As filed with the Securities and Exchange Commission January 31, 2000.
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. 81 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 27 (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
MURRAY L. SIMPSON, 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, 2000 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
Prospectus
Franklin
Custodian Funds, Inc.
CLASS A, B & C
INVESTMENT STRATEGY
GROWTH
GROWTH & INCOME
INCOME
DynaTech Series
Growth Series
Income Series
Utilities Series
U.S. Government Securities Series
FEBRUARY 1, 2000
[Insert Franklin Templeton Ben Head]
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
THE FUNDS
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
2 DynaTech Series
11 Growth Series
23 Income Series
36 Utilities Series
47 U.S. Government Securities Series
57 Distribution and tax information for each fund
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
59 Choosing a Share Class
64 Buying Shares
66 Investor Services
69 Selling Shares
71 Account Policies
74 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
DYNATECH SERIES
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is capital appreciation.
PRINCIPAL INVESTMENTS The fund normally invests most of its assets in equity
securities of companies that emphasize scientific or technological
development or that are in fast-growing industries. The fund's manager
searches for industry leaders and companies that it believes have a
competitive advantage due, for example, to their state-of-the-art products or
technologies. While companies that meet these criteria are often considered
to be growth stocks, the manager will also invest in these companies when
their stock price may be considered undervalued.
[Begin callout]
The fund normally invests most of its assets in common stocks of companies
that emphasize scientific or technological development or that are in
fast-growing industries.
[End callout]
The fund has no limitation on the capitalization of the companies in which it
may invest. The fund may invest a significant portion of its assets in
smaller companies. Smaller company stocks are generally those with market
capitalizations of less than $1.5 billion. The fund may invest up to 10% of
its assets in foreign securities. The fund may also maintain a significant
portion of its assets in cash and cash equivalents when the manager believes
the markets or the stocks in which it normally invests are overvalued based
upon historical norms.
An equity security, or stock, represents a proportionate share of the
ownership of a company; its value is based on the success of the company's
business and the value of its assets, as well as general market conditions.
Common stocks and preferred stocks are examples of equity securities.
Depending upon current market conditions, the fund may invest a portion of
its assets in debt securities. Debt securities represent an obligation of the
issuer to repay a loan of money to it, and generally provide for the payment
of interest. These include bonds, notes and debentures.
TEMPORARY INVESTMENTS The fund may from time to time maintain a significant
portion of its assets in cash or cash equivalents during periods of extreme
volatility either in the market (domestic and/or abroad), or in the types of
securities in which the fund normally invests. A prolonged price decline in
either may also lead the fund to have more of its assets invested in cash.
Under these circumstances, the fund will not have most of its assets in the
companies in which it normally invests and this will make it more difficult
to achieve its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While the stock markets have historically outperformed other asset
classes over the long term, individual stock prices tend to go up and down
more dramatically over the shorter term. These price movements may result
from factors affecting individual companies, industries or the securities
market as a whole.
SMALLER COMPANIES Historically, smaller company securities have been more
volatile in price than larger company securities, especially over the
short-term. Among the reasons for the greater price volatility are the less
certain growth prospects of smaller companies, the lower degree of liquidity
in the markets for such securities, and the greater sensitivity of smaller
companies to changing economic conditions and interest rates.
[Begin callout]
Investors should be aware of the special risks of seeking capital
appreciation among technology and fast-growing industries, including
investment in securities of a more speculative nature. Because the securities
the fund holds fluctuate in price, the value of your investment in the fund
will go up and down. This means you could lose money over short or even
extended periods.
[End callout]
In addition, small companies may lack depth of management, they may be unable
to generate funds necessary for growth or development, or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established.
Therefore, while smaller companies offer opportunities for capital growth,
they also involve special risks and should be considered speculative.
SCIENCE AND TECHNOLOGY COMPANIES Companies in the rapidly changing fields of
science and technology face special risks. For example, their products may
not prove commercially successful or may become obsolete quickly. Prices of
technology company securities historically have been more volatile than other
securities, especially over the short term.
MARKET A security's price may be reduced by market activity or the results
of supply and demand. This is a basic risk associated with all securities.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to rise.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country.
COMPANY. Foreign companies are not subject to the same accounting, auditing
and financial reporting standards and practices as U.S. companies and their
stocks may not be as liquid as stocks of similar U.S. companies. Foreign
markets and their participants generally have less government supervision and
regulation than in the U.S.
CURRENCY. To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency.
EURO. The European Monetary Union (EMU) introduced a new single currency,
the euro, on January 1, 1999. It will replace the national currency for
participating member countries in stages through July 1, 2002.
Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on currency valuations and on the
business or financial condition of European issuers which the fund may hold
in its portfolio.
YEAR 2000 At this date, it appears that neither the operations of the fund
nor its portfolio securities were materially adversely affected by Year 2000
computer-related problems. However, it is still possible that Year 2000
problems could emerge. If a company in which the fund is invested develops
problems related to Year 2000 which have not shown up at this date, the price
of its securities may be adversely affected, and this may have an adverse
effect on the fund's share price.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not insured by the Federal Deposit Insurance
Corporation or any other agency of the U.S. government. Mutual fund shares
involve investment risks, including the possible loss of principal.
[End callout]
The business operations of the fund and its portfolio companies depend on a
worldwide network of computer systems that contain date fields. Prior to
remediation efforts of the last several months, many of the systems
previously used a two digit date field to represent the date and could not
have distinguished the Year 1900 from the Year 2000 (commonly referred to as
the Year 2000 problem). In addition, the fact that the Year 2000 is a leap
year could have created difficulties for some systems. Year 2000 has been one
of the many factors the manager considers in making investment decisions.
More detailed information about the fund, its policies, including temporary
investments, and risks can be found in the fund's Statement of Additional
Information (SAI).
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
3.18% 35.45% 4.20% 7.43% 5.21% 26.13% 28.79%14.62% 27.34% 37.19%
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q4 '99
21.93%
WORST
QUARTER:
Q3 '90
- -16.06%
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------------
Franklin DynaTech Series - Class A 2 29.32% 25.13% 17.56%
S&P 500(R)Index 21.04% 28.56% 18.21%
Hambrecht & Quist Technology Index 123.32% 49.90% 32.24%
SINCE
INCEPTION
1 YEAR (9/16/96)
- ------------------------------------------------------------------
Franklin DynaTech Series - Class C2 33.88% 27.19%
S&P 500(R)Index3 21.04% 28.96%
Hambrecht & Quist Technology Index4 123.32% 59.09%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
4. Source: Standard & Poor's(R) Micropal. The unmanaged Hambrecht & Quist
Technology Index is a market capitalization weighted index consisting of the
publicly traded stocks of technology companies, which include the
electronics, services and other related technology industries. It includes
reinvested dividends.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B 1 CLASS C
- -------------------------------------------------------------------
Maximum sales charge (load)
as a percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge None 2 4.00% 3 0.99% 4
(load)
Exchange fee None None None
Please see "Choosing a Share Class" on page 59 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B 1 CLASS C
- -------------------------------------------------------------------
Management fees 0.52% 0.52% 0.52%
Distribution and service (12b-1) 0.25% 1.00% 1.00%
fees5
Other expenses 0.23% 0.23% 0.23%
-------------------------------
Total annual fund operating 1.00% 1.75% 1.75%
expenses
===============================
1. The fund began offering Class B shares on February 1, 2000. Annual fund
operating expenses for Class B are annualized.
2. Except for investments of $1 million or more (see page 60).
3. Declines to zero after six years.
4. This is equivalent to a charge of 1% based on net asset value.
5. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------
If you sell your shares at the end
of the period:
CLASS A $671 1 $875 $1,096 $1,729
CLASS B $578 $851 $1,149 $1,864 2
CLASS C $375 $646 $1,039 $2,142
If you do not sell your shares:
CLASS B $178 $551 $949 $1,864 2
CLASS C $276 $646 $1,039 $2,142
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Advisers and its affiliates manage
over $224 billion in assets.
RUPERT H. JOHNSON, JR., PRESIDENT OF ADVISERS
Mr. Johnson has been a manager of the fund since inception. He joined the
Franklin Templeton Group in 1965. Mr. Johnson is primarily responsible for
the fund's investment management decisions.
For the fiscal year ended September 30, 1999, the fund paid 0.52% of its
average monthly net assets to the manager for managing the fund's assets.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED SEPTEMBER 30,
1999 3 1998 1997 1996 4 1995
- -------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 17.84 18.48 14.03 12.78 9.85
year
---------------------------------
Net investment income .37 .27 .10 .06 .12
Net realized and unrealized 5.14 .23 4.81 1.54 2.99
gains
---------------------------------
Total from investment operations 5.51 .50 4.91 1.60 3.11
---------------------------------
Distributions from net
investment income (.24) (.17) (.06) (.12) (.05)
---------------------------------
Distributions from net realized - (.97) (.40) (.23) (.13)
gains
---------------------------------
Total distributions (.24) (1.14) (.46) (.35) (.18)
---------------------------------
Net asset value, end of year 23.11 17.84 18.48 14.03 12.78
=================================
Total return (%)1 31.15 3.06 35.63 12.84 32.10
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 499,471 215,864 188,102 104,508 92,987
1,000)
Ratios to average net assets: (%)
Expenses 1.00 1.02 1.04 1.05 1.01
Net investment income 1.70 1.55 .75 .43 1.11
Portfolio turnover rate (%) 6.49 10.84 5.59 11.94 9.83
CLASS C
- -------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 17.53 18.30 14.03 13.57
year
---------------------------------
Net investment income .22 .15 .07 -
Net realized and unrealized 5.05 .17 4.66 .46
gains
---------------------------------
Total from investment operations 5.27 .32 4.73 .46
---------------------------------
Distributions from net
investment income (.16) (.12) (.06) -
Distributions from net realized - (.97) (.40) -
gains
Total distributions (.16) (1.09) (.46) -
---------------------------------
Net asset value, end of year 22.64 17.53 18.30 14.03
=================================
Total return (%)1 30.20 2.03 34.32 3.39
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 73,890 12,358 3,386 -
1,000)
Ratios to average net assets: (%)
Expenses 1.75 1.79 1.82 1.852
Net investment income (loss) 1.00 .81 .25 (.14) 2
Portfolio turnover rate (%) 6.49 10.84 5.59 11.94
1. Total return does not include sales charges, and is not annualized.
2. Annualized.
3. Based on average shares outstanding.
4. For the period September 16, 1996 (effective date) to September 30, 1996
for Class C.
GROWTH SERIES
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is capital appreciation.
PRINCIPAL INVESTMENTS The fund will normally invest most of its assets in
the equity securities of companies that are leaders in their industries. In
selecting securities, the manager considers many factors, including
historical and potential growth in revenues and earnings, assessment of
strength and quality of management, and determination of a company's
strategic positioning in its industry.
[Begin callout]
The fund normally invests most of its assets in the common stocks of
companies that are leaders in their industries.
[End callout]
The fund may invest up to 40% of its assets in smaller companies, as well as
in companies in new and emerging industries where growth is expected to be
above average. For this fund, smaller company stocks are generally those with
market capitalizations of less than $1.5 billion. The fund generally invests
up to 10% of its assets in foreign securities.
An equity security, or stock, represents a proportionate share of the
ownership of a company; its value is based on the success of the company's
business and the value of its assets, as well as general market conditions.
Common stocks and preferred stocks are examples of equity securities.
Depending upon current market conditions, the fund may invest a portion of
its assets in debt securities. Debt securities represent an obligation of the
issuer to repay a loan of money to it and generally provide for the payment
of interest. These include bonds, notes and debentures. Convertible
securities have characteristics of both debt securities (which is generally
the form in which they are first issued) and equity securities (which is what
they can be converted into).
The manager considers the tax consequences of its investment decisions,
including capital gains or income that may result in taxable distributions to
shareholders. The manager generally uses a "buy-and-hold" strategy. The fund
has historically had low portfolio turnover, and its portfolio turnover is
expected to be significantly lower than that of comparable actively managed
equity funds. When selling portfolio securities, the manager uses an
identified cost lot system that generally selects higher cost lots with
long-term holding periods, where possible. The fund may also realize losses
to minimize or offset any capital gains. Because the fund uses a "buy and
hold" investment strategy and tries to minimize the tax impact to
shareholders of the fund's net capital gains, the fund's portfolio securities
may have a higher level of unrealized capital appreciation than if the fund
did not use these strategies. During periods of net redemptions of fund
shares, the manager may be required to sell these securities, generating a
higher level of taxable gain for shareholders than would occur if the fund
had not used these strategies.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economies of countries
where the fund invests are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. Under these
circumstances, the fund may be unable to pursue its investment goal because
it may not invest or may invest substantially less in common stocks of
companies that are leaders in their industries.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While the stock markets have historically outperformed other asset
classes over the long term, individual stock prices tend to go up and down
more dramatically over the shorter term. These price movements may result
from factors affecting individual companies, industries or the securities
market as a whole.
SMALLER COMPANIES Historically, smaller company securities have been more
volatile in price than larger company securities, especially over the
short-term. Among the reasons for the greater price volatility are the less
certain growth prospects of smaller companies, the lower degree of liquidity
in the markets for such securities, and the greater sensitivity of smaller
companies to changing economic conditions and interest rates.
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
In addition, small companies may lack depth of management, they may be unable
to generate funds necessary for growth or development, or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established.
Therefore, while smaller companies may offer opportunities for capital
growth, they also involve special risks and should be considered speculative.
MARKET A security's price may be reduced by market activity or the results
of supply and demand. This is a basic risk associated with all securities.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to rise.
FOREIGN SECURITIES Securities of companies located outside the U.S. may
involve risks that can increase the potential for losses in the fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns which trade in that country.
COMPANY. Foreign companies are not subject to the same accounting, auditing
and financial reporting standards and practices as U.S. companies and their
stocks may not be as liquid as stocks of similar U.S. companies. Foreign
markets and their participants generally have less government supervision and
regulation than in the U.S.
CURRENCY. To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority will
have a significant impact on the value of any securities denominated in that
currency. Currency markets generally are not as regulated as securities
markets.
EURO. The European Monetary Union (EMU) introduced a new single currency,
the euro, on January 1, 1999. It will replace the national currency for
participating member countries in stages through July 1, 2002.
Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on currency valuations and on the
business or financial condition of European issuers which the fund may hold
in its portfolio.
YEAR 2000 At this date, it appears that neither the operations of the fund
nor its portfolio securities were materially adversely affected by Year 2000
computer-related problems. However, it is still possible that Year 2000
problems could emerge. If a company in which the fund is invested develops
problems related to Year 2000 which have not shown up at this date, the price
of its securities may be adversely affected, and this may have an adverse
effect on the fund's share price.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not insured by the Federal Deposit Insurance
Corporation or any other agency of the U.S. government. Mutual fund shares
involve investment risks, including the possible loss of principal.
[End callout]
The business operations of the fund and its portfolio companies depend on a
worldwide network of computer systems that contain date fields. Prior to
remediation efforts of the last several months, many of the systems
previously used a two digit date field to represent the date and could not
have distinguished the Year 1900 from the Year 2000 (commonly referred to as
the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
could have created difficulties for some systems. Year 2000 has been one of
the many factors the manager considers in making investment decisions.
More detailed information about the fund, its policies, including temporary
investments, and risks can be found in the fund's Statement of Additional
Information (SAI).
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
2.07% 26.71% 2.96% 7.10% 2.92% 38.40% 16.68%18.60% 18.52% 12.19%
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '91
14.09%
WORST
QUARTER:
Q3 '90
- -12.73%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
Franklin Growth Series - Class A 2 5.73% 19.13% 13.42%
S&P 500(R)Index 3 21.04% 28.56% 18.21%
SINCE
INCEPTION
1 YEAR (1/1/99)
- ----------------------------------------------------------------------
Franklin Growth Series - Class B 2 7.34% 7.34%
S&P 500(R)Index 3 21.04% 21.04%
SINCE
INCEPTION
1 YEAR (5/1/95)
- ----------------------------------------------------------------------
Franklin Growth Series - Class C 2 9.25% 18.02%
S&P 500(R)Index 3 21.04% 27.51%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B 1 CLASS C
- -----------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge None 2 4.00% 3 0.99% 4
(load)
Exchange fee 5 $5.00 $5.00 $5.00
Please see "Choosing a Share Class" on page 59 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B 1 CLASS C
- -----------------------------------------------------------------
Management fees 0.46% 0.46% 0.46%
Distribution and service (12b-1) 0.24% 1.00% 1.00%
fees 6
Other expenses 0.19% 0.19% 0.19%
=============================
Total annual fund operating 0.89% 1.65% 1.65%
expenses
=============================
1. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses for Class B are annualized.
2. Except for investments of $1 million or more (see page 60) and purchases
by certain retirement plans without an initial sales charge.
3. Declines to zero after six years.
4. This is equivalent to a charge of 1% based on net asset value.
5. This fee is only for market timers (see page 72).
6. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
If you sell your shares at the end
of the period:
CLASS A $661 1 $843 $1,040 $1,608
CLASS B $568 $820 $1,097 $1,752 2
CLASS C $364 $615 $988 $2,035
If you do not sell your shares:
CLASS B $168 $520 $897 $1,752 2
CLASS C $266 $615 $988 $2,035
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
[Insert graphic of briefcase] MANAGEMENT
Franklin Investment Advisory Services, Inc. (Investment Advisory), 50 Cedar
Hill Drive, Jamestown, Rhode Island 02835, is the fund's investment manager.
Investment Advisory and its affiliates manage over $224 billion in assets.
The team responsible for the fund's management is:
VIVIAN J. PALMIERI, VICE PRESIDENT OF INVESTMENT ADVISORY
Mr. Palmieri has been a manager of the fund since 1965. He joined the
Franklin Templeton Group in 1965.
CONRAD B. HERRMANN CFA, PORTFOLIO MANAGER OF INVESTMENT ADVISORY
Mr. Herrmann has been a manager of the fund since 1993. He joined the
Franklin Templeton Group in 1989.
For the fiscal year ended September 30, 1999, the fund paid 0.46% of its
average monthly net assets to the manager for managing the fund's assets.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED SEPTEMBER 30,
1999 3,5 1998 1997 1996 1995
PER SHARE DATA ($)
Net asset value, beginning 28.58 27.09 22.82 19.38 14.96
of year
---------------------------------------
Net investment income .39 .49 .36 .22 .17
Net realized and 4.89 1.71 4.34 3.53 4.43
unrealized gains
---------------------------------------
Total from investment 5.28 2.20 4.70 3.75 4.60
operations
---------------------------------------
Distributions from net
investment income (.44) (.47) (.23) (.16) (.14)
In excess of net (.21) (.24) (.20) (.15) (.04)
investment income
---------------------------------------
Total distributions (.65) (.71) (.43) (.31) (.18)
---------------------------------------
Net asset value, end of year 33.21 28.58 27.09 22.82 19.38
=======================================
Total return (%)1 18.63 8.22 20.84 19.60 31.11
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 2,119,740 1,635,780 1,435,561 1,020,486 712,866
Ratios to average net
assets: (%)
Expenses .89 .88 .89 .87 .90
Net investment income 1.19 1.78 1.60 1.16 1.08
Portfolio turnover rate (%) 3.74 .58 1.77 2.03 1.39
CLASS B
PER SHARE DATA ($)
Net asset value, beginning 31.45
of year
---------------------------------------
Net investment income .14
Net realized and 1.44
unrealized gains
---------------------------------------
Total from investment 1.58
operations
---------------------------------------
Net asset value, end of year 33.03
=======================================
Total return (%)1 5.02
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ 17,271
x 1,000)
Ratios to average net
assets: (%)
Expenses 1.65 2
Net investment income .57 2
Portfolio turnover rate (%) 3.74
CLASS C YEAR ENDED SEPTEMBER 30,
1999 3 1998 1997 1996 1995 4
PER SHARE DATA ($)
Net asset value, beginning 28.11 26.70 22.60 19.33 16.88
of year
---------------------------------------
Net investment income .14 .29 .20 .12 .02
Net realized and 4.81 1.66 4.25 3.46 2.43
unrealized gains
---------------------------------------
Total from investment 4.95 1.95 4.45 3.58 2.45
operations
---------------------------------------
Distributions from net
investment income (.27) (.30) (.15) (.16) -
Distributions from net (.21) (.24) (.20) (.15) -
realized gains
---------------------------------------
Total distributions (.48) (.54) (.35) (.31) -
---------------------------------------
Net asset value, end of year 32.58 28.11 26.70 22.60 19.33
Total return (%) 1 17.71 7.39 19.91 18.73 14.72
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ 362,216 189,572 117,218 43,417 4,161
x 1,000)
Ratios to average net
assets: (%)
Expenses 1.65 1.65 1.66 1.63 1.79 2
Net investment income .45 1.02 .85 .40 .37 2
Portfolio turnover rate (%) 3.74 .58 1.77 2.03 1.39
1. Total return does not include sales charges, and is not annualized.
2. Annualized.
3. Based on average shares outstanding.
4. For the period May 1, 1995 (effective date) to September 30, 1995 for
Class C.
5. For the period January 1, 1999 (effective date) to September 30, 1999 for
Class B.
INCOME SERIES
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to maximize income while maintaining
prospects for capital appreciation.
PRINCIPAL INVESTMENTS The fund will normally invest in a diversified
portfolio of debt and equity securities.
Debt securities represent an obligation of the issuer to repay a loan of
money to it and generally provide for the payment of interest. These include
bonds, notes and debentures. An equity security, or stock, represents a
proportionate share of the ownership of a company; its value is based on the
success of the company's business and the value of its assets, as well as
general market conditions. Common stocks and preferred stocks are examples of
equity securities. Convertible securities have characteristics of both debt
securities (which is generally the form in which they are first issued) and
equity securities (which is what they can be converted into).
[Begin callout]
The fund normally invests in a diversified portfolio of bonds and stocks in
the U.S. and abroad.
[End callout]
The fund seeks income by selecting investments such as corporate, foreign and
U.S. Treasury bonds, as well as stocks with attractive dividend yields. In
its search for growth opportunities, the fund invests in common stocks of
companies from a variety of industries such as utilities, oil, gas, real
estate and consumer goods.
The fund may invest up to 100% of total assets in debt securities that are
rated below investment grade, but it is not currently expected that the fund
will invest more than 50% of its assets in these securities. Securities rated
in the top four ratings categories by independent rating organizations such
as Standard & Poor's Corporation (S&P) and Moody's Investors Service, Inc.
(Moody's) are considered "investment grade." The fund generally invests in
securities rated at least Caa by Moody's or CCC by S&P or unrated securities
the fund's manager determines are comparable. Generally, lower rated
securities pay higher yields than more highly rated securities to compensate
investors for the higher risk. As of September 30, 1999, approximately 30.71%
of the fund's net assets were invested in lower rated and comparable quality
unrated debt securities.
The fund may invest up to 25% of its assets in foreign securities. It
ordinarily buys foreign securities that are traded in the U.S. or American
Depositary Receipts, which are certificates typically issued by a bank or
trust company that give their holders the right to receive securities issued
by a foreign or a domestic company.
The fund's manager searches for undervalued or out-of-favor securities it
believes offer opportunities for income today and significant growth
tomorrow. It performs independent analysis of the securities being considered
for the fund's portfolio, rather than relying principally on the ratings
assigned by rating agencies. In its analysis, the manager considers a variety
of factors, including:
o the experience and managerial strength of the company;
o responsiveness to changes in interest rates and business conditions;
o debt maturity schedules and borrowing requirements;
o the company's changing financial condition and market recognition of the
change; and
o a security's relative value based on such factors as anticipated cash
flow, interest or dividend coverage, asset coverage, and earnings prospects.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt security prices fall. The
opposite is also true: debt security prices rise when interest rates fall. In
general, securities with longer maturities are more sensitive to changes in
interest rates.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT Credit risk is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's price and,
thus, impact fund performance.
LOWER-RATED SECURITIES. Securities rated below investment grade, sometimes
called "junk bonds," generally have more credit risk than higher-rated
securities.
Companies issuing high yield, fixed-income securities are not as strong
financially as those issuing securities with higher credit ratings. These
companies are more likely to encounter financial difficulties and are more
vulnerable to changes in the economy, such as a recession or a sustained
period of rising interest rates, that could affect their ability to make
interest and principal payments. If an issuer stops making interest and/or
principal payments, payments on the securities may never resume. These
securities may be worthless and the fund could lose its entire investment.
The prices of high yield, fixed-income securities fluctuate more than
higher-quality securities. Prices are especially sensitive to developments
affecting the company's business and to changes in the ratings assigned by
ratings agencies. Prices often are closely linked with the company's stock
prices and typically rise and fall in response to factors that affect stock
prices. In addition, the entire high yield securities market can experience
sudden and sharp price swings due to changes in economic conditions, stock
market activity, large sustained sales by major investors, a high-profile
default, or changes in investors' attitudes towards risk.
High yield securities generally are less liquid than higher-quality
securities. Many of these securities do not trade frequently, and when they
do their prices may be significantly higher or lower than expected.
STOCKS While the stock markets have historically outperformed other asset
classes over the long term, individual stock prices tend to go up and down
more dramatically over the short term. These price movements may result from
factors affecting individual companies, industries or the securities market
as a whole. Value stock prices are considered "cheap" relative to the
company's perceived value. They may not increase in value, as anticipated by
the manager, if other investors fail to recognize the company's value and bid
up the price or in markets favoring faster-growing companies. Utility company
securities are particularly sensitive to interest rate movements: when
interest rates rise, the stock prices of these companies tend to fall.
MARKET A security's price may be reduced by market activity or the results
of supply and demand. This is a basic risk associated with all securities.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to rise.
CONVERTIBLE SECURITIES The value of convertible securities may rise and fall
with the market value of the underlying stock or, like a debt security, vary
with changes in interest rates and the credit quality of the issuer. A
convertible security tends to perform more like a stock when the underlying
stock price is high (because it is assumed it will be converted) and more
like a debt security when the underlying stock price is low (because it is
assumed it will not be converted). Because its value can be influenced by
many different factors, a convertible security is not as sensitive to
interest rate changes as a similar non-convertible debt security, and
generally has less potential for gain or loss than the underlying stock.
[Begin callout]
If a security's credit rating is downgraded or a company's financial
condition deteriorates, the price of the security will fall and so too will
the fund's share price. If interest rates rise, the price of the fund's debt
securities will also fall. Because the value of the fund's holdings
fluctuates in price, the value of your investment in the fund will go up and
down. This means you could lose money over short or even extended periods.
[End callout]
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund. Investments in depositary receipts also involve some or all of the
following risks.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns which trade in that country. These movements will affect the fund's
share price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, business and social frameworks to
support securities markets. Foreign securities markets, including emerging
markets, may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than in the U.S. While
short-term volatility in these markets can be disconcerting, declines in
excess of 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY. To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
has a significant impact on the value of any securities denominated in that
currency. Currency markets generally are not as regulated as securities
markets.
EURO. The European Monetary Union (EMU) introduced a new single currency,
the euro, on January 1, 1999. It will replace the national currency for
participating member countries in stages through July 1, 2002.
Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on currency valuations and on the
business or financial condition of European issuers which the fund may hold
in its portfolio.
YEAR 2000 At this date, it appears that neither the operations of the fund
nor its portfolio securities were materially adversely affected by Year 2000
computer-related problems. However, it is still possible that Year 2000
problems could emerge. If a company in which the fund is invested develops
problems related to Year 2000 which have not shown up at this date, the price
of its securities may be adversely affected, and this may have an adverse
effect on the fund's share price.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not insured by the Federal Deposit Insurance
Corporation or any other agency of the U.S. government. Mutual fund shares
involve investment risks, including the possible loss of principal.
[End callout]
The business operations of the fund and its portfolio companies depend on a
worldwide network of computer systems that contain date fields. Prior to
remediation efforts of the last several months, many of the systems
previously used a two digit date field to represent the date and could not
have distinguished the Year 1900 from the Year 2000 (commonly referred to as
the Year 2000 problem). In addition, the fact that the Year 2000 is a leap
year could have created difficulties for some systems. Year 2000 has been one
of the many factors the manager considers in making investment decisions.
More detailed information about the fund, its policies, including temporary
investments, risks and the ratings of debt securities can be found in the
fund's Statement of Additional Information (SAI).
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
- -8.77% 41.15% 15.24% 21.53% -6.38% 21.29% 10.45%16.85% 0.95% -0.74%
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '91
16.67%
WORST
QUARTER:
Q3 '90
- -8.58%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
- -----------------------------------------------------------------
Franklin Income Series - Class A 2 -4.77% 8.51% 9.76%
S&P 500(R)Index 3 21.04% 28.56% 18.21%
Lehman Bros. Gov't/Corp. Bond -2.15% 7.61% 7.65%
Index 4
SINCE
INCEPTION
1 YEAR (1/1/99)
- -----------------------------------------------------------------
Franklin Income Series - Class B 2 -4.83% -4.83%
S&P 500(R) Index 3 21.04% 21.04%
Lehman Bros. Gov't/Corp. Bond -2.15% -2.15%
Index 4
SINCE
INCEPTION
1 YEAR (5/1/95)
- -----------------------------------------------------------------
Franklin Income Series - Class C 2 -2.55% 7.82%
S&P 500(R)Index 3 21.04% 27.51%
Lehman Bros. Gov't/Corp. Bond -2.15% 6.73%
Index 4
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
May 1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
4. Source: Standard & Poor's(R) Micropal. Lehman Brothers Government/Corporate
Bond Index is an unmanaged index of fixed-rate U.S. government and foreign
and domestic corporate bonds that are rated investment grade or higher and
have maturities of one year or more and at least $50 million outstanding. One
cannot invest directly in an index, nor is an index representative of the
fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B 2 CLASS C
- ---------------------------------------------------------------
Maximum sales charge (load)
as a percentage of offering price 4.25% 4.00% 1.99%
Load imposed on purchases 4.25% None 1.00%
Maximum deferred sales charge None 2 4.00% 3 0.99% 4
(load)
Exchange fee 5 $5.00 $5.00 $5.00
Please see "Choosing a Share Class" on page 59 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B 1 CLASS C
- ---------------------------------------------------------------
Management fees 0.45% 0.45% 0.45%
Distribution and service (12b-1) 0.15% 0.65% 0.65%
fees 6
Other expenses 0.13% 0.13% 0.13%
===========================
Total annual fund operating 0.73% 1.23% 1.23%
expenses
===========================
1. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses for Class B are annualized.
2. Except for investments of $1 million or more (see page 60) and purchases
by certain retirement plans without an initial sales charge.
3. Declines to zero after six years.
4. This is equivalent to a charge of 1% based on net asset value.
5. This fee is only for market timers (see page 72).
6. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------
If you sell your shares at the end of
the period:
CLASS A $496 1 $648 $814 $1,293
CLASS B $525 $690 $876
$1,350 2
CLASS C $323 $486 $769 $1,574
If you do not sell your shares:
CLASS B $125 $390 $676
$1,350 2
CLASS C $224 $486 $769 $1,574
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Advisers and its affiliates manage
over $224 billion in assets.
The team responsible for the fund's management is:
CHARLES B. JOHNSON, CHAIRMAN OF THE BOARD OF ADVISERS
Mr. Johnson has been a manager of the fund since 1957. He joined the Franklin
Templeton Group in 1957.
MATTHEW F. AVERY, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Avery has been a manager of the fund since 1989. He joined the Franklin
Templeton Group in 1987.
FREDERICK G. FROMM, VICE PRESIDENT OF ADVISERS
Mr. Fromm has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1992.
For the fiscal year ended September 30, 1999, the fund paid 0.45% of its
average monthly net assets to the manager for managing the fund's assets.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED SEPTEMBER 30,
- ------------------------------------------------------------------------
1999 3,5 1998 1997 1996 1995
PER SHARE DATA ($)
Net asset value, beginning 2.34 2.49 2.30 2.30 2.22
of year
-----------------------------------------
Net investment income .17 .17 .18 .19 .18
Net realized and
unrealized
gains (losses) (.09) (.11) .20 .02 .11
-----------------------------------------
Total from investment .08 .06 .38 .21 .29
operations
-----------------------------------------
Distributions from net
investment income (.18) (.18) (.18) (.18) (.18)
Distributions from net
realized gains (.01) (.03) (.01) (.03) (.03)
-----------------------------------------
Total distributions (.19) (.21) (.19) (.21) (.21)
=========================================
Net asset value, end of year 2.23 2.34 2.49 2.30 2.30
=========================================
Total return (%)1 4.02 2.23 17.31 9.43 14.00
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 6,776,804 7,704,983 7,738,746 6,780,153 5,885,788
Ratios to average net
assets: (%)
Expenses .73 .72 .72 .70 .71
Net investment income 7.46 6.83 7.45 8.27 8.26
Portfolio turnover rate (%) 17.35 22.01 16.15 25.29 58.64
CLASS B
PER SHARE DATA ($)
Net asset value, beginning 2.36
of year
-----------------------------------------
Net investment income .12
Net realized and
unrealized
gains (losses) (.11)
-----------------------------------------
Total from investment .01
operations
-----------------------------------------
Distributions from net
investment income (.13)
=========================================
Net asset value, end of year 2.24
=========================================
Total return (%)1 .34
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ 83,031
x 1,000)
Ratios to average net
assets: (%)
Expenses 1.23 2
Net investment income 7.22 2
Portfolio turnover rate (%) 17.35
CLASS C YEAR ENDED SEPTEMBER 30,
- ------------------------------------------------------------------------
1999 3 1998 1997 1996 1995 4
PER SHARE DATA ($)
Net asset value, beginning 2.34 2.49 2.30 2.30 2.18
of year
-----------------------------------------
Net investment income .16 .16 .16 .17 .08
Net realized and
unrealized
gains (losses) (.08) (.11) .21 .03 .11
-----------------------------------------
Total from investment .08 .05 .37 .20 .19
operations
-----------------------------------------
Distributions from net
investment income (.17) (.17) (.17) (.17) (.07)
Distributions from net (.01) (.03) (.01) (.03) -
realized gains
-----------------------------------------
Total distributions (.18) (.20) (.18) (.20) (.07)
=========================================
Net asset value, end of year 2.24 2.34 2.49 2.30 2.30
=========================================
Total return (%) 1 3.46 1.70 16.72 8.86 8.96
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ 997,438 1,014,634 695,355 343,314 65,822
x 1,000)
Ratios to average net
assets: (%)
Expenses 1.23 1.22 1.22 1.21 1.23 2
Net investment income 6.97 6.35 6.96 7.84 7.89 2
Portfolio turnover rate (%) 17.35 22.01 16.15 25.29 58.64
1. Total return does not include sales charges, and is not annualized.
2. Annualized.
3. Based on average shares outstanding.
4. For the period May 1, 1995 (effective date) to September 30, 1995 for
Class C.
5. For the period January 1, 1999 (effective date) to September 30, 1999 for
Class B.
UTILITIES SERIES
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's investment goals are capital appreciation and current
income.
PRINCIPAL INVESTMENTS The fund will normally invest most of its assets in
the securities of public utilities companies. These are companies that
provide electricity, natural gas, water, and communications services to the
public and companies that provide services to public utilities companies. The
fund concentrates (invests more than 25% of its total assets) in companies
operating in the utilities industry. The manager expects that more than 50%
of the fund's assets will be invested in electric utilities securities.
[Begin callout]
The fund normally invests most of its assets in securities of public
utilities companies.
[End callout]
The fund invests primarily in equity securities. An equity security or stock,
represents a proportionate share of the ownership of a company; its value is
based on the success of the company's business and the value of its assets,
as well as general market conditions. Common stocks and preferred stocks are
examples of equity securities. The fund may invest up to 25% of its assets in
debt securities. Debt securities represent an obligation of the issuer to
repay a loan of money to it and generally provide for the payment of
interest. These include bonds, notes, and debentures. Convertible securities
have characteristics of both debt securities (which is generally the form in
which they are first issued) and equity securities (which is what they can be
converted into).
The fund focuses on "investment grade" debt securities. These are issues
rated in the top four ratings categories by independent rating agencies such
as Standard & Poor's Corporation or Moody's Investor's Service, Inc. or, if
unrated, determined by the fund's manager to be comparable.
The fund may invest up to 10% of its assets in foreign securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goals because it may not invest or may invest
substantially less in public utilities securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
UTILITIES INDUSTRY The fund's performance is closely tied to conditions
affecting the public utilities industry. These conditions may change rapidly.
Utility company securities, which are frequently bought for their dividend
yield, are particularly sensitive to interest rate movements: when interest
rates rise, the stock prices of these companies tend to fall. On-going
regulatory changes have led to greater competition in the industry and the
emergence of the non-regulated providers as a significant part of the
industry. This trend may make some companies less profitable. In addition,
the industry is subject to a variety of risks specific to this industry:
utilities often find it difficult to obtain adequate returns on invested
capital in spite of frequent rate increases; they may face difficulty in
financing large construction programs during inflationary and rising interest
rate periods; utilities are subject to many restrictions on operations and
increased costs due to environmental and safety regulations; utilities may
face difficulties in obtaining fuel for electric generation at reasonable
prices; utilities may face risks associated with the operation of nuclear
power plants; utilities also may be subject to adverse effects of the results
of energy conservation programs as well as other factors affecting the level
of demand for services. State and other regulators monitor and control
utility revenues and costs, and therefore may limit utility profits and
dividends paid to investors. Regulatory authorities also may restrict a
utility company's access to new markets, thereby diminishing the company's
long-term prospects.
[Begin callout]
Utility company securities are particularly sensitive to interest rate
movements: when interest rates rise, the stock prices of these companies tend
to fall. Because the securities the fund holds fluctuate in price, the value
of your investment in the fund will go up and down. This means you could lose
money over short or even extended periods.
[End callout]
STOCKS While stock markets have historically outperformed other asset
classes over the long term, individual stock prices tend to go up and down
more dramatically over the shorter term. These price movements may result
from factors affecting individual companies, industries or the securities
market as a whole.
MARKET A security's price may be reduced by market activity or the results
of supply and demand. This is a basic risk associated with all securities.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to rise.
INTEREST RATE When interest rates rise, debt security prices fall. The
opposite is also true: debt security prices rise when interest rates fall. In
general, securities with longer maturities are more sensitive to changes in
interest rates.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT Credit risk is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's price and,
thus, impact fund performance.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns which trade in that country.
COMPANY. Foreign companies are not subject to the same accounting, auditing
and financial reporting standards and practices as U.S. companies and their
stocks may not be as liquid as stocks of similar U.S. companies. Foreign
markets and their participants generally have less government supervision and
regulation than in the U.S.
YEAR 2000 At this date, it appears that neither the operations of the fund
nor its portfolio securities were materially adversely affected by Year 2000
computer-related problems. However, it is still possible that Year 2000
problems could emerge. If a company in which the fund is invested develops
problems related to Year 2000 which have not shown up at this date, the price
of its securities may be adversely affected, and this may have an adverse
effect on the fund's share price.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not insured by the Federal Deposit Insurance
Corporation or any other agency of the U.S. government. Mutual fund shares
involve investment risks, including the possible loss of principal.
[End callout]
The business operations of the fund and its portfolio companies depend on a
worldwide network of computer systems that contain date fields. Prior to
remediation efforts of the last several months, many of the systems
previously used a two digit date field to represent the date and could not
have distinguished the Year 1900 from the Year 2000 (commonly referred to as
the Year 2000 problem). In addition, the fact that the Year 2000 is a leap
year could have created difficulties for some systems. Year 2000 has been one
of the many factors the manager considers in making investment decisions.
More detailed information about the fund, its policies, including temporary
investments, risks and the ratings of debt securities can be found in the
fund's Statement of Additional Information (SAI).
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
0.38% 24.18% 9.08% 11.52% -11.69%30.68% 2.03% 24.90% 7.57% -15.00%
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q4 '97
15.02%
WORST
QUARTER:
Q1 '94
- -9.95%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------------
Franklin Utilities Series - Class A 2 -18.60% 7.82% 6.91%
S&P 500(R)Index 3 21.04% 28.56% 18.21%
SINCE
INCEPTION
1 YEAR (1/1/99)
- ----------------------------------------------------------------
Franklin Utilities Series - Class B 2 -18.33% -18.33%
S&P 500(R)Index 3 21.04% 21.04%
SINCE
INCEPTION
1 YEAR (5/1/95)
- ----------------------------------------------------------------
Franklin Utilities Series - Class C 2 -17.05% 7.25%
S&P 500(R)Index 3 21.04% 27.51%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B 1 CLASS C
- -----------------------------------------------------------------
Maximum sales charge (load)
as a percentage of offering 4.25% 4.00% 1.99%
price
Load imposed on purchases 4.25% None 1.00%
Maximum deferred sales charge None 2 4.00%3 0.99% 4
(load)
Exchange fee 5 $5.00 $5.00 $5.00
Please see "Choosing a Share Class" on page 59 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B 1 CLASS C
- -----------------------------------------------------------------
Management fees 0.46% 0.46% 0.46%
Distribution and service (12b-1) 0.14% 0.65% 0.65%
fees 6
Other expenses 0.20% 0.20% 0.20%
===============================
Total annual fund operating 0.80% 1.31% 1.31%
expenses
===============================
1. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses for Class B are annualized.
2. Except for investments of $1 million or more (see page 60) and purchases
by certain retirement plans without an initial sales charge.
3. Declines to zero after six years.
4. This is equivalent to a charge of 1% based on net asset value.
5. This fee is only for market timers (see page 72).
6. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------
If you sell your shares at the
end of the period:
CLASS A $503 1 $670 $850 $1,373
CLASS B $533 $715 $918 $1,439 2
CLASS C $331 $511 $811 $1,663
If you do not sell your shares:
CLASS B $133 $415 $718 $1,439 2
CLASS C $232 $511 $811 $1,663
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Advisers and its affiliates manage
over $224 billion in assets.
The team responsible for the fund's management is:
SALLY EDWARDS HAFF CFA, SENIOR VICE PRESIDENT OF ADVISERS
Ms. Haff has been a manager of the fund since 1990. She joined the Franklin
Templeton Group in 1986.
GREGORY E. JOHNSON, VICE PRESIDENT OF ADVISERS
Mr. Johnson has been a manager of the fund since 1987. He joined the Franklin
Templeton Group in 1986.
JOHN KOHLI, PORTFOLIO MANAGER OF ADVISERS
Mr. Kohli has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1992.
