Fund may also invest in preferred
stocks and bonds issued by issuers engaged in the public utilities industry.
When buying fixed-income debt securities, the Fund may invest in securities
regardless of their rating depending upon prevailing market and economic
conditions, including securities in the lowest rating categories and unrated
securities. Most of the Fund's investments, however, are rated at least Baa by
Moody's or BBB by S&P. These ratings represent the opinions of the rating
services with respect to the securities and are not absolute standards of
quality. They will be considered in connection with the investment of the Fund's
assets but will not be a determining or limiting factor. Please see the Appendix
to this prospectus for a discussion of the ratings.
With respect to unrated securities, it is also the Fund's intent to buy
securities that, in the view of Advisers, would be comparable in quality to the
Fund's rated securities and have been determined to be consistent with the
Fund's objectives without exposing the Fund to excessive risk. The Fund will not
buy issues that are in default or that Advisers believes involve excessive risk.
Like all debt securities, the value of the Fund's fixed-income debt securities
generally has an inverse relationship with market interest rates. For example,
when interest rates rise, the value of the Fund's debt securities tends to fall.
On the other hand, when interest rates fall, the value of these securities tends
to rise. Likewise, because securities issued by utility companies are
particularly sensitive to movements in interest rates, the equity securities of
these companies are more affected by movements in interest rates than are the
equity securities of other issuers.
INCOME SERIES
The investment objective of this Fund is to maximize income while maintaining
prospects for capital appreciation. The Fund invests in a diversified portfolio
of securities selected with particular consideration of current income
production. The Fund's assets may be invested in securities traded on any
national securities exchange or issued by a corporation, association or similar
legal entity with total assets of at least $1,000,000, according to its latest
published annual report, or held in cash or cash equivalents. The Fund may also
invest in preferred stocks. There are no restrictions as to the proportion of
investments that may be made in a particular type of security and the
determination is entirely within Advisers' discretion.
Lower Rated Securities. The Fund may invest up to 100% of its net assets in
non-investment grade bonds. These are commonly known as "junk bonds." Their
default and other risks are greater than those of higher rated securities. You
should carefully consider these risks before investing in the Fund. Please see
"What are the Risks of Investing in the Fund? - High Yield Securities."
Various investment services publish ratings of some of the types of securities
in which the Fund may invest. Higher yields are ordinarily available from
securities in the lower rating categories, such as securities rated Ba or lower
by Moody's or BB or lower by S&P or from unrated securities deemed by the Fund's
manager to be of comparable quality. These ratings represent the opinions of the
rating services with respect to the issuer's ability to pay interest and repay
principal. They do not purport to reflect the risk of fluctuations in market
value and are not absolute standards of quality. These ratings will be
considered in connection with the investment of the Fund's assets but will not
be a determining or limiting factor. Please see the Appendix to this prospectus
for a description of these ratings.
The Fund may invest in securities regardless of their rating or in securities
that are unrated, including up to 5% of its assets in securities that are in
default at the time of purchase. As an operating policy, however, the Fund will
generally invest in securities that are rated at least Caa by Moody's or CCC by
S&P, except for defaulted securities as noted below, or that are unrated but of
comparable quality as determined by Advisers. Unrated debt securities are not
necessarily of lower quality than rated securities, but they may not be
attractive to as many buyers. A breakdown of the ratings for the bonds in the
Fund's portfolio is included under "What are the Risks of Investing in the
Fund?" below.
The Fund may also buy debt securities of issuers that are not currently paying
interest, as well as issuers who are in default, and may keep an issue that has
defaulted. The Fund will buy defaulted debt securities if, in the opinion of
Advisers, they may present an opportunity for later price recovery, the issuer
may resume interest payments, or other advantageous developments appear likely
in the near future. In general, securities that default lose much of their value
before the actual default so that the security, and thus the Fund's Net Asset
Value, would be impacted before the default. Defaulted debt securities may be
illiquid and, as such, will be part of the 10% limit discussed under "Illiquid
Investments."
If the rating on an issue held in the Fund's portfolio is changed by the rating
service or the security goes into default, this event will be considered by the
Fund in its evaluation of the overall investment merits of that security but
will not generally result in an automatic sale of the security.
Rather than relying principally on the ratings assigned by rating services, the
investment analysis of securities being considered for the Fund's portfolio may
also include, among other things, consideration of relative values based on such
factors as anticipated cash flow, interest or dividend coverage, asset coverage,
earnings prospects, the experience and managerial strength of the issuer,
responsiveness to changes in interest rates and business conditions, debt
maturity schedules and borrowing requirements, and the issuer's changing
financial condition and the public recognition of such change.
Certain of the high yielding, fixed-income securities in which the Fund may
invest may be purchased at a discount. When held to maturity or retired, these
securities may include an element of capital gain. Capital losses may be
realized when securities purchased at a premium, that is, in excess of their
stated or par value, are held to maturity or are called or redeemed at a price
lower than their purchase price. Capital gains or losses also may be realized
upon the sale of securities.
ZERO COUPON AND PAY-IN-KIND BONDS. The Fund may buy certain bonds issued at a
discount that defer the payment of interest or pay no interest until maturity,
known as zero coupon bonds, or which pay interest through the issuance of
additional bonds, known as pay-in-kind bonds. For federal tax purposes, holders
of these bonds, such as the Fund, are deemed to receive interest over the life
of the bonds and are taxed as if interest were paid on a current basis although
no cash interest payments are in fact received by the holder until the bonds
mature. See "What are the Fund's Potential Risks? High Yield Securities" for
more information about these bonds.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may buy debt obligations
on a "when-issued" or "delayed delivery" basis. These transactions are subject
to market fluctuation before delivery to the Fund and generally do not earn
interest until their scheduled delivery date. Therefore, the value or yields at
delivery may be more or less than those available when the transaction was
entered into. When the Fund is the buyer, it will maintain, in a segregated
account with its custodian bank, cash or high-grade marketable securities having
an aggregate value equal to the amount of its purchase commitments until payment
is made. To the extent the Fund engages in when-issued and delayed delivery
transactions, it will do so only for the purpose of acquiring portfolio
securities consistent with its investment objective and policies, and not for
the purpose of investment leverage. See "How Does the Fund Invest Its Assets? -
When-Issued, Delayed Delivery and To-Be-Announced Transactions" in the SAI for a
more complete discussion of these transactions.
LOAN PARTICIPATIONS. The Fund may invest up to 5% of its assets in loan
participations and other related direct or indirect bank obligations. These
instruments are interests in floating or variable rate senior loans to U.S.
corporations, partnerships and other entities. While loan participations
generally trade at par value, the Fund will also be able to acquire loan
participations that sell at a discount because of the borrower's credit
problems. To the extent the borrower's credit problems are resolved, the loan
participation may appreciate in value. Advisers may acquire loan participations
for the Fund when it believes that over the long term appreciation will occur.
An investment in these securities, however, carries substantially the same risks
as those for defaulted debt securities and may cause the loss of the entire
investment to the Fund. Most loan participations are illiquid and, to that
extent, will be included in the 10% limitation described under "Illiquid
Investments."
TRADE CLAIMS. The Fund may invest a portion of its assets in trade claims. Trade
claims are purchased from creditors of companies in financial difficulty. For
buyers, such as the Fund, trade claims offer the potential for profits since
they are often purchased at a significantly discounted value and, consequently,
may generate capital appreciation if the value of the claim increases as the
debtor's financial position improves. If the debtor is able to pay the full
obligation on the face of the claim as a result of a restructuring or an
improvement in the debtor's financial condition, trade claims offer the
potential for higher income due to the difference in the face value of the claim
as compared to the discounted purchase price.
An investment in trade claims is speculative and carries a high degree of risk.
There can be no guarantee that the debtor will ever be able to satisfy the
obligation on the trade claim. Trade claims are not regulated by federal
securities laws or the SEC. Currently, trade claims are regulated primarily by
bankruptcy laws. Because trade claims are unsecured, holders of trade claims may
have a lower priority in terms of payment than most other creditors in a
bankruptcy proceeding. In light of the nature and risk of trade claims, the
Fund's investment in these instruments will not exceed 5% of its net assets at
the time of acquisition.
CONCENTRATION. As market conditions change, it is conceivable that all of the
assets of the Fund could be invested in common stocks or, conversely, in debt
securities. It is a fundamental policy of the Fund that concentration of
investment in a single industry may not exceed 25% of the total assets of the
Fund.
U.S. GOVERNMENT SECURITIES SERIES
The investment objective of this Fund is income through investment in a
portfolio limited to securities that are obligations of the U.S. government or
its instrumentalities. U.S. government securities include, but are not limited
to, U.S. Treasury bonds, notes and bills, Treasury certificates of indebtedness
and securities issued by instrumentalities of the U.S. government. Other than
investments in U.S. Treasury securities or assets held in cash pending
investment, the assets of the Fund are currently invested solely in obligations
of the Government National Mortgage Association ("GNMA(s)" or "Ginnie Maes").
The Fund's investments are continually monitored and changes are made as market
conditions warrant. The Fund does not, however, engage in the trading of
securities for the purpose of realizing short-term profits.
GNMAS. GNMAs are mortgage-backed securities representing part ownership of a
pool of mortgage loans. GNMAs differ from other bonds in that principal may be
paid back on an unscheduled basis rather than returned in a lump sum at
maturity. The Fund will buy GNMAs whose principal and interest are guaranteed.
The Fund also buys adjustable rate GNMAs and other types of securities that may
be issued with the guarantee of the Government National Mortgage Association
(the "Association").
The Association's guarantee of payment of principal and interest on GNMAs is
backed by the full faith and credit of the U.S. government. The Association may
borrow U.S. Treasury funds to the extent needed to make payments under its
guarantee. Of course, this guarantee does not extend to the market value or
yield of the GNMAs or the Net Asset Value or performance of the Fund, which will
fluctuate daily with market conditions.
Payments to holders of GNMAs consist of the monthly distributions of interest
and principal less the Association's and issuers' fees. The portion of the
monthly payment that represents a return of principal will be reinvested by the
Fund in securities that may have interest rates that are higher or lower than
the obligation from which the principal payment was received.
When mortgages in the pool underlying a GNMA are prepaid by borrowers or as a
result of foreclosure, the principal payments are passed through to the GNMA
holders, such as the Fund. Accordingly, a GNMA's life is likely to be
substantially shorter than the stated maturity of the mortgages in the
underlying pool. Because of the variation in prepayment rates, it is not
possible to accurately predict the life of a particular GNMA.
TO-BE-ANNOUNCED AND DELAYED DELIVERY TRANSACTIONS. The Fund may buy and sell
GNMAs on a "To-Be-Announced" ("TBA") and "delayed delivery" basis. These
transactions are arrangements under which the Fund may buy securities with
payment and delivery scheduled for a future time, generally within 30 to 60
days. These transactions are subject to market fluctuation and the risk that the
value or yields at delivery may be more or less than those available when the
transaction was entered into. In TBA and delayed delivery transactions, the Fund
relies on the seller to complete the transaction. The seller's failure to do so
may cause the Fund to miss a price or yield considered advantageous. Securities
purchased on a TBA or delayed delivery basis do not generally earn interest
until their scheduled delivery date. The Fund is not subject to any percentage
limit on the amount of its assets that may be invested in delayed delivery and
TBA purchase obligations. For more information about these transactions, please
see the SAI.
The price per share you receive when you sell your shares may be more or less
than the price you paid for the shares. The dividends per share paid by the Fund
may also vary.
OTHER INVESTMENT POLICIES OF THE FUND
FOREIGN SECURITIES. U.S. Government Securities Series may not buy securities of
foreign issuers. Income Series may invest up to 25% of its assets in foreign
securities and Growth, DynaTech and Utilities Series may invest without
restriction in foreign securities, if the investments are consistent with their
objectives and comply with their concentration and diversification policies. The
Fund will ordinarily buy foreign securities that are traded in the U.S. or buy
American Depositary Receipts, which are certificates issued by U.S. banks
representing the right to receive securities of a foreign issuer deposited with
that bank or a correspondent bank. The Fund may also buy the securities of
foreign issuers directly in foreign markets. DynaTech and Utilities Series
presently have no intention of investing more than 10% of their net assets in
foreign securities not publicly traded in the U.S. Growth Series presently has
no intention of investing more than 25% of its net assets in foreign securities
not publicly traded in the U.S. Investments in foreign securities where delivery
takes place outside the U.S. will be made in compliance with any applicable U.S.
and foreign currency restrictions and tax and other laws limiting the amount and
types of foreign investments. Changes of governmental administrations or
economic or monetary policies in the U.S. or abroad, changed circumstances in
dealings between nations, or changes in currency convertibility or exchange
rates could result in investment losses for the Fund.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Securities that are acquired by the Fund outside the U.S. and that are publicly
traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered by the Fund to be illiquid assets so long
as the Fund acquires and holds the securities with the intention of reselling
them in the foreign trading market, the Fund reasonably believes it can readily
dispose of the securities for cash in the U.S. or a foreign market, and current
market quotations are readily available.
OPTIONS. Each Fund, except U.S. Government Securities Series, may write covered
call options that are listed for trading on a national securities exchange. This
means that the Fund will only write options on securities that it actually owns.
A call option gives the buyer the right to buy the security on which the option
is written for a specified period of time and at a price agreed to at the time
the Fund sells the option, even though that price may be less than the value of
the security at the time the option is exercised. When the Fund sells covered
call options, it will receive a cash premium that can be used in whatever way is
felt to be most beneficial to the Fund. The risks associated with covered call
writing are that in the event of a price increase on the underlying security,
which would likely trigger the exercise of the call option, the Fund will not
participate in the increase in price beyond the exercise price. If the Fund
determines that it does not wish to deliver the underlying securities from its
portfolio, it would have to enter into a "closing purchase transaction," the
premium on which may be higher or lower than that received by the Fund for
writing the option. There is no assurance that a closing purchase transaction
will be available in every instance.
Transactions in options are generally considered "derivative securities."
CONVERTIBLE SECURITIES. Each Fund, except U.S. Government Securities Series, may
invest in convertible securities. A convertible security is generally a debt
obligation or preferred stock that may be converted within a specified period of
time into a certain amount of common stock of the same or a different issuer. A
convertible security provides a fixed-income stream and the opportunity, through
its conversion feature, to participate in the capital appreciation resulting
from a market price advance in its underlying common stock. As with a straight
fixed-income security, a convertible security tends to increase in market value
when interest rates decline and decrease in value when interest rates rise. Like
a common stock, the value of a convertible security also tends to increase as
the market value of the underlying stock rises, and it tends to decrease as the
market value of the underlying stock declines. Because its value can be
influenced by both interest rate and market movements, a convertible security is
not as sensitive to interest rates as a similar fixed-income security, nor is it
as sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, each Fund, except U.S. Government
Securities Series, may lend its portfolio securities to qualified securities
dealers or other institutional investors, if such loans do not exceed 10% of the
value of the Fund's total assets at the time of the most recent loan. The
borrower must deposit with the Fund's custodian bank collateral with an initial
market value of at least 102% of the market value of the securities loaned,
including any accrued interest, with the value of the collateral and loaned
securities marked-to-market daily to maintain collateral coverage of at least
100%. This collateral shall consist of cash, securities issued by the U.S.
government, its agencies or instrumentalities, or irrevocable letters of credit.
The lending of securities is a common practice in the securities industry. The
Fund may engage in security loan arrangements with the primary objective of
increasing the Fund's income either through investing cash collateral in
short-term interest-bearing obligations or by receiving a loan premium from the
borrower. Under the securities loan agreement, the Fund continues to be entitled
to all dividends or interest on any loaned securities. As with any extension of
credit, there are risks of delay in recovery and loss of rights in the
collateral should the borrower of the security fail financially.
REPURCHASE AGREEMENTS. Each Fund, except U.S. Government Securities Series, may
engage in repurchase transactions. In a repurchase agreement, the Fund buys U.S.
government securities from a bank or broker-dealer at one price and agrees to
sell them back to the bank or broker-dealer at a higher price on a specified
date. The securities subject to resale are held on behalf of the Fund by a
custodian bank approved by the Board. The bank or broker-dealer must transfer to
the custodian securities with an initial market value of at least 102% of the
repurchase price to help secure the obligation to repurchase the securities at a
later date. The securities are then marked-to-market daily to maintain coverage
of at least 100%. If the bank or broker-dealer does not repurchase the
securities as agreed, the Fund may experience a loss or delay in the liquidation
of the securities underlying the repurchase agreement and may also incur
liquidation costs. The Fund, however, intends to enter into repurchase
agreements only with banks or broker-dealers that are considered creditworthy by
the investment manager.
BORROWING. None of the Funds borrow money or mortgage or pledge any of their
assets, except that each Fund may borrow for temporary or emergency purposes in
an amount up to 5% of its total asset value.
ILLIQUID INVESTMENTS. Each Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them. Subject to this
limitation, the Board has authorized each Fund, except U.S. Government
Securities Series, to invest in restricted securities where such investment is
consistent with the Fund's investment objective and has authorized such
securities to be considered liquid to the extent the investment manager
determines on a daily basis that there is a liquid institutional or other market
for the securities. Notwithstanding the investment manager's determinations in
this regard, the Board will remain responsible for such determinations and will
consider appropriate action, consistent with the Fund's objective and policies,
if the security should become illiquid after its purchase. To the extent the
Fund invests in restricted securities that are deemed liquid, the general level
of illiquidity in the Fund may be increased if qualified institutional buyers
become uninterested in buying these securities, or the market for these
securities contracts.
OTHER POLICIES AND RESTRICTIONS. Each Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the
SAI.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
TAX CONSIDERATIONS. The investment of the Fund, except the U.S. Government
Securities Series, in options, foreign securities and other complex securities
are subject to special tax rules that may affect the amount, timing or character
of the income earned by the Fund and distributed to you. The Fund may also be
subject to withholding taxes on earnings from certain of its foreign securities.
These special tax rules are discussed under "Additional Information on
Distributions and Taxes" in the SAI.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
HIGH YIELD SECURITIES. Income Series may invest up to 100% of its net assets in
non-investment grade securities. Because the Fund may invest in securities below
investment grade, an investment in the Fund is subject to a higher degree of
risk than an investment in a fund that invests primarily in higher-quality
securities. You should consider the increased risk of loss to principal that is
present with an investment in higher risk securities, such as those in which the
Fund invests. Accordingly, an investment in the Fund should not be considered a
complete investment program and should be carefully evaluated for its
appropriateness in light of your overall investment needs and goals. Utilities
Series may also invest a portion of its assets in non-investment grade
securities.
The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with buying the securities of these issuers is generally
greater than the risk associated with higher-quality securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the Fund's portfolio defaults, the Fund may have unrealized losses on the
security, which may lower the Fund's Net Asset Value. Defaulted securities tend
to lose much of their value before they default. Thus, the Fund's Net Asset
Value may be adversely affected before an issuer defaults. In addition, the Fund
may incur additional expenses if it must try to recover principal or interest
payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the Fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, Advisers may find it necessary to replace
the securities with lower-yielding securities, which could result in less net
investment income for the Fund. The premature disposition of a high yield
security due to a call or buy-back feature, the deterioration of an issuer's
creditworthiness, or a default by an issuer may make it more difficult for the
Fund to manage the timing of its income. Under the Code and U.S. Treasury
regulations, the Fund may have to accrue income on defaulted securities and
distribute the income to shareholders for tax purposes, even though the Fund is
not currently receiving interest or principal payments on the defaulted
securities. To generate cash to satisfy these distribution requirements, the
Fund may have to sell portfolio securities that it otherwise may have continued
to hold or use cash flows from other sources, such as the sale of Fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on market price of a security and on the Fund's ability to sell a security in
response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, or if necessary to meet the Fund's liquidity
needs. Reduced liquidity may also make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
The Fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry restrictions
on resale. While many high yielding securities have been sold with registration
rights, covenants and penalty provisions for delayed registration, if the Fund
is required to sell restricted securities before the securities have been
registered, it may be deemed an underwriter of the securities under the
Securities Act of 1933, which entails special responsibilities and liabilities.
The Fund may also incur special costs in disposing of restricted securities,
although the Fund will generally not incur any costs when the issuer is
responsible for registering the securities.
The Fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The Fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
The high yield securities market is relatively new and much of its growth before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993 depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any security generally
reflects the true operating results of the issuer. Factors adversely impacting
the market value of high yield securities may lower the Fund's Net Asset Value.
The Fund relies on Advisers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, Advisers takes into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
The credit risk factors above also apply to lower-quality zero-coupon, deferred
interest and pay-in-kind securities. These securities have an additional risk,
however, because unlike securities that pay interest throughout the time until
maturity, the Fund will not receive any cash until the cash payment date. If the
issuer defaults, the Fund may not obtain any return on its investment.
Zero-coupon or deferred interest securities are debt obligations that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the "cash payment date"), and
therefore are generally issued and traded at a discount from their face amount
or par value. The discount varies depending on the time remaining until maturity
or the cash payment date, as well as prevailing interest rates, liquidity of the
security, and the perceived credit quality of the issuer. The discount, in the
absence of financial difficulties of the issuer, typically decreases as the
final maturity or cash payment date approaches.
The value of zero-coupon securities is generally more volatile than the value of
other fixed-income securities that pay interest periodically. Zero-coupon
securities are also likely to respond to changes in interest rates to a greater
degree than other fixed-income securities having similar maturities and credit
quality. The Fund is not limited in the amount of its assets that may be
invested in these types of securities.
The table below shows the percentage of Income Series' assets invested in
securities rated in each of the rating categories shown. A credit rating by a
rating agency evaluates the safety of principal and interest based on an
evaluation of the security's credit quality, but does not consider the market
risk or the risk of fluctuation in the price of the security. The information
shown is based on a dollar-weighted average of the Fund's portfolio composition
based on month-end assets for each of the 12 months in the fiscal year ended
September 30, 1997. The Appendix to this prospectus includes a description of
each rating category.
AVERAGE WEIGHTED
MOODY'S RATING PERCENTAGE OF ASSETS
- ----------------------------------------------------
Aaa 9.05%
Aa 0.32%
A 0.00%
Baa 4.47%
Ba 6.95%
B 26.68%
Caa 6.35%*
Ca 0.15%
C 0.00%
*2.28% of these securities, which are unrated by Moody's, have been included in
the Caa rating category.
PUBLIC UTILITIES INDUSTRY SECURITIES. Utilities Series' investments in the
public utilities industry entail certain characteristics and risks that you
should consider. These characteristics include: risks associated with regulatory
changes including deregulation and interest rate fluctuations; the difficulty of
obtaining adequate returns on invested capital in spite of frequent rate
increases and of financing large construction programs during inflationary
periods; restrictions on operations and increased costs and delays attributable
to environmental considerations; difficulties of the capital markets in
absorbing utility debt and equity securities; difficulties in obtaining fuel for
electric generation at reasonable prices; risks associated with the operation of
nuclear power plants; and general effects of energy conservation.
GNMAS. GNMA yields (interest income as a percentage of price) have historically
exceeded the current yields on other types of U.S. government securities with
comparable maturities. The effects of interest rate fluctuations and
unpredictable prepayments of principal, however, can greatly change realized
yields. As with most bonds, in a period of rising interest rates, the value of a
GNMA will generally decline. In a period of declining interest rates, it is more
likely that mortgages contained in GNMA pools will be prepaid, thus reducing the
effective yield. This potential for prepayment during periods of declining
interest rates may reduce the general upward price increases of GNMAs as
compared to the increases experienced by noncallable debt securities over the
same periods. In addition, any premium paid on the purchase of a GNMA will be
lost if the obligation is prepaid. Of course, price changes of GNMAs and other
securities held by U.S. Government Securities Series will have a direct impact
on the Net Asset Value per share of the Fund.
SMALL COMPANIES. Growth Series may invest in companies that have relatively
small revenues, limited product lines, and a small share of the market for their
products or services. Small companies may lack depth of management, they may be
unable to internally generate funds necessary for growth or potential
development or to generate such funds through external financing on favorable
terms, and they may be developing or marketing new products or services for
which markets are not yet established and may never become established. Due to
these and other factors, small companies may suffer significant losses, as well
as realize substantial growth.
Historically, small capitalization stocks have been more volatile than larger
capitalization stocks and are therefore more speculative than investments in
larger companies. Among the reasons for the greater price volatility are the
less certain growth prospects of smaller firms, the lower degree of liquidity in
the markets for such stocks and the greater sensitivity of small companies to
changing economic conditions. Besides exhibiting greater volatility, small
company stocks may, to a degree, fluctuate independently of larger company
stocks. Small company stocks may decline in price as large company stocks rise
or rise in price as large company stocks decline.
FOREIGN SECURITIES. Investment in the shares of foreign issuers requires
consideration of certain factors that are not normally involved in investments
solely in U.S. issuers. Among other things, the financial and economic policies
of some foreign countries in which the Fund may invest are not as stable as in
the U.S. Furthermore, foreign issuers are not generally subject to uniform
accounting, auditing and financial standards and requirements comparable to
those applicable to U.S. corporate issuers. There may also be less government
supervision and regulation of foreign securities exchanges, brokers and issuers
than exist in the U.S. Restrictions and controls on investment in the securities
markets of some countries may have an adverse effect on the availability and
costs to the Fund of investments in those countries. In addition, there may be
the possibility of expropriations, foreign withholding taxes, confiscatory
taxation, political, economic or social instability or diplomatic developments
that could affect assets of the Fund invested in issuers in foreign countries.
There may be less publicly available information about foreign issuers than is
contained in reports and reflected in ratings published for U.S. issuers. Some
foreign securities markets have substantially less volume than the NYSE and some
foreign government securities may be less liquid and more volatile than U.S.
government securities. Transaction costs on foreign securities exchanges may be
higher than in the U.S. and foreign securities settlements may, in some
instances, be subject to delays and related administrative uncertainties.
INTEREST RATE, CURRENCY AND MARKET RISK. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline, shown
for example by a drop in the Dow Jones Industrials or other equity based index,
in any country where the Fund is invested may cause the value of what the Fund
owns, and thus the Fund's share price to decline. Changes in currency valuations
may also affect the price of Fund shares. The value of stock markets, currency
valuations and interest rates throughout the world have increased and decreased
in the past. These changes are unpredictable.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Custodian Funds and elects
its officers. The officers are responsible for each Fund's day-to-day
operations. The Board also monitors each Fund to ensure no material conflicts
exist among the Fund's classes of shares. While none is expected, the Board will
act appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers is the investment manager of each of the Funds,
except Growth Series. As of July 1, 1997, Investment Advisory is the investment
manager of Growth Series. Investment Advisory employs the same individuals to
manage the Fund's portfolio as the previous investment manager and the
management services provided to the Fund are also the same. The terms and
conditions of the investment management agreement with Investment Advisory are
substantially the same as those in the investment management agreement with
Advisers.
The investment manager manages the Fund's assets and makes its investment
decisions. The investment manager also performs similar services for other
funds. It is wholly owned by Resources, a publicly owned company engaged in the
financial services industry through its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr. are the principal shareholders of Resources. Together,
Advisers and its affiliates manage over $215 billion in assets. Please see
"Investment Management and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
MANAGEMENT TEAM. The teams responsible for the day-to-day management of each
Fund's portfolio are:
GROWTH SERIES - Vivian J. Palmieri since 1965 and Conrad B. Herrmann since 1991.
Vivian J. Palmieri
Portfolio Manager of Investment Advisory
Mr. Palmieri holds a Bachelor of Arts degree in Economics from Williams College.
He has been with the Franklin Templeton Group since 1965. Mr. Palmieri is a
member of several securities industry-related associations.
Conrad B. Herrmann
Portfolio Manager of Investment Advisory
Mr. Herrmann is a Chartered Financial Analyst and holds a Master of Business
Administration degree from Harvard University. He earned his Bachelor of Arts
degree from Brown University. Mr. Herrmann has been with the Franklin Templeton
Group since 1989 and is a member of several securities industry-related
associations.
Utilities Series - Sally Edwards Haff since 1990, Gregory E. Johnson since 1987
and Ian Link since 1995.
Sally Edwards Haff
Vice President of Advisers
Ms. Haff is a Chartered Financial Analyst and holds a Bachelor of Arts degree in
Economics from the University of California at Santa Barbara. She has been with
the Franklin Templeton Group since 1986. Ms. Haff is a member of several
securities industry-related associations.
Gregory E. Johnson
Vice President of Advisers
Mr. Johnson holds a Bachelor of Science degree in Accounting and Business
Administration from Washington and Lee University and a certificate as a
Certified Public Accountant. He has been with the Franklin Templeton Group since
1986.
Mr. Johnson is a member of several securities industry-related associations.
Ian Link
Portfolio Manager of Advisers
Mr. Link is a Chartered Financial Analyst and holds a Bachelor of Arts degree in
Economics from the University of California at Davis. He has been with the
Franklin Templeton Group since 1989. He is a member of several securities
industry-related associations.
DynaTech Series - Rupert H. Johnson, Jr. since inception, Lisa Costa since 1983
and Kevin Carrington since 1995.
Rupert H. Johnson, Jr.
President of Advisers
Mr. Johnson is a graduate of Washington and Lee University. He has been with the
Franklin Templeton Group since 1965 and prior thereto was an officer in the U.S.
Marine Corps. Mr. Johnson is a member of several securities industry-related
associations.
Lisa Costa
Portfolio Manager of Advisers
Ms. Costa holds a Master of Business Administration degree from Golden Gate
University and a Bachelor of Science degree in Finance from California State
University at Hayward. She has been with the Franklin Templeton Group since
1983. Ms. Costa is a Chartered Market Technician and a member of several
securities industry-related committees and associations.
Kevin Carrington
Portfolio Manager of Advisers
Mr. Carrington is a Chartered Financial Analyst and holds a Bachelor of Science
degree in Business Administration from California State University at Chico. He
has been with the Franklin Templeton Group since 1992.
Income Series - Charles B. Johnson since 1957 and Matt Avery since 1989.
Charles B. Johnson
Chairman of the Board of Advisers
Mr. Johnson holds a Bachelor of Arts degree in Economics and Political Science
from Yale University. He has been with the Franklin Templeton Group since 1957.
Mr. Johnson is a member of several securities industry-related associations.
Matt Avery
Vice President of Advisers
Mr. Avery holds a Master of Business Administration degree from the University
of California at Los Angeles and a Bachelor of Science degree in Industrial
Engineering from Stanford University. He has been in the securities industry
since 1982 and with the Franklin Templeton Group since 1987.
U.S. Government Securities Series - Jack Lemein since 1984, Anthony Coffey since
1989 and Roger Bayston since 1993.
Jack Lemein
Senior Vice President of Advisers
Mr. Lemein holds a Bachelor of Science degree in Finance from the University of
Illinois. He has been in the securities industry since 1967 and with the
Franklin Templeton Group since 1984. He is a member of several securities
industry-related associations.
T. Anthony Coffey
Portfolio Manager of Advisers
Mr. Coffey is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned a Bachelor of Arts degree in Applied Mathematics and Economics from
Harvard University. Mr. Coffey has been with the Franklin Templeton Group since
1989. He is a member of several securities industry-related associations.
Roger Bayston
Portfolio Manager of Advisers
Mr. Bayston is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned his Bachelor of Science degree from the University of Virginia. He has
been with the Franklin Templeton Group since earning his MBA degree in 1991.
MANAGEMENT FEES. During the fiscal year ended September 30, 1997, management
fees paid to the investment manager, as a percentage of average monthly net
assets, and total expenses of Class I and Class II shares were as follows:
TOTAL
MANAGEMENT OPERATING EXPENSES
FEES CLASS I CLASS II
Growth Series* 0.48% 0.89% 1.66%
DynaTech Series 0.60% 1.04% 1.82%
Utilities Series 0.46% 0.75% 1.27%
Income Series 0.46% 0.72% 1.22%
U.S. Government Securities
Series 0.45% 0.64% 1.20%
*Prior to July 1, 1997, the fee was paid to Advisers.
PORTFOLIO TRANSACTIONS. The investment manager tries to obtain the best
execution on all transactions. If the investment manager believes more than one
broker or dealer can provide the best execution, it may consider research and
related services and the sale of Fund shares, as well as shares of other funds
in the Franklin Templeton Group of Funds, when selecting a broker or dealer.
Please see "How Does the Fund Buy Securities for Its Portfolio?" in the SAI for
more information.
ADMINISTRATIVE SERVICES. Under an agreement with the investment manager, FT
Services provides certain administrative services and facilities for the Fund.
Please see "Investment Management and Other Services" in the SAI for more
information.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
Fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by Growth and DynaTech Series under the Class I plan may not exceed
0.25% per year of Class I's average daily net assets. Payments by Utilities,
Income and U.S. Government Securities Series under the Class I plan may not
exceed 0.15% per year of Class I's average daily net assets. All distribution
expenses over this amount will be borne by those who have incurred them. During
the first year after certain Class I purchases made without a sales charge,
Securities Dealers may not be eligible to receive the Rule 12b-1 fees associated
with the purchase.
Under the Class II plan, Growth and DynaTech Series may pay Distributors up to
0.75% per year and Utilities, Income and U.S. Government Securities Series may
pay Distributors up to 0.50% per year of Class II's average daily net assets to
pay Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them. During the first year after a
purchase of Class II shares, Securities Dealers may not be eligible to receive
this portion of the Rule 12b-1 fees associated with the purchase.
Growth and DynaTech Series may also pay a servicing fee of up to 0.25% per year
and Utilities, Income and U.S. Government Securities Series may pay a servicing
fee of up to 0.15% per year of Class II's average daily net assets under the
Class II plan. This fee may be used to pay Securities Dealers or others for,
among other things, helping to establish and maintain customer accounts and
records, helping with requests to buy and sell shares, receiving and answering
correspondence, monitoring dividend payments from the Fund on behalf of
customers, and similar servicing and account maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. Commonly
used measures of performance include total return, current yield and current
distribution rate. Performance figures are usually calculated using the maximum
sales charges, but certain figures may not include sales charges.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How Does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
ON AUGUST 5, 1997, PRESIDENT CLINTON SIGNED INTO LAW THE TAXPAYER RELIEF ACT OF
1997 (THE "1997 ACT"). THIS NEW LAW MAKES SWEEPING CHANGES IN THE CODE. BECAUSE
MANY OF THESE CHANGES ARE COMPLEX THEY ARE DISCUSSED IN THE SAI.
The Fund invests your money in the stocks, bonds and other securities that are
described in the section "How Does the Fund Invest Its Assets?" Special tax
rules may apply in determining the income and gains that the Fund earns on its
investments. These rules may, in turn, affect the amount of distributions that
the Fund pays to you. These special tax rules are discussed in the SAI.
TAXATION OF THE FUND. As a regulated investment company, the Fund generally pays
no federal income tax on the income and gains that it distributes to you.
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains from
the investments of the Fund, other than the U.S. Government Securities Series,
in foreign stocks and bonds. These taxes will reduce the amount of the Fund's
distributions to you. The Fund may also invest in the securities of foreign
companies that are "passive foreign investment companies" ("PFICs"). These
investments in PFICs may cause the Fund to pay income taxes and interest
charges. If possible, the Fund will adopt strategies to avoid PFIC taxes and
interest charges.
HOW DOES THE FUND EARN INCOME AND GAINS?
The Fund earns dividends and interest (the Fund's "income") on its investments.
When the Fund sells a security for a price that is higher than it paid, it has a
gain. When the Fund sells a security for a price that is lower than it paid, it
has a loss. If the Fund has held the security for more than one year, the gain
or loss will be a long-term capital gain or loss. If the Fund has held the
security for one year or less, the gain or loss will be a short-term capital
gain or loss. The Fund's gains and losses are netted together, and, if the Fund
has a net gain (the Fund's "gains"), that gain will generally be distributed to
you.
TAXATION OF SHAREHOLDERS.
DISTRIBUTIONS. Distributions from the Fund, whether you receive them in cash or
in additional shares, are generally subject to income tax. The Fund will send
you a statement in January of the current year that reflects the amount of
ordinary dividends, capital gain distributions and non-taxable distributions you
received from the Fund in the prior year. This statement will include
distributions declared in December and paid to you in January of the current
year, but which are taxable as if paid on December 31 of the prior year. The IRS
requires you to report these amounts on your income tax return for the prior
year. The Fund's statement for the prior year will tell you how much of your
capital gain distribution represents 28% rate gain property. The remainder of
the capital gain distribution represents 20% rate gain.
WHAT IS A DISTRIBUTION?
As a shareholder, you will receive your share of the Fund's income and gains on
its investments in stocks, bonds and other securities. The Fund's income and
short term capital gains are paid to you as ordinary dividends. The Fund's
long-term capital gains are paid to you as capital gain distributions. If the
Fund pays you an amount in excess of its income and gains, this excess will
generally be treated as a non-taxable distribution. These amounts, taken
together, are what we call the Fund's distributions to you.
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan, such as a Section 401(k) plan or IRA, are generally
tax-deferred; this means that you are not required to report Fund distributions
on your income tax return when paid to your plan, but, rather, when your plan
makes payments to you.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors of the Fund, except the U.S.
Government Securities Series, may be entitled to a dividends-received deduction
on a portion of the ordinary dividends they receive from the Fund. No portion of
the distributions from the U.S. Government Securities Series will qualify for
the corporate dividends-received deduction.
REDEMPTIONS AND EXCHANGES. If you redeem your shares or if you exchange your
shares in the Fund for shares in another Franklin Templeton Fund, you will
generally have a gain or loss that the IRS requires you to report on your income
tax return. If you exchange Fund shares held for 90 days or less and pay no
sales charge, or a reduced sales charge, for the new shares, all or a portion of
the sales charge you paid on the purchase of the shares you exchanged is not
included in their cost for purposes of computing gain or loss on the exchange.
If you hold your shares for six months or less, any loss you have will be
treated as a long-term capital loss to the extent of any capital gain
distributions received by you from the Fund. All or a portion of any loss on the
redemption or exchange of your shares will be disallowed by the IRS if you
purchase other shares in the Fund within 30 days before or after your redemption
or exchange.
WHAT IS A REDEMPTION?
A redemption is a sale by you to the Fund of some or all of your shares in the
Fund. The price per share you receive when you redeem Fund shares may be more or
less than the price at which you purchased those shares. An exchange of shares
in the Fund for shares of another Franklin Templeton Fund is treated as a
redemption of Fund shares and then a purchase of shares of the other fund. When
you redeem or exchange your shares, you will generally have a gain or loss,
depending upon whether the basis in your shares is more or less than your cost
or other basis in the shares. Call Fund Information for a free shareholder Tax
Information Handbook if you need more information in calculating the gain or
loss on the redemption or exchange of your shares.
U.S. GOVERNMENT AND STATE OBLIGATION INTEREST. Many states grant tax-free status
to dividends paid from interest earned on direct obligations of the U.S.
Government, subject to certain restrictions. Investments in state and local
obligations also may qualify for tax-free treatment. The Fund will provide you
with information after the end of each calendar year on the amounts of such
dividends that may qualify for exemption from reporting on your individual
income tax returns.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income
tax withholding. Your home country may also tax ordinary dividends, capital gain
distributions and gains arising from redemptions or exchanges of your Fund
shares. Fund shares held by the estate of a non-U.S. investor may be subject to
U.S. estate tax. You may wish to contact your tax advisor to determine the U.S.
and non-U.S. tax consequences of your investment in the Fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive
from the Fund, and gains arising from redemptions or exchanges of your Fund
shares will generally be subject to state and local income tax. The holding of
Fund shares may also be subject to state and local intangibles taxes. You may
wish to contact your tax advisor to determine the state and local tax
consequences of your investment in the Fund.
BACKUP WITHHOLDING. When you open an account, IRS regulations require that you
provide your taxpayer identification number ("TIN"), certify that it is correct,
and certify that you are not subject to backup withholding under IRS rules. If
you fail to provide a correct TIN or the proper tax certifications, the Fund is
required to withhold 31% of all the distributions (including ordinary dividends
and capital gain distributions), and redemption proceeds paid to you. The Fund
is also required to begin backup withholding on your account if the IRS
instructs the Fund to do so. The Fund reserves the right not to open your
account, or, alternatively, to redeem your shares at the current Net Asset
Value, less any taxes withheld, if you fail to provide a correct TIN, fail to
provide the proper tax certifications, or the IRS instructs the Fund to begin
backup withholding on your account.
WHAT IS A BACKUP WITHHOLDING?
Backup withholding occurs when the Fund is required to withhold and pay over to
the IRS 31% of your distributions and redemption proceeds. You can avoid backup
withholding by providing the Fund with your TIN, and by completing the tax
certifications on your shareholder application that you were asked to sign when
you opened your account. However, if the IRS instructs the Fund to begin backup
withholding, it is required to do so even if you provided the Fund with your TIN
and these tax certifications, and backup withholding will remain in place until
the Fund is instructed by the IRS that it is no longer required.
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS IS CONTAINED IN THE SECTION
ENTITLED "ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI. THE TAX
TREATMENT TO YOU OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, FOREIGN TAXES PAID
AND INCOME TAXES WITHHELD IS ALSO DISCUSSED IN A FREE FRANKLIN TEMPLETON TAX
INFORMATION HANDBOOK WHICH IS AVAILABLE BY CONTACTING FUND INFORMATION.
HOW IS THE FUND ORGANIZED?
Each Fund is a diversified series of Custodian Funds, an open-end management
investment company, commonly called a mutual fund. The Custodian Funds was
incorporated under the laws of Delaware in 1947, reincorporated under the laws
of Maryland in 1979, and is registered with the SEC. As of January 1, 1997, each
Fund, except the DynaTech Series, began offering a new class of shares
designated Income Series - Advisor Class, Utilities Series - Advisor Class,
Growth Series - Advisor Class and U.S. Government Securities Series - Advisor
Class. All shares outstanding before the offering of Advisor Class shares have
been designated Income Series - Class I, Utilities Series - Class I, Growth
Series - Class I, U.S. Government Securities Series - Class I, and DynaTech
Series - Class I and Income Series - Class II, Utilities Series - Class II,
Growth Series - Class II, U.S. Government Securities Series - Class II and
DynaTech Series - Class II. Additional series and classes of shares may be
offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters affecting only that class, or expressly required
to be voted on separately by state or federal law. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of Custodian Funds for matters that affect Custodian Funds as
a whole.
Custodian Funds has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the Board.
If this happens, holders of the remaining shares voting will not be able to
elect anyone to the Board.