For the fiscal year ended September 30, 1999, the fund paid 0.46% of its
average monthly net assets to the manager for managing the fund's assets.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED SEPTEMBER 30,
1999 3,5 1998 1997 1996 1995
- --------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, 11.36 10.04 9.73 9.75 8.33
beginning of year
Net investment income .48 .52 .53 .54 .53
Net realized and
unrealized
gains (losses) (1.41) 1.58 .73 .03 1.42
Total from investment (.93) 2.10 1.26 .57 1.95
operations
Distributions from net
investment income (.52) (.52) (.52) (.52) (.52)
Distributions from net
realized gains (.33) (.26) (.43) (.07) (.01)
Total distributions (.85) (.78) (.95) (.59) (.53)
Net asset value, end of 9.58 11.36 10.04 9.73 9.75
year
Total return (%) 1 (8.54) 21.71 13.72 5.94 24.19
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 1,594,862 2,054,546 1,953,273 2,400,561 2,765,976
Ratios to average net
assets: (%)
Expenses .80 .76 .75 .71 .73
Net investment income 4.60 4.73 5.26 5.24 5.88
Portfolio turnover rate 33.99 11.77 7.24 17.05 5.55
(%)
CLASS B
- --------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, 11.08
beginning of year
-----------------------------------------
Net investment income .31
Net realized and
unrealized
gains (losses) (1.44)
-----------------------------------------
Total from investment (1.13)
operations
-----------------------------------------
Distributions from net
investment income (.36)
=========================================
Net asset value, end of 9.59
year
=========================================
Total return (%) 1 (10.37)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year 3,142
($ x 1,000)
Ratios to average net
assets: (%)
Expenses 1.31 2
Net investment income 4.12 2
Portfolio turnover rate (%) 33.99
CLASS C YEAR ENDED SEPTEMBER 30,
- ------------------------------------------------------------------------
1999 3 1998 1997 5 1996 1995 4
- ------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, 11.35 10.02 9.72 9.75 8.89
beginning of year
-----------------------------------------
Net investment income .43 .46 .45 .46 .23
Net realized and
unrealized
gains (losses) (1.42) 1.60 .76 .06 .88
-----------------------------------------
Total from investment (.99) 2.06 1.21 .52 1.11
operations
-----------------------------------------
Distributions from net
investment income (.46) (.47) (.48) (.48) (.25)
Distributions from net (.33) (.26) (.43) (.07) -
realized gains
-----------------------------------------
Total distributions (.79) (.73) (.91) (.55) (.25)
=========================================
Net asset value, end of 9.57 11.35 10.02 9.72 9.75
year
=========================================
Total return (%) (9.06) 21.24 13.06 5.39 13.01
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year 34,697 40,628 21,906 19,655 8,369
($ x 1,000)
Ratios to average net
assets: (%)
Expenses 1.31 1.28 1.27 1.23 1.21 2
Net investment income 4.08 4.19 4.78 4.86 5.15 2
Portfolio turnover rate 33.99 11.77 7.24 17.05 5.55
(%)
1. Total return does not include sales charges, and is not annualized.
2. Annualized.
3. Based on average shares outstanding.
4. For the period May 1, 1995 (effective date) to September 30, 1995 for
Class C.
5. For the period January 1, 1999 (effective date) to September 30, 1999 for
Class B.
U.S. GOVERNMENT
SECURITIES SERIES
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is income.
PRINCIPAL INVESTMENTS The fund invests substantially all of
its assets in Government National Mortgage Association obligations (Ginnie
Maes).
Ginnie Maes represent an ownership interest in mortgage loans made by banks
and other financial institutions to finance purchases of homes. The mortgage
loans may have either fixed or adjustable interest rates. Individual loans
are packaged or "pooled" together for sale to investors such as the fund. As
the underlying mortgage loans are paid off, investors receive principal and
interest payments.
[Begin callout]
The fund invests substantially all of its assets in Ginnie Maes.
[End callout]
Ginnie Maes carry a guarantee backed by the full faith and credit of the U.S.
government. The guarantee applies only to the timely repayment of principal
and interest and not to the market prices and yields of the Ginnie Maes or to
the net asset value or performance of the fund, which will vary with changes
in interest rates and other market conditions.
The fund may also invest in other U.S. government securities which are backed
by the full faith and credit of the U.S. government, such as U.S. Treasury
STRIPS, bills, bonds and notes. The fund's short-term investments include
short-term government securities and cash and after April 1, 2000, the fund
may also invest in repurchase agreements collateralized by U.S. government
securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal because it may not invest or may invest
substantially less in Ginnie Mae securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
GINNIE MAES Ginnie Maes differ from conventional debt securities because
principal is paid back over the life of the security rather than at maturity.
The fund may receive unscheduled prepayments of principal due to voluntary
prepayments, refinancing or foreclosure on the underlying mortgage loans.
During periods of declining interest rates, the volume of principal
prepayments generally increases as borrowers refinance their mortgages at
lower rates. The fund may be forced to reinvest returned principal at lower
interest rates, reducing the fund's income. For this reason, Ginnie Maes may
be less effective than other types of securities as a means of "locking in"
long-term interest rates and may have less potential for capital appreciation
during periods of falling interest rates than other investments with similar
maturities. A reduction in the anticipated rate of principal prepayments,
especially during periods of rising interest rates, may increase the
effective maturity of Ginnie Maes, making them more susceptible than other
debt securities to a decline in market value when interest rates rise. This
could increase the volatility of the fund's performance and share price.
INTEREST RATE When interest rates rise, debt security prices fall. While,
the opposite is also true, that debt security prices rise when interest rates
fall, this may be less true for Ginnie Maes since homeowners may refinance
their mortgages when interest rates fall, thus limiting the upside potential
of the Ginnie Maes. In general, securities with longer maturities are more
sensitive to these interest rate changes.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
[Begin callout]
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of the fund's debt securities will fall and so too will
the fund's share price. If rates fall, mortgage holders may refinance their
mortgage loans at lower interest rates, which may reduce the fund's income
and yield. This means you could lose money over short or even extended
periods.
[End callout]
MARKET A security's price may be reduced by market activity or the results
of supply and demand. This is a basic risk associated with all securities.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to rise.
YEAR 2000 At this date, it appears that neither the operations of the fund
nor its portfolio securities were materially adversely affected by Year 2000
computer-related problems. However, it is still possible that Year 2000
problems could emerge. If a company in which the fund is invested develops
problems related to Year 2000 which have not shown up at this date, the price
of its securities may be adversely affected, and this may have an adverse
effect on the fund's share price.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not insured by the Federal Deposit Insurance
Corporation or any other agency of the U.S. government. Mutual fund shares
involve investment risks, including the possible loss of principal.
[End callout]
The business operations of the fund and its portfolio companies depend on a
worldwide network of computer systems that contain date fields. Prior to
remediation efforts of the last several months, many of the systems
previously used a two digit date field to represent the date and could not
have distinguished the Year 1900 from the Year 2000 (commonly referred to as
the Year 2000 problem). In addition, the fact that the Year 2000 is a leap
year could have created difficulties for some systems. Year 2000 has been one
of the many factors the manager considers in making investment decisions.
More detailed information about the fund, its policies, including temporary
investments, and risks can be found in the fund's Statement of Additional
Information (SAI).
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
10.78% 13.71% 7.40% 6.92% -2.69% 16.73% 4.60% 9.46% 6.61% 0.82%
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q2 '95
5.37%
WORST
QUARTER:
Q1 '94
- -2.84%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------
Franklin U.S. Government Securities Fund -3.51% 6.60% 6.83%
- - Class A 2
Lehman Brothers Intermediate U.S.
Government Bond Index 3 0.49% 6.93% 7.10%
SINCE
INCEPTION
1 YEAR (1/1/99)
- -------------------------------------------------------------------
Franklin U.S. Government Securities Fund -3.58% -3.58%
- - Class B 2
Lehman Brothers Intermediate U.S. 0.49% 0.49%
Government Bond Index 3
SINCE
INCEPTION
1 YEAR (5/1/95)
- -------------------------------------------------------------------
Franklin U.S. Government Securities Fund -1.66% 5.75%
- - Class C 2
Lehman Brothers Intermediate U.S. 0.49% 6.25%
Government Bond Index 3
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. Lehman Brothers Intermediate
Government Bond Index is an unmanaged index of fixed-rate bonds issued by the
U.S. government and its agencies that are rated investment grade or higher
and have one to ten years remaining until maturity and at least $100 million
outstanding. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B1 CLASS C
- -----------------------------------------------------------------
Maximum sales charge (load)
as a percentage of offering price 4.25% 4.00% 1.99%
Load imposed on purchases 4.25% None 1.00%
Maximum deferred sales charge None2 4.00%3 0.99%4
(load)
Exchange fee5 $5.00 $5.00 $5.00
Please see "Choosing a Share Class" on page 59 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B 1 CLASS C
- -------------------------------------------------------------------
Management fees 0.45% 0.45% 0.45%
Distribution and service (12b-1) 0.10% 0.65% 0.65%
fees 6
Other expenses 0.12% 0.12% 0.12%
===============================
Total annual fund operating 0.67% 1.22% 1.22%
expenses
===============================
1. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses for Class B are annualized.
2. Except for investments of $1 million or more (see page 60) and purchases
by certain retirement plans without an initial sales charge.
3. Declines to zero after six years.
4. This is equivalent to a charge of 1% based on net asset value.
5. This fee is only for market timers (see page 72).
6. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
If you sell your shares at the end
of the period:
CLASS A $491 1 $630 $782 $1,224
CLASS B $524 $687 $870 $1,325 2
CLASS C $322 $483 $764 $1,563
If you do not sell your shares:
CLASS B $124 $387 $670 $1,325 2
CLASS C $223 $483 $764 $1,563
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Advisers and its affiliates manage
over $224 billion in assets.
The team responsible for the fund's management is:
JACK LEMEIN, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Lemein has been a manager of the fund since 1989 and has more than 30
years' experience in the securities industry.
T. ANTHONY COFFEY CFA, VICE PRESIDENT OF ADVISERS
Mr. Coffey has been a manager of the fund since 1989. He joined the Franklin
Templeton Group in 1989.
ROGER BAYSTON CFA, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Bayston has been a manager of the fund since 1991. He joined the Franklin
Templeton Group in 1991.
For the fiscal year ended September 30, 1999, the fund paid 0.45% of its
average monthly net assets to the manager for managing the fund's assets.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------
1999 3,5 1998 1997 1996 1995
- ----------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning 6.99 6.89 6.72 6.87 6.51
of year
-----------------------------------------
Net investment income .44 .46 .48 .49 .50
Net realized and
unrealized
gains (losses) (.37) .10 .17 (.15) .35
-----------------------------------------
Total from investment .07 .56 .65 .34 .85
operations
-----------------------------------------
Distributions from net
investment income (.44) (.46) (.48) (.49) (.49)
=========================================
Net asset value, end of year 6.62 6.99 6.89 6.72 6.87
=========================================
Total return (%) 1 1.05 8.41 10.08 5.15 13.56
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 7,895,906 9,049,829 9,350,751 10,129,483 11,101,605
Ratios to average net
assets: (%)
Expenses .67 .65 .64 .61 .61
Net investment income 6.43 6.67 7.01 7.18 7.50
Portfolio turnover rate (%)6 15.04 25.98 1.74 8.01 5.48
CLASS B
- ----------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning 6.91
of year
-----------------------------------------
Net investment income .30
Net realized and
unrealized
gains (losses) (.28)
-----------------------------------------
Total from investment .02
operations
-----------------------------------------
Distributions from net
investment income (.31)
=========================================
Net asset value, end of year 6.62
=========================================
Total return (%) 1 .25
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ 51,433
x 1,000)
Ratios to average net
assets: (%)
Expenses 1.22 2
Net investment income 5.93 2
Portfolio turnover rate (%)6 15.04
CLASS C YEAR ENDED SEPTEMBER 30,
- ------------------------------------------------------------------------
1999 3 1998 1997 1996 1995 4
- ----------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning 6.97 6.87 6.70 6.85 6.67
of year
-----------------------------------------
Net investment income .40 .42 .44 .45 .21
Net realized and
unrealized
gains (losses) (.37) .10 .17 (.15) .16
-----------------------------------------
Total from investment .03 .52 .61 .30 .37
operations
-----------------------------------------
Distributions from net
investment income (.40)(.42) (.44) (.45) (.19)
=========================================
Net asset value, end of year 6.60 6.97 6.87 6.70 6.85
=========================================
Total return (%) 1 .50 7.85 9.48 4.55 5.66
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ 308,961 271,665 120,818 57,657 11,695
x 1,000)
Ratios to average net
assets: (%)
Expenses 1.22 1.21 1.20 1.17 1.18 2
Net investment income 5.89 6.10 6.44 6.80 6.48 2
Portfolio turnover rate (%)6 15.0425.98 1.74 8.01 5.48
1. Total return does not include sales charges, and is not annualized.
2. Annualized.
3. Based on average shares outstanding.
4. For the period May 1, 1995 (effective date) to September 30, 1995 for
Class C.
5. For the period January 1, 1999 (effective date) to September 30, 1999 for
Class B.
6. 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.
[Insert graphic of dollar signs and stacks of coins]
DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS DynaTech Series and Growth Series
intend to pay a dividend at least annually representing substantially all of
each fund's net investment income and any net realized capital gains. Income
Series and U.S. Government Securities Series intend to pay a dividend at
least monthly, on or about the 15th day of each month, representing each
fund's net investment income. Utilities Series intends to pay a dividend at
least quarterly in March, June, September and December representing its net
investment income. Capital gains, if any, may be distributed annually by the
funds. The amount of these distributions will vary and there is no guarantee
the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the funds' distributions will vary. Please keep in mind that
if you invest in a fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back
in the form of a taxable distribution. If you would like information
on upcoming record dates for the fund's distributions, please call 1-800/DIAL
BEN(R).
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional fund shares or receive them in cash. Any
capital gains a fund distributes are taxable to you as long-term capital
gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, a fund must withhold 31% of your taxable distributions and redemption
proceeds if you do not provide your correct social security or taxpayer
identification number, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Non-U.S. investors
may be subject to U.S. withholding and estate tax. You should consult your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in a fund.
YOUR ACCOUNT
[Insert graphic of pencil marking an X] CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your investment
representative can help you decide.
CLASS A CLASS B CLASS C
- ----------------------------------------------------------------------
o Initial sales o No initial o Initial sales
charge of 5.75% sales charge charge of 1%
(DynaTech and
Growth Series),
4.25% (Income,
Utilities and U.S.
Government
Securities Series)
or less
o Deferred sales o Deferred sales o Deferred sales
charge of 1% on charge of 4% on charge of 1% on
purchases of $1 shares you sell shares you sell
million or more within the first within 18 months
sold within 12 year, declining to
months 1% within six
years and
eliminated after
that
o Lower annual o Higher annual o Higher annual
expenses than Class expenses than expenses than
B or C due to lower Class A (same as Class A (same as
distribution fees Class C) due to Class B) due to
higher higher
distribution fees. distribution fees.
Automatic No conversion to
conversion to Class A shares, so
Class A shares annual expenses do
after eight years, not decrease.
reducing future
annual expenses.
THE GROWTH, INCOME, UTILITIES AND U.S. GOVERNMENT SECURITIES SERIES BEGAN
OFFERING CLASS B SHARES ON JANUARY 1, 1999. THE DYNATECH SERIES BEGAN
OFFERING CLASS B ON FEBRUARY 1, 2000.
SALES CHARGES - CLASS A - DYNATECH AND GROWTH SERIES
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS OF THE OFFERING OF YOUR NET
AMOUNT PRICE INVESTMENT
- --------------------------------------------------------------------
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under 3.50 3.63
$250,000
$250,000 but under 2.50 2.56
$500,000
$500,000 but under $1 2.00 2.04
million
SALES CHARGES - CLASS A - INCOME, UTILITIES AND
U.S. GOVERNMENT SECURITIES SERIES
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS OF THE OFFERING OF YOUR NET
AMOUNT PRICE INVESTMENT
- --------------------------------------------------------------------
Under $100,000 4.25 4.44
$100,000 but under 3.50 3.63
$250,000
$250,000 but under 2.50 2.56
$500,000
$500,000 but under $1 2.00 2.04
million
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either
as a lump sum or through our cumulative quantity discount or letter of intent
programs (see page 63), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC
is the same for each class (please see page 62).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows DynaTech and Growth Series
to pay distribution fees of up to 0.25% per year and Income, Utilities and
U.S. Government Securities Series to pay distribution fees of up to 0.15% per
year to those who sell and distribute Class A shares and provide other
services to shareholders. Because these fees are paid out of Class A's assets
on an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS B
IF YOU SELL YOUR SHARES WITHIN THIS % IS DEDUCTED FROM
THIS MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
- -----------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
With Class B shares, there is no initial sales charge. However, there is a
CDSC if you sell your shares within six years, as described in the table
above. The way we calculate the CDSC is the same for each class (please see
page 62). After 8 years, your Class B shares automatically convert to Class A
shares, lowering your annual expenses from that time on.
MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares
at one time is $249,999. We place any investment of $250,000 or more in Class
A shares, since a reduced initial sales charge is available and Class A's
annual expenses are lower.
RETIREMENT PLANS Class B shares are available to certain retirement plans,
including IRAs (of any type), Franklin Templeton Trust Company 403(b) plans,
and Franklin Templeton Trust Company qualified plans with participant or
earmarked accounts.
DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows DynaTech and Growth Series
to pay distribution and other fees of up to 1% per year and Income, Utilities
and U.S. Government Securities Series to pay distribution and other fees of
up to 0.65% per year for the sale of Class B shares and for services provided
to shareholders. Because these fees are paid out of Class B's assets on an
on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
when you invest this OF THE OFFERING OF YOUR NET
amount PRICE INVESTMENT
- --------------------------------------------------------------------
Under $1 million 1.00 1.01
WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE
IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C
shares you sell within 18 months of purchase. The way we calculate the CDSC
is the same for each class (please see page 62).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows DynaTech and Growth Series
to pay distribution and other fees of up to 1% per year and Income, Utilities
and U.S. Government Securities Series to pay distribution and other fees of
up to 0.65% per year for the sale of Class C shares and for services provided
to shareholders. Because these fees are paid out of Class C's assets on an
on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) -
CLASS A, B & C
The CDSC for each class is based on the current value of the shares being
sold or their net asset value when purchased, whichever is less. There is no
CDSC on shares you acquire by reinvesting your dividends or capital gains
distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page 67 for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below,
please let us know at the time you make your investment to help ensure you
receive the lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases
in the Franklin Templeton Funds to take advantage of the lower sales charges
for large purchases of Class A shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance
Products Trust, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in
the Franklin Templeton Funds for purposes of calculating the sales charge.
You also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same sales
charge as if all shares had been purchased at one time. We will reserve a
portion of your shares to cover any additional sales charge that may apply
if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION
OF YOUR ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you
may reinvest some or all of the proceeds within 365 days without an initial
sales charge. The proceeds must be reinvested within the same share class,
except proceeds from the sale of Class B shares will be reinvested in Class A
shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit
your account with the amount of the CDSC paid but a new CDSC will apply. For
Class B shares reinvested in Class A, a new CDSC will not apply, although
your account will not be credited with the amount of any CDSC paid when you
sold your Class B shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial
sales charge or CDSC by various individuals, institutions and retirement
plans or by investors who reinvest certain distributions and proceeds within
365 days. Certain investors also may buy Class C shares without an initial
sales charge. The CDSC for each class may be waived for certain redemptions
and distributions. If you would like information about available sales charge
waivers, call your investment representative or call Shareholder Services at
1-800/632-2301. For information about retirement plans, you may call
Retirement Plan Services at 1-800/527-2020. A list of available sales charge
waivers also may be found in the Statement of Additional Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors
to invest as a group. For sales charge purposes, the group's investments are
added together. There are certain other requirements and the group must have
a purpose other than buying fund shares at a discount.
[Insert graphic of paper with lines and someone writing]
BUYING SHARES
MINIMUM INVESTMENTS
- -------------------------------------------------------------------
INITIAL ADDITIONAL
- -------------------------------------------------------------------
Regular accounts $1,000 $50
- -------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- -------------------------------------------------------------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education
IRAs or Roth IRAs)
- -------------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or Roth $250 $50
IRAs
- -------------------------------------------------------------------
Broker-dealer sponsored wrap account $250 $50
programs
- -------------------------------------------------------------------
Full-time employees, officers, trustees and $100 $50
directors of
Franklin Templeton entities, and their
immediate family members
- -------------------------------------------------------------------
PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND ELIGIBLE FOR SALE
IN YOUR STATE OR JURISDICTION.
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. Make sure you indicate the share class
you have chosen. If you do not indicate a class, we will place your purchase
in Class A shares. To save time, you can sign up now for services you may
want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- ----------------------------------------------------------------------
[Insert graphic of Contact your Contact your
hands shaking] investment investment
representative representative
Through your
investment
representative
- ----------------------------------------------------------------------
[Insert graphic of Make your check Make your check
envelope] payable to the fund. payable to the fund.
Include your account
By Mail Mail the check and number on the check.
your signed
application to Fill out the deposit
Investor Services. slip from your
account statement. If
you do not have a
slip, include a note
with your name, the
fund name, and your
account number.
Mail the check and
deposit slip or note
to Investor Services.
- ----------------------------------------------------------------------
[Insert graphic of Call to receive a Call to receive a
three lightning bolts] wire control number wire control number
and wire instructions. and wire instructions.
BY WIRE
Wire the funds and To make a same day
1-800/632-2301 mail your signed wire investment,
(or 1-650/312-2000 application to please call us by
collect) Investor Services. 1:00 p.m. Pacific
Please include the time and make sure
wire control number your wire arrives by
or your new account 3:00 p.m.
number on the
application.
To make a same day
wire investment,
please call us by
1:00 p.m. Pacific
time and make sure
your wire arrives by
3:00 p.m.
- ----------------------------------------------------------------------
BY EXCHANGE Call Shareholder Call Shareholder
Services at the Services at the
TeleFACTS(R) number below, or send number below or our
1-800/247-1753 signed written automated TeleFACTS
(around-the-clock instructions. The system, or send
access) TeleFACTS system signed written
cannot be used to instructions.
open a new account.
(Please see page 67
(Please see page 67 for information on
for information on exchanges.)
exchanges.)
- ----------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30P.M., PACIFIC TIME)
[Insert graphic of person with headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in a fund by automatically transferring money from your checking or
savings account each month to buy shares. The minimum investment to open an
account with an automatic investment plan is $50 ($25 for an Education IRA).
To sign up, complete the appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in Class
A shares of the fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your
application that you would like to receive an Automatic Payroll Deduction
Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from a fund
in an existing account in the same share class* of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please
call 1-800/527-2020 for information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
*Class B and C shareholders may reinvest their distributions in Class A
shares of any Franklin Templeton money fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*, generally without paying any additional sales
charges. If you exchange shares held for less than six months, however, you
may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%. If you exchange shares from a
money fund, a sales charge may apply no matter how long you have held the
shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply
to purchases and sales apply to exchanges, including minimum investment
amounts. Exchanges also have the same tax consequences as ordinary sales and
purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into Class A without any sales charge. Advisor Class shareholders of
another Franklin Templeton Fund also may exchange into Class A without any
sales charge. Advisor Class shareholders who exchange their shares for Class
A shares and later decide they would like to exchange into another fund that
offers Advisor Class may do so.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton Fund, the time your shares are held in that fund will
count towards the eight year period for automatic conversion to Class A
shares.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page 72).
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of certificate] SELLING SHARES
You can sell your shares at any time. Please keep in mind that a contingent
deferred sales charge (CDSC) may apply.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can
be made over the phone or with a simple letter. Sometimes, however, to
protect you and the fund we will need written instructions signed by all
registered owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can
obtain a signature guarantee at most banks and securities dealers.
[End callout]
A notary public CANNOT provide a signature guarantee.
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in
a Franklin Templeton Trust Company retirement plan. For participants under
age 591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
SELLING SHARES
To sell some or all of your shares
- ----------------------------------------------------------------------
[Insert graphic of hands Contact your investment representative
shaking]
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- ----------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed
envelope] share certificates (if you hold share
certificates) to Investor Services.
BY MAIL Corporate, partnership or trust accounts
may need to send additional documents.
Specify the fund, the account number and
the dollar value or number of shares you
wish to sell. If you own both Class A
and B shares, also specify the class of
shares, otherwise we will sell your
Class A shares first. Be sure to include
all necessary signatures and any
additional documents, as well as
signature guarantees if required.
A check will be mailed to the name(s)
and address on the account, or otherwise
according to your written instructions.
- ----------------------------------------------------------------------
[Insert graphic of phone] As long as your transaction is for
$100,000 or less, you do not hold share
BY PHONE certificates and you have not changed
your address by phone within the last 15
1-800/632-2301 days, you can sell your shares by phone.
A check will be mailed to the name(s)
and address on the account. Written
instructions, with a signature
guarantee, are required to send the
check to another address or to make it
payable to another person.
- ----------------------------------------------------------------------
[Insert graphic of three You can call or write to have redemption
lightning bolts] proceeds sent to a bank account. See the
policies above for selling shares by
BY ELECTRONIC FUNDS mail or phone.
TRANSFER (ACH)
Before requesting to have redemption
proceeds sent to a bank account, please
make sure we have your bank account
information on file. If we do not have
this information, you will need to send
written instructions with your bank's
name and address, a voided check or
savings account deposit slip, and a
signature guarantee if the ownership of
the bank and fund accounts is different.
If we receive your request in proper
form by 1:00 p.m. Pacific time, proceeds
sent by ACH generally will be available
within two to three business days.
- ----------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund
arrows pointing in you are considering.
opposite directions]
Call Shareholder Services at the number
BY EXCHANGE below or our automated TeleFACTS system,
or send signed written instructions. See
TeleFACTS(R) the policies above for selling shares by
1-800/247-1753 mail or phone.
(around-the-clock access)
If you hold share certificates, you will
need to return them to the fund before
your exchange can be processed.
- ----------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE Each fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. Pacific time). Each class's NAV is calculated by
dividing its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The funds' assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If a fund holds securities listed primarily on a foreign exchange that
trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee and UGMA/UTMA accounts) because you sell some of your
shares, we may mail you a notice asking you to bring the account back up to
its applicable minimum investment amount. If you choose not to do so within
30 days, we may close your account and mail the proceeds to the address of
record. You will not be charged a CDSC if your account is closed for this
reason.
STATEMENTS AND REPORTS You will receive quarterly account statements that
show all your account transactions during the quarter. You also will receive
written notification after each transaction affecting your account (except
for distributions and transactions made through automatic investment or
withdrawal programs, which will be reported on your quarterly statement). You
also will receive the funds' financial reports every six months. To reduce
fund expenses, we try to identify related shareholders in a household and
send only one copy of the financial reports. If you need additional copies,
please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and
statements and other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The funds may restrict or refuse exchanges by market timers.
If accepted, each exchange by a market timer will be charged $5 by
Franklin/Templeton Investor Services, Inc., the funds' transfer agent.
DynaTech Series does not allow investments by market timers. You will be
considered a market timer if you have (i) requested an exchange out of a fund
within two weeks of an earlier exchange request, or (ii) exchanged shares out
of a fund more than twice in a calendar quarter, or (iii) exchanged shares
equal to at least $5 million, or more than 1% of a fund's net assets, or (iv)
otherwise seem to follow a timing pattern. Shares under common ownership or
control are combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies
and reserves certain rights, including:
o The funds may refuse any order to buy shares, including any purchase
under the exchange privilege.
o At any time, the funds may change their investment minimums or waive or
lower their minimums for certain purchases.
o The funds may modify or discontinue the exchange privilege on 60 days'
notice.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, each fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check, wire or electronic funds transfer
would be harmful to existing shareholders.
To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive
sales commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and
service (12b-1) fees and its other resources.
DYNATECH AND GROWTH SERIES
CLASS A CLASS B CLASS C
COMMISSION (%) - 4.00 2.00
Investment under $50,000 5.00 - -
$50,000 but under $100,000 3.75 - -
$100,000 but under $250,000 2.80 - -
$250,000 but under $500,000 2.00 - -
$500,000 but under $1 million 1.60 - -
$1 million or more up to 1.00 1 - -
12B-1 FEE TO DEALER 0.25 1 0.25 2 1.00 3
INCOME, UTILITIES AND U.S. GOVERNMENT SECURITIES SERIES
CLASS A CLASS B CLASS C
Commission (%) - 3.00 2.00
Investment under $100,000 4.00 - -
$100,000 but under $250,000 3.25 - -
$250,000 but under $500,000 2.25 - -
$500,000 but under $1 million 1.85 - -
$1 million or more up to 0.75 1 - -
12B-1 FEE TO DEALER 0.15 1 0.15 2 0.65 3
A dealer commission of up to 1% may be paid on Class A NAV purchases by
certain retirement plans1 and on Class C NAV purchases. A dealer commission
of up to 0.25% may be paid on Class A NAV purchases by certain trust
companies and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive
fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.25% for Growth Series and 0.15%
for Income, Utilities and U.S. Government Securities Series from the date of
purchase. After 8 years, Class B shares convert to Class A shares and dealers
may then receive the 12b-1 fee applicable to Class A.
3. Dealers may be eligible to receive up to 0.25% for DynaTech and Growth
Series and 0.15% for Income, Utilities and U.S. Government Securities Series
during the first year after purchase and may be eligible to receive the full
12b-1 fee starting in the 13th month.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the fund or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE MONDAY THROUGH FRIDAY)
NUMBER
- -------------------------------------------------------------------
Shareholder Services 1-800/ 632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
Fund Information 1-800/ DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It
is incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the
SAI, please contact your investment representative or call us at the number
below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, D.C. 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-537 FCF P2/00
Prospectus
Franklin
Custodian
Funds, Inc.
ADVISOR CLASS
INVESTMENT STRATEGY
GROWTH
GROWTH & INCOME
INCOME
Growth Series
Income Series
Utilities Series
U.S. Government Securities Series
FEBRUARY 1, 2000
[Insert Franklin Templeton Ben Head]
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
THE FUNDS
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
2 Growth Series
11 Income Series
21 Utilities Series
29 U.S. Government Securities Series
36 Distribution and tax information for each fund
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND services
[End callout]
38 Qualified Investors
40 Buying Shares
41 Investor Services
43 Selling Shares
45 Account Policies
47 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
GROWTH SERIES
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is capital appreciation.
PRINCIPAL INVESTMENTS The fund will normally invest most of its assets in
the equity securities of companies that are leaders in their industries. In
selecting securities, the manager considers many factors, including
historical and potential growth in revenues and earnings, assessment of
strength and quality of management, and determination of a company's
strategic positioning in its industry.
[Begin callout]
The fund normally invests most of its assets in the common stocks of
companies that are leaders in their industries.
[End callout]
The fund may invest up to 40% of its assets in smaller companies, as well as
in companies in new and emerging industries where growth is expected to be
above average. For this fund, smaller company stocks are generally those with
market capitalizations of less than $1.5 billion. The fund generally invests
up to 10% of its assets in foreign securities.
An equity security, or stock, represents a proportionate share of the
ownership of a company; its value is based on the success of the company's
business and the value of its assets, as well as general market conditions.
Common stocks and preferred stocks are examples of equity securities.
Depending upon current market conditions, the fund may invest a portion of
its assets in debt securities. Debt securities represent an obligation of the
issuer to repay a loan of money to it and generally provide for the payment
of interest. These include bonds, notes and debentures. Convertible
securities have characteristics of both debt securities (which is generally
the form in which they are first issued) and equity securities (which is what
they can be converted into).
The manager considers the tax consequences of its investment decisions,
including capital gains or income that may result in taxable distributions to
shareholders. The manager generally uses a "buy-and-hold" strategy. The fund
has historically had low portfolio turnover, and its portfolio turnover is
expected to be significantly lower than that of comparable actively managed
equity funds. When selling portfolio securities, the manager uses an
identified cost lot system that generally selects higher cost lots with
long-term holding periods, where possible. The fund may also realize losses
to minimize or offset any capital gains. Because the fund uses a "buy and
hold" investment strategy and tries to minimize the tax impact to
shareholders of the fund's net capital gains, the fund's portfolio securities
may have a higher level of unrealized capital appreciation than if the fund
did not use these strategies. During periods of net redemptions of fund
shares, the manager may be required to sell these securities, generating a
higher level of taxable gain for shareholders than would occur if the fund
had not used these strategies.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economies of countries
where the fund invests are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. Under these
circumstances, the fund may be unable to pursue its investment goal because
it may not invest or may invest substantially less in common stocks of
companies that are leaders in their industries.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While the stock markets have historically outperformed other asset
classes over the long term, individual stock prices tend to go up and down
more dramatically over the shorter term. These price movements may result
from factors affecting individual companies, industries or the securities
market as a whole.
SMALLER COMPANIES Historically, smaller company securities have been more
volatile in price than larger company securities, especially over the
short-term. Among the reasons for the greater price volatility are the less
certain growth prospects of smaller companies, the lower degree of liquidity
in the markets for such securities, and the greater sensitivity of smaller
companies to changing economic conditions and interest rates.
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
In addition, small companies may lack depth of management, they may be unable
to generate funds necessary for growth or development, or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established.
Therefore, while smaller companies may offer opportunities for capital
growth, they also involve special risks and should be considered speculative.
MARKET A security's price may be reduced by market activity or the results
of supply and demand. This is a basic risk associated with all securities.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to rise.
FOREIGN SECURITIES Securities of companies located outside the U.S. may
involve risks that can increase the potential for losses in the fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns which trade in that country.
COMPANY. Foreign companies are not subject to the same accounting, auditing
and financial reporting standards and practices as U.S. companies and their
stocks may not be as liquid as stocks of similar U.S. companies. Foreign
markets and their participants generally have less government supervision and
regulation than in the U.S.
CURRENCY. To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority will
have a significant impact on the value of any securities denominated in that
currency. Currency markets generally are not as regulated as securities
markets.
EURO. The European Monetary Union (EMU) introduced a new single currency,
the euro, on January 1, 1999. It will replace the national currency for
participating member countries in stages through July 1, 2002.
Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on currency valuations and on the
business or financial condition of European issuers which the fund may hold
in its portfolio.
YEAR 2000 At this date, it appears that neither the operations of the fund
nor its portfolio securities were materially adversely affected by Year 2000
computer-related problems. However, it is still possible that Year 2000
problems could emerge. If a company in which the fund is invested develops
problems related to Year 2000 which have not shown up at this date, the price
of its securities may be adversely affected, and this may have an adverse
effect on the fund's share price.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not insured by the Federal Deposit Insurance
Corporation or any other agency of the U.S. government. Mutual fund shares
involve investment risks, including the possible loss of principal.
[End callout]
The business operations of the fund and its portfolio companies depend on a
worldwide network of computer systems that contain date fields. Prior to
remediation efforts of the last several months, many of the systems
previously used a two digit date field to represent the date and could not
have distinguished the Year 1900 from the Year 2000 (commonly referred to as
the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
could have created difficulties for some systems. Year 2000 has been one of
the many factors the manager considers in making investment decisions.
More detailed information about the fund, its policies, including temporary
investments, and risks can be found in the fund's Statement of Additional
Information (SAI).
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS 1
[Insert bar graph]
2.07% 26.71% 2.96% 7.10% 2.92% 38.40% 16.68%18.85% 18.82% 12.45%
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '91
14.09%
WORST
QUARTER:
Q3 '90
- -12.73%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------
Franklin Growth Fund - Advisor Class 1 12.45% 20.92% 14.27%
S&P 500(R)Index 2 21.04% 28.56% 18.21%
1. Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class A performance, excluding the effect
of Class A's maximum initial sales charge and including the effect of the
Class A distribution and service (12b-1) fees; and (b) for periods after
January 1, 1997, an actual Advisor Class figure is used reflecting a
deduction of all applicable charges and fees for that class. This blended
figure assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
- ------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee 1 $5.00
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
ADVISOR CLASS
Management fees 0.46%
Distribution and service (12b-1) fees None
Other expenses 0.19%
==============
Total annual fund operating expenses 0.65%
==============
1. This fee is only for market timers (see page 46).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------
$66 $208 $362 $810
[Insert graphic of briefcase] MANAGEMENT
Franklin Investment Advisory Services, Inc. (Investment Advisory), 50 Cedar
Hill Drive, Jamestown, Rhode Island 02835, is the fund's investment manager.
Investment Advisory and its affiliates manage over $224 billion in assets.
The team responsible for the fund's management is:
VIVIAN J. PALMIERI, VICE PRESIDENT OF INVESTMENT ADVISORY
Mr. Palmieri has been a manager of the fund since 1965. He joined the
Franklin Templeton Group in 1965.
CONRAD B. HERRMANN CFA, PORTFOLIO MANAGER OF
INVESTMENT ADVISORY
Mr. Herrmann has been a manager of the fund since 1993. He joined the
Franklin Templeton Group in 1989.
For the fiscal year ended September 30, 1999, the fund paid 0.46% of its
average monthly net assets to the manager for managing the fund's assets.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Advisor Class since its
inception. This information has been audited by PricewaterhouseCoopers LLP.
ADVISOR CLASS YEAR ENDED SEPTEMBER 30,
1999 3 1998 1997 4
PER SHARE DATA ($)
Net asset value, beginning of year 28.63 27.13 23.24
----------------------
Net investment income .46 .57 .25
Net realized and unrealized gains 4.90 1.69 3.64
----------------------
Total from investment operations 5.35 2.26 3.89
----------------------
Less distributions from:
Net investment income (.51) (.52) -
Net realized gains (.21) (.24) -
----------------------
Total distributions (.72) (.76) -
======================
Net asset value, end of year 33.27 28.63 27.13
======================
Total return (%) 1 18.89 8.47 16.74
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 35,461 41,871 25,823
Ratios to average net assets: (%)
Expenses 0.65 .65 .66 2
Net investment income 1.41 2.01 1.93 2
Portfolio turnover rate (%) 3.74 .58 1.77
1. Total return is not annualized.
2. Annualized.
3. Based on average shares outstanding.
4. From the period January 2, 1997 (effective date) to September 30, 1997.
INCOME SERIES
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to maximize income while maintaining
prospects for capital appreciation.
PRINCIPAL INVESTMENTS The fund will normally invest in a diversified
portfolio of debt and equity securities.
Debt securities represent an obligation of the issuer to repay a loan of
money to it and generally provide for the payment of interest. These include
bonds, notes and debentures. An equity security, or stock, represents a
proportionate share of the ownership of a company; its value is based on the
success of the company's business and the value of its assets, as well as
general market conditions. Common stocks and preferred stocks are examples of
equity securities. Convertible securities have characteristics of both debt
securities (which is generally the form in which they are first issued) and
equity securities (which is what they can be converted into).
[Begin callout]
The fund normally invests in a diversified portfolio of bonds and stocks in
the U.S. and abroad.
[End callout]
The fund seeks income by selecting investments such as corporate, foreign and
U.S. Treasury bonds, as well as stocks with attractive dividend yields. In
its search for growth opportunities, the fund invests in common stocks of
companies from a variety of industries such as utilities, oil, gas, real
estate and consumer goods.
The fund may invest up to 100% of total assets in debt securities that are
rated below investment grade, but it is not currently expected that the fund
will invest more than 50% of its assets in these securities. Securities rated
in the top four ratings categories by independent rating organizations such
as Standard & Poor's Corporation (S&P) and Moody's Investors Service, Inc.
(Moody's) are considered "investment grade." The fund generally invests in
securities rated at least Caa by Moody's or CCC by S&P or unrated securities
the fund's manager determines are comparable. Generally, lower rated
securities pay higher yields than more highly rated securities to compensate
investors for the higher risk. As of September 30, 1999, approximately 30.71%
of the fund's net assets were invested in lower rated and comparable quality
unrated debt securities.
The fund may invest up to 25% of its assets in foreign securities. It
ordinarily buys foreign securities that are traded in the U.S. or American
Depositary Receipts, which are certificates typically issued by a bank or
trust company that give their holders the right to receive securities issued
by a foreign or a domestic company.
The fund's manager searches for undervalued or out-of-favor securities it
believes offer opportunities for income today and significant growth
tomorrow. It performs independent analysis of the securities being considered
for the fund's portfolio, rather than relying principally on the ratings
assigned by rating agencies. In its analysis, the manager considers a variety
of factors, including:
o the experience and managerial strength of the company;
o responsiveness to changes in interest rates and business conditions;
o debt maturity schedules and borrowing requirements;
o the company's changing financial condition and market recognition of the
change; and
o a security's relative value based on such factors as anticipated cash
flow, interest or dividend coverage, asset coverage, and earnings prospects.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt security prices fall. The
opposite is also true: debt security prices rise when interest rates fall. In
general, securities with longer maturities are more sensitive to changes in
interest rates.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT Credit risk is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's price and,
thus, impact fund performance.
LOWER-RATED SECURITIES. Securities rated below investment grade, sometimes
called "junk bonds," generally have more credit risk than higher-rated
securities.
Companies issuing high yield, fixed-income securities are not as strong
financially as those issuing securities with higher credit ratings. These
companies are more likely to encounter financial difficulties and are more
vulnerable to changes in the economy, such as a recession or a sustained
period of rising interest rates, that could affect their ability to make
interest and principal payments. If an issuer stops making interest and/or
principal payments, payments on the securities may never resume. These
securities may be worthless and the fund could lose its entire investment.
The prices of high yield, fixed-income securities fluctuate more than
higher-quality securities. Prices are especially sensitive to developments
affecting the company's business and to changes in the ratings assigned by
ratings agencies. Prices often are closely linked with the company's stock
prices and typically rise and fall in response to factors that affect stock
prices. In addition, the entire high yield securities market can experience
sudden and sharp price swings due to changes in economic conditions, stock
market activity, large sustained sales by major investors, a high-profile
default, or changes in investors' attitudes towards risk.
High yield securities generally are less liquid than higher-quality
securities. Many of these securities do not trade frequently, and when they
do their prices may be significantly higher or lower than expected.
STOCKS While the stock markets have historically outperformed other asset
classes over the long term, individual stock prices tend to go up and down
more dramatically over the short term. These price movements may result from
factors affecting individual companies, industries or the securities market
as a whole. Value stock prices are considered "cheap" relative to the
company's perceived value. They may not increase in value, as anticipated by
the manager, if other investors fail to recognize the company's value and bid
up the price or in markets favoring faster-growing companies. Utility company
securities are particularly sensitive to interest rate movements: when
interest rates rise, the stock prices of these companies tend to fall.
MARKET A security's price may be reduced by market activity or the results
of supply and demand. This is a basic risk associated with all securities.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to rise.
CONVERTIBLE SECURITIES The value of convertible securities may rise and fall
with the market value of the underlying stock or, like a debt security, vary
with changes in interest rates and the credit quality of the issuer. A
convertible security tends to perform more like a stock when the underlying
stock price is high (because it is assumed it will be converted) and more
like a debt security when the underlying stock price is low (because it is
assumed it will not be converted). Because its value can be influenced by
many different factors, a convertible security is not as sensitive to
interest rate changes as a similar non-convertible debt security, and
generally has less potential for gain or loss than the underlying stock.
[Begin callout]
If a security's credit rating is downgraded or a company's financial
condition deteriorates, the price of the security will fall and so too will
the fund's share price. If interest rates rise, the price of the fund's debt
securities will also fall. Because the value of the fund's holdings
fluctuates in price, the value of your investment in the fund will go up and
down. This means you could lose money over short or even extended periods.
[End callout]
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund. Investments in depositary receipts also involve some or all of the
following risks.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns which trade in that country. These movements will affect the fund's
share price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, business and social frameworks to
support securities markets. Foreign securities markets, including emerging
markets, may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than in the U.S. While
short-term volatility in these markets can be disconcerting, declines in
excess of 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY. To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
has a significant impact on the value of any securities denominated in that
currency. Currency markets generally are not as regulated as securities
markets.
EURO. The European Monetary Union (EMU) introduced a new single currency, the
euro, on January 1, 1999. It will replace the national currency for
participating member countries in stages through July 1, 2002.
Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on currency valuations and on the
business or financial condition of European issuers which the fund may hold
in its portfolio.
YEAR 2000 At this date, it appears that neither the operations of the fund
nor its portfolio securities were materially adversely affected by Year 2000
computer-related problems. However, it is still possible that Year 2000
problems could emerge. If a company in which the fund is invested develops
problems related to Year 2000 which have not shown up at this date, the price
of its securities may be adversely affected, and this may have an adverse
effect on the fund's share price.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not insured by the Federal Deposit Insurance
Corporation or any other agency of the U.S. government. Mutual fund shares
involve investment risks, including the possible loss of principal.