Custodian Funds does not intend to hold annual shareholder meetings. Custodian
Funds or a series of Custodian Funds may hold special meetings, however, for
matters requiring shareholder approval. A meeting may also be called by the
Board in its discretion or by shareholders holding at least 10% of the
outstanding shares. In certain circumstances, we are required to help you
communicate with other shareholders about the removal of a Board member. A
special meeting may also be called by a majority of the Board or by the written
request of shareholders holding at least 25% of the shares entitled to vote at
the meeting.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
PLEASE KEEP IN MIND THAT DYNATECH SERIES DOES NOT CURRENTLY ALLOW INVESTMENTS BY
MARKET TIMERS.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The Fund's minimum investments
are:
o To open your account: $100*
o To add to your account: $25*
*We may waive these minimums for retirement plans. We also reserve the right to
refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to
send an additional application to add privileges later. Please also
indicate which class of shares you want to buy. IF YOU DO NOT SPECIFY A
CLASS, WE WILL AUTOMATICALLY INVEST YOUR PURCHASE IN CLASS I SHARES. It is
important that we receive a signed application since we will not be able
to process any redemptions from your account until we receive your signed
application.
4. Make your investment using the table below.
METHOD STEPS TO FOLLOW
BY MAIL For an initial investment:
Return the application to
the Fund with your check
made payable to the Fund.
For additional investments:
Send a check made payable
to the Fund. Please include
your account number on the
check.
BY WIRE 1. Call Shareholder Services or, if that
number is busy, call 1-650/312-2000
collect, to receive a wire control number
and wire instructions. You need a new wire
control number every time you wire money
into your account. If you do not have a
currently effective wire control number,
we will return the money to the bank, and
we will not credit the purchase to your
account.
2. For initial investments you must also
return your signed shareholder application
to the Fund.
IMPORTANT DEADLINES: If we
receive your call before
1:00 p.m. Pacific time and
the bank receives the wired
funds and reports the
receipt of wired funds to
the Fund by 3:00 p.m.
Pacific time, we will credit
the purchase to your account
that day. If we receive your
call after 1:00 p.m. or the
bank receives the wire after
3:00 p.m., we will credit
the purchase to your account
the following business day.
THROUGH YOUR DEALER CALL YOUR INVESTMENT REPRESENTATIVE
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. The class that may be best for
you depends on a number of factors, including the amount and length of time you
expect to invest. Generally, Class I shares may be more attractive for long-term
investors or investors who qualify to buy Class I shares at a reduced sales
charge. Your financial representative can help you decide.
CLASS I
o Higher front-end sales charges than Class II shares. There are several
ways to reduce these charges, as described below. There is no front-end
sales charge for purchases of $1 million or more.*
o Contingent Deferred Sales Charge on purchases of $1 million or more sold
within one year
o Lower annual expenses than Class II shares
CLASS II
o Lower front-end sales charges than Class I shares
o Contingent Deferred Sales Charge on purchases sold within 18 months
o Higher annual expenses than Class I shares
*If you are investing $1 million or more, it is generally more beneficial for
you to buy Class I shares because there is no front-end sales charge and the
annual expenses are lower. Therefore, any purchase of $1 million or more is
automatically invested in Class I shares. You may accumulate more than $1
million in Class II shares through purchases over time. If you plan to do this,
however, you should determine if it would be better for you to buy Class I
shares through a Letter of Intent.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I - GROWTH AND DYNATECH SERIES
Under $100,000 4.50% 4.71% 4.00%
$100,000 but less than
$250,000 3.75% 3.90% 3.25%
$250,000 but less than
$500,000 2.75% 2.83% 2.50%
$500,000 but less than
$1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more* None None None
CLASS I - INCOME, UTILITIES AND U.S. GOVERNMENT SECURITIES SERIES
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than
$250,000 3.50% 3.63% 3.25%
$250,000 but less than
$500,000 2.75% 2.83% 2.50%
$500,000 but less than
$1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more* None None None
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS II - ALL FUNDS
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Choosing a Share
Class."
SALES CHARGE REDUCTIONS AND WAIVERS
- - IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't include
this statement, we cannot guarantee that you will receive the sales charge
reduction or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds, as well as those of your spouse, children under the
age of 21 and grandchildren under the age of 21. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts. Companies with one or more retirement plans may add together the total
plan assets invested in the Franklin Templeton Funds to determine the sales
charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased Class I shares of the Fund at a reduced sales
charge under the group purchase privilege before February 1, 1998, however, may
continue to do so.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of Fund shares, you may buy shares of the Fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the sales
charge waivers listed below apply to purchases of Class I shares only, except
for items 1 and 2 which also apply to Class II purchases.
Certain distributions, payments or redemption proceeds that you receive may be
used to buy shares of the Fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same class of
shares. Certain exceptions apply, however, to Class II shareholders who
chose to reinvest their distributions in Class I shares of the Fund before
November 17, 1997, and to Advisor Class or Class Z shareholders of a
Franklin Templeton Fund who may reinvest their distributions in Class I
shares of the Fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton Fund
if you originally paid a sales charge on the shares and you reinvest the
money in the same class of shares. This waiver does not apply to
exchanges.
If you paid a Contingent Deferred Sales Charge when you redeemed your
shares from a Franklin Templeton Fund, a Contingent Deferred Sales Charge
will apply to your purchase of Fund shares and a new Contingency Period
will begin. We will, however, credit your Fund account with additional
shares based on the Contingent Deferred Sales Charge you paid and the
amount of redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Bank CD,
you may reinvest them as described above. The proceeds must be reinvested
within 365 days from the date the CD matures, including any rollover.
3. Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
4. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, the Templeton Variable Annuity Fund,
or the Templeton Variable Products Series Fund. You should contact your
tax advisor for information on any tax consequences that may apply.
5. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
6. Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor. If you
paid a contingent deferred sales charge when you redeemed your Class A
shares from a Templeton Global Strategy Fund, a Contingent Deferred Sales
Charge will apply to your purchase of Fund shares and a new Contingency
Period will begin. We will, however, credit your Fund account with
additional shares based on the contingent deferred sales charge you paid
and the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin
Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date they are
redeemed from the money fund.
Various individuals and institutions also may buy Class I shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans,
have full or shared investment discretion. We will accept orders for
these accounts by mail accompanied by a check or by telephone or other
means of electronic data transfer directly from the bank or trust
company, with payment by federal funds received by the close of business
on the next business day following the order.
2. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
4. Registered Securities Dealers and their affiliates, for their investment
accounts only
5. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
6. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
7. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
8. Accounts managed by the Franklin Templeton Group
9. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
10. Group annuity separate accounts offered to retirement plans
11. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with at
least 100 employees, or (ii) have plan assets of $1 million or more, or (iii)
agree to invest at least $500,000 in the Franklin Templeton Funds over a 13
month period may buy Class I shares without a front-end sales charge. Retirement
plans that are not Qualified Retirement Plans, SIMPLEs or SEPs must also meet
the requirements described under "Group Purchases - Class I Only" above to be
able to buy Class I shares without a front-end sales charge. We may enter into a
special arrangement with a Securities Dealer, based on criteria established by
the Fund, to add together certain small Qualified Retirement Plan accounts for
the purpose of meeting these requirements.
For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the retirement plan is transferred out of the
Franklin Templeton Funds or terminated within 365 days of the retirement plan
account's initial purchase in the Franklin Templeton Funds. Please see "How Do I
Sell Shares? - Contingent Deferred Sales Charge" for details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. For Class I purchases of the Growth and DynaTech Series of $1 million or
more - up to 1% of the amount invested. For Class I purchases of the
Income, Utilities and U.S. Government Securities Series of $1 million or
more - up to 0.75% of the amount invested.
3. Class I purchases made without a front-end sales charge by certain
retirement plans described under "Sales Charge Reductions and Waivers -
Retirement Plans" above - up to 1% of the amount invested.
4. Class I purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of
clients participating in comprehensive fee programs - up to 0.25% of the
amount invested.
5. Class I purchases by Chilean retirement plans - up to 1% of the amount
invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1, 2 or 5 above or a payment of up to 1% for investments
described in paragraph 3 will be eligible to receive the Rule 12b-1 fee
associated with the purchase starting in the thirteenth calendar month after the
purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
FOR INVESTORS OUTSIDE THE U.S.
The distribution of this prospectus and the offering of Fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the Fund
should determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums. Some Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for the
shares you want to exchange
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability
to exchange by phone to apply to
your account, please let us
know.
THROUGH YOUR DEALER CALL YOUR INVESTMENT REPRESENTATIVE
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE. For accounts with shares subject to a
Contingent Deferred Sales Charge, we will first exchange any shares in your
account that are not subject to the charge. If there are not enough of these to
meet your exchange request, we will exchange shares subject to the charge in the
order they were purchased.
If you exchange Class I shares into one of our money funds, the time your shares
are held in that fund will not count towards the completion of any Contingency
Period. If you exchange your Class II shares for shares of Money Fund II,
however, the time your shares are held in that fund will count towards the
completion of any Contingency Period.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this
option to be available on your account. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60
days' written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the Fund more than twice in a calendar quarter,
or (iii) exchanged shares equal to at least $5 million, or more than 1% of
the Fund's net assets. Shares under common ownership or control are combined
for these limits. If you have exchanged shares as described in this
paragraph, you will be considered a Market Timer. Each exchange by a Market
Timer, if accepted, will be charged $5.00. Some of our funds do not allow
investments by Market Timers.
o Currently, the DynaTech Series does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Growth, Utilities, Income and U.S. Government Securities Series,
such as "Class Z" shares or the DynaTech Series, such as "Advisor Class" or
"Class Z" shares. Because the DynaTech Series does not currently offer an
Advisor Class, you may exchange Advisor Class shares of any Franklin Templeton
Fund for Class I shares of the Fund at Net Asset Value. If you do so and you
later decide you would like to exchange into a fund that offers an Advisor
Class, you may exchange your Class I shares for Advisor Class shares of that
fund. Certain shareholders of Class Z shares of Franklin Mutual Series Fund Inc.
may also exchange their Class Z shares for Class I shares of each Fund at Net
Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us signed written instructions. If you would like your
redemption proceeds wired to a bank account, your instructions
should include:
o The name, address and telephone number of the bank where
you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union, the
name of the corresponding bank and the account number
2. Include any outstanding share certificates for the shares you
are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have other requirements.
BY PHONE Call Shareholder Services. If you would like your redemption
proceeds wired to a bank account, other than an escrow
account, you must first sign up for the wire feature. To sign up,
send us written instructions, with a signature guarantee. To
avoid any delay in processing, the instructions should include
the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you
want to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement
plan account
o Unless the address on your account was changed by phone within
the last 15 days
- If you do not want the ability to redeem by phone to apply
to your account, please let us know.
THROUGH YOUR DEALER CALL YOUR INVESTMENT REPRESENTATIVE
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To
obtain the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, if you did not pay a front-end sales charge because you
invested $1 million or more or agreed to invest $1 million or more under a
Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell all
or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make without
a sales charge may also be subject to a Contingent Deferred Sales Charge if they
are sold within the Contingency Period. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares within the Contingency
Period. The charge is 1% of the value of the shares sold or the Net Asset Value
at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan account is
transferred out of the Franklin Templeton Funds or terminated within 365 days of
the account's initial purchase in the Franklin Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Account fees
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997,
or (ii) the Securities Dealer of record received a payment from Distributors
of 0.25% or less, or (iii) Distributors did not make any payment in
connection with the purchase, or (iv) the Securities Dealer of record has
entered into a supplemental agreement with Distributors
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, at a rate of up to 1% a month of an account's Net Asset Value. For
example, if you maintain an annual balance of $1 million in Class I shares,
you can redeem up to $120,000 annually through a systematic withdrawal plan
free of charge. Likewise, if you maintain an annual balance of $10,000 in
Class II shares, $1,200 may be redeemed annually free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit plans
serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Income and U.S. Government Securities Series declare dividends from their
net investment income monthly to shareholders of record on the last business day
of that month and pay them on or about the 15th day of the next month. The
Utilities Series generally declares dividends from its net investment income
quarterly in February, May, August and November, and the Growth and DynaTech
Series generally declare dividends annually in November.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of Class I and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge) by
reinvesting capital gain distributions, or both dividend and capital gain
distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy shares of another Franklin Templeton Fund (without a sales
charge or imposition of a Contingent Deferred Sales Charge). Many shareholders
find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers - Class I
Only" under "Services to Help You Manage Your Account."
Distributions may be reinvested only in the same class of shares, except as
follows: (i) Class II shareholders who chose to reinvest their distributions in
Class I shares of the Fund or another Franklin Templeton Fund before November
17, 1997, may continue to do so; and (ii) Class II shareholders may reinvest
their distributions in shares of any Franklin Templeton money fund.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the record date for us
to process the new option. For Trust Company retirement plans, special forms are
required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share of the class you wish to purchase, plus any applicable sales charges. When
you sell shares, you receive the Net Asset Value per share minus any applicable
Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the close of the NYSE, normally 1:00
p.m. Pacific time. You can find the prior day's closing Net Asset Value and
Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of transactions
or account changes. These include transactions or account changes that you could
also make by phone, such as certain redemptions of $50,000 or less, exchanges
between identically registered accounts, and changes to the address of record.
For most other types of transactions or changes, written instructions must be
signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed by
all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
Telephone Transactions
You may initiate many transactions and changes to your account by phone. Please
refer to the sections of this prospectus that discuss the transaction you would
like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to ask
your investment representative for assistance or send us written instructions,
as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we are
not reasonably satisfied that the instructions are genuine. If this occurs, we
will not be liable for any loss. We also will not be liable for any loss if we
follow instructions by phone that we reasonably believe are genuine or if you
are unable to execute a transaction by phone.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, we cannot accept instructions to change owners on the account unless ALL
owners agree in writing, even if the law in your state says otherwise. If you
would like another person or owner to sign for you, please send us a current
power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
CORPORATION CORPORATE RESOLUTION
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have told us that
you do not want telephone privileges to apply to your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION - CLASS I ONLY
You may have money transferred from your paycheck to the Fund to buy additional
Class I shares. Your investments will continue automatically until you instruct
the Fund and your employer to discontinue the plan. To process your investment,
we must receive both the check and payroll deduction information in required
form. Due to different procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time we receive the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers - Class I Only" below.
Once your plan is established, any distributions paid by the Fund will be
automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS - CLASS I ONLY
You may choose to have dividend and capital gain distributions from Class I
shares of the Fund or payments under a systematic withdrawal plan sent directly
to a checking account. If the checking account is with a bank that is a member
of the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If you choose this option, please allow at least
fifteen days for initial processing. We will send any payments made during that
time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the code numbers for each class to use TeleFACTS(R). The code
numbers for Class I and Class II are:
CODE NUMBER
FUND NAME CLASS I CLASS II
- ----------------------------------------------------------------------
Growth Series 106 206
DynaTech Series 108 208
Utilities Series 107 207
Income Series 109 209
U.S. Government
Securities Series 110 210
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you.
Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. Investment
Advisory is located at 16 South Main Street, Suite 303, Norwalk, Connecticut
06854. You may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
1TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager, except Growth
Series
BOARD - The Board of Directors of Custodian Funds
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - Each Fund, except the DynaTech Series
offer three classes of shares, designated "Class I," "Class II" and "Advisor
Class." The three classes have proportionate interests in the Fund's portfolio.
They differ, however, primarily in their sales charge and expense structures.
The DynaTech Series offers two classes of shares, designated "Class I" and
"Class II". The two classes have proportionate interests in the DynaTech Series
portfolio. They differ, however primarily in their sales charge structure and
Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTMENT ADVISORY - Franklin Investment Advisory Services, Inc., the Growth
Series' investment manager
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
Market Timers - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge for the Growth and DynaTech Series is 4.50% for Class I
and 1% for Class II. The maximum front-end sales charge for the Utilities,
Income and U.S. Government Series is 4.25% for Class I and 1% for Class II.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
SIMPLE (SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES) - An employer sponsored
salary deferral plan established under section 408(p) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN
CUSTODIAN
FUNDS, INC.
ADVISOR CLASS
FEBRUARY 1, 1998
INVESTMENT STRATEGY
UTILITIES SERIES GROWTH & INCOME
INCOME SERIES GROWTH & INCOME
GROWTH SERIES GROWTH
U.S. GOVERNMENT SECURITIES SERIES INCOME
This prospectus describes the Advisor Class shares of the four series of
Franklin Custodian Funds, Inc. ("Custodian Funds") offering Advisor Class
shares. Each series may individually or together be referred to as the
"Fund(s)." This Prospectus contains information you should know before investing
in the Fund. Please keep it for future reference.
The Funds currently offer other classes of shares with different sales charge
and expense structures, which affect performance. These classes are described in
a separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Custodian Funds has a Statement of Additional Information ("SAI") for its
Advisor Class, dated February 1, 1998, which may be amended from time to time.
It includes more information about the Custodian Funds' procedures and policies.
It has been filed with the SEC and is incorporated by reference into this
prospectus. For a free copy or a larger print version of this prospectus, call
1-800/DIAL BEN.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE 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.
FRANKLIN
CUSTODIAN
FUNDS, INC.
ADVISOR CLASS
February 1, 1998
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary .......................................................2
Financial Highlights ..................................................3
How Does the Fund Invest Its Assets? ..................................6
What Are the Risks of Investing in the Fund? .........................16
Who Manages the Fund? ................................................21
How Does the Fund Measure Performance? ...............................24
How Taxation Affects the Fund and Its Shareholders ...................25
How Is the Fund Organized? ...........................................28
ABOUT YOUR ACCOUNT
How Do I Buy Shares? .................................................29
May I Exchange Shares for Shares of Another Fund?.....................33
How Do I Sell Shares? ................................................35
What Distributions Might I Receive From the Fund? ....................36
Transaction Procedures and Special Requirements ......................37
Services to Help You Manage Your Account .............................42
What If I Have Questions About My Account? ...........................43
GLOSSARY
Useful Terms and Definitions .........................................44
APPENDIX
Description of Ratings ...............................................46
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of the Advisor Class for the fiscal
year ended September 30, 1997. The Fund's actual expenses may vary. The expenses
are annualized.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
US
GOVERNMENT
GROWTH UTILITIES INCOME SECURITIES
SERIES SERIES SERIES SERIES
A. Shareholder Transaction Expenses+
Maximum Sales Charge Imposed
on Purchases NONE NONE NONE NONE
Exchange Fee (per transaction) $5.00* $5.00* $5.00* $5.00*
B. Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.48% 0.46% 0.46% 0.45%
Rule 12b-1 Fees NONE NONE NONE NONE
Other Expenses 0.18% 0.16% 0.11% 0.10%
----------------------------------------------------
Total Fund Operating Expenses 0.66% 0.62% 0.57% 0.55%
===================================================
C. Example
</TABLE>
Assume the annual return for the 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
U.S.
GROWTH UTILITIES INCOME GOVERNMENT
1 Year $ 7 $ 6 $ 6 $ 6
3 Years $21 $20 $18 $18
5 Years $37 $35 $32 $31
10 Years $82 $77 $71 $69
</TABLE>
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
its Net Asset Value or dividends 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. *$5.00 fee is only for
Market Timers. We process all other exchanges without a fee.
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 the period shown below appears in the financial statements
in Custodian Funds' Annual Report to Shareholders for the fiscal year ended
September 30, 1997. The Annual Report to Shareholders also includes more
information about each Fund's performance. For a free copy, please call Fund
Information.
GROWTH SERIES
YEAR ENDED SEPT. 30 1997*
- ---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period $23.24
Income from investment operations:
Net investment income .25
Net realized and unrealized gain 3.64
Total from investment operations 3.89
Net asset value, end of period $27.13
======
Total Return*** 16.74%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $25,823
Ratio to average net assets:
Expenses .66%**
Net investment income 1.93%**
Portfolio turnover rate 1.77%
Average commission rate paid+ $.0568
UTILITIES SERIES
YEAR ENDED SEPT. 30 1997*
- ----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period $9.55
-----
Income from investment operations:
Net investment income .36
Net realized and unrealized gain .53
---
Total from investment operations .89
---
Less distributions:
Dividends from net investment income (.40)
-------
Net asset value, end of period $10.04
=======
Total Return*** 9.61%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $8,719
Ratio to average net assets:
Expenses .62%**
Net investment income 5.33%**
Portfolio turnover rate 7.24%
Average commission rate paid+ $.0505
INCOME SERIES
YEAR ENDED SEPT. 30 1997*
- -------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period $2.34
-----
Income from investment operations:
Net investment income .14
Net realized and unrealized gain .14
----
Total from investment operations .28
----
Less distributions:
Dividends from net investment income (.14)
------
Net asset value, end of period $2.48
======
Total Return*** 12.31%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $13,318
Ratio to average net assets:
Expenses .57%**
Net investment income 7.58%**
Portfolio turnover rate 16.15%
Average commission rate paid+ $.0498
U.S. GOVERNMENT SECURITIES SERIES
YEAR ENDED SEPT. 30 1997*
- ----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period $6.76
Income from investment operations ------
Net investment income .38
Net realized and unrealized gain .12
------
Total from investment operations .50
------
Less distributions:
Dividends from net investment income (.36)
------
Net asset value, end of period $6.90
======
Total Return*** 7.68%
Ratios/Supplemental Data
Ner Assets, end of period (in 000's) $14,469
Ratio to average net assets:
Expenses .56%**
Net investment income 7.01%**
Portfolio turnover rate++ 1.74%
*For the period January 2, 1997 (effective date) to September 30, 1997.
**Annualized ***Total return is not annualized. +Relates to purchases and sales
of equity securities. ++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."
UTILITIES SERIES
The investment objectives of this Fund are both capital appreciation and current
income. As a fundamental policy, the Fund's assets may be invested in securities
of an issuer engaged in the public utilities industry, or held in cash or cash
equivalents. The public utilities industry includes the manufacture, production,
generation, transmission and sale of gas, water and electricity and companies
involved in providing services related to these activities. The industry also
includes issuers engaged in the communications field, such as telephone,
cellular, paging, telegraph, satellite, microwave and other companies that
provide communication facilities or services for the public's benefit. As
required by the SEC, at least 65% of the Fund's investments will be in the
securities of issuers engaged in the public utilities industry. Under normal
circumstances, the Fund expects to have substantially all of its assets invested
in securities issued by these types of issuers.
To achieve its investment objectives, the Fund invests primarily in common
stocks, including, from time to time, non-dividend paying common stocks if, in
the opinion of Advisers, these securities appear to offer attractive
opportunities for capital appreciation. The Fund may also invest in preferred
stocks and bonds issued by issuers engaged in the public utilities industry.
When buying fixed-income debt securities, the Fund may invest in securities
regardless of their rating depending upon prevailing market and economic
conditions, including securities in the lowest rating categories and unrated
securities. Most of the Fund's investments, however, are rated at least Baa by
Moody's or BBB by S&P. These ratings represent the opinions of the rating
services with respect to the securities and are not absolute standards of
quality. They will be considered in connection with the investment of the Fund's
assets but will not be a determining or limiting factor. Please see the Appendix
to this prospectus for a discussion of the ratings.
With respect to unrated securities, it is also the Fund's intent to buy
securities that, in the view of Advisers, would be comparable in quality to the
Fund's rated securities and have been determined to be consistent with the
Fund's objectives without exposing the Fund to excessive risk. The Fund will not
buy issues that are in default or that Advisers believes involve excessive risk.
Like all debt securities, the value of the Fund's fixed-income debt securities
generally has an inverse relationship with market interest rates. For example,
when interest rates rise, the value of the Fund's debt securities tends to fall.
On the other hand, when interest rates fall, the value of these securities tends
to rise. Likewise, because securities issued by utility companies are
particularly sensitive to movements in interest rates, the equity securities of
these companies are more affected by movements in interest rates than are the
equity securities of other issuers.
INCOME SERIES
The investment objective of this Fund is to maximize income while maintaining
prospects for capital appreciation. The Fund invests in a diversified portfolio
of securities selected with particular consideration of current income
production. The Fund's assets may be invested in securities traded on any
national securities exchange or issued by a corporation, association or similar
legal entity with total assets of at least $1,000,000, according to its latest
published annual report, or held in cash or cash equivalents. The Fund may also
invest in preferred stocks. There are no restrictions as to the proportion of
investments that may be made in a particular type of security and the
determination is entirely within Advisers' discretion.
LOWER RATED SECURITIES. The Fund may invest up to 100% of its net assets in
non-investment grade bonds. These are commonly known as "junk bonds." Their
default and other risks are greater than those of higher rated securities. You
should carefully consider these risks before investing in the Fund. Please see
"What Are the Risks of Investing in the Fund? - High Yield Securities."
Various investment services publish ratings of some of the types of securities
in which the Fund may invest. Higher yields are ordinarily available from
securities in the lower rating categories, such as securities rated Ba or lower
by Moody's or BB or lower by S&P or from unrated securities deemed by the Fund's
manager to be of comparable quality. These ratings represent the opinions of the
rating services with respect to the issuer's ability to pay interest and repay
principal. They do not purport to reflect the risk of fluctuations in market
value and are not absolute standards of quality. These ratings will be
considered in connection with the investment of the Fund's assets but will not
be a determining or limiting factor. Please see the Appendix to this prospectus
for a description of these ratings.
The Fund may invest in securities regardless of their rating or in securities
that are unrated, including up to 5% of its assets in securities that are in
default at the time of purchase. As an operating policy, however, the Fund will
generally invest in securities that are rated at least Caa by Moody's or CCC by
S&P, except for defaulted securities as noted below, or that are unrated but of
comparable quality as determined by Advisers. Unrated debt securities are not
necessarily of lower quality than rated securities, but they may not be
attractive to as many buyers. A breakdown of the ratings for the bonds in the
Fund's portfolio is included under "What Are the Risks of Investing in the
Fund?" below.
The Fund may also buy debt securities of issuers that are not currently paying
interest, as well as issuers who are in default, and may keep an issue that has
defaulted. The Fund will buy defaulted debt securities if, in the opinion of
Advisers, they may present an opportunity for later price recovery, the issuer
may resume interest payments, or other advantageous developments appear likely
in the near future. In general, securities that default lose much of their value
before the actual default so that the security, and thus the Fund's Net Asset
Value, would be impacted before the default. Defaulted debt securities may be
illiquid and, as such, will be part of the 10% limit discussed under "Illiquid
Investments."
If the rating on an issue held in the Fund's portfolio is changed by the rating
service or the security goes into default, this event will be considered by the
Fund in its evaluation of the overall investment merits of that security but
will not generally result in an automatic sale of the security.
Rather than relying principally on the ratings assigned by rating services, the
investment analysis of securities being considered for the Fund's portfolio may
also include, among other things, consideration of relative values based on such
factors as anticipated cash flow, interest or dividend coverage, asset coverage,
earnings prospects, the experience and managerial strength of the issuer,
responsiveness to changes in interest rates and business conditions, debt
maturity schedules and borrowing requirements, and the issuer's changing
financial condition and the public recognition of such change.
Certain of the high yielding, fixed-income securities in which the Fund may
invest may be purchased at a discount. When held to maturity or retired, these
securities may include an element of capital gain. Capital losses may be
realized when securities purchased at a premium, that is, in excess of their
stated or par value, are held to maturity or are called or redeemed at a price
lower than their purchase price. Capital gains or losses also may be realized
upon the sale of securities.
ZERO COUPON AND PAY-IN-KIND BONDS. The Fund may buy certain bonds issued at a
discount that defer the payment of interest or pay no interest until maturity,
known as zero coupon bonds, or which pay interest through the issuance of
additional bonds, known as pay-in-kind bonds. For federal tax purposes, holders
of these bonds, such as the Fund, are deemed to receive interest over the life
of the bonds and are taxed as if interest were paid on a current basis although
no cash interest payments are in fact received by the holder until the bonds
mature. See "What Are the 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 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. Utilities Series presently has no
intention of investing more than 10% of its 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 loose much of their value before they default. Thus, the Fund's Net Asset
Value may be adversely affected before an issuer defaults. In addition, the Fund
may incur additional expenses if it must try to recover principal or interest
payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the Fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, Advisers may find it necessary to replace
the securities with lower-yielding securities, which could result in less net
investment income for the Fund. The premature disposition of a high yield
security due to a call or buy-back feature, the deterioration of an issuer's
creditworthiness, or a default by an issuer may make it more difficult for the
Fund to manage the timing of its income. Under the Code and U.S. Treasury
regulations, the Fund may have to accrue income on defaulted securities and
distribute the income to shareholders for tax purposes, even though the Fund is
not currently receiving interest or principal payments on the defaulted
securities. To generate cash to satisfy these distribution requirements, the
Fund may have to sell portfolio securities that it otherwise may have continued
to hold or use cash flows from other sources, such as the sale of Fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on market price of a security and on the Fund's ability to sell a security in
response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, or if necessary to meet the Fund's liquidity
needs. Reduced liquidity may also make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
The Fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry restrictions
on resale. While many high yielding securities have been sold with registration
rights, covenants and penalty provisions for delayed registration, if the Fund
is required to sell restricted securities before the securities have been
registered, it may be deemed an underwriter of the securities under the
Securities Act of 1933, which entails special responsibilities and liabilities.
The Fund may also incur special costs in disposing of restricted securities,
although the Fund will generally not incur any costs when the issuer is
responsible for registering the securities.
The Fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The Fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
The high yield securities market is relatively new and much of its growth before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993, depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any security generally
reflects the true operating results of the issuer. Factors adversely impacting
the market value of high yield securities may lower the Fund's Net Asset Value.
The Fund relies on Advisers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, Advisers takes into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
The credit risk factors above also apply to lower-quality zero-coupon, deferred
interest and pay-in-kind securities. These securities have an additional risk,
however, because unlike securities that pay interest throughout the time until
maturity, the Fund will not receive any cash until the cash payment date. If the
issuer defaults, the Fund may not obtain any return on its investment.
Zero-coupon or deferred interest securities are debt obligations that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the "cash payment date"), and
therefore are generally issued and traded at a discount from their face amount
or par value. The discount varies depending on the time remaining until maturity
or the cash payment date, as well as prevailing interest rates, liquidity of the
security, and the perceived credit quality of the issuer. The discount, in the
absence of financial difficulties of the issuer, typically decreases as the
final maturity or cash payment date approaches.
The value of zero-coupon securities is generally more volatile than the value of
other fixed-income securities that pay interest periodically. Zero-coupon
securities are also likely to respond to changes in interest rates to a greater
degree than other fixed-income securities having similar maturities and credit
quality. The Fund is not limited in the amount of its assets that may be
invested in these types of securities.
The table below shows the percentage of Income Series' assets invested in
securities rated in each of the rating categories shown. A credit rating by a
rating agency evaluates the safety of principal and interest based on an
evaluation of the security's credit quality, but does not consider the market
risk or the risk of fluctuation in the price of the security. The information
shown is based on a dollar-weighted average of the Fund's portfolio composition
based on month-end assets for each of the 12 months in the fiscal year ended
September 30, 1997. The Appendix to this prospectus includes a description of
each rating category.
AVERAGE WEIGHTED
MOODY'S RATING PERCENTAGE OF ASSETS
- -----------------------------------------------------------
Aaa 9.05%
Aa 0.32%
A 0.00%
Baa 4.47%
Ba 6.95%
B 26.68%
Caa 6.35%*
Ca 0.15%
C 0.00%
*2.28% of these securities, which are unrated by Moody's, have been included in
the Caa rating category.
PUBLIC UTILITIES INDUSTRY SECURITIES. Utilities Series' investments in the
public utilities industry entail certain characteristics and risks that you
should consider. These characteristics include: risks associated with regulatory
changes including deregulation and interest rate fluctuations; the difficulty of
obtaining adequate returns on invested capital in spite of frequent rate
increases and of financing large construction programs during inflationary
periods; restrictions on operations and increased costs and delays attributable
to environmental considerations; difficulties of the capital markets in
absorbing utility debt and equity securities; difficulties in obtaining fuel for
electric generation at reasonable prices; risks associated with the operation of
nuclear power plants; and general effects of energy conservation.
GNMAS. GNMA yields (interest income as a percentage of price) have historically
exceeded the current yields on other types of U.S. government securities with
comparable maturities. The effects of interest rate fluctuations and
unpredictable prepayments of principal, however, can greatly change realized
yields. As with most bonds, in a period of rising interest rates, the value of a
GNMA will generally decline. In a period of declining interest rates, it is more
likely that mortgages contained in GNMA pools will be prepaid, thus reducing the
effective yield. This potential for prepayment during periods of declining
interest rates may reduce the general upward price increases of GNMAs as
compared to the increases experienced by noncallable debt securities over the
same periods. In addition, any premium paid on the purchase of a GNMA will be
lost if the obligation is prepaid. Of course, price changes of GNMAs and other
securities held by U.S. Government Securities Series will have a direct impact
on the Net Asset Value per share of the Fund.
SMALL COMPANIES. Growth Series may invest in companies that have relatively
small revenues, limited product lines, and a small share of the market for their
products or services. Small companies may lack depth of management, they may be
unable to internally generate funds necessary for growth or potential
development or to generate such funds through external financing on favorable
terms, and they may be developing or marketing new products or services for
which markets are not yet established and may never become established. Due to
these and other factors, small companies may suffer significant losses, as well
as realize substantial growth.
Historically, small capitalization stocks have been more volatile than larger
capitalization stocks and are therefore more speculative than investments in
larger companies. Among the reasons for the greater price volatility are the
less certain growth prospects of smaller firms, the lower degree of liquidity in
the markets for such stocks and the greater sensitivity of small companies to
changing economic conditions. Besides exhibiting greater volatility, small
company stocks may, to a degree, fluctuate independently of larger company
stocks. Small company stocks may decline in price as large company stocks rise
or rise in price as large company stocks decline.
FOREIGN SECURITIES. Investment in the shares of foreign issuers requires
consideration of certain factors that are not normally involved in investments
solely in U.S. issuers. Among other things, the financial and economic policies
of some foreign countries in which the Fund may invest are not as stable as in
the U.S. Furthermore, foreign issuers are not generally subject to uniform
accounting, auditing and financial standards and requirements comparable to
those applicable to U.S. corporate issuers. There may also be less government
supervision and regulation of foreign securities exchanges, brokers and issuers
than exist in the U.S. Restrictions and controls on investment in the securities
markets of some countries may have an adverse effect on the availability and
costs to the Fund of investments in those countries. In addition, there may be
the possibility of expropriations, foreign withholding taxes, confiscatory
taxation, political, economic or social instability or diplomatic developments
that could affect assets of the Fund invested in issuers in foreign countries.
There may be less publicly available information about foreign issuers than is
contained in reports and reflected in ratings published for U.S. issuers. Some
foreign securities markets have substantially less volume than the NYSE and some
foreign government securities may be less liquid and more volatile than U.S.
government securities. Transaction costs on foreign securities exchanges may be
higher than in the U.S. and foreign securities settlements may, in some
instances, be subject to delays and related administrative uncertainties.
INTEREST RATE, CURRENCY AND MARKET RISK. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline, shown
for example by a drop in the Dow Jones Industrials or other equity based index,
in any country where the Fund is invested may cause the value of what the Fund
owns, and thus the Fund's share price to decline. Changes in currency valuations
may also affect the price of Fund shares. The value of stock markets, currency
valuations and interest rates throughout the world have increased and decreased
in the past. These changes are unpredictable.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Custodian Funds and elects
its officers. The officers are responsible for each Fund's day-to-day
operations. The Board also monitors each Fund to ensure no material conflicts
exist among the Fund's classes of shares. While none is expected, the Board will
act appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers is the investment manager of each of the Funds,
except Growth Series. As of July 1, 1997, Investment Advisory is the investment
manager of Growth Series. Investment Advisory employs the same individuals to
manage the Fund's portfolio as the previous investment manager and the
management services provided to the Fund are also the same. The terms and
conditions of the investment management agreement with Investment Advisory are
substantially the same as those in the investment management agreement with
Advisers.
The investment manager manages the Fund's assets and makes its investment
decisions. The investment manager also performs similar services for other
funds. It is wholly owned by Resources, a publicly owned company engaged in the
financial services industry through its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr. are the principal shareholders of Resources. Together,
Advisers and its affiliates manage over $215 billion in assets. Please see
"Investment Management and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
MANAGEMENT TEAM. The teams responsible for the day-to-day management of each
Fund's portfolio are:
GROWTH SERIES - Vivian J. Palmieri since 1965 and Conrad B. Herrmann since 1991.
Vivian J. Palmieri
Portfolio Manager of Investment Advisory
Mr. Palmieri holds a Bachelor of Arts degree in Economics from Williams College.
He has been with the Franklin Templeton Group since 1965. Mr. Palmieri is a
member of several securities industry-related associations.
Conrad B. Herrmann
Portfolio Manager of Investment Advisory
Mr. Herrmann is a Chartered Financial Analyst and holds a Master of Business
Administration degree from Harvard University. He earned his Bachelor of Arts
degree from Brown University. Mr. Herrmann has been with the Franklin Templeton
Group since 1989 and is a member of several securities industry-related
associations.
UTILITIES SERIES - Sally Edwards Haff since 1990, Gregory E. Johnson since 1987
and Ian Link since 1995.
Sally Edwards Haff
Vice President of Advisers
Ms. Haff is a Chartered Financial Analyst and holds a Bachelor of Arts degree in
Economics from the University of California at Santa Barbara. She has been with
the Franklin Templeton Group since 1986. Ms. Haff is a member of several
securities industry-related associations.
Gregory E. Johnson
Vice President of Advisers
Mr. Johnson holds a Bachelor of Science degree in Accounting and Business
Administration from Washington and Lee University and a certificate as a
Certified Public Accountant. He has been with the Franklin Templeton Group since
1986. Mr. Johnson is a member of several securities industry-related
associations.
Ian Link
Portfolio Manager of Advisers
Mr. Link is a Chartered Financial Analyst and holds a Bachelor of Arts degree in
Economics from the University of California at Davis. He has been with the
Franklin Templeton Group since 1989. He is a member of several securities
industry-related associations.
INCOME SERIES - Charles B. Johnson since 1957 and Matt Avery since 1989.
Charles B. Johnson
Chairman of the Board of Advisers
Mr. Johnson holds a Bachelor of Arts degree in Economics and Political Science
from Yale University. He has been with the Franklin Templeton Group since 1957.
Mr. Johnson is a member of several securities industry-related associations.
Matt Avery
Vice President of Advisers
Mr. Avery holds a Master of Business Administration degree from the University
of California at Los Angeles and a Bachelor of Science degree in Industrial
Engineering from Stanford University. He has been in the securities industry
since 1982 and with the Franklin Templeton Group since 1987.
U.S. GOVERNMENT SECURITIES SERIES - Jack Lemein since 1984, Anthony Coffey since
1989 and Roger Bayston since 1993.
Jack Lemein
Senior Vice President of Advisers
Mr. Lemein holds a Bachelor of Science degree in Finance from the University of
Illinois. He has been in the securities industry since 1967 and with the
Franklin Templeton Group since 1984. He is a member of several securities
industry-related associations.
T. Anthony Coffey
Portfolio Manager of Advisers
Mr. Coffey is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned a Bachelor of Arts degree in Applied Mathematics and Economics from
Harvard University. Mr. Coffey has been with the Franklin Templeton Group since
1989. He is a member of several securities industry-related associations.
Roger Bayston
Portfolio Manager of Advisers
Mr. Bayston is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned his Bachelor of Science degree from the University of Virginia. He has
been with the Franklin Templeton Group since earning his MBA degree in 1991.
MANAGEMENT FEES. During the fiscal year ended September 30, 1997, management
fees paid to the investment manager, as a percentage of average monthly net
assets, and total expenses of the Funds were as follows:
TOTAL
MANAGEMENT OPERATING
FEES EXPENSES
Growth Series* 0.48% 0.66%
Utilities Series 0.46% 0.62%
Income Series 0.46% 0.57%
U.S. Government Securities
Series 0.45% 0.55%
*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.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Advisor Class of the Fund advertises its performance.
Commonly used measures of performance include total return, current yield and
current distribution rate.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by Advisor Class. The current distribution rate shows
the dividends or distributions paid to shareholders of Advisor Class. This rate
is usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Net Asset Value of the class.
Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of the Advisor Class will vary. Performance figures are
always based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How Does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
ON AUGUST 5, 1997, PRESIDENT CLINTON SIGNED INTO LAW THE TAXPAYER RELIEF ACT OF
1997 (THE "1997 ACT"). THIS NEW LAW MAKES SWEEPING CHANGES IN THE CODE. BECAUSE
MANY OF THESE CHANGES ARE COMPLEX THEY ARE DISCUSSED IN THE SAI.
HOW DOES THE FUND EARN INCOME AND GAINS?
The Fund earns dividends and interest (the Fund's "income") on its investments.
When the Fund sells a security for a price that is higher than it paid, it has a
gain. When the Fund sells a security for a price that is lower than it paid, it
has a loss. If the Fund has held the security for more than one year, the gain
or loss will be a long-term capital gain or loss. If the Fund has held the
security for one year or less, the gain or loss will be a short-term capital
gain or loss. The Fund's gains and losses are netted together, and, if the Fund
has a net gain (the Fund's "gains"), that gain will generally be distributed to
you.
The Fund invests your money in the stocks, bonds and other securities that are
described in the section "How Does the Fund Invest Its Assets?" Special tax
rules may apply in determining the income and gains that the Fund earns on its
investments. These rules may, in turn, affect the amount of distributions that
the Fund pays to you. These special tax rules are discussed in the SAI.
TAXATION OF THE FUND. As a regulated investment company, the Fund generally pays
no federal income tax on the income and gains that it distributes to you.
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains from
the investments of the Fund, other than the U.S. Government Securities Series,
in foreign stocks and bonds. These taxes will reduce the amount of the Fund's
distributions to you. The Fund may also invest in the securities of foreign
companies that are "passive foreign investment companies" ("PFICs"). These
investments in PFICs may cause the Fund to pay income taxes and interest
charges. If possible, the Fund will adopt strategies to avoid PFIC taxes and
interest charges.
TAXATION OF SHAREHOLDERS
DISTRIBUTIONS. Distributions from the Fund, whether you receive them in cash or
in additional shares, are generally subject to income tax. The Fund will send
you a statement in January of the current year that reflects the amount of
ordinary dividends, capital gain distributions and non-taxable distributions you
received from the Fund in the prior year. This statement will include
distributions declared in December and paid to you in January of the current
year, but which are taxable as if paid on December 31 of the prior year. The IRS
requires you to report these amounts on your income tax return for the prior
year. The Fund's statement for the prior year will tell you how much of your
capital gain distribution represents 28% rate gain property. The remainder of
the capital gain distribution represents 20% rate gain.
WHAT IS A DISTRIBUTION?
As a shareholder, you will receive your share of the Fund's income and gains on
its investments in stocks, bonds and other securities. The Fund's income and
short term capital gains are paid to you as ordinary dividends. The Fund's
long-term capital gains are paid to you as capital gain distributions. If the
Fund pays you an amount in excess of its income and gains, this excess will
generally be treated as a non-taxable distribution. These amounts, taken
together, are what we call the Fund's distributions to you.
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan, such as a Section 401(k) plan or IRA, are generally
tax-deferred; this means that you are not required to report Fund distributions
on your income tax return when paid to your plan, but, rather, when your plan
makes payments to you.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors of the Fund, except the U.S.
Government Securities Series, may be entitled to a dividends-received deduction
on a portion of the ordinary dividends they receive from the Fund. No portion of
the distributions from the U.S. Government Securities Series will qualify for
the corporate dividends-received deduction.
WHAT IS A REDEMPTION?
A redemption is a sale by you to the Fund of some or all of your shares in the
Fund. The price per share you receive when you redeem Fund shares may be more or
less than the price at which you purchased those shares. An exchange of shares
in the Fund for shares of another Franklin Templeton Fund is treated as a
redemption of Fund shares and then a purchase of shares of the other fund. When
you redeem or exchange your shares, you will generally have a gain or loss,
depending upon whether the basis in your shares is more or less than your cost
or other basis in the shares. Call Fund Information for a free shareholder Tax
Information Handbook if you need more information in calculating the gain or
loss on the redemption or exchange of your shares.
REDEMPTIONS AND EXCHANGES. If you redeem your shares or if you exchange your
shares in the Fund for shares in another Franklin Templeton Fund, you will
generally have a gain or loss that the IRS requires you to report on your income
tax return. If you exchange Fund shares held for 90 days or less and pay no
sales charge, or a reduced sales charge, for the new shares, all or a portion of
the sales charge you paid on the purchase of the shares you exchanged is not
included in their cost for purposes of computing gain or loss on the exchange.
If you hold your shares for six months or less, any loss you have will be
treated as a long-term capital loss to the extent of any capital gain
distributions received by you from the Fund. All or a portion of any loss on the
redemption or exchange of your shares will be disallowed by the IRS if you
purchase other shares in the Fund within 30 days before or after your redemption
or exchange.
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.
WHAT IS A BACKUP WITHHOLDING?
Backup withholding occurs when the Fund is required to withhold and pay over to
the IRS 31% of your distributions and redemption proceeds. You can avoid backup
withholding by providing the Fund with your TIN, and by completing the tax
certifications on your shareholder application that you were asked to sign when
you opened your account. However, if the IRS instructs the Fund to begin backup
withholding, it is required to do so even if you provided the Fund with your TIN
and these tax certifications, and backup withholding will remain in place until
the Fund is instructed by the IRS that it is no longer required.
BACKUP WITHHOLDING. When you open an account, IRS regulations require that you
provide your taxpayer identification number ("TIN"), certify that it is correct,
and certify that you are not subject to backup withholding under IRS rules. If
you fail to provide a correct TIN or the proper tax certifications, the Fund is
required to withhold 31% of all the distributions (including ordinary dividends
and capital gain distributions), and redemption proceeds paid to you. The Fund
is also required to begin backup withholding on your account if the IRS
instructs the Fund to do so. The Fund reserves the right not to open your
account, or, alternatively, to redeem your shares at the current Net Asset
Value, less any taxes withheld, if you fail to provide a correct TIN, fail to
provide the proper tax certifications, or the IRS instructs the Fund to begin
backup withholding on your account.
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 ABOUT 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. 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 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,
Income Series - Class II, Utilities Series - Class I, Utilities Series - Class
II, Growth Series - Class I, Growth Series - Class II, U.S. Government
Securities Series - Class I and U.S. Government Securities Series - Class II.
Custodian Fund's other series, DynaTech Series offers Class I and Class II
shares only. Additional series and classes of shares may be offered in the
future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters affecting only that class, or expressly required
to be voted on separately by state or federal law. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of Custodian Funds for matters that affect Custodian Funds as
a whole.
Custodian Funds has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the Board.
If this happens, holders of the remaining shares voting will not be able to
elect anyone to the Board.
Custodian Funds does not intend to hold annual shareholder meetings. Custodian
Funds or a series of Custodian Funds may hold special meetings, however, for
matters requiring shareholder approval. A meeting may also be called by the
Board in its discretion or by shareholders holding at least 10% of the
outstanding shares. In certain circumstances, we are required to help you
communicate with other shareholders about the removal of a Board member. A
special meeting may also be called by a majority of the Board or by the written
request of shareholders holding at least 25% of the shares entitled to vote at
the meeting.
As of January 2, 1998, FTTC TTEE For ValuSelect Franklin Resources PSP owned of
record and beneficially more than 25% of the outstanding shares of the Advisor
Class of Utilities Series and Income Series and FTTC TTEE For ValuSelect
Franklin Templeton owned of record and beneficially more than 25% of the
outstanding shares of the Advisor Class of Income Series.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
Shares of the Fund may be purchased without a sales charge. Please note that as
of January 1, 1998, shares of the Fund are not available to retirement plans
through Franklin Templeton's ValuSelect(R) program. Retirement plans in Franklin
Templeton's ValuSelect program before January 1, 1998, however, may continue to
invest in the Fund.
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The Fund's minimum investments
are:
o To open your account: $5,000,000*
o To add to your account: $25*
*We may waive or lower these minimums for certain investors. Please see
"Minimum Investments" below. 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. 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 an initial investment 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.
BY PHONE
(For additional purchases only)
Call the Fund at 1-800/448-FUND
before 4:00 p.m. Eastern time or the
close of the NYSE, whichever is
earlier.
- This privilege is only available
to current Fund shareholders for
purchases of at least $1,000. The
purchase also must be for an account
with an existing balance of at least
one-half of the telephone purchase.
Please see section 7 of the
shareholder application.
THROUGH YOUR DEALER CALL YOUR INVESTMENT REPRESENTATIVE
MINIMUM INVESTMENTS
To determine if you meet the minimum initial investment requirement of $5
million, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds. At least $1 million of this amount, however, must be invested in Advisor
Class or Class Z shares of any of the Franklin Templeton Funds.
The Fund may waive or lower its minimum investment requirement for certain
purchases. A lower minimum initial investment requirement applies to purchases
by:
1. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs, subject to a $250,000 minimum
initial investment requirement or a $100,000 minimum initial investment
requirement for an individual client
2. Qualified registered investment advisors or certified financial planners
who have clients invested in the Franklin Mutual Series Fund Inc. on
October 31, 1996, or who buy through a broker-dealer or service agent who
has entered into an agreement with Distributors, subject to a $1,000
minimum initial investment requirement
3. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group and their immediate
family members, subject to a $100 minimum investment requirement
4. Each series of the Franklin Templeton Fund Allocator Series, subject to
a $1,000 minimum initial and subsequent investment requirement
5. Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under Section 501 of the Code, subject to
a $1 million initial investment in Advisor Class shares
No minimum initial investment requirement applies to purchases by:
1. Accounts managed by the Franklin Templeton Group
2. The Franklin Templeton Profit Sharing 401(k) Plan
3. Defined contribution plans such as employer stock, bonus, pension or profit
sharing plans that meet the requirements for qualification under Section
401 of the Code, including salary reduction plans qualified under Section
401(k) of the Code, and that (i) are sponsored by an employer with at least
10,000 employees, or (ii) have plan assets of $100 million or more
4. Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a fiduciary,
agency, advisory, custodial or similar capacity and over which the trust
companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion
5. Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of a qualified group, if the group as
a whole meets the $5 million minimum investment requirement. 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.
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.
PAYMENTS TO SECURITIES DEALERS
Securities Dealers who initiate and are responsible for purchases of Advisor
Class shares may receive up to 0.25% of the amount invested. The payment is
subject to the sole discretion of Distributors, and is paid by Distributors or
one of its affiliates and not by the Fund or its shareholders.
For 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.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and some do not offer Advisor
Class 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
- 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.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this
option to be available on your account. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60
days' written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the Fund more than twice in a calendar quarter,
or (iii) exchanged shares equal to at least $5 million, or more than 1% of
the Fund's net assets. Shares under common ownership or control are combined
for these limits. If you have exchanged shares as described in this
paragraph, you will be considered a Market Timer. Each exchange by a Market
Timer, if accepted, will be charged $5.00. Some of our funds do not allow
investments by Market Timers.
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
If you want to exchange into a fund that does not currently offer an Advisor
Class, you may exchange your Advisor Class shares for Class I shares of that
fund at Net Asset Value. If you do not qualify to buy Advisor Class shares of
Templeton Developing Markets Trust, Templeton Foreign Fund or Templeton Growth
Fund, you may exchange the Advisor Class shares you own for Class I shares of
those funds or of Templeton Institutional Funds, Inc. 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. You may also exchange your Advisor Class shares for Class Z shares of
Franklin Mutual Series Fund Inc.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us signed written instructions.
If you would like your redemption
proceeds wired to a bank account, your
instructions should include:
o The name, address and telephone
number of the bank where you want
the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing
number
o If you are using a savings and loan
or credit union, the name of the
corresponding bank and the account
number
2. Include any outstanding share
certificates for the shares you are
selling
3. Provide a signature guarantee if
required
4. Corporate, partnership and trust
accounts may need to send additional
documents. Accounts under court
jurisdiction may have other
requirements.
BY PHONE Call Shareholder Services. If you would
like your redemption proceeds wired to a
bank account, other than an escrow
account, you must first sign up for the
wire feature. To sign up, send us written
instructions, with a signature guarantee.
To avoid any delay in processing, the
instructions should include the items
listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less.
Institutional accounts may exceed
$50,000 by completing a separate
agreement. Call Institutional Services
to receive a copy.
o If there are no share certificates
issued for the shares you want to
sell or you have already returned
them to the Fund
o Unless you are selling shares in a
Trust
Company retirement plan account
o Unless the address on your account was
changed by phone within the last 15
days
- If you do not want the ability to
redeem by phone to apply to your
account, please let us know.
THROUGH YOUR DEALER CALL YOUR INVESTMENT REPRESENTATIVE
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
Income and U.S. Government Securities Series declare dividends from their net
investment income monthly to shareholders of record on the last business day of
that month and pay them on or about the 15th day of the next month. Utilities
Series generally declares dividends from its net investment income quarterly in
February, May, August and November, and Growth Series generally declare
dividends annually in November.
Capital gains, if any, may be distributed annually, usually in December.
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
same class of the Fund by reinvesting capital gain distributions, or both
dividend and capital gain distributions. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton
Fund. You may also direct your distributions to buy Class I shares of
another Franklin Templeton Fund. Many shareholders find this a convenient
way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to
another person or to a checking account, you may need a signature
guarantee.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN 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
You buy and sell Advisor Class shares at the Net Asset Value per share. 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 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 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. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. Each Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of transactions
or account changes. These include transactions or account changes that you could
also make by phone, such as certain redemptions of $50,000 or less, exchanges
between identically registered accounts, and changes to the address of record.
For most other types of transactions or changes, written instructions must be
signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed by
all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone. Please
refer to the sections of this prospectus that discuss the transaction you would
like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to ask
your investment representative for assistance or send us written instructions,
as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we are
not reasonably satisfied that the instructions are genuine. If this occurs, we
will not be liable for any loss. We also will not be liable for any loss if we
follow instructions by phone that we reasonably believe are genuine or if you
are unable to execute a transaction by phone.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, we cannot accept instructions to change owners on the account unless all
owners agree in writing, even if the law in your state says otherwise. If you
would like another person or owner to sign for you, please send us a current
power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
CORPORATION CORPORATE RESOLUTION
PARTNERSHIP 1. The pages from the partnership
agreement that identify the general
partners, or
2. A certification for a partnership
agreement
TRUST 1. The pages from the trust document
that identify the trustees, or
2. A certification for trust
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have told us that
you do not want telephone privileges to apply to your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
These minimums do not apply if you fall within categories 4, 5, 6 or 7 under
"How Do I Buy Shares? - Opening Your Account."
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 shareholder application included with this
prospectus or contact your investment representative. The market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. You may discontinue the program
at any time by notifying Investor Services by mail or phone.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. 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.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
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; and
o obtain price information about any Franklin Templeton Fund.
You will need the Fund's code number to use TeleFACTS(R). The code numbers are
as follows:
FUND CODE NUMBER
Growth 606
Utilities 607
Income 609
U.S. Government Securities 610
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 - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R)and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTMENT ADVISORY - Franklin Investment Advisory Services, Inc., Growth
Series' investment manager
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
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
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.
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned
subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN
CUSTODIAN
FUNDS, INC.
STATEMENT OF
ADDITIONAL INFORMATION
FEBRUARY 1, 1998
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777
1-800/DIAL BEN
TABLE OF CONTENTS
How Does the Fund Invest Its Assets? .............. 2
Investment Restrictions ............................5
Officers and Directors .............................6
Investment Management
and Other Services ................................9
How Does the Fund Buy
Securities for Its Portfolio? ................... 11
How Do I Buy, Sell
and Exchange Shares? .............................12
How Are Fund Shares Valued? .......................15
Additional Information on
Distributions and Taxes ..........................16
The Fund's Underwriter ............................22
How Does the Fund
Measure Performance? .............................25
Miscellaneous Information .........................28
Financial Statements ..............................31
Useful Terms and Definitions ......................31
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
- -------------------------------------------------------------------------------
The Franklin Custodian Funds, Inc. (the "Custodian Funds") is an open-end
management investment company consisting of the following five series
(individually or collectively referred to as the "Fund(s)"): Growth Series,
Utilities Series, Income Series, U.S. Government Securities Series and DynaTech
Series.
Growth Series' investment objective is capital appreciation. Growth Series seeks
to achieve its objective by investing primarily in common stocks or convertible
securities believed to offer favorable possibilities for capital appreciation,
some of which may yield little or no current income. Current income is only a
secondary consideration when selecting portfolio securities. DynaTech Series'
investment objective is capital appreciation. DynaTech Series seeks to achieve
its objective by investing primarily in companies that emphasize technological
development, in fast-growing industries, or in the securities of companies that
Advisers considers undervalued. Utilities Series' investment objectives are both
capital appreciation and current income. Utilities Series seeks to achieve its
investment objectives by investing primarily in common stocks, including, from
time to time, non-dividend paying common stocks if, in the opinion of Advisers,
these securities appear to offer attractive opportunities for capital
appreciation. Utilities Series may also invest in preferred stocks and bonds; at
least 65% of the Fund's investments will be in securities of issuers engaged in
the public utilities industry. Income Series' investment objective is to
maximize income while maintaining prospects for capital appreciation. Income
Series invests in a diversified portfolio of securities selected with particular
consideration of current income production. U.S. Government Securities Series'
investment objective is income. U.S. Government Securities Series seeks to
achieve its objective by investing in a portfolio limited to securities that are
obligations of the U.S. government or its instrumentalities.
The Prospectus, dated February 1, 1998, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN.
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- -------------------------------------------------------------------------------
This SAI describes the Fund's Class I and Class II shares. Growth Series,
Utilities Series, Income Series and U.S. Government Securities Series offer
another class of shares with a different sales charge and expense structure,
which affects performance. This class is described in a separate SAI and
prospectus. For more information, contact your investment representative or call
1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Funds may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How Does the Fund Invest Its Assets?"
OPTION TRANSACTIONS. Subject to the investment restrictions noted below, the
Fund may write covered call options which trade on national securities
exchanges. Call options written by the Fund give the holder the right to buy the
underlying securities from the Fund at a stated exercise price. A call option is
"covered" if the option writer owns the underlying security which is subject to
the call or a call on the same security where the exercise price of the call
held is equal to or less than the exercise price of the call written.
The writer of an option receives a premium from the buyer, and retains the
premium whether or not the option expires unexercised. The premium paid by the
purchaser of an option will reflect, among other things, the relationship of the
exercise price to the market price and volatility of the underlying security,
the remaining term of the option, supply and demand and interest rates. If a
call option is exercised, the writer also experiences a profit or loss from the
sale of the underlying security. The writer of a call option may have no control
over when the underlying securities must be sold since, with regard to certain
options, the writer may be assigned an exercise notice at any time prior to the
termination of the obligation.
The Fund may terminate its obligation by effecting a "closing purchase
transaction." This is accomplished by buying an option identical to the option
previously written. However, a writer may not effect a closing purchase
transaction after being notified of the exercise of an option. There is no
guarantee that a closing purchase will be available to be effected at the time
desired by the Fund. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option; the Fund
will realize a loss from a closing transaction if the price of the transaction
is more than the premium received from writing the option. Because increases in
the market price of a call option will generally reflect increases in the market
price of the underlying security, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Fund until the time of repurchase. Thereafter,
the Fund bears the risk of the security's rise or fall in market value unless it
sells the security.
The Fund's manager does not currently intend to write options which would cause
the market value of any Fund's open options to exceed 5% of the Fund's total net
assets. There is no specific limitation on the Fund's ability to write covered
call options. However, as a practical matter, the Fund's option writing
activities may be limited by federal regulations. As of the fiscal year ended
September 30, 1997, there were no open options transactions in any Fund. U.S.
Government Securities Series does not presently engage in option transactions,
as discussed in investment restriction 10, below.
ENHANCED CONVERTIBLE SECURITIES. The Fund, other than the U.S. Government
Securities Series, may invest in convertible preferred stocks that offer
enhanced yield features, such as Preferred Equity Redemption Cumulative Stocks
("PERCS"), which provide an investor, such as the Fund, with the opportunity to
earn higher dividend income than is available on a company's common stock. PERCS
are preferred stocks that generally feature a mandatory conversion date, as well
as a capital appreciation limit which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, after three
years PERCS convert into one share of the issuer's common stock if the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, and into less than one full share if the issuer's common stock is trading
at a price above that set by the capital appreciation limit. The amount of that
fractional share of common stock is determined by dividing the price set by the
capital appreciation limit by the market price of the issuer's common stock.
PERCS can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The Fund may also invest in other classes of enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities) and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted;
unlike PERCS, they do not have a capital appreciation limit; they seek to
provide the investor with high current income with some prospect of future
capital appreciation; they are typically issued with three or four-year
maturities; they typically have some built-in call protection for the first two
to three years; investors have the right to convert them into shares of common
stock at a preset conversion ratio or hold them until maturity, and upon
maturity they will necessarily convert into either cash or a specified number of
shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked as
senior or subordinated debt in the issuer's corporate structure according to the
terms of the debt indenture. There may be additional types of convertible
securities not specifically referred to herein which may be also similar to
those described in which a Fund may invest, consistent with its objectives and
policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Fund. The Fund may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the creditworthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the Fund's portfolio. The Fund, however, intends
to acquire liquid securities, though there can be no assurances that this will
be achieved. U.S. Government Securities Series does not invest in convertible
preferred stocks.
LOAN PARTICIPATIONS - Income Series may invest up to 5% of its total assets (at
the time of investment) in loan participations, all of which may have
speculative characteristics, when the fund's investment manager believes such
investments offer the possibility of long-term appreciation in value.
Loan participations are interests in floating or variable rate senior loans
("Loans") to U.S. corporations, partnerships and other entities ("Borrowers")
which operate in a variety of industries and geographical regions. An investment
in loan participations carries a high degree of risk and may have the
consequence that interest payments with respect to such securities may be
reduced, deferred, suspended or eliminated and may have the further consequence
that principal payments may likewise be reduced, deferred, suspended or
canceled, causing the loss of the entire amount of the investment. Loans will
generally be acquired by Income Series from a bank, finance company or other
similar financial services entity ("Lender").
Loans in which Income Series will purchase participation interests may pay
interest at rates which are periodically redetermined on the basis of a base
lending rate plus a premium. These base lending rates are generally the Prime
Rate offered by a major U.S. bank, the London Inter-Bank Offered Rate, the CD
rate or other base lending rates used by commercial lenders. The Loans typically
have the most senior position in a Borrower's capital structure, although some
Loans may hold an equal ranking with other senior securities of the Borrower.
Although the Loans generally are secured by specific collateral, Income Series
may invest in Loans which are not secured by any collateral. Uncollateralized
Loans pose a greater risk of nonpayment of interest or loss of principal than do
collateralized Loans. The collateral underlying a collateralized Loan may
consist of assets that may not be readily liquidated, and there is no assurance
that the liquidation of such assets would satisfy fully a Borrower's obligations
under a Loan. Income Series is not subject to any restrictions with respect to
the maturity of the Loans in which it purchases participation interests.
The Loans generally are not rated by nationally recognized statistical rating
organizations. Ratings of other securities issued by a Borrower do not
necessarily reflect adequately the relative quality of a Borrower's Loans.
Therefore, although Advisers may consider such ratings in determining whether to
invest in a particular Loan, such ratings, will not be the determinative factor
in Advisers analysis.
The Loans are not readily marketable and may be subject to restrictions on
resale. Participation interests in the Loans generally are not listed on any
national securities exchange or automated quotation system and no regular market
has developed for such interests. Any secondary purchases and sales of loan
participations generally are conducted in private transactions between buyers
and sellers. Many of the Loans in which the Income Series expects to purchase
interests are of a relatively large principal amount and are held by a
relatively large number of owners which, in Advisers' opinion, should enhance
the relative liquidity of such interests.
When acquiring a loan participation, Income Series will have a contractual
relationship only with the Lender (typically an entity in the banking, finance
or financial services industries), not with the Borrower. Income Series has the
right to receive payments of principal and interest to which it is entitled only
from the Lender selling the loan participation and only upon receipt by such
Lender of such payments from the Borrower. In connection with purchasing loan
participations, Income Series generally will have no right to enforce compliance
by the Borrower with the terms of the Loan Agreement, nor any rights with
respect to any funds acquired by other Lenders through set-off against the
Borrower, and the Fund may not directly benefit from the collateral supporting
the Loan in which it has purchased the loan participation. As a result, Income
Series may assume the credit risk of both the Borrower and the Lender selling
the loan participation. In the event of the insolvency of the Lender selling a
loan participation, Income Series may be treated as a general creditor of such
Lender, and may not benefit from any set-off between such Lender and the
Borrower.
GNMA CERTIFICATES. Securities of the type to be included in U.S. Government
Securities Series portfolio have historically involved little risk to principal
if held to maturity. However, due to fluctuations in interest rates, the market
value of such securities may vary during the period of a shareholder's
investment in the Fund. The U.S. government has never defaulted and never
delayed payments of interest or principal on its obligations, however, this does
not guarantee the value of a shareholder's investment in U.S. Government
Securities Series.
WHEN-ISSUED, DELAYED DELIVERY AND TO-BE-ANNOUNCED ("TBA") Transactions. Income
Series may purchase debt obligations and U.S. Government Series may purchase and
sell GNMA Certificates on a "when-issued," "delayed delivery" or "TBA" basis.
These transactions are arrangements under which either Fund may purchase
securities with payment and delivery scheduled for a future time, generally
within 30 to 60 days. These transactions are subject to market fluctuation and
are subject to the risk that the value or yields at delivery may be more or less
than the purchase price or yields available when the transaction was entered
into. Although both Funds will generally purchase these securities on a
when-issued or TBA basis with the intention of acquiring such securities, they
may sell such securities before the settlement date if it is deemed advisable.
When a Fund is the buyer in such a transaction, it will maintain, in a
segregated account with its custodian bank, cash or high-grade marketable
securities having an aggregate value equal to the amount of such purchase
commitments until payment is made. To the extent the Fund engages in
when-issued, delayed delivery or TBA transactions, it will do so only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objectives and policies, and not for the purpose of investment leverage. In
when-issued, delayed delivery and TBA transactions, the Fund relies on the
seller to complete the transaction. The other party's failure to do so may cause
the Fund to miss a price or yield considered advantageous. Securities purchased
on a when-issued, delayed delivery or TBA basis do not generally earn interest
until their scheduled delivery date. Neither Fund is subject to any percentage
limit on the amount of its assets which may be invested in when-issued, delayed
delivery or TBA purchase obligations.
OTHER POLICIES - As discussed in the Prospectus, the Funds, other than U.S.
Government Securities Series, may enter into repurchase agreements with banks or
government securities dealers recognized by the Federal Reserve Board and which
have been approved by the Board, who agree to repurchase the securities at a
predetermined price within a specified time (normally one day to one week). In
these transactions, the securities purchased by the Fund have an initial total
value in excess of the value of the repurchase agreement and are held by the
Fund's custodian bank until repurchased. Such arrangements permit the Fund to
keep all of its assets at work while retaining flexibility in pursuit of
investments of a longer-term nature. Repurchase agreements of more than one
week's duration are considered to be illiquid. U.S. Government Securities Series
does not engage in repurchase agreements.
There are no restrictions or limitations on investments in obligations of the
U.S. government, or of corporations chartered by Congress as federal government
instrumentalities. The underlying assets may be retained in cash, including cash
equivalents which are Treasury bills, commercial paper and short-term bank
obligations such as certificates of deposit and bankers' acceptances. However,
it is intended that only as much of the underlying assets of each Fund be
retained in cash as is deemed desirable or expedient under then-existing market
conditions.
Each Fund, other than U.S. Government Securities Series, may invest in
securities that cannot be offered to the public for sale without first being
registered under the Securities Act of 1933 ("restricted securities"), or in
other securities which, in the opinion of the Board, may be otherwise illiquid.
Illiquid equity securities will not be purchased if, upon such purchase, such
securities will constitute 5% of the value of the total net assets of the Fund.
As noted in the Prospectus, it is also the policy of each Fund that illiquid
securities may not constitute, at the time of purchase, more than 10% of the
value of the total net assets of the Fund in which they are held. Generally an
"illiquid security" is any security that cannot be disposed of promptly and in
the ordinary course of business at approximately the amount at which the Fund
has valued the instrument. Custodian Funds' Board has authorized the Funds to
invest in restricted securities where such investment is consistent with each
Fund's investment objective and has authorized such securities to be considered
liquid and thus not subject to the foregoing limitation, to the extent the
investment manager determines that there is a liquid institutional or other
market for such securities - for example, restricted securities which may be
freely transferred among qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended, and for which a liquid
institutional market has developed. The Board will review any determination by
the investment manager to treat a restricted security as a liquid security on an
ongoing basis, including the investment manager's assessment of current trading
activity and the availability of reliable price information. In determining
whether a restricted security is properly considered a liquid security, the
investment manager and the Board will take into account the following factors:
(i) the frequency of trades and quotes for the security; (ii) the number of
dealers willing to purchase or sell the security and the number of other
potential purchasers; (iii) dealer undertakings to make a market in the
security; and (iv) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). To the extent a Fund invests
in restricted securities that are deemed liquid, the general level of
illiquidity in the Fund may be increased if qualified institutional buyers
become uninterested in purchasing these securities or the market for these
securities contracts.
INVESTMENT RESTRICTIONS
Custodian Funds has adopted the following restrictions as fundamental policies.
These restrictions may not be changed without the approval of a majority of the
outstanding voting securities of Custodian Funds. Under the 1940 Act, this means
the approval of (i) more than 50% of the outstanding shares of Custodian Funds
or (ii) 67% or more of the shares of Custodian Funds present at a shareholder
meeting if more than 50% of the outstanding shares of Custodian Funds are
represented at the meeting in person or by proxy, whichever is less.
Custodian Funds MAY NOT:
1. Borrow money or mortgage or pledge any of the assets of the Fund, except
that borrowings for temporary or emergency purposes may be made in an amount up
to 5% of total asset value.
2. Buy any securities on "margin" or sell any securities "short."
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes, to-be-announced securities or other debt
securities and except that securities of any Fund, other than the U.S.
Government Securities Series, may be loaned to broker-dealers or other
institutional investors as discussed in the Fund's Prospectus under "Loans of
Portfolio Securities." For additional information relating to this policy see
discussions under "Loan Participations" and limitations on illiquid securities
under "Other Policies."
4. Act as underwriter of securities issued by other persons except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Invest more than 5% of the value of the gross assets of a Fund in the
securities of any one issuer, but this limitation does not apply to investments
in securities issued or guaranteed by the U.S. government or its
instrumentalities. (Growth, DynaTech, Income and Utilities Series also have
policies that concentration of investments in a single industry may not exceed
25% of their assets, except that Utilities Series will concentrate its
investments in the utilities industry.)
6. Purchase the securities of any issuer which would result in any Fund owning
more than 10% of the outstanding voting securities of an issuer.
7. Purchase from or sell to its officers and directors, or any firm of which
any officer or director is a member, as principal, any securities, but may deal
with such persons or firms as brokers and pay a customary brokerage commission;
retain securities of any issuer if, to the knowledge of the Fund, one or more of
its officers, directors or investment advisor own beneficially more than
one-half of 1% of the securities of such issuer and all such officers and
directors together own beneficially more than 5% of such securities.
8. Purchase any securities issued by a corporation which has not been in
continuous operation for three years, but such period may include the operation
of a predecessor.
9. Acquire, lease or hold real estate except such as may be necessary or
advisable for the maintenance of its offices.
10. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas or other mineral
exploration or development programs. The Fund may, however, write covered call
options listed for trading on a national securities exchange and purchase call
options to the extent necessary to cancel call options previously written. At
the present, there are no options listed for trading on a national securities
exchange covering the types of securities which are appropriate for investment
by the U.S. Government Securities Series and, therefore, there are no option
transactions available for that Fund.
11. Invest in companies for the purpose of exercising control or management.
12. Purchase securities of other investment companies; except to the extent each
Fund invests its uninvested daily cash balances in shares of the Franklin Money
Fund and other money market funds in the Franklin Templeton Group of Funds
provided (i) its purchases and redemptions of such money market fund shares may
not be subject to any purchase or redemption fees, (ii) its investments may not
be subject to duplication of management fees, nor to any charge related to the
expense of distributing each Fund's shares (as determined under Rule 12b-1, as
amended, under the federal securities laws) and (iii) provided aggregate
investments by a Fund in any such money market fund do not exceed (A) the
greater of (i) 5% of each Fund's total net assets or (ii) $2.5 million, or (B)
more than 3% of the outstanding shares of any such money market fund.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the Fund, the Fund may receive stock, real estate, or other
investments that the Fund would not, or could not, buy. In this case, the Fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND DIRECTORS
The Board has the responsibility for the overall management of Custodian Funds,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of Custodian Funds who are responsible for
administering each Fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of Custodian Funds under the 1940 Act are indicated by an asterisk (*).
Positions and Principal Occupations
Name, Age and Offices with the During the Past Five
ADDRESS FUND YEARS
Harris J. Ashton (65) Director
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods (a meat packing company); and director or
trustee, as the case may be, of 52 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (65) Director
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director, General Host
Corporation (nursery and craft centers); and director or trustee, as the case
may be, of 54 of the investment companies in the Franklin Templeton Group of
Funds.
*Edith E. Holiday (45) Director
3239 38th Street, N.W.
Washington, DC 20016
Director (1993-present) of Amerada Hess Corporation and Hercules Incorporated;
Director of Beverly Enterprises, Inc. (1995-present) and H.J. Heinz Company
(1994-present; formerly, chairman (1995-1997) and trustee (1993-1997) of
National Child Research Center; assistant to the President of the United States
and Secretary of the Cabinet (1990-1993), general counsel to the United States
Treasury Department (1989-1990) and counselor to the Secretary and Assistant
Secretary for Public Affairs and Public Liaison-United States Treasury
Department (1988-1989); and trustee or director of 24 of the investment
companies in the Franklin Templeton Group of Funds.
*Charles B. Johnson (65) President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc., Franklin Templeton Services, Inc. and General Host Corporation (nursery
and craft centers); and officer and/or director or trustee, as the case may be,
of most of the other subsidiaries of Franklin Resources, Inc. and of 53 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (57) Vice President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Senior Vice President and Director, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case may
be, of most of the other subsidiaries of Franklin Resources, Inc. and of 57 of
the investment companies in the Franklin Templeton Group of Funds.
Gordon S. Macklin (69) Director
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (financial services); Director, Fund American
Enterprises Holdings, Inc., MCI Communications Corporation, CCC Information
Services Group, Inc. (information services), MedImmune, Inc. (biotechnology),
Shoppers Express (home shopping), and Spacehab, Inc. (aerospace services); and
director or trustee, as the case may be, of 51 of the investment companies in
the Franklin Templeton Group of Funds; formerly Chairman, Hambrecht and Quist
Group, Director, H & Q Healthcare Investors, and President, National Association
of Securities Dealers, Inc.
Harmon E. Burns (52) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc. and
Franklin Templeton Services, Inc.; Executive Vice President, Franklin Advisers,
Inc.; Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 57 of the investment companies in the Franklin
Templeton Group of Funds.
Martin L. Flanagan (37) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and Director, Templeton Investment Counsel,
Inc.; Senior Vice President and Treasurer, Franklin Advisers, Inc.; Treasurer,
Franklin Advisory Services, Inc.; Treasurer and Chief Financial Officer,
Franklin Investment Advisory Services, Inc.; President, Franklin Templeton
Services, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; and officer and/or director or trustee, as the case may be, of 57 of the
investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief Operating
Officer, Franklin Investment Advisory Services, Inc.; and officer of 57 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (58) Treasurer
777 Mariners Island Blvd. and Principal
San Mateo, CA 94404 Accounting
Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 34 of
the investment companies in the Franklin Templeton Group of Funds.
Brian E. Lorenz (58) Secretary
One North Lexington Avenue
White Plains, NY 10001-1700
Attorney, member of the law firm of Bleakley Platt & Schmidt; and officer of
three of the investment companies in the Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors, Advisers and Investment Advisory. Nonaffiliated members of the
Board are currently paid $1,350 per month plus $1,300 per meeting attended. As
shown above, the nonaffiliated Board members also serve as directors or trustees
of other investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The following table provides
the total fees paid to nonaffiliated Board members by Custodian Funds and by
other funds in the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN THE
TOTAL FEES FRANKLIN
TOTAL FEES RECEIVED FROM THE TEMPLETON GROUP
RECEIVED FROM FRANKLIN TEMPLETON OF FUNDS ON
THE FUND* GROUP OF FUNDS** WHICH EACH SERVES***
Harris J. Ashton $30,500 $344,642 52
S. Joseph Fortunato 30,500 361,562 54
Edith E. Holiday 0 72,875 24
Gordon S. Macklin 30,500 337,292 51
*For the fiscal year ended September 30, 1997.
**For the calendar year ended December 31, 1997.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 58 registered investment companies, with approximately 171 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or trustee.
No officer or Board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the Fund or other funds in the
Franklin Templeton Group of Funds. Certain officers or Board members who are
shareholders of Resources may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
During the fiscal year ended September 30, 1997, legal fees and expenses of
$74,098 were paid to the law firm of which Mr. Lorenz, an officer of Custodian
Funds, is a partner, and which acts as counsel to the Fund.
As of January 2, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately
4,428.423 shares of Growth Series - Class I, 4,094.172 shares of Growth Series -
Advisor Class, 102.460 shares of Utilities Series - Class I, 13,603.842 shares
of DynaTech Series - Class I, 439.436 shares of Income Series - Class I,
12,633.274 shares of Income Series - Advisor Class, 48,364.879 shares of U.S.
Government Securities Series Class I and 9,716.923 shares of U.S. Government
Securities Series - Advisor Class, or less than 1% of the total outstanding
Class I and Advisor Class shares of each Fund and 29,290.179 shares of Utilities
Series - Advisor Class, or less than 3% of the total outstanding Advisor Class
shares of Utilities Series. Many of the Board members also own shares in other
funds in the Franklin Templeton Group of Funds. Charles B. Johnson and Rupert H.
Johnson, Jr. are brothers.
INVESTMENT MANAGEMENT
AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. Advisers is the investment manager of
the Funds, except for Growth Series. Growth Series' investment manager is
Investment Advisory. The investment manager provides investment research and
portfolio management services, including the selection of securities for the
Fund to buy, hold or sell and the selection of brokers through whom the Fund's
portfolio transactions are executed. The investment manager's activities are
subject to the review and supervision of the Board to whom the investment
manager renders periodic reports of the Fund's investment activities. Each
investment manager and its officers, directors and employees are covered by
fidelity insurance for the protection of the Funds.
The investment managers and their affiliates act as investment manager to
numerous other investment companies and accounts. The investment manager may
give advice and take action with respect to any of the other funds it manages,
or for its own account, that may differ from action taken by the investment
manager on behalf of the Fund. Similarly, with respect to the Fund, the
investment manager is not obligated to recommend, buy or sell, or to refrain
from recommending, buying or selling any security that the investment manager
and access persons, as defined by the 1940 Act, may buy or sell for its or their
own account or for the accounts of any other fund. The investment manager is not
obligated to refrain from investing in securities held by the Fund or other
funds that it manages. Of course, any transactions for the accounts of the
investment manager and other access persons will be made in compliance with the
Fund's Code of Ethics. Please see "Miscellaneous Information - Summary of Code
of Ethics."
MANAGEMENT FEES. Under its management agreement, each Fund pays the investment
manager a management fee equal to a monthly rate of 5/96 of 1% of the value of
net assets up to and including $100 million; and 1/24 of 1% of the value of net
assets over $100 million and not over $250,000,000; and 9/240 of 1% of the value
of net assets over $250 million and not over $10 billion; and 11/300 of 1% of
the value of net assets over $10 billion and not over $12.5 billion; and 7/200
of 1% of the value of net assets over $12.5 billion and not over $15 billion;
and 1/30 of 1% of the value of net assets over $15 billion and not over $17.5
billion; and 19/100 of 1% of the value of net assets over $17.5 billion and not
over $20 billion; and 3/100 of 1% of the value of net assets in excess of $20
billion. The fee is computed at the close of business on the last business day
of each month. Each class pays its proportionate share of the management fee.
For the fiscal years ended September 30, 1995, 1996 and 1997, management fees
paid to the in vestment manager were as follows:
FUND 1995 1996 1997
- ------------------------------------------------------------------------------
Growth Series $ 2,969,094 $ 4,329,460 $6,295,304
DynaTech Series 491,673 601,568 840,480
Utilities Series 12,223,592 12,335,820 9,987,693
Income Series 23,887,430 30,075,761 35,364,027
U.S.Government Securities
Series 50,269,876 48,138,799 44,411,776
MANAGEMENT AGREEMENT. The management agreement for each Fund is in effect until
January 31, 1999. Each agreement may continue in effect for successive annual
periods if its continuance is specifically approved at least annually by a vote
of the Board or by a vote of the holders of a majority of Custodian Funds'
outstanding voting securities, and in either event by a majority vote of the
Board members who are not parties to the management agreement or interested
persons of any such party (other than as members of the Board), cast in person
at a meeting called for that purpose. Each management agreement may be
terminated without penalty at any time by the Board or by a vote of the holders
of a majority of Custodian Funds' outstanding voting securities on 30 days'
written notice to the investment manager, or by the investment manager on 30
days' written notice to Custodian Funds, and will automatically terminate in the
event of its assignment, as defined in the 1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with the investment manager, FT
Services provides certain administrative services and facilities for Custodian
Funds. These include preparing and maintaining books, records, and tax and
financial reports, and monitoring compliance with regulatory requirements. FT
Services is a wholly owned subsidiary of Resources.
Under its administration agreement, the investment manager pays FT Services a
monthly administration fee equal to an annual rate of 0.15% of the Fund's
average daily net assets up to $200 million, 0.135% of average daily net assets
over $200 million up to $700 million, 0.10% of average daily net assets over
$700 million up to $1.2 billion, and 0.075% of average daily net assets over
$1.2 billion. The fee is paid by the investment manager. It is not a separate
expense of the Fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is Custodian Funds' shareholder servicing agent and acts as the
Fund's transfer agent and dividend-paying agent. Investor Services is
compensated on the basis of a fixed fee per account. Custodian Funds may also
reimburse Investor Services for certain out-of-pocket expenses, which may
include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the Fund. The amount of reimbursements
for these services per benefit plan participant Fund account per year may not
exceed the per account fee payable by Custodian Funds to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
Custodian Funds. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are Custodian Funds' independent auditors. During the fiscal year ended
September 30, 1997, their auditing services consisted of rendering an opinion on
the financial statements of Custodian Funds included in Custodian Funds' Annual
Report to Shareholders for the fiscal year ended September 30, 1997.
HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
The investment manager selects brokers and dealers to execute the Fund's
portfolio transactions in accordance with criteria set forth in the management
agreement and any directions that the Board may give.
When placing a portfolio transaction, the investment manager seeks to obtain
prompt execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid by the Fund
is negotiated between the investment manager and the broker executing the
transaction. The determination and evaluation of the reasonableness of the
brokerage commissions paid are based to a large degree on the professional
opinions of the persons responsible for placement and review of the
transactions. These opinions are based on the experience of these individuals in
the securities industry and information available to them about the level of
commissions being paid by other institutional investors of comparable size. The
investment manager will ordinarily place orders to buy and sell over-the-counter
securities on a principal rather than agency basis with a principal market maker
unless, in the opinion of the investment manager, a better price and execution
can otherwise be obtained. Purchases of portfolio securities from underwriters
will include a commission or concession paid by the issuer to the underwriter,
and purchases from dealers will include a spread between the bid and ask price.
The investment manager may pay certain brokers commissions that are higher than
those another broker may charge, if the investment manager determines in good
faith that the amount paid is reasonable in relation to the value of the
brokerage and research services it receives. This may be viewed in terms of
either the particular transaction or the investment manager's overall
responsibilities to client accounts over which it exercises investment
discretion. The services that brokers may provide to the investment manager
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to the investment
manager in carrying out its investment advisory responsibilities. These services
may not always directly benefit the Fund. They must, however, be of value to the
investment manager in carrying out its overall responsibilities to its clients.
Since most purchases by U.S. Government Securities Series are principal
transactions at net prices, U.S. Government Securities Series incurs little or
no brokerage costs. The Fund deals directly with the selling or buying principal
or market maker without incurring charges for the services of a broker on its
behalf, unless it is determined that a better price or execution may be obtained
by using the services of a broker. Purchases of portfolio securities from
underwriters will include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers will include a spread between the bid
and ask prices. The Fund seeks to obtain prompt execution of orders at the most
favorable net price. Transactions may be directed to dealers in return for
research and statistical information, as well as for special services provided
by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services the investment manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order to
obtain additional research services permits the investment manager to supplement
its own research and analysis activities and to receive the views and
information of individuals and research staffs of other securities firms. As
long as it is lawful and appropriate to do so, the investment manager and its
affiliates may use this research and data in their investment advisory
capacities with other clients. If the Fund's officers are satisfied that the
best execution is obtained, the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, may also be considered a factor
in the selection of broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the investment manager will be reduced by the amount of any fees
received by Distributors in cash, less any costs and expenses incurred in
connection with the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by the investment manager are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to all
by the investment manager, taking into account the respective sizes of the funds
and the amount of securities to be purchased or sold. In some cases this
procedure could have a detrimental effect on the price or volume of the security
so far as the Fund is concerned. In other cases it is possible that the ability
to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.