[End callout]
The business operations of the fund and its portfolio companies depend on a
worldwide network of computer systems that contain date fields. Prior to
remediation efforts of the last several months, many of the systems
previously used a two digit date field to represent the date and could not
have distinguished the Year 1900 from the Year 2000 (commonly referred to as
the Year 2000 problem). In addition, the fact that the Year 2000 is a leap
year could have created difficulties for some systems. Year 2000 has been one
of the many factors the manager considers in making investment decisions.
More detailed information about the fund, its policies, including temporary
investments, risks and the ratings of debt securities can be found in the
fund's Statement of Additional Information (SAI).
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS 1
[Insert bar graph]
- -8.77% 41.15% 15.24% 21.53% -6.38% 21.29% 10.45%17.04% 1.12% -0.58%
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '91
16.67%
WORST
QUARTER:
Q3 '90
- -8.58%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------------
Franklin Income Fund - Advisor -0.58% 9.72% 10.38%
Class 1
S&P 500(R)Index 2 21.04% 28.56% 18.12%
Lehman Bros. Gov't/Corp. Bond -2.15% 7.61% 7.65%
Index 3
1. Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class A performance, excluding the effect
of Class A's maximum initial sales charge and including the effect of the
Class A distribution and service (12b-1) fees; and (b) for periods after
January 1, 1997, an actual Advisor Class figure is used reflecting a
deduction of all applicable charges and fees for that class. This blended
figure assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
3. Source: Standard & Poor's(R) Micropal. Lehman Brothers Government/Corporate
Bond Index is an unmanaged index of fixed-rate U.S. government and foreign
and domestic corporate bonds that are rated investment grade or higher and
have maturities of one year or more and at least $50 million outstanding. One
cannot invest directly in an index, nor is an index representative of the
fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
- -----------------------------------------------------------------
Maximum sales charge (load) imposed on None
purchases
Exchange fee 1 $5.00
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
ADVISOR CLASS
- -----------------------------------------------------------------
Management fees 0.45%
Distribution and service (12b-1) fees None
Other expenses 0.13%
-------
Total annual fund operating expenses 0.58%
=======
1. This fee is only for market timers (see page 46).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------
$59 $186 $324 $726
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Advisers and its affiliates manage
over $224 billion in assets.
The team responsible for the fund's management is:
CHARLES B. JOHNSON, CHAIRMAN OF THE BOARD OF ADVISERS
Mr. Johnson has been a manager of the fund since 1957. He joined the Franklin
Templeton Group in 1957.
MATTHEW F. AVERY, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Avery has been a manager of the fund since 1989. He joined the Franklin
Templeton Group in 1987.
FREDERICK G. FROMM, VICE PRESIDENT OF ADVISERS
Mr. Fromm has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1992.
For the fiscal year ended September 30, 1999, the fund paid 0.45% of its
average monthly net assets to the manager for managing the fund's assets.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Advisor Class for the past
five years. This information has been audited by PricewaterhouseCoopers LLP.
ADVISOR CLASS YEAR ENDED SEPTEMBER 30,
1999 3 1998 1997 4
- -------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 2.34 2.48 2.34
-------------------------
Net investment income .17 .17 .14
Net realized and unrealized gains (.09) (.10) .14
(losses)
-------------------------
Total from investment operations .08 .07 .28
-------------------------
Less distributions from:
Net investment income (.18) (.18) (.14)
Net realized gains (.01) (.03) -
-------------------------
Total distributions (.19) (.21) (.14)
=========================
Net asset value, end of year 2.23 2.34 2.48
=========================
Total return (%) 1 3.71 2.82 12.31
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 23,891 21,851 13,318
Ratios to average net assets: (%)
Expenses .58 .57 .57 2
Net investment income 7.60 7.02 7.58 2
Portfolio turnover rate (%) 17.35 22.01 16.15
1. Total return is not annualized.
2. Annualized.
3. Based on average shares outstanding.
4. For the period January 2, 1997 (effective date) to September 30, 1997.
UTILITIES SERIES
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's investment goals are capital appreciation and current
income.
PRINCIPAL INVESTMENTS The fund will normally invest most of its assets in
the securities of public utilities companies. These are companies that
provide electricity, natural gas, water, and communications services to the
public and companies that provide services to public utilities companies. The
fund concentrates (invests more than 25% of its total assets) in companies
operating in the utilities industry. The manager expects that more than 50%
of the fund's assets will be invested in electric utilities securities.
[Begin callout]
The fund normally invests most of its assets in securities of public
utilities companies.
[End callout]
The fund invests primarily in equity securities. An equity security or stock,
represents a proportionate share of the ownership of a company; its value is
based on the success of the company's business and the value of its assets,
as well as general market conditions. Common stocks and preferred stocks are
examples of equity securities. The fund may invest up to 25% of its assets in
debt securities. Debt securities represent an obligation of the issuer to
repay a loan of money to it and generally provide for the payment of
interest. These include bonds, notes, and debentures. Convertible securities
have characteristics of both debt securities (which is generally the form in
which they are first issued) and equity securities (which is what they can be
converted into).
The fund focuses on "investment grade" debt securities. These are issues
rated in the top four ratings categories by independent rating agencies such
as Standard & Poor's Corporation or Moody's Investor's Service, Inc. or, if
unrated, determined by the fund's manager to be comparable.
The fund may invest up to 10% of its assets in foreign securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goals because it may not invest or may invest
substantially less in public utilities securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
UTILITIES INDUSTRY The fund's performance is closely tied to conditions
affecting the public utilities industry. These conditions may change rapidly.
Utility company securities, which are frequently bought for their dividend
yield, are particularly sensitive to interest rate movements: when interest
rates rise, the stock prices of these companies tend to fall. On-going
regulatory changes have led to greater competition in the industry and the
emergence of the non-regulated providers as a significant part of the
industry. This trend may make some companies less profitable. In addition,
the industry is subject to a variety of risks specific to this industry:
utilities often find it difficult to obtain adequate returns on invested
capital in spite of frequent rate increases; they may face difficulty in
financing large construction programs during inflationary and rising interest
rate periods; utilities are subject to many restrictions on operations and
increased costs due to environmental and safety regulations; utilities may
face difficulties in obtaining fuel for electric generation at reasonable
prices; utilities may face risks associated with the operation of nuclear
power plants; utilities also may be subject to adverse effects of the results
of energy conservation programs as well as other factors affecting the level
of demand for services. State and other regulators monitor and control
utility revenues and costs, and therefore may limit utility profits and
dividends paid to investors. Regulatory authorities also may restrict a
utility company's access to new markets, thereby diminishing the company's
long-term prospects.
[Begin callout]
Utility company securities are particularly sensitive to interest rate
movements: when interest rates rise, the stock prices of these companies tend
to fall. Because the securities the fund holds fluctuate in price, the value
of your investment in the fund will go up and down. This means you could lose
money over short or even extended periods.
[End callout]
STOCKS While stock markets have historically outperformed other asset
classes over the long term, individual stock prices tend to go up and down
more dramatically over the shorter term. These price movements may result
from factors affecting individual companies, industries or the securities
market as a whole.
MARKET A security's price may be reduced by market activity or the results
of supply and demand. This is a basic risk associated with all securities.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to rise.
INTEREST RATE When interest rates rise, debt security prices fall. The
opposite is also true: debt security prices rise when interest rates fall. In
general, securities with longer maturities are more sensitive to changes in
interest rates.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT Credit risk is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's price and,
thus, impact fund performance.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns which trade in that country.
COMPANY. Foreign companies are not subject to the same accounting, auditing
and financial reporting standards and practices as U.S. companies and their
stocks may not be as liquid as stocks of similar U.S. companies. Foreign
markets and their participants generally have less government supervision and
regulation than in the U.S.
YEAR 2000 At this date, it appears that neither the operations of the fund
nor its portfolio securities were materially adversely affected by Year 2000
computer-related problems. However, it is still possible that Year 2000
problems could emerge. If a company in which the fund is invested develops
problems related to Year 2000 which have not shown up at this date, the price
of its securities may be adversely affected, and this may have an adverse
effect on the fund's share price.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not insured by the Federal Deposit Insurance
Corporation or any other agency of the U.S. government. Mutual fund shares
involve investment risks, including the possible loss of principal.
[End callout]
The business operations of the fund and its portfolio companies depend on a
worldwide network of computer systems that contain date fields. Prior to
remediation efforts of the last several months, many of the systems
previously used a two digit date field to represent the date and could not
have distinguished the Year 1900 from the Year 2000 (commonly referred to as
the Year 2000 problem). In addition, the fact that the Year 2000 is a leap
year could have created difficulties for some systems. Year 2000 has been one
of the many factors the manager considers in making investment decisions.
More detailed information about the fund, its policies, including temporary
investments, risks and the ratings of debt securities can be found in the
fund's Statement of Additional Information (SAI).
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS 1
[Insert bar graph]
0.38% 24.18% 9.08% 11.52% -11.69% 30.68% 2.03% 25.07% 7.91% -14.76%
90 91 92 93 94 95 96 97 98 99
[Begin callout]
BEST
QUARTER:
Q4 '97
15.06%
WORST
QUARTER:
Q1 '94
- -9.95%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------
Franklin Utilities Fund - Advisor -14.76% 9.11% 7.55%
Class 1
S&P 500(R)Index 2 21.04% 28.56% 18.21%
1. Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class A performance, excluding the effect
of Class A's maximum initial sales charge and including the effect of the
Class A distribution and service (12b-1) fees; and (b) for periods after
January 1, 1997, an actual Advisor Class figure is used reflecting a
deduction of all applicable charges and fees for that class. This blended
figure assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
- -----------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee 1 $5.00
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
ADVISOR CLASS
- -----------------------------------------------------------------
Management fees 0.46%
Distribution and service (12b-1) fees None
Other expenses 0.20%
-------
Total annual fund operating expenses 0.66%
=======
1. This fee is only for market timers (see page 46).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------
$67 $211 $368 $822
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Advisers and its affiliates manage
over $224 billion in assets.
The team responsible for the fund's management is:
SALLY EDWARDS HAFF CFA, SENIOR VICE PRESIDENT OF ADVISERS
Ms. Haff has been a manager of the fund since 1990. She joined the Franklin
Templeton Group in 1986.
GREGORY E. JOHNSON, VICE PRESIDENT OF ADVISERS
Mr. Johnson has been a manager of the fund since 1987. He joined the Franklin
Templeton Group in 1986.
JOHN KOHLI, PORTFOLIO MANAGER OF ADVISERS
Mr. Kohli has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1992.
For the fiscal year ended September 30, 1999, the fund paid 0.46% of its
average monthly net assets to the manager for managing the fund's assets.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Advisor Class since its
inception. This information has been audited by Pricewaterhouse-
Coopers LLP.
ADVISOR CLASS YEAR ENDED SEPTEMBER 30,
1999 3 1998 1997 4
- ------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.39 10.04 9.55
------------------------
Net investment income .51 .58 .36
Net realized and unrealized gains (1.42) 1.57 .53
(losses)
------------------------
Total from investment operations (.91) 2.15 .89
------------------------
Less distributions from:
Net investment income (.54) (.54) (.40)
Net realized gains (.33) (.26) -
------------------------
Total distributions (.87) (.80) (.40)
========================
Net asset value, end of year 9.61 11.39 10.04
========================
Total return (%) 1 (8.48) 22.20 9.61
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 8,058 13,651 8,719
Ratios to average net assets: (%)
Expenses .66 .63 .62 2
Net investment income 4.82 4.93 5.33 2
Portfolio turnover rate (%) 33.99 11.77 7.24
1. Total return is not annualized.
2. Annualized.
3. Based on average shares outstanding.
4. For the period January 2, 1997 (effective date) to September 30, 1997.
U.S. GOVERNMENT
SECURITIES SERIES
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is income.
PRINCIPAL INVESTMENTS The fund invests substantially all of
its assets in Government National Mortgage Association obligations (Ginnie
Maes).
Ginnie Maes represent an ownership interest in mortgage loans made by banks
and other financial institutions to finance purchases of homes. The mortgage
loans may have either fixed or adjustable interest rates. Individual loans
are packaged or "pooled" together for sale to investors such as the fund. As
the underlying mortgage loans are paid off, investors receive principal and
interest payments.
[Begin callout]
The fund invests substantially all of its assets in Ginnie Maes.
[End callout]
Ginnie Maes carry a guarantee backed by the full faith and credit of the U.S.
government. The guarantee applies only to the timely repayment of principal
and interest and not to the market prices and yields of the Ginnie Maes or to
the net asset value or performance of the fund, which will vary with changes
in interest rates and other market conditions.
The fund may also invest in other U.S. government securities which are backed
by the full faith and credit of the U.S. government, such as U.S. Treasury
STRIPS, bills, bonds and notes. The fund's short-term investments include
short-term government securities and cash and after April 1, 2000, the fund
may also invest in repurchase agreements collateralized by U.S. government
securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal because it may not invest or may invest
substantially less in Ginnie Mae securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
GINNIE MAES Ginnie Maes differ from conventional debt securities because
principal is paid back over the life of the security rather than at maturity.
The fund may receive unscheduled prepayments of principal due to voluntary
prepayments, refinancing or foreclosure on the underlying mortgage loans.
During periods of declining interest rates, the volume of principal
prepayments generally increases as borrowers refinance their mortgages at
lower rates. The fund may be forced to reinvest returned principal at lower
interest rates, reducing the fund's income. For this reason, Ginnie Maes may
be less effective than other types of securities as a means of "locking in"
long-term interest rates and may have less potential for capital appreciation
during periods of falling interest rates than other investments with similar
maturities. A reduction in the anticipated rate of principal prepayments,
especially during periods of rising interest rates, may increase the
effective maturity of Ginnie Maes, making them more susceptible than other
debt securities to a decline in market value when interest rates rise. This
could increase the volatility of the fund's performance and share price.
INTEREST RATE When interest rates rise, debt security prices fall. While,
the opposite is also true, that debt security prices rise when interest rates
fall, this may be less true for Ginnie Maes since homeowners may refinance
their mortgages when interest rates fall, thus limiting the upside potential
of the Ginnie Maes. In general, securities with longer maturities are more
sensitive to these interest rate changes.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
[Begin callout]
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of the fund's debt securities will fall and so too will
the fund's share price. If rates fall, mortgage holders may refinance their
mortgage loans at lower interest rates, which may reduce the fund's income
and yield. This means you could lose money over short or even extended
periods.
[End callout]
MARKET A security's price may be reduced by market activity or the results
of supply and demand. This is a basic risk associated with all securities.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to rise.
YEAR 2000 At this date, it appears that neither the operations of the fund
nor its portfolio securities were materially adversely affected by Year 2000
computer-related problems. However, it is still possible that Year 2000
problems could emerge. If a company in which the fund is invested develops
problems related to Year 2000 which have not shown up at this date, the price
of its securities may be adversely affected, and this may have an adverse
effect on the fund's share price.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not insured by the Federal Deposit Insurance
Corporation or any other agency of the U.S. government. Mutual fund shares
involve investment risks, including the possible loss of principal.
[End callout]
The business operations of the fund and its portfolio companies depend on a
worldwide network of computer systems that contain date fields. Prior to
remediation efforts of the last several months, many of the systems previously
used a two digit date field to represent the date and could not have
distinguished the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a leap year could
have created difficulties for some systems. Year 2000 has been one of the many
factors the manager considers in making investment decisions.
More detailed information about the fund, its policies, including temporary
investments, and risks can be found in the fund's Statement of Additional
Information (SAI).
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS 1
[Insert bar graph]
10.78% 13.71% 7.40% 6.92% -2.69% 16.73% 4.60% 9.71% 6.70% 0.79%
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q2 '95
5.37%
WORST
QUARTER:
Q1 '94
- -2.84%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------
Franklin U.S. Government Securities
Fund - Advisor Class 1 0.79% 7.64% 7.35%
Lehman Brothers Intermediate U.S.
Government Bond Index 2 0.49% 6.93% 7.10%
1. Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class A performance, excluding the effect
of Class A's maximum initial sales charge and including the effect of the
Class A distribution and service (12b-1) fees; and (b) for periods after
January 1, 1997, an actual Advisor Class figure is used reflecting a
deduction of all applicable charges and fees for that class. This blended
figure assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's(R) Micropal. Lehman Brothers Intermediate
Government Bond Index is an unmanaged index of fixed-rate bonds issued by the
U.S. government and its agencies that are rated investment grade or higher
and have one to ten years remaining until maturity and at least $100 million
outstanding. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
- -----------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee 1 $5.00
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
ADVISOR CLASS
- -----------------------------------------------------------------
Management fees 0.45%
Distribution and service (12b-1) fees None
Other expenses 0.12%
---------------
Total annual fund operating expenses 0.57%
================
1. This fee is only for market timers (see page 46).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------
$58 $183 $318 $714
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Advisers and its affiliates manage
over $224 billion in assets.
The team responsible for the fund's management is:
JACK LEMEIN, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Lemein has been a manager of the fund since 1989 and has more than 30
years' experience in the securities industry.
T. ANTHONY COFFEY CFA, VICE PRESIDENT OF ADVISERS
Mr. Coffey has been a manager of the fund since 1989. He joined the Franklin
Templeton Group in 1989.
ROGER BAYSTON CFA, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Bayston has been a manager of the fund since 1991. He joined the Franklin
Templeton Group in 1991.
For the fiscal year ended September 30, 1999, the fund paid 0.45% of its
average monthly net assets to the manager for managing the fund's assets.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Advisor Class since its
inception. This information has been audited by PricewaterhouseCoopers LLP.
ADVISOR CLASS YEAR ENDED SEPTEMBER 30,
1999 3 1998 1997 4
- ----------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 7.00 6.90 6.76
------------------------
Net investment income .45 .47 .38
Net realized and unrealized gains (.37) .10 .12
(losses)
------------------------
Total from investment operations .08 .57 .50
------------------------
Less distributions from:
Net investment income (.45) (.47) (.36)
========================
Net asset value, end of year 6.63 7.00 6.90
========================
Total return (%) 1 1.16 8.51 7.68
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 15,544 36,308 14,469
Ratios to average net assets: (%)
Expenses .57 .56 .56 2
Net investment income 6.53 6.75 7.01 2
Portfolio turnover rate (%) 15.04 25.98 1.74
1. Total return is not annualized.
2. Annualized.
3. Based on average shares outstanding.
4. For the period January 2, 1997 (effective date) to September 30, 1997.
[Insert graphic of dollar signs and stacks of coins]
DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS Growth Series intends to pay a
dividend at least annually representing substantially all of its net
investment income. Income Series and U.S. Government Securities Series intend
to pay a dividend at least monthly, on or about the 15th day of each month,
representing each fund's net investment income. Utilities Series intends to
pay a dividend at least quarterly in March, June, September and December
representing its net investment income. Capital gains, if any, may be
distributed annually by the funds. The amount of the funds' distributions
will vary and there is no guarantee the funds will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the funds' distributions will vary. Please keep in mind that
if you invest in a fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of
a taxable distribution. If you would like information on upcoming record
dates for the fund's distributions, please call 1-800/DIAL BEN(R).
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional fund shares or receive them in cash. Any
capital gains a fund distributes are taxable to you as long-term capital
gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, a fund must withhold 31% of your taxable distributions and redemption
proceeds if you do not provide your correct social security or taxpayer
identification number, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Non-U.S. investors
may be subject to U.S. withholding and estate tax. You should consult your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in a fund.
YOUR ACCOUNT
[Insert graphic of pencil marking an X] QUALIFIED INVESTORS
The following investors may qualify to buy Advisor Class shares of the fund.
o Qualified registered investment advisors with clients invested in any
series of Franklin Mutual Series Fund Inc. on October 31, 1996, or who buy
through a broker-dealer or service agent who has an agreement with Franklin
Templeton Distributors, Inc. (Distributors). Minimum investments: $1,000
initial and $50 additional.
o Broker-dealers, registered investment advisors or certified financial
planners who have an agreement with Distributors for clients participating
in comprehensive fee programs. Minimum investments: $250,000 initial
($100,000 initial for an individual client) and $50 additional.
o Officers, trustees, directors and full-time employees of Franklin
Templeton and their immediate family members. Minimum investments: $100
initial ($50 for accounts with an automatic investment plan) and $50
additional.
o Each series of the Franklin Templeton Fund Allocator Series. Minimum
investments: $1,000 initial and $1,000 additional.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance
Products Trust, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
[End callout]
o Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under section 501 of the Internal Revenue
Code. Minimum investments: $1 million initial investment in Advisor Class
or Class Z shares of any of the Franklin Templeton Funds and $50 additional.
o Accounts managed by the Franklin Templeton Group. Minimum investments:
No initial minimum and $50 additional.
o The Franklin Templeton Profit Sharing 401(k) Plan. Minimum investments:
No initial or additional minimums.
o Defined contribution plans such as employer stock, bonus, pension or
profit sharing plans that meet the requirements for qualification under
section 401 of the Internal Revenue Code, including salary reduction plans
qualified under section 401(k) of the Internal Revenue Code, and that are
sponsored by an employer (i) with at least 10,000 employees, or (ii) with
retirement plan assets of $100 million or more. Minimum investments: No
initial or additional minimums.
o Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a fiduciary,
agency, advisory, custodial or similar capacity and over which the trust
companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. Minimum investments: No initial or additional
minimums.
o Individual investors. Minimum investments: $5 million initial and $50
additional. You may combine all of your shares in the Franklin Templeton
Funds for purposes of determining whether you meet the $5 million minimum,
as long as $1 million is in Advisor Class or Class Z shares of any of the
Franklin Templeton Funds.
o Any other investor, including a private investment vehicle such as a
family trust or foundation, who is a member of an established group of 11
or more investors. Minimum investments: $5 million initial and $50
additional. For minimum investment purposes, the group's investments are
added together. The group may combine all of its shares in the Franklin
Templeton Funds for purposes of determining whether it meets the $5 million
minimum, as long as $1 million is in Advisor Class or Class Z shares of any
of the Franklin Templeton Funds. There are certain other requirements and
the group must have a purpose other than buying fund shares without a sales
charge.
Please note that Advisor Class shares of the funds generally are not
available to retirement plans through Franklin Templeton's ValuSelect(R)
program. Retirement plans in the ValuSelect program before January 1, 1998,
however, may invest in the funds' Advisor Class shares.
[Insert graphic of paper with lines and someone writing]
BUYING SHARES
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. To save time, you can sign up now for
services you may want on your account by completing the appropriate sections
of the application (see the next page).
BUYING SHARES
- ----------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- ----------------------------------------------------------------------
[Insert graphic of Contact your Contact your
hands shaking] investment investment
representative representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- ----------------------------------------------------------------------
[Insert graphic of Make your check Make your check
envelope] payable to the fund. payable to the fund.
Include your account
BY MAIL Mail the check and number on the check.
your signed
application to Fill out the deposit
Investor Services. slip from your
account statement. If
you do not have a
slip, include a note
with your name, the
fund name, and your
account number.
Mail the check and
deposit slip or note
to Investor Services.
- ----------------------------------------------------------------------
[Insert graphic of Call to receive a Call to receive a
three lightning bolts] wire control number wire control number
and wire instructions. and wire instructions.
BY WIRE
Wire the funds and To make a same day
1-800/632-2301 (or mail your signed wire investment,
1-650/312-2000 collect) application to please call us by
Investor Services. 1:00 p.m. Pacific
Please include the time and make sure
wire control number your wire arrives by
or your new account 3:00 p.m.
number on the
application.
To make a same day
wire investment,
please call us by
1:00 p.m. Pacific
time and make sure
your wire arrives by
3:00 p.m.
- ----------------------------------------------------------------------
[Insert graphic of two Call Shareholder
arrows pointing in Services at the Call Shareholder
opposite directions] number below, or send Services at the
signed written number below, or send
BY EXCHANGE instructions. (Please signed written
see page 42 for instructions. (Please
information on see page 42 for
exchanges.) information on
exchanges.)
- ----------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in a fund by automatically transferring money from your checking or
savings account each month to buy shares. To sign up, complete the
appropriate section of your account application.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from a fund
in an existing account in the same share class of the fund or in Advisor
Class or Class A shares of another Franklin Templeton Fund. To reinvest your
distributions in Advisor Class shares of another Franklin Templeton Fund, you
must qualify to buy that fund's Advisor Class shares. For distributions
reinvested in Class A shares of another Franklin Templeton Fund, initial
sales charges and contingent deferred sales charges (CDSCs) will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the funds to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class. You also may exchange your Advisor Class shares
for Class A shares of a fund that does not currently offer an Advisor Class
(without any sales charge)* or for Class Z shares of Franklin Mutual Series
Fund Inc.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
If you do not qualify to buy Advisor Class shares of Templeton Developing
Markets Trust or Templeton Foreign Fund, you also may exchange your shares
for Class A shares of those funds (without any sales charge)* or for shares
of Templeton Institutional Funds, Inc.
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page 46).
*If you exchange into Class A shares and you later decide you would like to
exchange into a fund that offers an Advisor Class, you may exchange your
Class A shares for Advisor Class shares if you otherwise qualify to buy the
fund's Advisor Class shares.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. Certain terms and
minimums apply. To sign up, complete the appropriate section of your
application.
[Insert graphic of certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can
be made over the phone or with a simple letter. Sometimes, however, to
protect you and the fund we will need written instructions signed by all
registered owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can
obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
funds against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in
a Franklin Templeton Trust Company retirement plan. For participants under
age 591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
SELLING SHARES
- ----------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- ----------------------------------------------------------------------
[Insert graphic of hands shaking] Contact your investment
representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- ----------------------------------------------------------------------
[Insert graphic of envelope] Send written instructions and
endorsed share certificates (if
BY MAIL you hold share certificates) to
Investor Services. Corporate,
partnership or trust accounts
may need to send additional
documents.
Specify the fund, the account
number and the dollar value or
number of shares you wish to
sell. Be sure to include all
necessary signatures and any
additional documents, as well as
signature guarantees if required.
A check will be mailed to the
name(s) and address on the
account, or otherwise according
to your written instructions.
- ----------------------------------------------------------------------
[Insert graphic of phone] As long as your transaction is
for $100,000 or less, you do not
BY PHONE hold share certificates and you
have not changed your address by
1-800/632-2301 phone within the last 15 days,
you can sell your shares by
phone.
A check will be mailed to the
name(s) and address on the
account. Written instructions,
with a signature guarantee, are
required to send the check to
another address or to make it
payable to another person.
- ----------------------------------------------------------------------
[Insert graphic of three lightning You can call or write to have
bolts] redemption proceeds sent to a
bank account. See the policies
BY ELECTRONIC FUNDS TRANSFER (ACH) above for selling shares by mail
or phone.
Before requesting to have
redemption proceeds sent to a
bank account, please make sure
we have your bank account
information on file. If we do
not have this information, you
will need to send written
instructions with your bank's
name and address, a voided check
or savings account deposit slip,
and a signature guarantee if the
ownership of the bank and fund
accounts is different.
If we receive your request in
proper form by 1:00 p.m. Pacific
time, proceeds sent by ACH
generally will be available
within two to three business
days.
- ----------------------------------------------------------------------
[Insert graphic of two arrows Obtain a current prospectus for
pointing in opposite directions] the fund you are considering.
BY EXCHANGE Call Shareholder Services at the
number below, or send signed
written instructions. See the
policies above for selling
shares by mail or phone.
If you hold share certificates,
you will need to return them to
the fund before your exchange
can be processed.
- ----------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE Each fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. Pacific time). The NAV for Advisor Class is
calculated by dividing its net assets by the number of its shares outstanding.
The funds' assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If a fund holds securities listed primarily on a foreign exchange that
trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee accounts) because you sell some of your shares, we may mail
you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record.
STATEMENTS AND REPORTS You will receive quarterly account statements that
show all your account transactions during the quarter. You also will receive
written notification after each transaction affecting your account (except
for distributions and transactions made through automatic investment or
withdrawal programs, which will be reported on your quarterly statement). You
also will receive the funds' financial reports every six months. To reduce
fund expenses, we try to identify related shareholders in a household and
send only one copy of the financial reports. If you need additional copies,
please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and
statements and other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The funds may restrict or refuse exchanges by market timers.
If accepted, each exchange by a market timer will be charged $5 by
Franklin/Templeton Investor Services, Inc., the fund's transfer agent. You
will be considered a market timer if you have (i) requested an exchange out
of a fund within two weeks of an earlier exchange request, or (ii) exchanged
shares out of a fund more than twice in a calendar quarter, or (iii)
exchanged shares equal to at least $5 million, or more than 1% of a fund's
net assets, or (iv) otherwise seem to follow a timing pattern. Shares under
common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies
and reserves certain rights, including:
o The funds may refuse any order to buy shares, including any purchase
under the exchange privilege.
o At any time, the funds may change their investment minimums or waive or
lower their minimums for certain purchases.
o The funds may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, each fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check, wire or electronic funds transfer
would be harmful to existing shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell Advisor Class shares may
receive up to 0.25% of the amount invested. This amount is paid by Franklin
Templeton Distributors, Inc. from its own resources.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the fund or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored
or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- --------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m.
(Saturday)
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 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Services
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It
is incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, D.C. 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-537 FCF PA 02/00
FRANKLIN
CUSTODIAN FUNDS, INC.
DYNATECH SERIES
GROWTH SERIES
INCOME SERIES
UTILITIES SERIES
U.S. GOVERNMENT SECURITIES SERIES
CLASS A, B & C
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 1, 2000
[Insert Franklin Templeton Ben Head]
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the funds' prospectus.
The funds' prospectus, dated February 1, 2000, which we may amend from time
to time, contains the basic information you should know before investing in a
fund. You should read this SAI together with the funds' prospectus.
The audited financial statements and auditor's report in the Franklin
Custodian Funds, Inc.'s (Custodian Funds) Annual Report to Shareholders, for
the fiscal year ended September 30, 1999, are incorporated by reference (are
legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies ............... 2
Risks .............................. 10
Officers and Directors ............. 13
Management and Other Services ...... 15
Portfolio Transactions ............. 17
Distributions and Taxes ............ 18
Organization, Voting Rights
and Principal Holders ............. 19
Buying and Selling Shares .......... 20
Pricing Shares ..................... 27
The Underwriter .................... 27
Performance ........................ 30
Miscellaneous Information .......... 33
Description of Ratings ............. 34
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
FCFSAI 02/00
GOALS AND STRATEGIES
- -------------------------------------------------------------------------------
DYNATECH SERIES The fund's investment goal is capital appreciation. This goal
is fundamental, which means it may not be changed without shareholder
approval.
The fund normally invests most of its assets in equity securities of
companies that emphasize scientific or technological development, or that are
in fast-growing industries.
The fund's investments tend to be more speculative in nature, and there can
be a greater emphasis on short-term trading. 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's assets may be invested in securities traded on any national
securities exchange or issued by a corporation, association or similar legal
entity with total assets of at least $1,000,000, according to its latest
published annual report, or held in cash or cash equivalents. It is thought
that most of the fund's assets will be invested in common stocks, including
securities convertible into common stocks. The fund, however, may also invest
in debt securities or preferred stocks that the manager believes will further
the fund's investment goal. From time to time, concentration of the fund's
investments in a few issues may develop due to market appreciation.
GROWTH SERIES The fund's investment goal is capital appreciation. This goal
is fundamental, which means it may not be changed without shareholder
approval.
The fund will normally invest most of its assets in the equity securities of
companies that are leaders in their industries. The fund's manager looks for
securities it believes offer favorable possibilities for capital appreciation
and these securities may yield little or no current income. Current income is
only a secondary consideration when selecting portfolio investments.
The fund's assets may be invested in shares of common stock traded on any
national securities exchange or issued by a corporation, association or
similar legal entity with total assets of at least $1,000,000, according to
its latest published annual report. The fund's assets may also be invested in
bonds or preferred stock convertible into shares of common stock listed for
trading on a national securities exchange or held in cash or cash equivalents.
The fund may invest in smaller capitalization companies, which generally are
those with a market capitalization of less than $1.5 billion at the time of
the fund's investment.
INCOME SERIES The fund's investment goal is to maximize income while
maintaining prospects for capital appreciation. This goal is fundamental,
which means it may not be changed without shareholder approval.
The fund will normally invest in a diversified portfolio of equity
securities, debt securities and cash equivalents.
The fund's assets may be invested in securities traded on any national
securities exchange or issued by a corporation, association or similar legal
entity with total assets of at least $1,000,000, according to its latest
published annual report, or held in cash or cash equivalents. The fund may
also invest in preferred stocks. The fund may invest in debt securities
regardless of their rating or in securities that are unrated, including up to
5% of its assets in securities that are in default at the time of purchase.
The fund generally invests in securities rated at least Caa by Moody's
Investors Service, Inc. (Moody's) or CCC by Standard & Poor's Corporation
(S&P) or unrated securities the fund's manager determines are comparable.
Unrated debt securities are not necessarily of lower quality than rated
securities, but they may not be as attractive to as many buyers.
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. The fund may also buy debt securities of issuers that are not
currently paying interest, as well as issuers who are in default, and may
keep an issue that has defaulted. The fund will buy defaulted debt securities
if, in the opinion of the manager, they may present an opportunity for later
price recovery, the issuer may resume interest payments, or other
advantageous developments appear likely in the near future. In general,
securities that default lose much of their value before the actual default so
that the security, and thus the fund's net asset value, would be impacted
before the default. Defaulted debt securities may be illiquid and, as such,
will be part of the 10% limit discussed under "Illiquid securities."
There are no restrictions as to the proportion of investments that may be
made in a particular type of security and the determination is entirely
within the manager's discretion. 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.
UTILITIES SERIES The fund's investment goals are capital appreciation and
current income. These goals are fundamental, which means they may not be
changed without shareholder approval.
The fund will normally invest substantially all of its assets in the
securities of public utilities companies. 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. At least 65% of the fund's investments will be in the
securities of issuers engaged in the public utilities industry. The manager
expects that more than 50% of the fund's assets will be invested in electric
utilities securities.
The fund invests primarily in common stocks, including, from time to time,
non-dividend paying common stocks if, in the opinion of the manager, these
securities appear to offer attractive opportunities for capital appreciation.
When buying fixed-income debt securities, the fund may invest in securities
regardless of their rating depending upon prevailing market and economic
conditions, including securities in the lowest rating categories and unrated
securities. Most of the fund's investments, however, are rated at least Baa
by Moody's or BBB by S&P. These ratings represent the opinions of the rating
services with respect to the securities and are not absolute standards
of quality. They will be considered in connection with the investment of the
fund's assets but will not be a determining or limiting factor. Please see
the appendix for a discussion of the ratings.
With respect to unrated securities, it is also the fund's intent to buy
securities that, in the view of the manager, would be comparable in quality
to the fund's rated securities and have been determined to be consistent with
the fund's objectives without exposing the fund to excessive risk. The fund
will not buy issues that are in default or that the manager believes involve
excessive risk.
U.S. GOVERNMENT SECURITIES SERIES The fund's investment goal is income. This
goal is fundamental, which means it may not be changed without shareholder
approval.
The fund invests in a portfolio limited to U.S. government securities and
repurchase agreements collateralized by U.S. government securities. U.S.
government securities include U.S. Treasury bonds, notes and bills, U.S.
Treasury STRIPS and securities issued by U.S. government agencies. Other than
investments in short term government securities and cash, substantially all
of the fund's investments are currently held in Government National Mortgage
Association obligations (Ginnie Maes). Ginnie Maes have historically paid
higher current yields than other types of U.S. government securities with
comparable maturities. These higher yields compensate investors for the
higher risks involved.
The fund will buy Ginnie Maes whose principal and interest are guaranteed.
The fund also buys adjustable rate Ginnie Maes and other types of securities
that may be issued with the guarantee of the Government National Mortgage
Association. Ginnie Maes differ from other bonds in that principal may be
paid back on an unscheduled basis rather than returned in a lump sum at
maturity. Payments to holders of Ginnie Maes consist of monthly distributions
of interest and principal less the Government National Mortgage Association's
and issuers' fees.
The Government National Mortgage Association's guarantee of payment of
principal and interest on Ginnie Maes is backed by the full faith and credit
of the U.S. government. The Government National Mortgage 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 Ginnie Maes or the net asset value or performance of the fund,
which will fluctuate daily with market conditions. The fund's manager
monitors the fund's investments and changes are made as market conditions
warrant. The fund does not, however, engage in the trading of securities for
the purpose of realizing short-term profits.
Ginnie Maes and the other securities included in U.S. Government Securities
Series' portfolio have historically involved little risk to principal if held
to maturity. However, due to fluctuations in interest rates, the market value
of such securities may vary during the period of a shareholder's investment
in the fund. The 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.
The following is a description of the various types of securities the funds
may buy.
EQUITY SECURITIES represent a proportionate share of the ownership of a
company; their value is based on the success of the company's business and
the value of its assets, as well as general market conditions. The purchaser
of an equity security typically receives an ownership interest in the company
as well as certain voting rights. The owner of an equity security may
participate in a company's success through the receipt of dividends, which
are distributions of earnings by the company to its owners. Equity security
owners may also participate in a company's success or lack of success through
increases or decreases in the value of the company's shares as traded in the
public trading market for such shares. Equity securities generally take the
form of common stock or preferred stock, as well as securities convertible
into common stocks. Preferred stockholders typically receive greater
dividends but may receive less appreciation than common stockholders and may
have greater voting rights as well. Equity securities may also include
convertible securities, warrants, or rights. Warrants or rights give the
holder the right to buy a common stock at a given time for a specified price.
DEBT SECURITIES A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it
declares and pays any dividend to holders of its equity securities. Bonds,
notes, and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's net asset value per share.
RATINGS. Various investment services publish ratings of some of the debt
securities in which the funds may invest. Higher yields are ordinarily available
from securities in the lower rating categories, such as securities rated Ba or
lower by Moody's or BB or lower by S&P or from unrated securities deemed by a
fund's manager to be of comparable quality. These ratings represent the opinions
of the rating services with respect to the issuer's ability to pay interest and
repay principal. They do not purport to reflect the risk of fluctuations in
market value and are not absolute standards of quality. Please see the appendix
for a discussion of the ratings.
If the rating on an issue held in a fund's portfolio is changed by the rating
service or the security goes into default, this event will be considered by
the fund in its evaluation of the overall investment merits of that security
but will not generally result in an automatic sale of the security.
ZERO COUPON AND PAY-IN-KIND BONDS Income Series may buy certain bonds issued
at a discount that defer the payment of interest or pay no interest until
maturity, known as zero coupon bonds, or which pay interest through the
issuance of additional bonds, known as pay-in-kind bonds. For federal tax
purposes, holders of these bonds, such as the fund, are deemed to receive
interest over the life of the bonds and are taxed as if interest were paid on
a current basis although no cash interest payments are in fact received by
the holder until the bonds mature. See "Risks - High yield securities risk"
for more information about these bonds.
LOAN PARTICIPATIONS Income Series may invest up to 5% of its assets in loan
participations and other related direct or indirect bank obligations. These
instruments are interests in floating or variable rate senior loans to U.S.
corporations, partnerships and other entities. While loan participations
generally trade at par value, the fund will also be able to acquire loan
participations that sell at a discount because of the borrower's credit
problems. To the extent the borrower's credit problems are resolved, the loan
participation may appreciate in value. The manager may acquire loan
participations for the fund when it believes that over the long term
appreciation will occur. Most loan participations are illiquid and, to that
extent, will be included in the 10% limitation described under "Illiquid
securities."
Loan participations are interests in floating or variable rate senior loans
(Loans) to U.S. corporations, partnerships and other entities (Borrowers)
which operate in a variety of industries and geographical regions. An
investment in these securities, however, carries substantially the same risks
as those for defaulted debt securities. Interest payments on these securities
may be reduced, deferred, suspended or eliminated and principal payments may
likewise be reduced, deferred, suspended or canceled, causing the loss of the
entire amount of the investment. Loans will generally be acquired by Income
Series from a bank, finance company or other similar financial services
entity (Lender).
Loans in which Income Series will purchase participation interests may pay
interest at rates which are periodically redetermined on the basis of a base
lending rate plus
a premium. These base lending rates are generally the Prime Rate offered by a
major U.S. bank, the London Inter-Bank Offered Rate, the CD rate or other
base lending rates used by commercial lenders. The Loans typically have the
most senior position in a Borrower's capital structure, although some Loans
may hold an equal ranking with other senior securities of the Borrower.
Although the Loans generally are secured by specific collateral, Income
Series may invest in Loans which are not secured by any collateral.
Uncollateralized Loans pose a greater risk of nonpayment of interest or loss
of principal than do collateralized Loans. The collateral underlying a
collateralized Loan may consist of assets that may not be readily liquidated,
and there is no assurance that the liquidation of such assets would satisfy
fully a Borrower's obligations under a Loan. Income Series is not subject to
any restrictions with respect to the maturity of the Loans in which it
purchases participation interests.
The Loans generally are not rated by nationally recognized statistical rating
organizations. Ratings of other securities issued by a Borrower do not
necessarily reflect adequately the relative quality of a Borrower's Loans.
Therefore, although the manager may consider such ratings in determining
whether to invest in a particular Loan, such ratings, will not be the
determinative factor in the manager's analysis.
The Loans are not readily marketable and may be subject to restrictions on
resale. Participation interests in the Loans generally are not listed on any
national securities exchange or automated quotation system and no regular
market has developed for such interests. Any secondary purchases and sales of
loan participations generally are conducted in private transactions between
buyers and sellers. Many of the Loans in which the Income Series expects to
purchase interests are of a relatively large principal amount and are held by
a relatively large number of owners which, in the 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.
TRADE CLAIMS Income Series may invest a portion of its assets in trade
claims. Trade claims are purchased from creditors of companies in financial
difficulty. For buyers, such as the fund, trade claims offer the potential
for profits since they are often purchased at a significantly discounted
value and, consequently, may generate capital appreciation if the value of
the claim increases as the debtor's financial position improves. If the
debtor is able to pay the full obligation on the face of the claim as a
result of a restructuring or an improvement in the debtor's financial
condition, trade claims offer the potential for higher income due to the
difference in the face value of the claim as compared to the discounted
purchase price.
An investment in trade claims is speculative and carries a high degree of
risk. There can be no guarantee that the debtor will ever be able to satisfy
the obligation on the trade claim. Trade claims are not regulated by federal
securities laws or the Securities and Exchange Commission. Currently, trade
claims are regulated primarily by bankruptcy laws. Because trade claims are
unsecured, holders of trade claims may have a lower priority in terms of
payment than most other creditors in a bankruptcy proceeding. In light of the
nature and risk of trade claims, the fund's investment in these instruments
will not exceed 5% of its net assets at the time of acquisition.
FOREIGN SECURITIES U.S. Government Securities Series may not buy securities
of foreign issuers. Income Series may invest up to 25% of its assets in
foreign securities and Growth Series, DynaTech Series and Utilities Series
may invest without restriction in foreign securities, if the investments are
consistent with their goals and comply with their concentration and
diversification policies. The funds will ordinarily buy foreign securities
that are traded in the U.S. or buy American Depositary Receipts, which are
certificates issued by U.S. banks representing the right to receive
securities of a foreign issuer deposited with that bank or a correspondent
bank. The funds may also buy the securities of foreign issuers directly in
foreign markets. DynaTech Series and Utilities Series presently have no
intention of investing more than 10% of their net assets in foreign
securities not publicly traded in the U.S. Growth Series presently has no
intention of investing more than 25% of its net assets in foreign securities
not publicly traded in the U.S. Investments in foreign securities where
delivery takes place outside the U.S. will be made in compliance with any
applicable U.S. and foreign currency restrictions and tax and other laws
limiting the amount and types of foreign investments. Changes of governmental
administrations or economic or monetary policies in the U.S. or abroad,
changed circumstances in dealings between nations, or changes in currency
convertibility or exchange rates could result in investment losses for a fund.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Securities that are acquired by a fund outside the U.S. and that are publicly
traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered by the fund to be illiquid assets so
long as the fund acquires and holds the securities with the intention of
reselling them in the foreign trading market, the fund reasonably believes it
can readily dispose of the securities for cash in the U.S. or a foreign
market, and current market quotations are readily available.