During the fiscal years ended September 30, 1995, 1996 and 1997, the Fund paid
brokerage commissions as follows:
FUND 1995 1996 1997
- ------------------------------------------------------------------------------
Growth Series $ 50,102 $105,528 $ 78,178
DynaTech Series 11,850 18,930 11,855
Utilities Series 1,025,293 1,525,621 1,146,668
Income Series 895,111 1,220,342 848,922
U.S.Government Securities Series -0- -0- -0-
As of September 30, 1997, the Fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
Custodian Funds continuously offers its shares through Securities Dealers who
have an agreement with Distributors. Securities Dealers may at times receive the
entire sales charge. A Securities Dealer who receives 90% or more of the sales
charge may be deemed an underwriter under the Securities Act of 1933, as
amended.
Securities laws of states where Custodian Funds offers its shares may differ
from federal law. Banks and financial institutions that sell shares of the Funds
may be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, Custodian
Funds' shares are available to these banks' trust accounts without a sales
charge. The banks may charge service fees to their customers who participate in
the trusts. A portion of these service fees may be paid to Distributors or one
of its affiliates to help defray expenses of maintaining a service office in
Taiwan, including expenses related to local literature fulfillment and
communication facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
For the Growth Series and DynaTech Series:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
Under $30,000 3%
$30,000 but less than $50,000 2.5%
$50,000 but less than $100,000 2.0%
$100,000 but less than $200,000 1.5%
$200,000 but less than $400,000 1.0%
$400,000 or more 0%
For the Utilities Series, Income Series and U.S. Government Securities Series:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
Under $30,000 3%
$30,000 but less than $100,000 2%
$100,000 but less than $400,000 1%
$400,000 or more 0%
OTHER PAYMENTS TO SECURITIES DEALERS. For Growth and DynaTech Series,
Distributors may pay the following commissions, out of its own resources, to
Securities Dealers who initiate and are responsible for purchases of Class I
shares of $1 million or more: 1% on sales of $1 million to $2 million, plus
0.80% on sales over $2 million to $3 million, plus 0.50% on sales over $3
million to $50 million, plus 0.25% on sales over $50 million to $100 million,
plus 0.15% on sales over $100 million. For Income, Utilities, and U.S.
Government Securities Series, Distributors may pay the following commissions,
out of its own resources, to Securities Dealers who initiate and are responsible
for purchases of Class I shares of $1 million or more: 0.75% on sales of $1
million to $2 million, plus 0.60% on sales over $2 million to $3 million, plus
0.50% on sales over $3 million to $50 million, plus 0.25% on sales over $50
million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases of Class I shares by certain retirement plans without a front-end
sales charge, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds acquired more than 90 days before the Letter is filed will be counted
towards completion of the Letter, but they will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the 13
month period, except in the case of certain retirement plans, will be subtracted
from the amount of the purchases for purposes of determining whether the terms
of the Letter have been completed. If the Letter is not completed within the 13
month period, there will be an upward adjustment of the sales charge, depending
on the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute a
Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name until you fulfill the Letter. This policy of reserving shares does not
apply to certain retirement plans. If total purchases, less redemptions, equal
the amount specified under the Letter, the reserved shares will be deposited to
an account in your name or delivered to you or as you direct. If total
purchases, less redemptions, exceed the amount specified under the Letter and is
an amount that would qualify for a further quantity discount, a retroactive
price adjustment will be made by Distributors and the Securities Dealer through
whom purchases were made pursuant to the Letter (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, you will remit to Distributors an amount equal to the difference in the
dollar amount of sales charge actually paid and the amount of sales charge that
would have applied to the aggregate purchases if the total of the purchases had
been made at a single time. Upon remittance, the reserved shares held for your
account will be deposited to an account in your name or delivered to you or as
you direct. If within 20 days after written request the difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize the difference will be made. In the event of a total redemption of
the account before fulfillment of the Letter, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objectives exist
immediately. This money will then be withdrawn from the short-term, money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the 25th day of the month in which a payment is scheduled. If the 25th falls
on a weekend or holiday, we will process the redemption on the next business
day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions that
maintain omnibus accounts with the Fund on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee that the Fund normally pays
Investor Services. These financial institutions may also charge a fee for their
services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the close of the NYSE, normally
1:00 p.m. Pacific time, each day that the NYSE is open for trading. As of the
date of this SAI, the Fund is informed that the NYSE observes the following
holidays: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by the investment manager.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the close of trading on the
NYSE, if that is earlier. The value is then converted into its U.S. dollar
equivalent at the foreign exchange rate in effect at noon, New York time, on the
day the value of the foreign security is determined. If no sale is reported at
that time, the foreign security is valued within the range of the most recent
quoted bid and ask prices. Occasionally events that affect the values of foreign
securities and foreign exchange rates may occur between the times at which they
are determined and the close of the exchange and will, therefore, not be
reflected in the computation of the Net Asset Value of each class. If events
materially affecting the values of these foreign securities occur during this
period, the securities will be valued at their fair value as determined by the
investment manager and approved in good faith by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value of each class is determined as of such times. Occasionally,
events affecting the values of these securities may occur between the times at
which they are determined and the close of the NYSE that will not be reflected
in the computation of the Net Asset Value. If events materially affecting the
values of these securities occur during this period, the securities will be
valued at their fair value as determined by the investment manager and approved
in good faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. The Custodian Funds receive income
generally in the form of dividends, interest, original issue, market and
acquisition discount, and other income derived from its investments. This
income, less expenses incurred in the operation of a Fund, constitutes its net
investment income from which dividends may be paid to you. Any distributions by
a Fund from such income will be taxable to you as ordinary income, whether you
take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS. The Custodian Funds may derive capital gains and
losses in connection with sales or other dispositions of its portfolio
securities. Distributions derived from the excess of net short-term capital gain
over net long-term capital loss will be taxable to you as ordinary income.
Distributions paid from long-term capital gains realized by a Fund will be
taxable to you as long-term capital gain, regardless of how long you have held
your shares in a Fund. Any net short-term or long-term capital gains realized by
a Fund (net of any capital loss carryovers) generally will be distributed once
each year, and may be distributed more frequently, if necessary, in order to
reduce or eliminate federal excise or income taxes on a Fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Custodian Funds are
required to report the capital gain distributions paid to you from gains
realized on the sale of portfolio securities using the following categories:
"28% RATE GAINS": gains resulting from securities sold by a Fund after July 28,
1997 that were held for more than one year but not more than 18 months, and
securities sold by a Fund before May 7, 1997 that were held for more than one
year. These gains will be taxable to individual investors at a maximum rate of
28%.
"20% RATE GAINS" gains resulting from securities sold by a Fund after July 28,
1997 that were held for more than 18 months, and under a transitional rule,
securities sold by a Fund between May 7 and July 28, 1997 (inclusive) that were
held for more than one year. These gains will be taxable to individual investors
at a maximum rate of 20% for individual investors in the 28% or higher federal
income tax brackets, and at a maximum rate of 10% for investors in the 15%
federal income tax bracket.
The Act also provides for a new maximum rate of tax on capital gains of 18% for
individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket for "qualified 5-year gains."
For individuals in the 15% bracket, qualified 5-year gains are net gains on
securities held for more than 5 years which are sold after December 31, 2000.
For individuals who are subject to tax at higher rates, qualified 5-year gains
are net gains on securities which are purchased after December 31, 2000 and are
held for more than 5 years. Taxpayers subject to tax at the higher rates may
also make an election for shares held on January 1, 2001 to recognize gain on
their shares in order to qualify such shares as qualified 5-year property.
The Custodian Funds will advise you after the end of each calendar year of the
amount of its capital gain distributions paid during the calendar year that
qualify for these maximum federal tax rates. Additional information on reporting
these distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook. This handbook has been revised to include
1997 Act tax law changes. Questions concerning each investor's personal tax
reporting should be addressed to the investor's personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following year,
will be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. The Custodian Funds will report this
income to you on your Form 1099-DIV for the year in which these distributions
were declared.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by a
Fund. Similarly, you should be aware that any foreign exchange losses realized
by a Fund, on the sale of debt instruments, are generally treated as ordinary
losses by the Fund. These gains when distributed will be taxable to you as
ordinary dividends, and any losses will reduce a Fund's ordinary income
otherwise available for distribution to you. This treatment could increase or
reduce a Fund's ordinary income distributions to you, and may cause some or all
of a Fund's previously distributed income to be classified as a return of
capital.
The 1997 Act also simplifies the procedures by which investors in funds that
invest in foreign securities can claim tax credits on their individual income
tax returns for the foreign taxes paid by a Fund. These provisions will allow
investors who claim a credit for foreign taxes paid of $300 or less on a single
return or $600 or less on a joint return during any year (all of which must be
reported on IRS Form 1099-DIV from a Fund to the investor) to bypass the
burdensome and detailed reporting requirements on the supporting foreign tax
credit schedule (Form 1116) and report foreign taxes paid directly on page 2 of
Form 1040. YOU SHOULD NOTE THAT THIS SIMPLIFIED PROCEDURE WILL NOT BE AVAILABLE
UNTIL CALENDAR YEAR 1998.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The Custodian Funds will
inform you of the amount and character of your distributions at the time they
are paid, and will advise you of the tax status for federal income tax purposes
of such distributions shortly after the close of each calendar year.
Shareholders who have not held Fund shares for a full year may have designated
and distributed to them as ordinary income or capital gain a percentage of
income that is not equal to the actual amount of such income earned during the
period of their investment in a Fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. Each Fund has elected to
be treated as a regulated investment company under Subchapter M of the Code, has
qualified as such for its most recent fiscal year, and intends to so qualify
during the current fiscal year. The Directors reserve the right not to maintain
the qualification of a Fund as a regulated investment company if they determine
such course of action to be beneficial to you. In such case, a Fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of such a Fund's available earnings and profits.
In order to qualify as a regulated investment company for tax purposes, a Fund
must meet certain specific requirements, including:
o A Fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. Government securities and securities of other
regulated investment companies) can exceed 25% of a Fund's total assets, and,
with respect to 50% of a Fund's total assets, no investment (other than cash and
cash items, U.S. Government securities and securities of other regulated
investment companies) can exceed 5% of a Fund's total assets;
o A Fund must derive at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, and gains from the sale or
disposition of stock, securities or foreign currencies, or other income derived
with respect to its business of investing in such stock, securities, or
currencies; and
o A Fund must distribute to its shareholders at least 90% of its net investment
income and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires each Fund to distribute
at least 98% of its taxable ordinary income earned during the calendar year and
98% of the capital gain net income earned during the twelve month period ending
October 31 (in addition to undistributed amounts from the prior year) to you by
December 31 of each year in order to avoid federal excise taxes. Each Fund
intends to declare and pay sufficient dividends in December (or in January that
are treated by you as received in December) but does not guarantee and can give
no assurances that its distributions will be sufficient to eliminate all such
taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of Fund shares are taxable
transactions for federal and state income tax purposes. The tax law requires
that you recognize a gain or loss in an amount equal to the difference between
your tax basis and the amount you received in exchange for your shares, subject
to the rules described below. If you hold your shares as a capital asset, the
gain or loss that you realize will be capital gain or loss, and will be
long-term for federal income tax purposes if you have held your shares for more
than one year at the time of redemption or exchange. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by the Fund on those shares. The holding periods and
categories of capital gain that apply under the 1997 Act are described above the
"Distributions" section.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you purchase other shares in such
Fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis in the new shares you purchase.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for your
shares in a Fund will be excluded from your tax basis in any of the shares sold
within 90 days of their purchase (for the purpose of determining gain or loss
upon the sale of such shares) if you reinvest the sales proceeds in such Fund or
in another Fund in the Franklin Templeton Group of Funds, and the sales charge
that would otherwise apply to your reinvestment is reduced or eliminated because
of your reinvestment with Franklin Templeton. The portion of the sales charge
excluded from your tax basis in the shares sold will equal the amount that the
sales charge is reduced on your reinvestment. Any portion of the sales charge
excluded from your tax basis in the shares sold will be added to the tax basis
of the shares you acquire from your reinvestment in another Franklin Templeton
fund.
U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. Government,
subject in some states to minimum investment requirements that must be met by a
Fund. Investments by the U.S. Government Securities Series or other Fund in
GNMA/FNMA securities, bankers' acceptances, commercial paper and repurchase
agreements collateralized by U.S. Government securities do not generally qualify
for tax-free treatment. At the end of each calendar year, the Custodian Funds
will provide you with the percentage of any dividends paid that may qualify for
tax-free treatment on your personal income tax return. You should consult with
your own tax advisor to determine the application of your state and local laws
to these distributions. Because the rules on exclusion of this income are
different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of their distributions may be exempt
from corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. As a corporate shareholder, you
should note that, except for the U.S. Government Securities Series, a portion of
the dividends paid by each Fund for the most recent calendar year qualified for
the dividends-received deduction. You will be permitted in some circumstances to
deduct these qualified dividends, thereby reducing the tax that you would
otherwise be required to pay on these dividends. The dividends-received
deduction will be available with respect to dividends designated by a Fund as
eligible for such treatment. Dividends so designated by a Fund must be
attributable to dividends earned by such Fund from U.S. corporations that were
not debt financed.
Under the 1997 Act, the amount that a Fund may designate as eligible for the
dividends-received deduction will be reduced or eliminated if the shares on
which the dividends were earned by such Fund were debt-financed or held by such
Fund for less than a 46 day period during a 90 day period beginning 45 days
before the ex-dividend date of the corporate stock. Similarly, if your Fund
shares are debt-financed or held by you for less than this same 46 day period,
then the dividends-received deduction may also be reduced or eliminated. Even if
designated as dividends eligible for the dividends-received deduction, all
dividends (including the deducted portion) must be included in your alternative
minimum taxable income calculation.
No portion of the distributions from the U.S. Government Securities Series will
qualify for the corporate dividends-received deduction.
INVESTMENT IN COMPLEX SECURITIES. A Fund's investment in options, including
transactions involving actual or deemed short sales or foreign exchange gains or
losses are subject to many complex and special tax rules. Over-the-counter
options on debt securities and equity options, including options on stock and on
narrow-based stock indexes, will be subject to tax under Section 1234 of the
Code, generally producing a long-term or short-term capital gain or loss upon
exercise, lapse, or closing out of the option or sale of the underlying stock or
security. Certain other options entered into by a Fund are generally governed by
Section 1256 of the Code. These "Section 1256" positions generally include
listed options on debt securities, options on broad-based stock indexes, options
on securities indexes, options on futures contracts, regulated futures contracts
and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held by a
Fund will be marked-to-market (i.e., treated as if it were sold for fair market
value) on the last business day of the Fund's fiscal year (and on other dates as
prescribed by the Code), and all gain or loss associated with fiscal year
transactions and mark-to-market positions at fiscal year end (except certain
currency gain or loss covered by Section 988 of the Code) will generally be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. Under legislation pending in technical corrections to the 1997 Act, the
60% long-term capital gain portion will qualify as 20% rate gain and will be
subject to tax to individual investors at a maximum rate of 20% for investors in
the 28% or higher federal income tax brackets, or at a maximum rate of 10% for
investors in the 15% federal income tax bracket. While foreign currency is
marked-to-market at year end, gain or loss realized as a result will always be
ordinary. Even though marked-to-market, gains and losses realized on foreign
currency and foreign security investments will generally be treated as ordinary
income. The effect of Section 1256 mark-to-market rules may be to accelerate
income or to convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-capital losses
within a Fund. The acceleration of income on Section 1256 positions may require
a Fund to accrue taxable income without the corresponding receipt of cash. In
order to generate cash to satisfy the distribution requirements of the Code, a
Fund may be required to dispose of portfolio securities that it otherwise would
have continued to hold or to use cash flows from other sources such as the sale
of Fund shares. In these ways, any or all of these rules may affect the amount,
character and timing of income distributed to you by a Fund.
When a Fund holds an option or contract which substantially diminishes such
Fund's risk of loss with respect to another position of such Fund (as might
occur in some hedging transactions), this combination of positions could be
treated as a "straddle" for tax purposes, possibly resulting in deferral of
losses, adjustments in the holding periods and conversion of short-term capital
losses into long-term capital losses. A Fund may make certain tax elections for
mixed straddles (i.e., straddles comprised of at least one Section 1256 position
and at least one non-Section 1256 position) which may reduce or eliminate the
operation of these straddle rules.
The 1997 Act has also added new provisions for dealing with transactions that
are generally called "Constructive Sale Transactions." Under these rules, a Fund
must recognize gain (but not loss) on any constructive sale of an appreciated
financial position in stock, a partnership interest or certain debt instruments.
A Fund will generally be treated as making a constructive sale when it: 1)
enters into a short sale on the same property, 2) enters into an offsetting
notional principal contract, or 3) enters into a futures or forward contract to
deliver the same or substantially similar property. Other transactions
(including certain financial instruments called collars) will be treated as
constructive sales as provided in Treasury regulations to be published. There
are also certain exceptions that apply for transactions that are closed before
the end of the 30th day after the close of the taxable year.
Distributions paid to you by a Fund of ordinary income and short-term capital
gains arising from a Fund's investments, including investments in options, will
be taxable to you as ordinary income. The Custodian Funds will monitor their
transactions in such options and contracts and may make certain other tax
elections in order to mitigate the effect of the above rules.
INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. Each Fund, other than
the U.S. Government Securities Series, is authorized to invest in foreign
currency denominated securities. Such investments, if made, will have the
following additional tax consequences:
Under the Code, gains and losses attributable to fluctuations in foreign
currency exchange rates which occur between the time a Fund accrues income
(including dividends), or accrues expenses which are denominated in a foreign
currency, and the time a Fund actually collects such income or pays such
expenses generally are treated as ordinary income or loss. Similarly, on the
disposition of debt securities denominated in a foreign currency and on the
disposition of certain options, gain or loss attributable to fluctuations in the
value of foreign currency between the date of acquisition of the security or
contract and the date of its disposition are also treated as ordinary gain or
loss. These gains or losses, referred to under the Code as "Section 988" gains
or losses, may increase or decrease the amount of a Fund's net investment
company taxable income, which, in turn, will affect the amount of income to be
distributed to you by the Fund.
If a Fund's Section 988 losses exceed such Fund's other net investment company
taxable income during a taxable year, such Fund generally will not be able to
make ordinary dividend distributions to you for that year, or distributions made
before the losses were realized will be recharacterized as return of capital
distributions for federal income tax purposes, rather than as an ordinary
dividend or capital gain distribution. If a distribution is treated as a return
of capital, your tax basis in your Fund shares will be reduced by a like amount
(to the extent of such basis), and any excess of the distribution over your tax
basis in your Fund shares will be treated as capital gain to you.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES. Each Fund, other
than the U.S. Government Securities Series, may invest in shares of foreign
corporation which may be classified under the Code as passive foreign investment
companies ("PFICs"). In general, a foreign corporation is classified as a PFIC
if at least one-half of its assets constitute investment-type assets or 75% or
more of its gross income is investment-type income.
If a Fund receives an "excess distribution" with respect to PFIC stock, such
Fund itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by such
Fund to you. In general, under the PFIC rules, an excess distribution is treated
as having been realized ratably over the period during which a Fund held the
PFIC shares. A Fund itself will be subject to tax on the portion, if any, of an
excess distribution that is so allocated to prior Fund taxable years, and an
interest factor will be added to the tax, as if the tax had been payable in such
prior taxable years. In this case, you would not be permitted to claim a credit
on your own tax return for the tax paid by a Fund. Certain distributions from a
PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain. This may have the effect of increasing
Fund distributions to you that are treated as ordinary dividends rather than
long-term capital gain dividends.
A Fund may be eligible to elect alternative tax treatment with respect to PFIC
shares. Under an election that currently is available in some circumstances, a
Fund generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether distributions are
received from the PFIC during such period. If this election were made, the
special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, the 1997 Act provides for another
election that would involve marking-to-market a Fund's PFIC shares at the end of
each taxable year (and on certain other dates as prescribed in the Code), with
the result that unrealized gains would be treated as though they were realized.
A Fund would also be allowed an ordinary deduction for the excess, if any, of
the adjusted basis of its investment in the PFIC stock over its fair market
value at the end of the taxable year. This deduction would be limited to the
amount of any net mark-to-market gains previously included with respect to that
particular PFIC security. If a Fund were to make this second PFIC election, tax
at the Fund level under the PFIC rules would generally be eliminated.
The application of the PFIC rules may affect, among other things, the amount of
tax payable by a Fund (if any), the amounts distributable to you by a Fund, the
time at which these distributions must be made, and whether these distributions
will be classified as ordinary income or capital gain distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is a
PFIC, and that there is always a possibility that a foreign corporation will
become a PFIC after a Fund acquires shares in that corporation. While a Fund
will generally seek to avoid investing in PFIC shares to avoid the tax
consequences detailed above, there are no guarantees that it will do so and it
reserves the right to make such investments as a matter of its fundamental
investment policy.
CONVERSION TRANSACTIONS. Gains realized by a Fund from transactions that are
deemed to be "conversion transactions" under the Code, and that would otherwise
produce capital gain may be recharacterized as ordinary income to the extent
that such gain does not exceed an amount defined as the "applicable imputed
income amount." A conversion transaction is any transaction in which
substantially all of a Fund's expected return is attributable to the time value
of such Fund's net investment in such transaction, and any one of the following
criteria are met:
1) there is an acquisition of property with a substantially contemporaneous
agreement to sell the same or substantially identical property in the future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it would
have the economic characteristics of a loan but would be taxed as capital gain
or
4) the transaction is specified in Treasury regulations to be promulgated in the
future.
The applicable imputed income amount, which represents the deemed return on the
conversion transaction based upon the time value of money, is computed using a
yield equal to 120 percent of the applicable federal rate, reduced by any prior
recharacterizations under this provision or the provisions of Section 263(g) of
the Code dealing with capitalized carrying costs.
STRIPPED PREFERRED STOCK. Occasionally, a Fund other than the U.S. Government
Securities Series may purchase "stripped preferred stock" that is subject to
special tax treatment. Stripped preferred stock is defined as certain preferred
stock issues where ownership of the stock has been separated from the right to
receive dividends that have not yet become payable. The stock must have a fixed
redemption price, must not participate substantially in the growth of the
issuer, and must be limited and preferred as to dividends. The difference
between the redemption price and purchase price is taken into Fund income over
the term of the instrument as if it were original issue discount. The amount
that must be included in each period generally depends on the original yield to
maturity, adjusted for any prepayments of principal.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS. A
Fund's investments in zero coupon bonds, bonds issued or acquired at a discount,
delayed interest bonds, or bonds that provide for payment of interest-in-kind
(PIK) may cause a Fund to recognize income and make distributions to you prior
to its receipt of cash payments. Zero coupon and delayed interest bonds are
normally issued at a discount and are therefore generally subject to tax
reporting as OID obligations. A Fund is required to accrue as income a portion
of the discount at which these securities were issued, and to distribute such
income each year (as ordinary dividends) in order to maintain its qualification
as a regulated investment company and to avoid income reporting and excise taxes
at the Fund level. PIK bonds are subject to similar tax rules concerning the
amount, character and timing of income required to be accrued by a Fund. Bonds
acquired in the secondary market for a price less than their stated redemption
price or revised issue price are said to have been acquired with market
discount. For these bonds, a Fund may elect to accrue market discount on a
current basis, in which case such Fund will be required to distribute any such
accrued discount. If a Fund does not elect to accrue market discount into income
currently, gain recognized on sale will be recharacterized as ordinary income
instead of capital gain to the extent of any accumulated market discount on the
obligation.
DEFAULTED OBLIGATIONS. A Fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy these distribution requirements, a Fund may be required
to dispose of portfolio securities that it otherwise would have continued to
hold or to use cash flows from other sources such as the sale of Fund shares.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the Funds' shares. The
underwriting agreement will continue in effect for successive annual periods if
its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. Custodian Funds pays the expenses of
preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of Distributors)
and of sending prospectuses to existing shareholders.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions received by Distributors and, after allowances to dealers, the
amounts retained by Distributors in net underwriting discounts and commissions,
and the amounts received by Distributors in connection with redemptions or
repurchases of shares, for the fiscal years ended September 30, 1995, 1996 and
1997 were as follows:
AMOUNT RECEIVED
IN CONNECTION
COMMISSIONS COMMISSIONS WITH REDEMPTIONS
RETAINED RECEIVED OR REPURCHASES
1995
Growth Series $ 2,112,855 $ 233,027 $ 227
DynaTech Series 231,256 25,733 280
Utilities Series 6,047,891 366,179 -0-
Income Series 37,121,561 2,117,539 4,700
U.S. Government
Securities Series 10,902,931 656,562 2,188
1996
Growth Series $ 4,835,570 $ 505,111 7,930
DynaTech Series 285,074 32,125 -0-
Utilities Series 3,913,659 228,611 11,242
Income Series 46,806,723 1,739,086 136,828
U.S. Government
Securities Series 13,160,355 834,565 23,231
1997
Growth Series $ 7,068,758 $ 708,574 $ 47,529
DynaTech Series 682,911 67,617 1,344
Utilities Series 1,698,314 99,703 19,661
Income Series 39,253,724 1,822,592 293,033
U.S. Government
Securities Series 10,252,511 620,114 56,854
Distributors may be entitled to reimbursement under the Rule 12b-1 plan for each
class, as discussed below. Except as noted, Distributors received no other
compensation from the Custodian Funds for acting as underwriter.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans" that
were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLANS. Under the Class I plans, Growth Series and DynaTech Series
may pay up to a maximum of 0.25% and Income Series, Utilities Series, and U.S.
Government Securities Series may pay up to a maximum of 0.15% per year of Class
I's average daily net assets, payable quarterly, for expenses incurred in the
promotion and distribution of Class I shares.
In implementing the Class I plans, the Board has determined that the annual fees
payable under the Growth Series' and DynaTech Series' Class I plans, will be
equal to the sum of: (i) the amount obtained by multiplying 0.25% by the average
daily net assets represented by Class I shares of the Fund that were acquired by
investors on or after May 1, 1994, the effective date of the plan ("New
Assets"), and (ii) the amount obtained by multiplying 0.15% by the average daily
net assets represented by Class I shares of the Fund that were acquired before
May 1, 1994 ("Old Assets"). These fees will be paid to the current Securities
Dealer of record on the account. In addition, until such time as the maximum
payment of 0.25% is reached on a yearly basis, up to an additional 0.05% will be
paid to Distributors under Growth Series' and DynaTech Series' Class I plans.
With respect to Income and Utilities Series, the annual fees payable under their
respective Class I plans will be equal to the sum of: (i) the amount obtained by
multiplying 0.15% by the average daily net assets represented by the New Assets
of such Fund's Class I shares, and (ii) the amount obtained by multiplying 0.10%
by the average daily net assets represented by the Old Assets of such Fund's
Class I shares. With respect to U.S. Government Securities Series, the annual
fees payable under it's Class I plan will be equal to the sum of: (i) the amount
obtained by multiplying 0.15% by the New Assets of such Fund's Class I shares,
and (ii) the amount obtained by multiplying 0.05% by the Old Assets of such
Fund. These fees will be paid to the current Securities Dealer of record on the
account. In addition, until such time as the maximum payment of 0.15% with
respect to Income, Utilities and U.S. Government Securities Series is reached on
a yearly basis, up to an additional 0.02% will be paid to Distributors under
their respective Class I plan. The payments made to Distributors will be used by
Distributors to defray other marketing expenses that have been incurred in
accordance with the plan, such as advertising.
The fee is a Class I expense. This means that all Class I shareholders,
regardless of when they purchased their shares, will bear Rule 12b-1 expenses at
the same rate. The initial rate will be at least 0.20% (0.15% plus 0.05%) for
Growth and DynaTech Series; 0.12% (0.10% plus 0.02%) for Income and Utilities
Series; and 0.07% (0.05% plus 0.02%) for U.S. Government Securities Series of
the average daily net assets of Class I and, as Class I shares are sold on or
after May 1, 1994, will increase over time. Thus, as the proportion of Class I
shares purchased on or after May 1, 1994, increases in relation to outstanding
Class I shares, the expenses attributable to payments under the plan will also
increase (but will not exceed the maximum allowable under each Class I plan).
While this is the currently anticipated calculation for fees payable under the
Class I plans, the plans permit the Board to allow Growth and DynaTech Series to
pay a full 0.25% and Income, Utilities, and U.S. Government Securities Series to
pay a full 0.15% on all assets at any time. The approval of the Board would be
required to change the calculation of the payments to be made under the Class I
plans.
The Class I plans do not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
THE CLASS II PLANS. Under the Class II plans, Growth Series and Dynatech Series
pay Distributors up to 0.75% per year of Class II's average daily net assets,
and Utilities Series, Income Series, and U.S. Government Securities Series pay
Distributors up to 0.50% per year of Class II's average daily net assets,
payable quarterly, for distribution and related expenses. These fees may be used
to compensate Distributors or others for providing distribution and related
services and bearing certain Class II expenses. All distribution expenses over
this amount will be borne by those who have incurred them without reimbursement
by the Fund.
Under the Class II Plans, Growth Series and Dynatech Series also pay an
additional 0.25% per year and Utilities Series, Income Series and U.S.
Government Securities Series also pay an additional 0.15% per year of Class II's
average daily net assets, payable quarterly, as a servicing fee.
THE CLASS I AND CLASS II PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the Fund, the investment manager or Distributors or other parties on
behalf of the Fund, the investment manager or Distributors make payments that
are deemed to be for the financing of any activity primarily intended to result
in the sale of shares of each class within the context of Rule 12b-1 under the
1940 Act, then such payments shall be deemed to have been made pursuant to the
plan. The terms and provisions of each plan relating to required reports, term,
and approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the Board, including a majority vote
of the Board members who are not interested persons of Custodian Funds and who
have no direct or indirect financial interest in the operation of the plans,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
management agreement with the investment manager or by vote of a majority of the
outstanding shares of the class. Distributors or any dealer or other firm may
also terminate their respective distribution or service agreement at any time
upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended September 30, 1997, for Growth Series, Distributors
had eligible expenditures of $2,709,835 and $1,140,104 for advertising,
printing, and payments to underwriters and broker-dealers pursuant to the Class
I and Class II plans respectively, of which the Fund paid Distributors
$2,637,475 and $754,727 under the Class I and Class II plans. For the fiscal
year ended September 30, 1997, for Utilities Series, Distributors had eligible
expenditures of $2,931,051 and $177,120 for advertising, printing, and payments
to underwriters and broker-dealers pursuant to the Class I and Class II plans,
respectively, of which the Fund paid Distributors $2,879,105 and $138,653 under
the Class I and Class II plans. For the fiscal year ended September 30, 1997,
for DynaTech Series, Distributors had eligible expenditures of $275,783 and
$38,067 for advertising, printing, and payments to underwriters and
broker-dealers pursuant to the Class I and Class II plans, respectively, of
which the Fund paid Distributors $268,706 and $6,189 under the Class I and Class
II plans. For the fiscal year ended September 30, 1997, for Income Series,
Distributors had eligible expenditures of $11,722,297 and $5,099,630 for
advertising, printing, and payments to underwriters and broker-dealers pursuant
to the Class I and Class II plans, respectively, of which the Fund paid
Distributors $10,187,627 and $2,962,518 under the Class I and Class II plans.
For the fiscal year ended September 30, 1997, for U.S. Government Securities
Series, Distributors had eligible expenditures of $8,778,798 and $723,673 for
advertising, printing, and payments to underwriters and broker-dealers pursuant
to the Class I and Class II plans, respectively, of which the Fund paid
Distributors $6,493,142 and $419,597 under the Class I and Class II plans.
HOW DOES THE FUND
MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an indication
of the return to shareholders only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below that
would equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes the maximum front-end sales charge is deducted
from the initial $1,000 purchase, and income dividends and capital gain
distributions are reinvested at Net Asset Value. The quotation assumes the
account was completely redeemed at the end of each period and the deduction of
all applicable charges and fees. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum front-end sales charge currently in effect.
The average annual total return for Class I for the one-, five- and ten-year
periods ended September 30, 1997 was as follows:
ONE-YEAR FIVE-YEAR TEN-YEAR
CLASS I PERIOD PERIOD PERIOD
Growth Series 15.38% 15.59% 12.35%
DynaTech Series 29.53% 17.87% 13.04%
Utilities Series 8.91% 6.80% 9.51%
Income Series 12.43% 10.49% 11.31%
U.S. Government
Securities Series 5 .38% 5.63% 8.42%
The average annual total return for Class II for the one-year period ended
September 30, 1997, and for the period from inception to September 30, 1997, was
as follows:
ONE-YEAR FROM
CLASS II PERIOD INCEPTION
Growth Series 17.71% 21.99%*
DynaTech Series 32.01% 33.99%**
Utilities Series 10.92% 12.63%*
Income Series 14.73% 13.86%*
U.S. Government
Securities Series 7.36% 7.71%*
*Inception date: May 1, 1995
**Inception date: September 16, 1996
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000 T = average annual total return n =
number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above. The cumulative total return for Class I for the one-,
five- and ten-year periods ended September 30, 1997 was as follows:
ONE-YEAR FIVE-YEAR TEN-YEAR
CLASS I PERIOD PERIOD PERIOD
Growth Series 15.38% 106.38% 220.32%
DynaTech Series 29.53% 127.50% 240.74%
Utilities Series 8.91% 38.94% 9.51%
Income Series 12.43% 64.88% 192.06%
U.S. Government
Securities
Series 5.38% 31.48% 124.34%
The cumulative total return for Class II for the one-year period ended September
30, 1997, and for the period from inception to September 30, 1997 was as
follows:
ONE-YEAR FROM
CLASS II PERIOD INCEPTION
- ---------------------------------------------------------------
Growth Series 17.71% 61.69%*
DynaTech Series 32.01% 35.47%**
Utilities Series 10.92% 33.31%*
Income Series 14.73% 36.86%*
U.S. Government
Securities Series 7.36% 19.66%*
*Inception date: May 1, 1995
**Inception date: September 16, 1996
YIELD
CURRENT YIELD. Current yield of each class shows the income per share earned by
the Fund. It is calculated by dividing the net investment income per share of
each class earned during a 30-day base period by the applicable maximum Offering
Price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders of
the class during the base period. The yield for each class for the 30-day period
ended September 30, 1997, was as follows:
30-DAY
CLASS I YIELD
Utilities Series 4.73%
Income Series 6.45%
U.S. Government
Securities Series 6.36%
CLASS II
Utilities Series 4.36%
Income Series 6.16%
U.S. Government
Securities Series 6.04%
These figures were obtained using the following SEC formula:
Yield = 2 [(A-B + 1)6 - 1]
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders.
Amounts paid to shareholders are reflected in the quoted current distribution
rate. The current distribution rate is usually computed by annualizing the
dividends paid per share by a class during a certain period and dividing that
amount by the current maximum Offering Price. The current distribution rate
differs from the current yield computation because it may include distributions
to shareholders from sources other than dividends and interest, such as premium
income from option writing and short-term capital gains, and is calculated over
a different period of time. The current distribution rate for each class for the
30-day period ended September 30, 1997, was as follows:
CURRENT
DISTRIBUTION
CLASS I RATE
Utilities Series 5.00%
Income Series 6.92%
U.S. Government
Securities Series 6.50%
CLASS II
Utilities Series 5.00%
Income Series 6.69%
U.S. Government
Securities Series 6.19%
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
h) Financial publications: The Wall Street Journal, and Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Standard & Poor's(R) 100 Stock Index - an unmanaged index based on the prices
of 100 blue-chip stocks, including 92 industrials, one utility, two
transportation companies, and 5 financial institutions. The S&P 100 Stock Index
is a smaller more flexible index for options trading.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk-adjusted performance of a fund over specified
time periods relative to other funds within its category.
In addition to the indices listed above, the following specific comparisons may
be appropriate:
Utilities Series may be compared to Moody's Utilities Stock Index, an unmanaged
index of utility stock performance.
DynaTech Series may be compared to:
a) Hambrecht & Quist Technology Index - an unmanaged index of technology-based
companies published by Hambrecht & Quist.
b) Pacific Stock Exchange Technology Index - an unmanaged index representing a
wide variety of technology-based companies ranging from established companies to
emerging growth companies.
c) Over-the-Counter (OTC) Composite Stock Index - an unmanaged index of stock
performance of all stocks listed in the OTC market.
Income Series and U.S. Government Securities Series may be compared to:
a) Salomon Brothers Broad Bond Index or its component indices - measures yield,
price and total return for Treasury, agency, corporate and mortgage bonds.
b) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
c) Standard & Poor's(R) Bond Indices - measures yield and price of corporate,
municipal and government bonds.
d) Other taxable investments including certificates of deposit (CDs), money
market deposit accounts (MMDAs), checking accounts, savings accounts, money
market mutual funds and repurchase agreements.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
1. Franklin pioneered the concept of Ginnie Mae funds, and U.S. Government
Securities Series, with over $9.4 billion in assets and more than 390,000
shareholders as of September 30, 1997, is one of the largest Ginnie Mae funds in
the U.S. and the world. Shareholders in this Fund, which has a history of solid
performance, range from individual investors with a few thousand dollars to
institutions that have invested millions of dollars.
The U.S. Government Securities Series offers investors the opportunity to invest
in GNMAs, which are among the highest yielding U.S. government securities on the
market.
2. Advertisements or information may also compare the Fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares that are based upon
the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
3. Utilities Series has paid uninterrupted dividends for the past 48 years. Over
the life of Utilities Series, dividends have increased in 29 of the last 48
years. Historically, equity securities of utility companies have paid a higher
level of dividends than that paid by the general stock market. Utilities Series,
well established for over 40 years, is the oldest mutual fund in the U.S.
investing in securities issued by public utility companies, primarily in the
country's fast growing regions, and the Fund has been continuously managed by
the same portfolio manager since 1957.
4. Income Series has paid uninterrupted dividends for the past 48 years.
5. Growth Series offers investors a convenient way to invest in a diversified
portfolio focusing on companies with long-term growth prospects.
6. Growth Series made the 1990, 1991 and 1996 Forbes Mutual Fund Honor Roll for
its performance in both up and down markets.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years and
now services more than 2.9 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $216 billion in assets under
management for more than 5.9 million U.S. based mutual fund shareholder and
other accounts. The Franklin Templeton Group of Funds offers 121 U.S. based
open-end investment companies to the public. The Fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment objectives, no two are exactly alike.
As noted in the Prospectus, shares of the Fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment.
As of January 2, 1998, the principal shareholders of the Fund, beneficial or of
record, were as follows:
GROWTH SERIES
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
ADVISOR CLASS
FTTC Trust Services FBO
Vivian J. Palmieri
P.O. Box 7519
San Mateo, CA 94403-7519 119,814.904 10.54%
FTTC Trust Services FBO
Rupert Johnson IRA
P.O. Box 7519
San Mateo, CA 94403-7519 156,272.041 13.75%
FTTC TTEE For ValuSelect
Franklin Templeton
P.O. Box 2438
Rancho Cordova, CA 95741-2438 179,171.631 15.77%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 175,176.159 15.41%
Franklin Templeton
Fund Allocator-
Franklin Templeton Moderate
Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 130,542.295 11.49%
Franklin Templeton
Fund Allocator-
Franklin Templeton Growth Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 136,770.684 12.03%
UTILITIES SERIES
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
ADVISOR CLASS
First Mar & Co.
101 W. Washington St.
P.O. Box 580
Marquette, MI 49855 149,441.469 14.02%
The Washington Trust Company
23 Broad St.
Westerly, RI 02891 172,648.669 16.20%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 381,957.762 35.85%
Franklin Templeton
Fund Allocator-
Franklin Templeton Moderate
Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 82,972.715 7.79%
INCOME SERIES
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
ADVISOR CLASS
FTTC TTEE For ValuSelect
Franklin Templeton
P.O. Box 2438
Rancho Cordova, CA 95741-2438 1,786,249.239 32.13%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 1,562,974.617 28.11%
U.S. GOVERNMENT SECURITIES SERIES
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
ADVISOR CLASS
FTTC Cust for the IRA of
John M. Lane
1840 Elmwood Rd.
Hillsborough, CA 94010-6363 262,740.431 10.53%
CAP & CO
P.O. Box 2887
Wilson, NC 27894-2887 133,067.037 5.33%
Franklin Templeton
Fund Allocator-
Franklin Templeton Conservative
Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 215,704.910 8.64%
Franklin Templeton
Fund Allocator-
Franklin Templeton
Moderate Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 307,624.951 12.33%
U.S. GOVERNMENT SECURITIES SERIES (CONT.)
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
Franklin Templeton
Fund Allocator-
Franklin Templeton Growth Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 383,738.676 15.38%
FTTC TTEE For ValuSelect
Franklin Templeton
P.O. Box 2438
Rancho Cordova, CA 95741-2438 239,159.442 9.58%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 433,490.892 17.37%
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations must be sent to a compliance
officer and, within 10 days after the end of each calendar quarter, a report of
all securities transactions must be provided to the compliance officer; and
(iii) access perons involved in preparing and making investment decisions must,
in addition to (i) and (ii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of Custodian Funds, for the fiscal year ended September 30, 1997, including the
auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., investment manager of the Funds, except
Growth Series
BOARD - The Board of Directors of Custodian Funds
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - Each Fund, except DynaTech Series offers
three classes of shares, designated "Class I", "Class II" and "Advisor Class."
The three classes have proportionate interests in the Fund's portfolio. They
differ, however, primarily in their sales charge and expense structures.
DynaTech Series offers two classes of shares, designated "Class I" and "Class
II." The two classes have proportionate interests in the Fund's portfolio. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTMENT ADVISORY - Franklin Investment Advisory Services, Inc., Growth
Series' investment manager
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge for the Growth and DynaTech Series is 4.50% for Class I
and 1% for Class II. The maximum front-end sales charge for the Utilities
Series, Income Series, and U.S. Government Securities Series is 4.25% for Class
I and 1% for Class II.
PROSPECTUS - The prospectus for the Funds' Class I and Class II shares dated
February 1, 1998, as may be amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
FRANKLIN CUSTODIAN FUNDS, INC.-
ADVISOR CLASS
STATEMENT OF
ADDITIONAL INFORMATION
FEBRUARY 1, 1998
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How Does the Fund Invest Its Assets? ...................................2
Investment Restrictions ................................................5
Officers and Directors .................................................7
Investment Management and Other Services .............................10
How Does the Fund Buy Securities for Its Portfolio? ..................11
How Do I Buy, Sell and Exchange Shares?................................12
How Are Fund Shares Valued? ...........................................14
Additional Information on Distributions and Taxes ....................15
The Fund's Underwriter.................................................20
How Does the Fund Measure Performance?................................21
Miscellaneous Information .............................................24
Financial Statements ..................................................26
Useful Terms and Definitions ..........................................26
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
- ------------------------------------------------------------------------------
The Franklin Custodian Funds, Inc. ("Custodian Funds") is an open-end management
investment company consisting of five separate series. This SAI describes the
four series (individually or collectively referred to as the "Fund(s)") of
Custodian Funds offering Advisor Class shares.
Growth Series - Advisor Class
Utilities Series - Advisor Class
Income Series - Advisor Class
U.S. Government Securities Series - Advisor Class
Growth Series' investment objective is capital appreciation. Growth Series seeks
to achieve its objective by investing primarily in common stocks or convertible
securities believed to offer favorable possibilities for capital appreciation,
some of which may yield little or no current income. Current income is only a
secondary consideration when selecting portfolio securities. Utilities Series
investment objectives are both capital appreciation and current income.
Utilities Series seeks to achieve its investment objectives by investing
primarily in common stocks, including, from time to time, non-dividend paying
common stocks if, in the opinion of Advisers, these securities appear to offer
attractive opportunities for capital appreciation. Utilities Series may also
invest in preferred stocks and bonds; at least 65% of the Fundis investments
will be in securities of issuers engaged in the public utilities industry.
Income Series investment objective is to maximize income while maintaining
prospects for capital appreciation. Income Series invests in a diversified
portfolio of securities selected with particular consideration of current income
production. U.S. Government Securities Series investment objective is income.
U.S. Government Securities Series seeks to achieve its objective by investing in
a portfolio limited to securities that are obligations of the U.S.
government or its instrumentalities.
The Prospectus, dated February 1, 1998, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
- -------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Funds may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How Does the Fund Invest Its Assets?"
OPTION TRANSACTIONS. Subject to the investment restrictions noted below, the
Fund may write covered call options which trade on national securities
exchanges. Call options written by the Fund give the holder the right to buy the
underlying securities from the Fund at a stated exercise price. A call option is
"covered" if the option writer owns the underlying security which is subject to
the call or a call on the same security where the exercise price of the call
held is equal to or less than the exercise price of the call written.
The writer of an option receives a premium from the buyer, and retains the
premium whether or not the option expires unexercised. The premium paid by the
purchaser of an option will reflect, among other things, the relationship of the
exercise price to the market price and volatility of the underlying security,
the remaining term of the option, supply and demand and interest rates. If a
call option is exercised, the writer also experiences a profit or loss from the
sale of the underlying security. The writer of a call option may have no control
over when the underlying securities must be sold since, with regard to certain
options, the writer may be assigned an exercise notice at any time prior to the
termination of the obligation.
The Fund may terminate its obligation by effecting a "closing purchase
transaction." This is accomplished by buying an option identical to the option
previously written. However, a writer may not effect a closing purchase
transaction after being notified of the exercise of an option. There is no
guarantee that a closing purchase will be available to be effected at the time
desired by the Fund. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option; the Fund
will realize a loss from a closing transaction if the price of the transaction
is more than the premium received from writing the option. Because increases in
the market price of a call option will generally reflect increases in the market
price of the underlying security, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Fund until the time of repurchase. Thereafter,
the Fund bears the risk of the security's rise or fall in market value unless it
sells the security.
The Fund's manager does not currently intend to write options which would cause
the market value of any Fund's open options to exceed 5% of the Fund's total net
assets. There is no specific limitation on the Fund's ability to write covered
call options. However, as a practical matter, the Fund's option writing
activities may be limited by federal regulations. As of the fiscal year ended
September 30, 1997, there were no open options transactions in any Fund. U.S.
Government Securities Series does not presently engage in option transactions,
as discussed in investment restriction 10, below.
ENHANCED CONVERTIBLE SECURITIES. The Fund, other than the U.S. Government
Securities Series, may invest in convertible preferred stocks that offer
enhanced yield features, such as Preferred Equity Redemption Cumulative Stocks
("PERCS"), which provide an investor, such as the Fund, with the opportunity to
earn higher dividend income than is available on a company's common stock. PERCS
are preferred stocks that generally feature a mandatory conversion date, as well
as a capital appreciation limit which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, after three
years PERCS convert into one share of the issuer's common stock if the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, and into less than one full share if the issuer's common stock is trading
at a price above that set by the capital appreciation limit. The amount of that
fractional share of common stock is determined by dividing the price set by the
capital appreciation limit by the market price of the issuer's common stock.
PERCS can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The Fund may also invest in other classes of enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities) and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted;
unlike PERCS, they do not have a capital appreciation limit; they seek to
provide the investor with high current income with some prospect of future
capital appreciation; they are typically issued with three- or four-year
maturities; they typically have some built-in call protection for the first two
to three years; investors have the right to convert them into shares of common
stock at a preset conversion ratio or hold them until maturity, and upon
maturity they will necessarily convert into either cash or a specified number of
shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked as
senior or subordinated debt in the issuer's corporate structure according to the
terms of the debt indenture. There may be additional types of convertible
securities not specifically referred to herein which may be also similar to
those described in which a Fund may invest, consistent with its objectives and
policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Fund. The Fund may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the creditworthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the Fund's portfolio. The Fund, however, intends
to acquire liquid securities, though there can be no assurances that this will
be achieved. U.S. Government Securities Series does not invest in convertible
preferred stocks.
LOAN PARTICIPATIONS. Income Series may invest up to 5% of its total assets (at
the time of investment) in loan participations, all of which may have
speculative characteristics. Income Series may purchase loan participations at
par or which sell at a discount because of the borrower's credit problems. To
the extent the borrower's credit problems are resolved, the loan participation
may appreciate in value but not beyond par value.
The investment manager may acquire loan participations for Income Series from
time to time when it believes the investments offer the possibility of long-term
appreciation in value. An investment in loan participations carries a high
degree of risk and may have the consequence that interest payments with respect
to such securities may be reduced, deferred, suspended or eliminated and may
have the further consequence that principal payments may likewise be reduced,
deferred, suspended or canceled, causing the loss of the entire amount of the
investment. Loans will generally be acquired by Income Series from a bank,
finance company or other similar financial services entity ("Lender").
Loan participations are interests in floating or variable rate senior loans
("Loans") to U.S. corporations, partnerships and other entities ("Borrowers")
which operate in a variety of industries and geographical regions. Loans in
which Income Series will purchase participation interests may pay interest at
rates which are periodically redetermined on the basis of a base lending rate
plus a premium. These base lending rates are generally the Prime Rate offered by
a major U.S. bank, the London Inter-Bank Offered Rate, the CD rate or other base
lending rates used by commercial lenders. The Loans typically have the most
senior position in a Borrower's capital structure, although some Loans may hold
an equal ranking with other senior securities of the Borrower. Although the
Loans generally are secured by specific collateral, Income Series may invest in
Loans which are not secured by any collateral. Uncollateralized Loans pose a
greater risk of nonpayment of interest or loss of principal than do
collateralized Loans. The collateral underlying a collateralized Loan may
consist of assets that may not be readily liquidated, and there is no assurance
that the liquidation of such assets would satisfy fully a Borrower's obligations
under a Loan. Income Series is not subject to any restrictions with respect to
the maturity of the Loans in which it purchases participation interests.
The Loans generally are not rated by nationally recognized statistical rating
organizations. Ratings of other securities issued by a Borrower do not
necessarily reflect adequately the relative quality of a Borrower's Loans.
Therefore, although the investment manager may consider such ratings in
determining whether to invest in a particular Loan, such ratings will not be the
determinative factor in the investment manager's analysis.
The Loans are not readily marketable and may be subject to restrictions on
resale. Participation interests in the Loans generally are not listed on any
national securities exchange or automated quotation system and no regular market
has developed for such interests. Any secondary purchases and sales of loan
participations generally are conducted in private transactions between buyers
and sellers. Many of the Loans in which Income Series expects to purchase
interests are of a relatively large principal amount and are held by a
relatively large number of owners which, in the investment manager's opinion,
should enhance the relative liquidity of such interests.
When acquiring a loan participation, Income Series will have a contractual
relationship only with the Lender (typically an entity in the banking, finance
or financial services industries), not with the Borrower. Income Series has the
right to receive payments of principal and interest to which it is entitled only
from the Lender selling the loan participation and only upon receipt by such
Lender of such payments from the Borrower. In connection with purchasing loan
participations, Income Series generally will have no right to enforce compliance
by the Borrower with the terms of the Loan Agreement, nor any rights with
respect to any funds acquired by other Lenders through set-off against the
Borrower, and the Fund may not directly benefit from the collateral supporting
the Loan in which it has purchased the loan participation. As a result, Income
Series may assume the credit risk of both the Borrower and the Lender selling
the loan participation. In the event of the insolvency of the Lender selling a
loan participation, Income Series may be treated as a general creditor of such
Lender, and may not benefit from any set-off between such Lender and the
Borrower.
GNMA CERTIFICATES. Securities of the type to be included in U.S. Government
Securities Series portfolio have historically involved little risk to principal
if held to maturity. However, due to fluctuations in interest rates, the market
value of such securities may vary during the period of a shareholder's
investment in the Fund. The U.S. government has never defaulted and never
delayed payments of interest or principal on its obligations, however, this does
not guarantee the value of a shareholder's investment in U.S. Government
Securities Series.
WHEN-ISSUED, DELAYED DELIVERY AND TO-BE-ANNOUNCED ("TBA") TRANSACTIONS. Income
Series may purchase debt obligations and U.S. Government Series may purchase and
sell GNMA Certificates on a "when-issued," "delayed delivery" or "TBA" basis.
These transactions are arrangements under which either Fund may purchase
securities with payment and delivery scheduled for a future time, generally
within 30 to 60 days. These transactions are subject to market fluctuation and
are subject to the risk that the value or yields at delivery may be more or less
than the purchase price or yields available when the transaction was entered
into. Although both Funds will generally purchase these securities on a
when-issued or TBA basis with the intention of acquiring such securities, they
may sell such securities before the settlement date if it is deemed advisable.
When a Fund is the buyer in such a transaction, it will maintain, in a
segregated account with its custodian bank, cash or high-grade marketable
securities having an aggregate value equal to the amount of such purchase
commitments until payment is made. To the extent the Fund engages in
when-issued, delayed delivery or TBA transactions, it will do so only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objectives and policies, and not for the purpose of investment leverage. In
when-issued, delayed delivery and TBA transactions, the Fund relies on the
seller to complete the transaction. The other party's failure to do so may cause
the Fund to miss a price or yield considered advantageous. Securities purchased
on a when-issued, delayed delivery or TBA basis do not generally earn interest
until their scheduled delivery date. Neither Fund is subject to any percentage
limit on the amount of its assets which may be invested in when-issued, delayed
delivery or TBA purchase obligations.
OTHER POLICIES - As discussed in the Prospectus, the Funds, other than U.S.
Government Securities Series, may enter into repurchase agreements with banks or
government securities dealers recognized by the Federal Reserve Board and which
have been approved by the Board, who agree to repurchase the securities at a
predetermined price within a specified time (normally one day to one week). In
these transactions, the securities purchased by the Fund have an initial total
value in excess of the value of the repurchase agreement and are held by the
Fund's custodian bank until repurchased. Such arrangements permit the Fund to
keep all of its assets at work while retaining flexibility in pursuit of
investments of a longer-term nature. Repurchase agreements of more than one
week's duration are considered to be illiquid. U.S. Government Securities Series
does not engage in repurchase agreements.
There are no restrictions or limitations on investments in obligations of the
U.S. government, or of corporations chartered by Congress as federal government
instrumentalities. The underlying assets may be retained in cash, including cash
equivalents which are Treasury bills, commercial paper and short-term bank
obligations such as certificates of deposit and bankers' acceptances. However,
it is intended that only as much of the underlying assets of each Fund be
retained in cash as is deemed desirable or expedient under then-existing market
conditions.
Each Fund, other than U.S. Government Securities Series, may invest in
securities that cannot be offered to the public for sale without first being
registered under the Securities Act of 1933 ("restricted securities"), or in
other securities which, in the opinion of the Board, may be otherwise illiquid.
Illiquid equity securities will not be purchased if, upon such purchase, such
securities will constitute 5% of the value of the total net assets of the Fund.
As noted in the Prospectus, it is also the policy of each Fund that illiquid
securities may not constitute, at the time of purchase, more than 10% of the
value of the total net assets of the Fund in which they are held. Generally an
"illiquid security" is any security that cannot be disposed of promptly and in
the ordinary course of business at approximately the amount at which the Fund
has valued the instrument. Custodian Funds' Board has authorized the Funds to
invest in restricted securities where such investment is consistent with each
Fund's investment objective and has authorized such securities to be considered
liquid and thus not subject to the foregoing limitation, to the extent the
investment manager determines that there is a liquid institutional or other
market for such securities - for example, restricted securities which may be
freely transferred among qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended, and for which a liquid
institutional market has developed. The Board will review any determination by
the investment manager to treat a restricted security as a liquid security on an
ongoing basis, including the investment manager's assessment of current trading
activity and the availability of reliable price information. In determining
whether a restricted security is properly considered a liquid security, the
investment manager and the Board will take into account the following factors:
(i) the frequency of trades and quotes for the security; (ii) the number of
dealers willing to purchase or sell the security and the number of other
potential purchasers; (iii) dealer undertakings to make a market in the
security; and (iv) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). To the extent a Fund invests
in restricted securities that are deemed liquid, the general level of
illiquidity in the Fund may be increased if qualified institutional buyers
become uninterested in purchasing these securities or the market for these
securities contracts.
WHEN WILL THE FUND ENGAGE IN SECURITIES TRANSACTIONS?
It is intended that portfolio changes in the Growth, Utilities, Income and U.S.
Government Securities Series be made as infrequently as possible, consistent
with market and economic factors generally, and special considerations affecting
any particular security such as the limitation of loss or realization of price
appreciation at a time believed to be opportune. The sale of securities held for
relatively short periods and reinvestment of the proceeds will result in
increased brokerage and transaction costs to the Fund and may involve an
increase in taxes to the shareholders.
The portfolio turnover rates for each Fund are set forth below:
PORTFOLIO TURNOVER
FOR FISCAL YEARS
ENDED SEPTEMBER 30
FUND 1996 1997
- -----------------------------------------------------------
Growth Series ......... 2.03% 1.77%
Utilities Series ...... 17.05% 7.24%
Income Series ......... 25.29% 16.15%
U.S. Government
Securities Series .... 8.01% 1.74%
INVESTMENT RESTRICTIONS
Custodian Funds has adopted the following restrictions as fundamental policies.
These restrictions may not be changed without the approval of a majority of the
outstanding voting securities of Custodian Funds. Under the 1940 Act, this means
the approval of (i) more than 50% of the outstanding shares of Custodian Funds
or (ii) 67% or more of the shares of Custodian Funds present at a shareholder
meeting if more than 50% of the outstanding shares of Custodian Funds are
represented at the meeting in person or by proxy, whichever is less. Custodian
Funds MAY NOT:
1. Borrow money or mortgage or pledge any of the assets of the Fund, except
that borrowings for temporary or emergency purposes may be made in an amount up
to 5% of total asset value.
2. Buy any securities on "margin" or sell any securities "short."
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes, to-be-announced securities or other debt
securities and except that securities of any Fund, other than the U.S.
Government Securities Series, may be loaned to broker-dealers or other
institutional investors as discussed in the Fund's Prospectus under "Loans of
Portfolio Securities." For additional information relating to this policy see
discussions under "Loan Participations" and limitations on illiquid securities
under "Other Policies."
4. Act as underwriter of securities issued by other persons except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Invest more than 5% of the value of the gross assets of a Fund in the
securities of any one issuer, but this limitation does not apply to investments
in securities issued or guaranteed by the U.S. government or its
instrumentalities. (Growth, Income and Utilities Series also have policies that
concentration of investments in a single industry may not exceed 25% of their
assets, except that Utilities Series will concentrate its investments in the
utilities industry.)
6. Purchase the securities of any issuer which would result in any Fund owning
more than 10% of the outstanding voting securities of an issuer.
7. Purchase from or sell to its officers and directors, or any firm of which
any officer or director is a member, as principal, any securities, but may deal
with such persons or firms as brokers and pay a customary brokerage commission;
retain securities of any issuer if, to the knowledge of the Fund, one or more of
its officers, directors or investment advisor own beneficially more than
one-half of 1% of the securities of such issuer and all such officers and
directors together own beneficially more than 5% of such securities.
8. Purchase any securities issued by a corporation which has not been in
continuous operation for three years, but such period may include the operation
of a predecessor.
9. Acquire, lease or hold real estate except such as may be necessary or
advisable for the maintenance of its offices.
10. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas or other mineral
exploration or development programs. The Fund may, however, write covered call
options listed for trading on a national securities exchange and purchase call
options to the extent necessary to cancel call options previously written. At
the present, there are no options listed for trading on a national securities
exchange covering the types of securities which are appropriate for investment
by the U.S. Government Securities Series and, therefore, there are no option
transactions available for that Fund.
11. Invest in companies for the purpose of exercising control or management.
12. Purchase securities of other investment companies; except to the extent each
Fund invests its uninvested daily cash balances in shares of the Franklin Money
Fund and other money market funds in the Franklin Templeton Group of Funds
provided (i) its purchases and redemptions of such money market fund shares may
not be subject to any purchase or redemption fees, (ii) its investments may not
be subject to duplication of management fees, nor to any charge related to the
expense of distributing each Fund's shares (as determined under Rule 12b-1, as
amended, under the federal securities laws) and (iii) provided aggregate
investments by a Fund in any such money market fund do not exceed (A) the
greater of (i) 5% of each Fund's total net assets or (ii) $2.5 million, or (B)
more than 3% of the outstanding shares of any such money market fund.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the Fund, the Fund may receive stock, real estate, or other
investments that the Fund would not, or could not, buy. In this case, the Fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND DIRECTORS
The Board has the responsibility for the overall management of Custodian Funds,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of Custodian Funds who are responsible for
administering each Fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of Custodian Funds under the 1940 Act are indicated by an asterisk (*).
...... Positions and Principal Occupation
Name, Age and Offices with the During the Past Five
ADDRESS FUND YEARS
Harris J. Ashton (65) Director
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and
Chairman of the Board, General Host
Corporation (nursery and craft
centers); Director, RBC Holdings, Inc.
(a bank holding company) and Bar-S
Foods (a meat packing company); and
director or trustee, as the case may
be, of 52 of the investment companies
in the Franklin Templeton Group of
Funds.
S. Joseph Fortunato (65) Director
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney,
Hardin, Kipp & Szuch; Director, General
Host Corporation (nursery and craft
centers); and director or trustee, as
the case may be, of 54 of the
investment companies in the Franklin
Templeton Group of Funds.
Edith E. Holiday (45) Director
3239 38th Street, N.W.
Washington, DC 20016
Director (1993-present) of Amerada Hess
Corporation and Hercules Incorporated;
Director of Beverly Enterprises, Inc.
(1995-present) and H.J. Heinz Company
(1994-present; formerly, chairman
(1995-1997) and trustee (1993-1997) of
National Child Research Center;
assistant to the President of the
United States and Secretary of the
Cabinet (1990-1993), general counsel to
the United States Treasury Department
(1989-1990) and counselor to the
Secretary and Assistant Secretary for
Public Affairs and Public
Liaison-United States Treasury
Department (1988-1989); and trustee or
director of 24 of the investment
companies in the Franklin Templeton
Group of Funds.
*Charles B. Johnson (65) President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
President, Chief Executive Officer and
Director, Franklin Resources, Inc.;
Chairman of the Board and Director,
Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin
Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor
Services, Inc., Franklin Templeton
Services, Inc. and General Host
Corporation (nursery and craft
centers); and officer and/or director
or trustee, as the case may be, of most
of the other subsidiaries of Franklin
Resources, Inc. and of 53 of the
investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (57) Vice President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
Executive Vice President and Director,
Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President
and Director, Franklin Advisers, Inc.;
Senior Vice President and Director,
Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services,
Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer
and/or director or trustee, as the case
may be, of most of the other
subsidiaries of Franklin Resources,
Inc. and of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
Gordon S. Macklin (69) Director
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation
(financial services); Director, Fund
American Enterprises Holdings, Inc.,
MCI Communications Corporation, CCC
Information Services Group, Inc.
(information services), MedImmune, Inc.
(biotechnology), Shoppers Express (home
shopping), and Spacehab, Inc.
(aerospace services); and director or
trustee, as the case may be, of 51 of
the investment companies in the
Franklin Templeton Group of Funds;
formerly Chairman, Hambrecht and Quist
Group, Director, H & Q Healthcare
Investors, and President, National
Association of Securities Dealers, Inc.
Harmon E. Burns (52) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President, Secretary and
Director, Franklin Resources, Inc.;
Executive Vice President and Director,
Franklin Templeton Distributors, Inc.
and Franklin Templeton Services, Inc.;
Executive Vice President, Franklin
Advisers, Inc.; Director,
Franklin/Templeton Investor Services,
Inc.; and officer and/or director or
trustee, as the case may be, of most of
the other subsidiaries of Franklin
Resources, Inc. and of 57 of the
investment companies in the Franklin
Templeton Group of Funds.
Martin L. Flanagan (37) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President and Chief
Financial Officer, Franklin Resources,
Inc.; Executive Vice President and
Director, Templeton Worldwide, Inc.;
Executive Vice President, Chief
Operating Officer and Director,
Templeton Investment Counsel, Inc.;
Senior Vice President and Treasurer,
Franklin Advisers, Inc.; Treasurer,
Franklin Advisory Services, Inc.;
Treasurer and Chief Financial Officer,
Franklin Investment Advisory Services,
Inc.; President, Franklin Templeton
Services, Inc.; Senior Vice President,
Franklin/Templeton Investor Services,
Inc.; and officer and/or director or
trustee, as the case may be, of 57 of
the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (49) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and General
Counsel, Franklin Resources, Inc.;
Senior Vice President, Franklin
Templeton Services, Inc. and Franklin
Templeton Distributors, Inc.; Vice
President, Franklin Advisers, Inc. and
Franklin Advisory Services, Inc.; Vice
President, Chief Legal Officer and
Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and
officer of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
Diomedes Loo-Tam (58) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting Officer
Senior Vice President, Franklin
Templeton Services, Inc.; and officer
of 34 of the investment companies in
the Franklin Templeton Group of Funds.
Brian E. Lorenz (58) Secretary
One North Lexington Avenue
White Plains, NY 10001-1700
Attorney, member of the law firm of
Bleakley Platt & Schmidt; and officer
of three of the investment companies in
the Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors, Advisers and Investment Advisory. Nonaffiliated members of the
Board are currently paid $1,350 per month plus $1,300 per meeting attended. As
shown above, the nonaffiliated Board members also serve as directors or trustees
of other investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The following table provides
the total fees paid to nonaffiliated Board members by Custodian Funds and by
other funds in the Franklin Templeton Group of Funds.
NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
TOTAL FEES RECEIVED FROM THE TEMPLETON GROUP
RECEIVED FROM FRANKLIN TEMPLETON OF FUNDS ON WHICH
NAME THE FUND* GROUP OF FUNDS* EACH SERVES***
----------------------------------------------------------------------
Harris J. Ashton ......... $30,500 $344,642 53
S. Joseph Fortunato ...... 30,500 361,562 55
Edith Holiday ............ -0- 72,875 24
Gordon S. Macklin ........ 30,500 337,292 50
*For the fiscal year ended September 30, 1997.
**For the calendar year ended December 31, 1997.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 59 registered investment companies, with approximately 172 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or trustee.
No officer or Board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the Fund or other funds in the
Franklin Templeton Group of Funds. Certain officers or Board members who are
shareholders of Resources may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
During the fiscal year ended September 30, 1997, legal fees and expenses of
$74,098 were paid to the law firm of which Mr. Lorenz, an officer of Custodian
Funds, is a partner, and which acts as counsel to the Fund.
As of January 2, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately
4,428.423 shares of Growth Series - Class I, 4,094.172 shares of Growth Series -
Advisor Class, 102.460 shares of Utilities Series - Class I, 13,603.842 shares
of DynaTech Series - Class I, 439.436 shares of Income Series - Class I,
12,633.274 shares of Income Series - Advisor Class, 48,364.879 shares of U.S.
Government Securities Series Class I and 9,716.923 shares of U.S. Government
Securities Series - Advisor Class, or less than 1% of the total outstanding
Class I and Advisor Class shares of each Fund and 29,290.179 shares of Utilities
Series - Advisor Class, or less than 3% of the total outstanding Advisor Class
shares of Utilities Series. Many of the Board members also own shares in other
funds in the Franklin Templeton Group of Funds. Charles B. Johnson and Rupert H.
Johnson, Jr. are brothers.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Manager and Services Provided. Advisers is the investment manager of
the Funds, except for Growth Series. Growth Series' investment manager is
Investment Advisory. The investment manager provides investment research and
portfolio management services, including the selection of securities for the
Fund to buy, hold or sell and the selection of brokers through whom the Fund's
portfolio transactions are executed. The investment manager's activities are
subject to the review and supervision of the Board to whom the investment
manager renders periodic reports of the Fund's investment activities. Each
investment manager and its officers, directors and employees are covered by
fidelity insurance for the protection of the Funds.
The investment managers and their affiliates act as investment manager to
numerous other investment companies and accounts. The investment manager may
give advice and take action with respect to any of the other funds it manages,
or for its own account, that may differ from action taken by the investment
manager on behalf of the Fund. Similarly, with respect to the Fund, the
investment manager is not obligated to recommend, buy or sell, or to refrain
from recommending, buying or selling any security that investment manager and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. The investment manager is not
obligated to refrain from investing in securities held by the Fund or other
funds that it manages. Of course, any transactions for the accounts of the
investment manager and other access persons will be made in compliance with the
Fund's Code of Ethics. Please see "Miscellaneous Information - Summary of Code
of Ethics."
MANAGEMENT FEES. Under its management agreement, each Fund pays the investment
manager a management fee equal to a monthly rate of 5/96 of 1% of the value of
net assets up to and including $100 million; and 1/24 of 1% of the value of net
assets over $100 million and not over $250,000,000; and 9/240 of 1% of the value
of net assets over $250 million and not over $10 billion; and 11/300 of 1% of
the value of net assets over $10 billion and not over $12.5 billion; and 7/200
of 1% of the value of net assets over $12.5 billion and not over $15 billion;
and 1/30 of 1% of the value of net assets over $15 billion and not over $17.5
billion; and 19/100 of 1% of the value of net assets over $17.5 billion and not
over $20 billion; and 3/100 of 1% of the value of net assets in excess of $20
billion. The fee is computed at the close of business on the last business day
of each month. Each class pays its proportionate share of the management fee.
For the fiscal years ended September 30, 1995, 1996 and 1997, management fees
paid to the investment manager were as follows:
FUND 1995 1996 1997
Growth Series ....................$ 2,969,094 $ 4,329,460 $ 6,295,304
Utilities Series ................. 12,223,592 12,335,820 9,987,693
Income Series..................... 23,887,430 30,075,76 35,364,027
U.S. Government Securities Series 0,269,876 48,138,799 44,411,776
MANAGEMENT AGREEMENT. The management agreement for each Fund is in effect until
January 31, 1999. Each may continue in effect for successive annual periods if
its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of Custodian Funds' outstanding
voting securities, and in either event by a majority vote of the Board members
who are not parties to the management agreement or interested persons of any
such party (other than as members of the Board), cast in person at a meeting
called for that purpose. Each management agreement may be terminated without
penalty at any time by the Board or by a vote of the holders of a majority of
Custodian Funds' outstanding voting securities on 30 days' written notice to the
investment manager, or by the investment manager on 30 days' written notice to
Custodian Funds, and will automatically terminate in the event of its
assignment, as defined in the 1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with the investment manager, FT
Services provides certain administrative services and facilities for Custodian
Funds. These include preparing and maintaining books, records, and tax and
financial reports, and monitoring compliance with regulatory requirements. FT
Services is a wholly owned subsidiary of Resources.
Under its administration agreement, the investment manager pays FT Services a
monthly administration fee equal to an annual rate of 0.15% of the Fund's
average daily net assets up to $200 million, 0.135% of average daily net assets
over $200 million up to $700 million, 0.10% of average daily net assets over
$700 million up to $1.2 billion, and 0.075% of average daily net assets over
$1.2 billion. The fee is paid by the investment manager. It is not a separate
expense of the Fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is Custodian Funds' shareholder servicing agent and acts as the
Fund's transfer agent and dividend-paying agent. Investor Services is
compensated on the basis of a fixed fee per account. Custodian Funds may also
reimburse Investor Services for certain out-of-pocket expenses, which may
include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the Fund. The amount of reimbursements
for these services per benefit plan participant Fund account per year may not
exceed the per account fee payable by Custodian Funds to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
Custodian Funds. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are Custodian Funds' independent auditors. During the fiscal year ended
September 30, 1997, their auditing services consisted of rendering an opinion on
the financial statements of Custodian Funds included in Custodian Funds' Annual
Report to Shareholders for the fiscal year ended September 30, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
The investment manager selects brokers and dealers to execute the Fund's
portfolio transactions in accordance with criteria set forth in the management
agreement and any directions that the Board may give.
When placing a portfolio transaction, the investment manager seeks to obtain
prompt execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid by the Fund
is negotiated between the investment manager and the broker executing the
transaction. The determination and evaluation of the reasonableness of the
brokerage commissions paid are based to a large degree on the professional
opinions of the persons responsible for placement and review of the
transactions. These opinions are based on the experience of these individuals in
the securities industry and information available to them about the level of
commissions being paid by other institutional investors of comparable size. The
investment manager will ordinarily place orders to buy and sell over-the-counter
securities on a principal rather than agency basis with a principal market maker
unless, in the opinion of the investment manager, a better price and execution
can otherwise be obtained. Purchases of portfolio securities from underwriters
will include a commission or concession paid by the issuer to the underwriter,
and purchases from dealers will include a spread between the bid and ask price.
The investment manager may pay certain brokers commissions that are higher than
those another broker may charge, if the investment manager determines in good
faith that the amount paid is reasonable in relation to the value of the
brokerage and research services it receives. This may be viewed in terms of
either the particular transaction or the investment manager's overall
responsibilities to client accounts over which it exercises investment
discretion. The services that brokers may provide to the investment manager
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to the investment
manager in carrying out its investment advisory responsibilities. These services
may not always directly benefit the Fund. They must, however, be of value to the
investment manager in carrying out its overall responsibilities to its clients.
Since most purchases by U.S. Government Securities Series are principal
transactions at net prices, U.S. Government Securities Series incurs little or
no brokerage costs. The Fund deals directly with the selling or buying principal
or market maker without incurring charges for the services of a broker on its
behalf, unless it is determined that a better price or execution may be obtained
by using the services of a broker. Purchases of portfolio securities from
underwriters will include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers will include a spread between the bid
and ask prices. The Fund seeks to obtain prompt execution of orders at the most
favorable net price. Transactions may be directed to dealers in return for
research and statistical information, as well as for special services provided
by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services the investment manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order to
obtain additional research services permits the investment manager to supplement
its own research and analysis activities and to receive the views and
information of individuals and research staffs of other securities firms. As
long as it is lawful and appropriate to do so, the investment manager and its
affiliates may use this research and data in their investment advisory
capacities with other clients. If the Fund's officers are satisfied that the
best execution is obtained, the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, may also be considered a factor
in the selection of broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the investment manager will be reduced by the amount of any fees
received by Distributors in cash, less any costs and expenses incurred in
connection with the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by the investment manager are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to all
by the investment manager, taking into account the respective sizes of the funds
and the amount of securities to be purchased or sold. In some cases this
procedure could have a detrimental effect on the price or volume of the security
so far as the Fund is concerned. In other cases it is possible that the ability
to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.
During the fiscal years ended September 30, 1995, 1996 and 1997, the Fund paid
brokerage commissions as follows:
FUND 1995 1996 1997
---------------------------------------------------------------------
Growth Series..................... $50,102 $ 105,528 $ 78,178
Utilities Series.................. 11,850 1,525,621 1,146,668
Income Series..................... 895,111 1,220,342 848,922
U.S. Government Securities
Series............................ -0- -0- -0-
As of September 30, 1997, the Fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
Custodian Funds continuously offers its shares through Securities Dealers who
have an agreement with Distributors. Securities laws of states where Custodian
Fund offers its shares may differ from federal law. Banks and financial
institutions that sell shares of the Funds may be required by state law to
register as Securities Dealers.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors and/or its affiliates provide
financial support to various Securities Dealers that sell shares of the Franklin
Templeton Group of Funds. This support is based primarily on the amount of sales
of fund shares. The amount of support may be affected by: total sales; net
sales; levels of redemptions; the proportion of a Securities Dealer's sales and
marketing efforts in the Franklin Templeton Group of Funds; a Securities
Dealer's support of, and participation in, Distributors' marketing programs; a
Securities Dealer's compensation programs for its registered representatives;
and the extent of a Securities Dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to Securities Dealers may
be made by payments from Distributors' resources, from Distributors' retention
of underwriting concessions and, in the case of funds that have Rule 12b-1
plans, from payments to Distributors under such plans. In addition, certain
Securities Dealers may receive brokerage commissions generated by fund portfolio
transactions in accordance with the NASD's rules.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objectives exist
immediately. This money will then be withdrawn from the short-term, money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the 25th day of the month in which a payment is scheduled. If the 25th falls
on a weekend or holiday, we will process the redemption on the next business
day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions that
maintain omnibus accounts with the Fund on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee that the Fund normally pays
Investor Services. These financial institutions may also charge a fee for their
services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the close of the NYSE, normally
1:00 p.m. Pacific time, each day that the NYSE is open for trading. As of the
date of this SAI, the Fund is informed that the NYSE observes the following
holidays: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by the investment manager.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the close of trading on the
NYSE, if that is earlier. The value is then converted into its U.S. dollar
equivalent at the foreign exchange rate in effect at noon, New York time, on the
day the value of the foreign security is determined. If no sale is reported at
that time, the foreign security is valued within the range of the most recent
quoted bid and ask prices. Occasionally events that affect the values of foreign
securities and foreign exchange rates may occur between the times at which they
are determined and the close of the exchange and will, therefore, not be
reflected in the computation of the Net Asset Value. If events materially
affecting the values of these foreign securities occur during this period, the
securities will be valued at their fair value as determined by the investment
manager and approved in good faith by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the Net
Asset Value is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the Net Asset Value. If events materially affecting the values of
these securities occur during this period, the securities will be valued at
their fair value as determined by the investment manager and approved in good
faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. The Custodian Funds receive income
generally in the form of dividends, interest, original issue, market and
acquisition discount, and other income derived from its investments. This
income, less expenses incurred in the operation of a Fund, constitutes its net
investment income from which dividends may be paid to you. Any distributions by
a Fund from such income will be taxable to you as ordinary income, whether you
take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS. The Custodian Funds may derive capital gains and
losses in connection with sales or other dispositions of its portfolio
securities. Distributions derived from the excess of net short-term capital gain
over net long-term capital loss will be taxable to you as ordinary income.
Distributions paid from long-term capital gains realized by a Fund will be
taxable to you as long-term capital gain, regardless of how long you have held
your shares in a Fund. Any net short-term or long-term capital gains realized by
a Fund (net of any capital loss carryovers) generally will be distributed once
each year, and may be distributed more frequently, if necessary, in order to
reduce or eliminate federal excise or income taxes on a Fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Custodian Funds are
required to report the capital gain distributions paid to you from gains
realized on the sale of portfolio securities using the following categories:
"28% RATE GAINS": gains resulting from securities sold by a Fund after July 28,
1997 that were held for more than one year but not more than 18 months, and
securities sold by a Fund before May 7, 1997 that were held for more than one
year. These gains will be taxable to individual investors at a maximum rate of
28%.
"20% RATE GAINS": gains resulting from securities sold by a Fund after July 28,
1997 that were held for more than 18 months, and under a transitional rule,
securities sold by a Fund between May 7 and July 28, 1997 (inclusive) that were
held for more than one year. These gains will be taxable to individual investors
at a maximum rate of 20% for individual investors in the 28% or higher federal
income tax brackets, and at a maximum rate of 10% for investors in the 15%
federal income tax bracket.
The Act also provides for a new maximum rate of tax on capital gains of 18% for
individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket for "qualified 5-year gains."
For individuals in the 15% bracket, qualified 5-year gains are net gains on
securities held for more than 5 years which are sold after December 31, 2000.
For individuals who are subject to tax at higher rates, qualified 5-year gains
are net gains on securities which are purchased after December 31, 2000 and are
held for more than 5 years. Taxpayers subject to tax at the higher rates may
also make an election for shares held on January 1, 2001 to recognize gain on
their shares in order to qualify such shares as qualified 5-year property.
The Custodian Funds will advise you after the end of each calendar year of the
amount of its capital gain distributions paid during the calendar year that
qualify for these maximum federal tax rates. Additional information on reporting
these distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook. This handbook has been revised to include
1997 Act tax law changes. Questions concerning each investor's personal tax
reporting should be addressed to the investor's personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following year,
will be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. The Custodian Funds will report this
income to you on your Form 1099-DIV for the year in which these distributions
were declared.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by a
Fund. Similarly, you should be aware that any foreign exchange losses realized
by a Fund, on the sale of debt instruments, are generally treated as ordinary
losses by the Fund. These gains when distributed will be taxable to you as
ordinary dividends, and any losses will reduce a Fund's ordinary income
otherwise available for distribution to you. This treatment could increase or
reduce a Fund's ordinary income distributions to you, and may cause some or all
of a Fund's previously distributed income to be classified as a return of
capital.
The 1997 Act also simplifies the procedures by which investors in funds that
invest in foreign securities can claim tax credits on their individual income
tax returns for the foreign taxes paid by a Fund. These provisions will allow
investors who claim a credit for foreign taxes paid of $300 or less on a single
return or $600 or less on a joint return during any year (all of which must be
reported on IRS Form 1099-DIV from a Fund to the investor) to bypass the
burdensome and detailed reporting requirements on the supporting foreign tax
credit schedule (Form 1116) and report foreign taxes paid directly on page 2 of
Form 1040. YOU SHOULD NOTE THAT THIS SIMPLIFIED PROCEDURE WILL NOT BE AVAILABLE
UNTIL CALENDAR YEAR 1998.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The Custodian Funds will
inform you of the amount and character of your distributions at the time they
are paid, and will advise you of the tax status for federal income tax purposes
of such distributions shortly after the close of each calendar year.
Shareholders who have not held Fund shares for a full year may have designated
and distributed to them as ordinary income or capital gain a percentage of
income that is not equal to the actual amount of such income earned during the
period of their investment in a Fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. Each Fund has elected to
be treated as a regulated investment company under Subchapter M of the Code, has
qualified as such for its most recent fiscal year, and intends to so qualify
during the current fiscal year. The Directors reserve the right not to maintain
the qualification of a Fund as a regulated investment company if they determine
such course of action to be beneficial to you. In such case, a Fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of such a Fund's available earnings and profits.
In order to qualify as a regulated investment company for tax purposes, a Fund
must meet certain specific requirements, including:
o A Fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. Government securities and securities of other
regulated investment companies) can exceed 25% of a Fund's total assets, and,
with respect to 50% of a Fund's total assets, no investment (other than cash
and cash items, U.S. Government securities and securities of other regulated
investment companies) can exceed 5% of a Fund's total assets;
o A Fund must derive at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, and gains from the sale or
disposition of stock, securities or foreign currencies, or other income
derived with respect to its business of investing in such stock, securities,
or currencies; and
o A Fund must distribute to its shareholders at least 90% of its net investment
income and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires each Fund to distribute
at least 98% of its taxable ordinary income earned during the calendar year and
98% of the capital gain net income earned during the twelve month period ending
October 31 (in addition to undistributed amounts from the prior year) to you by
December 31 of each year in order to avoid federal excise taxes. Each Fund
intends to declare and pay sufficient dividends in December (or in January that
are treated by you as received in December) but does not guarantee and can give
no assurances that its distributions will be sufficient to eliminate all such
taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of Fund shares are taxable
transactions for federal and state income tax purposes. The tax law requires
that you recognize a gain or loss in an amount equal to the difference between
your tax basis and the amount you received in exchange for your shares, subject
to the rules described below. If you hold your shares as a capital asset, the
gain or loss that you realize will be capital gain or loss, and will be
long-term for federal income tax purposes if you have held your shares for more
than one year at the time of redemption or exchange. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by the Fund on those shares. The holding periods and
categories of capital gain that apply under the 1997 Act are described above the
"Distributions" section.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you purchase other shares in such
Fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis in the new shares you purchase.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for your
shares in a Fund will be excluded from your tax basis in any of the shares sold
within 90 days of their purchase (for the purpose of determining gain or loss
upon the sale of such shares) if you reinvest the sales proceeds in such Fund or
in another Fund in the Franklin Templeton Group of Funds, and the sales charge
that would otherwise apply to your reinvestment is reduced or eliminated because
of your reinvestment with Franklin Templeton. The portion of the sales charge
excluded from your tax basis in the shares sold will equal the amount that the
sales charge is reduced on your reinvestment. Any portion of the sales charge
excluded from your tax basis in the shares sold will be added to the tax basis
of the shares you acquire from your reinvestment in another Franklin Templeton
fund.
U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. Government,
subject in some states to minimum investment requirements that must be met by a
Fund. Investments by the U.S. Government Securities Series or other Fund in
GNMA/FNMA securities, bankers' acceptances, commercial paper and repurchase
agreements collateralized by U.S. Government securities do not generally qualify
for tax-free treatment. At the end of each calendar year, the Custodian Funds
will provide you with the percentage of any dividends paid that may qualify for
tax-free treatment on your personal income tax return. You should consult with
your own tax advisor to determine the application of your state and local laws
to these distributions. Because the rules on exclusion of this income are
different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of their distributions may be exempt
from corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. As a corporate shareholder, you
should note that, except for the U.S. Government Securities Series, a portion of
the dividends paid by each Fund for the most recent calendar year qualified for
the dividends-received deduction. You will be permitted in some circumstances to
deduct these qualified dividends, thereby reducing the tax that you would
otherwise be required to pay on these dividends. The dividends-received
deduction will be available with respect to dividends designated by a Fund as
eligible for such treatment. Dividends so designated by a Fund must be
attributable to dividends earned by such Fund from U.S. corporations that were
not debt financed.
Under the 1997 Act, the amount that a Fund may designate as eligible for the
dividends-received deduction will be reduced or eliminated if the shares on
which the dividends were earned by such Fund were debt-financed or held by such
Fund for less than a 46 day period during a 90 day period beginning 45 days
before the ex-dividend date of the corporate stock. Similarly, if your Fund
shares are debt-financed or held by you for less than this same 46 day period,
then the dividends-received deduction may also be reduced or eliminated. Even if
designated as dividends eligible for the dividends-received deduction, all
dividends (including the deducted portion) must be included in your alternative
minimum taxable income calculation.
No portion of the distributions from the U.S. Government Securities Series will
qualify for the corporate dividends-received deduction.