DEPOSITARY RECEIPTS American Depositary Receipts (ADRs) are typically issued
by a U.S. bank or trust company and evidence ownership of underlying
securities issued by a foreign corporation. European Depositary Receipts
(EDRs) and Global Depositary Receipts (GDRs) are typically issued by foreign
banks or trust companies, although they may be issued by U.S. banks or trust
companies, and evidence ownership of underlying securities issued by either a
foreign or a U.S. corporation. Generally, depositary receipts in registered
form are designed for use in the U.S. securities market and depositary
receipts in bearer form are designed for use in securities markets outside
the U.S. Depositary receipts may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted.
Depositary receipts may be issued pursuant to sponsored or unsponsored
programs. In sponsored programs, an issuer has made arrangements to have its
securities traded in the form of depositary receipts. In unsponsored
programs, the issuer may not be directly involved in the creation of the
program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs,
and there may not be a correlation between such information and the market
value of the depositary receipts.
Depositary receipts also involve the risks of other investments in foreign
securities, as discussed below. For purposes of the fund's investment
policies, the fund will consider its investments in depositary receipts to be
investments in the underlying securities.
CONVERTIBLE SECURITIES Each fund, except U.S. Government Securities Series,
may invest in convertible securities. A convertible security is generally a
debt obligation or preferred stock that may be converted within a specified
period of time into a certain amount of common stock of the same or a
different issuer. A convertible security provides a fixed-income stream and
the opportunity, through its conversion feature, to participate in the
capital appreciation resulting from a market price advance in its underlying
common stock. As with a straight fixed-income security, a convertible
security tends to increase in market value when interest rates decline and
decrease in value when interest rates rise. Like a common stock, the value of
a convertible security also tends to increase as the market value of the
underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both
interest rate and market movements, a convertible security is not as
sensitive to interest rates as a similar fixed-income security, nor is it as
sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by
an investment bank. When issued by an operating company, a convertible
security tends to be senior to common stock, but subordinate to other types
of fixed-income securities issued by that company. When a convertible
security issued by an operating company
is "converted," the operating company often issues new stock to the holder of
the convertible security but, if the parity price of the convertible security
is less than the call price, the operating company may pay out cash instead
of common stock. If the convertible security is issued by an investment bank,
the security is an obligation of and is convertible through the issuing
investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the fund's financial
reporting, credit rating, and investment limitation purposes. A preferred
stock is subordinated to all debt obligations in the event of insolvency, and
an issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred stock
generally has no maturity date, so that its market value is dependent on the
issuer's business prospects for an indefinite period
of time. In addition, distributions from preferred stock are dividends,
rather than interest payments, and are usually treated as such for corporate
tax purposes.
ENHANCED CONVERTIBLE SECURITIES The funds, other than the U.S. Government
Securities Series, may invest in convertible preferred stocks that offer
enhanced yield features, such as Preferred Equity Redemption Cumulative
Stocks (PERCS), which provide an investor, such as the fund, with the
opportunity to earn higher dividend income than is available on a company's
common stock. PERCS are preferred stocks that generally feature a mandatory
conversion date, as well as a capital appreciation limit which is usually
expressed in terms of a stated price. Most PERCS expire three years from the
date of issue, at which time they are convertible into common stock of the
issuer. PERCS are generally not convertible into cash at maturity. Under a
typical arrangement, after three years PERCS convert into one share of the
issuer's common stock if the issuer's common stock is trading at a price
below that set by the capital appreciation limit, and into less than
one full share if the issuer's common stock is trading at a price above that
set by the capital appreciation limit. The amount of that fractional share of
common stock is determined by dividing the price set by the capital
appreciation limit by the market price of the issuer's common stock. PERCS
can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The funds (except U.S. Government Securities Series) may also invest in other
classes of enhanced convertible securities. These include but are not limited to
ACES (Automatically Convertible Equity Securities), PEPS (Participating Equity
Preferred Stock), PRIDES (Preferred Redeemable Increased Dividend Equity
Securities), SAILS (Stock Appreciation Income Linked Securities), TECONS (Term
Convertible Notes), QICS (Quarterly Income Cumulative Securities) and DECS
(Dividend Enhanced Convertible Securities). ACES, PEPS, PRIDES, SAILS, TECONS,
QICS and DECS all have the following features: they are issued by the company,
the common stock of which will be received in the event the convertible
preferred stock is converted; unlike PERCS, they do not have a capital
appreciation limit; they seek to provide the investor with high current income
with some prospect of future capital appreciation; they are typically issued
with three or four-year maturities; they typically have some built-in call
protection for the first two to three years; investors have the right to convert
them into shares of common stock at a preset conversion ratio or hold them until
maturity, and upon maturity they will necessarily convert into either cash or a
specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked
as senior or subordinated debt in the issuer's corporate structure according
to the terms of the debt indenture. There may be additional types of
convertible securities not specifically referred to herein which may be also
similar to those described in which a fund may invest, consistent with its
objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the fund. The fund may have difficulty disposing
of such securities because there may be a thin trading market for a
particular security at any given time. Reduced liquidity may have an adverse
impact on market price and the fund's ability to dispose of particular
securities, when necessary, to meet the fund's liquidity needs or in response
to a specific economic event, such as the deterioration in the
creditworthiness of an issuer. Reduced liquidity in the secondary market for
certain securities may also make it more difficult for the fund to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio. The fund, however, intends to acquire liquid securities, though
there can be no assurances that this will be achieved. U.S. Government
Securities Series does not invest in convertible preferred stocks.
STRIPPED SECURITIES U.S. Government Securities Series may buy stripped
securities that are issued or guaranteed by the U.S. Treasury or by an agency or
instrumentality of the U.S. government. Stripped securities are the separate
income and principal components of a debt security. U.S. Treasury STRIPS
(Separate Trading of Registered Interest and Principal of Securities) are
considered U.S. Treasury securities for purposes of the fund's investment
policies. Once the securities have been stripped they are referred to as zero
coupon securities. Their risks are similar to those of other U.S. government
securities, although they may be more volatile and the value of certain types of
stripped securities may move in the same direction as interest rates. Stripped
securities do not make periodic payments of interest prior to maturity and the
stripping of the interest coupons causes them to be offered at a discount from
their face amount. This results in the security being subject to greater
fluctuations in response to changing interest rates than interest-paying
securities of similar maturities.
WHEN-ISSUED, DELAYED DELIVERY AND TO-BE-ANNOUNCED (TBA) TRANSACTIONS Income
Series may buy debt obligations and U.S. Government Securities Series may buy
and sell Ginnie Mae certificates on a "when-issued," "delayed delivery" or
"TBA" 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 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 the funds will generally purchase these securities on
a when-issued or TBA basis with the intention of acquiring such securities,
they may sell such securities before the settlement date if it is deemed
advisable. When a fund is the buyer in such a transaction, it will maintain,
in a segregated account with its custodian bank, cash or high-grade
marketable securities having an aggregate value equal to the amount of such
purchase commitments until payment is made. To the extent the fund engages in
when-issued, delayed delivery or TBA transactions, it will do so only for the
purpose of acquiring portfolio securities consistent with the fund's
investment objectives and policies, and not for the purpose of investment
leverage. In when-issued, delayed delivery and TBA transactions, the fund
relies on the seller to complete the transaction. The other party's failure
to do so may cause the fund to miss a price or yield considered advantageous.
Securities purchased on a when-issued, delayed delivery or TBA basis do not
generally earn interest until their scheduled delivery date. Neither fund is
subject to any percentage limit on the amount of its assets which may be
invested in when-issued, delayed delivery or TBA purchase obligations.
ILLIQUID SECURITIES Each fund, other than U.S. Government Securities Series,
may invest in securities that cannot be offered to the public for sale
without first being registered under the Securities Act of 1933 (restricted
securities), or in other securities which, in the opinion of the board of
directors, may be otherwise illiquid. Illiquid equity securities will not be
purchased if, upon such purchase, such securities will constitute 5%{10%?} of
the value of the total net assets of a fund.
It is also the policy of each fund that illiquid securities may not
constitute, at the time of purchase, more than 10% of the value of the total
net assets of the fund in which they are held. Illiquid securities are
generally securities that cannot be sold within seven days in the normal
course of business at approximately the amount at which the fund has valued
them. Subject to this limitation, Custodian Funds' board of directors has
authorized each fund, except U.S. Government Securities Series, to invest in
restricted securities where such investment is consistent with each fund's
investment objective and has authorized such securities to be considered
liquid to the extent the investment manager determines on a daily basis that
there is a liquid institutional or other market for such securities - for
example, restricted securities which may be freely transferred among
qualified institutional buyers pursuant to Rule 144A under the Securities Act
of 1933, as amended, and for which a liquid institutional market has
developed. Notwithstanding the managers' determinations in this regard, the
board of directors will remain responsible for such determinations and will
consider appropriate action, consistent with the fund's goals and policies,
if the security should become illiquid after purchase. In determining whether
a restricted security is properly considered a liquid security, the
investment manager and the board of directors will take into account the
following factors: (i) the frequency of trades and quotes for the security;
(ii) the number of dealers willing to purchase or sell the security and the
number of other potential purchasers; (iii) dealer undertakings to make a
market in the security; and (iv) the nature of the security and the nature of
the marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). To the extent a
fund invests in restricted securities that are deemed liquid, the general
level of illiquidity in the fund may be increased if qualified institutional
buyers become uninterested in purchasing these securities or the market for
these securities contracts.
REPURCHASE AGREEMENTS Each fund generally will have a portion of its assets
in cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, each fund may enter into repurchase
agreements. Under a repurchase agreement, the fund agrees to buy securities
guaranteed as to payment of principal and interest by the U.S. government or
its agencies from a qualified bank or broker-dealer and then to sell the
security back to the bank or broker-dealer after a short period of time
(generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the fund's custodian securities with an
initial market value of at least 102% of the dollar amount invested by the
fund in each repurchase agreement. The manager will monitor the value of such
securities daily to determine that the value equals or exceeds the repurchase
price.
Repurchase agreements may involve risks in the event of default or insolvency
of the bank or broker-dealer, including possible delays or restrictions upon
the funds' ability to sell the underlying securities. The funds will enter
into repurchase agreements only with parties who meet certain
creditworthiness standards, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES To generate additional income, each fund,
except U.S. Government Securities Series, may lend certain of its portfolio
securities to qualified banks and broker-dealers. These loans may not exceed
10% of the value of the fund's total assets, measured at the time of the most
recent loan. For each loan, the borrower must maintain with the funds'
custodian collateral (consisting of any combination of cash, securities
issued by the U.S. government and its agencies and instrumentalities, or
irrevocable letters of credit) with a value at least equal to 102% of the
current market value of the loaned securities. The funds retain all or a
portion of the interest received on investment of the cash collateral or
receive a fee from the borrower. The funds also continue to receive any
distributions paid on the loaned securities. The funds may terminate a loan
at any time and obtain the return of the securities loaned within the normal
settlement period for the security involved.
Where voting rights with respect to the loaned securities pass with the
lending of the securities, the manager intends to call the loaned securities
to vote proxies, or to use other practicable and legally enforceable means to
obtain voting rights, when the manager has knowledge that, in its opinion, a
material event affecting the loaned securities will occur or the manager
otherwise believes it necessary to vote. As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in collateral in
the event of default or insolvency of the borrower. The funds will loan their
securities only to parties who meet creditworthiness standards approved by
the funds' board of directors, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the loan.
OPTIONS Each fund, except U.S. Government Securities Series, may write
covered call options that trade on national securities exchanges. A call
option gives the purchaser of the option the right to buy the security from
the writer of the option at a set price during the term of the option. A call
option is "covered" if the option writer owns the underlying security which
is subject to the call or a call on the same security where the exercise
price of the call held is equal to or less than the exercise price of the
call written.
A fund receives a premium when it writes a call option. A decline in the price
of the security during the option period would offset the amount of the premium.
If a call option a fund has written is exercised, the fund incurs a profit or
loss from the sale of the underlying security. The writer of a call option may
have no control over when the underlying securities must be sold since, with
regard to certain options, the writer may be assigned an exercise notice at any
time prior to the termination of the obligation. The risks associated with
covered call writing are that in the event of a price increase on the underlying
security, which would likely trigger the exercise of the call option, the fund
will not participate in the increase in price beyond the exercise price of the
option.
A fund generally may terminate its obligation under an option by entering
into a closing purchase transaction. This is accomplished by buying an option
identical to the option previously written. However, a writer may not effect
a closing purchase transaction after being notified of the exercise of an
option. There is no guarantee that a closing purchase will be available to be
effected at the time desired by the fund. If a fund desires to sell a
particular security from its portfolio on which it has written a call option,
it will effect a closing transaction prior to or concurrent with the sale of
the security.
When a fund has written an option, the fund will realize a profit from a
closing transaction if the price of the transaction is less than the premium
and will realize a loss if the price is more than the premium. Because
increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the repurchase of a call option is likely to be offset in whole or in
part by appreciation of the underlying security owned by the fund until the
time of repurchase. Thereafter, the fund bears the risk of the security's
rise or fall in market value unless it sells the security.
The managers of the funds do not currently intend to write options which
would cause the market value of any fund's open options to exceed 5% of the
fund's total net assets. There is no specific limitation on a fund's ability
to write covered call options. However, as a practical matter, the fund's
option writing activities may be limited by federal regulations. As of the
fiscal year ended September 30, 1999, there were no open options transactions
in any fund. U.S. Government Securities Series does not presently engage in
option transactions, as discussed in investment restriction 10, below.
Transactions in options are generally considered "derivative securities."
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest each fund's
portfolio in a temporary defensive manner. Under such circumstances, each
fund may invest up to 100% of its assets in U.S. government securities,
bankers' acceptances and high-grade commercial paper issued by domestic
corporations, commercial bank deposits, or other cash equivalents, provided
such investments are otherwise permissible investments for the fund.
INVESTMENT RESTRICTIONS Custodian Funds has adopted the following
restrictions as fundamental policies. This means they may only be changed if
the change is approved by (i) more than 50% of Custodian Funds' outstanding
shares or (ii) 67% or more of Custodian Funds' shares present
at a shareholder meeting if more than 50% of Custodian Funds' outstanding
shares 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 under "Loans of portfolio securities."
For additional information relating to this policy see discussions under
"Loan participations" and "Illiquid securities."
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.
DynaTech, Growth and Utilities Series may also be subject to investment
limitations imposed by foreign jurisdictions in which the funds sell their
shares.
If a bankruptcy or other extraordinary event occurs concerning a particular
security a fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets will not be
considered a violation
of any of the foregoing restrictions.
RISKS
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The value of your shares will increase as the value of the securities owned
by the fund increases and will decrease as the value of the fund's
investments decrease. In this way, you participate in any change in the value
of the securities owned by the fund. In addition to the factors that affect
the value of any particular security that the fund owns, the value of fund
shares may also change with movements in the stock and bond markets as a
whole.
INTEREST RATE To the extent a fund invests in debt securities, changes in
interest rates in any country where the fund is invested will affect the
value of the fund's portfolio and its share price. Rising interest rates,
which often occur during times of inflation or a growing economy, are likely
to have a negative effect on the value of the fund's shares. Of course,
interest rates throughout the world have increased and decreased, sometimes
very dramatically,
in the past. These changes are likely to occur again in the future at
unpredictable times.
HIGH YIELD SECURITIES Income Series may invest up to 100% of its net assets
in non-investment grade securities. Because the fund may invest in securities
below investment grade, an investment in the fund is subject to a higher
degree of risk than an investment in a fund that invests primarily in
higher-quality securities. You should consider the increased risk of loss to
principal that is present with an investment in higher risk securities, such
as those in which the fund invests. Accordingly, an investment in the fund
should not be considered a complete investment program and should be
carefully evaluated for its appropriateness in light of your overall investment
needs and goals.
Utilities Series may also invest a portion of its assets in non-investment
grade securities.
The market value of high yield, lower-quality fixed-income securities,
commonly known as junk bonds, tends to reflect individual developments
affecting the issuer to a greater degree than the market value of
higher-quality securities, which react primarily to fluctuations in the
general level of interest rates. Lower-quality securities also tend to be
more sensitive to economic conditions than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them.
Therefore, the risk associated with buying the securities of these issuers is
generally greater than the risk associated with higher-quality securities.
For example, during an economic downturn or a sustained period of rising
interest rates, issuers of lower-quality securities may experience financial
stress and may not have sufficient cash flow to make interest payments. The
issuer's ability to make timely interest and principal payments may also be
adversely affected by specific developments affecting the issuer, including
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the fund's portfolio defaults, the fund may have unrealized losses on the
security, which may lower the fund's net asset value. Defaulted securities
tend to lose much of their value before they default. Thus, the fund's net
asset value may be adversely affected before an issuer defaults. In addition,
the fund may incur additional expenses if it must try to recover principal or
interest payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three
to five years from the date of issue, if an issuer calls its securities
during periods of declining interest rates, the manager may find it necessary
to replace the securities with lower-yielding securities, which could result
in less net investment income for the fund. The premature disposition of a
high yield security due to a call or buy-back feature, the deterioration of
an issuer's creditworthiness, or a default by an issuer may make it more
difficult for the fund to manage the timing of its income. Under the Internal
Revenue Code and U.S. Treasury regulations, the fund may have to accrue
income on defaulted securities and distribute the income to shareholders for
tax purposes, even though the fund is not currently receiving interest
or principal payments on the defaulted securities. To generate cash to
satisfy these distribution requirements, the fund may have to sell portfolio
securities that it otherwise may have continued to hold or use cash flows
from other sources, such as the sale of fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse
impact on market price of a security and on the fund's ability to sell a
security in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, or if necessary to meet the fund's
liquidity needs. Reduced liquidity may also make it more difficult to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio.
The fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry
restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if the fund is required to sell restricted securities before
the securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The fund may also incur special costs in
disposing of restricted securities, although the fund will generally not
incur any costs when the issuer is responsible for registering the securities.
The fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. The manager will carefully review their credit and other
characteristics. The fund has no arrangement with its underwriter or any
other person concerning the acquisition of these securities.
The high yield securities market is relatively new and much of its growth
before 1990 paralleled a long economic expansion. The recession that began in
1990 disrupted the market for high yield securities and adversely affected
the value of outstanding securities, as well as the ability of issuers of
high yield securities to make timely principal and interest payments.
Although the economy has improved and high yield securities have performed
more consistently since that time, the adverse effects previously experienced
may recur. For example, the highly publicized defaults on some high yield
securities during 1989 and 1990 and concerns about a sluggish economy that
continued into 1993 depressed the prices of many of these securities. While
market prices may be temporarily depressed due to these factors, the ultimate
price of any security generally reflects the true operating results of the
issuer. Factors adversely impacting the market value of high yield securities
may lower the fund's net asset value. The fund relies on the manager's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer. In this evaluation, the manager takes into consideration, among other
things, the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of the issuer's
management and regulatory matters.
The credit risk factors above also apply to lower-quality zero coupon,
deferred interest and pay-in-kind securities. These securities have an
additional risk, however, because unlike securities that pay interest
throughout the time until maturity, the fund will not receive any cash until
the cash payment date. If the issuer defaults, the fund may not obtain any
return on its investment.
Zero coupon or deferred interest securities are debt obligations that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the cash payment date), and
therefore are generally issued and traded at a discount from their face
amount or par value. The discount varies depending on the time remaining
until maturity or the cash payment date, as well as prevailing interest
rates, liquidity of the security, and the perceived credit quality of the
issuer. The discount, in the absence of financial difficulties of the issuer,
typically decreases as the final maturity or cash payment date approaches.
The value of zero coupon securities is generally more volatile than the value
of other fixed-income securities that pay interest periodically. Zero coupon
securities are also likely to respond to changes in interest rates to a
greater degree than other fixed-income securities having similar maturities
and credit quality. The fund is not limited in the amount of its assets that
may be invested in these types of securities.
Certain of the high yielding, fixed-income securities in which the funds may
invest may be purchased at a discount. When held to maturity or retired,
these securities may include an element of capital gain. Capital losses may
be realized when securities purchased at a premium, that is, in excess of
their stated or par value, are held to maturity or are called or redeemed at
a price lower than their purchase price. Capital gains or losses also may
be realized upon the sale of securities.
GINNIE MAE Ginnie Mae yields (interest income as a percentage of price) have
historically exceeded the current yields on other types of U.S. government
securities with comparable maturities. The effects of interest rate
fluctuations and unpredictable prepayments of principal, however, can greatly
change realized yields. As with most bonds, in a period of rising interest
rates, the value of a Ginnie Mae will generally decline. In a period of
declining interest rates, it is more likely that mortgages contained in
Ginnie Mae pools will be prepaid, thus reducing the effective yield. This
potential for prepayment during periods of declining interest rates may
reduce the general upward price increases of Ginnie Maes as compared to the
increases experienced by noncallable debt securities over the same periods.
In addition, any premium paid on the purchase of a Ginnie Mae will be lost if
the obligation is prepaid. Of course, price changes of Ginnie Maes and other
securities held by U.S. Government Securities Series will have a direct
impact on the net asset value per share of the fund.
FOREIGN SECURITIES The value of foreign (and U.S.) securities is affected by
general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in the fund. These risks can be significantly greater for investments
in emerging markets. Many of the risks described below also apply to
investments in depositary receipts.
The political, economic and social structures of some countries in which a
fund invests may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, and punitive taxes.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S.
or other major economies. As a result, they may not
have uniform accounting, auditing and financial reporting standards and may
have less government supervision of financial markets. Foreign securities
markets may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than experienced in the U.S.
Transaction costs on foreign securities markets are generally higher than in
the U.S. The settlement practices may be cumbersome and result in delays that
may affect portfolio liquidity. The fund may have greater difficulty voting
proxies, exercising shareholder rights, pursuing legal remedies and obtaining
judgments with respect to foreign investments in foreign courts than with
respect to domestic issuers in U.S. courts.
Some of the countries in which the funds invest are considered developing or
emerging markets. Investments in these markets are subject to all of the
risks of foreign investing generally, and have additional and heightened
risks due to a lack of legal, business and social frameworks to support
securities markets.
Emerging markets involve additional significant risks, including:
o political and social uncertainty (for example, regional conflicts and
risk of war)
o currency exchange rate volatility
o pervasiveness of corruption and crime
o delays in settling portfolio transactions
o risk of loss arising out of the system of share registration and custody
o comparatively smaller and less liquid than developed markets
o dependency upon foreign economic assistance and international trade
o less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the U.S.
All of these factors make developing market equity and fixed-income
securities' prices generally more volatile than securities issued in
developed countries.
CURRENCY Some of the funds' investments may be denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what a fund owns and a fund's share price. Generally, when the U.S. dollar
rises in value against a foreign currency, an investment in that country
loses value because that currency is worth fewer U.S. dollars.
EURO On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will be implemented in stages through July
1, 2002, to replace the national currency for participating member countries.
The participating countries are Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The
transition and the elimination of currency risk among EMU countries may
change the economic environment and behavior of investors, particularly in
European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect
on the fund, the fund's manager and its affiliated service providers are
taking steps they believe are reasonably designed to address the euro issue.
REPURCHASE AGREEMENT The use of repurchase agreements involves certain risks.
For example, if the other party to the agreement defaults on its obligation
to repurchase the underlying security at a time when the value of the
security has declined, the fund may incur a loss upon disposition of the
security. If the other party to the agreement becomes insolvent and subject
to liquidation or reorganization under the bankruptcy code or other laws, a
court may determine that the underlying security is collateral for a loan by
the fund not within the control of the fund, and therefore the realization by
the fund on the collateral may be automatically stayed. Finally, it is
possible that the fund may not be able to substantiate its interest in the
underlying security and may be deemed an unsecured creditor of the other
party to the agreement. While the manager acknowledges these risks, it is
expected that if repurchase agreements are otherwise deemed useful to the
fund, these risks can be controlled through careful monitoring procedures.
UTILITIES Historically, electric utility companies were required by state
regulators to build and maintain generation plants, transmission and
distribution lines, and other equipment. State regulators set the rates that
the companies could charge customers to pay for these costs, spread over as
much as 30 years. As the various states move away from the traditional
regulatory model toward greater competitiveness among electric utilities,
customers will be able to choose different electricity suppliers and will no
longer pay for the equipment and facilities that were mandated by regulators,
thus creating "stranded costs" for their former electricity suppliers. If
states fail to enact legislation that permits electricity suppliers to
recover their stranded costs, the financial position of these suppliers could
be adversely affected, which could cause the value of the fund's holdings in
such companies and its net asset value to fall.
OFFICERS AND DIRECTORS
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Custodian Funds has a board of directors. The board is responsible for the
overall management of the funds, including general supervision and review of
each fund's 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 board also monitors each fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the Custodian Funds, and principal
occupations during the past five years are shown below.
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
DIRECTOR
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 47 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers) (until 1998).
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or
trustee, as the case may be, of 49 of the investment companies in the
Franklin Templeton Group
of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
DIRECTOR
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present), H.J.
Heinz Company (processed foods and allied products) (1994-present) and RTI
International Metals, Inc. (metal mill products) (July 1999-present);
director or trustee, as the case may be, of 24 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and
Trustee (1993-1997), National Child Research Center, Assistant to the
President of the United States and Secretary of the Cabinet (1990-1993),
General Counsel to the United States Treasury Department (1989-1990), and
Counselor to the Secretary and Assistant Secretary for Public Affairs and
Public Liaison - United States Treasury Department (1988-1989).
*Charles B. Johnson (67)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND DIRECTOR
Chairman of the Board, Chief Executive Officer, Member - Office of the
Chairman and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services,
Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director,
Franklin/Templeton Investor Services, Inc. and Franklin Templeton Services,
Inc.; officer and/or director or trustee, as the case may be, of most of the
other subsidiaries of Franklin Resources, Inc. and of 48 of the investment
companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND DIRECTOR
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment
Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services,
LLC; 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 51 of the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
DIRECTOR
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology) and Spacehab, Inc. (aerospace services); director or trustee,
as the case may be, of 47 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman, White River Corporation
(financial services) and Hambrecht and Quist Group (investment banking),
President, National Association of Securities Dealers, Inc. and Director,
Real 3D (software).
Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc., Franklin Templeton Distributors, Inc. and Franklin Templeton
Services, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director,
Franklin Investment Advisory Services, Inc. and 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 51 of
the investment companies in the Franklin Templeton Group
of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, Franklin Resources, Inc.; Senior
Vice President, Chief Financial Officer and Director, Franklin/Templeton
Investor Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial
Officer and Director, Templeton Worldwide, Inc.; Executive Vice President,
Chief Operating Officer and Director, Templeton Investment Counsel, Inc.;
Executive Vice President and Chief Financial Officer, Franklin Advisers,
Inc.; Chief Financial Officer, Franklin Advisory Services, LLC and Franklin
Investment Advisory Services, Inc.; President and Director, Franklin
Templeton Services, Inc.; officer and/or director of some of the other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or
trustee, as the case may be, of 51 of the investment companies in the
Franklin Templeton Group of Funds.
Brian E. Lorenz (60)
One North Lexington Avenue, White Plains, NY 10001-1700
SECRETARY
Attorney, member of the law firm of Bleakley Platt & Schmidt; and officer of
three of the investment companies in the Franklin Templeton Group of Funds.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Vice President, Franklin Templeton Services, Inc.; and officer of 30 of the
investment companies in the Franklin Templeton Group of Funds.
David Goss (53)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Chief Executive Officer and Director, Franklin Select Realty
Trust, Property Resources, Inc., Property Resources Equity Trust and Franklin
Real Estate Management, Inc.; President and Chief Executive Officer, Franklin
Properties, Inc.; officer of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, President, Chief Executive Officer
and Director, Franklin Real Estate Income Fund and Franklin Advantage Real
Estate Income Fund (until 1996).
Murray L. Simpson (63)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and General Counsel, Franklin Resources, Inc.;
officer of 27 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Chief Executive Officer and Managing Director, Templeton
Franklin Investment Services (Asia) Limited (until January 2000) and
Director, Templeton Asset Management Ltd. (until 1999).
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Custodian Funds pays noninterested board members $1,550 per month plus $1,500
per meeting attended. Noninterested board members also may serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the Custodian Funds are subject to reductions
resulting from fee caps limiting the amount of fees payable to board members
who serve on other boards within the Franklin Templeton Group of Funds. The
following table provides the total fees paid to noninterested board members
by the Custodian Funds and by other funds in the Franklin Templeton Group of
Funds.
NUMBER OF
TOTAL FEES BOARDS IN
TOTAL FEES RECEIVED FROM THE FRANKLIN
RECEIVED THE FRANKLIN TEMPLETON
FROM THE TEMPLETON GROUP
CUSTODIAN GROUP OF FUNDS
FUNDS 1 OF FUNDS 2 ON WHICH
NAME ($) ($) EACH SERVES 3
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Harris J. Ashton 27,947 363,165 47
S. Joseph Fortunato 26,032 363,238 49
Edith Holiday 35,100 237,265 24
Gordon S. Macklin 27,947 363,165 47
1. For the fiscal year ended September 30, 1999.
2. For the calendar year ended December 31, 1999.
3. We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the board members are responsible. The Franklin Templeton Group of
Funds currently includes 53 registered investment companies, with
approximately 155 U.S. based funds or series.
Noninterested board members are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
funds or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
During the fiscal year ended September 30, 1999, legal fees of $72,742 were
paid to the law firm of which Mr. Lorenz, an officer of Custodian Funds, is
the partner, and which acts as counsel to Custodian Funds.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED Franklin Advisers, Inc. is the manager of the
funds, except for Growth Series. Growth Series' manager is Franklin
Investment Advisory, Inc. Each manager is a wholly owned subsidiary of
Franklin Resources, Inc. (Resources), a publicly owned company engaged in the
financial services industry through its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr. are the principal shareholders of Resources.
The managers provide investment research and portfolio management services,
and selects the securities for the funds to buy, hold or sell. The managers
also select the brokers who execute the funds' portfolio transactions. The
managers provide periodic reports to the board, which reviews and supervises
the managers' investment activities. To protect the funds, the managers and
their officers, directors and employees are covered by fidelity insurance.
The managers and their affiliates manage numerous other investment companies
and accounts. Each manager may give advice and take action with respect to
any of the other funds it manages, or for its own account, that may differ
from action taken by the manager on behalf of the funds. Similarly, with
respect to the funds, the managers are not obligated to recommend, buy or
sell, or to refrain from recommending, buying or selling any security that
the managers and access persons, as defined by applicable federal securities
laws, may buy or sell for its or their own account or for the accounts of any
other fund. The managers are not obligated to refrain from investing in
securities held by the funds or other funds they manage.
The funds, their managers and principal underwriter have each adopted a code
of ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal
securities transactions, including transactions involving securities that are
being considered for a fund or that are currently held by a fund, subject to
certain general restrictions and procedures. The personal securities
transactions of access persons of a fund, its manager and principal
underwriter will be governed by the code of ethics.
MANAGEMENT FEES Each fund pays the manager a fee equal to a monthly rate of:
o 5/96 of 1% of the value of net assets up to and including $100 million;
o 1/24 of 1% of the value of net assets over $100 million and not over
$250 million;
o 9/240 of 1% of the value of net assets over $250 million and not over
$10 billion;
o 11/300 of 1% of the value of net assets over $10 billion and not over
$12.50 billion;
o 7/200 of 1% of the value of net assets over $12.5 billion and not over
$15 billion;
o 1/30 of 1% of the value of net assets over $15 billion and not over
$17.5 billion;
o 19/600 of 1% of the value of net assets over $17.5 billion and not over
$20 billion; and
o 3/100 of 1% of the value of net assets in excess of $20 billion.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of the
funds' shares pays its proportionate share of the fee.
For the last three fiscal years ended September 30, the funds paid the
following management fees:
MANAGEMENT FEES PAID ($)
1999 1998 1997
- -----------------------------------------------------------------
DynaTech Series 2,208,918 1,166,790 840,480
Growth Series 11,122,057 8,291,109 6,295,304
Income Series 38,308,264 40,167,205 35,364,027
Utilities Series 8,923,770 9,617,382 9,987,693
U.S. Government
Securities Series 39,973,823 42,190,481 44,411,776
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with each manager to provide certain
administrative services and facilities for the funds. FT Services is wholly
owned by Resources and is an affiliate of the funds' manager and principal
underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The managers pay FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to
o $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended September 30, the manager paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
1999 1998
- --------------------------------------------------------------
DynaTech Series 599,684 309,337
Growth Series 0 1,913,636
Income Series 6,944,274 7,226,547
Utilities Series 2,040,426 2,127,219
U.S. Government Securities 7,216,607 7,561,475
Series
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the funds' shareholder servicing agent
and acts as the funds' transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please
send all correspondence to Investor Services to P.O. Box 997151, Sacramento,
CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. The
funds also will reimburse Investor Services for certain out-of-pocket
expenses, which may include payments by Investor Services to entities,
including affiliated entities, that provide sub-shareholder services,
recordkeeping and/or transfer agency services to beneficial owners of the
funds. The amount of reimbursements for these services per benefit plan
participant fund account per year will not exceed the per account fee payable
by the funds to Investor Services in connection with maintaining shareholder
accounts.
CUSTODIAN Bank of New York, Mutual Funds Division,
90 Washington Street, New York, NY 10286, acts as custodian of the funds'
securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the Custodian Funds' independent auditor. The auditor gives an
opinion on the financial statements included in the Custodian Funds' Annual
Report to Shareholders and reviews the Custodian Funds' registration
statement filed with the U.S. Securities and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
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The manager selects brokers and dealers to execute the funds' portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid is
negotiated between the manager and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of
the persons responsible for placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being paid by other institutional investors of comparable size. The manager
will ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in
the opinion of the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager include, among others, supplying
information about particular companies, markets, countries, or local,
regional, national or transnational economies, statistical data, quotations
and other securities pricing information, and other information that provides
lawful and appropriate assistance to the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the funds. They must, however, be of value to the manager in carrying
out its overall responsibilities to its clients.
Since most purchases by the U.S. Government Securities Series are principal
transactions at net prices, the U.S. Government Securities Series incurs
little or no brokerage costs. The fund deals directly with the selling or
buying principal or market maker without incurring charges for the services
of a broker on its behalf, unless it is determined that a better price or
execution may be obtained by using the services of a broker. Purchases of
portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask prices. The fund seeks to
obtain prompt execution of orders at the most favorable net price.
Transactions may be directed to dealers in return for research and
statistical information, as well as for special services provided by the
dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on
the research services the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions to
obtain additional research services allows the manager to supplement its own
research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, the manager and its affiliates may use this
research and data in their investment advisory capacities with other clients.
If the funds' officers are satisfied that the best execution is obtained, the
sale of fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, also may be considered a factor in the selection of
broker-dealers to execute the funds' portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when a fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of a fund,
any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next
management fee payable to the manager will be reduced by the amount of any
fees received by Distributors in cash, less any costs and expenses incurred
in connection with the tender.
If purchases or sales of securities of the funds and one or more other
investment companies or clients supervised by the manager are considered at
or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by the manager, taking into account the respective sizes of
the funds and the amount of securities to be purchased or sold. In some cases
this procedure could have a detrimental effect on the price or volume of the
security so far as the funds are concerned. In other cases it is possible
that the ability to participate in volume transactions may improve execution
and reduce transaction costs to the funds.
During the last three fiscal years ended September 30, the funds paid the
following brokerage commissions:
BROKERAGE COMMISSIONS ($)
1999 1998 1997
- ----------------------------------------------------------------
DynaTech Series 50,968 27,869 11,855
Growth Series 249,624 187,647 78,178
Income Series 654,842 549,013 848,922
Utilities Series 1,830,146 811,152 1,146,668
U.S. Government
Securities Series -0- -0- -0-
For the fiscal year ended September 30, 199, the funds did not pay brokerage
commissions to brokers who provided research services.
As of September 30, 1999, the funds did not own securities of their regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
The funds calculate dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in any distribution and service (Rule 12b-1) fees of
each class. Distributions are subject to approval by the board. The funds do
not pay "interest" or guarantee any fixed rate of return on an investment in
its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The funds receive income generally in
the form of dividends and interest on their investments. This income, less
expenses incurred in the operation of a fund, constitutes a fund's net
investment income from which dividends may be paid to you. Any distributions
by a fund from such income will be taxable to you as ordinary income, whether
you take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The funds may derive capital gains and losses
in connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in a fund. Any net capital gains realized by a fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, to reduce or eliminate excise or income taxes on
the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of
debt securities 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 decrease 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.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year. If you have not held fund shares for a full year, a fund may
designate and distribute to you, as ordinary income or capital gain, a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in a fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As regulated
investment companies, the funds generally pay no federal income tax on the
income and gains they distribute to you. The board reserves the right not to
maintain the qualification of a fund as a regulated investment company if it
determines such course of action to be beneficial to shareholders. In such
case, a fund will be subject to federal, and possibly state, corporate taxes
on its taxable income and gains, and distributions to you will be taxed as
ordinary dividend income to the extent of such fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires a fund to distribute to you by December 31 of
each year, at a minimum, the following amounts: 98% of its taxable ordinary
income earned during the calendar year; 98% of its capital gain net income
earned during the twelve month period ending October 31; and 100% of any
undistributed amounts from the prior year. Each fund intends to declare and
pay these distributions in December (or to pay them in January, in which case
you must treat them as received in December), but can give no assurances that
its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) and
exchanges of fund shares are taxable transactions for federal and state
income tax purposes. If you redeem your fund shares, or exchange your fund
shares for shares of a different Franklin Templeton Fund, the IRS will
require that you report any gain or loss on your redemption or exchange. If
you hold your shares as a capital asset, the gain or loss that you realize
will be capital gain or loss and will be long-term or short-term, generally
depending on how long you hold your shares. 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.
Beginning after the year 2005 (2000 for certain shareholders), gains from the
sale of fund shares held for more than five years may be subject to a reduced
tax rate.
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 buy 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 buy.
U.S. GOVERNMENT OBLIGATIONS 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 or reporting requirements that
must be met by a fund. Investments in Government National Mortgage
Association or Federal National Mortgage Association securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 16.68% of the dividends paid by the
DynaTech Series, 49.36% of the dividends paid by the Growth Series, 23.16% of
the dividends paid by the Income Series and 85.48% of the dividends paid by
the Utilities Series for the most recent fiscal year qualified for the
dividends-received deduction. You may be allowed to deduct these qualified
dividends, thereby reducing the tax that you would otherwise be required to
pay on these dividends. The dividends-received deduction will be available
only with respect to dividends designated by such fund as eligible for such
treatment. All dividends (including the deducted portion) must be included in
your alternative minimum taxable income calculation.
Because the U.S. Government Securities Series' income is derived primarily
from interest rather than dividends, generally no portion of its
distributions will be eligible for the dividends-received deduction. None of
the dividends paid by the fund for the most recent calendar year qualified
for such deduction, and it is anticipated that none of the current year's
dividends will so qualify.
INVESTMENT IN COMPLEX SECURITIES The funds may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to a fund (possibly causing the fund to sell securities to raise the
cash for necessary distributions) and/or defer a fund's ability to recognize
losses. In turn, these rules may affect the amount, timing or character of
the income distributed to you by a fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- -------------------------------------------------------------------------------
Each fund is a diversified series of Custodian Funds, an open-end management
investment company, commonly called a mutual fund. Custodian Funds was
organized as a Delaware corporation in 1947, reincorporated as a Maryland
corporation in 1979, and is registered with the SEC.
The funds currently offer four classes of shares, Class A, Class B, Class C
and Advisor Class; DynaTech Series does not offer Advisor Class. Growth,
Income, Utilities and U.S. Government Securities Series began offering Class
B shares on January 1, 1999. DynaTech Series began offering Class B shares on
February 1, 2000. The funds may offer additional classes of shares in the
future. The full title of each class is:
o DynaTech Series - Class A
o DynaTech Series - Class B
o DynaTech Series - Class C
o Growth Series - Class A
o Growth Series - Class B
o Growth Series - Class C
o Growth Series - Advisor Class
o Income Series - Class A
o Income Series - Class B
o Income Series - Class C
o Income Series - Advisor Class
o Utilities Series - Class A
o Utilities Series - Class B
o Utilities Series - Class C
o Utilities Series - Advisor Class
o U.S. Government Securities Series - Class A
o U.S. Government Securities Series - Class B
o U.S. Government Securities Series - Class C
o U.S. Government Securities Series - Advisor Class
Shares of each class represent proportionate interests in each fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
separately on matters affecting only that class, or expressly required to be
voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes
and series of Custodian Funds for matters that affect Custodian Funds as a
whole. Additional series may be offered in the future.
Custodian Funds has noncumulative voting rights. For board member elections,
this gives holders of more than 50% of the shares voting the ability to elect
all of the members of the board. If this happens, holders of the remaining
shares voting will not be able to elect anyone to the board.
Custodian Funds does not intend to hold annual shareholder meetings.
Custodian Funds or a series of Custodian Funds may hold special meetings,
however, for matters requiring shareholder approval. A meeting may be called
by the board to consider the removal of a board member if requested in
writing by shareholders holding at least 10% of the outstanding shares. In
certain circumstances, we are required to help you communicate with other
shareholders about the removal of a board member. A special meeting also may
be called by the board in its discretion.
As of January 3, 2000, the principal shareholders of the fund, beneficial or
of record, were:
PERCENTAGE
NAME AND ADDRESS SHARE CLASS (%)
- ---------------------------------------------------------------
GROWTH FUND
Franklin Templeton Trust Advisor 10.77
Company Trust Services FBO Class
Vivian J. Palmieri
P.O. Box 5086
San Mateo, CA 94402-0086
Franklin Templeton Trust Advisor 16.71
Company Trust Services FBO Class
Rupert Johnson IRA
P.O. Box 5086
San Mateo, CA 94402-0086
St. Petersburg Lesopromyshleny Bank Advisor 5.09
5 Krapivny Per Class
St. Petersburg, Russia 194044
Franklin Templeton Trust Advisor 5.09
Company TTEE for ValuSelect Class
Franklin Templeton 401K
P.O. Box 2438
Rancho Cordova, CA 95741-2438
Franklin Templeton Trust Advisor 23.16
Company TTEE for ValuSelect Class
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438
Utilities Fund
FIRST MAR & CO 2 Advisor 15.16
101 W. Washington Street Class
P.O. Box 580
Marquette, MI 49855
The Washington Trust Company Advisor 13.54
23 Broad Street Class
Westerly, RI 02891
PERCENTAGE
NAME AND ADDRESS SHARE CLASS (%)
- ---------------------------------------------------------------
Franklin Templeton Trust Advisor 52.42
Company TTEE for ValuSelect1 Class
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438
U.S. Government Securities Fund
Templeton Funds Trust Company Advisor 11.80
100 Fountain Parkway Class
St. Petersburg, FL 33716-1205
St. Petersburg Lesopromyshleny Bank Advisor 13.80
5 Krapivny Per Class
St. Petersburg, Russia 194044
Franklin Templeton Trust Advisor 10.44
Company TTEE for ValuSelect 401k Class
P.O. Box 2438
Rancho Cordova, CA 95741-2438
Franklin Templeton Trust Advisor 29.70
Company TTEE for ValuSelect1 Class
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438
1. Franklin Templeton Trust Company is a California corporation and is wholly
owned by Franklin Resources, Inc.