INVESTMENT IN COMPLEX SECURITIES. A Fund's investment in options, including
transactions involving actual or deemed short sales or foreign exchange gains or
losses are subject to many complex and special tax rules. Over-the-counter
options on debt securities and equity options, including options on stock and on
narrow-based stock indexes, will be subject to tax under Section 1234 of the
Code, generally producing a long-term or short-term capital gain or loss upon
exercise, lapse, or closing out of the option or sale of the underlying stock or
security. Certain other options entered into by a Fund are generally governed by
Section 1256 of the Code. These "Section 1256" positions generally include
listed options on debt securities, options on broad-based stock indexes, options
on securities indexes, options on futures contracts, regulated futures contracts
and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held by a
Fund will be marked-to-market (i.e., treated as if it were sold for fair market
value) on the last business day of the Fund's fiscal year (and on other dates as
prescribed by the Code), and all gain or loss associated with fiscal year
transactions and mark-to-market positions at fiscal year end (except certain
currency gain or loss covered by Section 988 of the Code) will generally be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. Under legislation pending in technical corrections to the 1997 Act, the
60% long-term capital gain portion will qualify as 20% rate gain and will be
subject to tax to individual investors at a maximum rate of 20% for investors in
the 28% or higher federal income tax brackets, or at a maximum rate of 10% for
investors in the 15% federal income tax bracket. While foreign currency is
marked-to-market at year end, gain or loss realized as a result will always be
ordinary. Even though marked-to-market, gains and losses realized on foreign
currency and foreign security investments will generally be treated as ordinary
income. The effect of Section 1256 mark-to-market rules may be to accelerate
income or to convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-capital losses
within a Fund. The acceleration of income on Section 1256 positions may require
a Fund to accrue taxable income without the corresponding receipt of cash. In
order to generate cash to satisfy the distribution requirements of the Code, a
Fund may be required to dispose of portfolio securities that it otherwise would
have continued to hold or to use cash flows from other sources such as the sale
of Fund shares. In these ways, any or all of these rules may affect the amount,
character and timing of income distributed to you by a Fund.
When a Fund holds an option or contract which substantially diminishes such
Fund's risk of loss with respect to another position of such Fund (as might
occur in some hedging transactions), this combination of positions could be
treated as a "straddle" for tax purposes, possibly resulting in deferral of
losses, adjustments in the holding periods and conversion of short-term capital
losses into long-term capital losses. A Fund may make certain tax elections for
mixed straddles (i.e., straddles comprised of at least one Section 1256 position
and at least one non-Section 1256 position) which may reduce or eliminate the
operation of these straddle rules.
The 1997 Act has also added new provisions for dealing with transactions that
are generally called "Constructive Sale Transactions." Under these rules, a Fund
must recognize gain (but not loss) on any constructive sale of an appreciated
financial position in stock, a partnership interest or certain debt instruments.
A Fund will generally be treated as making a constructive sale when it: 1)
enters into a short sale on the same property, 2) enters into an offsetting
notional principal contract, or 3) enters into a futures or forward contract to
deliver the same or substantially similar property. Other transactions
(including certain financial instruments called collars) will be treated as
constructive sales as provided in Treasury regulations to be published. There
are also certain exceptions that apply for transactions that are closed before
the end of the 30th day after the close of the taxable year.
Distributions paid to you by a Fund of ordinary income and short-term capital
gains arising from a Fund's investments, including investments in options, will
be taxable to you as ordinary income. The Custodian Funds will monitor their
transactions in such options and contracts and may make certain other tax
elections in order to mitigate the effect of the above rules.
INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. Each Fund, other than
the U.S. Government Securities Series, is authorized to invest in foreign
currency denominated securities. Such investments, if made, will have the
following additional tax consequences:
Under the Code, gains and losses attributable to fluctuations in foreign
currency exchange rates which occur between the time a Fund accrues income
(including dividends), or accrues expenses which are denominated in a foreign
currency, and the time a Fund actually collects such income or pays such
expenses generally are treated as ordinary income or loss. Similarly, on the
disposition of debt securities denominated in a foreign currency and on the
disposition of certain options, gain or loss attributable to fluctuations in the
value of foreign currency between the date of acquisition of the security or
contract and the date of its disposition are also treated as ordinary gain or
loss. These gains or losses, referred to under the Code as "Section 988" gains
or losses, may increase or decrease the amount of a Fund's net investment
company taxable income, which, in turn, will affect the amount of income to be
distributed to you by the Fund.
If a Fund's Section 988 losses exceed such Fund's other net investment company
taxable income during a taxable year, such Fund generally will not be able to
make ordinary dividend distributions to you for that year, or distributions made
before the losses were realized will be recharacterized as return of capital
distributions for federal income tax purposes, rather than as an ordinary
dividend or capital gain distribution. If a distribution is treated as a return
of capital, your tax basis in your Fund shares will be reduced by a like amount
(to the extent of such basis), and any excess of the distribution over your tax
basis in your Fund shares will be treated as capital gain to you.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES. Each Fund, other
than the U.S. Government Securities Series, may invest in shares of foreign
corporation which may be classified under the Code as passive foreign investment
companies ("PFICs"). In general, a foreign corporation is classified as a PFIC
if at least one-half of its assets constitute investment-type assets or 75% or
more of its gross income is investment-type income.
If a Fund receives an "excess distribution" with respect to PFIC stock, such
Fund itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by such
Fund to you. In general, under the PFIC rules, an excess distribution is treated
as having been realized ratably over the period during which a Fund held the
PFIC shares. A Fund itself will be subject to tax on the portion, if any, of an
excess distribution that is so allocated to prior Fund taxable years, and an
interest factor will be added to the tax, as if the tax had been payable in such
prior taxable years. In this case, you would not be permitted to claim a credit
on your own tax return for the tax paid by a Fund. Certain distributions from a
PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain. This may have the effect of increasing
Fund distributions to you that are treated as ordinary dividends rather than
long-term capital gain dividends.
A Fund may be eligible to elect alternative tax treatment with respect to PFIC
shares. Under an election that currently is available in some circumstances, a
Fund generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether distributions are
received from the PFIC during such period. If this election were made, the
special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, the 1997 Act provides for another
election that would involve marking-to-market a Fund's PFIC shares at the end of
each taxable year (and on certain other dates as prescribed in the Code), with
the result that unrealized gains would be treated as though they were realized.
A Fund would also be allowed an ordinary deduction for the excess, if any, of
the adjusted basis of its investment in the PFIC stock over its fair market
value at the end of the taxable year. This deduction would be limited to the
amount of any net mark-to-market gains previously included with respect to that
particular PFIC security. If a Fund were to make this second PFIC election, tax
at the Fund level under the PFIC rules would generally be eliminated.
The application of the PFIC rules may affect, among other things, the amount of
tax payable by a Fund (if any), the amounts distributable to you by a Fund, the
time at which these distributions must be made, and whether these distributions
will be classified as ordinary income or capital gain distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is a
PFIC, and that there is always a possibility that a foreign corporation will
become a PFIC after a Fund acquires shares in that corporation. While a Fund
will generally seek to avoid investing in PFIC shares to avoid the tax
consequences detailed above, there are no guarantees that it will do so and it
reserves the right to make such investments as a matter of its fundamental
investment policy.
CONVERSION TRANSACTIONS. Gains realized by a Fund from transactions that are
deemed to be "conversion transactions" under the Code, and that would otherwise
produce capital gain may be recharacterized as ordinary income to the extent
that such gain does not exceed an amount defined as the "applicable imputed
income amount". A conversion transaction is any transaction in which
substantially all of a Fund's expected return is attributable to the time value
of such Fund's net investment in such transaction, and any one of the following
criteria are met:
1) there is an acquisition of property with a substantially contemporaneous
agreement to sell the same or substantially identical property in the future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it would
have the economic characteristics of a loan but would be taxed as capital
gain; or
4) the transaction is specified in Treasury regulations to be promulgated in the
future.
The applicable imputed income amount, which represents the deemed return on the
conversion transaction based upon the time value of money, is computed using a
yield equal to 120 percent of the applicable federal rate, reduced by any prior
recharacterizations under this provision or the provisions of Section 263(g) of
the Code dealing with capitalized carrying costs.
STRIPPED PREFERRED STOCK. Occasionally, a Fund other than the U.S. Government
Securities Series may purchase "stripped preferred stock" that is subject to
special tax treatment. Stripped preferred stock is defined as certain preferred
stock issues where ownership of the stock has been separated from the right to
receive dividends that have not yet become payable. The stock must have a fixed
redemption price, must not participate substantially in the growth of the
issuer, and must be limited and preferred as to dividends. The difference
between the redemption price and purchase price is taken into Fund income over
the term of the instrument as if it were original issue discount. The amount
that must be included in each period generally depends on the original yield to
maturity, adjusted for any prepayments of principal.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS. A
Fund's investments in zero coupon bonds, bonds issued or acquired at a discount,
delayed interest bonds, or bonds that provide for payment of interest-in-kind
(PIK) may cause a Fund to recognize income and make distributions to you prior
to its receipt of cash payments. Zero coupon and delayed interest bonds are
normally issued at a discount and are therefore generally subject to tax
reporting as OID obligations. A Fund is required to accrue as income a portion
of the discount at which these securities were issued, and to distribute such
income each year (as ordinary dividends) in order to maintain its qualification
as a regulated investment company and to avoid income reporting and excise taxes
at the Fund level. PIK bonds are subject to similar tax rules concerning the
amount, character and timing of income required to be accrued by a Fund. Bonds
acquired in the secondary market for a price less than their stated redemption
price or revised issue price are said to have been acquired with market
discount. For these bonds, a Fund may elect to accrue market discount on a
current basis, in which case such Fund will be required to distribute any such
accrued discount. If a Fund does not elect to accrue market discount into income
currently, gain recognized on sale will be recharacterized as ordinary income
instead of capital gain to the extent of any accumulated market discount on the
obligation.
DEFAULTED OBLIGATIONS. A Fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy these distribution requirements, a Fund may be required
to dispose of portfolio securities that it otherwise would have continued to
hold or to use cash flows from other sources such as the sale of Fund shares.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the Fund's shares. The
underwriting agreement will continue in effect for successive annual periods if
its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. Custodian Funds pays the expenses of
preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of Distributors)
and of sending prospectuses to existing shareholders.
Distributors does not receive compensation from the Fund for acting as
underwriter of the Fund's Advisor Class shares.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation.
For periods before January 1, 1997, standardized performance quotations for
Advisor Class are calculated by substituting Class I performance for the
relevant time period, excluding the effect of Class I's maximum initial sales
charge, and including the effect of the Rule 12b-1 fees applicable to Class I
shares of the Fund. For periods after January 1, 1997, standardized performance
quotations for Advisor Class are calculated as described below.
An explanation of these and other methods used by the Fund to compute or express
performance follows. Regardless of the method used, past performance does not
guarantee future results, and is an indication of the return to shareholders
only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below that
would equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes income dividends and capital gain distributions
are reinvested at Net Asset Value. The quotation assumes the account was
completely redeemed at the end of each period and the deduction of all
applicable charges and fees. If a change is made to the sales charge structure,
historical performance information will be restated to reflect the maximum
front-end sales charge currently in effect.
The average annual total return for Advisor Class for the one-, five- and
ten-year periods ended September 30, 1997 was as follows:
ONE-YEAR FIVE-YEAR TEN-YEAR
PERIOD PERIOD PERIOD
Growth Series.. 20.91% 16.71% 12.88%
Utilities Series 13.83 7.76 9.99
Income Series.. 16.99 11.39 11.77
U.S. Government
Securities Series 10.30 6.58 8.90
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000 T = average annual total return n =
number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested at
Net Asset Value. Cumulative total return, however, is based on the actual return
for a specified period rather than on the average return over the periods
indicated above. The cumulative total return for Advisor Class for the one-,
five- and ten-year periods ended September 30, 1997, was as follows:
ONE-YEAR FIVE-YEAR TEN-YEAR
PERIOD PERIOD PERIOD
Growth Series.. 20.91% 116.50% 235.92%
Utilities Series 13.83 45.29 159.15
Income Series.. 16.99 71.51 204.36
U.S. Government
Securities Series 10.30 37.55 134.60
YIELD
CURRENT YIELD. Current yield shows the income per share earned by the Fund. It
is calculated by dividing the net investment income per share earned during a
30-day base period by the Net Asset Value per share on the last day of the
period and annualizing the result. Expenses accrued for the period include any
fees charged to all shareholders during the base period. The yield for Advisor
Class for the 30-day period ended September 30, 1997, was:
30-DAY
YIELD
Utilities Series 5.05%
Income Series 6.88%
U.S. Government Securities Series 6.75%
These figures were obtained using the following SEC formula:
Yield = 2 [(A-B + 1)6 - 1]
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the Net Asset Value per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders of
the Fund. Amounts paid to shareholders are reflected in the quoted current
distribution rate. The current distribution rate is usually computed by
annualizing the dividends paid per share during a certain period and dividing
that amount by the current Net Asset Value. The current distribution rate
differs from the current yield computation because it may include distributions
to shareholders from sources other than dividends and interest, such as premium
income from option writing and short-term capital gains, and is calculated over
a different period of time. The current distribution rate for Advisor Class for
the 30-day period ended September 30, 1997, was:
CURRENT
DISTRIBUTION
RATE
Utilities Series 5.35%
Income Series 7.40%
U.S. Government Securities
Series 6.87%
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
h) Financial publications: The Wall Street Journal, and Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Standard & Poor's(R) 100 Stock Index - an unmanaged index based on the prices
of 100 blue-chip stocks, including 92 industrials, one utility, two
transportation companies and 5 financial institutions. The S&P 100 Stock Index
is a smaller more flexible index for options trading.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk-adjusted performance of a fund over specified
time periods relative to other funds within its category.
In addition to the indices listed above, the following specific comparisons may
be appropriate:
Utilities Series may be compared to Moody's Utilities Stock Index, an unmanaged
index of utility stock performance.
Income Series and U.S. Government Securities Series may be compared to:
a) Salomon Brothers Broad Bond Index or its component indices - measures yield,
price and total return for Treasury, agency, corporate and mortgage bonds.
b) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
c) Standard & Poor's(R) Bond Indices - measures yield and price of corporate,
municipal and government bonds.
d) Other taxable investments including certificates of deposit (CDs), money
market deposit accounts (MMDAs), checking accounts, savings accounts, money
market mutual funds and repurchase agreements.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
1. Franklin pioneered the concept of Ginnie Mae funds, and the U.S. Government
Securities Series, with over $9.4 billion in assets and more than 390,000
shareholders as of September 30, 1997, is one of the largest Ginnie Mae funds in
the U.S. and the world. Shareholders in this Fund, which has a history of solid
performance, range from individual investors with a few thousand dollars to
institutions that have invested millions of dollars.
The U.S. Government Securities Series offers investors the opportunity to invest
in GNMAs, which are among the highest yielding U.S. government securities on the
market.
2. Advertisements or information about U.S. Government Securities Series may
also compare the Fund's performance to the return on CDs or other investments.
You should be aware, however, that an investment in U.S. Government Securities
Series involves the risk of fluctuation of principal value, a risk generally not
present in an investment in a CD issued by a bank. For example, as the general
level of interest rates rise, the value of U.S. Government Series' fixed-income
investments, as well as the value of its shares that are based upon the value of
such portfolio investments, can be expected to decrease. Conversely, when
interest rates decrease, the value of the Fund's shares can be expected to
increase. CDs are frequently insured by an agency of the U.S. government. An
investment in the Fund is not insured by any federal, state or private entity.
3. Utilities Series has paid uninterrupted dividends for the past 48 years. Over
the life of Utilities Series, dividends have increased in 29 of the last 48
years. Historically, equity securities of utility companies have paid a higher
level of dividends than that paid by the general stock market. Utilities Series,
well established for over 40 years, is the oldest mutual fund in the U.S.
investing in securities issued by public utility companies, primarily in the
country's fast growing regions, and the Fund has been continuously managed by
the same portfolio manager since 1957.
4. Income Series has paid uninterrupted dividends for the past 48 years.
5. Growth Series offers investors a convenient way to invest in a diversified
portfolio focusing on companies with long-term growth prospects.
6. Growth Series made the 1990, 1991 and 1996 Forbes Mutual Fund Honor Roll for
its performance in both up and down markets.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years and
now services more than 2.8 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $215 billion in assets under
management for more than 5.8 million U.S. based mutual fund shareholder and
other accounts. The Franklin Templeton Group of Funds offers 121 U.S. based
open-end investment companies to the public. The Fund may identify itself by its
NASDAQ symbol or CUSIP number.
As of January 2, 1998, the principal shareholders of the Fund, beneficial or of
record, were as follows:
GROWTH SERIES
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
ADVISOR CLASS
FTTC Trust Services FBO
Vivian J. Palmieri
P.O. Box 7519
San Mateo, CA 94403-7519 119,814.904 10.54%
FTTC Trust Services FBO
Rupert Johnson IRA
P.O. Box 7519
San Mateo, CA 94403-7519 156,272.041 13.75%
FTTC TTEE For ValuSelect
Franklin Templeton
P.O. Box 2438
Rancho Cordova, CA 95741-2438 179,171.631 15.77%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 175,176.159 15.41%
GROWTH SERIES (CONT.)
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
ADVISOR CLASS
Franklin Templeton Fund Allocator- Franklin Templeton Moderate Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 130,542.295 11.49%
Franklin Templeton Fund Allocator- Franklin Templeton Growth Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 136,770.684 12.03%
UTILITIES SERIES
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
ADVISOR CLASS
First Mar & Co.
101 W. Washington St.
P.O. Box 580
Marquette, MI 49855 149,441.469 14.02%
The Washington Trust Company
23 Broad St.
Westerly, RI 02891 172,648.669 16.20%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 381,957.762 35.85%
Franklin Templeton Fund Allocator- Franklin Templeton Moderate Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 82,972.715 7.79%
INCOME SERIES
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
ADVISOR CLASS
FTTC TTEE For ValuSelect
Franklin Templeton
P.O. Box 2438
Rancho Cordova, CA 95741-2438 1,786,249.239 32.13%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 1,562,974.617 28.11%
U.S. GOVERNMENT SECURITIES SERIES
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
ADVISOR CLASS
FTTC Cust for the IRA of John M. Lane
1840 Elmwood Rd.
Hillsborough, CA 94010-6363 262,740.431 10.53%
CAP & CO
P.O. Box 2887
Wilson, NC 27894-2887 133,067.037 5.33%
U.S. GOVERNMENT SECURITIES SERIES (CONT.)
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
ADVISOR CLASS
Franklin Templeton Fund Allocator-
Franklin Templeton Conservative Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 215,704.910 8.64%
Franklin Templeton Fund Allocator- Franklin Templeton Moderate Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 307,624.951 12.33%
Franklin Templeton Fund Allocator- Franklin Templeton Growth Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 383,738.676 15.38%
FTTC TTEE For ValuSelect
Franklin Templeton
P.O. Box 2438
Rancho Cordova, CA 95741-2438 239,159.442 9.58%
FTTC TTEE For ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 433,490.892 17.37%
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations must be sent to a compliance
officer and, within 10 days after the end of each calendar quarter, a report of
all securities transactions must be provided to the compliance officer; and
(iii) access persons involved in preparing and making investment decisions must,
in addition to (i) and (ii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of Custodian Funds, for the fiscal year ended September 30, 1997, including the
auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the investment manager of each of the Funds,
except Growth Series
BOARD - The Board of Directors of Custodian Funds
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - Each Fund 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.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the Fund's administrator
INVESTMENT ADVISORY - Franklin Investment Advisory Services, Inc., Growth
Series' investment manager
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
PROSPECTUS - The prospectus for Advisor Class shares of the Funds dated February
1, 1998, as may be amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
FRANKLIN CUSTODIAN FUNDS, INC.
File Nos.
2-11346
811-537
FORM N-1A
PART C
OTHER INFORMATION
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements incorporated herein by reference to the Registrant's
Annual Report to Shareholders dated September 30, 1997 as filed with the
SEC electronically on form type N-30D on December 10, 1997.
(i) Report of Independent Accountants
(ii) Financial Highlights
(iii) Statement of Investments, September 30, 1997
(iv) Statements of Assets and Liabilities - September
30, 1997
(v) Statements of Operations - for the year ended
September 30, 1997
(vi) Statement of Changes in Net Assets - for the years
ended September 30, 1997 and 1996
(vii) Notes to Financial Statements
b) Exhibits:
The following exhibits are incorporated by reference, except exhibits
1(ix), 1(x), 1(xi), 5(v), 8(iii), 8(iv), 11(i), 18(i), 18(ii), 18(iii),
18(iv), 18(v), 27(i), 27(ii), 27(iii), 27(iv), 27(v), 27(vi), 27(vii),
27(viii), 27(ix), 27(x), 27(xi), 27(xii), 27(xiii) and 27(xiv) which are
attached.
(1) copies of the charter as now in effect;
(i) Articles of Incorporation dated October 9, 1979
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Agreement and Articles of Merger dated November
7, 1979
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iii) Certificate of Amendment to Articles of
Incorporation dated October 4, 1985
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iv) Articles of Amendment dated October 14, 1985
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(v) Certificate of Amendment to Articles of
Incorporation dated February 24, 1989
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(vi) Certificate of Amendment to Articles of
Incorporation dated March 21, 1995
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(vii) Articles Supplementary to the Charter dated June
29, 1995
Filing: Post-Effective Amendment No. 72 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 30, 1995
(viii) Articles Supplementary to the Charter dated July
19, 1996
Filing: Post-Effective Amendment No. 75 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: December 31, 1996
(ix) Certificate of Correction to the Articles
Supplementary to the Charter dated August 22, 1996
(x) Articles Supplementary to the Charter dated
November 4, 1996
(xi) Articles Supplementary to the Charter dated
January 22, 1997
(2) copies of the existing By-Laws or instruments corresponding
thereto;
(i) By-Laws
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(3) copies of any voting trust agreement with respect to more than
five percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the rights
of the holders of such securities, and copies of each security being
registered;
Not Applicable
(5) copies of all investment advisory contracts relating to
the management of the assets of the Registrant;
(i) Management Agreement between the Registrant on behalf
of the DynaTech Series and Franklin Advisers, Inc.
dated May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Management Agreement between the Registrant on behalf
of the Income Series and Franklin Advisers, Inc. dated
May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iii) Management Agreement between the Registrant on behalf
of the U.S. Government Securities Series and Franklin
Advisers, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iv) Management Agreement between the Registrant on behalf
of the Utilities Series and Franklin Advisers, Inc.
dated May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(v) Management Agreement between Registrant on behalf of
the Growth Series and Franklin Investment Advisory
Services, Inc. dated July 1, 1997
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of all
agreements between principal underwriters and dealers;
(i) Amended and Restated Distribution Agreement between
Registrant and Franklin/Templeton Distributors, Inc.
dated March 29, 1995
Filing: Post-Effective Amendment No. 72 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 30, 1995
(ii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and dealers
Registrant: Franklin Tax-Free Trust
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(7) copies of all bonus, profit sharing, pension or other similar contracts or
arrangements wholly or partly for the benefit of directors or officers of
the Registrant in their capacity as such; any such plan that is not set
forth in a formal document, furnish a reasonably detailed description
thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under Section
17(f) of the 1940 Act, with respect to securities and similar investments
of the Registrant, including the schedule of remuneration;
(i) Master Custody Agreement between Registrant and Bank
of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 74 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: August 19, 1996
(ii) Terminal Link Agreement between Registrant and
Bank of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 74 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: August 19, 1996
(iii) Amendment dated May 7, 1997 to the Master Custody Agreement dated
February 16, 1996 between Registrant and Bank of New York
(iv) Amendment dated October 15, 1997 to the Master Custody Agreement
dated February 16, 1996 between Registrant and Bank of New York
(9) copies of all other material contracts not made in the ordinary course of
business which are to be performed in whole or in part at or after the
date of filing the Registration Statement;
Not Applicable
(10) an opinion and consent of counsel as to the legality of the securities
being registered, indicating whether they will when sold be legally
issued, fully paid and nonassessable;
Not Applicable
(11) copies of any other opinions, appraisals or rulings and consents to the
use thereof relied on in the preparation of this Registration Statement
and required by Section 7 of the 1933 Act;
(i) Consent of Independent Accountants
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, adviser, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their purchases
were made for investment purposes without any present intention of
redeeming or reselling;
(i) Letter of Understanding dated April 12, 1995
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Subscription Agreement for DynaTech Series - Class II
dated September 13, 1996
Filing: Post-Effective Amendment No. 75 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: December 31, 1996
(14) copies of the model plan used in the establishment of any retirement
plan in conjunction with which Registrant offers its securities, any
instructions thereto and any other documents making up the model plan.
Such form(s) should disclose the costs and fees charged in connection
therewith;
(i) Copy of Model Retirement Plan
Registrant: AGE High Income Fund
Filing: Post-Effective Amendment No. 26 to
Registration Statement on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(15) copies of any plan entered into by Registrant pursuant to Rule 12b-1
under the 1940 Act, which describes all material aspects of the financing
of distribution of Registrant's shares, and any agreements with any
person relating to implementation of such plan.
(i) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the DynaTech Series and
Franklin/Templeton Distributors, Inc. dated May 1,
1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the Growth Series and
Franklin/Templeton Distributors, Inc. dated May 1,
1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the Income Series and
Franklin/Templeton Distributors, Inc. dated May 1,
1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iv) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the U.S. Government Securities
Series and Franklin/Templeton Distributors, Inc. dated
May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(v) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the Utilities Series and
Franklin/Templeton Distributors, Inc. dated May 1,
1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(vi) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the Utilities Series, Income
Series and U.S. Government Securities Series - Class
II and Franklin/Templeton Distributors, Inc. dated
March 30, 1995
Filing: Post-Effective Amendment No. 72 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 30, 1995
(vii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the Growth Series - Class II
and Franklin/Templeton Distributors, Inc. dated March
30, 1995
Filing: Post-Effective Amendment No. 72 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 30, 1995
(viii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of the DynaTech Series - Class II
and Franklin/Templeton Distributors, Inc. dated
September 16, 1996
Filing: Post-Effective Amendment No. 75 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: December 31, 1996
(16) schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 (which need not be
audited)
(i) Schedule for computation of performance quotation
Registrant: Franklin New York Tax-Free Trust
Filing: Post-Effective Amendment No. 12 to
Registration Statement on Form N-1A
File No. 33-7785
Filing Date: April 25, 1995
(17) Power of Attorney
(i) Power of Attorney dated February 16, 1995
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Certificate of Secretary dated February 16, 1995
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(18) Copies of any plan entered into by Registrant pursuant to Rule 18f-3
under the 1940 Act.
(i) Multiple Class Plan for DynaTech Series Class II
dated June 18, 1996
(ii) Multiple Class Plan for Growth Series dated June 18, 1996
(iii) Multiple Class Plan for Utilities Series dated June
18, 1996
(iv) Multiple Class Plan for Income Series dated
June 18, 1996
(v) Multiple Class Plan for U.S. Government Series dated
June 18, 1996
(27) Financial Data Schedule
(i) Financial Data Schedule for DynaTech Series - Class I
(ii) Financial Data Schedule for DynaTech Series - Class II
(iii) Financial Data Schedule for Growth Series - Class I
(iv) Financial Data Schedule for Growth Series - Class II
(v) Financial Data Schedule for Growth Series - Advisor Class
(vi) Financial Data Schedule for Utilities Series - Class I
(vii) Financial Data Schedule for Utilities Series - Class II
(viii) Financial Data Schedule for Utilities Series -
Advisor Class
(ix) Financial Data Schedule for U.S. Government Securities
Series - Class I
(x) Financial Data Schedule for U.S. Government Securities Series -
Class II
(xi) Financial Data Schedule for U.S. Government Securities Series -
Advisor Class
(xii) Financial Data Schedule for Income Series - Class I
(xiii) Financial Data Schedule for Income Series - Class II
(xiv) Financial Data Schedule for Income Series - Advisor Class
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of October 31, 1997 the number of record holders of each series of the
Registrant was as follows:
NUMBER OF RECORD HOLDERS
CLASS I CLASS II ADVISOR CLASS
Growth Series 124,487 16,310 334
Utilities Series 147,723 2,307 90
DynaTech Series 17,322 1,081 N/A
Income Series 331,786 36,097 332
U.S. Government Securities Series
382,972 6,862 125
ITEM 27 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court or appropriate
jurisdiction the question whether such indemnification is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
Please see the By-Laws, Management, and Distribution Agreements previously filed
as exhibits and incorporated herein by reference.
Notwithstanding the provisions contained in the Registrant's By-Laws, in the
absence of authorization by the appropriate court on the merits pursuant to said
By-Laws, any indemnification under said By-Laws shall be made by Registrant only
if authorized in the manner provided by such By-Laws.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
The officers and directors of the Registrant's managers also serve as officers
and/or directors or trustees for (1) the advisor's corporate parent, Franklin
Resources, Inc., and/or (2) other investment companies in the Franklin Templeton
Group of Funds. In addition, Mr. Charles B. Johnson is a director of General
Host Corporation. For additional information please see Part B and Schedules A
and D of Forms ADV of the Funds' investment advisors Franklin Advisers, Inc.(SEC
File 801-26292), Franklin Investment Advisory Services, Inc. (SEC File
801-52152) incorporated herein by reference, which sets forth the officers and
directors of the investment advisor and information as to any business,
profession, vocation or employment of a substantial nature engaged in by those
officers and directors during the past two years.
ITEM 29 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Franklin Templeton Japan Fund
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
b) The information required by this item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No.
8-5889)
c) Not applicable. Registrant's principal underwriter is an affiliated
person of an affiliated person of the Registrant.
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section 31
(a) of the Investment Company Act of 1940 are kept by the Fund or its
shareholder services agent, Franklin/Templeton Investor Services, Inc., both of
whose address is 777 Mariners Island Blvd., San Mateo, California 94404-1585.
ITEM 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32 UNDERTAKINGS
a) The Registrant hereby undertakes to promptly call a meeting of shareholders
for the purpose of voting upon the question of removal of any director or
directors when requested in writing to do so by the record holders of not less
than 10 percent of the Registrant's outstanding shares to assist its
shareholders in accordance with the requirements of Section 16(c) of the
Investment Company Act of 1940.
b) The Registrant hereby undertakes to comply with the information requirement
in Item 5A of the Form N-1A by including the required information in the Fund's
annual report and to furnish each person to whom a prospectus is delivered a
copy of the annual report upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of San Mateo and the State of California, on the 28th day
of January, 1998.
FRANKLIN CUSTODIAN FUNDS, INC.
(Registrant)
By: CHARLES B. JOHNSON*
Charles B. Johnson
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
CHARLES B. JOHNSON* Principal Executive
Charles B. Johnson Officer and Director
Dated: January 28, 1998
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: January 28, 1998
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: January 28x, 1998
HARRIS J. ASHTON* Director
Harris J. Ashton Dated: January 28, 1998
S. JOSEPH FORTUNATO* Director
S. Joseph Fortunato Dated: January 28, 1998
RUPERT H. JOHNSON, JR.* Director
Rupert H. Johnson, Jr. Dated: January 28, 1998
GORDON S. MACKLIN* Director
Gordon S. Macklin Dated: January 28, 1998
*By /s/ Larry L. Greene
Larry L. Greene, Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
FRANKLIN CUSTODIAN FUNDS, INC.
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1(i) Articles of Incorporation *
dated October 9, 1979
EX-99.B1(ii) Agreement and Articles of Merger *
dated November 7, 1979
EX-99.B1(iii) Certificate of Amendment to *
Articles of Incorporation
dated October 4, 1985
EX-99.B1(iv) Articles of Amendment dated *
October 14, 1985
EX-99.B1(v) Certificate of Amendment to *
Articles of Incorporation
dated February 24, 1989
EX-99.B1(vi) Certificate of Amendment to *
Articles of Incorporation
dated March 21, 1995
EX-99.B1(vii) Articles Supplementary to the *
Charter dated June 29, 1995
EX-99.B1(viii) Articles Supplementary to the *
Charter dated July 19, 1996
EX-99.B1(ix) Certificate of Correction to Attached
the Articles Supplementary to
the Charter dated August 22, 1996
EX-99.B1(x) Articles Supplementary to the Attached
Charter dated November 4, 1996
EX-99.B1(xi) Articles Supplementary to the Attached
Charter dated January 22, 1997
EX-99.B2(i) By-Laws *
EX-99.B5(i) Management Agreement between *
the Registrant on behalf of the
DynaTech Series and Franklin
Advisers, Inc. dated May 1, 1994
EX-99.B5(ii) Management Agreement between the *
Registrant on behalf of the Income
Series and Franklin Advisers, Inc.
dated May 1, 1994
EX-99.B5(iii) Management Agreement between the *
Registrant on behalf of the U.S.
Government Securities Series and
Franklin Advisers, Inc. dated May
1, 1994
EX-99.B5(iv) Management Agreement between the *
Registrant on behalf of the Utilities
Series and Franklin Advisers, Inc.
dated May 1, 1994
EX-99.B5(v) Management Agreement between Attached
Registrant on behalf of the Growth
Series and Franklin Investment
Advisory Services, Inc. dated
July 1, 1997
EX-99.B6(i) Amended and Restated Distribution *
Agreement between Registrant and
Franklin/Templeton Distributors, Inc.
dated March 29, 1995
EX-99.B6(ii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors, Inc.
and dealers
EX-99.B8(i) Master Custody Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.B8(ii) Terminal Link Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.B8(iii) Amendment dated May 7, 1997 Attached
to the Master Custody Agreement
dated February 16, 1996 between
Registrant and Bank of New York
EX-99.B8(iv) Amendment dated October 15, 1997 Attached
to the Master Custody Agreement
dated February 16, 1996 between
Registrant and Bank of New York
EX-99.B11(i) Consent of Independent Attached
Accountants
EX-99.B13(i) Letter of Understanding dated *
April 12, 1995
EX-99.B13(ii) Subscription Agreement for *
DynaTech Series - Class II
dated September 13, 1996
EX-99.B14(i) Copy of Model Retirement Plan *
EX-99.B15(i) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on
behalf of the DynaTech Series and
Franklin/Templeton Distributors,
Inc. dated May 1, 1994
EX-99.B15(ii) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on
behalf of the Growth Series and
Franklin/Templeton Distributors,
Inc. dated May 1, 1994
EX-99.B15(iii) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on
behalf of the Income Series and
Franklin/Templeton Distributors,
Inc. dated May 1, 1994
EX-99.B15(iv) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on
behalf of the U.S. Government
Securities Series and Franklin/Templeton
Distributors, Inc. dated May 1, 1994
EX-99.B15(v) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on
behalf of the Utilities Series and
Franklin/Templeton Distributors, Inc.
dated May 1, 1994
EX-99.B15(vi) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on
behalf of the Utilities Series,
Income Series and U.S. Government
Securities Series - Class II and
Franklin/Templeton Distributors,
Inc. dated March 30, 1995
EX-99.B15(vii) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on behalf
of the Growth Series - Class II and
Franklin/Templeton Distributors, Inc.,
dated March 30, 1995
EX-99.B15(viii) Distribution Plan pursuant to Rule *
12b-1 between the Registrant on
behalf of the DynaTech Series -
Class II and Franklin/Templeton
Distributors, Inc. dated
September 16, 1996
EX-99.B16(i) Schedule for Computation of *
Performance Quotation
EX-99.B17(i) Powers of Attorney dated February *
16, 1995
EX-99.B17(ii) Certificate of Secretary dated *
February 16, 1995
EX-99.B18(i) Multiple Class Plan for Attached
DynaTech Series Class II
Dated June 18, 1996
EX-99.B18(ii) Multiple Class Plan for Growth Attached
Series, dated June 18, 1996
EX-99.B18(iii) Multiple Class Plan for Utilities Attached
Series dated June 18, 1996
EX-99.B18(iv) Multiple Class Plan for Income Attached
Series dated June 18, 1996
EX-99.18(v) Multiple Class Plan for U.S. Attached
Government Series dated June
18, 1996
EX-27.B(i) Financial Data Schedule for Attached
DynaTech Series - Class I
EX-27.B(ii) Financial Data Schedule for Attached
DynaTech Series - Class II
EX-27.B(iii) Financial Data Schedule for Attached
Growth Series - Class I
EX-27.B(iv) Financial Data Schedule for Attached
Growth Series - Class II
EX-27.B(v) Financial Data Schedule for Attached
Growth Series - Advisor Class
EX-27,B(vi) Financial Data Schedule for Attached
Utilities Series - Class I
EX-27,(vii) Financial Data Schedule for Attached
Utilities Series - Class II
EX-27,B(viii) Financial Data Schedule for Attached
Utilities Series - Advisor Class
EX-27.B(ix) Financial Data Schedule for U.S. Attached
Government Series - Class I
EX-27.B(x) Financial Data Schedule for Attached
U.S. Government Series
- Class II
EX-27.B(xi) Financial Data Schedule for Attached
U.S. Government Series
- Advisor Class I
EX-27.B(xii) Financial Data Schedule Attached
for Income Series - Class I
EX-27.B(xiii) Financial Data Schedule Attached
for Income Series - Class II
EX-27.B(xiv) Financial Data Schedule Attached
for Income Series - Advisor Class
* Incorporated by reference
FRANKLIN CUSTODIAN FUNDS, INC.
CERTIFICATE OF CORRECTION
FIRST: The title of the document being corrected is:
ARTICLES SUPPLEMENTARY TO THE CHARTER
SECOND: The name of the party to the document being corrected is:
FRANKLIN CUSTODIAN FUND, INC.
THIRD: The date that the document being corrected was filed was on:
JULY 19, 1996
FOURTH: In the previously filed Articles Supplementary to the Charter
in Paragraphs SECOND and FOURTH, there is a typographical error in that the type
written word "seventeen" should be corrected to the type written word
"eighteen".
IN WITNESS WHEREOF, FRANKLIN CUSTODIAN FUNDS, INC. has caused these
presents to be signed in its name and on its behalf by its President and
witnessed by its Secretary on August 20, 1996.
FRANKLIN CUSTODIAN FUNDS, INC.
By: /S/ C. B. JOHNSON
Charles B. Johnson
Witness (Attest) President
/S/BRIAN E. LORENZ
Brian E. Lorenz, Secretary
FRANKLIN CUSTODIAN FUNDS, INC.
ARTICLES SUPPLEMENTARY TO THE CHARTER
FRANKLIN CUSTODIAN FUNDS, INC., a Maryland corporation having its
principal office c/o Corporation Trust Incorporated, 32 South Street, Baltimore,
Maryland 21202 (hereinafter called the "Corporation"), and registered under the
Investment Company Act of 1940 as an open-end company, hereby certifies in
accordance with the requirements of Sections 2-208, 2.201.1 of the Maryland
General Corporation Law to the State Department of Assessments and Taxation of
Maryland, that:
FIRST: The Corporation has auathority to issue a total of eighteen
billion (18,000,000,000) shares of stock with a par value of one cent ($.01) per
share, such shares having an aggregate par value of $180,000,000. The allocation
of such shares to the Corporation's existing classes and sub-classes is as
follows:
CLASS DESIGNATION NUMBER OF SHARES ALLOCATED
U.S. Government Securities Series Class I 2,500,000,000
U.S. Government Securities Series Class II 2,500,000,000
U.S. Government Securities Series Class Z 1,000,000,000
Income Series Class I 4,600,000,000
Income Series Class I 3,600,000,000
Growth Series Class I 250,000,000
Growth Series Class II 250,000,000
Growth Series Class Z 1,000,000,000
DynaTech Series Class I 250,000,000
DynaTech Series Class I 250,000,000
Utilities Series Class I 400,000,000
Utilities Series Class II 400,000,000
Utilities Series Class Z 1,000,000.000
SECOND: The Board of Directors of the Croporation, in accordance with
Section 2-105(C) of the Maryland General Corporation Law, has adopted a
resolution increasing the aggregate number of shares by one billion
(1,000,000,000) shares so that the Corporation has authority to issue nineteen
billion (19,000,000,000) shares.
THIRD The Board of Directors has allocated one billion
(1,000,000,000) of such increased shares to a sub-class known as Income Series
- Class Z.
FOURTH Following the aforesaid actions, the total number of shares
that the Corporation is authorized to issue is nineteen billion (19,000,000,000)
with a par value of one cent ($.01) per share and an aggregate par value of
$190,000,000 and the allocation of shares to the Corporation's existing classes
and sub-classes is as follows:
Class Designation Number of Shares Allocated
U.S. Government Securities Series Class I 2,500,000,000
U.S. Government Securities Series Class II 2,500,000,000
U.S. Government Securities Series Class Z 1,000,000,000
Income Series Class I 4,600,000,000
Income Series Class I 3,600,000,000
Income Series Class Z 1,000,000,000
Growth Series Class I 250,000,000
Growth Series Class II 250,000,000
Growth Series Class Z 1,000,000,000
DynaTech Series Class I 250,000,000
DynaTech Series Class I 250,000,000
Utilities Series Class I 400,000,000
Utilities Series Class II 400,000,000
Utilities Series Class Z 1,000,000.000
FIFTH: A description of the shares so classified, with the preferences,
conversions and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption as set or
changed by the Board of Directors of the Corporation is as follows:
(a) The assets of the Corporation received as a
consideration for the issue of sale of shares of each
class of stock, together with all income, earnings,
profits and proceeds thereof, in whatsoever form the
same may be, may be invested only in cash or
securities having at the time of investments the
qualifications expressed in relation to each class.
As used herein "Cash" shall include cash equivalents
as determined by the Board of Directors and
"Securities" shall include all forms of stocks,
bonds, rights and certificates or evidences of
interest indebtedness and participation irrespective
of form. The investment qualifications for the
classes of stock so classified shall be as follows;
(1) GROWTH SERIES SHARES.
(A) Cash; or
(B) Any shares of common or capital stock listed
or admitted to trading privileges or dealt
in on the New York Stock Exchange or any
other recognized security exchange or the
issuer of which is a corporation,
association or similar legal entity having
gross assets valued by it at not less than
$1,000,000 as shown by its latest published
annual report and bonds or preferred stock
or other Securities convertible into such
common or capital stock or in covered call
options listed for trading on a national
securities exchange.
(2) U.S. GOVERNMENT SECURITIES SERIES.
(A) Cash; or
(B) Securities which are obligations of or
guaranteed by the United States Government
or its instrumentalities.
(3) INCOME SERIES SHARES.
(A) Cash; or
(B) Securities listed or admitted to trading
privileges or dealt in on the New York Stock
Exchange or any other recognized security
exchange; or the issuer of which is a
corporation, association or similar legal
entity having gross assets valued by it at
not less than $1,000,000, as shown by its
latest published annual report.
(4) UTILITIES SERIES SHARES.
(A) Cash; or
(B) Securities issued, created or guaranteed by
a corporation, association or similar legal
entity engaged in the public utilities
industry. The determination of the Board of
Directors shall be conclusive as to what
corporations are engaged in the public
utilities industry.
(5) DYNATECH SERIES SHARES.
(A) Cash; or
(B) Securities listed or admitted to trading
privileges or dealt in on the New York Stock
Exchange or any other recognized security
exchange or the issuer of which is a
corporation, association or similar legal
entity having gross assets valued by it at
not less than $1,000,000, as shown by its
latest published annual report.
(b) The shares of Class I, Class II and Class Z of a Series shall
represent proportionate interests in the same portfolio of
investments of the Series. The shares of Class I, Class II and
Class Z of a Series shall have the same rights and privileges,
and shall be subject to the same limitations and priorities, all
as set forth herein, provided that dividends paid on the shares
of Class I shall not reflect any reduction for payment of fees
under the Distribution Plan of Class II adopted ursuant to Rule
12b-1 under the Investment Company Act of 1940 as amended,
dividends paid on the shares of Class II shall not reflect
reduction for payment of fees under the Distribution Plan of
Class I adopted pursuant to Rule 12b-1 under the Investment
Company Act of 1940 as amended, and dividends paid on the shares
of Class Z shall not reflect reductions for payments of fees
under any Distribution Plan adopted pursuant to 12b-1 under the
Investment Company Act of 1940 as amended, and provided further,
that the shares of Class I and Class Z shall not vote upon or
with respect to any matter relating to or arising from any such
Distribution Plan of Class II, and the shares of Class II and
Class Z shall not vote upon or with respect to any matter
ralating to or arising from any such Distribution Plan of Class
I.
Each share of a class shall have equal rights with each other
share of that class with respect to the assets of the Corporation
pertaining to that class. The dividends payable to the holders of
any class or sub-class thereof (subject to any applicable rules,
regulation or order of the Securities and Exchange Commission or
any other applicable law or regulation) may be charged with any
pro rata portion of distribution expenses paid pursuant to a Plan
of Distribution adipted by such class or sub-class thereof in
accordance with Investment Company Act of 1940 Rule 12b-1 (or any
successor thereto), which dividend shall be determined as
directed by the Board and need not be individually declared, but
may be declared and paid in accordance with a formula adopted by
the Board. Except as otherwise provided herein, all references in
these Articles of Incorporation to stock shall apply without
discrimination to the shares of each class of stock.
(c) The assets of the Corporation received as a consideration for the
issue of sale of shares of each class of its stock, together with
all income, earnings, profits and proceeds thereof from the time
of receipt thereof by the Corporation in whatever form the same
shall from time to time be, shall irrevocably appertain to such
class of stock and shall constitute the assets of such class of
stock, subject only to the rights or creditors, and shall be so
entered and segregated upon the books of account, and shall be
known as the "underlying assets" of such class. The underlying
assets of each class shall be charged with the liabilities
(including accrued expenses and reserves as determined from time
to time by the Board of Directors in accordance with sound
accounting practice) in respect of any two or more classes in
proportion to the liquidating asset value of the respective
classes, determined as hereinafter provided. The determination of
the board of Directors shall be conclusive as to which such
liabilities are allocable to given class and as to which of the
same are general or allocable to two or more classes. If at any
time any reasonable doubt may exist as to the class or classes of
stock to which any particular assets of the Corporation shall
properly belong, the Board of Directors may, by specific
resolution, resolve such doubt and its action in that regard
shall be conclusive.
(d) In the event of the dissolution or other liquidation of the
Corporation the registered holders of the stock of any class
shall be entitled to receive, as a class, the underlying assets
of such class available for distribution to stockholders less
the liabilities (including accrued expenses and reserves as
determined from time to time by the Board of Directors in
accordance with sound accounting practice)in respect of such
class, and also the share of such liabilities (including
general liabilities of the Corporation) in respect of any two or
more classes in proportion to the liquidating asset value of
the respective classes. Said available underlying assets of any
class, less the liabilities of such class shall be distributable
among the shareholders of the stock of such class in proportion
to the number of shares of stock of such class held by them
respectively.
(e) The holder of each share of stock of the Corporation shall be
entitled to one vote for each full share, and a fractional vote
for each fractional share of stock, irrespective of the class
then standing in his or her name in the books of the Corporation
On any matter submitted to a vote of shareholders, all shares of
the Corporation then issued and outstanding and entitled to vote,
irrespective of the class or sub-class, shall be voted in the
aggregate and not by class or sub-class except (1) when otherwise
expressly provided by the Maryland General Corporation Law, or
(2) when required by the Investment Company Act of 1940, as
amended, shares shall be voted by individual classes, or
sub-classes and (3) when the matter does not affect any interest
of the particular class or sub-class, then only shareholders of
the affected classes or sub-classes shall be entitled to vote
thereon. Holders of shares of stock of the Corporation shall not
be entitled to cumulative voting in the election of directors or
on any other matter.
SIXTH: The Growth Series Shares, the U.S. Government Securities
Series Shares, the Income Series Shares, the Utilities Series
Shares, and the DynaTech Series Shares have been duly classified
by the board of directors pursuant to authority and power
contained in the charter of the Corporation. IN WITNESS WHEREOF,
FRANKLIN CUSTODIAN FUNDS, INC. has caused these presents to be
signed in its name and on its behalf by its President and
witnessed by its Secretary on October 18, 1996.
FRANKLIN CUSTODIAN FUNDS, INC.
BY:/S/C. B. JOHNSON
Charles B. Johnson
President
Witness (Attest)
/S/BRIAN E. LORENZ
Brian E. Lorenz, Secretary
FRANKLIN CUSTODIAN FUNDS, INC.
ARTICLES SUPPLEMENTARY TO THE CHARTER
FRANKLIN CUSTODIAN FUNDS, INC., a Maryland corporation having its
principal office c/o Corporation Trust Incorporated, 32 South Street, Baltimore,
Maryland 21202 (hereinafter called the "Corporation"), and registered under the
Investment Company Act of 1940 as an open-end company, hereby certifies in
accordance with the requirements of Sections 2-208, 2.201.1 of the Maryland
General Corporation Law to the State Department of Assessments and Taxation of
Maryland, that:
FIRST: The Corporation has auathority to issue a total of nineteen
billion (19,000,000,000) shares of stock with a par value of one cent ($.01) per
share, such shares having an aggregate par value of $190,000,000. The allocation
of such shares to the Corporation's existing classes and sub-classes is as
follows:
CLASS DESIGNATION NUMBER OF SHARES ALLOCATED
U.S. Government Securities Series Class I 2,500,000,000
U.S. Government Securities Series Class II 2,500,000,000
U.S. Government Securities Series Class Z 1,000,000,000
Income Series Class I 4,600,000,000
Income Series Class I 3,600,000,000
Income Series Class Z 1,000,000,000
Growth Series Class I 250,000,000
Growth Series Class II 250,000,000
Growth Series Class Z 1,000,000,000
DynaTech Series Class I 250,000,000
DynaTech Series Class I 250,000,000
Utilities Series Class I 400,000,000
Utilities Series Class II 400,000,000
Utilities Series Class Z 1,000,000.000
SECOND: The Board of Directors of the Croporation, in accordance with
Section 2-105(C) of the Maryland General Corporation Law, have adopted
resolutions changing the name of the U.S. Government Securities Class Z, Income
Series Class Z, Growth Series Class Z, and Utilities Series Class Z,
respectively to U.S. Government Securities Advisor Class, Income Series Advisor
Class, Growth Series Advisor Class and Utilities Series Advisor Class.
THIRD: Following the aforesaid actions, the total number of shares
that the Corporation is authorized to issue is nineteen billion (19,000,000,000)
with a par value of one cent ($.01) per share and an aggregate par value of
$190,000,000 and the allocation of shares to the Corporation's existing classes
and sub-classes is as follows:
Class Designation Number of Shares Allocated
U.S. Government Securities Series Class I 2,500,000,000
U.S. Government Securities Series Class II 2,500,000,000
U.S. Government Securities Advisor Class 1,000,000,000
Income Series Class I 4,600,000,000
Income Series Class I 3,600,000,000
Income Series Advisor Class 1,000,000,000
Growth Series Class I 250,000,000
Growth Series Class II 250,000,000
Growth Series Advisor Class 1,000,000,000
DynaTech Series Class I 250,000,000
DynaTech Series Class I 250,000,000
Utilities Series Class I 400,000,000
Utilities Series Class II 400,000,000
Utilities Series Advisor Class 1,000,000.000
FOURTH: A description of the shares so classified, with the preferences,
conversions and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption as set or
changed by the Board of Directors of the Corporation is as follows:
(a) The assets of the Corporation received as a
consideration for the issue or sale of shares of each
class of stock, together with all income, earnings,
profits and proceeds thereof, in whatsoever form the
same may be, may be invested only in cash or
securities having at the time of investments the
qualifications expressed in relation to each class.
As used herein "Cash" shall include cash equivalents
as determined by the Board of Directors and
"Securities" shall include all forms of stocks,
bonds, rights and certificates or evidences of
interest indebtedness and participation irrespective
of form. The investment qualifications for the
classes of stock so classified shall be as follows;
(1) GROWTH SERIES SHARES.
(A) Cash; or
(B) Any shares of common or capital stock listed
or admitted to trading privileges or dealt
in on the New York Stock Exchange or any
other recognized security exchange or the
issuer of which is a corporation,
association or similar legal entity having
gross assets valued by it at not less than
$1,000,000 as shown by its latest published
annual report and bonds or preferred stock
or other Securities convertible into such
common or capital stock or in covered call
options listed for trading on a national
securities exchange.
(2) U.S. GOVERNMENT SECURITIES SERIES.
(A) Cash; or
(B) Securities which are obligations of or
guaranteed by the United States Government
or its instrumentalities.
(3) INCOME SERIES SHARES.
(A) Cash; or
(B) Securities listed or admitted to trading
privileges or dealt in on the New York Stock
Exchange or any other recognized security
exchange; or the issuer of which is a
corporation, association or similar legal
entity having gross assets valued by it at
not less than $1,000,000, as shown by its
latest published annual report.
(4) UTILITIES SERIES SHARES.
(A) Cash; or
(B) Securities issued, created or guaranteed by
a corporation, association or similar legal
entity engaged in the public utilities
industry. The determination of the Board of
Directors shall be conclusive as to what
corporations are engaged in the public
utilities industry.
(5) DYNATECH SERIES SHARES.
(A) Cash; or
(B) Securities listed or admitted to trading
privileges or dealt in on the New York Stock
Exchange or any other recognized security
exchange or the issuer of which is a
corporation, association or similar legal
entity having gross assets valued by it at
not less than $1,000,000, as shown by its
latest published annual report.
(b) The shares of Class I, Class II and Advisor Class of a Series
shall represent proportionate interests in the same portfolio of
investments of the Series. The shares of Class I, Class II and
Advisor Class of a Series shall have the same rights and
privileges, and shall be subject to the same limitations and
priorities, all as set forth herein, provided that dividends paid
on the shares of Class I shall not reflect any reduction for
payment of fees under the Distribution Plan of Class II adopted
pursuant to Rule 12b-1 under the Investment Company Act of
1940 as amended,dividends paid on the shares of Class II shall
not reflect reduction for payment of fees under the Distribution
Plan of Class I adopted pursuant to Rule 12b-1 under the
Investment Company Act of 1940 as amended, and dividends paid on
the shares of Advisor Class shall not reflect reductions for
payments of fees under any Distribution Plan adopted pursuant to
12b-1 under the Investment Company Act of 1940 as amended, and
provided further, that the shares of Class I and Advisor Class
shall not vote upon or with respect to any matter relating to
or arising from any such Distribution Plan of Class II, and the
shares of Class II and Advisor Class shall not vote upon or with
respect to any matter ralating to or arising from any such
Distribution Plan of Class I.
Each share of a class shall have equal rights with each other
share of that class with respect to the assets of the Corporation
pertaining to that class. The dividends payable to the holders of
any class or sub-class thereof (subject to any applicable rules,
regulation or order of the Securities and Exchange Commission or
any other applicable law or regulation) may be charged with any
pro rata portion of distribution expenses paid pursuant to a Plan
of Distribution adipted by such class or sub-class thereof in
accordance with Investment Company Act of 1940 Rule 12b-1 (or any
successor thereto), which dividend shall be determined as
directed by the Board and need not be individually declared, but
may be declared and paid in accordance with a formula adopted by
the Board. Except as otherwise provided herein, all references in
these Articles of Incorporation to stock or class of stock
shall apply without discrimination to the shares of each class
of stock.
(c) The assets of the Corporation received as a consideration for the
issue or sale of shares of each class of its stock, together with
all income, earnings, profits and proceeds thereof from the time
of receipt thereof by the Corporation in whatever form the same
shall from time to time be, shall irrevocably appertain to such
class of stock and shall constitute the assets of such class of
stock, subject only to the rights of creditors, and shall be so
entered and segregated upon the books of account, and shall be
known as the "underlying assets" of such class. The underlying
assets of each class shall be charged with the liabilities
(including accrued expenses and reserves as determined from time
to time by the Board of Directors in accordance with sound
accounting practice) in respectof such class and shall also be
charged with the share of such liabilities (including general
liabilities of the Corporation) in respect of any two or more
classes in proportion to the liquidating asset value of the
respective classes, determined as hereinafter provided. The
determination of the Board of Directors shall be conclusive as to
which such liabilities are allocable to given class and as to
which of the same are general or allocable to two or more
classes. If at any time any reasonable doubt may exist as to the
class or classes of stock to which an particular assets of the
Corporation shall properly belong, the Board of Directors may, by
specific resolution, resolve such doubt and its action in that
regard shall be conclusive.
(d) In the event of the dissolution or other liquidation of the
Corporation the registered holders of the stock of any class
shall be entitled to receive, as a class, the underlying assets
of such class available for distribution to stockholders less
the liabilities (including accrued expenses and reserves as
determined from time to time by the Board of Directors in
accordance with sound accounting practice)in respect of such
class, and also the share of such liabilities (including
general liabilities of the Corporation) in respect of any two or
more classes in proportion to the liquidating asset value of
the respective classes. Said available underlying assets of any
class, less the liabilities of such class shall be distributable
among the shareholders of the stock of such class in proportion
to the number of shares of stock of such class held by them
respectively.
(e) The holder of each share of stock of the Corporation shall be
entitled to one vote for each full share, and a fractional vote
for each fractional share of stock, irrespective of the class
then standing in his or her name in the books of the Corporation
On any matter submitted to a vote of shareholders, all shares of
the Corporation then issued and outstanding and entitled to vote,
irrespective of the class or sub-class, shall be voted in the
aggregate and not by class or sub-class except (1) when otherwise
expressly provided by the Maryland General Corporation Law, or
(2) when required by the Investment Company Act of 1940, as
amended, shares shall be voted by individual classes, or
sub-classes and (3) when the matter does not affect any interest
of the particular class or sub-class, then only shareholders of
the affected classes or sub-classes shall be entitled to vote
thereon. Holders of shares of stock of the Corporation shall not
be entitled to cumulative voting in the election of directors or
on any other matter.
FIFTH: The Growth Series Shares, the U.S. Government Securities
Series Shares, the Income Series Shares, the Utilities Series
Shares, and the DynaTech Series Shares have been duly classified
by the board of directors pursuant to authority and power
contained in the charter of the Corporation.
IN WITNESS WHEREOF, FRANKLIN CUSTODIAN FUNDS, INC. has caused
these presents to be signed in its name and on its behalf by its
President and witnessed by its Secretary on January 14, 1997.
FRANKLIN CUSTODIAN FUNDS, INC.
BY:/S/C. B. JOHNSON
Charles B. Johnson
President
Witness (Attest)
/S/BRIAN E. LORENZ
Brian E. Lorenz, Secretary
1
FRANKLIN CUSTODIAN FUNDS, INC.
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT made between FRANKLIN CUSTODIAN FUNDS, INC., a
Maryland Corporation ("Custodian Funds") on behalf of the Growth Series (the
"Fund") and FRANKLIN INVESTMENT ADVISORY SERVICES, INC., a Connecticut
corporation (the "Manager").
WHEREAS, Custodian Funds has been organized and operates as an investment
company registered under the Investment Company Act of 1940 (the "1940 Act") for
the purpose of investing and reinvesting its assets in securities, as set forth
in its Articles of Incorporation, its By-Laws and its Registration Statements
under the 1940 Act and the Securities Act of 1933, all as heretofore and
hereafter amended and supplemented; and
WHEREAS, Custodian Funds desires to avail itself of the services, information,
advice, assistance and facilities of an investment manager and to have an
investment manager perform for its various management, statistical, research,
investment advisory and other services; and,
WHEREAS, the Manager is registered as an investment adviser under the Investment
Advisers Act of 1940, is engaged in the business of rendering management,
investment advisory, counselling and supervisory services to investment
companies and other investment counselling clients, and desires to provide these
services to the Fund.
NOW THEREFORE, in consideration of the terms and conditions hereinafter set
forth, it is mutually agreed as follows:
1. EMPLOYMENT OF THE MANAGER. Custodian Funds hereby employs the Manager
to manage the investment and reinvestment of the Fund's assets and to
administer its affairs, subject to the direction of the Board of
Directors and the officers of Custodian Funds, for the period and on the
terms hereinafter set forth. The Manager hereby accepts such employment
and agrees during such period to render the services and to assume the
obligations herein set forth for the compensation herein provided. The
Manager shall for all purposes herein be deemed to be an independent
contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent
the Fund or Custodian Funds in any way or otherwise be deemed an agent of
the Fund or Custodian Funds.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE MANAGER. The Manager
undertakes to provide the services hereinafter set forth and to assume
the following obligations:
A. ADMINISTRATIVE SERVICES. The Manager shall furnish to the Fund adequate
(i) office space, which may be space within the offices of the Manager
or in such other place as may be agreed upon from time to time,(ii) office
furnishings, facilities and equipment as may be reasonably required for
managing the corporate affairs and conducting the business of the Fund,
including complying with the corporate and securities reporting
requirements of the United States and the various states in which the Fund
does business, conducting correspondence and other communications with the
shareholders of the Fund, maintaining all internal bookkeeping,
accounting and auditing services and records in connection with the Fund's
investment and business activities, and computing net asset value. The
Manager shall employ or provide and compensate the executive, secretarial
and clerical personnel necessary to provide such services. The Manager
shall also compensate all officers and employees of Custodian Funds who are
officers or employees of the Manager or its affiliates.
B. INVESTMENT MANAGEMENT SERVICES.
(a) The Manager shall manage the Fund's assets and portfolio subject to and in
accordance with the investment objectives and policies of the Fund and any
directions which Custodian Funds' Board of Directors may issue from time to
time. In pursuance of the foregoing, the Manager shall make all
determinations with respect to the investment of the Fund's assets and the
purchase and sale of portfolio securities, and shall take such steps as may
be necessary to implement the same. Such determinations and services shall
include determining the manner in which any voting rights, rights to
consent to corporate action and any other rights pertaining to the Fund's
investment securities shall be exercised. The Manager shall render or cause
to be rendered regular reports to Custodian Funds, at regular meetings of
its Board of Directors and at such other times as may be reasonably
requested by Custodian Funds' Board of Directors, of (i) the decisions
which it has made with respect to the investment of the Fund's assets and
the purchase and sale of its investment securities, (ii) the reasons for
such decisions and (iii) the extent to which those decisions have been
implemented.
(b) The Manager, subject to and in accordance with any directions which
Custodian Funds' Board of Directors may issue from time to time, shall
place, in the name of the Fund, orders for the execution of the Fund's
securities transactions. When placing such orders the Manager shall seek to
obtain the best net price and execution for the Fund, but this requirement
shall not be deemed to obligate the Manager to place any order solely on
the basis of obtaining the lowest commission rate if the other standards
set forth in this Paragraph have been satisfied. The parties recognize that
there are likely to be many cases in which different brokers or dealers are
equally able to provide such best price and execution and that, in
selecting among such brokers and dealers with respect to particular trades,
it is desirable to choose those brokers or dealers who furnish research,
statistical quotations and other information to the Fund and the Manager in
accord with the standards set forth below. Moreover, to the extent that it
continues to be lawful to do so and so long as the Board of Directors
determines that the Fund will benefit, directly or indirectly, by doing so,
the Manager may place orders with a broker who charges a commission for
that transaction which is in excess of the amount of commission that
another broker would have charged for effecting that transaction, provided
that the excess commission is reasonable in relation to the value of
"brokerage and research services" (as defined in Section 28(e)(3) of the
Securities Exchange Act of 1934) provided by that broker.
Accordingly, the Fund and the Manager agree that the Manager shall select
brokers for the execution of the Fund's portfolio transactions from among:
(i) Those brokers and dealers who provide quotations and other services to
the Fund, specifically including the quotations necessary to determine
the Fund's net assets, in such amount of total brokerage as may
reasonably be required in light of such services; and
(ii) Those brokers and dealers who supply research, statistical and other
data to the Manager or its affiliates which the Manager and its
affiliates may lawfully and appropriately use in their investment
advisory capacities, which relate directly to securities, actual or
potential, of the Fund, or which place the Manager in a better
position to make decisions in connection with the management of the
Fund's assets and portfolio, whether or not such data may also be
useful to the Manager and its affiliates in managing other portfolios
or advising other clients, in such amount of total brokerage as may
reasonably be required.
Provided that Custodian Funds' officers are satisfied that the best
execution is obtained, the sale of shares of the Fund may also be
considered as a factor in the selection of broker-dealers to execute
the Fund's portfolio transactions.
(c) It is acknowledged that the Manager may contract with one or more
firms to undertake some or all of the manager's investment management
services as set forth herein pursuant to an agreement which is subject
to substantially the same provisions as contained in paragraphs 6 and 7
herein.
(d) When the Manager has determined that the Fund should tender
securities pursuant to a "tender offer solicitation,"
Franklin/Templeton Distributors, Inc. ("Distributors") shall be
designated as the "tendering dealer" so long as it is legally
permitted to act in such capacity under the federal securities
laws and rules thereunder and the rules of any securities
exchange or association of which Distributors may be a member.
Neither the Manager nor Distributors shall be obligated to make
any additional commitments of capital, expense or personnel
beyond that already committed (other than normal periodic fees or
payments necessary to maintain its corporate existence and
membership in the National Association of Securities Dealers,
Inc.) as of the date of this Agreement. This Agreement shall not
obligate the Manager or Distributors (i) to act pursuant to the
foregoing requirement under any circumstances in which they might
reasonably believe that liability might be imposed upon them as a
result of so acting, or (ii) to institute legal or other
proceedings to collect fees which may be considered to be due
from others to it as a result of such a tender, unless Custodian
Funds on behalf of the Fund shall enter into an agreement with
the Manager and/or Distributors to reimburse them for all such
expenses connected with attempting to collect such fees,
including legal fees and expenses and that portion of the
compensation due to their employees which is attributable to the
time involved in attempting to collect such fees.
(e) The Manager shall render regular reports to Custodian Funds, not
more frequently than quarterly, of how much total brokerage
business has been placed by the Manager, on behalf of the Fund,
with brokers falling into each of the categories referred to
above and the manner in which the allocation has been
accomplished.
(f) The Manager agrees that no investment decision will be made or
influenced by a desire to provide brokerage for allocation in
accordance with the foregoing, and that the right to make such
allocation of brokerage shall not interfere with the Manager's
paramount duty to obtain the best net price and execution for
the Fund.
C. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF SECURITIES
REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The Manager, its
officers and employees will make available and provide accounting and
statistical information required by the Fund in the preparation of
registration statements, reports and other documents required by federal
and state securities laws and with such information as the Fund may
reasonably request for use in the preparation of such documents or of other
materials necessary or helpful for the underwriting and distribution of the
Fund's shares.
D. OTHER OBLIGATIONS AND SERVICES. The Manager shall make its officers and
employees available to the Board of Directors and officers of Custodian
Funds for consultation and discussions regarding the administration and
management of the Fund and its investment activities.
3. EXPENSES OF THE FUND. It is understood that the Fund will pay all of its
own expenses other than those expressly assumed by the Manager herein,
which expenses payable by the Fund shall include:
A. Fees and expenses paid to the Manager as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend disbursing agent
and shareholder record-keeping services;
D. Expenses of obtaining quotations for calculating the value of the Fund's
net assets;
E. Salaries and other compensations of executive officers of Custodian Funds
who are not officers, directors, stockholders or employees of the Manager;
F. Taxes levied against the Fund;
G. Brokerage fees and commissions in connection with the purchase and sale of
securities for the Fund;
H. Costs, including the interest expense, of borrowing money;
I. Costs incident to meetings of the Board of Directors and shareholders of
the Fund, reports to the Fund's shareholders, the filing of reports with
regulatory bodies and the maintenance of the Fund's corporate existence;
J. Legal fees, including the legal fees related to the registration and
continued qualification of the Fund shares for sale;
K. Costs of printing stock certificates representing shares of the Fund;
L. Directors' fees and expenses to directors who are not directors, officers,
employees or stockholders of the Manager or any of its affiliates; and
M. Its pro rata portion of the fidelity bond insurance premium.
4. COMPENSATION OF THE MANAGER. The Fund shall pay a monthly management fee in
cash to the Manager based upon a percentage of the value of the Fund's net
assets, calculated as set forth below, as compensation for the services
rendered and obligations assumed by the Manager during the preceding month,
on the first business day of the month in each year. The initial management
fee under this Agreement shall be payable on the first business day of the
first month following the effective date of this Agreement, and shall be
reduced by the amount of any advance payments made by the Fund relating to
the previous month.
A. For purposes of calculating such fee, the value of the net assets of
the Fund shall be the net assets computed as of the close of business
on the last business day of the month preceding the month in which the
payment is being made, determined in the same manner as the Fund uses
to compute the value of its net assets in connection with the
determination of the net asset value of Fund shares, all as set forth
more fully in the Fund's current prospectus and statement of additional
information. The rate of the monthly management fee shall be as
follows:
5/96 of 1% of the value of net assets up to and including $100,000,000;
and
1/24 of 1% of the value of net assets over $100,000,000 and not over
$250,000,000; and
9/240 of 1% of the value of net assets over $250,000,000 and not over
$10,000,000,000; and
11/300 of 1% of the value of net assets over $10 billion and not over
$12.5 billion; and
7/200 of 1% of the value of net assets over $12.5 billion and not over
$15 billion; and
1/30 of 1% of the value of net assets over $15 billion and not over
$17.5 billion; and
19/100 of 1% of the value of net assets over $17.5 billion and not over
$20 billion; and
3/100 of 1% of the value of net assets in excess of $20 billion.
B. The Management fee payable by the Fund shall be reduced or eliminated
to the extent that Distributors has actually received cash payments of
tender offer solicitation fees less certain costs and expenses incurred
in connection therewith; and to the extent necessary to comply with the
limitations on expenses which may be borne by the Fund as set forth in
the laws, regulations and administrative interpretations of those
states in which the Fund's shares are registered. The Manager may, from
time to time, voluntarily reduce or waive any management fee due to it
hereunder.
C. If this Agreement is terminated prior to the end of any month, the
monthly management fee shall be prorated for the portion of any month
in which this Agreement is in effect which is not a complete month
according to the proportion which the number of calendar days in the
fiscal quarter during which the Agreement is in effect bears to the
number of calendar days in the month, and shall be payable within 10
days after the date of termination.
5. ACTIVITIES OF THE MANAGER. The services of the Manager to the Fund
hereunder are not to be deemed exclusive, and the Manager and any of its
affiliates shall be free to render similar services to others. Subject to
and in accordance with the Articles of Incorporation and By-Laws of
Custodian Funds and to Section 10(a) of the 1940 Act, it is understood that
directors, officers, agents and stockholders of Custodian Funds are or may
be interested in the Manager or its affiliates as directors, officers,
agents or stockholders, and that directors, officers, agents or
stockholders of the Manager or its affiliates are or may be interested in
Custodian Funds as directors, officers, agents, stockholders or otherwise,
that the Manager or its affiliates may be interested in the Fund as
stockholders or otherwise; and that the effect of any such interests shall
be governed by said Articles of Incorporation, the By-Laws and the 1940
Act.
6. LIABILITIES OF THE MANAGER.
A. In the absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of obligations or duties hereunder on the part of the
Manager, the Manager shall not be subject to liability to Custodian Funds
or the Fund or to any shareholder of the Fund for any act or omission in
the course of, or connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding or sale of any
security by the Fund.
B. Notwithstanding the foregoing, the Manager agrees to reimburse the Fund for
any and all costs, expenses, and counsel and directors' fees reasonably
incurred by the Fund in the preparation, printing and distribution of proxy
statements, amendments to its Registration Statement, holdings of meetings
of its shareholders or directors, the conduct of factual investigations,
any legal or administrative proceedings (including any applications for
exemptions or determinations by the Securities and Exchange Commission)
which the Fund incurs as the result of action or inaction of the Manager or
any of its affiliates or any of their officers, directors, employees or
shareholders where the action or inaction necessitating such expenditures
(i) is directly or indirectly related to any transaction or proposed
transaction in the shares or control of the Manager or its affiliates (or
litigation related to any pending or proposed or future transaction in such
shares or control) which shall have been undertaken without the prior,
express approval of Custodian Funds' Board of Directors; or, (ii) is within
the control of the Manager or any of its affiliates or any of their
officers, directors, employees or shareholders. The Manager shall not be
obligated pursuant to the provisions of this Subparagraph 6(B), to
reimburse the Fund for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Fund or a Fund
shareholder seeking to recover all or a portion of the proceeds derived by
any shareholder of the Manager any of its affiliates from the sale of his
shares of the Manager, or similar matters. So long as this Agreement is in
effect the Manager shall pay to the Fund the amount due for expenses
subject to this Subparagraph 6(B) within 30 days after a bill or statement
has been received by the Manager therefore. This provision shall not be
deemed to be a waiver of any claim the Fund may have or may assert against
the Manager or others for costs, expenses or damages heretofore incurred by
the Fund or for costs, expenses or damages the Fund may hereafter incur
which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to protect any director
or officer of Custodian Funds, or director or officer of the Manager, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
7. RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date written below and shall
continue in effect for two (2) years thereafter, unless sooner terminated
as hereinafter provided and shall continue in effect thereafter for periods
not exceeding one (1) year so long as such continuation is approved at
least annually (i) by a vote of a majority of the outstanding voting
securities of the Fund or by a vote of the Board of Directors of Custodian
Funds, and (ii) by a vote of a majority of the directors of Custodian Funds
who are not parties to the Agreement or interested persons of any parties
to the Agreement (other than as Directors of Custodian Funds) cast in
person at a meeting called for the purpose of voting on the Agreement.
B. This Agreement.
(i) may at any time be terminated without the payment of any penalty
either by vote of the Board of Directors of Custodian Funds or by vote
of a majority of the outstanding voting securities of the Fund, on 30
days' written notice to the Manager;
(ii) shall immediately terminate in the event of its assignment; and
(iii) may be terminated by the Manager on 30 days' written notice to the
Fund.
C. As used in this Paragraph the terms "assignment," "interested person" and
"vote of a majority of the outstanding voting securities" shall have the
meanings set forth for any such terms in the 1940 Act.
D. Any notice under this Agreement shall be given in writing addressed and
delivered, or mailed postage-paid, to the other party at any office of such
party.
8. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of July 1, 1997.
FRANKLIN CUSTODIAN FUNDS, INC.
on behalf of the Growth Series
By /s/Harmon E. Burns
Harmon E. Burns
Vice President
FRANKLIN INVESTMENT ADVISORY SERVICES, INC.
BY /s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President &
Assistant Secretary
AMENDMENT, dated May 7 , 1997, to the Master Custody Agreement ("Agreement")
between each Investment Company listed on Exhibit A to the Agreement and The
Bank of New York dated February 16, 1996.
It is hereby agreed as follows:
A. Unless otherwise provided herein, all terms and conditions of the
Agreement are expressly incorporated herein by reference and, except as modified
hereby, the Agreement is confirmed in all respects. Capitalized terms used
herein without definition shall have the meanings ascribed to them in the
Agreement.
B. The Agreement shall be amended to add a new Section 4. 1 0 as follows:
4.10 ADDITIONAL DUTIES WITH RESPECT TO RUSSIAN SECURITIES.
(a) Upon 3 business days prior written notice from a Fund that
it will invest in any security issued by a Russian issuer ("Russian Security"),
the Custodian shall to the extent required and in accordance with the terms of
the Subcustodian Agreement between the Custodian and Credit Suisse ("Foreign
Custodian") dated as of August 8, 1996 (the "Subcustodian Agreement") direct the
Foreign Custodian to enter into a contract ("Registrar Contract") with the
entity providing share registration services to the Russian issuer ("Registrar")
containing substantially the following protective provisions:
(1) REGULAR SHARE CONFIRMATIONS. Each Registrar Contract must
establish the Foreign Custodian's right to conduct regular
share confirmations on behalf of the Foreign Custodian's
customers.
(2) PROMPT RE-REGISTRATIONS. Registrars must be obligated to
effect re-registrations within 72 hours (or such other
specified time as the United States Securities and Exchange
Commission (the "SEC") may deem appropriate by rule,
regulation, order or "no-action" letter) of receiving the
necessary documentation.
(3) USE OF NOMINEE NAME. The Registrar Contract must establish
the Foreign Custodian's right to hold shares not held
directly in the beneficial owner's name in the name of the
Foreign Custodian's nominee.
(4) AUDITOR VERIFICATION. The Registrar Contract must allow the
independent auditors of the Custodian and the Custodian's
clients to obtain direct access to the share register for
the independent auditors of each of the Foreign Custodian's
clients.
(5) SPECIFICATION OF REGISTRAR'S RESPONSIBILITIES AND
LIABILITIES. The contract must set forth: (1) the
Registrar's responsibilities with regard to corporate
actions and other distributions; (ii) the Registrar's
liabilities as established under the regulations applicable
to the Russian share registration -system and (iii) the
procedures for making a claim against and receiving
compensation from the registrar in the event a loss is
incurred.
(b) The Custodian shall, in accordance with the Subcustodian
Agreement, direct the Foreign Custodian to conduct regular share confirmations,
which shall require the Foreign Custodian to (1) request either a duplicate
share extract or some other sufficient evidence of verification and (2)
determine if the Foreign Custodian's records correlate with those of the
Registrar. For at least the first two years following the Foreign Custodian's
first use of a Registrar in connection with a Fund investment, and subject to
the cooperation of the Registrar, the Foreign Custodian will conduct these share
confirmations on at least a quarterly basis, although thereafter they may be
conducted on a less frequent basis, but no less frequently than annually, if the
Fund's Board of Directors, in consultation with the Custodian, determine it
appropriate.
(c) The Custodian shall, pursuant to the Subcustodian
Agreement, direct the Subcustodian to maintain custody of the Fund's share
register extracts or other evidence of verification obtained pursuant to
paragraph (b) above.
(d) The Custodian shall, pursuant to the Subcustodian
Agreement, direct the Foreign Custodian to comply with the rules, regulations,
orders and "no-action" letters of the SEC with respect to
(1) the receipt, holding, maintenance, release and delivery
of Securities; and
(2) providing notice to the Fund and its Board of Directors
of events specified in such rules, regulations, orders and letters.
(e) The Custodian shall have no liability for the action or
inaction of any Registrar or securities depository utilized in connection with
Russian Securities except to the extent that any such action or inaction was the
result of the Custodian's negligence. With respect to any costs, expenses,
damages, liabilities or claims, including attorneys' and accountants' fees
(collectively, "Losses") incurred by a Fund as a result of the acts or the
failure to act by any Foreign Custodian or its subsidiary in Russia
("Subsidiary"), the Custodian shall take appropriate action to recover such
Losses from the Foreign Custodian or Subsidiary. The Custodian's sole
responsibility and liability to a Fund with respect to any Losses shall be
limited to amounts so received from the Foreign Custodian or Subsidiary
(exclusive of costs and expenses incurred by the Custodian) except to the extent
that such losses were the result of the Custodian's negligence.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
THE BANK OF NEW YORK
By: /s/ STEPHEN E. GRUNSTON
Name: STEPHEN E. GRUNSTON
Title: Vice President
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A TO THE AGREEMENT
By: /s/ DEBORAH R. GATZEK
Name: Deborah R. Gatzek
Title: Vice President
By: /s/Karen L. Skidmore
Name: KarenL. Skidmore
Title: Assistant Vice President
Amendment to Master Custody Agreement
The Bank of New York and each of the Investment Companies listed on Exhibit A,
for itself and on behalf of its specified series, hereby amend the Master
Custody Agreement dated as of February 16, 1996, by replacing Exhibit A with the
attached.
Dated as of: October 15, 1997
INVESTMENT COMPANIES
By: /S/ DEBORAH R. GATZEK
Deborah R. Gatzek
Title: Vice President & Secretary
THE BANK OF NEW YORK
By: /S/ STEPHEN E. GRUNSTON
Stephen E. Grunston
Title: Vice President
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series
for which the Custodian shall serve under the Master Custody Agreement dated as
of February 16, 1996.
<TABLE>
<CAPTION>
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<S> <C> <C>
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ---------------------------------------------------------------------------------------------------------------------
Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage
Portfolio
Adjustable Rate Securities Portfolio
Franklin Asset Allocation Fund Delaware Business Trust
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Trust Franklin California Insured Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income California Corporation
Fund
- ---------------------------------------------------------------------------------------------------------------------
<PAGE>
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ---------------------------------------------------------------------------------------------------------------------
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business Trust
Franklin High Income Trust Delaware Business Trust AGE High Income Fund
Franklin Investors Securities Trust Massachusetts Business Trust Franklin Global Government Income Fund
Franklin Short-Intermediate U.S. Gov't
Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities
Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
Franklin Managed Trust Massachusetts Business Trust Franklin Corporate Qualified Dividend Fund
Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Institutional Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Income Delaware Business Trust
Fund
- ---------------------------------------------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund
Trust Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
Franklin Real Estate Securities Delaware Business Trust Franklin Real Estate Securities Fund
Trust
Franklin Strategic Mortgage Delaware Business Trust
Portfolio
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Biotechnology Discovery Fund
Franklin Tax-Exempt Money Fund California Corporation
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income Trust Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Michigan Tax-Free Income Fund
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Templeton Fund Allocator Delaware Business Trust Franklin Templeton Conservative Target Fund
Series Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Global Trust Delaware Business Trust Franklin Templeton German Government Bond Fund
Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton International Delaware Business Trust Templeton Pacific Growth Fund
Trust Templeton Foreign Smaller Companies Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund
Trust Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Valuemark Funds Massachusetts Business Money Market Fund
Trust Growth and Income Fund
Natural Resources Securities Fund
Real Estate Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global Income Securities Fund
Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Rising Dividends Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Valuemark Funds Massachusetts Business Templeton Pacific Growth Fund
Trust Templeton International Equity Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation Fund
Small Cap Fund
Capital Growth Fund
Templeton International Smaller Companies Fund
- -------------------------------------------------------------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio
Trust Franklin U.S. Government Securities Money Market Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S.
Government Securities Fund
Franklin Institutional Adjustable Rate
Securities Fund
Franklin U.S. Government Agency Money Market Fund
Franklin Cash Reserves Fund
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market Portfolio
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Principal Maturity Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
Franklin Floating Rate Trust Delaware Business Trust
- -------------------------------------------------------------------------------------------------------------
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment No. 77
to the Registration Statement of Franklin Custodian Funds, Inc. on Form N-1A
File No. 2-11346 of our report dated October 28, 1997 on our audit of the
financial statements and financial highlights of Franklin Custodian Funds, Inc.,
which report is included in the Annual Report to Shareholders for the year ended
September 30, 1997 which is incorporated by reference in the Registration
Statement.
/s/COOPERS & LYBRAND L.L.P.
San Francisco, California
January 27, 1998
FRANKLIN CUSTODIAN FUNDS, INC.
ON BEHALF OF
DYNATECH SERIES
MULTIPLE CLASS PLAN
This Multiple Class Plan (the "Plan") has been adopted by a
majority of the Board of Directors of Franklin Custodian Funds, Inc. (the
"Investment Company"), on behalf of the Dynatech Series (the "Fund"). The Board
has determined that the Plan is in the best interests of each class and the Fund
as a whole. The Plan sets forth the provisions relating to the establishment of
multiple classes of shares for the Fund.
1. The Fund shall offer two classes of shares, to be known as
Dynatech Series - Class I and Dynatech Series - Class II.
2. Class I shares shall carry a front-end sales charge ranging from
0% - 4.50%, and Class II shares shall carry a front-end sales charge of 1.00%.
3. Class I shares shall not be subject to a contingent deferred
sales charge ("CDSC") except in the following limited circumstances. On
investments of $1 million or more, a contingent deferred sales charge of 1.00%
of the lesser of the then-current net asset value or the original net asset
value at the time of purchase applies to redemptions of those investments within
the contingency period of 12 months from the calendar month following their
purchase. The CDSC is waived in certain circumstances, as described in the
Fund's prospectus.
4. Class II shares redeemed within 18 months of their purchase
shall be assessed a CDSC of 1.00% on the lesser of the then-current net asset
value or the original net asset value at the time of purchase. The CDSC is
waived in certain circumstances as described in the Fund's prospectus.
5. The Rule 12b-1 Plan associated with Class I shares may be used to
reimburse Franklin/Templeton Distributors, Inc. (the "Distributor") or others
for expenses incurred in the promotion and distribution of the shares of Class
I. Such expenses include, but are not limited to, the printing of prospectuses
and reports used for sales purposes, expenses of preparing and distributing
sales literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion of the Distributor's
overhead expenses attributable to the distribution of Class shares, as well as
any distribution or service fees paid to securities dealers or their firms or
others who have executed a servicing agreement with the Fund for the Class, the
Distributor or its affiliates.
The Rule 12b-1 Plan associated with Class II shares has two components.
The first component is a shareholder servicing fee, to be paid to
broker-dealers, banks, trust companies and others who will provide personal
assistance to shareholders in servicing their accounts. The second component is
an asset-based sales charge to be retained by the Distributor during the first
year after sale of shares, and, in subsequent years, to be paid to dealers or
retained by the Distributor to be used in the promotion and distribution of
Class II shares, in a manner similar to that described above for Class I shares.
The Plan shall operate in accordance with the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., Article III, section
26(d).
6. The only difference in expenses as between Class I and Class II
shares shall relate to differences in the Rule 12b-1 plan expenses of each
class, as described in each class' Rule 12b-1 Plan.
7. There shall be no conversion features associated with the Class I
and Class II shares.
8. Shares of either Class may be exchanged for shares of another
investment company within the Franklin Templeton Group of Funds according to the
terms and conditions stated in each fund's prospectus, as it may be amended from
time to time, to the extent permitted by the Investment Company Act of 1940 and
the rules and regulations adopted thereunder.
9. Each Class will vote separately with respect to the Rule 12b-1 Plan
related to that Class.