Note: Charles B. Johnson and Rupert H. Johnson, Jr., who are officers and
directors of Custodian Funds, serve on the administrative committee of the
Franklin Resources, Inc. profit sharing plan, which owns shares of Custodian
Funds. In that capacity, they participate in the voting of such shares.
Charles B. Johnson and Rupert H. Johnson, Jr. disclaim beneficial ownership
of any share of Custodian Funds owned by the profit sharing plan.
From time to time, the number of fund shares held in the "street name"
accounts of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
As of January 3, 2000, the officers and board members, as a group, owned of
record and beneficially less than
1% of the outstanding shares of each class. The board members may own shares
in other funds in the Franklin Templeton Group of Funds.
BUYING AND SELLING SHARES
- -------------------------------------------------------------------------------
The funds continuously offer their shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer
orders and accounts with the funds. This reference is for convenience only
and does not indicate a legal conclusion of capacity. Banks and financial
institutions that sell shares of the funds may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the funds should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the funds must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank. We may deduct any applicable banking
charges imposed by the bank from your account.
When you buy shares, if you submit a check or a draft that is returned unpaid
to a fund we may impose a $10 charge against your account for each returned
item.
If you buy shares through the reinvestment of dividends, the shares will be
purchased at the net asset value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not
affect the amount or value of the shares acquired.
INITIAL SALES CHARGES For DynaTech and Growth Series, the maximum initial
sales charge is 5.75% for Class A and 1% for Class C. For Income, Utilities
and U.S. Government Securities Series, the maximum initial sales charge is
4.25% for Class A and 1% for Class C. There is no initial sales charge for
Class B.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of
the lower sales charges for large purchases. The Franklin Templeton Funds
include the U.S. registered mutual funds in the Franklin Group of Funds(R) and
the Templeton Group of Funds except Franklin Templeton Variable Insurance
Products Trust, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge
by completing the letter of intent section of your account application. A
letter of intent is a commitment by you to invest a specified dollar amount
during a 13 month period. The amount you agree to invest determines the sales
charge you pay. By completing the letter of intent section of the
application, you acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the
sales charge applicable to the amount specified in your LOI. Sales charge
reductions based on purchases in more than one Franklin Templeton Fund will
be effective only after notification to Distributors that the investment
qualifies for a discount. Any Class A purchases you made within 90 days
before you filed your LOI also may qualify for a retroactive reduction in the
sales charge. If you file your LOI with the fund before a change in the
fund's sales charge, you may complete the LOI at the lower of the new sales
charge or the sales charge in effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days
before you filed your LOI will be counted towards the completion of the LOI,
but they will not be entitled to a retroactive reduction in the sales charge.
Any redemptions you make during the 13 month period, except in the case of
certain retirement plans, will be subtracted from the amount of the purchases
for purposes of determining whether the terms of the LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of
your total purchases, less redemptions, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases.
If the amount of your total purchases, less redemptions, is less than the
amount specified in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, the
reserved shares held for your account will be deposited to an account in your
name or delivered to you or as you direct. If within 20 days after written
request the difference in sales charge is not paid, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.
For LOIs filed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the LOI. These plans are not subject to the requirement to reserve 5%
of the total intended purchase or to the policy on upward adjustments in
sales charges described above, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class
A shares at a reduced sales charge that applies to the group as a whole. The
sales charge is based on the combined dollar value of the group members'
existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the funds, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group generally does not include a 403(b) plan that only allows
salary deferral contributions, although any such plan that purchased the
fund's Class A shares at a reduced sales charge under the group purchase
privilege before February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be
purchased without an initial sales charge or contingent deferred sales charge
(CDSC) by investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the same share
class. Certain exceptions apply, however, to Class C shareholders who chose
to reinvest their distributions in Class A shares of 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 the fund's
Class A shares. This waiver category also applies to Class B
o and C shares.
o Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option
the Franklin Templeton Variable Insurance Products Trust or the Templeton
Variable Products Series Fund. You should contact your tax advisor for
information on any tax consequences that may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating
Rate Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or
a Franklin Templeton money fund, you may reinvest them as described above.
The proceeds must be reinvested within 365 days from the date the CD
matures, including any rollover, or the date you redeem your money fund
shares.
o Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously paid
and the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
o Distributions from an existing retirement plan invested in the
Franklin Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without
an initial sales charge or CDSC by various individuals and institutions due
to anticipated economies in sales efforts and expenses, including:
o Trust companies and bank trust departments agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of
assets held in a fiduciary, agency, advisory, custodial or similar capacity
and over which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
o Any state or local government or any instrumentality, department,
authority or agency thereof that has determined a fund is a legally
permissible investment and that can only buy fund shares without paying
sales charges. Please consult your legal and investment advisors to
determine if an investment in a fund is permissible and suitable for you
and the effect, if any, of payments by the fund on arbitrage rebate
calculations.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting
distributions from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
In addition, Class C shares may be purchased without
an initial sales charge by any investor who buys Class C shares through an
omnibus account with Merrill Lynch Pierce Fenner & Smith, Inc. A CDSC may
apply, however, if the shares are sold within 18 months of purchase.
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales
charge. Retirement plans that are not qualified retirement plans (employer
sponsored pension or profit-sharing plans that qualify under section 401 of
the Internal Revenue Code, including 401(k), money purchase pension, profit
sharing and defined benefit plans), SIMPLEs (savings incentive match plans
for employees) or SEPs (employer sponsored simplified employee pension plans
established under section 408(k) of the Internal Revenue Code) must also meet
the group purchase requirements described above to be able to buy Class A
shares without an initial sales charge. We may enter into a special
arrangement with a securities dealer, based on criteria established by the
funds, to add together certain small qualified retirement plan accounts for
the purpose of meeting these requirements.
For retirement plan accounts opened on or after May 1, 1997, a CDSC may apply
if the retirement plan is transferred out of the Franklin Templeton Funds or
terminated within 365 days of the retirement plan account's initial purchase
in the Franklin Templeton Funds.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, the funds' shares are available to these banks' trust accounts without
a sales charge. The banks may charge service fees to their customers who
participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining
a service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
The funds' Class A shares may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class A
shares may be offered with the following schedule of sales charges:
For DynaTech and Growth Series:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE
(%)
- -------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $50,000 2.5
$50,000 but less than $100,000 2.0
$100,000 but less than $200,000 1.5
$200,000 but less than $400,000 1.0
$400,000 or more 0
For Income, Utilities and U.S. Government Securities Series:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE
(%)
- -------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $100,000 2.0
$100,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge. A securities dealer who receives 90% or more of the sales charge may
be deemed an underwriter under the Securities Act of 1933, as amended.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the funds' prospectus.
For DynaTech and Growth Series, Distributors may pay the following
commissions, out of its own resources, to securities dealers who initiate and
are responsible for purchases of Class A shares of $1 million or more: 1% on
sales of $1 million to $2 million, plus 0.80% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on
sales over $50 million to $100 million, plus 0.15% on sales over $100 million.
FOR INCOME, UTILITIES AND U.S. GOVERNMENT SECURITIES SERIES, Distributors may
pay the following commissions, out of its own resources, to securities
dealers who initiate and are responsible for purchases of Class A shares of
$1 million or more: 0.75% on sales of $1 million to $2 million, plus 0.60% on
sales over $2 million to $3 million, plus 0.50% on sales over $3 million to
$50 million, plus 0.25% on sales over $50 million to $100 million, plus 0.15%
on sales over $100 million.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors or one of its affiliates may pay up to 1%, out of its own
resources, to securities dealers who initiate and are responsible for
purchases of Class A shares by certain retirement plans without an initial
sales charge. These payments may be made 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.
In addition to the payments above, Distributors and/or its affiliates may
provide financial support to 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 and/or total assets with the Franklin
Templeton Group of Funds. The amount of support may be affected by: total
sales; net sales; levels of redemptions; the proportion of a securities
dealer's sales and marketing efforts in the Franklin Templeton Group of
Funds; a securities dealer's support of, and participation in, Distributors'
marketing programs; a securities dealer's compensation programs for its
registered representatives; and the extent
of a securities dealer's marketing programs relating to
the Franklin Templeton Group of Funds. Financial support
to securities dealers may be made by payments from Distributors' resources,
from Distributors' retention of underwriting concessions and, in the case of
funds that have Rule 12b-1 plans, from payments to Distributors under such
plans. In addition, certain securities dealers may receive brokerage
commissions generated by fund portfolio transactions in accordance with the
rules of the National Association of Securities Dealers, Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity
discount or letter of intent programs, a CDSC may apply on any shares you
sell within 12 months of purchase. For Class C shares, a CDSC may apply if
you sell your shares within 18 months of purchase. The CDSC is 1% of the
value of the shares sold or the net asset value at the time of purchase,
whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class A shares without an initial sales charge also may be
subject to a CDSC if the retirement plan is transferred out of the Franklin
Templeton Funds or terminated within 365 days of the account's initial
purchase in the Franklin Templeton Funds.
For Class B shares, there is a CDSC if you sell your shares within six years,
as described in the table below. The charge is based on the value of the
shares sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES WITHIN THIS % IS DEDUCTED FROM
THIS MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
- -----------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Sales of Class A shares purchased without an initial sales charge by
certain retirement plan accounts if (i) the account was opened before May
1, 1997, or (ii) the securities dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the securities dealer of
record has entered into a supplemental agreement with Distributors
o Redemptions of Class A shares by investors who purchased $1 million or
more without an initial sales charge if the securities dealer of record
waived its commission in connection with the purchase
o Redemptions by the funds when an account falls below the minimum
required account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February
1, 1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's net asset value depending on the frequency of
your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans
or employee benefit plans serviced by ValuSelect(R) (not applicable to Class
B)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy (for
Class B, this applies to all retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
employee benefit
o Participant initiated distributions from plans or participant initiated
exchanges among investment choices in employee benefit plans (not
applicable to Class B)
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, a 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 each 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 goals exist immediately. This money will then be withdrawn from
the short-term, interest-bearing money market instruments and invested in
portfolio securities in as orderly a manner as is possible when attractive
investment opportunities arise.
The proceeds from the sale of shares of an investment company generally are
not available until the seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of fund shares to complete an exchange will
be effected at net asset value at the close of business on the day the
request for exchange is received in proper form.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at
least $50. For retirement plans subject to mandatory distribution
requirements, the $50 minimum will not apply. There are no service charges
for establishing or maintaining a systematic withdrawal plan.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. When you sell your
shares under a systematic withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan also
may be subject to a CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. The funds may discontinue a systematic
withdrawal plan by notifying you in writing and will automatically
discontinue a systematic withdrawal plan if all shares in your account are
withdrawn or if the fund receives notification of the shareholder's death or
incapacity.
REDEMPTIONS IN KIND Each fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the U.S. Securities
and Exchange Commission (SEC). In the case of redemption requests in excess
of these amounts, the board reserves the right to make payments in whole or
in part in securities or other assets of the fund, in case of an emergency,
or if the payment of such a redemption in cash would be detrimental to the
existing shareholders of the fund. In these circumstances, the securities
distributed would be valued at the price used to compute the fund's net
assets and you may incur brokerage fees in converting the securities to cash.
The funds do not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This
eliminates the costly problem of replacing lost, stolen or destroyed
certificates. If a certificate is lost, stolen or destroyed, you may have to
pay an insurance premium of up to 2% of the value of the certificate to
replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to a fund marked "unable
to forward" by the postal service, we will consider this a request by you to
change your dividend option to reinvest all distributions. The proceeds will
be reinvested in additional shares at net asset value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the funds
nor their affiliates will be liable for any loss caused by your failure to
cash such checks. The funds are not responsible for tracking down uncashed
checks, unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
Sending redemption proceeds by wire or electronic funds transfer (ACH) is a
special service that we make available whenever possible. By offering this
service to you, the funds are not bound to meet any redemption request in
less than the seven day period prescribed by law. Neither the funds nor their
agents shall be liable to you or any other person if, for any reason, a
redemption request by wire or ACH is not processed as described in the
prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the funds
on behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such owners. For each beneficial owner in the
omnibus account, a fund may reimburse Investor Services an amount not to
exceed the per account fee that the fund normally pays Investor Services.
These financial institutions also may charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. If you sell shares
through your securities dealer, it is your dealer's responsibility to
transmit the order to the fund in a timely fashion. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, each fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
notice of levy.
PRICING SHARES
- -------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of
shares outstanding.
The funds calculate the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther
King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, each fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. Each fund values over-the-counter portfolio securities
within the range of the most recent quoted bid and ask prices. If portfolio
securities trade both in the over-the-counter market and on a stock exchange,
each fund values them according to the broadest and most representative market
as determined by the manager.
Each fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option a fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
Each fund determines the value of a foreign security as of the close of trading
on the foreign exchange on which the security is traded or as of the close of
trading on the NYSE, if that is earlier. The value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the NAV. If events materially
affecting the values of these foreign securities occur during this period, the
securities will be valued in accordance with procedures established by the
board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the NAV. If events materially affecting the values of these
securities occur during this period, the securities will be valued at their
fair value as determined in good faith by the board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading
in similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for
which market prices are not readily available are valued at fair value as
determined following procedures approved by the board. With the approval of
the board, the funds may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
- -------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the funds' shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. Each fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the funds' shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
September 30:
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
- -------------------------------------------------------------
1999
DynaTech Series 1,817,832 227,733 40,965
Growth Series 6,020,599 732,432 211,566
Income Series 18,559,693 514,562 713,435
Utilities Series 1,552,583 84,795 44,618
U.S. Government
Securities Series 10,338,031 612,000 345,385
1998
DynaTech Series 726,687 71,933 6,857
Growth Series 6,106,577 627,929 83,796
Income Series 38,432,701 2,191,540 403,597
Utilities Series 1,800,127 100,078 12,642
U.S. Government
Securities Series 12,066,960 756,299 111,036
1997
DynaTech Series 682,911 67,617 1,344
Growth Series 7,068,758 708,574 47,529
Income Series 39,253,724 1,822,592 293,033
Utilities Series 1,698,314 99,703 19,661
U.S. Government
Securities Series 10,252,511 620,114 56,854
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the funds for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) fees Each class has a separate distribution
or "Rule 12b-1" plan. Under each plan, each fund shall pay or may reimburse
Distributors or others for the expenses of activities that are primarily
intended to sell shares of the class. These expenses may include, among
others, distribution or service fees paid to securities dealers or others who
have executed a servicing agreement with the 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.
The distribution and service (12b-1) fees charged to each class are based
only on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by DynaTech and Growth Series under the Class A
plans may not exceed 0.25% per year of Class A's average daily net assets,
and payments by Income, Utilities and U.S. Government Securities Series under
the Class A plan may not exceed 0.15% per year of Class A's average daily net
assets, payable quarterly. All distribution expenses over this amount will be
borne by those who have incurred them.
In implementing the Class A plan, the board has determined that the annual
fees payable under Growth and DynaTech Series' Class A plans will be equal to
the sum of: (i) the amount obtained by multiplying 0.25% by the average daily
net assets represented by the fund's Class A shares that were acquired by
investors on or after May 1, 1994, the effective date of the plan (new
assets), and (ii) the amount obtained by multiplying 0.15% by the average
daily net assets represented by the fund's Class A shares that were acquired
before May 1, 1994 (old assets). These fees will be paid to the current
securities dealer of record on the account. In addition, until such time as
the maximum payment of 0.25% is reached on a yearly basis, up to an
additional 0.05% will be paid to Distributors under DynaTech and Growth
Series' Class A plans. With respect to Income and Utilities Series, the
annual fees payable under their respective Class A plans will be equal to the
sum of: (i) the amount obtained by multiplying 0.15% by the average daily net
assets represented by the new assets of such fund's Class A shares and (ii)
the amount obtained by multiplying 0.10% by the average daily net assets
represented by the old assets of such fund's Class A shares. With respect to
U.S. Government Securities Series, the annual fees payable under its Class A
plan will be equal to the sum of: (i) the amount obtained by multiplying
0.15% by the average daily net assets represented by the new assets of such
fund's Class A shares and (ii) the amount obtained by multiplying 0.05% by
the average daily net assets represented by the old assets of the fund's
Class A shares. These fees will be paid to the current securities dealer of
record on the account. In addition, until such time as the maximum payment of
0.15% with respect to Income, Utilities and U.S. Government Securities Series
is reached on a yearly basis, up to an additional 0.02% will be paid to
Distributors under their respective Class A plan. The payments made to
Distributors will be used by Distributors to defray other marketing expenses
that have been incurred in accordance with each plan, such as advertising.
The fee is a Class A expense. This means that all Class A shareholders,
regardless of when they purchased their shares, will bear Rule 12b-1 expenses
at the same rate. The initial rate will be at least 0.20% (0.15% plus 0.05%)
for DynaTech and Growth Series; 0.12% (0.10% plus 0.02%) for Income and
Utilities Series; and 0.07% (0.05% plus 0.02%) for U.S. Government Securities
Series of the average daily net assets of Class A and, as Class A shares are
sold on or after May 1, 1994, will increase over time. Thus, as the
proportion of Class A shares purchased on or after May 1, 1994, increases in
relation to outstanding Class A shares, the expenses attributable to payments
under the plan also will increase (but will not exceed the maximum allowable
under each Class A plan). While this is the currently anticipated calculation
for fees payable under the Class A plan, the plan permits the board to allow
the DynaTech and Growth Series to pay a full 0.25% and Income, Utilities and
U.S. Government Securities Series to pay a full 0.15% on all assets at any
time. The approval of the board would be required to change the calculation
of the payments to be made under the Class A plan.
The Class A plan does not permit unreimbursed expenses incurred in a
particular year to be carried over to or reimbursed in later years.
THE CLASS B AND C PLANS. Under the Class B and C plans, DynaTech and Growth
Series pays Distributors up to 0.75% per year of the class's average daily
net assets, and Income, Utilities and U.S. Government Securities Series pays
Distributors up to 0.50% per year of the class's average daily net assets,
payable quarterly, to pay Distributors or others for providing distribution
and related services and bearing certain expenses. All distribution expenses
over this amount will be borne by those who have incurred them. DynaTech and
Growth Series may also pay a servicing fee of up to 0.25% per year of the
class's average daily net assets and Income Series, Utilities Series and U.S.
Government Securities Series also pay a servicing fee of up to 0.15% per year
of the class's average daily net assets, payable quarterly. This fee may be
used to pay securities dealers or others for, among other things, helping to
establish and maintain customer accounts and records, helping with requests
to buy and sell shares, receiving and answering correspondence, monitoring
dividend payments from the fund on behalf of customers, and similar servicing
and account maintenance activities.
The expenses relating to each of the Class B and C plans also are used to pay
Distributors for advancing the commission costs to securities dealers with
respect to the initial sale of Class B and C shares. Further, the expenses
relating to the Class B plan may be used by Distributors to pay third party
financing entities that have provided financing to Distributors in connection
with advancing commission costs to securities dealers.
The Class A, B and C plans. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the fund, the manager or Distributors or other parties on behalf of
the fund, the manager or Distributors make payments that
are deemed to be for the financing of any activity primarily intended to
result in the sale of fund shares within the context of Rule 12b-1 under the
Investment Company Act of 1940, as amended, then such payments shall be
deemed to have been made pursuant to the plan. The terms and provisions of
each plan relating to required reports, term, and approval are consistent
with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks will not be entitled to participate in the plans as a result of
applicable federal law prohibiting certain banks from engaging in the
distribution of mutual fund shares. These banking institutions, however, are
permitted to receive fees under the plans for administrative servicing or for
agency transactions. If you are a customer of a bank that is prohibited from
providing these services, you would be permitted to remain a shareholder of
the fund, and alternate means for continuing the servicing would be sought.
In this event, changes in the services provided might occur and you might no
longer be able to avail yourself of any automatic investment or other
services then being provided by the bank. It is not expected that you would
suffer any adverse financial consequences as a result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1.
The plans are renewable annually by a vote of the board, including a majority
vote of the board members who are not interested persons of the fund and who
have no direct or indirect financial interest in the operation of the plans,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such board members be done by the
noninterested members of the fund's board. The plans and any related
agreement may be terminated at any time, without penalty, by vote of a
majority of the noninterested board members on not more than 60 days' written
notice, by Distributors on not more than 60 days' written notice, by any act
that constitutes an assignment of the management agreement with the manager
or by vote of a majority of the outstanding shares of the class. The Class A
plan also may be terminated by any act that constitutes an assignment of the
underwriting agreement with Distributors. Distributors or any dealer or other
firm also may terminate their respective distribution or service agreement at
any time upon written notice.
The plans and any related agreements may not be amended to increase
materially the amount to be spent for distribution expenses without approval
by a majority of the outstanding shares of the class, and all material
amendments to the plans or any related agreements shall be approved by a vote
of the noninterested board members, cast in person at a meeting called for
the purpose of voting on any such amendment.
Distributors is required to report in writing to the board at least quarterly
on the amounts and purpose of any payment made under the plans and any
related agreements, as well as to furnish the board with such other
information as may reasonably be requested to enable the board to make an
informed determination of whether the plans should be continued.
For the fiscal year ended September 30, 1999, Distributors' eligible
expenditures for advertising, printing, payments
to underwriters and broker-dealers and other expenses pursuant to the plans
and the amounts the fund paid Distributors under the plans were:
DISTRIBUTORS' AMOUNT
ELIGIBLE PAID BY THE
EXPENSES ($) FUND ($)
- --------------------------------------------------------------
DynaTech Series - Class A 915,022 813,972
DynaTech Series - Class C 4 91,726 359,295
Growth Series - Class A 6,616,493 4,587,394
Growth Series - Class B 516,275 37,006
Growth Series - Class C 3,379,203 2,781,072
Income Series - Class A 9,769,395 1,463,010
Income Series - Class B 30,657 102,192
Income Series - Class C 4,978,510 1,784,806
Utilities Series - Class A 3,735,101 2,665,508
Utilities Series - Class B 82,824 5,895
Utilities Series - Class C 413,823 275,175
U.S. Government Securities Series
- -
Class A 10,106,994 8,824,836
U.S. Government Securities Series
- -
Class B 1,359,700 82,199
U.S. Government Securities Series
- -
Class C 2,821,627 1,897,327
PERFORMANCE
- -------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by a fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the funds
are based on the standardized methods of computing performance mandated by
the SEC. Performance figures reflect Rule 12b-1 fees from the date of the
plan's implementation. An explanation of these and other methods used by the
funds to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an
indication of the return to shareholders only for the limited historical
period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum initial sales charge is
deducted from the initial $1,000 purchase, and income dividends and capital
gain distributions are reinvested at net asset value. The quotation assumes
the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum initial sales charge currently in effect.
When considering the average annual total return quotations for Class A and C
shares, you should keep in mind that the maximum initial sales charge
reflected in each quotation is a one time fee charged on all direct
purchases, which will have its greatest impact during the early stages of
your investment. This charge will affect actual performance less the longer
you retain your investment in the fund. The average annual total returns for
the indicated periods ended September 30, 1999, were:
CLASS A 1 YEAR (%) 5 YEARS (%) 10 YEARS (%)
- -----------------------------------------------------------------
DynaTech Series 23.60 20.83 15.33
Growth Series 11.82 18.06 12.67
Income Series -0.25 8.29 10.11
Utilities Series -12.40 9.78 8.49
U.S. Government
Securities Series -3.24 6.63 7.18
SINCE INCEPTION
CLASS C 1 YEAR (%) INCEPTION (%) DATE
- -----------------------------------------------------------------
DynaTech Series 27.88 21.63 9/16/96
Growth Series 15.56 17.56 5/01/95
Income Series 1.64 8.55 5/01/95
Utilities Series -10.77 9.11 5/01/95
U.S. Government
Securities Series -1.43 6.07 5/01/95
The following SEC formula was used to calculate these figures:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, income dividends and capital gain distributions are
reinvested at net asset value, the account was completely redeemed at the end
of each period and the deduction of all applicable charges and fees.
Cumulative total return, however, is based on the actual return for a
specified period rather than on the average return over the periods indicated
above. The cumulative total returns for the indicated periods ended September
30, 1999, were:
CLASS A 1 YEAR (%) 5 YEARS (%) 10 YEARS
(%)
- -----------------------------------------------------------------
DynaTech Series 23.60 157.58 316.18
Growth Series 11.82 129.31 229.78
Income Series -0.25 48.91 161.95
Utilities Series -12.40 59.46 125.87
U.S. Government
Securities Series -3.24 37.87 99.96
SINCE
INCEPTION
CLASS B (1/01/99)
(%)
- -----------------------------------------------------------------
Growth Series 1.02
Income Series -3.46
Utilities Series -13.83
U.S. Government Securities Series -3.58
SINCE INCEPTION
CLASS C 1 YEAR (%) INCEPTION DATE
(%)
- -----------------------------------------------------------------
DynaTech Series 27.88 81.28 9/16/96
Growth Series 15.56 104.39 5/01/95
Income Series 1.64 43.69 5/01/95
Utilities Series -10.77 46.98 5/01/95
U.S. Government
Securities Series -1.43 29.72 5/01/95
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 applicable maximum offering price per share on the
last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders of the class during the
base period. The yields for the 30-day period ended September 30, 1999, were:
CLASS A YIELD
- ----------------------------------------------------------------
Income Series 7.91%
Utilities Series 4.66%
U.S. Government Securities Series 6.10%
CLASS C YIELD
- ----------------------------------------------------------------
Income Series 7.71%
Utilities Series 4.30%
U.S. Government Securities Series 5.78%
The following SEC formula was used to calculate these figures:
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 rates for the 30-day period ended September
30, 1999, were:
DISTRIBUTION
CLASS A RATE
- ---------------------------------------------------------------
Income Series 7.69%
Utilities Series 5.23%
U.S. Government Securities Series 6.08%
DISTRIBUTION
CLASS C RATE
- ---------------------------------------------------------------
Income Series 7.49%
Utilities Series 4.87%
U.S. Government Securities Series 5.76%
VOLATILITY Occasionally statistics may be used to show a fund's volatility or
risk. Measures of volatility or risk are generally used to compare a fund's
net asset value or performance to a market index. One measure of volatility
is beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities
in which the fund invests. A beta of more than 1.00 indicates volatility
greater than the market and a beta of less than 1.00 indicates volatility
less than the market. Another measure of volatility or risk is standard
deviation. Standard deviation is used to measure variability of net asset
value or total return around an average over a specified period of time. The
idea is that greater volatility means greater risk undertaken in achieving
performance.
OTHER PERFORMANCE QUOTATIONS A fund also may quote the performance of shares
without a sales charge. Sales literature and advertising may quote a
cumulative total return, average annual total return and other measures of
performance with the substitution of net asset value for the public offering
price.
Sales literature referring to the use of the funds as a potential investment
for IRAs, business retirement plans, and other tax-advantaged retirement
plans may quote a total return based upon compounding of dividends on which
it is presumed no federal income tax applies.
The funds may include in their advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of the Franklin Templeton Group of
Funds.
COMPARISONS To help you better evaluate how an investment in the funds may
satisfy your investment goal, advertisements and other materials about the
funds may discuss certain measures of fund performance as reported by various
financial publications. Materials also may compare performance (as calculated
above) to performance as reported by other investments, indices, and
averages. These comparisons may include, but are not limited to, the
following examples:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally leaders in their industry), the
Dow Jones Transportation Average (20 transportation stocks), and the Dow
Jones Utilities Average (15 utility stocks involved in the production of
electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an
unmanaged index of all industrial, utilities, transportation, and finance
stocks listed on the NYSE.
o Wilshire 5000 Equity Index - represents the return on the market value
of all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
o Financial publications: The Wall Street Journal, and Business Week,
Changing Times, Financial World, Forbes, Fortune, and Money magazines -
provide performance statistics over specified time periods.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessmentof the historical risk-adjusted performance of
a fund over specified time periods relative to other funds within its
category.
In addition to the indices listed above, the following specific comparisons
may be appropriate:
Utilities Series may be compared to Moody's Utilities Stock Index, an
unmanaged index of utility stock performance.
DynaTech Series may be compared to:
o Hambrecht & Quist Technology Index - an unmanaged index of
technology-based companies published by Hambrecht & Quist.
o Pacific Stock Exchange Technology Index - an unmanaged index
representing a wide variety of technology-based companies ranging from
established companies to emerging growth companies.
o Over-the-Counter (OTC) Composite Stock Index - an unmanaged index of
stock performance of all stocks listed in the OTC market.
Income Series and U.S. Government Securities Series may be compared to:
o Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.
o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o Standard & Poor's(R) Bond Indices - measures yield and price of corporate,
municipal and government bonds.
o Other taxable investments including certificates of deposit (CDs), money
market deposit accounts (MMDAs), checking accounts, savings accounts, money
market mutual funds and repurchase agreements.
From time to time, advertisements or information for the funds may include a
discussion of certain attributes or benefits to be derived from an investment
in the funds. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
1. Franklin pioneered the concept of Ginnie Mae funds, and U.S. Government
Securities Series, with over $9.3 billion in assets and more than 424,000
shareholders as of September 30, 1998, is one of the largest Ginnie Mae funds
in the U.S. and the world. Shareholders in this fund, which has a history of
solid performance, range from individual investors with a few thousand
dollars to institutions that have invested millions of dollars.
U.S. Government Securities Series offers investors the opportunity to invest
in Ginnie Maes, which are among the highest yielding U.S. government
securities on the market.
2. Advertisements or information also may compare the funds' performance to
the return on certificates of deposit (CDs) or other investments. You should
be aware, however, that an investment in a fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, if any, as well as
the value of its shares that are based upon the value of such portfolio
investments, can be expected to fall. Conversely, when interest rates
decrease, the value of the fund's shares can be expected to increase. CDs are
frequently insured by an agency of the U.S. government. An investment in a
fund is not insured by any federal, state or private entity.
3. Utilities Series has paid uninterrupted dividends for the past 49 years.
Over the life of Utilities Series, dividends have increased in 28 of the last
49 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 1990.
4. Income Series has paid uninterrupted dividends for the past 49 years.
5. Growth Series offers investors a convenient way to invest in a diversified
portfolio focusing on companies with long-term growth prospects.
6. Growth Series made the 1990, 1991 and 1996 Forbes Mutual Fund Honor Roll
for its performance in both up and down markets.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the funds' portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the funds to calculate its figures. In
addition, there can be no assurance that the funds will continue their
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
- -------------------------------------------------------------------------------
The funds may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis to have a
projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by
the College Board.) The Franklin Retirement Planning Guide leads you through
the steps to start a retirement savings program. Of course, an investment in
a fund cannot guarantee that these goals will be met.
Each fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of
the oldest mutual fund organizations and now services approximately 3 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined
forces with Templeton, a pioneer in international investing. The Mutual
Series team, known for its value-driven approach to domestic equity
investing, became part of the organization four years later. Together, the
Franklin Templeton Group has over $224 billion in assets under management for
more than 5 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 103 U.S. based open-end
investment companies to the public. Each fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the funds are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has been
making necessary software changes to help the computer systems that service
the fund and its shareholders to be Year 2000 compliant. After completing
these modifications, comprehensive tests are conducted in one of Resources'
U.S. test labs to verify their effectiveness. Resources continues to seek
reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources
is also developing a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice
and data lines are limited.
DESCRIPTION OF RATINGS
- -------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A: Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP (S&P(R))
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC
the highest degree of speculation. While these bonds will likely have some
quality and protective characteristics, they are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating also may 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 for both
short-term debt and commercial paper, all judged to be investment grade, to
indicate the relative repayment capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FRANKLIN
CUSTODIAN FUNDS, INC.
GROWTH SERIES
INCOME SERIES
UTILITIES SERIES
U.S. GOVERNMENT SECURITIES SERIES
ADVISOR CLASS
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 1, 2000
[Insert Franklin Templeton Ben Head]
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
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This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the funds' prospectus.
The funds' prospectus, dated February 1, 2000, which we may amend from time
to time, contains the basic information you should know before investing in a
fund. You should read this SAI together with the funds' prospectus.
The audited financial statements and auditor's report in the Franklin
Custodian Funds, Inc.'s (Custodian Funds) Annual Report to Shareholders, for
the fiscal year ended September 30, 1999, are incorporated by reference (are
legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call
1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies .................. 2
Risks ................................. 10
Officers and Directors ................ 13
Management and Other Services ......... 15
Portfolio Transactions ................ 16
Distributions and Taxes ............... 17
Organization, Voting Rights
and Principal Holders ................ 19
Buying and Selling Shares ............. 20
Pricing Shares ........................ 23
The Underwriter ....................... 23
Performance ........................... 24
Miscellaneous Information ............. 26
Description of Ratings ................ 27
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
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GOALS AND STRATEGIES
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GROWTH SERIES The fund's investment goal is capital appreciation. This goal
is fundamental, which means it may not be changed without shareholder
approval.
The fund will normally invest most of its assets in the equity securities of
companies that are leaders in their industries. The fund's manager looks for
securities it believes offer favorable possibilities for capital appreciation
and these securities may yield little or no current income. Current income is
only a secondary consideration when selecting portfolio investments.
The fund's assets may be invested in shares of common stock traded on any
national securities exchange or issued by a corporation, association or
similar legal entity with total assets of at least $1,000,000, according to
its latest published annual report. The fund's assets may also be invested in
bonds or preferred stock convertible into shares of common stock listed for
trading on a national securities exchange or held in cash or cash equivalents.
The fund may invest in smaller capitalization companies, which generally are
those with a market capitalization of less than $1.5 billion at the time of
the fund's investment.
INCOME SERIES The fund's investment goal is to maximize income while
maintaining prospects for capital appreciation. This goal is fundamental,
which means it may not be changed without shareholder approval.
The fund will normally invest in a diversified portfolio of equity
securities, debt securities and cash equivalents.
The fund's assets may be invested in securities traded on any national
securities exchange or issued by a corporation, association or similar legal
entity with total assets of at least $1,000,000, according to its latest
published annual report, or held in cash or cash equivalents. The fund may
also invest in preferred stocks. The fund may invest in debt securities
regardless of their rating or in securities that are unrated, including up to
5% of its assets in securities that are in default at the time of purchase.
The fund generally invests in securities rated at least Caa by Moody's
Investors Service, Inc. (Moody's) or CCC by Standard & Poor's Corporation
(S&P) or unrated securities the fund's manager determines are comparable.
Unrated debt securities are not necessarily of lower quality than rated
securities, but they may not be as attractive to as many buyers.
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. The fund may also buy debt securities of issuers that are not
currently paying interest, as well as issuers who are in default, and may
keep an issue that has defaulted. The fund will buy defaulted debt securities
if, in the opinion of the manager, they may present an opportunity for later
price recovery, the issuer may resume interest payments, or other
advantageous developments appear likely in the near future. In general,
securities that default lose much of their value before the actual default so
that the security, and thus the fund's net asset value, would be impacted
before the default. Defaulted debt securities may be illiquid and, as such,
will be part of the 10% limit discussed under "Illiquid securities."
There are no restrictions as to the proportion of investments that may be
made in a particular type of security and the determination is entirely
within the manager's discretion. 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.
UTILITIES SERIES The fund's investment goals are capital appreciation and
current income. These goals are fundamental, which means they may not be
changed without shareholder approval.
The fund will normally invest substantially all of its assets in the
securities of public utilities companies. 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. At least 65%
of the fund's investments will be in the securities of issuers engaged in the
public utilities industry. The manager expects that more than 50% of the
fund's assets will be invested in electric utilities securities.
The fund invests primarily in common stocks, including, from time to time,
non-dividend paying common stocks if, in the opinion of the manager, these
securities appear to offer attractive opportunities for capital appreciation.
When buying fixed-income debt securities, the fund may invest in securities
regardless of their rating depending upon prevailing market and economic
conditions, including securities in the lowest rating categories and unrated
securities. Most of the fund's investments, however, are rated at least Baa
by Moody's or BBB by S&P. These ratings represent the opinions of the rating
services with respect to the securities and are not absolute standards of
quality. They will be considered in connection with the investment of the
fund's assets but will not be a determining or limiting factor. Please see
the appendix for a discussion of the ratings.
With respect to unrated securities, it is also the fund's intent to buy
securities that, in the view of the manager, would be comparable in quality
to the fund's rated securities and have been determined to be consistent with
the fund's objectives without exposing the fund to excessive risk. The fund
will not buy issues that are in default or that the manager believes involve
excessive risk.
U.S. GOVERNMENT SECURITIES SERIES The fund's investment goal is income. This
goal is fundamental, which means it may not be changed without shareholder
approval.
The fund invests in a portfolio limited to U.S. government securities and
repurchase agreements collateralized by U.S. government securities. U.S.
government securities include U.S. Treasury bonds, notes and bills, U.S.
Treasury STRIPS and securities issued by U.S. government agencies. Other than
investments in short term government securities and cash, substantially all
of the fund's investments are currently held in Government National Mortgage
Association obligations (Ginnie Maes). Ginnie Maes have historically paid
higher current yields than other types of U.S. government securities with
comparable maturities. These higher yields compensate investors for the
higher risks involved.
The fund will buy Ginnie Maes whose principal and interest are guaranteed.
The fund also buys adjustable rate Ginnie Maes and other types of securities
that may be issued with the guarantee of the Government National Mortgage
Association. Ginnie Maes differ from other bonds in that principal may be
paid back on an unscheduled basis rather than returned in a lump sum at
maturity. Payments to holders of Ginnie Maes consist of monthly distributions
of interest and principal less the Government National Mortgage Association's
and issuers' fees.
The Government National Mortgage Association's guarantee of payment of
principal and interest on Ginnie Maes is backed by the full faith and credit
of the U.S. government. The Government National Mortgage 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 Ginnie Maes or the net asset value or performance of the fund,
which will fluctuate daily with market conditions. The fund's manager
monitors the fund's investments and changes are made as market conditions
warrant. The fund does not, however, engage in the trading of securities for
the purpose of realizing short-term profits.
Ginnie Maes and the other securities included in U.S. Government Securities
Series' portfolio have historically involved little risk to principal if held
to maturity. However, due to fluctuations in interest rates, the market value
of such securities may vary during the period of a shareholder's investment
in the fund. The 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.
The following is a description of the various types of securities the funds
may buy.
EQUITY SECURITIES represent a proportionate share of the ownership of the
company; their value is based on the success of the company's business and
the value of its assets, as well as general market conditions. The purchaser
of an equity security typically receives an ownership interest in the company
as well as certain voting rights. The owner of an equity security may
participate in a company's success through the receipt of dividends, which
are distributions of earnings by the company to its owners. Equity security
owners may also participate in a company's success or lack of success through
increases or decreases in the value of the company's shares as traded in the
public trading market for such shares. Equity securities generally take the
form of common stock or preferred stock, as well as securities convertible
into common stocks. Preferred stockholders typically receive greater
dividends but may receive less appreciation than common stockholders and may
have greater voting rights as well. Equity securities may also include
convertible securities, warrants, or rights. Warrants or rights give the
holder the right to buy a common stock at a given time for a specified price.
DEBT SECURITIES A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it
declares and pays any dividend to holders of its equity securities. Bonds,
notes, and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's net asset value per share.
RATINGS. Various investment services publish ratings of some of the debt
securities in which the funds may invest. Higher yields are ordinarily
available from securities in the lower rating categories, such as securities
rated Ba or lower by Moody's or BB or lower by S&P or from unrated securities
deemed by a fund's manager to be of comparable quality. These ratings
represent the opinions of the rating services with respect to the issuer's
ability to pay interest and repay principal. They do not purport to reflect
the risk of fluctuations in market value and are not absolute standards of
quality. Please see the appendix for a discussion of the ratings.
If the rating on an issue held in a fund's portfolio is changed by the rating
service or the security goes into default, this event will be considered by
the fund in its evaluation of the overall investment merits of that security
but will not generally result in an automatic sale of the security.
ZERO COUPON AND PAY-IN-KIND BONDS Income Series may buy certain bonds issued
at a discount that defer the payment of interest or pay no interest until
maturity, known as zero coupon bonds, or which pay interest through the
issuance of additional bonds, known as pay-in-kind bonds. For federal tax
purposes, holders of these bonds, such as the fund, are deemed to receive
interest over the life of the bonds and are taxed as if interest were paid on
a current basis although no cash interest payments are in fact received by
the holder until the bonds mature. See "Risks - High yield securities risk"
for more information about these bonds.
LOAN PARTICIPATIONS Income Series may invest up to 5% of its assets in loan
participations and other related direct or indirect bank obligations. These
instruments are interests in floating or variable rate senior loans to U.S.
corporations, partnerships and other entities. While loan participations
generally trade at par value, the fund will also be able to acquire loan
participations that sell at a discount because of the borrower's credit
problems. To the extent the borrower's credit problems are resolved, the loan
participation may appreciate in value. The manager may acquire loan
participations for the fund when it believes that over the long term
appreciation will occur. Most loan participations are illiquid and, to that
extent, will be included in the 10% limitation described under "Illiquid
securities."
Loan participations are interests in floating or variable rate senior loans
(Loans) to U.S. corporations, partnerships and other entities (Borrowers)
which operate in a variety of industries and geographical regions. An
investment in these securities, however, carries substantially the same risks
as those for defaulted debt securities. Interest payments on these securities
may be reduced, deferred, suspended or eliminated and principal payments may
likewise be reduced, deferred, suspended or canceled, causing the loss of the
entire amount of the investment. Loans will generally be acquired by Income
Series from a bank, finance company or other similar financial services
entity (Lender).
Loans in which Income Series will purchase participation interests may pay
interest at rates which are periodically redetermined on the basis of a base
lending rate plus a premium. These base lending rates are generally the Prime
Rate offered by a major U.S. bank, the London Inter-Bank Offered Rate, the CD
rate or other base lending rates used by commercial lenders. The Loans
typically have the most senior position in a Borrower's capital structure,
although some Loans may hold an equal ranking with other senior securities of
the Borrower. Although the Loans generally are secured by specific
collateral, Income Series may invest in Loans which are not secured by any
collateral. Uncollateralized Loans pose a greater risk of nonpayment of
interest or loss of principal than do collateralized Loans. The collateral
underlying a collateralized Loan may consist of assets that may not be
readily liquidated, and there is no assurance that the liquidation of such
assets would satisfy fully a Borrower's obligations under a Loan. Income
Series is not subject to any restrictions with respect to the maturity of the
Loans in which it purchases participation interests.
The Loans generally are not rated by nationally recognized statistical rating
organizations. Ratings of other securities issued by a Borrower do not
necessarily reflect adequately the relative quality of a Borrower's Loans.
Therefore, although the manager may consider such ratings in determining
whether to invest in a particular Loan, such ratings, will not be the
determinative factor in the manager's analysis.
The Loans are not readily marketable and may be subject to restrictions on
resale. Participation interests in the Loans generally are not listed on any
national securities exchange or automated quotation system and no regular
market has developed for such interests. Any secondary purchases and sales of
loan participations generally are conducted in private transactions between
buyers and sellers. Many of the Loans in which the Income Series expects to
purchase interests are of a relatively large principal amount and are held by
a relatively large number of owners which, in the 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.
TRADE CLAIMS Income Series may invest a portion of its assets in trade
claims. Trade claims are purchased from creditors of companies in financial
difficulty. For buyers, such as the fund, trade claims offer the potential
for profits since they are often purchased at a significantly discounted
value and, consequently, may generate capital appreciation if the value of
the claim increases as the debtor's financial position improves. If the
debtor is able to pay the full obligation on the face of the claim as a
result of a restructuring or an improvement in the debtor's financial
condition, trade claims offer the potential for higher income due to the
difference in the face value of the claim as compared to the discounted
purchase price.
An investment in trade claims is speculative and carries a high degree of
risk. There can be no guarantee that the debtor will ever be able to satisfy
the obligation on the trade claim. Trade claims are not regulated by federal
securities laws or the Securities and Exchange Commission. Currently, trade
claims are regulated primarily by bankruptcy laws. Because trade claims are
unsecured, holders of trade claims may have a lower priority in terms of
payment than most other creditors in a bankruptcy proceeding. In light of the
nature and risk of trade claims, the fund's investment in these instruments
will not exceed 5% of its net assets at the time of acquisition.
FOREIGN SECURITIES U.S. Government Securities Series may not buy securities
of foreign issuers. Income Series may invest up to 25% of its assets in
foreign securities and Growth Series and Utilities Series may invest without
restriction in foreign securities, if the investments are consistent with
their goals and comply with their concentration and diversification policies.
The funds will ordinarily buy foreign securities that are traded in the U.S.
or buy American Depositary Receipts, which are certificates issued by U.S.
banks representing the right to receive securities of a foreign issuer
deposited with that bank or a correspondent bank. The funds may also buy the
securities of foreign issuers directly in foreign markets. Utilities Series
presently has no intention of investing more than 10% of their net assets in
foreign securities not publicly traded in the U.S. Growth Series presently
has no intention of investing more than 25% of its net assets in foreign
securities not publicly traded in the U.S. Investments in foreign securities
where delivery takes place outside the U.S. will be made in compliance with
any applicable U.S. and foreign currency restrictions and tax and other laws
limiting the amount and types of foreign investments. Changes of governmental
administrations or economic or monetary policies in the U.S. or abroad,
changed circumstances in dealings between nations, or changes in currency
convertibility or exchange rates could result in investment losses for a fund.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Securities that are acquired by a fund outside the U.S. and that are publicly
traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered by the fund to be illiquid assets so
long as the fund acquires and holds the securities with the intention of
reselling them in the foreign trading market, the fund reasonably believes it
can readily dispose of the securities for cash in the U.S. or a foreign
market, and current market quotations are readily available.
DEPOSITARY RECEIPTS American Depositary Receipts (ADRs) are typically issued
by a U.S. bank or trust company and evidence ownership of underlying
securities issued by a foreign corporation. European Depositary Receipts
(EDRs) and Global Depositary Receipts (GDRs) are typically issued by foreign
banks or trust companies, although they may be issued by U.S. banks or trust
companies, and evidence ownership of underlying securities issued by either a
foreign or a U.S. corporation. Generally, depositary receipts in registered
form are designed for use in the U.S. securities market and depositary
receipts in bearer form are designed for use in securities markets outside
the U.S. Depositary receipts may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted.
Depositary receipts may be issued pursuant to sponsored or unsponsored
programs. In sponsored programs, an issuer has made arrangements to have its
securities traded in the form of depositary receipts. In unsponsored
programs, the issuer may not be directly involved in the creation of the
program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs,
and there may not be a correlation between such information and the market
value of the depositary receipts.
Depositary receipts also involve the risks of other investments in foreign
securities, as discussed below. For purposes of the fund's investment
policies, the fund will consider its investments in depositary receipts to be
investments in the underlying securities.
CONVERTIBLE SECURITIES Each fund, except U.S. Government Securities Series,
may invest in convertible securities. A convertible security is generally a
debt obligation or preferred stock that may be converted within a specified
period of time into a certain amount of common stock of the same or a
different issuer. A convertible security provides a fixed-income stream and
the opportunity, through its conversion feature, to participate in the
capital appreciation resulting from a market price advance in its underlying
common stock. As with a straight fixed-income security, a convertible
security tends to increase in market value when interest rates decline and
decrease in value when interest rates rise. Like a common stock, the value of
a convertible security also tends to increase as the market value of the
underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both
interest rate and market movements, a convertible security is not as
sensitive to interest rates as a similar fixed-income security, nor is it as
sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by
an investment bank. When issued by an operating company, a convertible
security tends to be senior to common stock, but subordinate to other types
of fixed-income securities issued by that company. When a convertible
security issued by an operating company is "converted," the operating company
often issues new stock to the holder of the convertible security but, if the
parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the
convertible security is issued by an investment bank, the security is an
obligation of and is convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the fund's financial
reporting, credit rating, and investment limitation purposes. A preferred
stock is subordinated to all debt obligations in the event of insolvency, and
an issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred stock
generally has no maturity date, so that its market value is dependent on the
issuer's business prospects for an indefinite period of time. In addition,
distributions from preferred stock are dividends, rather than interest
payments, and are usually treated as such for corporate tax purposes.
ENHANCED CONVERTIBLE SECURITIES The funds, other than the U.S. Government
Securities Series, may invest in convertible preferred stocks that offer
enhanced yield features, such as Preferred Equity Redemption Cumulative
Stocks (PERCS), which provide an investor, such as the fund, with the
opportunity to earn higher dividend income than is available on a company's
common stock. PERCS are preferred stocks that generally feature a mandatory
conversion date, as well as a capital appreciation limit which is usually
expressed in terms of a stated price. Most PERCS expire three years from the
date of issue, at which time they are convertible into common stock of the
issuer. PERCS are generally not convertible into cash at maturity. Under a
typical arrangement, after three years PERCS convert into one share of the
issuer's common stock if the issuer's common stock is trading at a price
below that set by the capital appreciation limit, and into less than one full
share if the issuer's common stock is trading at a price above that set by
the capital appreciation limit. The amount of that fractional share of common
stock is determined by dividing the price set by the capital appreciation
limit by the market price of the issuer's common stock. PERCS can be called
at any time prior to maturity, and hence do not provide call protection. If
called early, however, the issuer must pay a call premium over the market
price to the investor. This call premium declines at a preset rate daily, up
to the maturity date.
The funds (except U.S. Government Securities Series) may also invest in other
classes of enhanced convertible securities. These include but are not limited
to ACES (Automatically Convertible Equity Securities), PEPS (Participating
Equity Preferred Stock), PRIDES (Preferred Redeemable Increased Dividend
Equity Securities), SAILS (Stock Appreciation Income Linked Securities),
TECONS (Term Convertible Notes), QICS (Quarterly Income Cumulative
Securities) and DECS (Dividend Enhanced Convertible Securities). ACES, PEPS,
PRIDES, SAILS, TECONS, QICS and DECS all have the following features: they
are issued by the company, the common stock of which will be received in the
event the convertible preferred stock is converted; unlike PERCS, they do not
have a capital appreciation limit; they seek to provide the investor with
high current income with some prospect of future capital appreciation; they
are typically issued with three or four-year maturities; they typically have
some built-in call protection for the first two to three years; investors
have the right to convert them into shares of common stock at a preset
conversion ratio or hold them until maturity, and upon maturity they will
necessarily convert into either cash or a specified number of shares of
common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked
as senior or subordinated debt in the issuer's corporate structure according
to the terms of the debt indenture. There may be additional types of
convertible securities not specifically referred to herein which may be also
similar to those described in which a fund may invest, consistent with its
objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the fund. The fund may have difficulty disposing
of such securities because there may be a thin trading market for a
particular security at any given time. Reduced liquidity may have an adverse
impact on market price and the fund's ability to dispose of particular
securities, when necessary, to meet the fund's liquidity needs or in response
to a specific economic event, such as the deterioration in the
creditworthiness of an issuer. Reduced liquidity in the secondary market for
certain securities may also make it more difficult for the fund to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio. The fund, however, intends to acquire liquid securities, though
there can be no assurances that this will be achieved. U.S. Government
Securities Series does not invest in convertible preferred stocks.
STRIPPED SECURITIES U.S. Government Securities Series may buy stripped
securities that are issued or guaranteed by the U.S. Treasury or by an agency
or instrumentality of the U.S. government. Stripped securities are the
separate income and principal components of a debt security. U.S. Treasury
STRIPS (Separate Trading of Registered Interest and Principal of Securities)
are considered U.S. Treasury securities for purposes of the fund's investment
policies. Once the securities have been stripped they are referred to as zero
coupon securities. Their risks are similar to those of other U.S. government
securities, although they may be more volatile and the value of certain types
of stripped securities may move in the same direction as interest rates.
Stripped securities do not make periodic payments of interest prior to
maturity and the stripping of the interest coupons causes them to be offered
at a discount from their face amount. This results in the security being
subject to greater fluctuations in response to changing interest rates than
interest-paying securities of similar maturities.
WHEN-ISSUED, DELAYED DELIVERY AND TO-BE-ANNOUNCED (TBA) TRANSACTIONS Income
Series may buy debt obligations and U.S. Government Securities Series may buy
and sell Ginnie Mae certificates on a "when-issued," "delayed delivery" or
"TBA" 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 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 the funds will generally purchase these securities on
a when-issued or TBA basis with the intention of acquiring such securities,
they may sell such securities before the settlement date if it is deemed
advisable. When a fund is the buyer in such a transaction, it will maintain,
in a segregated account with its custodian bank, cash or high-grade
marketable securities having an aggregate value equal to the amount of such
purchase commitments until payment is made. To the extent the fund engages in
when-issued, delayed delivery or TBA transactions, it will do so only for the
purpose of acquiring portfolio securities consistent with the fund's
investment objectives and policies, and not for the purpose of investment
leverage. In when-issued, delayed delivery and TBA transactions, the fund
relies on the seller to complete the transaction. The other party's failure
to do so may cause the fund to miss a price or yield considered advantageous.
Securities purchased on a when-issued, delayed delivery or TBA basis do not
generally earn interest until their scheduled delivery date. Neither fund is
subject to any percentage limit on the amount of its assets which may be
invested in when-issued, delayed delivery or TBA purchase obligations.
ILLIQUID SECURITIES Each fund, other than U.S. Government Securities Series,
may invest in securities that cannot be offered to the public for sale
without first being registered under the Securities Act of 1933 (restricted
securities), or in other securities which, in the opinion of the board of
directors, may be otherwise illiquid. Illiquid equity securities will not be
purchased if, upon such purchase, such securities will constitute 5%{10%?} of
the value of the total net assets of a fund.
It is also the policy of each fund that illiquid securities may not
constitute, at the time of purchase, more than 10% of the value of the total
net assets of the fund in which they are held. Illiquid securities are
generally securities that cannot be sold within seven days in the normal
course of business at approximately the amount at which the fund has valued
them. Subject to this limitation, Custodian Funds' board of directors has
authorized each fund, except U.S. Government Securities Series, to invest in
restricted securities where such investment is consistent with each fund's
investment objective and has authorized such securities to be considered
liquid to the extent the investment manager determines on a daily basis that
there is a liquid institutional or other market for such securities - for
example, restricted securities which may be freely transferred among
qualified institutional buyers pursuant to Rule 144A under the Securities Act
of 1933, as amended, and for which a liquid institutional market has
developed. Notwithstanding the managers' determinations in this regard, the
board of directors will remain responsible for such determinations and will
consider appropriate action, consistent with the fund's goals and policies,
if the security should become illiquid after purchase. In determining whether
a restricted security is properly considered a liquid security, the
investment manager and the board of directors will take into account the
following factors: (i) the frequency of trades and quotes for the security;
(ii) the number of dealers willing to purchase or sell the security and the
number of other potential purchasers; (iii) dealer undertakings to make a
market in the security; and (iv) the nature of the security and the nature of
the marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). To the extent a
fund invests in restricted securities that are deemed liquid, the general
level of illiquidity in the fund may be increased if qualified institutional
buyers become uninterested in purchasing these securities or the market for
these securities contracts.
REPURCHASE AGREEMENTS Each fund generally will have a portion of its assets
in cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, each fund may enter into repurchase
agreements. Under a repurchase agreement, the fund agrees to buy securities
guaranteed as to payment of principal and interest by the U.S. government or
its agencies from a qualified bank or broker-dealer and then to sell the
security back to the bank or broker-dealer after a short period of time
(generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the fund's custodian securities with an
initial market value of at least 102% of the dollar amount invested by the
fund in each repurchase agreement. The manager will monitor the value of such
securities daily to determine that the value equals or exceeds the repurchase
price.
Repurchase agreements may involve risks in the event of default or insolvency
of the bank or broker-dealer, including possible delays or restrictions upon
the funds' ability to sell the underlying securities. The funds will enter
into repurchase agreements only with parties who meet certain
creditworthiness standards, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES To generate additional income, each fund,
except U.S. Government Securities Series, may lend certain of its portfolio
securities to qualified banks and broker-dealers. These loans may not exceed
10% of the value of the fund's total assets, measured at the time of the most
recent loan. For each loan, the borrower must maintain with the funds'
custodian collateral (consisting of any combination of cash, securities
issued by the U.S. government and its agencies and instrumentalities, or
irrevocable letters of credit) with a value at least equal to 102% of the
current market value of the loaned securities. The funds retain all or a
portion of the interest received on investment of the cash collateral or
receive a fee from the borrower. The funds also continue to receive any
distributions paid on the loaned securities. The funds may terminate a loan
at any time and obtain the return of the securities loaned within the normal
settlement period for the security involved.
Where voting rights with respect to the loaned securities pass with the
lending of the securities, the manager intends to call the loaned securities
to vote proxies, or to use other practicable and legally enforceable means to
obtain voting rights, when the manager has knowledge that, in its opinion, a
material event affecting the loaned securities will occur or the manager
otherwise believes it necessary to vote. As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in collateral in
the event of default or insolvency of the borrower. The funds will loan their
securities only to parties who meet creditworthiness standards approved by
the funds' board of directors, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the loan.
OPTIONS Each fund, except U.S. Government Securities Series, may write
covered call options that trade on national securities exchanges. A call
option gives the purchaser of the option the right to buy the security from
the writer of the option at a set price during the term of the option. A call
option is "covered" if the option writer owns the underlying security which
is subject to the call or a call on the same security where the exercise
price of the call held is equal to or less than the exercise price of the
call written.
A fund receives a premium when it writes a call option. A decline in the
price of the security during the option period would offset the amount of the
premium. If a call option a fund has written is exercised, the fund incurs a
profit or loss from the sale of the underlying security. The writer of a call
option may have no control over when the underlying securities must be sold
since, with regard to certain options, the writer may be assigned an exercise
notice at any time prior to the termination of the obligation. The risks
associated with covered call writing are that in the event of a price
increase on the underlying security, which would likely trigger the exercise
of the call option, the fund will not participate in the increase in price
beyond the exercise price of the option.
A fund generally may terminate its obligation under an option by entering
into a closing purchase transaction. This is accomplished by buying an option
identical to the option previously written. However, a writer may not effect
a closing purchase transaction after being notified of the exercise of an
option. There is no guarantee that a closing purchase will be available to be
effected at the time desired by the fund. If a fund desires to sell a
particular security from its portfolio on which it has written a call option,
it will effect a closing transaction prior to or concurrent with the sale of
the security.
When a fund has written an option, the fund will realize a profit from a
closing transaction if the price of the transaction is less than the premium
and will realize a loss if the price is more than the premium. Because
increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the repurchase of a call option is likely to be offset in whole or in
part by appreciation of the underlying security owned by the fund until the
time of repurchase. Thereafter, the fund bears the risk of the security's
rise or fall in market value unless it sells the security.
The managers of the funds do not currently intend to write options which
would cause the market value of any fund's open options to exceed 5% of the
fund's total net assets. There is no specific limitation on a fund's ability
to write covered call options. However, as a practical matter, the fund's
option writing activities may be limited by federal regulations. As of the
fiscal year ended September 30, 1999, there were no open options transactions
in any fund. U.S. Government Securities Series does not presently engage in
option transactions, as discussed in investment restriction 10, below.
Transactions in options are generally considered "derivative securities."
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest each fund's
portfolio in a temporary defensive manner. Under such circumstances, each
fund may invest up to 100% of its assets in U.S. government securities,
bankers' acceptances and high-grade commercial paper issued by domestic
corporations, commercial bank deposits, or other cash equivalents, provided
such investments are otherwise permissible investments for the fund.
INVESTMENT RESTRICTIONS Custodian Funds has adopted the following
restrictions as fundamental policies. This means they may only be changed if
the change is approved by (i) more than 50% of Custodian Funds' outstanding
shares or (ii) 67% or more of Custodian Funds' shares present at a
shareholder meeting if more than 50% of Custodian Funds' outstanding shares
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 under "Loans of portfolio securities."
For additional information relating to this policy see discussions under
"Loan participations" and "Illiquid securities."
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.
Growth and Utilities Series may also be subject to investment limitations
imposed by foreign jurisdictions in which the funds sell their shares.
If a bankruptcy or other extraordinary event occurs concerning a particular
security a fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
RISKS
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The value of your shares will increase as the value of the securities owned
by the fund increases and will decrease as the value of the fund's
investments decrease. In this way, you participate in any change in the value
of the securities owned by the fund. In addition to the factors that affect
the value of any particular security that the fund owns, the value of fund
shares may also change with movements in the stock and bond markets as a
whole.
INTEREST RATE To the extent a fund invests in debt securities, changes in
interest rates in any country where the fund is invested will affect the
value of the fund's portfolio and its share price. Rising interest rates,
which often occur during times of inflation or a growing economy, are likely
to have a negative effect on the value of the fund's shares. Of course,
interest rates throughout the world have increased and decreased, sometimes
very dramatically, in the past. These changes are likely to occur again in
the future at unpredictable times.
HIGH YIELD SECURITIES Income Series may invest up to 100% of its net assets
in non-investment grade securities. Because the fund may invest in securities
below investment grade, an investment in the fund is subject to a higher
degree of risk than an investment in a fund that invests primarily in
higher-quality securities. You should consider the increased risk of loss to
principal that is present with an investment in higher risk securities, such
as those in which the fund invests. Accordingly, an investment in the fund
should not be considered a complete investment program and should be
carefully evaluated for its appropriateness in light of your overall
investment needs and goals.
Utilities Series may also invest a portion of its assets in non-investment
grade securities.
The market value of high yield, lower-quality fixed-income securities,
commonly known as junk bonds, tends to reflect individual developments
affecting the issuer to a greater degree than the market value of
higher-quality securities, which react primarily to fluctuations in the
general level of interest rates. Lower-quality securities also tend to be
more sensitive to economic conditions than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them.
Therefore, the risk associated with buying the securities of these issuers is
generally greater than the risk associated with higher-quality securities.
For example, during an economic downturn or a sustained period of rising
interest rates, issuers of lower-quality securities may experience financial
stress and may not have sufficient cash flow to make interest payments. The
issuer's ability to make timely interest and principal payments may also be
adversely affected by specific developments affecting the issuer, including
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the fund's portfolio defaults, the fund may have unrealized losses on the
security, which may lower the fund's net asset value. Defaulted securities
tend to lose much of their value before they default. Thus, the fund's net
asset value may be adversely affected before an issuer defaults. In addition,
the fund may incur additional expenses if it must try to recover principal or
interest payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three
to five years from the date of issue, if an issuer calls its securities
during periods of declining interest rates, the manager may find it necessary
to replace the securities with lower-yielding securities, which could result
in less net investment income for the fund. The premature disposition of a
high yield security due to a call or buy-back feature, the deterioration of
an issuer's creditworthiness, or a default by an issuer may make it more
difficult for the fund to manage the timing of its income. Under the Internal
Revenue Code and U.S. Treasury regulations, the fund may have to accrue
income on defaulted securities and distribute the income to shareholders for
tax purposes, even though the fund is not currently receiving interest or
principal payments on the defaulted securities. To generate cash to satisfy
these distribution requirements, the fund may have to sell portfolio
securities that it otherwise may have continued to hold or use cash flows
from other sources, such as the sale of fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse
impact on market price of a security and on the fund's ability to sell a
security in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, or if necessary to meet the fund's
liquidity needs. Reduced liquidity may also make it more difficult to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio.
The fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry
restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if the fund is required to sell restricted securities before
the securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The fund may also incur special costs in
disposing of restricted securities, although the fund will generally not
incur any costs when the issuer is responsible for registering the securities.
The fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. The manager will carefully review their credit and other
characteristics. The fund has no arrangement with its underwriter or any
other person concerning the acquisition of these securities.
The high yield securities market is relatively new and much of its growth
before 1990 paralleled a long economic expansion. The recession that began in
1990 disrupted the market for high yield securities and adversely affected
the value of outstanding securities, as well as the ability of issuers of
high yield securities to make timely principal and interest payments.
Although the economy has improved and high yield securities have performed
more consistently since that time, the adverse effects previously experienced
may recur. For example, the highly publicized defaults on some high yield
securities during 1989 and 1990 and concerns about a sluggish economy that
continued into 1993 depressed the prices of many of these securities. While
market prices may be temporarily depressed due to these factors, the ultimate
price of any security generally reflects the true operating results of the
issuer. Factors adversely impacting the market value of high yield securities
may lower the fund's net asset value. The fund relies on the manager's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer. In this evaluation, the manager takes into consideration, among other
things, the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of the issuer's
management and regulatory matters.
The credit risk factors above also apply to lower-quality zero coupon,
deferred interest and pay-in-kind securities. These securities have an
additional risk, however, because unlike securities that pay interest
throughout the time until maturity, the fund will not receive any cash until
the cash payment date. If the issuer defaults, the fund may not obtain any
return on its investment.
Zero coupon or deferred interest securities are debt obligations that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the cash payment date), and
therefore are generally issued and traded at a discount from their face
amount or par value. The discount varies depending on the time remaining
until maturity or the cash payment date, as well as prevailing interest
rates, liquidity of the security, and the perceived credit quality of the
issuer. The discount, in the absence of financial difficulties of the issuer,
typically decreases as the final maturity or cash payment date approaches.
The value of zero coupon securities is generally more volatile than the value
of other fixed-income securities that pay interest periodically. Zero coupon
securities are also likely to respond to changes in interest rates to a
greater degree than other fixed-income securities having similar maturities
and credit quality. The fund is not limited in the amount of its assets that
may be invested in these types of securities.
Certain of the high yielding, fixed-income securities in which the funds may
invest may be purchased at a discount. When held to maturity or retired,
these securities may include an element of capital gain. Capital losses may
be realized when securities purchased at a premium, that is, in excess of
their stated or par value, are held to maturity or are called or redeemed at
a price lower than their purchase price. Capital gains or losses also may be
realized upon the sale of securities.
GINNIE MAE Ginnie Mae yields (interest income as a percentage of price) have
historically exceeded the current yields on other types of U.S. government
securities with comparable maturities. The effects of interest rate
fluctuations and unpredictable prepayments of principal, however, can greatly
change realized yields. As with most bonds, in a period of rising interest
rates, the value of a Ginnie Mae will generally decline. In a period of
declining interest rates, it is more likely that mortgages contained in
Ginnie Mae pools will be prepaid, thus reducing the effective yield. This
potential for prepayment during periods of declining interest rates may
reduce the general upward price increases of Ginnie Maes as compared to the
increases experienced by noncallable debt securities over the same periods.
In addition, any premium paid on the purchase of a Ginnie Mae will be lost if
the obligation is prepaid. Of course, price changes of Ginnie Maes and other
securities held by U.S. Government Securities Series will have a direct
impact on the net asset value per share of the fund.
FOREIGN SECURITIES The value of foreign (and U.S.) securities is affected by
general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in the fund. These risks can be significantly greater for investments
in emerging markets. Many of the risks described below also apply to
investments in depositary receipts.
The political, economic and social structures of some countries in which a
fund invests may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, and punitive taxes.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs
on foreign securities markets are generally higher than in the U.S. The
settlement practices may be cumbersome and result in delays that may affect
portfolio liquidity. The fund may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies and obtaining
judgments with respect to foreign investments in foreign courts than with
respect to domestic issuers in U.S. courts.
Some of the countries in which the funds invest are considered developing or
emerging markets. Investments in these markets are subject to all of the
risks of foreign investing generally, and have additional and heightened
risks due to a lack of legal, business and social frameworks to support
securities markets.
Emerging markets involve additional significant risks, including:
o political and social uncertainty (for example, regional conflicts and
risk of war)
o currency exchange rate volatility
o pervasiveness of corruption and crime
o delays in settling portfolio transactions
o risk of loss arising out of the system of share registration and custody
o comparatively smaller and less liquid than developed markets
o dependency upon foreign economic assistance and international trade
o less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the U.S.
All of these factors make developing market equity and fixed-income
securities' prices generally more volatile than securities issued in
developed countries.
CURRENCY Some of the funds' investments may be denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what a fund owns and a fund's share price. Generally, when the U.S. dollar
rises in value against a foreign currency, an investment in that country
loses value because that currency is worth fewer U.S. dollars.
EURO On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will be implemented in stages through July
1, 2002, to replace the national currency for participating member countries.
The participating countries are Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The
transition and the elimination of currency risk among EMU countries may
change the economic environment and behavior of investors, particularly in
European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect
on the fund, the fund's manager and its affiliated services providers are
taking steps they believe are reasonably designed to address the euro issue.
REPURCHASE AGREEMENT The use of repurchase agreements involves certain risks.
For example, if the other party to the agreement defaults on its obligation
to repurchase the underlying security at a time when the value of the
security has declined, the fund may incur a loss upon disposition of the
security. If the other party to the agreement becomes insolvent and subject
to liquidation or reorganization under the bankruptcy code or other laws, a
court may determine that the underlying security is collateral for a loan by
the fund not within the control of the fund, and therefore the realization by
the fund on the collateral may be automatically stayed. Finally, it is
possible that the fund may not be able to substantiate its interest in the
underlying security and may be deemed an unsecured creditor of the other
party to the agreement. While the manager acknowledges these risks, it is
expected that if repurchase agreements are otherwise deemed useful to the
fund, these risks can be controlled through careful monitoring procedures.
UTILITIES Historically, electric utility companies were required by state
regulators to build and maintain generation plants, transmission and
distribution lines, and other equipment. State regulators set the rates that
the companies could charge customers to pay for these costs, spread over as
much as 30 years. As the various states move away from the traditional
regulatory model toward greater competitiveness among electric utilities,
customers will be able to choose different electricity suppliers and will no
longer pay for the equipment and facilities that were mandated by regulators,
thus creating "stranded costs" for their former electricity suppliers. If
states fail to enact legislation that permits electricity suppliers to
recover their stranded costs, the financial position of these suppliers could
be adversely affected, which could cause the value of the fund's holdings in
such companies and its net asset value to fall.
OFFICERS AND DIRECTORS
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Custodian Funds has a board of directors. The board is responsible for the
overall management of the funds, including general supervision and review of
each fund's 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 board also monitors each fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the Custodian Funds, and principal
occupations during the past five years are shown below.
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
DIRECTOR
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 47 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers) (until 1998).
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or
trustee, as the case may be, of 49 of the investment companies in the
Franklin Templeton Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
DIRECTOR
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present), H.J.
Heinz Company (processed foods and allied products) (1994-present) and RTI
International Metals, Inc. (metal mill products) (July 1999-present);
director or trustee, as the case may be, of 24 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and
Trustee (1993-1997), National Child Research Center, Assistant to the
President of the United States and Secretary of the Cabinet (1990-1993),
General Counsel to the United States Treasury Department (1989-1990), and
Counselor to the Secretary and Assistant Secretary for Public Affairs and
Public Liaison - United States Treasury Department (1988-1989).
*Charles B. Johnson (67)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND DIRECTOR
Chairman of the Board, Chief Executive Officer, Member - Office of the
Chairman and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services,
Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director,
Franklin/Templeton Investor Services, Inc. and Franklin Templeton Services,
Inc.; officer and/or director or trustee, as the case may be, of most of the
other subsidiaries of Franklin Resources, Inc. and of 48 of the investment
companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND DIRECTOR
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment
Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services,
LLC; 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 51 of the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
DIRECTOR
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology) and Spacehab, Inc. (aerospace services); director or trustee,
as the case may be, of 47 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman, White River Corporation
(financial services) and Hambrecht and Quist Group (investment banking),
President, National Association of Securities Dealers, Inc. and Director,
Real 3D (software).
Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc., Franklin Templeton Distributors, Inc. and Franklin Templeton
Services, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director,
Franklin Investment Advisory Services, Inc. and 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 51 of the investment companies in the Franklin Templeton Group of
Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, Franklin Resources, Inc.; Senior
Vice President, Chief Financial Officer and Director, Franklin/Templeton
Investor Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial
Officer and Director, Templeton Worldwide, Inc.; Executive Vice President,
Chief Operating Officer and Director, Templeton Investment Counsel, Inc.;
Executive Vice President and Chief Financial Officer, Franklin Advisers,
Inc.; Chief Financial Officer, Franklin Advisory Services, LLC and Franklin
Investment Advisory Services, Inc.; President and Director, Franklin
Templeton Services, Inc.; officer and/
or director of some of the other subsidiaries of Franklin Resources, Inc.;
and officer and/or director or trustee, as the case may be, of 51 of the
investment companies in the Franklin Templeton Group of Funds.
Brian E. Lorenz (60)
One North Lexington Avenue, White Plains, NY 10001-1700
SECRETARY
Attorney, member of the law firm of Bleakley Platt & Schmidt; and officer of
three of the investment companies in the Franklin Templeton Group of Funds.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Vice President, Franklin Templeton Services, Inc.; and officer of 30 of the
investment companies in the Franklin Templeton Group of Funds.
David Goss (53)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Chief Executive Officer and Director, Franklin Select Realty
Trust, Property Resources, Inc., Property Resources Equity Trust and Franklin
Real Estate Management, Inc.; President and Chief Executive Officer, Franklin
Properties, Inc.; officer of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, President, Chief Executive Officer
and Director, Franklin Real Estate Income Fund and Franklin Advantage Real
Estate Income Fund (until 1996).
Murray L. Simpson (63)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and General Counsel, Franklin Resources, Inc.;
officer of 27 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Chief Executive Officer and Managing Director, Templeton
Franklin Investment Services (Asia) Limited (until January 2000) and
Director, Templeton Asset Management Ltd. (until 1999).
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Custodian Funds pays noninterested board members $1,550 per month plus $1,500
per meeting attended. Noninterested board members also may serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the Custodian Funds are subject to reductions
resulting from fee caps limiting the amount of fees payable to board members
who serve on other boards within the Franklin Templeton Group of Funds. The
following table provides the total fees paid to noninterested board members
by the Custodian Funds and by other funds in the Franklin Templeton Group of
Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
TOTAL FEES RECEIVED FROM TEMPLETON
RECEIVED THE FRANKLIN GROUP
FROM THE TEMPLETON OF FUNDS
CUSTODIAN GROUP OF ON WHICH
NAME FUNDS1 ($) FUNDS2 ($) EACH SERVES3
- ------------------------------------------------------------------
Harris J. Ashton 27,947 363,165 47
S. Joseph Fortunato 26,032 363,238 49
Edith Holiday 35,100 237,265 24
Gordon S. Macklin 27,947 363,165 47
1. For the fiscal year ended September 30, 1999.
2. For the calendar year ended December 31, 1999.
3. We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the board members are responsible. The Franklin Templeton Group of
Funds currently includes 53 registered investment companies, with
approximately 155 U.S. based funds or series.
Noninterested board members are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
funds or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
During the fiscal year ended September 30, 1999, legal fees of $72,742 were
paid to the law firm of which Mr. Lorenz, an officer of Custodian Funds, is
the partner, and which acts as counsel to Custodian Funds.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED Franklin Advisers, Inc. is the manager of the
funds, except for Growth Series. Growth Series' manager is Franklin
Investment Advisory, Inc. Each manager is a wholly owned subsidiary of
Franklin Resources, Inc. (Resources), a publicly owned company engaged in the
financial services industry through its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr. are the principal shareholders of Resources.
The managers provide investment research and portfolio management services,
and selects the securities for the funds to buy, hold or sell. The managers
also select the brokers who execute the funds' portfolio transactions. The
managers provide periodic reports to the board, which reviews and supervises
the managers' investment activities. To protect the funds, the managers and
their officers, directors and employees are covered by fidelity insurance.
The managers and their affiliates manage numerous other investment companies
and accounts. Each manager may give advice and take action with respect to
any of the other funds it manages, or for its own account, that may differ
from action taken by the manager on behalf of the funds. Similarly, with
respect to the funds, the managers are not obligated to recommend, buy or
sell, or to refrain from recommending, buying or selling any security that
the managers and access persons, as defined by applicable federal securities
laws, may buy or sell for its or their own account or for the accounts of any
other fund. The managers are not obligated to refrain from investing in
securities held by the funds or other funds they manage.
The funds, their managers and principal underwriter have each adopted a code
of ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal
securities transactions, including transactions involving securities that are
being considered for a fund or that are currently held by a fund, subject to
certain general restrictions and procedures. The personal securities
transactions of access persons of a fund, its manager and principal
underwriter will be governed by the code of ethics.
MANAGEMENT FEES Each fund pays the manager a fee equal to a monthly rate of:
o 5/96 of 1% of the value of net assets up to and including $100 million;
o 1/24 of 1% of the value of net assets over $100 million and not over
$250 million;
o 9/240 of 1% of the value of net assets over $250 million and not over
$10 billion;
o 11/300 of 1% of the value of net assets over $10 billion and not over
$12.50 billion;
o 7/200 of 1% of the value of net assets over $12.5 billion and not over
$15 billion;
o 1/30 of 1% of the value of net assets over $15 billion and not over
$17.5 billion;
o 19/600 of 1% of the value of net assets over $17.5 billion and not over
$20 billion; and
o 3/100 of 1% of the value of net assets in excess of $20 billion.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of the
funds' shares pays its proportionate share of the fee.
For the last three fiscal years ended September 30, the funds paid the
following management fees:
MANAGEMENT FEES PAID ($)
1999 1998 1997
- -----------------------------------------------------------------
Growth Series 11,122,057 8,291,109 6,295,304
Income Series 38,308,264 40,167,205 35,364,027
Utilities Series 8,923,770 9,617,382 9,987,693
U.S. Government
Securities Series 39,973,823 42,190,481 44,411,776
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with each manager to provide certain
administrative services and facilities for the funds. FT Services is wholly
owned by Resources and is an affiliate of the funds' manager and principal
underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The managers pay FT Services a monthly fee equal to an
annual rate of:
o 0.15% of a fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended September 30, the manager paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
1999 1998
- ------------------------------------------------------------
Growth Series 0 1,913,636
Income Series 6,944,274 7,226,547
Utilities Series 2,040,426 2,127,219
U.S. Government
Securities Series 7,216,607 7,561,475
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/
Templeton Investor Services, Inc. (Investor Services) is the funds'
shareholder servicing agent and acts as the funds' transfer agent and
dividend-paying agent. Investor Services is located at 777 Mariners Island
Blvd., San Mateo, CA 94404. Please send all correspondence to Investor
Services to P.O. Box 997151, Sacramento, CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. The
funds also will reimburse Investor Services for certain out-of-pocket
expenses, which may include payments by Investor Services to entities,
including affiliated entities, that provide sub-shareholder services,
recordkeeping and/or transfer agency services to beneficial owners of the
funds. The amount of reimbursements for these services per benefit plan
participant fund account per year will not exceed the per account fee payable
by the funds to Investor Services in connection with maintaining shareholder
accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the funds' securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the Custodian Funds' independent auditor. The auditor gives an
opinion on the financial statements included in the Custodian Funds' Annual
Report to Shareholders and reviews the Custodian Funds' registration
statement filed with the U.S. Securities and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
- -------------------------------------------------------------------------------
The manager selects brokers and dealers to execute the funds' portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid is
negotiated between the manager and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of
the persons responsible for placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being paid by other institutional investors of comparable size. The manager
will ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in
the opinion of the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager include, among others, supplying
information about particular companies, markets, countries, or local,
regional, national or transnational economies, statistical data, quotations
and other securities pricing information, and other information that provides
lawful and appropriate assistance to the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the funds. They must, however, be of value to the manager in carrying
out its overall responsibilities to its clients.
Since most purchases by the U.S. Government Securities Series are principal
transactions at net prices, the U.S. Government Securities Series incurs
little or no brokerage costs. The fund deals directly with the selling or
buying principal or market maker without incurring charges for the services
of a broker on its behalf, unless it is determined that a better price or
execution may be obtained by using the services of a broker.
Purchases of portfolio securities from underwriters will include a commission
or concession paid by the issuer to the underwriter, and purchases from
dealers will include a spread between the bid and ask prices. The fund seeks
to obtain prompt execution of orders at the most favorable net price.
Transactions may be directed to dealers in return for research and
statistical information, as well as for special services provided by the
dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on
the research services the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions to
obtain additional research services allows the manager to supplement its own
research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, the manager and its affiliates may use this
research and data in their investment advisory capacities with other clients.
If the funds' officers are satisfied that the best execution is obtained, the
sale of fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, also may be considered a factor in the selection of
broker-dealers to execute the funds' portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when a fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of a fund,
any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next
management fee payable to the manager will be reduced by the amount of any
fees received by Distributors in cash, less any costs and expenses incurred
in connection with the tender.
If purchases or sales of securities of the funds and one or more other
investment companies or clients supervised by the manager are considered at
or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by the manager, taking into account the respective sizes of
the funds and the amount of securities to be purchased or sold. In some cases
this procedure could have a detrimental effect on the price or volume of the
security so far as the funds are concerned. In other cases it is possible
that the ability to participate in volume transactions may improve execution
and reduce transaction costs to the funds.
During the last three fiscal years ended September 30, the funds paid the
following brokerage commissions:
BROKERAGE COMMISSIONS ($)
1999 1998 1997
- ------------------------------------------------------------------
Growth Series 249,624 187,647 78,178
Income Series 654,842 549,013 848,922
Utilities Series 1,830,146 811,152 1,146,668
U.S. Government
Securities Series -0- -0- -0-
For the fiscal year ended September 30, 1999, the funds did not pay to
brokers who provided research services.
As of September 30, 1999, the funds did not own securities of their regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
The funds calculate dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in any distribution and service (Rule 12b-1) fees of
each class. Distributions are subject to approval by the board. The funds do
not pay "interest" or guarantee any fixed rate of return on an investment in
its shares.
DISTRIBUTIONS OF NET INVESTMENT income The funds receive income generally in
the form of dividends and interest on their investments. This income, less
expenses incurred in the operation of a fund, constitutes a fund's net
investment income from which dividends may be paid to you. Any distributions
by a fund from such income will be taxable to you as ordinary income, whether
you take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The funds may derive capital gains and losses
in connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in a fund. Any net capital gains realized by a fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, to reduce or eliminate excise or income taxes on
the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of
debt securities 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 decrease 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.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year. If you have not held fund shares for a full year, a fund may
designate and distribute to you, as ordinary income or capital gain, a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As regulated
investment companies, the funds generally pay no federal income tax on the
income and gains they distribute to you. The board reserves the right not to
maintain the qualification of a fund as a regulated investment company if it
determines such course of action to be beneficial to shareholders. In such
case, a fund will be subject to federal, and possibly state, corporate taxes
on its taxable income and gains, and distributions to you will be taxed as
ordinary dividend income to the extent of such fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires a fund to distribute to you by December 31 of
each year, at a minimum, the following amounts: 98% of its taxable ordinary
income earned during the calendar year; 98% of its capital gain net income
earned during the twelve month period ending October 31; and 100% of any
undistributed amounts from the prior year. Each fund intends to declare and
pay these distributions in December (or to pay them in January, in which case
you must treat them as received in December) but can give no assurances that
its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) and
exchanges of fund shares are taxable transactions for federal and state
income tax purposes. If you redeem your fund shares, or exchange your fund
shares for shares of a different Franklin Templeton Fund, the IRS will
require that you report any gain or loss on your redemption or exchange. If
you hold your shares as a capital asset, the gain or loss that you realize
will be capital gain or loss and will be long-term or short-term, generally
depending on how long you hold your shares. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated
as a long-term capital loss to the extent of any long-term capital gains
distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you buy 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 buy.
Beginning after the year 2005 (2000 for certain shareholders), gains from the
sale of fund shares held for more than five years may be subject to a reduced
tax rate.
U.S. GOVERNMENT OBLIGATIONS 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 or reporting requirements that
must be met by a fund. Investments in Government National Mortgage
Association or Federal National Mortgage Association securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 49.36% of the dividends paid by the Growth
Series, 23.16% of the dividends paid by the Income Series and 85.48% of the
dividends paid by the Utilities Series for the most recent fiscal year
qualified for the dividends-received deduction. You may be allowed to deduct
these qualified dividends, thereby reducing the tax that you would otherwise
be required to pay on these dividends. The dividends-received deduction will
be available only with respect to dividends designated by such fund as
eligible for such treatment. All dividends (including the deducted portion)
must be included in your alternative minimum taxable income calculation.
Because the U.S. Government Securities Series' income is derived primarily
from interest rather than dividends, generally no portion of its
distributions will be eligible for the dividends-received deduction. None of
the dividends paid by the fund for the most recent calendar year qualified
for such deduction, and it is anticipated that none of the current year's
dividends will so qualify.
INVESTMENT IN COMPLEX SECURITIES The funds may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to a fund (possibly causing the fund to sell securities to raise cash
for necessary distributions) and/or defer a fund's ability to recognize
losses. In turn, these rules may affect the amount, timing or character of
the income distributed to you by a fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- -------------------------------------------------------------------------------
Each fund is a diversified series of Custodian Funds, an open-end management
investment company, commonly called a mutual fund. Custodian Funds was
organized as a Delaware corporation in 1947, reincorporated as a Maryland
corporation in 1979, and is registered with the SEC.
The funds currently offer four classes of shares, Class A, Class B, Class C
and Advisor Class. DynaTech Series does not offer Advisor Class. Growth,
Income, Utilities and U.S. Government Securities Series began offering Class
B shares on January 1, 1999. The funds may offer additional classes of shares
in the future. The full title of each class is:
o DynaTech Series - Class A
o DynaTech Series - Class B
o DynaTech Series - Class C
o Growth Series - Class A
o Growth Series - Class B
o Growth Series - Class C
o Growth Series - Advisor Class
o Income Series - Class A
o Income Series - Class B
o Income Series - Class C
o Income Series - Advisor Class
o Utilities Series - Class A
o Utilities Series - Class B
o Utilities Series - Class C
o Utilities Series - Advisor Class
o U.S. Government Securities Series - Class A
o U.S. Government Securities Series - Class B
o U.S. Government Securities Series - Class C
o U.S. Government Securities Series - Advisor Class
Shares of each class represent proportionate interests in each fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
separately on matters affecting only that class, or expressly required to be
voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes
and series of Custodian Funds for matters that affect Custodian Funds as a
whole. Additional series may be offered in the future.
Custodian Funds has noncumulative voting rights. For board member elections,
this gives holders of more than 50% of the shares voting the ability to elect
all of the members of the board. If this happens, holders of the remaining
shares voting will not be able to elect anyone to the board.
Custodian Funds does not intend to hold annual shareholder meetings.
Custodian Funds or a series of Custodian Funds may hold special meetings,
however, for matters requiring shareholder approval. A meeting may be called
by the board to consider the removal of a board member if requested in
writing by shareholders holding at least 10% of the outstanding shares. In
certain circumstances, we are required to help you communicate with other
shareholders about the removal of a board member. A special meeting also may
be called by the board in its discretion.
As of January 3, 2000, the principal shareholders of the fund, beneficial or
of record, were:
PERCENTAGE
NAME AND ADDRESS SHARE CLASS (%)
- -------------------------------------------------------------------
GROWTH FUND
Franklin Templeton Trust Company
Trust Services FBO Advisor 10.77
Vivian J. Palmieri Class
P.O. Box 5086
San Mateo, CA 94402-0086
PERCENTAGE
NAME AND ADDRESS SHARE CLASS (%)
- -------------------------------------------------------------------
GROWTH FUND (CONT.)