10. On an ongoing basis, the Directors pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund for the
existence of any material conflicts between the interests of the two classes of
shares. The Directors, including a majority of the independent Directors, shall
take such action as is reasonably necessary to eliminate any such conflict that
may develop. Franklin Advisers, Inc. and Franklin/Templeton Distributors, Inc.
shall be responsible for alerting the Board to any material conflicts that
arise.
11. All material amendments to this Plan must be approved by a majority
of the Directors of the Fund, including a majority of the Directors who are not
interested persons of the Fund.
I, Brian E. Lorenz, Secretary of Franklin Custodian Funds, Inc., do
hereby certify that this Multiple Class Plan was adopted on behalf of the
Dynatech Series, by a majority of the Directors of the Fund on June 18, 1996.
/s/BRIAN E. LORENZ
Brian E. Lorenz
Secretary
FRANKLIN CUSTODIAN FUNDS, INC.
on behalf of the
GROWTH SERIES
Multiple Class Plan
This Multiple Class Plan (the "Plan") has been adopted by a majority of
the Board of Directors of Franklin Custodian Funds, Inc. (the "Investment
Company") for the Growth Series (the "Fund"). The Board has determined that the
Plan is in the best interests of each class of the Fund and the Investment
Company as a whole. The Plan sets forth the provisions relating to the
establishment of multiple classes of shares of the Fund, and supersedes the Plan
previously adopted for the Fund.
1. The Fund shall offer three classes of shares, to be known as Class
I, Class II and Class Z shares.
2. Class I Shares shall carry a front-end sales charge ranging from 0%
- - 4.50 %, and Class II Shares shall carry a front-end sales charge of 1.00%.
Class Z Shares shall not be subject to any front-end sales charges.
3. Class I Shares shall not be subject to a contingent deferred sales
charge ("CDSC") except in the following limited circumstances. On investments of
$1 million or more, a contingent deferred sales charge of 1.00% of the lesser of
the then-current net asset value or the original net asset value at the time of
purchase applies to redemptions of those investments within the contingency
period of 12 months from the calendar month following their purchase. The CDSC
is waived in certain circumstances, as described in the Fund's prospectus.
Class II Shares redeemed within 18 months of their purchase shall be
assessed a CDSC of 1.00% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase. The CDSC is waived in
certain circumstances as described in the Fund's prospectus.
Class Z Shares shall not be subject to any CDSC.
4. The distribution plan adopted by the Investment Company pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended, (the "Rule
12b-1 Plan") associated with the Class I Shares may be used to reimburse
Franklin/Templeton Distributors, Inc. (the "Distributor") or others for expenses
incurred in the promotion and distribution of the Class I Shares. Such expenses
include, but are not limited to, the printing of prospectuses and reports used
for sales purposes, expenses of preparing and distributing sales literature and
related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of the Distributor's overhead expenses attributable
to the distribution of the Class I Shares, as well as any distribution or
service fees paid to securities dealers of their firms or others who have
executed a servicing agreement with the Investment Company for the Class I
Shares, the Distributor or its affiliates.
The Rule 12b-1 Plan associated with the Class II Shares has two
components. The first component is a shareholder servicing fee, to be paid to
broker-dealers, banks, trust companies and others who provide personal
assistance to shareholders in servicing their accounts. The second component is
an asset-based sales charge to be retained by the Distributor during the first
year after the sale of shares, and in subsequent years, to be paid to dealers or
retained by the Distributor to be used in the promotion and distribution of
Class II Shares, in a manner similar to that described above for Class I Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Class Z Shares,
and therefore, the Class Z Shares shall not be subject to deductions relating to
rule 12b-1 fees.
The Rule 12b-1 Plans for the Class I and Class II Shares shall operate
in accordance with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, section 26(d).
5. The only difference in expenses as between Class I, Class II and
Class Z Shares shall relate to differences in Rule 12b-1 plan expenses, as
described in the applicable Rule 12b-1 Plans.
6. There shall be no conversion features associated with the Class I,
Class II and Class Z Shares.
7. Shares of Class I and Class II may be exchanged for shares of
another investment company within the Franklin Templeton Group of Funds
according to the terms and conditions stated in each fund's prospectus, as it
may be amended from time to time, to the extent permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder. There is
no conversion feature applicable to Class Z Shares.
8. Each class will vote separately with respect to any Rule 12b-1 Plan
related to that class.
9. On an ongoing basis, the Board members, pursuant to their
fiduciary responsibilities under the 1940 Act and otherwise, will monitor the
Fund for the existence of any material conflicts between the Board members
interests of the various classes of shares. The Board members, including a
majority of the independent Board members, shall take such action as is
reasonably necessary to eliminate any such conflict that may develop. Franklin
Advisers, Inc. and Franklin/Templeton Distributors, Inc. shall be responsible
for alerting the Board to any material conflicts that arise.
10. All material amendments to this Plan must be approved by a majority
of the Board members, including a majority of the Board members who are not
interested persons of the Investment Company.
11. I, Brian E. Lorenz, Secretary of Franklin Custodian Funds, Inc., do
hereby certify that this Multiple Class Plan was adopted on behalf of the
Growth Series, by a majority of the Directors of the Fund on June 18, 1996.
/s/BRIAN E. LORENZ
Brian E. Lorenz
Secretary
FRANKLIN CUSTODIAN FUNDS, INC.
on behalf of the
UTILITIES SERIES
Multiple Class Plan
This Multiple Class Plan (the "Plan") has been adopted by a majority of
the Board of Directors of Franklin Custodian Funds, Inc. (the "Investment
Company") for the Utilities Series (the "Fund"). The Board has determined that
the Plan is in the best interests of each class of the Fund and the Investment
Company as a whole. The Plan sets forth the provisions relating to the
establishment of multiple classes of shares of the Fund, and supersedes the Plan
previously adopted for the Fund.
1. The Fund shall offer three classes of shares, to be known as Class
I, Class II and Class Z shares.
2. Class I Shares shall carry a front-end sales charge ranging from
0% - 4.25 %, and Class II Shares shall carry a front-end sales charge of
1.00%. Class Z Shares shall not be subject to any front-end sales charges.
3. Class I Shares shall not be subject to a contingent deferred sales
charge ("CDSC") except in the following limited circumstances. On investments of
$1 million or more, a contingent deferred sales charge of 1.00% of the lesser of
the then-current net asset value or the original net asset value at the time of
purchase applies to redemptions of those investments within the contingency
period of 12 months from the calendar month following their purchase. The CDSC
is waived in certain circumstances, as described in the Fund's prospectus.
Class II Shares redeemed within 18 months of their purchase shall be
assessed a CDSC of 1.00% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase. The CDSC is waived in
certain circumstances as described in the Fund's prospectus.
Class Z Shares shall not be subject to any CDSC.
4. The distribution plan adopted by the Investment Company pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended, (the "Rule
12b-1 Plan") associated with the Class I Shares may be used to reimburse
Franklin/Templeton Distributors, Inc. (the "Distributor") or others for expenses
incurred in the promotion and distribution of the Class I Shares. Such expenses
include, but are not limited to, the printing of prospectuses and reports used
for sales purposes, expenses of preparing and distributing sales literature and
related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of the Distributor's overhead expenses attributable
to the distribution of the Class I Shares, as well as any distribution or
service fees paid to securities dealers of their firms or others who have
executed a servicing agreement with the Investment Company for the Class I
Shares, the Distributor or its affiliates.
The Rule 12b-1 Plan associated with the Class II Shares has two
components. The first component is a shareholder servicing fee, to be paid to
broker-dealers, banks, trust companies and others who provide personal
assistance to shareholders in servicing their accounts. The second component is
an asset-based sales charge to be retained by the Distributor during the first
year after the sale of shares, and in subsequent years, to be paid to dealers or
retained by the Distributor to be used in the promotion and distribution of
Class II Shares, in a manner similar to that described above for Class I Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Class Z Shares,
and therefore, the Class Z Shares shall not be subject to deductions relating to
rule 12b-1 fees.
The Rule 12b-1 Plans for the Class I and Class II Shares shall operate
in accordance with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, section 26(d).
5. The only difference in expenses as between Class I, Class II and
Class Z Shares shall relate to differences in Rule 12b-1 plan expenses, as
described in the applicable Rule 12b-1 Plans.
6. There shall be no conversion features associated with the Class I,
Class II and Class Z Shares.
7. Shares of Class I and Class II may be exchanged for shares of
another investment company within the Franklin Templeton Group of Funds
according to the terms and conditions stated in each fund's prospectus, as it
may be amended from time to time, to the extent permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder. There is
no conversion feature applicable to Class Z Shares.
8. Each class will vote separately with respect to any Rule 12b-1 Plan
related to that class.
9. On an ongoing basis, the Board members, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund for the
existence of any material conflicts between the Board members interests of the
various classes of shares. The Board members, including a majority of the
independent Board members, shall take such action as is reasonably necessary to
eliminate any such conflict that may develop. Franklin Advisers, Inc. and
Franklin/Templeton Distributors, Inc. shall be responsible for alerting the
Board to any material conflicts that arise.
10. All material amendments to this Plan must be approved by a majority
of the Board members, including a majority of the Board members who are not
interested persons of the Investment Company.
11. I, Brian E. Lorenz, Secretary of Franklin Custodian Funds, Inc.,do
hereby certify that this Multiple Class Plan was adopted on behalf of the
Utilities Series, by a majority of the Directors of the Fund on June 18, 1996.
/s/BRIAN E. LORENZ
Brian E. Lorenz
Secretary
FRANKLIN CUSTODIAN FUNDS, INC.
on behalf of the
INCOME SERIES
Multiple Class Plan
This Multiple Class Plan (the "Plan") has been adopted by a majority of
the Board of Directors of Franklin Custodian Funds, Inc. (the "Investment
Company") for the Income Series (the "Fund"). The Board has determined that the
Plan is in the best interests of each class of the Fund and the Investment
Company as a whole. The Plan sets forth the provisions relating to the
establishment of multiple classes of shares of the Fund, and supersedes the Plan
previously adopted for the Fund.
1. The Fund shall offer three classes of shares, to be known as Class
I, Class II and Class Z shares.
2. Class I Shares shall carry a front-end sales charge ranging from
0% - 4.25 %, and Class II Shares shall carry a front-end sales charge of 1.00%.
Class Z Shares shall not be subject to any front-end sales charges.
3. Class I Shares shall not be subject to a contingent deferred sales
charge ("CDSC") except in the following limited circumstances. On investments of
$1 million or more, a contingent deferred sales charge of 1.00% of the lesser of
the then-current net asset value or the original net asset value at the time of
purchase applies to redemptions of those investments within the contingency
period of 12 months from the calendar month following their purchase. The CDSC
is waived in certain circumstances, as described in the Fund's prospectus.
Class II Shares redeemed within 18 months of their purchase shall be
assessed a CDSC of 1.00% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase. The CDSC is waived in
certain circumstances as described in the Fund's prospectus.
Class Z Shares shall not be subject to any CDSC.
4. The distribution plan adopted by the Investment Company pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended, (the "Rule
12b-1 Plan") associated with the Class I Shares may be used to reimburse
Franklin/Templeton Distributors, Inc. (the "Distributor") or others for expenses
incurred in the promotion and distribution of the Class I Shares. Such expenses
include, but are not limited to, the printing of prospectuses and reports used
for sales purposes, expenses of preparing and distributing sales literature and
related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of the Distributor's overhead expenses attributable
to the distribution of the Class I Shares, as well as any distribution or
service fees paid to securities dealers of their firms or others who have
executed a servicing agreement with the Investment Company for the Class I
Shares, the Distributor or its affiliates.
The Rule 12b-1 Plan associated with the Class II Shares has two
components. The first component is a shareholder servicing fee, to be paid to
broker-dealers, banks, trust companies and others who provide personal
assistance to shareholders in servicing their accounts. The second component is
an asset-based sales charge to be retained by the Distributor during the first
year after the sale of shares, and in subsequent years, to be paid to dealers or
retained by the Distributor to be used in the promotion and distribution of
Class II Shares, in a manner similar to that described above for Class I Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Class Z Shares,
and therefore, the Class Z Shares shall not be subject to deductions relating to
rule 12b-1 fees.
The Rule 12b-1 Plans for the Class I and Class II Shares shall operate
in accordance with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, section 26(d).
5. The only difference in expenses as between Class I, Class II, and
Class Z Shares shall relate to differences in Rule 12b-1 plan expenses, as
described in the applicable Rule 12b-1 Plans.
6. There shall be no conversion features associated with the Class I,
Class II and Class Z Shares.
7. Shares of Class I and Class II may be exchanged for shares of
another investment company within the Franklin Templeton Group of Funds
according to the terms and conditions stated in each fund's prospectus, as it
may be amended from time to time, to the extent permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder. There is
no conversion feature applicable to Class Z Shares.
8. Each class will vote separately with respect to any Rule 12b-1 Plan
related to that class.
9. On an ongoing basis, the Board members, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund for the
existence of any material conflicts between the Board members interests of the
various classes of shares. The Board members, including a majority of the
independent Board members, shall take such action as is reasonably necessary to
eliminate any such conflict that may develop. Franklin Advisers, Inc. and
Franklin/Templeton Distributors, Inc. shall be responsible for alerting the
Board to any material conflicts that arise.
10. All material amendments to this Plan must be approved by a majority
of the Board members, including a majority of the Board members who are not
interested persons of the Investment Company.
11. I, Deborah R. Gatzek, Assistant Secretary of Franklin Custodian
Funds, Inc., do hereby certify that this Multiple Class Plan was adopted on
behalf of the Income Series, by a majority of the Directors of the Fund on June
18, 1996.
/s/DEBORAH R. GATZEK
Deborah R. Gatzek
Assistant Secretary
FRANKLIN CUSTODIAN FUNDS, INC.
on behalf of the
U.S. GOVERNMENT SECURITIES SERIES
Multiple Class Plan
This Multiple Class Plan (the "Plan") has been adopted by a majority of
the Board of Directors of Franklin Custodian Funds, Inc. (the "Investment
Company") for the U.S. Government Securities Series (the "Fund"). The Board has
determined that the Plan is in the best interests of each class of the Fund and
the Investment Company as a whole. The Plan sets forth the provisions relating
to the establishment of multiple classes of shares of the Fund, and supersedes
the Plan previously adopted for the Fund.
1. The Fund shall offer three classes of shares, to be known as Class
I, Class II shares and Class Z shares.
2. Class I Shares shall carry a front-end sales charge ranging from 0%
- - 4.25 %, and Class II Shares shall carry a front-end sales charge of 1.00%.
Class Z Shares shall not be subject to any front-end sales charges.
3. Class I Shares shall not be subject to a contingent deferred sales
charge ("CDSC") except in the following limited circumstances. On investments of
$1 million or more, a contingent deferred sales charge of 1.00% of the lesser of
the then-current net asset value or the original net asset value at the time of
purchase applies to redemptions of those investments within the contingency
period of 12 months from the calendar month following their purchase. The CDSC
is waived in certain circumstances, as described in the Fund's prospectus.
Class II Shares redeemed within 18 months of their purchase shall be
assessed a CDSC of 1.00% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase. The CDSC is waived in
certain circumstances as described in the Fund's prospectus.
Class Z Shares shall not be subject to any CDSC.
4. The distribution plan adopted by the Investment Company pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended, (the "Rule
12b-1 Plan") associated with the Class I Shares may be used to reimburse
Franklin/Templeton Distributors, Inc. (the "Distributor") or others for expenses
incurred in the promotion and distribution of the Class I Shares. Such expenses
include, but are not limited to, the printing of prospectuses and reports used
for sales purposes, expenses of preparing and distributing sales literature and
related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of the Distributor's overhead expenses attributable
to the distribution of the Class I Shares, as well as any distribution or
service fees paid to securities dealers of their firms or others who have
executed a servicing agreement with the Investment Company for the Class I
Shares, the Distributor or its affiliates.
The Rule 12b-1 Plan associated with the Class II Shares has two
components. The first component is a shareholder servicing fee, to be paid to
broker-dealers, banks, trust companies and others who provide personal
assistance to shareholders in servicing their accounts. The second component is
an asset-based sales charge to be retained by the Distributor during the first
year after the sale of shares, and in subsequent years, to be paid to dealers or
retained by the Distributor to be used in the promotion and distribution of
Class II Shares, in a manner similar to that described above for Class I Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Class Z Shares,
and therefore, the Class Z Shares shall not be subject to deductions relating to
rule 12b-1 fees.
The Rule 12b-1 Plans for the Class I and Class II Shares shall operate
in accordance with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, section 26(d).
5. The only difference in expenses as between Class I, Class II, and
Class Z Shares shall relate to differences in Rule 12b-1 plan expenses, as
described in the applicable Rule 12b-1 Plans.
6. There shall be no conversion features associated with the Class I,
Class II, and Class Z Shares.
7. Shares of Class I and Class II may be exchanged for shares of
another investment company within the Franklin Templeton Group of Funds
according to the terms and conditions stated in each fund's prospectus, as it
may be amended from time to time, to the extent permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder. There is
no conversion feature applicable to Class Z Shares.
8. Each class will vote separately with respect to any Rule 12b-1 Plan
related to that class.
9. On an ongoing basis, the Board members, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund for the
existence of any material conflicts between the Board members interests of the
various classes of shares. The Board members, including a majority of the
independent Board members, shall take such action as is reasonably necessary to
eliminate any such conflict that may develop. Franklin Advisers, Inc. and
Franklin/Templeton Distributors, Inc. shall be responsible for alerting the
Board to any material conflicts that arise.
10. All material amendments to this Plan must be approved by a majority
of the Board members, including a majority of the Board members who are not
interested persons of the Investment Company.
11. I, Brian E. Lorenz, Secretary of Franklin Custodian Funds, Inc., do
hereby certify that this Multiple Class Plan was adopted on behalf of the
U.S. Government Securities Series, by a majority of the Directors of the Fund
on June 18, 1996.
/s/BRIAN E. LORENZ
Brian E. Lorenz
Secretary
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERRENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 021
<NAME> FRANKLIN DYNATECH SERIES - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 31,963,323
<INVESTMENTS-AT-VALUE> 118,805,938
<RECEIVABLES> 72,995,320
<ASSETS-OTHER> 268,120
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 192,069,378
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 582,033
<TOTAL-LIABILITIES> 582,033
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 96,665,679
<SHARES-COMMON-STOCK> 10,177,494
<SHARES-COMMON-PRIOR> 7,446,627
<ACCUMULATED-NII-CURRENT> 1,031,642
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,947,409
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 86,842,615
<NET-ASSETS> 191,487,345
<DIVIDEND-INCOME> 455,107
<INTEREST-INCOME> 2,060,661
<OTHER-INCOME> 0
<EXPENSES-NET> (1,472,532)
<NET-INVESTMENT-INCOME> 1,043,236
<REALIZED-GAINS-CURRENT> 6,949,626
<APPREC-INCREASE-CURRENT> 33,474,575
<NET-CHANGE-FROM-OPS> 41,467,437
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (415,339)
<DISTRIBUTIONS-OF-GAINS> (3,013,708)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,207,685
<NUMBER-OF-SHARES-REDEEMED> (4,675,913)
<SHARES-REINVESTED> 199,095
<NET-CHANGE-IN-ASSETS> 86,979,183
<ACCUMULATED-NII-PRIOR> 403,922
<ACCUMULATED-GAINS-PRIOR> 3,012,745
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 840,480
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,472,532
<AVERAGE-NET-ASSETS> 140,139,612
<PER-SHARE-NAV-BEGIN> 14.030
<PER-SHARE-NII> .100
<PER-SHARE-GAIN-APPREC> 4.810
<PER-SHARE-DIVIDEND> (.060)
<PER-SHARE-DISTRIBUTIONS> (.400)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 18.480
<EXPENSE-RATIO> 1.040
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 022
<NAME> FRANKLIN DYNATECH SERIES - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 31,963,323
<INVESTMENTS-AT-VALUE> 118,805,938
<RECEIVABLES> 72,995,320
<ASSETS-OTHER> 268,120
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 192,069,378
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 582,033
<TOTAL-LIABILITIES> 582,033
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 96,665,679
<SHARES-COMMON-STOCK> 184,978
<SHARES-COMMON-PRIOR> 14
<ACCUMULATED-NII-CURRENT> 1,031,642
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,947,409
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 86,842,615
<NET-ASSETS> 191,487,345
<DIVIDEND-INCOME> 455,107
<INTEREST-INCOME> 2,060,661
<OTHER-INCOME> 0
<EXPENSES-NET> (1,472,532)
<NET-INVESTMENT-INCOME> 1,043,236
<REALIZED-GAINS-CURRENT> 6,949,626
<APPREC-INCREASE-CURRENT> 33,474,575
<NET-CHANGE-FROM-OPS> 41,467,437
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (177)
<DISTRIBUTIONS-OF-GAINS> (1,254)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 275,202
<NUMBER-OF-SHARES-REDEEMED> (90,332)
<SHARES-REINVESTED> 94
<NET-CHANGE-IN-ASSETS> 86,979,183
<ACCUMULATED-NII-PRIOR> 403,922
<ACCUMULATED-GAINS-PRIOR> 3,012,745
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 840,480
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,472,532
<AVERAGE-NET-ASSETS> 140,139,612
<PER-SHARE-NAV-BEGIN> 14.030
<PER-SHARE-NII> .070
<PER-SHARE-GAIN-APPREC> 4.660
<PER-SHARE-DIVIDEND> (.060)
<PER-SHARE-DISTRIBUTIONS> (.400)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 18.300
<EXPENSE-RATIO> 1.820
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
CUSTODIAN FUNDS SEPTEMBER 30, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> FRANKLIN GROWTH SERIES - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 433,324,038
<INVESTMENTS-AT-VALUE> 1,065,564,551
<RECEIVABLES> 516,344,195
<ASSETS-OTHER> 564,636
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,582,473,382
<PAYABLE-FOR-SECURITIES> 780,632
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,091,238
<TOTAL-LIABILITIES> 3,871,870
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 912,447,954
<SHARES-COMMON-STOCK> 52,996,093
<SHARES-COMMON-PRIOR> 44,715,467
<ACCUMULATED-NII-CURRENT> 19,890,444
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,022,601
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 632,240,513
<NET-ASSETS> 1,578,601,512
<DIVIDEND-INCOME> 12,800,457
<INTEREST-INCOME> 20,234,726
<OTHER-INCOME> 0
<EXPENSES-NET> (12,503,943)
<NET-INVESTMENT-INCOME> 20,531,240
<REALIZED-GAINS-CURRENT> 14,065,272
<APPREC-INCREASE-CURRENT> 215,960,743
<NET-CHANGE-FROM-OPS> 250,557,255
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,432,896)
<DISTRIBUTIONS-OF-GAINS> (9,283,568)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19,647,652
<NUMBER-OF-SHARES-REDEEMED> (12,109,484)
<SHARES-REINVESTED> 742,458
<NET-CHANGE-IN-ASSETS> 514,698,292
<ACCUMULATED-NII-PRIOR> 10,212,504
<ACCUMULATED-GAINS-PRIOR> 9,795,215
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,295,304
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 12,503,943
<AVERAGE-NET-ASSETS> 1,321,892,182
<PER-SHARE-NAV-BEGIN> 22.820
<PER-SHARE-NII> .360
<PER-SHARE-GAIN-APPREC> 4.340
<PER-SHARE-DIVIDEND> (.230)
<PER-SHARE-DISTRIBUTIONS> (.200)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 27.090
<EXPENSE-RATIO> .890
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
CUSTODIAN FUNDS SEPTEMBER 30, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 012
<NAME> FRANKLIN GROWTH SERIES - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 433,324,038
<INVESTMENTS-AT-VALUE> 1,065,564,551
<RECEIVABLES> 516,344,195
<ASSETS-OTHER> 564,636
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,582,473,382
<PAYABLE-FOR-SECURITIES> 780,632
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,091,238
<TOTAL-LIABILITIES> 3,871,870
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 912,447,954
<SHARES-COMMON-STOCK> 4,391,009
<SHARES-COMMON-PRIOR> 1,921,082
<ACCUMULATED-NII-CURRENT> 19,890,444
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,022,601
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 632,240,513
<NET-ASSETS> 1,578,601,512
<DIVIDEND-INCOME> 12,800,457
<INTEREST-INCOME> 20,234,726
<OTHER-INCOME> 0
<EXPENSES-NET> (12,503,943)
<NET-INVESTMENT-INCOME> 20,531,240
<REALIZED-GAINS-CURRENT> 14,065,272
<APPREC-INCREASE-CURRENT> 215,960,743
<NET-CHANGE-FROM-OPS> 250,557,255
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (420,404)
<DISTRIBUTIONS-OF-GAINS> (554,318)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,570,458
<NUMBER-OF-SHARES-REDEEMED> (1,139,059)
<SHARES-REINVESTED> 38,528
<NET-CHANGE-IN-ASSETS> 514,698,292
<ACCUMULATED-NII-PRIOR> 10,212,504
<ACCUMULATED-GAINS-PRIOR> 9,795,215
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,295,304
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 12,503,943
<AVERAGE-NET-ASSETS> 1,321,892,182
<PER-SHARE-NAV-BEGIN> 22.600
<PER-SHARE-NII> .200
<PER-SHARE-GAIN-APPREC> 4.250
<PER-SHARE-DIVIDEND> (.150)
<PER-SHARE-DISTRIBUTIONS> (.200)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 26.700
<EXPENSE-RATIO> 1.660
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
CUSTODIAN FUNDS SEPTEMBER 30, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 013
<NAME> FRANKLIN GROWTH SERIES - ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 433,324,038
<INVESTMENTS-AT-VALUE> 1,065,564,551
<RECEIVABLES> 516,344,195
<ASSETS-OTHER> 564,636
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,582,473,382
<PAYABLE-FOR-SECURITIES> 780,632
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,091,238
<TOTAL-LIABILITIES> 3,871,870
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 912,447,954
<SHARES-COMMON-STOCK> 951,931
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 19,890,444
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,022,601
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 632,240,513
<NET-ASSETS> 1,578,601,512
<DIVIDEND-INCOME> 12,800,457
<INTEREST-INCOME> 20,234,726
<OTHER-INCOME> 0
<EXPENSES-NET> (12,503,943)
<NET-INVESTMENT-INCOME> 20,531,240
<REALIZED-GAINS-CURRENT> 14,065,272
<APPREC-INCREASE-CURRENT> 215,960,743
<NET-CHANGE-FROM-OPS> 250,557,255
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,309,960
<NUMBER-OF-SHARES-REDEEMED> (358,029)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 514,698,292
<ACCUMULATED-NII-PRIOR> 10,212,504
<ACCUMULATED-GAINS-PRIOR> 9,795,215
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,295,304
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 12,503,943
<AVERAGE-NET-ASSETS> 1,321,892,182
<PER-SHARE-NAV-BEGIN> 23.240
<PER-SHARE-NII> .250
<PER-SHARE-GAIN-APPREC> 3.640
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 27.130
<EXPENSE-RATIO> .660
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 031
<NAME> FRANKLIN UTILITIES SERIES - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 1,719,080,804
<INVESTMENTS-AT-VALUE> 1,933,205,376
<RECEIVABLES> 58,834,320
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,992,039,696
<PAYABLE-FOR-SECURITIES> 39,690
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,101,345
<TOTAL-LIABILITIES> 8,141,035
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,711,049,291
<SHARES-COMMON-STOCK> 194,534,988
<SHARES-COMMON-PRIOR> 246,652,238
<ACCUMULATED-NII-CURRENT> 8,991,193
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 49,733,605
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 214,124,572
<NET-ASSETS> 1,983,898,661
<DIVIDEND-INCOME> 108,058,105
<INTEREST-INCOME> 23,367,984
<OTHER-INCOME> 0
<EXPENSES-NET> (16,559,767)
<NET-INVESTMENT-INCOME> 114,866,322
<REALIZED-GAINS-CURRENT> 49,829,022
<APPREC-INCREASE-CURRENT> 112,850,805
<NET-CHANGE-FROM-OPS> 277,546,149
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (113,914,994)
<DISTRIBUTIONS-OF-GAINS> (100,515,956)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12,100,694
<NUMBER-OF-SHARES-REDEEMED> (81,440,706)
<SHARES-REINVESTED> 17,222,762
<NET-CHANGE-IN-ASSETS> (436,317,283)
<ACCUMULATED-NII-PRIOR> 9,384,835
<ACCUMULATED-GAINS-PRIOR> 101,323,800
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9,987,693
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 16,559,767
<AVERAGE-NET-ASSETS> 2,183,851,035
<PER-SHARE-NAV-BEGIN> 9.730
<PER-SHARE-NII> .530
<PER-SHARE-GAIN-APPREC> .730
<PER-SHARE-DIVIDEND> (.520)
<PER-SHARE-DISTRIBUTIONS> (.430)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.040
<EXPENSE-RATIO> .750
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 032
<NAME> FRANKLIN UTILITIES SERIES - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 1,719,080,804
<INVESTMENTS-AT-VALUE> 1,933,205,376
<RECEIVABLES> 58,834,320
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,992,039,696
<PAYABLE-FOR-SECURITIES> 39,690
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,101,345
<TOTAL-LIABILITIES> 8,141,035
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,711,049,291
<SHARES-COMMON-STOCK> 2,185,554
<SHARES-COMMON-PRIOR> 2,021,886
<ACCUMULATED-NII-CURRENT> 8,991,193
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 49,733,605
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 214,124,572
<NET-ASSETS> 1,983,898,661
<DIVIDEND-INCOME> 108,058,105
<INTEREST-INCOME> 23,367,984
<OTHER-INCOME> 0
<EXPENSES-NET> (16,559,767)
<NET-INVESTMENT-INCOME> 114,866,322
<REALIZED-GAINS-CURRENT> 49,829,022
<APPREC-INCREASE-CURRENT> 112,850,805
<NET-CHANGE-FROM-OPS> 277,546,149
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,067,340)
<DISTRIBUTIONS-OF-GAINS> (903,261)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 853,797
<NUMBER-OF-SHARES-REDEEMED> (854,260)
<SHARES-REINVESTED> 164,131
<NET-CHANGE-IN-ASSETS> (436,317,283)
<ACCUMULATED-NII-PRIOR> 9,384,835
<ACCUMULATED-GAINS-PRIOR> 101,323,800
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9,987,693
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 16,559,767
<AVERAGE-NET-ASSETS> 2,183,851,035
<PER-SHARE-NAV-BEGIN> 9.720
<PER-SHARE-NII> .450
<PER-SHARE-GAIN-APPREC> .760
<PER-SHARE-DIVIDEND> (.480)
<PER-SHARE-DISTRIBUTIONS> (.430)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.020
<EXPENSE-RATIO> 1.270
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 033
<NAME> FRANKLIN UTILITIES SERIES - ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 1,719,080,804
<INVESTMENTS-AT-VALUE> 1,933,205,376
<RECEIVABLES> 58,834,320
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,992,039,696
<PAYABLE-FOR-SECURITIES> 39,690
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,101,345
<TOTAL-LIABILITIES> 8,141,035
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,711,049,291
<SHARES-COMMON-STOCK> 868,767
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 8,991,193
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 49,733,605
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 214,124,572
<NET-ASSETS> 1,983,898,661
<DIVIDEND-INCOME> 108,058,105
<INTEREST-INCOME> 23,367,984
<OTHER-INCOME> 0
<EXPENSES-NET> (16,559,767)
<NET-INVESTMENT-INCOME> 114,866,322
<REALIZED-GAINS-CURRENT> 49,829,022
<APPREC-INCREASE-CURRENT> 112,850,805
<NET-CHANGE-FROM-OPS> 277,546,149
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (277,630)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,303,704
<NUMBER-OF-SHARES-REDEEMED> (458,724)
<SHARES-REINVESTED> 23,787
<NET-CHANGE-IN-ASSETS> (436,317,283)
<ACCUMULATED-NII-PRIOR> 9,384,835
<ACCUMULATED-GAINS-PRIOR> 101,323,800
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9,987,693
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 16,559,767
<AVERAGE-NET-ASSETS> 2,183,851,035
<PER-SHARE-NAV-BEGIN> 9.550
<PER-SHARE-NII> .360
<PER-SHARE-GAIN-APPREC> .530
<PER-SHARE-DIVIDEND> (.400)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.040
<EXPENSE-RATIO> .620
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 051
<NAME> FRANKLIN U.S. GOVERNMENT SECURITIES FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 9,275,272,398
<INVESTMENTS-AT-VALUE> 9,455,207,848
<RECEIVABLES> 64,187,449
<ASSETS-OTHER> 25,678
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,519,420,975
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 33,382,420
<TOTAL-LIABILITIES> 33,382,420
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,690,762,713
<SHARES-COMMON-STOCK> 1,357,281,977
<SHARES-COMMON-PRIOR> 1,507,740,610
<ACCUMULATED-NII-CURRENT> 7,036,041
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (391,695,649)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 179,935,450
<NET-ASSETS> 9,486,038,555
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 753,095,315
<OTHER-INCOME> 0
<EXPENSES-NET> (63,235,107)
<NET-INVESTMENT-INCOME> 689,860,208
<REALIZED-GAINS-CURRENT> (29,505,613)
<APPREC-INCREASE-CURRENT> 285,289,807
<NET-CHANGE-FROM-OPS> 945,644,402
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (694,284,790)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 78,194,660
<NUMBER-OF-SHARES-REDEEMED> (276,583,345)
<SHARES-REINVESTED> 47,930,052
<NET-CHANGE-IN-ASSETS> (701,101,700)
<ACCUMULATED-NII-PRIOR> 17,291,457
<ACCUMULATED-GAINS-PRIOR> (455,164,836)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 44,411,776
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 63,235,107
<AVERAGE-NET-ASSETS> 9,843,590,029
<PER-SHARE-NAV-BEGIN> 6.720
<PER-SHARE-NII> .480
<PER-SHARE-GAIN-APPREC> .170
<PER-SHARE-DIVIDEND> (.480)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 6.890
<EXPENSE-RATIO> .640
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 052
<NAME> FRANKLIN U.S. GOVERNMENT SECURITIES FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 9,275,272,398
<INVESTMENTS-AT-VALUE> 9,455,207,848
<RECEIVABLES> 64,187,449
<ASSETS-OTHER> 25,678
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,519,420,975
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 33,382,420
<TOTAL-LIABILITIES> 33,382,420
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,690,762,713
<SHARES-COMMON-STOCK> 17,586,866
<SHARES-COMMON-PRIOR> 8,605,785
<ACCUMULATED-NII-CURRENT> 7,036,041
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (391,695,649)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 179,935,450
<NET-ASSETS> 9,486,038,555
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 753,095,315
<OTHER-INCOME> 0
<EXPENSES-NET> (63,235,107)
<NET-INVESTMENT-INCOME> 689,860,208
<REALIZED-GAINS-CURRENT> (29,505,613)
<APPREC-INCREASE-CURRENT> 285,289,807
<NET-CHANGE-FROM-OPS> 945,644,402
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,467,178)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11,765,224
<NUMBER-OF-SHARES-REDEEMED> (3,311,245)
<SHARES-REINVESTED> 527,102
<NET-CHANGE-IN-ASSETS> (701,101,700)
<ACCUMULATED-NII-PRIOR> 17,291,457
<ACCUMULATED-GAINS-PRIOR> (455,164,836)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 44,411,776
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 63,235,107
<AVERAGE-NET-ASSETS> 9,843,590,029
<PER-SHARE-NAV-BEGIN> 6.700
<PER-SHARE-NII> .440
<PER-SHARE-GAIN-APPREC> .170
<PER-SHARE-DIVIDEND> (.440)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 6.870
<EXPENSE-RATIO> 1.200
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 053
<NAME> FRANKLIN U.S. GOVERNMENT SECURITIES FUND - ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 9,275,272,398
<INVESTMENTS-AT-VALUE> 9,455,207,848
<RECEIVABLES> 64,187,449
<ASSETS-OTHER> 25,678
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,519,420,975
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 33,382,420
<TOTAL-LIABILITIES> 33,382,420
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,690,762,713
<SHARES-COMMON-STOCK> 2,097,990
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 7,036,041
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (391,695,649)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 179,935,450
<NET-ASSETS> 9,486,038,555
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 753,095,315
<OTHER-INCOME> 0
<EXPENSES-NET> (63,235,107)
<NET-INVESTMENT-INCOME> 689,860,208
<REALIZED-GAINS-CURRENT> (29,505,613)
<APPREC-INCREASE-CURRENT> 285,289,807
<NET-CHANGE-FROM-OPS> 945,644,402
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (363,656)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,433,391
<NUMBER-OF-SHARES-REDEEMED> (375,540)
<SHARES-REINVESTED> 40,139
<NET-CHANGE-IN-ASSETS> (701,101,700)
<ACCUMULATED-NII-PRIOR> 17,291,457
<ACCUMULATED-GAINS-PRIOR> (455,164,836)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 44,411,776
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 63,235,107
<AVERAGE-NET-ASSETS> 9,843,590,029
<PER-SHARE-NAV-BEGIN> 6.760
<PER-SHARE-NII> .380
<PER-SHARE-GAIN-APPREC> .120
<PER-SHARE-DIVIDEND> (.360)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 6.900
<EXPENSE-RATIO> .550
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 041
<NAME> FRANKLIN INCOME SERIES - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 7,129,432,474
<INVESTMENTS-AT-VALUE> 7,872,822,469
<RECEIVABLES> 591,672,166
<ASSETS-OTHER> 953,208
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8,465,447,843
<PAYABLE-FOR-SECURITIES> 879,535
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 17,149,071
<TOTAL-LIABILITIES> 18,028,606
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,542,673,869
<SHARES-COMMON-STOCK> 3,106,620,788
<SHARES-COMMON-PRIOR> 2,943,970,959
<ACCUMULATED-NII-CURRENT> 69,436,365
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 92,009,348
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 743,299,655
<NET-ASSETS> 8,447,419,237
<DIVIDEND-INCOME> 178,110,067
<INTEREST-INCOME> 454,852,746
<OTHER-INCOME> 0
<EXPENSES-NET> (58,053,156)
<NET-INVESTMENT-INCOME> 574,909,657
<REALIZED-GAINS-CURRENT> 133,917,032
<APPREC-INCREASE-CURRENT> 524,014,976
<NET-CHANGE-FROM-OPS> 1,232,841,665
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (545,342,618)
<DISTRIBUTIONS-OF-GAINS> (29,741,890)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 538,060,045
<NUMBER-OF-SHARES-REDEEMED> (520,661,763)
<SHARES-REINVESTED> 145,251,547
<NET-CHANGE-IN-ASSETS> 1,323,951,983
<ACCUMULATED-NII-PRIOR> 34,315,598
<ACCUMULATED-GAINS-PRIOR> 30,949,499
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 35,364,027
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 58,053,156
<AVERAGE-NET-ASSETS> 7,750,901,854
<PER-SHARE-NAV-BEGIN> 2.300
<PER-SHARE-NII> .180
<PER-SHARE-GAIN-APPREC> .200
<PER-SHARE-DIVIDEND> (.180)
<PER-SHARE-DISTRIBUTIONS> (.010)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 2.490
<EXPENSE-RATIO> .720
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 042
<NAME> FRANKLIN INCOME SERIES - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 7,129,432,474
<INVESTMENTS-AT-VALUE> 7,872,822,469
<RECEIVABLES> 591,672,166
<ASSETS-OTHER> 953,208
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8,465,447,843
<PAYABLE-FOR-SECURITIES> 879,535
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 17,149,071
<TOTAL-LIABILITIES> 18,028,606
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,542,673,869
<SHARES-COMMON-STOCK> 278,951,410
<SHARES-COMMON-PRIOR> 148,995,814
<ACCUMULATED-NII-CURRENT> 69,436,365
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 92,009,348
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 743,299,655
<NET-ASSETS> 8,447,419,237
<DIVIDEND-INCOME> 178,110,067
<INTEREST-INCOME> 454,852,746
<OTHER-INCOME> 0
<EXPENSES-NET> (58,053,156)
<NET-INVESTMENT-INCOME> 574,909,657
<REALIZED-GAINS-CURRENT> 133,917,032
<APPREC-INCREASE-CURRENT> 524,014,976
<NET-CHANGE-FROM-OPS> 1,232,841,665
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (35,350,218)
<DISTRIBUTIONS-OF-GAINS> (1,712,633)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 151,188,247
<NUMBER-OF-SHARES-REDEEMED> (30,837,863)
<SHARES-REINVESTED> 9,605,212
<NET-CHANGE-IN-ASSETS> 1,323,951,983
<ACCUMULATED-NII-PRIOR> 34,315,598
<ACCUMULATED-GAINS-PRIOR> 30,949,499
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 35,364,027
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 58,053,156
<AVERAGE-NET-ASSETS> 7,750,901,854
<PER-SHARE-NAV-BEGIN> 2.300
<PER-SHARE-NII> .160
<PER-SHARE-GAIN-APPREC> .210
<PER-SHARE-DIVIDEND> (.170)
<PER-SHARE-DISTRIBUTIONS> (.010)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 2.490
<EXPENSE-RATIO> 1.220
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 043
<NAME> FRANKLIN INCOME SERIES - ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 7,129,432,474
<INVESTMENTS-AT-VALUE> 7,872,822,469
<RECEIVABLES> 591,672,166
<ASSETS-OTHER> 953,208
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8,465,447,843
<PAYABLE-FOR-SECURITIES> 879,535
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 17,149,071
<TOTAL-LIABILITIES> 18,028,606
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,542,673,869
<SHARES-COMMON-STOCK> 5,366,210
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 69,436,365
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 92,099,348
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 743,299,655
<NET-ASSETS> 8,447,419,237
<DIVIDEND-INCOME> 178,110,067
<INTEREST-INCOME> 454,852,746
<OTHER-INCOME> 0
<EXPENSES-NET> (58,053,156)
<NET-INVESTMENT-INCOME> 574,909,657
<REALIZED-GAINS-CURRENT> 133,917,032
<APPREC-INCREASE-CURRENT> 524,014,976
<NET-CHANGE-FROM-OPS> 1,232,841,665
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (498,714)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,630,896
<NUMBER-OF-SHARES-REDEEMED> (463,157)
<SHARES-REINVESTED> 198,471
<NET-CHANGE-IN-ASSETS> 1,323,951,983
<ACCUMULATED-NII-PRIOR> 34,315,598
<ACCUMULATED-GAINS-PRIOR> 30,949,499
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 35,364,027
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 58,053,156
<AVERAGE-NET-ASSETS> 7,750,901,854
<PER-SHARE-NAV-BEGIN> 2.340
<PER-SHARE-NII> .140
<PER-SHARE-GAIN-APPREC> .140
<PER-SHARE-DIVIDEND> (.140)
<PER-SHARE-DISTRIBUTIONS> (.000)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 2.480
<EXPENSE-RATIO> .570
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>