Franklin Templeton Trust Company
Trust Services FBO Advisor 16.71
Rupert Johnson IRA Class
P.O. Box 5086
San Mateo, CA 94402-0086
St. Petersburg Lesopromyshleny Bank Advisor 5.09
5 Krapivny Per Class
St. Petersburg, Russia 194044
Franklin Templeton Trust Company
TTEE for ValuSelect Advisor 5.09
Franklin Templeton 401K Class
P.O. Box 2438
Rancho Cordova, CA 95741-2438
Franklin Templeton Trust Company
TTEE for ValuSelect Advisor 23.16
Franklin Resources PSP Class
P.O. Box 2438
Rancho Cordova, CA 95741-2438
Utilities Fund
FIRST MAR & CO 2 Advisor 15.16
101 W. Washington Street Class
P.O. Box 580
Marquette, MI 49855
The Washington Trust Company Advisor 13.54
23 Broad Street Class
Westerly, RI 02891
Franklin Templeton Trust Company
TTEE for ValuSelect1 Advisor 52.42
Franklin Resources PSP Class
P.O. Box 2438
Rancho Cordova, CA 95741-2438
U.S. Government Securities Fund
Templeton Funds Trust Company Advisor 11.80
100 Fountain Parkway Class
St. Petersburg, FL 33716-1205
St. Petersburg Lesopromyshleny Bank Advisor 13.80
5 Krapivny Per Class
St. Petersburg, Russia 194044
Franklin Templeton Trust Company
TTEE for ValuSelect 401k Advisor 10.44
P.O. Box 2438 Class
Rancho Cordova, CA 95741-2438
Franklin Templeton Trust Company
TTEE for ValuSelect1 Advisor 29.70
Franklin Resources PSP Class
P.O. Box 2438
Rancho Cordova, CA 95741-2438
1. Franklin Templeton Trust Company is a California corporation and is wholly
owned by Franklin Resources, Inc.
Note: Charles B. Johnson and Rupert H. Johnson, Jr., who are officers and
directors of Custodian Funds, serve on the administrative committee of the
Franklin Resources, Inc. profit sharing plan, which owns shares of Custodian
Funds. In that capacity, they participate in the voting of such shares.
Charles B. Johnson and Rupert H. Johnson, Jr. disclaim beneficial ownership
of any share of Custodian Funds owned by the profit sharing plan.
From time to time, the number of fund shares held in the "street name"
accounts of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
As of January 3, 2000, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each class.
The board members may own shares in other funds in the Franklin Templeton
Group of Funds.
BUYING AND SELLING SHARES
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The funds continuously offer their shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer
orders and accounts with the funds. This reference is for convenience only
and does not indicate a legal conclusion of capacity. Banks and financial
institutions that sell shares of the funds may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the funds should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the funds must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank. We may deduct any applicable banking
charges imposed by the bank from your account.
When you buy shares, if you submit a check or a draft that is returned unpaid
to a fund we may impose a $10 charge against your account for each returned
item.
If you buy shares through the reinvestment of dividends, the shares will be
purchased at the net asset value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not
affect the amount or value of the shares acquired.
GROUP PURCHASES As described in the prospectus, members of a qualified group
may add the group's investments together for minimum investment purposes.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the funds, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
DEALER COMPENSATION Distributors and/or its affiliates may provide financial
support to 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 and/or total assets with the Franklin Templeton Group of Funds.
The amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a securities dealer's sales and marketing
efforts in the Franklin Templeton Group of Funds; a securities dealer's
support of, and participation in, Distributors' marketing programs; a
securities dealer's compensation programs for its registered representatives;
and the extent of a securities dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to securities dealers
may be made by payments from Distributors' resources, from Distributors'
retention of underwriting concessions and, in the case of funds that have
Rule 12b-1 plans, from payments to Distributors under such plans. In
addition, certain securities dealers may receive brokerage commissions
generated by fund portfolio transactions in accordance with the rules of the
National Association of Securities Dealers, Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, a 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 each 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 goals exist immediately. This money will then be withdrawn from
the short-term, interest-bearing money market instruments and invested in
portfolio securities in as orderly a manner as is possible when attractive
investment opportunities arise.
The proceeds from the sale of shares of an investment company generally are
not available until the seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of fund shares to complete an exchange will
be effected at net asset value at the close of business on the day the
request for exchange is received in proper form.
SYSTEMATIC WITHDRAWAL plan Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at
least $50. For retirement plans subject to mandatory distribution
requirements, the $50 minimum will not apply. There are no service charges
for establishing or maintaining a systematic withdrawal plan.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. When you sell your
shares under a systematic withdrawal plan, it is a taxable transaction.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. The funds may discontinue a systematic
withdrawal plan by notifying you in writing and will automatically
discontinue a systematic withdrawal plan if all shares in your account are
withdrawn or if the fund receives notification of the shareholder's death or
incapacity.
REDEMPTIONS IN KIND Each fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the U.S. Securities
and Exchange Commission (SEC). In the case of redemption requests in excess
of these amounts, the board reserves the right to make payments in whole or
in part in securities or other assets of the fund, in case of an emergency,
or if the payment of such a redemption in cash would be detrimental to the
existing shareholders of the fund. In these circumstances, the securities
distributed would be valued at the price used to compute the fund's net
assets and you may incur brokerage fees in converting the securities to cash.
The funds do not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This
eliminates the costly problem of replacing lost, stolen or destroyed
certificates. If a certificate is lost, stolen or destroyed, you may have to
pay an insurance premium of up to 2% of the value of the certificate to
replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to the fund marked
"unable to forward" by the postal service, we will consider this a request by
you to change your dividend option to reinvest all distributions. The
proceeds will be reinvested in additional shares at net asset value until we
receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the funds
nor their affiliates will be liable for any loss caused by your failure to
cash such checks. The funds are not responsible for tracking down uncashed
checks, unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
Sending redemption proceeds by wire or electronic funds transfer (ACH) is a
special service that we make available whenever possible. By offering this
service to you, the funds are not bound to meet any redemption request in
less than the seven day period prescribed by law. Neither the funds nor their
agents shall be liable to you or any other person if, for any reason, a
redemption request by wire or ACH is not processed as described in the
prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the funds
on behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such owners. For each beneficial owner in the
omnibus account, a fund may reimburse Investor Services an amount not to
exceed the per account fee that the fund normally pays Investor Services.
These financial institutions also may charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. If you sell shares
through your securities dealer, it is your dealer's responsibility to
transmit the order to the fund in a timely fashion. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, each fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
notice of levy.
PRICING SHARES
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When you buy and sell shares, you pay the net asset value (NAV) per share.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of
shares outstanding.
The funds calculate the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther
King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, each fund values those securities at the last quoted sale price of
the day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. Each fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, each fund values them according to the broadest and most
representative market as determined by the manager.
Each fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option a fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
Each fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
close of trading on the NYSE, if that is earlier. The value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined. If no sale is reported at that time, the foreign security is
valued within the range of the most recent quoted bid and ask prices.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and
the close of the exchange and will, therefore, not be reflected in the
computation of the NAV. If events materially affecting the values of these
foreign securities occur during this period, the securities will be valued in
accordance with procedures established by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the NAV. If events materially affecting the values of these
securities occur during this period, the securities will be valued at their
fair value as determined in good faith by the board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the board. With the approval of
the board, the funds may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
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Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the funds' shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. Each fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
Distributors does not receive compensation from the funds for acting as
underwriter of the funds' Advisor Class shares.
PERFORMANCE
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Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by a fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the funds
are based on the standardized methods of computing performance mandated by
the SEC.
For periods before January 1, 1997, Advisor Class standardized performance
quotations are calculated by substituting Class A performance for the
relevant time period, excluding the effect of Class A's maximum initial sales
charge, and including the effect of the distribution and service (Rule 12b-1)
fees applicable to the funds' Class A shares. For periods after January 1,
1997, Advisor Class standardized performance quotations are calculated as
described below.
An explanation of these and other methods used by the funds to compute or
express performance follows. Regardless of the method used, past performance
does not guarantee future results, and is an indication of the return to
shareholders only for the limited historical period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes income dividends and capital gain
distributions are reinvested at net asset value. The quotation assumes the
account was completely redeemed at the end of each period and the deduction
of all applicable charges and fees. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum initial sales charge currently in effect.
The average annual total returns for the indicated periods ended September
30, 1999, were:
1 YEAR(%) 5 YEARS(%) 10 YEARS(%)
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Growth Series 18.89 19.80 13.50
Income Series 3.71 9.44 10.66
Utilities Series -8.48 11.05 9.11
U.S. Government
Securities Series 1.16 7.72 7.72
The following SEC formula was used to calculate these figures:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested
at net asset value, the account was completely redeemed at the end of each
period and the deduction of all applicable charges and fees. Cumulative total
return, however, is based on the actual return for a specified period rather
than on the average return over the periods indicated above. The cumulative
total returns for the indicated periods ended September 30, 1999, were:
1 YEAR(%) 5 YEARS(%) 10 YEARS(%)
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Growth Series 18.89 146.73 254.89
Income Series 3.71 56.96 175.47
Utilities Series -8.48 68.90 139.24
U.S. Government
Securities Series 1.16 45.01 110.41
CURRENT YIELD Current yield shows the income per share earned by a fund. It
is calculated by dividing the net investment income per share earned during a
30-day base period by the net asset value per share on the last day of the
period and annualizing the result. Expenses accrued for the period include
any fees charged to all shareholders of the class during the base period. The
yields for the 30-day period ended September 30, 1999, were:
YIELD (%)
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Income Series 8.45%
Utilities Series 5.01%
U.S. Government Securities Series 6.46%
The following SEC formula was used to calculate these figures:
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. Amounts paid to shareholders are reflected in
the quoted current distribution rate. The current distribution rate is
usually computed by annualizing the dividends paid per share by a class
during a certain period and dividing that amount by the current net asset
value. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing
and short-term capital gains, and is calculated over a different period of
time. The current distribution rates for the 30-day period ended September
30, 1999, were:
DISTRIBUTION
RATE (%)
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Income Series 8.23%
Utilities Series 5.61%
U.S. Government Securities Series 6.48%
VOLATILITY Occasionally statistics may be used to show a fund's volatility or
risk. Measures of volatility or risk are generally used to compare a fund's
net asset value or performance to a market index. One measure of volatility
is beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities
in which the fund invests. A beta of more than 1.00 indicates volatility
greater than the market and a beta of less than 1.00 indicates volatility
less than the market. Another measure of volatility or risk is standard
deviation. Standard deviation is used to measure variability of net asset
value or total return around an average over a specified period of time. The
idea is that greater volatility means greater risk undertaken in achieving
performance.
OTHER PERFORMANCE QUOTATIONS Sales literature referring to the use of the
funds as a potential investment for IRAs, business retirement plans, and
other tax-advantaged retirement plans may quote a total return based upon
compounding of dividends on which it is presumed no federal income tax
applies.
The funds may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of the Franklin Templeton Group of
Funds.
COMPARISONS To help you better evaluate how an investment in the funds may
satisfy your investment goal, advertisements and other materials about the
funds may discuss certain measures of fund performance as reported by various
financial publications. Materials also may compare performance (as calculated
above) to performance as reported by other investments, indices, and
averages. These comparisons may include, but are not limited to, the
following examples:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally leaders in their industry), the Dow
Jones Transportation Average (20 transportation stocks), and the Dow Jones
Utilities Average (15 utility stocks involved in the production of
electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an
unmanaged index of all industrial, utilities, transportation, and finance
stocks listed on the NYSE.
o Wilshire 5000 Equity Index - represents the return on the market value
of all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
o Financial publications: The Wall Street Journal, and Business Week,
Changing Times, Financial World, Forbes, Fortune, and Money magazines -
provide performance statistics over specified time periods.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
o 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
o its category.
In addition to the indices listed above, the following specific comparisons
may be appropriate:
Utilities Series may be compared to Moody's Utilities Stock Index, an
unmanaged index of utility stock performance.
Income Series and U.S. Government Securities Series may be compared to:
o Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.
o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o Standard & Poor's(R) Bond Indices - measures yield and price of corporate,
municipal and government bonds.
o Other taxable investments including certificates of deposit (CDs), money
market deposit accounts (MMDAs), checking accounts, savings accounts, money
market mutual funds and repurchase agreements.
From time to time, advertisements or information for the funds may include a
discussion of certain attributes or benefits to be derived from an investment
in the funds. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
1. Franklin pioneered the concept of Ginnie Mae funds, and U.S. Government
Securities Series, with over $9.3 billion in assets and more than 424,000
shareholders as of September 30, 1998, is one of the largest Ginnie Mae funds
in the U.S. and the world. Shareholders in this fund, which has a history of
solid performance, range from individual investors with a few thousand
dollars to institutions that have invested millions of dollars.
U.S. Government Securities Series offers investors the opportunity to invest
in Ginnie Maes, which are among the highest yielding U.S. government
securities on the market.
2. Advertisements or information also may compare the funds' performance to
the return on certificates of deposit (CDs) or other investments. You should
be aware, however, that an investment in a fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, if any, as well as
the value of its shares that are based upon the value of such portfolio
investments, can be expected to fall. Conversely, when interest rates
decrease, the value of the fund's shares can be expected to increase. CDs are
frequently insured by an agency of the U.S. government. An investment in a
fund is not insured by any federal, state or private entity.
3. Utilities Series has paid uninterrupted dividends for the past 49 years.
Over the life of Utilities Series, dividends have increased in 28 of the last
49 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 1990.
4. Income Series has paid uninterrupted dividends for the past 49 years.
5. Growth Series offers investors a convenient way to invest in a diversified
portfolio focusing on companies with long-term growth prospects.
6. Growth Series made the 1990, 1991 and 1996 Forbes Mutual Fund Honor Roll
for its performance in both up and down markets.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the funds' portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the funds to calculate its figures. In
addition, there can be no assurance that the funds will continue their
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
- -------------------------------------------------------------------------------
The funds may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis to have a
projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by
the College Board.) The Franklin Retirement Planning Guide leads you through
the steps to start a retirement savings program. Of course, an investment in
a fund cannot guarantee that these goals will be met.
Each fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of
the oldest mutual fund organizations and now services approximately 3 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined
forces with Templeton, a pioneer in international investing. The Mutual
Series team, known for its value-driven approach to domestic equity
investing, became part of the organization four years later. Together, the
Franklin Templeton Group has over $224 billion in assets under management for
more than 5 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 103 U.S. based open-end
investment companies to the public. Each fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the fund are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has been
making necessary software changes to help the computer systems that service
the fund and its shareholders to be Year 2000 compliant. After completing
these modifications, comprehensive tests are conducted in one of Resources'
U.S. test labs to verify their effectiveness. Resources continues to seek
reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources
is also developing a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice
and data lines are limited.
DESCRIPTION OF RATINGS
- -------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A: Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP (S&P(R))
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating also may 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 for both
short-term debt and commercial paper, all judged to be investment grade, to
indicate the relative repayment capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FCF SAIA 02/00
FRANKLIN CUSTODIAN FUNDS, INC.
FILE NOS. 2-11346
& 811-537
FORM N-1A
PART C
OTHER INFORMATION
ITEM 23.EXIBITS
The following exhibits are incorporated by reference to the
previously document indicated below, except as noted:
(a) Articles of Incorporation
(i) Articles of Incorporation dated October 9, 1979
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Agreement and Articles of Merger dated November 7, 1979
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iii) Certificate of Amendment to Articles of Incorporation
dated October 4, 1985
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iv) Articles of Amendment dated October 14, 1985
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(v) Certificate of Amendment to Articles of Incorporation
dated February 24, 1989
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(vi) Certificate of Amendment to Articles of Incorporation
dated March 21, 1995
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(vii) Articles Supplementary to the Charter dated June 29, 1995
Filing: Post-Effective Amendment No. 72 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 30, 1995
(viii) Articles Supplementary to the Charter dated July 19, 1996
Filing: Post-Effective Amendment No. 75 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: December 31, 1996
(ix) Certificate of Correction to the Articles Supplementary
to the Charter dated August 22, 1996
Filing: Post-Effective Amendment No. 77 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: January 29, 1998
(x) Articles Supplementary to the Charter dated November 4, 1996
Filing: Post-Effective Amendment No. 77 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: January 29, 1998
(xi) Articles Supplementary to the Charter dated January 22, 1997
Filing: Post-Effective Amendment No. 77 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: January 29, 1998
(xii) Articles Supplementary to Articles of Incorporation
dated December 15, 1998
(b) By-Laws
(i) By-Laws
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(c) Instruments Defining rights of Securities Holders
Not Applicable
(d) Investment Advisory Contracts
(i) Management Agreement between the Registrant on behalf
of the DynaTech Series and Franklin Advisers, Inc.
dated May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Management Agreement between the Registrant on behalf
of the Income Series and Franklin Advisers, Inc.
dated May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iii) Management Agreement between the Registrant on behalf
of the U.S. Government Securities Series and Franklin
Advisers, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iv) Management Agreement between the Registrant on behalf
of the Utilities Series and Franklin Advisers, Inc.
dated May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(v) Management Agreement between Registrant on behalf
of the Growth Series and Franklin Investment
Advisory Services, Inc. dated July 1, 1997
Filing: Post-Effective Amendment No. 77 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: January 29, 1998
(e) Underwriting contracts
(i) Amended and Restated Distribution Agreement between
Registrant and Franklin/Templeton Distributors, Inc.
dated March 29, 1995
Filing: Post-Effective Amendment No. 72 to Registration
Statement on Form N-1A
File No. 2-11346
Filing Date: November 30, 1995
(ii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and Securities Dealers
Filing: Post-Effective Amendment No. 78 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 27, 1998
(iii) Amendment dated January 12, 1999 of Amended and
Restated Distribution Agreement dated March 29, 1995
(f) Bonus or Profit Sharing Contracts
Not Applicable
(g) Custodian Agreements
(i) Master Custody Agreement between Registrant and
Bank of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 74 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: August 19, 1996
(ii) Terminal Link Agreement between Registrant and
Bank of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 74 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: August 19, 1996
(iii) Amendment dated May 7, 1997 to the Master Custody
Agreement dated February 16, 1996 between the Registrant
and Bank of New York
Filing: Post-Effective Amendment No. 77 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: January 29, 1998
(iv) Amendment dated February 27, 1998 to Exhibit A
of the Master Custody Agreement between the
Registrant and Bank of New York dated February 16,
1996
Filing: Post-Effective Amendment No. 78 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 27, 1998
(v) Foreign Custody Manager Agreement between the
Registrant and Bank of New York made as of
July 30, 1998, effective as of February 27, 1998
Filing: Post-Effective Amendment No. 78 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 27, 1998
(vi) Amendment dated September 16, 1999 to Exhibit A
of the Master Custody Agreement between the
Registrant and Bank of New York dated February 16,
1996
(h) Other Material Contracts
(i) Subcontract for Fund Administrative Services
dated October 1, 1996 and Amendment thereto
dated April 30, 998 between Franklin Advisers, Inc.
and Franklin Templeton Services, Inc.
Filing: Post-Effective Amendment No. 78 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 27, 1998
(ii) Subcontract for Fund Administrative Services
dated October 1, 1996 and Amendment thereto
dated July 1, 1997 between Franklin Investment
Advisory Services, Inc. and Franklin Templeton
Services, Inc.
Filing: Post-Effective Amendment No. 79 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: December 29, 1998
(i) Legal Opinion
(i) Opinion and Consent of Counsel dated November 6, 1998
Filing: Post-Effective Amendment No. 80 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: December 30, 1998
(j) Other Opinions
(i) Consent of Independent Auditors
(k) Omitted Financial Statements
Not Applicable
(l) Initial Capital Agreements
(i) Letter of Understanding dated April 12, 1995
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Subscription Agreement for DynaTech Series -
Class II dated September 13, 1996
Filing: Post-Effective Amendment No. 75 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: December 31, 1996
(m) Rule 12b-1 Plan
(i) Distribution Plan pursuant to Rule 12b-1 between
the Registrant on behalf of the DynaTech Series
and Franklin/Templeton Distributors, Inc. dated
May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Distribution Plan pursuant to Rule 12b-1 between
the Registrant on behalf of the Growth Series
and Franklin/Templeton Distributors, Inc. dated May
1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iii) Distribution Plan pursuant to Rule 12b-1 between
the Registrant on behalf of the Income Series and
Franklin/Templeton Distributors, Inc. dated May
1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iv) Distribution Plan pursuant to Rule 12b-1 between
the Registrant on behalf of the U.S. Government
Securities Series and Franklin/Templeton
Distributors, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(v) Distribution Plan pursuant to Rule 12b-1 between
the Registrant on behalf of the Utilities Series
and Franklin/Templeton Distributors, Inc. dated
May 1, 1994
Filing: Post-Effective Amendment No. 71 to Registration
Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(vi) Distribution Plan pursuant to Rule 12b-1 between
the Registrant on behalf of the Utilities Series,
Income Series and U.S. Government Securities
Series - Class II and Franklin/Templeton
Distributors, Inc. dated March 30, 1995
Filing: Post-Effective Amendment No. 72 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 30, 1995
(vii) Distribution Plan pursuant to Rule 12b-1 between
the Registrant on behalf of the Growth Series
- Class II and Franklin/Templeton Distributors, Inc.
dated March 30, 1995
Filing: Post-Effective Amendment No. 72 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: November 30, 1995
(viii) Distribution Plan pursuant to Rule 12b-1 between
the Registrant on behalf of the DynaTech Series
- Class II and Franklin/TempletonDistributors,
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
(ix) Form of Distribution Plan pursuant to Rule 12b-1
between Registrant, on behalf of Growth Series
- Class B, and Franklin/Templeton Distributors, Inc.
Filing: Post-Effective Amendment No. 79 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: December 29, 1998
(x) Distribution Plan pursuant to Rule 12b-1 between
Registrant, on behalf of Utilities Series, Income
Series and U.S. Government Securities Series - Class B,
and Franklin/Templeton Distributors, Inc. dated
October 16, 1998
(xi) Form of Distribution Plan pursuant to Rule 12b-1
between Registrant, on behalf of DynaTech Series
- Class B and Franklin/Templeton Distributors, Inc.
(o) Rule 18f-3 Plan
(i) Multiple Class Plan for Growth Series dated March 19, 1998
(ii) Multiple Class Plan for Utilities Series dated March 19, 1998
(iii) Multiple Class Plan for Income Series dated March 19, 1998
(iv) Multiple Class Plan for U.S. Government Securities Series
dated March 19, 1998
(v) Form of Multiple Class Plan for DynaTech Series
(p) Power of Attorney
(i) Power of Attorney dated January 20, 2000
(ii) Certificate of Secretary dated January 28, 2000
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 25. INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court 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.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The officers and directors of the Registrant's managers also serve as officers
and/or directors or trustees for (1) the advisor's corporate parent, Franklin
Resources, Inc., and/or (2) other investment companies in the Franklin Templeton
Group of Funds. In addition, Mr. Charles B. Johnson was formerly a director of
General Host Corporation. For additional information please see Part B and
Schedules A and D of Forms ADV of the Funds' investment advisors Franklin
Advisers, Inc.(SEC File 801-26292), Franklin Investment Advisory Services, Inc.
(SEC File 801-52152)incorporated herein by reference, which sets forth the
officers and directors of the investment advisor and information as to any
business, profession, vocation or employment of a substantial nature engaged in
by those officers and directors during the past two years.
ITEM 27. PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., (Distributors) also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Franklin Templeton Variable Insurance Products Trust
Institutional Fiduciary Trust
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
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 Form N-1A
and Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889).
c) Not Applicable. Registrant's principal underwriter is an affiliated person
of an affiliated person of the Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section 31
(a) of the Investment Company Act of 1940 will be 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.
ITEM 29. MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 30. UNDERTAKINGS
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant 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, 2000.
FRANKLIN CUSTODIAN FUNDS, INC.
(Registrant)
By: /s/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, 2000
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: January 28, 2000
KIMBERLEY MONASTERIO* Principal Accounting Officer
Kimberley Monasterio Dated: January 28, 2000
HARRIS J. ASHTON* Director
Harris J. Ashton Dated: January 28, 2000
S. JOSEPH FORTUNATO* Director
S. Joseph Fortunato Dated: January 28, 2000
EDITH E. HOLIDAY* Director
Edith E. Holiday Dated: January 28, 2000
RUPERT H. JOHNSON, JR.* Director
Rupert H. Johnson, Jr. Dated: January 28, 2000
GORDON S. MACKLIN* Director
Gordon S. Macklin Dated: January 28, 2000
*By /s/ DAVID P. GOSS
Leiann Nuzum, Attorney-in-Fact
(Pursuant to Power of Attorney filed herewith)
FRANKLIN CUSTODIAN FUNDS, INC.
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.(a)(i) Articles of Incorporation
dated October 9, 1979 *
EX-99.(a)(ii) Agreement and Articles of *
Merger dated November 7, 1979
EX-99.(a)(iii) Certificate of Amendment to *
Articles of Incorporation dated
October 4, 1985
EX-99.(a)(iv) Articles of Amendment dated *
October 14, 1985 *
EX-99.(a)(v) Certificate of Amendment to *
Articles of Incorporation
dated February 24, 1989
EX-99.(a)(vi) Certificate of Amendment to *
Articles of Incorporation
dated March 21, 1995
EX-99.(a)(vii) Articles Supplementary to *
the Charter dated June 29,
1995
EX-99.(a)(viii) Articles Supplementary to *
Charter dated July 19, 1996
EX-99.(a)(ix) Certificate of Correction *
to the Articles Supplementary
to the Charter dated August 22,
1996
EX-99.(a)(x) Articles Supplementary to *
the Charter dated November 4,
1996
EX-99.(a)(xi) Articles Supplementary to *
the Charter dated January 22,
1997
EX-99.(a)(xii) Articles Supplementary to Attached
Articles of Incorporation
dated December 15, 1998
EX-99.(b)(i) By-Laws *
EX-99.(b)(i) Management Agreement between *
the Registrant on behalf of
the DynaTech Series and Franklin
Advisers, Inc. dated May 1, 1994
EX-99.(d)(ii) Management Agreement between *
the Registrant on behalf of
the Income Series and Franklin
Advisers, Inc. dated May 1, 1994
EX-99.(d)(iii) Management Agreement *
between the Registrant on
behalf of the U.S. Government
Securities Series and Franklin
Advisers, Inc. dated May 1, 1994
EX-99.(d)(iv) Management Agreement between *
the Registrant on behalf of
the Utilities Series and
Franklin Advisers, Inc. dated
May 1, 1994
EX-99.(d)(v) Management Agreement between *
the Registrant on behalf of
the Growth Series and
Franklin Investment Advisory
Services, Inc. dated July 1, 1997
EX-99.(e)(i) Amended and Restated *
Distribution Agreement
between Registrant and
Franklin/Templeton
Distributors, Inc.,
dated March 29, 1995
EX-99.(e)(ii) Forms of Dealer Agreements *
between Franklin/Templeton
Distributors, Inc. and
Securities Dealers
EX-99.(e)(iii) Amendment dated January 12, Attached
1999 of Amended and
Restated Distribution Agreement
dated March 29, 1995
EX-99.(g)(i) Master Custody Agreement *
between Registrant and
Bank of New York dated
February 16, 1996
EX-99.(g)(ii) Terminal Link Agreement *
between Registrant and
Bank of New York dated
February 16, 1996
EX-99.(g)(iii) Amendment dated May 7, *
1997 to the Master
Custody Agreement dated
February 16, 1996
between the Registrant and
Bank of New York
EX-99.(g)(iv) Amendment dated February 27, *
1998 to Exhibit A of the
Master Custody Agreement
between the Registrant and
Bank of New York dated February
16, 1996
EX-99.(g)(v) Foreign Custody Manager *
Agreement between the
Registrant and Bank of
New York made as of
July 30, 1998, effective as
of February 27, 1998
EX-99.(g)(vi) Amendment dated September 16, Attached
1999 to Exhibit A of the Master
Custody Agreement between the
Registrant and Bank of New York
dated February 16, 1996
EX-99.(h)(i) Subcontract for Fund *
Administrative Services
dated October 1, 1996 and
Amendment thereto
dated April 30, 1998 between
Franklin Advisers, Inc. and
Franklin Templeton Services,
Inc.
EX-99.(h)(ii) Subcontract for Fund *
Administrative Services
dated October 1, 1996 and
Amendment thereto dated
July 1, 1997 between Franklin
Investment Advisory Services,
Inc. and Franklin Templeton
Services, Inc.
EX-99.(i)(i) Opinion and Consent of Counsel *
dated November 6, 1998
EX-99.(j)(i) Consent of Independent Auditors Attached
EX-99.(l)(i) Letter of Understanding dated *
April 12, 1995
EX-99.(l)(ii) Subscription Agreement for *
DynaTech Series - Class II dated
September 13, 1996
EX-99.(m)(i) Distribution Plan pursuant to *
Rule 12b-1 between the
Registrant on behalf of the
DynaTech Series and
Franklin/Templeton Distributors,
Inc. dated May 1, 1994
EX-99.(m)(ii) Distribution Plan pursuant *
to Rule 12b-1 between the
Registrant on behalf of the Growth
Series and Franklin/Templeton
Distributors, Inc. dated
May 1, 1994
EX-99.(m)(iii) Distribution Plan pursuant *
to Rule 12b-1 between
the Registrant on behalf
of the Income Series
and Franklin/Templeton
Distributors, Inc. dated
May 1, 1994
EX-99.(m)(iv) Distribution Plan pursuant *
to Rule 12b-1 between the
Registrant on behalf of
the U.S. Government
Securities Series and
Franklin/Templeton
Distributors, Inc. dated
May 1, 1994
EX-99.(m)(v) Distribution Plan pursuant *
to Rule 12b-1 between the
Registrant on behalf of the
Utilities Series and
Franklin/Templeton
Distributors, Inc. dated
May 1, 1994
EX-99.(m)(vi) Distribution Plan pursuant *
to Rule 12b-1 between the
Registrant on behalf of the
Utilities Series, Income Series
and U.S. Government Securities
Series - Class II and
Franklin/Templeton Distributors,
Inc. dated March 30, 1995
EX-99.(m)(vii) Distribution Plan pursuant *
to Rule 12b-1 between the
Registrant on behalf of the Growth
Series - Class II and
Franklin/Templeton
Distributors, Inc. dated
March 30, 1995
EX-99.(m)(viii) Distribution Plan pursuant *
to Rule 12b1 between the Registrant
on behalf of the DynaTech Series
- Class II and Franklin/Templeton
Distributors, Inc. dated
September 16, 1996
EX-99.(m)(ix) Form of Distribution Plan *
pursuant to Rule 12b-1
between Registrant, on behalf
of Growth Series - Class B, and
Franklin/Templeton
Distributors, Inc.
EX-99.(m)(x) Distribution Plan Attached
pursuant to Rule 12b-1
between Registrant, on behalf
of Utilities Series, Income
Series and U.S. Government
Securities Series - Class B,
and Franklin/Templeton
Distributors, Inc. dated
October 16, 1998
EX-99.(m)(xi) Form of Distribution Plan Attached
pursuant to Rule 12b-1
between Registrant, on
behalf of DynaTech Series
- Class B and Franklin/Templeton
Distributors, Inc.
EX-99.(o)(i) Multiple Class Plan for Attached
Growth Series dated March
19, 1998
EX-99.(o)(ii) Multiple Class Plan for Attached
Utilities Series dated
March 19, 1998
EX-99.(o)(iii) Multiple Class Plan for Attached
Income Series dated
March 19, 1998
EX-99.(o)(iv) Multiple Class Plan Attached
for U.S. Government Securities
Series dated March 19, 1998
EX-99.(o)(v) Form of Multiple Class Plan Attached
for DynaTech Series
EX-99.(p)(i) Power of Attorney dated Attached
January 20, 2000
EX-99.(p)(ii) Certificate of Secretary Attached
dated January 28, 2000
* Incorporated By Reference
FRANKLIN CUSTODIAN FUNDS, INC.
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
FRANKLIN CUSTODIAN FUNDS, INC., a Maryland corporation having its
principal office in Baltimore, Maryland (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland, that:
FIRST: The Corporation heretofore had authority to issue a total of
nineteen billion (19,000,000,000) shares of capital stock with a par value of
one cent ($.01) per share, and an aggregate par value of $190,000,000,
classified as follows:
Class Designation Number of Shares
U.S. Government Securities Series Class A 2,500,000,000
U.S. Government Securities Series Class C 2,500,000,000
U.S. Government Securities Advisor Class 1,000,000,000
Income Series Class A 4,600,000,000
Income Series Class C 3,600,000,000
Income Series Advisor Class 1,000,000,000
Growth Series Class A 250,000,000
Growth Series Class C 250,000,000
Growth Series Advisor Class 1,000,000,000
DynaTech Series Class A 250,000,000
DynaTech Series Class C 250,000,000
Utilities Series Class A 400,000,000
Utilities Series Class C 400,000,000
Utilities Series Advisor Class 1,000,000,000
SECOND: The Board of Directors of the Corporation, in accordance with
Section 2-105(c) of the Maryland General Corporation Law, has adopted a
resolution increasing the aggregate number of authorized shares of capital
stock by four billion (4,000,000,000) so that the Corporation has authority
to issue twenty-three billion (23,000,000,000) shares of capital stock.
THIRD: The Board of Directors has classified one billion
(1,000,000,000) of the increased shares of capital stock as U.S. Government
Securities Class B shares, one billion (1,000,000,000) of the increased
shares of capital stock as Income Series Class B shares, seven hundred fifty
million (750,000,000) of the increased shares of capital stock as Growth
Series Class B shares, five hundred million (500,000,000) of the increased
shares of capital stock as DynaTech Series Class B shares, and seven hundred
fifty million (750,000,000) of the increased shares of capital stock as
Utilities Series Class B shares.
FOURTH: As supplemented hereby, the total number of shares of capital
stock that the Corporation is authorized to issue is twenty-three billion
(23,000,000,000) shares with a par value of one cent ($.01) per share and an
aggregate par value of $230,000,000, classified as follows:
Class Designation Number of Shares
U.S. Government Securities Series Class A 2,500,000,000
U.S. Government Securities Series Class B 1,000,000,000
U.S. Government Securities Series Class C 2,500,000,000
U.S. Government Securities Advisor Class 1,000,000,000
Income Series Class A 4,600,000,000
Income Series Class B 1,000,000,000
Income Series Class C 3,600,000,000
Income Series Advisor Class 1,000,000,000
Growth Series Class A 250,000,000
Growth Series Class B 750,000,000
Growth Series Class C 250,000,000
Growth Series Advisor Class 1,000,000,000
DynaTech Series Class A 250,000,000
DynaTech Series Class B 500,000,000
DynaTech Series Class C 250,000,000
Utilities Series Class A 400,000,000
Utilities Series Class B 750,000,000
Utilities Series Class C 400,000,000
Utilities Series Advisor Class 1,000,000,000
FIFTH: The U.S. Government Securities Series Class B shares, the
Income Series Class B shares, the Growth Series Class B shares, the DynaTech
Series Class B shares, and the Utilities Series Class B shares (each referred
to herein as a "Class B share" or, collectively, as the "Class B shares"),
shall represent, respectively, interests in the same portfolio of investments
as the existing classes of shares of the U.S. Government Securities Series,
the Income Series, the Growth Series, the DynaTech Series, and the Utility
Series of the Corporation, respectively (each such series hereafter referred
to as a "Series"). Each Class B share of a Series shall have the same
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of
redemption as the existing classes of shares of that Series, all as set forth
in the Corporation's charter, except for the differences therein or
hereinafter set forth:
(1)(a) Dividends and distributions paid to holders of the Class B
shares of a Series shall be in such amounts as may be declared from
time to time by the Board of Directors, and such dividends and
distributions may vary with respect to that class from the
dividends and distributions may vary with respect to that class
from the dividends and distributions with respect to the other
classes of capital stock of the Series to reflect differing
allocations of the expenses of the Corporation and of the Series
among the classes, which may include, without limitation,
reductions for payments of fees under any 12b-1 Plan adopted for,
or relating to, the Class B shares of the Series in accordance with
the Investment Company Act of 1940 ("the 1940 Act"), and any
resultant difference among the net asset values per share as the
Board of Directors may deem appropriate.
(2) Except as otherwise required by law, Class B shares of a
series (I) shall have exclusive voting rights with respect to any
matter submitted to a vote of stockholders that affects only
holders of Class B shares of the Series, including, without
limitation, the provisions of any 12b-1 Plan adopted for, or
relating to the Class B shares; and (ii) shall not have voting
rights with respect to the provisions of any distribution plan
adopted pursuant to Rule 12b-1 under the 1940 Act applicable to any
other class of the Series or with regard to any other matter
submitted to a vote of stockholders which does not now or in the
future affect the holders of the Class B shares of the Series.
(3) Class B shares of each Series may be subject to an initial
sales charge and to a service and/or distribution fee pursuant to
the terms of the issuance of such shares, and the proceeds of the
redemption of Class B shares of a Series may be reduced by the
amount of any contingent deferred sales charge or other charge
payable on such redemption pursuant to the terms of the issuance of
the shares, as set forth in the Corporation's registration
statement on Form N-1A pursuant to the Securities Act of 1933 and
the 1940 Act (the "Registration Statement") and determined in
accordance with the applicable provisions of the 1940 Act and the
rules and regulations of the National Association of Securities
Dealers, Inc. (the "NASD").
(4) The allocation of investment income and losses, realized and
unrealized capital gains and losses, and expenses and liabilities
of the Corporation and of the Series among and between the classes
of a Series and any other class of the Corporation's capital stock
and the determination of their respective net asset values and
rights upon liquidation of the Corporation or of the Series or upon
dissolution of the Corporation shall be determined conclusively by
the Board of Directors in a manner that is consistent with Rule
18f-3 of the 1940 Act and any existing or future amendment to that
rule or any rule or interpretation under the 1940 Act that
modifies, is an authorized alternative to, or supersedes that rule
(the "Rule").
(5) At such times as may be determined by the Board of Directors
(or with the authorization of the Board of Directors, the officers
of the Corporation) in accordance with the Rule, the 1940 Act and
applicable rules and regulations of the NASD, and reflected in the
Registration Statement with respect to the particular Series, Class
B shares of the Series may be converted automatically into Class A
shares of the Series based on the relative net asset values of
those classes of the Series at the time of conversion, subject,
however, to any conditions of conversion that may be imposed by the
Board of Directors (or with the authorization of the Board of
Directors, the officers of the corporation) and reflected in the
Registration Statement with respect to the Series.
SIXTH: The Corporation is registered as an open-end company under the
Investment Company Act of 1940. The total number of shares that the
Corporation has authority to issue has been increased by the Board of
Directors in accordance with Section 2-105(C) of the Corporations and
Associations Article of the Annotated Code of Maryland. The shares of
capital stock classified herein have been classified by the Board of
Directors pursuant to authority contained in the Charter of the Corporation.
IN WITNESS WHEREOF, the Corporation has caused these Articles
Supplementary to be signed in its name and on its behalf by its undersigned
authorized officers who acknowledge that these Articles Supplementary are the
act of the Corporation, that to the best of their knowledge, information and
belief, the matters and facts set forth herein relating to the authorization
and approval of these Articles Supplementary are true in all material
respects.
Presented and witnessed on this 15th day of December, 1998.
FRANKLIN CUSTODIAN FUNDS, INC.
By: /s/C.B. Johnson
Charles B. Johnson, President
WITNESS: /s/Brian E. Lorenz
Brian E. Lorenz, Secretary
FRANKLIN CUSTODIAN FUNDS, INC.
777 Mariners Island Blvd.
San Mateo, California 94404
Franklin/Templeton Distributors, Inc
777 Mariners Island Blvd.
San Mateo, CA 94404
Re: Amendment of Amended and Restated Distribution Agreement
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund," which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act") and whose shares are
registered under the Securities Act of 1933, as amended (the "1933 Act"). You
have informed us that your company is registered as a broker-dealer under the
provisions of the Securities Exchange Act of 1934, as amended (the "1934 Act")
and that your company is a member of the National Association of Securities
Dealers, Inc.
This agreement is an amendment (the "Amendment") of the Amended and Restated
Distribution Agreement (the "Agreement") currently in effect between you and us.
As used herein all capitalized terms herein have the meanings set forth in the
Agreement. We have been authorized to execute and deliver the Amendment to you
by a resolution of our Board passed at a meeting at which a majority of Board
members, including a majority who are not otherwise interested persons of the
Fund and who are not interested persons of our investment adviser, its related
organizations or of you or your related organizations, were present and voted in
favor of such resolution approving the Amendment.
To the extent that any provision of the Amendment conflicts with any provision
of the Agreement, the Amendment provision supersedes the Agreement provision.
The Agreement and the Amendment together constitute the entire agreement between
the parties hereto and supersede all prior oral or written agreements between
the parties hereto.
Section 4. entitled "Compensation" is amended by adding the following sentences
at the end
of Subsection 4.B:
The compensation provided in the Class B Distribution Plan applicable to
Class B Shares (the "Class B Plan") is divided into a distribution fee and
a service fee, each of which fees is in compensation for different services
to be rendered to the Fund. Subject to the termination provisions in the
Class B Plan, the distribution fee with respect to the sale of a Class B
Share shall be earned when such Class B Share is sold and shall be payable
from time to time as provided in the Class B Plan. The distribution fee
payable to you as provided in the Class B Plan shall be payable without
offset, defense or counterclaim (it being understood by the parties hereto
that nothing in this sentence shall be deemed a waiver by the Fund of any
claim the Fund may have against you). You may direct the Fund to cause our
custodian to pay such distribution fee to Lightning Finance Company Limited
("LFL") or other persons providing funds to you to cover expenses referred
to in Section 2(a) of the Class B Plan and to cause our custodian to pay
the service fee to you for payment to dealers or others or directly to
others to cover expenses referred to in Section 2(b) of the Class B Plan.
We understand that you intend to assign your right to receive certain
distribution fees with respect to Class B Shares to LFL in exchange for
funds that you will use to cover expenses referred to in Section 2(a) of
the Class B Plan. In recognition that we will benefit from your arrangement
with LFL, we agree that, in addition to the provisions of Section 7 (iii)
of the Class B Plan, we will not pay to any person or entity, other than
LFL, any such assigned distribution fees related to Class B Shares sold by
you prior to the termination of either the Agreement or the Class B Plan.
We agree that the preceding sentence shall survive termination of the
Agreement.
Section 4. entitled "Compensation" is amended by adding the following
Subsection 4.C. after Subsection 4.B.:
C. With respect to the sales commission on the redemption of Shares of each
series and class of the Fund as provided in Subsection 4.A. above, we will
cause our shareholder services agent (the "Transfer Agent") to withhold
from redemption proceeds payable to holders of the Shares all contingent
deferred sales charges properly payable by such holders in accordance with
the terms of our then current prospectuses and statements of additional
information (each such sales charge, a "CDSC"). Upon receipt of an order
for redemption, the Transfer Agent shall direct our custodian to transfer
such redemption proceeds to a general trust account. We shall then cause
the Transfer Agent to pay over to you or your assigns from the general
trust account such CDSCs properly payable by such holders as promptly as
possible after the settlement date for each such redemption of Shares.
CDSCs shall be payable without offset, defense or counterclaim (it being
understood that nothing in this sentence shall be deemed a waiver by us of
any claim we may have against you.) You may direct that the CDSCs payable
to you be paid to any other person.
Section 11. entitled "Conduct of Business" is amended by replacing the
reference in the second paragraph to "Rules of Fair Practice" with a
reference to the "Conduct Rules".
Section 16. entitled "Miscellaneous" is amended in the first paragraph by
changing the first letter of each of the words in each of the terms in
quotations marks, except "Parent," to the lower case and giving to the term
"assignment" the meaning as set forth only in the 1940 Act and the Rules
and Regulations thereunder (and not as set forth in the 1933 Act and the
Rules and Regulations thereunder.)
If the foregoing meets with your approval, please acknowledge your
acceptance by signing each of the enclosed copies, whereupon this will
become a binding agreement as of the date set forth below.
Very truly yours,
FRANKLIN CUSTODIAN FUNDS, INC.
By: /s/D.R. GATZEK
Deborah R. Gatzek
Vice President &
Assistant Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By: /s/H.E. BURNS
Harmon E. Burns
Executive Vice President
Dated: January 12, 1999
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>
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Delaware Business U.S. Government Adjustable Rate Mortgage
Portfolios Trust Portfolio
Franklin Asset Allocation Fund Delaware Business
Trust
Franklin California Tax-Free Maryland Corporation
Income
Fund, Inc.
Franklin California Tax-Free Massachusetts Franklin California Insured Tax-Free
Trust Business Trust 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 California
Income Fund Corporation
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------
Franklin Gold Fund California
Corporation
Franklin High Income Trust Delaware Business AGE High Income Fund
Trust
Franklin Investors Securities Massachusetts Franklin Global Government Income Fund
Trust Business Trust Franklin Short-Intermediate U.S. Govt
Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government
Securities Fund
Franklin Equity Income Fund
Franklin Bond Fund
Franklin Managed Trust Delaware Business Franklin Rising Dividends Fund
Trust
Franklin Money Fund California
Corporation
Franklin Municipal Securities Delaware Business Franklin California High Yield Municipal
Trust Trust Fund
Franklin Tennessee Municipal Bond Fund
Franklin Mutual Series Fund Maryland Corporation Mutual Shares Fund
Inc. Mutual Beacon Fund
Mutual Qualified Fund
Mutual Discovery Fund
Mutual European Fund
Mutual Financial Services Fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin New York Tax-Free Delaware Business
Income Fund Trust
Franklin New York Tax-Free Massachusetts Franklin New York Tax-Exempt Money Fund
Trust Business Trust Franklin New York Intermediate-Term
Tax-Free
Income Fund
Franklin New York Insured Tax-Free
Income Fund
Franklin Real Estate Delaware Business Franklin Real Estate Securities Fund
Securities Trust Trust
Franklin Strategic Mortgage Delaware Business
Portfolio Trust
Franklin Strategic Series Delaware Business Franklin California Growth Fund
Trust 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 U.S. Long-Short Fund
Franklin Large Cap Growth Fund
Franklin Aggressive Growth Fund
Franklin Tax-Exempt Money Fund California
Corporation
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
Franklin Tax-Free Trust Massachusetts Franklin Massachusetts Insured Tax-Free
Business Trust Income Fund
Franklin Michigan Insured Tax-Free
Income Fund
Franklin Minnesota Insured Tax-Free
Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income
Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income
Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin 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
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Templeton Fund Delaware Business Franklin Templeton Conservative Target
Allocator Series Trust Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Global Trust Delaware Business Franklin Templeton Global Currency Fund
Trust Franklin Templeton Hard Currency Fund
Franklin Templeton Delaware Business Templeton Pacific Growth Fund
International Trust Trust Templeton Foreign Smaller Companies Fund
Franklin Templeton Money Fund Delaware Business Franklin Templeton Money Fund
Trust Trust
Franklin Value Investors Trust Massachusetts Franklin Balance Sheet Investment Fund
Business Trust Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Templeton Variable Massachusetts Franklin Money Market Fund
Insurance Products Trust Business Trust Franklin Growth and Income Fund
Franklin Natural Resources Securities
Fund
Franklin Real Estate Fund
Franklin Global Communications
Securities Fund
Franklin High Income Fund
Templeton Global Income Securities Fund
Franklin Income Securities Fund
Franklin U.S. Government Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Franklin Rising Dividends Securities Fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Templeton Variable Massachusetts Templeton Pacific Growth Fund
Insurance Products Trust Business Trust Templeton International Equity Fund
(cont.) Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation Fund
Franklin Small Cap Fund
Franklin Large Cap Growth Securities Fund
Templeton International Smaller
Companies Fund
Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Franklin Global Health Care Securities
Fund
Franklin Value Securities Fund
Franklin Aggressive Growth Securities
Fund
- -----------------------------------------------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Money Market Portfolio
Business Trust Franklin U.S. Government Securities
Money Market
Portfolio
Franklin Cash Reserves Fund
The Money Market Portfolios Delaware Business The Money Market Portfolio
Trust The U.S. Government Securities Money
Market Portfolio
Templeton Variable Products Franklin Growth Investments Fund
Series Fund Mutual Shares Investments Fund
Mutual Discovery Investments Fund
Franklin Small Cap Investments Fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts
Business Trust
Franklin Universal Trust Massachusetts
Business Trust
Franklin Floating Rate Trust Delaware Business
Trust
- -----------------------------------------------------------------------------------------------
</TABLE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 81
to the Registration Statement of Franklin Custodian Funds, Inc. on Form N-1A,
File No. 2-11346, of our report dated November 1, 1999, 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, 1999, filed with the Securities and Exchange Commission pursuant
to section 30(d) of the Investment Company Act of 1940, which is incorporated by
reference in the Registration Statement. We also consent to the reference to our
firm under the captions "Financial Highlights" and "Auditor."
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Francisco, California
January 28, 2000
CLASS B DISTRIBUTION PLAN
I. Investment Company: FRANKLIN CUSTODIAN FUNDS, INC.
II. Fund: UTILITIES SERIES - CLASS B
INCOME SERIES - CLASS B
U.S GOVERNMENT SECURITIES SERIES - CLASS B
III. Maximum Per Annum Rule 12b-1 Fees for Class B Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.50%
B. Service Fee: 0.15%
PREAMBLE TO CLASS B DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted
pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"Act") by the Investment Company named above ("Investment Company")
for the class B shares (the "Class") of each Fund named above
("Fund"), which Plan shall take effect as of the date Class B shares
are first offered (the "Effective Date of the Plan"). The Plan has
been approved by a majority of the Board of Directors of the
Investment Company (the "Board"), including a majority of the Board
members who are not interested persons of the Investment Company and
who have no direct, or indirect financial interest in the operation
of the Plan (the "non-interested Board members"), cast in person at a
meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and
nature of payments and terms of the Management Agreement between the
Investment Company and Franklin Advisers, Inc. and the terms of the
Underwriting Agreement between the Investment Company and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
concluded that the compensation of Advisers, under the Management
Agreement, and of Distributors, under the Underwriting Agreement, was
fair and not excessive. The approval of the Plan included a
determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
The Board recognizes that Distributors has entered into an
arrangement with a third party in order to finance the distribution
activities of the Class pursuant to which Distributors may assign its
rights to the fees payable hereunder to such third party. The Board
further recognizes that it has an obligation to act in good faith and
in the best interests of each Fund and its shareholders when
considering the continuation or termination of the Plan and any
payments to be made thereunder.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a monthly fee not
to exceed the above-stated maximum distribution fee per annum of the
Class' average daily net assets represented by shares of the Class,
as may be determined by the Board from time to time.
(b) In addition to the amounts described in (a) above, the
Fund shall pay (i) to Distributors for payment to dealers or others,
or (ii) directly to others, an amount not to exceed the above-stated
maximum service fee per annum of the Class' average daily net assets
represented by shares of the Class, as may be determined by the
Investment Company's Board from time to time, as a service fee
pursuant to servicing agreements which have been approved from time
to time by the Board, including the non-interested Board members.
2. (a) The monies paid to Distributors pursuant to Paragraph
1(a) above shall be treated as compensation for Distributors'
distribution-related services including compensation for amounts
advanced to securities dealers or their firms or others selling
shares of the Class who have executed an agreement with the
Investment Company, Distributors or its affiliates, which form of
agreement has been approved from time to time by the Board, including
the non-interested Board members, with respect to the sale of Class
shares. In addition, such monies may be used to compensate
Distributors for other expenses incurred to assist in the
distribution and promotion of shares of the Class. Payments made to
Distributors under the Plan may be used for, among other things, 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 pro-rated portion of Distributors' overhead expenses
attributable to the distribution of Class shares, as well as for
additional distribution fees paid to securities dealers or their
firms or others who have executed agreements with the Investment
Company, Distributors or its affiliates, or for certain promotional
distribution charges paid to broker-dealer firms or others, or for
participation in certain distribution channels. None of such
payments are the legal obligation of Distributors or its designee.
(b) The monies to be paid pursuant to paragraph 1(b) above
shall be used to pay dealers or others for, among other things,
furnishing personal services and maintaining shareholder accounts,
which services include, among other things, assisting in establishing
and maintaining customer accounts and records; assisting with
purchase and redemption requests; arranging for bank wires;
monitoring dividend payments from the Fund on behalf of customers;
forwarding certain shareholder communications from the Fund to
customers; receiving and answering correspondence; and aiding in
maintaining the investment of their respective customers in the
Class. Any amounts paid under this paragraph 2(b) shall be paid
pursuant to a servicing or other agreement, which form of agreement
has been approved from time to time by the Board. None of such
payments are the legal obligation of Distributors or its designee.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that the
Fund, Advisers, Distributors or other parties on behalf of the Fund,
Advisers or Distributors make payments that are deemed to be payments
by the Fund for the financing of any activity primarily intended to
result in the sale of Class shares issued by the Fund within the
context of Rule 12b-1 under the Act, then such payments shall be
deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which
include payments specified in paragraphs 1 and 2, plus any other
payments deemed to be made pursuant to the Plan under this paragraph,
exceed the amount permitted to be paid pursuant to Rule 2830(d) of
the Conduct Rules of the National Association of Securities Dealers,
Inc.
4. Distributors shall furnish to the Board, for its review, on
a quarterly basis, a written report of the monies paid to it and to
others under the Plan, and shall furnish the Board with such other
information as the Board may reasonably request in connection with
the payments made under the Plan in order to enable the Board to make
an informed determination of whether the Plan should be continued.
5. (a) Distributors may assign, transfer or pledge
("Transfer") to one or more designees (each an "Assignee"), its rights
to all or a designated portion of the fees to which it is entitled
under paragraph 1 of this Plan from time to time (but not
Distributors' duties and obligations pursuant hereto or pursuant to
any distribution agreement in effect from time to time, if any,
between Distributors and the Fund), free and clear of any offsets or
claims the Fund may have against Distributors. Each such Assignee's
ownership interest in a Transfer of a specific designated portion of
the fees to which Distributors is entitled is hereafter referred to
as an "Assignee's 12b-1 Portion." A Transfer pursuant to this
Section 5(a) shall not reduce or extinguish any claims of the Fund
against Distributors.
(b) Distributors shall promptly notify the Fund in writing
of each such Transfer by providing the Fund with the name and address
of each such Assignee.
(c) Distributors may direct the Fund to pay any Assignee's
12b-1 Portion directly to each Assignee. In such event, Distributors
shall provide the Fund with a monthly calculation of the amount to
which each Assignee is entitled (the "Monthly Calculation"). In such
event, the Fund shall, upon receipt of such notice and Monthly
Calculation from Distributors, make all payments required directly to
the Assignee in accordance with the information provided in such
notice and Monthly Calculation upon the same terms and conditions as
if such payments were to be paid to Distributors.
(d) Alternatively, in connection with a Transfer,
Distributors may direct the Fund to pay all or a portion of the fees
to which Distributors is entitled from time to time to a depository
or collection agent designated by any Assignee, which depository or
collection agent may be delegated the duty of dividing such fees
between the Assignee's 12b-1 Portion and the balance (such balance,
when distributed to Distributors by the depository or collection
agent, the "Distributors' 12b-1 Portion"), in which case only
Distributors' 12b-1 Portion may be subject to offsets or claims the
Fund may have against Distributors.
6. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically approved at
least annually by the Board, including the non-interested Board
members, cast in person at a meeting called for the purpose of voting
on the Plan. In determining whether there is a reasonable likelihood
that the continuation of the Plan will benefit the Fund and its
shareholders, the Board may, but is not obligated to, consider that
Distributors has incurred substantial cost and has entered into an
arrangement with a third party in order to finance the distribution
activities for the Class.
7. This Plan and any agreements entered into pursuant to this
Plan may be terminated with respect to the shares of the Class,
without penalty, at any time by vote of a majority of the
non-interested Board members of the Investment Company, or by vote of
a majority of outstanding Shares of such Class. Upon termination of
this Plan with respect to the Class, the obligation of the Fund to
make payments pursuant to this Plan with respect to such Class shall
terminate, and the Fund shall not be required to make payments
hereunder beyond such termination date with respect to expenses
incurred in connection with Class shares sold prior to such
termination date, provided, in each case that each of the
requirements of a Complete Termination of this Plan in respect of
such Class, as defined below, are met. For purposes of this Section
7, a "Complete Termination" of this Plan in respect of the Class
shall mean a termination of this Plan in respect of such Class,
provided that: (i) the non-interested Board members of the
Investment Company shall have acted in good faith and shall have
determined that such termination is in the best interest of the
Investment Company and the shareholders of the Fund and the Class;
(ii) and the Investment Company does not alter the terms of the
contingent deferred sales charges applicable to Class shares
outstanding at the time of such termination; and (iii) unless
Distributors at the time of such termination was in material breach
under the distribution agreement in respect of the Fund, the Fund
shall not, in respect of such Fund, pay to any person or entity,
other than Distributors or its designee, either the payments
described in paragraph 1(a) or 1(b) or in respect of the Class shares
sold by Distributors prior to such termination.
8. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 1 hereof without
approval by a majority of the outstanding voting securities of the
Class of the Fund.
9. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by the
non-interested Board members cast in person at a meeting called for
the purpose of voting on any such amendment.
10. So long as the Plan is in effect, the selection and
nomination of the Fund's non-interested Board members shall be
committed to the discretion of such non-interested Board members.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Investment Company and Distributors as
evidenced by their execution hereof.
Date: October 16, 1998
FRANKLIN CUSTODIAN FUNDS, INC.
By: /s/ D.R. GATZEK
Deborah R. Gatzek
Vice President &
Assistant Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: /s/ H.E. BURNS
Harmon E. Burns
Executive Vice President
CLASS B DISTRIBUTION PLAN
I. Investment Company: FRANKLIN CUSTODIAN FUNDS, INC.
II. Fund: DYNATECH SERIES - CLASS B
III. Maximum Per Annum Rule 12b-1 Fees for Class B Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS B DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted
pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"Act") by the Investment Company named above ("Investment Company")
for the class B shares (the "Class") of the Fund named above
("Fund"), which Plan shall take effect as of the date Class B shares
are first offered (the "Effective Date of the Plan"). The Plan has
been approved by a majority of the Board of Directors of the
Investment Company (the "Board"), including a majority of the Board
members who are not interested persons of the Investment Company and
who have no direct, or indirect financial interest in the operation
of the Plan (the "non-interested Board members"), cast in person at a
meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and
nature of payments and terms of the Management Agreement between the
Investment Company and Franklin Investment Advisory Services, Inc.
("Advisers") and the terms of the Underwriting Agreement between the
Investment Company and Franklin/Templeton Distributors, Inc.
("Distributors"). The Board concluded that the compensation of
Advisers, under the Management Agreement, and of Distributors, under
the Underwriting Agreement, was fair and not excessive. The approval
of the Plan included a determination that in the exercise of their
reasonable business judgment and in light of their fiduciary duties,
there is a reasonable likelihood that the Plan will benefit the Fund
and its shareholders.
The Board recognizes that Distributors has entered into an
arrangement with a third party in order to finance the distribution
activities of the Class pursuant to which Distributors may assign its
rights to the fees payable hereunder to such third party. The Board
further recognizes that it has an obligation to act in good faith and
in the best interests of the Fund and its shareholders when
considering the continuation or termination of the Plan and any
payments to be made thereunder.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a monthly fee not
to exceed the above-stated maximum distribution fee per annum of the
Class' average daily net assets represented by shares of the Class,
as may be determined by the Board from time to time.
(b) In addition to the amounts described in (a) above, the
Fund shall pay (i) to Distributors for payment to dealers or others,
or (ii) directly to others, an amount not to exceed the above-stated
maximum service fee per annum of the Class' average daily net assets
represented by shares of the Class, as may be determined by the
Investment Company's Board from time to time, as a service fee
pursuant to servicing agreements which have been approved from time
to time by the Board, including the non-interested Board members.
2. (a) The monies paid to Distributors pursuant to Paragraph
1(a) above shall be treated as compensation for Distributors'
distribution-related services including compensation for amounts
advanced to securities dealers or their firms or others selling
shares of the Class who have executed an agreement with the
Investment Company, Distributors or its affiliates, which form of
agreement has been approved from time to time by the Board, including
the non-interested Board members, with respect to the sale of Class
shares. In addition, such monies may be used to compensate
Distributors for other expenses incurred to assist in the
distribution and promotion of shares of the Class. Payments made to
Distributors under the Plan may be used for, among other things, 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 pro-rated portion of Distributors' overhead expenses
attributable to the distribution of Class shares, as well as for
additional distribution fees paid to securities dealers or their
firms or others who have executed agreements with the Investment
Company, Distributors or its affiliates, or for certain promotional
distribution charges paid to broker-dealer firms or others, or for
participation in certain distribution channels. None of such
payments are the legal obligation of Distributors or its designee.
(b) The monies to be paid pursuant to paragraph 1(b) above
shall be used to pay dealers or others for, among other things,
furnishing personal services and maintaining shareholder accounts,
which services include, among other things, assisting in establishing
and maintaining customer accounts and records; assisting with
purchase and redemption requests; arranging for bank wires;
monitoring dividend payments from the Fund on behalf of customers;
forwarding certain shareholder communications from the Fund to
customers; receiving and answering correspondence; and aiding in
maintaining the investment of their respective customers in the
Class. Any amounts paid under this paragraph 2(b) shall be paid
pursuant to a servicing or other agreement, which form of agreement
has been approved from time to time by the Board. None of such
payments are the legal obligation of Distributors or its designee.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that the
Fund, Advisers, Distributors or other parties on behalf of the Fund,
Advisers or Distributors make payments that are deemed to be payments
by the Fund for the financing of any activity primarily intended to
result in the sale of Class shares issued by the Fund within the
context of Rule 12b-1 under the Act, then such payments shall be
deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which
include payments specified in paragraphs 1 and 2, plus any other
payments deemed to be made pursuant to the Plan under this paragraph,
exceed the amount permitted to be paid pursuant to Rule 2830(d) of
the Conduct Rules of the National Association of Securities Dealers,
Inc.
4. Distributors shall furnish to the Board, for its review, on
a quarterly basis, a written report of the monies paid to it and to
others under the Plan, and shall furnish the Board with such other
information as the Board may reasonably request in connection with
the payments made under the Plan in order to enable the Board to make
an informed determination of whether the Plan should be continued.
5. (a) Distributors may assign, transfer or pledge
("Transfer") to one or more designees (each an "Assignee"), its rights
to all or a designated portion of the fees to which it is entitled
under paragraph 1 of this Plan from time to time (but not
Distributors' duties and obligations pursuant hereto or pursuant to
any distribution agreement in effect from time to time, if any,
between Distributors and the Fund), free and clear of any offsets or
claims the Fund may have against Distributors. Each such Assignee's
ownership interest in a Transfer of a specific designated portion of
the fees to which Distributors is entitled is hereafter referred to
as an "Assignee's 12b-1 Portion." A Transfer pursuant to this
Section 5(a) shall not reduce or extinguish any claims of the Fund
against Distributors.
(b) Distributors shall promptly notify the Fund in writing
of each such Transfer by providing the Fund with the name and address
of each such Assignee.
(c) Distributors may direct the Fund to pay any Assignee's
12b-1 Portion directly to each Assignee. In such event, Distributors
shall provide the Fund with a monthly calculation of the amount to
which each Assignee is entitled (the "Monthly Calculation"). In such
event, the Fund shall, upon receipt of such notice and Monthly
Calculation from Distributors, make all payments required directly to
the Assignee in accordance with the information provided in such
notice and Monthly Calculation upon the same terms and conditions as
if such payments were to be paid to Distributors.
(d) Alternatively, in connection with a Transfer,
Distributors may direct the Fund to pay all or a portion of the fees
to which Distributors is entitled from time to time to a depository
or collection agent designated by any Assignee, which depository or
collection agent may be delegated the duty of dividing such fees
between the Assignee's 12b-1 Portion and the balance (such balance,
when distributed to Distributors by the depository or collection
agent, the "Distributors' 12b-1 Portion"), in which case only
Distributors' 12b-1 Portion may be subject to offsets or claims the
Fund may have against Distributors.
6. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically approved at
least annually by the Board, including the non-interested Board
members, cast in person at a meeting called for the purpose of voting
on the Plan. In determining whether there is a reasonable likelihood
that the continuation of the Plan will benefit the Fund and its
shareholders, the Board may, but is not obligated to, consider that
Distributors has incurred substantial cost and has entered into an
arrangement with a third party in order to finance the distribution
activities for the Class.
7. This Plan and any agreements entered into pursuant to this
Plan may be terminated with respect to the shares of the Class,
without penalty, at any time by vote of a majority of the
non-interested Board members of the Investment Company, or by vote of
a majority of outstanding Shares of such Class. Upon termination of
this Plan with respect to the Class, the obligation of the Fund to
make payments pursuant to this Plan with respect to such Class shall
terminate, and the Fund shall not be required to make payments
hereunder beyond such termination date with respect to expenses
incurred in connection with Class shares sold prior to such
termination date, provided, in each case that each of the
requirements of a Complete Termination of this Plan in respect of
such Class, as defined below, are met. For purposes of this Section
7, a "Complete Termination" of this Plan in respect of the Class
shall mean a termination of this Plan in respect of such Class,
provided that: (i) the non-interested Board members of the
Investment Company shall have acted in good faith and shall have
determined that such termination is in the best interest of the
Investment Company and the shareholders of the Fund and the Class;
(ii) and the Investment Company does not alter the terms of the
contingent deferred sales charges applicable to Class shares
outstanding at the time of such termination; and (iii) unless
Distributors at the time of such termination was in material breach
under the distribution agreement in respect of the Fund, the Fund
shall not, in respect of such Fund, pay to any person or entity,
other than Distributors or its designee, either the payments
described in paragraph 1(a) or 1(b) or in respect of the Class shares
sold by Distributors prior to such termination.
8. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 1 hereof without
approval by a majority of the outstanding voting securities of the
Class of the Fund.
9. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by the
non-interested Board members cast in person at a meeting called for
the purpose of voting on any such amendment.
10. So long as the Plan is in effect, the selection and
nomination of the Fund's non-interested Board members shall be
committed to the discretion of such non-interested Board members.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Investment Company and Distributors as
evidenced by their execution hereof.
Date: __________________
FRANKLIN CUSTODIAN FUNDS, INC.
By:________________________
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:________________________
MULTIPLE CLASS PLAN
on behalf of
GROWTH SERIES
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 its series, the GROWTH SERIES (the "Fund"). The Board has
determined that the Plan, including the expense allocation, 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 any Plan previously adopted for
the Fund.
1. The Fund shall offer four classes of shares, to be known as Class A
Shares, Class B Shares, Class C Shares and Advisor Class Shares.
2. Class A Shares shall carry a front-end sales charge ranging from 0%
- - 5.75%, and Class C Shares shall carry a front-end sales charge of 1.00%.
Class B Shares and the Advisor Class Shares shall not be subject to any
front-end sales charges.
3. Class A 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 B Shares shall be subject to a CDSC with the following CDSC
schedule: (a) Class B Shares redeemed within 2 years of their purchase shall
be assessed a CDSC of 4% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase; (b) Class B Shares
redeemed within the third and fourth years of their purchase shall be
assessed a CDSC of 3% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase; (c) Class B Shares
redeemed within 5 years of their purchase shall be assessed a CDSC of 2% on
the lesser of the then-current net asset value or the original net asset
value at the time of purchase; and (d) Class B Shares redeemed within 6 years
of their purchase shall be assessed a CDSC of 1% 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 described in the
Fund's prospectus.
Class C 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.
Advisor Class 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 A 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 A 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
A 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 Investment Company for the Class A Shares, the Distributor or its
affiliates.
The Rule 12b-1 Plan associated with the Class B Shares has two
components. The first component is an asset-based sales charge to be
retained by Distributor to compensate Distributor for amounts advanced to
securities dealers or their firms or others with respect to the sale of Class
B Shares. In addition, such payments may be retained by the Distributor to
be used in the promotion and distribution of Class B Shares in a manner
similar to that described above for Class A Shares. The second component is
a shareholder servicing fee to be paid to securities dealers or others who
provide personal assistance to shareholders in servicing their accounts.
The Rule 12b-1 Plan associated with the Class C 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 C Shares, in a manner similar to that described above
for Class A Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Advisor Class
Shares and, therefore, the Advisor Class Shares shall not be subject to
deductions relating to Rule 12b-1 fees.
The Rule 12b-1 Plans for the Class A, Class B and Class C Shares shall
operate in accordance with Rule 2830(d) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
5. The only difference in expenses as between Class A, Class B, Class
C, and Advisor Class Shares shall relate to differences in Rule 12b-1 plan
expenses, as described in the applicable Rule 12b-1 Plans; however, to the
extent that the Rule 12b-1 Plan expenses of one Class are the same as the
Rule 12b-1 Plan expenses of another Class, such classes shall be subject to
the same expenses.
6. There shall be no conversion features associated with the Class A,
Class C, and Advisor Class Shares. Each Class B Share, however, shall be
converted automatically, and without any action or choice on the part of the
holder of the Class B Shares, into Class A Shares on the conversion date
specified, and in accordance with the terms and conditions approved by the
Franklin Custodian Fund's Board of Directors and as described, in each fund's
prospectus relating to the Class B Shares, as such prospectus may be amended
from time to time; provided, however, that the Class B Shares shall be
converted automatically into Class A Shares to the extent and on the terms
permitted by the Investment Company Act of 1940 and the rules and regulations
adopted thereunder.
7. Shares of Class A, Class B, Class C and Advisor 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.
8. Each class will vote separately with respect to any Rule 12b-1 Plan
related to, or which now or in the future may affect, that class.
9. On an ongoing basis, the Board members, pursuant to their fiduciary
responsibilities under the Investment Company Act of 1940 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 the 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
March 19, 1998.
/s/ D.R. Gatzek
------------------
Deborah R. Gatzek
Assistant Secretary
MULTIPLE CLASS PLAN
on behalf of
UTILITIES SERIES
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 its series, the UTILITIES SERIES (the "Fund"). The Board has
determined that the Plan, including the expense allocation, 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 any Plan previously adopted for
the Fund.
1. The Fund shall offer four classes of shares, to be known as Class A
Shares, Class B Shares, Class C Shares and Advisor Class Shares.
2. Class A Shares shall carry a front-end sales charge ranging from 0%
- - 4.25%, and Class C Shares shall carry a front-end sales charge of 1.00%.
Class B Shares and the Advisor Class Shares shall not be subject to any
front-end sales charges.
3. Class A 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 B Shares shall be subject to a CDSC with the following CDSC
schedule: (a) Class B Shares redeemed within 2 years of their purchase shall
be assessed a CDSC of 4% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase; (b) Class B Shares
redeemed within the third and fourth years of their purchase shall be
assessed a CDSC of 3% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase; (c) Class B Shares
redeemed within 5 years of their purchase shall be assessed a CDSC of 2% on
the lesser of the then-current net asset value or the original net asset
value at the time of purchase; and (d) Class B Shares redeemed within 6 years
of their purchase shall be assessed a CDSC of 1% 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 described in the
Fund's prospectus.
Class C 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.
Advisor Class 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 A 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 A 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
A 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 Investment Company for the Class A Shares, the Distributor or its
affiliates.
The Rule 12b-1 Plan associated with the Class B Shares has two
components. The first component is an asset-based sales charge to be
retained by Distributor to compensate Distributor for amounts advanced to
securities dealers or their firms or others with respect to the sale of Class
B Shares. In addition, such payments may be retained by the Distributor to
be used in the promotion and distribution of Class B Shares in a manner
similar to that described above for Class A Shares. The second component is
a shareholder servicing fee to be paid to securities dealers or others who
provide personal assistance to shareholders in servicing their accounts.
The Rule 12b-1 Plan associated with the Class C 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 C Shares, in a manner similar to that described above
for Class A Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Advisor Class
Shares and, therefore, the Advisor Class Shares shall not be subject to
deductions relating to Rule 12b-1 fees.
The Rule 12b-1 Plans for the Class A, Class B and Class C Shares shall
operate in accordance with Rule 2830(d) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
5. The only difference in expenses as between Class A, Class B, Class
C, and Advisor Class Shares shall relate to differences in Rule 12b-1 plan
expenses, as described in the applicable Rule 12b-1 Plans; however, to the
extent that the Rule 12b-1 Plan expenses of one Class are the same as the
Rule 12b-1 Plan expenses of another Class, such classes shall be subject to
the same expenses.
6. There shall be no conversion features associated with the Class A,
Class C, and Advisor Class Shares. Each Class B Share, however, shall be
converted automatically, and without any action or choice on the part of the
holder of the Class B Shares, into Class A Shares on the conversion date
specified, and in accordance with the terms and conditions approved by the
Franklin Custodian Fund's Board of Directors and as described, in each fund's
prospectus relating to the Class B Shares, as such prospectus may be amended
from time to time; provided, however, that the Class B Shares shall be
converted automatically into Class A Shares to the extent and on the terms
permitted by the Investment Company Act of 1940 and the rules and regulations
adopted thereunder.
7. Shares of Class A, Class B, Class C and Advisor 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.
8. Each class will vote separately with respect to any Rule 12b-1 Plan
related to, or which now or in the future may affect, that class.
9. On an ongoing basis, the Board members, pursuant to their fiduciary
responsibilities under the Investment Company Act of 1940 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 the 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
March 19, 1998.
/s/ D.R. Gatzek
-------------------
Deborah R. Gatzek
Assistant Secretary
MULTIPLE CLASS PLAN
on behalf of
INCOME SERIES
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 its series, the INCOME SERIES (the "Fund"). The Board has
determined that the Plan, including the expense allocation, 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 any Plan previously adopted for
the Fund.
1. The Fund shall offer four classes of shares, to be known as Class A
Shares, Class B Shares, Class C Shares and Advisor Class Shares.
2. Class A Shares shall carry a front-end sales charge ranging from 0%
- - 4.25%, and Class C Shares shall carry a front-end sales charge of 1.00%.
Class B Shares and the Advisor Class Shares shall not be subject to any
front-end sales charges.
3. Class A 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 B Shares shall be subject to a CDSC with the following CDSC
schedule: (a) Class B Shares redeemed within 2 years of their purchase shall
be assessed a CDSC of 4% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase; (b) Class B Shares
redeemed within the third and fourth years of their purchase shall be
assessed a CDSC of 3% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase; (c) Class B Shares
redeemed within 5 years of their purchase shall be assessed a CDSC of 2% on
the lesser of the then-current net asset value or the original net asset
value at the time of purchase; and (d) Class B Shares redeemed within 6 years
of their purchase shall be assessed a CDSC of 1% 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 described in the
Fund's prospectus.
Class C 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.
Advisor Class 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 A 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 A 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
A 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 Investment Company for the Class A Shares, the Distributor or its
affiliates.
The Rule 12b-1 Plan associated with the Class B Shares has two
components. The first component is an asset-based sales charge to be
retained by Distributor to compensate Distributor for amounts advanced to
securities dealers or their firms or others with respect to the sale of Class
B Shares. In addition, such payments may be retained by the Distributor to
be used in the promotion and distribution of Class B Shares in a manner
similar to that described above for Class A Shares. The second component is
a shareholder servicing fee to be paid to securities dealers or others who
provide personal assistance to shareholders in servicing their accounts.
The Rule 12b-1 Plan associated with the Class C 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 C Shares, in a manner similar to that described above
for Class A Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Advisor Class
Shares and, therefore, the Advisor Class Shares shall not be subject to
deductions relating to Rule 12b-1 fees.
The Rule 12b-1 Plans for the Class A, Class B and Class C Shares shall
operate in accordance with Rule 2830(d) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
5. The only difference in expenses as between Class A, Class B, Class
C, and Advisor Class Shares shall relate to differences in Rule 12b-1 plan
expenses, as described in the applicable Rule 12b-1 Plans; however, to the
extent that the Rule 12b-1 Plan expenses of one Class are the same as the
Rule 12b-1 Plan expenses of another Class, such classes shall be subject to
the same expenses.
6. There shall be no conversion features associated with the Class A,
Class C, and Advisor Class Shares. Each Class B Share, however, shall be
converted automatically, and without any action or choice on the part of the
holder of the Class B Shares, into Class A Shares on the conversion date
specified, and in accordance with the terms and conditions approved by the
Franklin Custodian Fund's Board of Directors and as described, in each fund's
prospectus relating to the Class B Shares, as such prospectus may be amended
from time to time; provided, however, that the Class B Shares shall be
converted automatically into Class A Shares to the extent and on the terms
permitted by the Investment Company Act of 1940 and the rules and regulations
adopted thereunder.
7. Shares of Class A, Class B, Class C and Advisor 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.
8. Each class will vote separately with respect to any Rule 12b-1 Plan
related to, or which now or in the future may affect, that class.
9. On an ongoing basis, the Board members, pursuant to their fiduciary
responsibilities under the Investment Company Act of 1940 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 the 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
March 19, 1998.
/s/ D.R. Gatzek
----------------
Deborah R. Gatzek
Assistant Secretary
MULTIPLE CLASS PLAN
on behalf of
U.S. GOVERNMENT SECURITIES SERIES
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 its series, the U.S. GOVERNMENT SECURITIES SERIES (the
"Fund"). The Board has determined that the Plan, including the expense
allocation, 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 any Plan previously adopted for the Fund.
1. The Fund shall offer four classes of shares, to be known as Class A
Shares, Class B Shares, Class C Shares and Advisor Class Shares.
2. Class A Shares shall carry a front-end sales charge ranging from 0%
- - 4.25%, and Class C Shares shall carry a front-end sales charge of 1.00%.
Class B Shares and the Advisor Class Shares shall not be subject to any
front-end sales charges.
3. Class A 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 B Shares shall be subject to a CDSC with the following CDSC
schedule: (a) Class B Shares redeemed within 2 years of their purchase shall
be assessed a CDSC of 4% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase; (b) Class B Shares
redeemed within the third and fourth years of their purchase shall be
assessed a CDSC of 3% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase; (c) Class B Shares
redeemed within 5 years of their purchase shall be assessed a CDSC of 2% on
the lesser of the then-current net asset value or the original net asset
value at the time of purchase; and (d) Class B Shares redeemed within 6 years
of their purchase shall be assessed a CDSC of 1% 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 described in the
Fund's prospectus.
Class C 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.
Advisor Class 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 A 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 A 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
A 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 Investment Company for the Class A Shares, the Distributor or its
affiliates.
The Rule 12b-1 Plan associated with the Class B Shares has two
components. The first component is an asset-based sales charge to be
retained by Distributor to compensate Distributor for amounts advanced to
securities dealers or their firms or others with respect to the sale of Class
B Shares. In addition, such payments may be retained by the Distributor to
be used in the promotion and distribution of Class B Shares in a manner
similar to that described above for Class A Shares. The second component is
a shareholder servicing fee to be paid to securities dealers or others who
provide personal assistance to shareholders in servicing their accounts.
The Rule 12b-1 Plan associated with the Class C 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 C Shares, in a manner similar to that described above
for Class A Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Advisor Class
Shares and, therefore, the Advisor Class Shares shall not be subject to
deductions relating to Rule 12b-1 fees.
The Rule 12b-1 Plans for the Class A, Class B and Class C Shares shall
operate in accordance with Rule 2830(d) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
5. The only difference in expenses as between Class A, Class B, Class
C, and Advisor Class Shares shall relate to differences in Rule 12b-1 plan
expenses, as described in the applicable Rule 12b-1 Plans; however, to the
extent that the Rule 12b-1 Plan expenses of one Class are the same as the
Rule 12b-1 Plan expenses of another Class, such classes shall be subject to
the same expenses.
6. There shall be no conversion features associated with the Class A,
Class C, and Advisor Class Shares. Each Class B Share, however, shall be
converted automatically, and without any action or choice on the part of the
holder of the Class B Shares, into Class A Shares on the conversion date
specified, and in accordance with the terms and conditions approved by the
Franklin Custodian Fund's Board of Directors and as described, in each fund's
prospectus relating to the Class B Shares, as such prospectus may be amended
from time to time; provided, however, that the Class B Shares shall be
converted automatically into Class A Shares to the extent and on the terms
permitted by the Investment Company Act of 1940 and the rules and regulations
adopted thereunder.
7. Shares of Class A, Class B, Class C and Advisor 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.
8. Each class will vote separately with respect to any Rule 12b-1 Plan
related to, or which now or in the future may affect, that class.
9. On an ongoing basis, the Board members, pursuant to their fiduciary
responsibilities under the Investment Company Act of 1940 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 the 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 March 19, 1998.
/s/ D.R. Gatzek
-------------------
Deborah R. Gatzek
Assistant Secretary
MULTIPLE CLASS PLAN
on behalf of
DYNATECH SERIES
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 its series, the DYNATECH SERIES (the "Fund"). The Board has
determined that the Plan, including the expense allocation, 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 any Plan previously adopted for
the Fund.
1. The Fund shall offer three classes of shares, to be known as Class
A Shares, Class B Shares and Class C Shares.
2. Class A Shares shall carry a front-end sales charge ranging from %
- - 5.75 %, and Class C Shares shall carry a front-end sales charge of 1.00%.
Class B Shares shall not be subject to any front-end sales charges.
3. Class A 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 B Shares shall be subject to a CDSC with the following CDSC
schedule: (a) Class B Shares redeemed within 2 years of their purchase shall
be assessed a CDSC of 4% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase; (b) Class B Shares
redeemed within the third and fourth years of their purchase shall be
assessed a CDSC of 3% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase; (c) Class B Shares
redeemed within 5 years of their purchase shall be assessed a CDSC of 2% on
the lesser of the then-current net asset value or the original net asset
value at the time of purchase; and (d) Class B Shares redeemed within 6 years
of their purchase shall be assessed a CDSC of 1% 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 described in the
Fund's prospectus.
Class C 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.
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 A 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 A 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
A 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 Investment Company for the Class A Shares, the Distributor or its
affiliates.
The Rule 12b-1 Plan associated with the Class B Shares has two
components. The first component is an asset-based sales charge to be
retained by Distributor to compensate Distributor for amounts advanced to
securities dealers or their firms or others with respect to the sale of Class
B Shares. In addition, such payments may be retained by the Distributor to
be used in the promotion and distribution of Class B Shares in a manner
similar to that described above for Class A Shares. The second component is
a shareholder servicing fee to be paid to securities dealers or others who
provide personal assistance to shareholders in servicing their accounts.
The Rule 12b-1 Plan associated with the Class C 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 C Shares, in a manner similar to that described above
for Class A Shares.
The Rule 12b-1 Plans for the Class A, Class B and Class C Shares shall
operate in accordance with Rule 2830(d) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
5. The only difference in expenses as between Class A, Class B and
Class C Shares shall relate to differences in Rule 12b-1 plan expenses, as
described in the applicable Rule 12b-1 Plans; however, to the extent that the
Rule 12b-1 Plan expenses of one Class are the same as the Rule 12b-1 Plan
expenses of another Class, such classes shall be subject to the same expenses.
6. There shall be no conversion features associated with the Class A
and Class C Shares. Each Class B Share, however, shall be converted
automatically, and without any action or choice on the part of the holder of
the Class B Shares, into Class A Shares on the conversion date specified, and
in accordance with the terms and conditions approved by the Franklin
Custodian Funds, Inc.'s Board of Directors and as described, in each fund's
prospectus relating to the Class B Shares, as such prospectus may be amended
from time to time; provided, however, that the Class B Shares shall be
converted automatically into Class A Shares to the extent and on the terms
permitted by the Investment Company Act of 1940 and the rules and regulations
adopted thereunder.
7. Shares of Class A, Class B and Class C 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.
8. Each class will vote separately with respect to any Rule 12b-1 Plan
related to, or which now or in the future may affect, 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, Secretary of the Franklin Group of Funds, do
hereby certify that this Multiple Class Plan was adopted by Franklin
Custodian Funds, Inc., on behalf of its series the Dynatech Series, by a
majority of the Directors of the Fund on _________________.
-------------------
Deborah R. Gatzek
Assistant Secretary
POWER OF ATTORNEY
The undersigned officers and directors of FRANKLIN CUSTODIAN FUNDS, INC. (the
"Registrant") hereby appoint BRIAN E. LORENZ, HARMON E. BURNS, DEBORAH R.
GATZEK, KAREN L. SKIDMORE, LEIANN NUZUM, Murray L. Simpson, Barbara J. Green and
David P. Goss (with full power to each of them to act alone) his
attorney-in-fact and agent, in all capacities, to execute, deliver and file in
the names of the undersigned, any and all instruments that said attorneys and
agents may deem necessary or advisable to enable the Registrant to comply with
or register any security issued by the Registrant under the Securities Act of
1933, as amended, and/or the Investment Company Act of 1940, as amended, and the
rules, regulations and interpretations thereunder, including but not limited to,
any registration statement, including any and all pre- and post-effective
amendments thereto, any other document to be filed with the U.S. Securities and
Exchange Commission and any and all documents required to be filed with respect
thereto with any other regulatory authority. Each of the undersigned grants to
each of said attorneys, full authority to do every act necessary to be done in
order to effectuate the same as fully, to all intents and purposes, as he could
do if personally present, thereby ratifying all that said attorneys-in-fact and
agents may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in one or more counterparts, each of
which shall be deemed to be an original, and all of which shall be deemed to be
a single document.
The undersigned officers and directors hereby execute this Power of Attorney as
of the 20th day of January, 2000.
/s/Charles B. Johnson, /s/Harris J. Ashton,
Principal Executive Officer and Director Director
/s/S. Joseph Fortunato, /s/Edith E. Holiday,
Director Director
/s/Rupert H. Johnson, Jr., /s/Gordon S. Macklin,
Director Director
/s/Martin L. Flanagan, /s/Kimberley H. Monasterio,
Principal Financial Officer Principal Accounting Officer
CERTIFICATE OF SECRETARY
I, David P. Goss, certify that I am Assistant Secretary of FRANKLIN CUSTODIAN
FUNDS, INC. (the "Fund").
As Assistant Secretary of the Fund, I further certify that the following
resolution was adopted by a majority of Directors of the Fund present at a
meeting held at 777 Mariners Island Boulevard, San Mateo, California 94404, on
January 20, 2000.
RESOLVED, that a Power of Attorney, substantially in the form of the Power
of Attorney presented to this Board, appointing Harmon E. Burns, Deborah R.
Gatzek, Brian E. Lorenz, Karen L. Skidmore, Leiann Nuzum, Murray L.
Simpson, Barbara J. Green and David P. Goss as attorneys-in-fact for the
purpose of filing documents with the Securities and Exchange Commission, be
executed by each Director and designated officer.
I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.
/s/DAVID P. GOSS
Dated: JANUARY 28, 2000 David P. Goss
Assistant Secretary
