UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-537
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FRANKLIN CUSTODIAN FUNDS, INC.
------------------------------
(Exact name of registrant as specified in charter)
ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
(Address of principal executive offices) (Zip code)
MURRAY L. SIMPSON, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
-----------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (650) 312-2000
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Date of fiscal year end: 9/30
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Date of reporting period: 9/30/03
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ITEM 1. REPORTS TO STOCKHOLDERS.
SEPTEMBER 30, 2003
Franklin DynaTech Fund
Franklin Growth Fund
Franklin Income Fund
Franklin U.S. Government
Securities Fund
Franklin Utilities Fund
[PHOTO OMITTED]
ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN
CUSTODIAN FUNDS, INC.
WANT TO RECEIVE
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FRANKLIN(R) TEMPLETON(R)
INVESTMENTS
FRANKLIN o TEMPLETON o MUTUAL SERIES
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE
Franklin Templeton's distinct multi-manager structure combines the
specialized expertise of three world-class investment management
groups--Franklin, Templeton and Mutual Series.
Each of our portfolio management groups operates autonomously, relying on its
own research and staying true to the unique investment disciplines that underlie
its success.
FRANKLIN. Founded in 1947, Franklin is a leader in tax-free investing and a
driving force in fixed income investing around the globe. They also bring
expertise in growth- and value-style U.S. equity investing.
TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in
1954, launched what has become the industry's oldest global fund. Today, with
research offices in over 25 countries, they offer investors the broadest global
reach in the industry.
MUTUAL SERIES. Established in 1949, Mutual Series is dedicated to a unique style
of value investing, searching aggressively for opportunity among undervalued
stocks, arbitrage situations and distressed companies.
Because our management groups work independently and adhere to distinctly
different investment approaches, Franklin, Templeton and Mutual Series funds
typically have a low overlap of securities. That's why our funds can be used to
build truly diversified portfolios covering every major asset class.
At Franklin Templeton Investments, we seek to consistently provide investors
with exceptional risk-adjusted returns over the long term, as well as the
reliable account services that have helped us become one of the most trusted
names in financial services.
SPECIALIZED EXPERTISE
TRUE DIVERSIFICATION
RELIABILITY YOU CAN TRUST
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
[photo
omitted]
Not part of the annual report
Contents
SHAREHOLDER LETTER ....................... 1
ANNUAL REPORT
Franklin DynaTech Fund ................... 3
Franklin Growth Fund ..................... 9
Franklin Income Fund ..................... 17
Franklin U.S. Government
Securities Fund .......................... 29
Franklin Utilities Fund .................. 39
Financial Highlights and
Statements of Investments ................ 48
Financial Statements ..................... 97
Notes to
Financial Statements ..................... 106
Independent
Auditors' Report ......................... 121
Tax Designation .......................... 122
Board Members
and Officers ............................. 123
Proxy Voting Policies
and Procedures ........................... 127
- --------------------------------------------------------------------------------
Annual Report
Franklin DynaTech Fund
YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: Franklin DynaTech Fund seeks capital
appreciation by investing most of its assets in companies emphasizing scientific
and technological development.
We are pleased to bring you Franklin DynaTech Fund's annual report for the
fiscal year ended September 30, 2003.
PERFORMANCE OVERVIEW
Franklin DynaTech Fund-Class A posted a +31.23% cumulative total return for the
12 months under review, as shown in the Performance Summary beginning on page 6.
Although the Fund performed well during the year under review, it underperformed
its narrow benchmark, the Nasdaq 100 Index, which had a price-only return of
56.60%, while it outperformed the broad Standard & Poor's 500 (S&P 500)
Composite Index's total return of 24.38%.1
ECONOMIC AND MARKET OVERVIEW
During the fiscal year ended September 30, 2003, the U.S. economy expanded
within a relatively muted inflation environment, despite rising energy and
health care costs. Gross domestic product (GDP) grew at annualized rates of 1.4%
in fourth quarter 2002 and first quarter 2003, 3.3% in the second quarter, and
an estimated 7.2% in the third quarter. Much of the momentum resulted from
surging government defense spending and the stalwart consumer, whose steady
participation in retail, vehicle and home sales was supported by tax cuts, cash
raised through aggressive mortgage borrowing, and increasingly attractive price
discounting and financing. Indeed, consumers' contribution to economic output,
which historically accounts for about two-thirds of GDP, rose to a record 70% in
2003's second
1. Source: Standard & Poor's Micropal. The Nasdaq 100 Index includes 100 of the
largest domestic and international non-financial companies listed on The Nasdaq
Stock Market based on market capitalization. The index reflects companies across
major industry groups including computer hardware and software,
telecommunications, retail/wholesale trade and biotechnology. It does not
contain financial companies including investment companies. Index returns are
price-return only and do not include reinvested dividends. The S&P 500 consists
of 500 stocks chosen for market size, liquidity and industry group
representation. Each stock's weight in the index is proportionate to its market
value. The S&P 500 is one of the most widely used benchmarks of U.S. equity
performance and includes reinvested dividends. The indexes are unmanaged. One
cannot invest directly in an index, nor is an index representative of the Fund's
portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL
TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF
INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 51.
Annual Report | 3
[SIDEBAR]
PORTFOLIO BREAKDOWN
Franklin DynaTech Fund
9/30/03
- -------------------------------------
% OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- -------------------------------------------
Semiconductors 11.4%
- -------------------------------------------
Packaged Software 8.9%
- -------------------------------------------
Biotechnology 7.9%
- -------------------------------------------
Medical Specialties 6.3%
- -------------------------------------------
Major Pharmaceuticals 5.1%
- -------------------------------------------
Electronic Production Equipment 4.7%
- -------------------------------------------
Data Processing Services 4.4%
- -------------------------------------------
Other Consumer Services 4.0%
- -------------------------------------------
Telecommunications Equipment 3.7%
- -------------------------------------------
Electronic Equipment & Instruments 3.1%
- -------------------------------------------
Information Technology Services 2.8%
- -------------------------------------------
Managed Health Care 2.7%
- -------------------------------------------
Casinos & Gaming 2.7%
- -------------------------------------------
Computer Processing Hardware 2.4%
- -------------------------------------------
Recreational Products 2.3%
- -------------------------------------------
Computer Communications 2.2%
- -------------------------------------------
Air Freight & Couriers 2.0%
- -------------------------------------------
Broadcasting 1.6%
- -------------------------------------------
Internet Software & Services 1.4%
- -------------------------------------------
Financial Conglomerates 1.4%
- -------------------------------------------
Other Pharmaceuticals 1.3%
- -------------------------------------------
Media Conglomerates 1.3%
- -------------------------------------------
Cable & Satellite TV 1.3%
- -------------------------------------------
Medical Distributors 1.2%
- -------------------------------------------
Chemicals: Specialty 1.0%
- -------------------------------------------
Computer Peripherals 0.8%
- -------------------------------------------
Electronics & Appliance Stores 0.7%
- -------------------------------------------
Insurance Brokers & Services 0.6%
- -------------------------------------------
Internet Retail 0.6%
- -------------------------------------------
Household & Personal Care 0.5%
- -------------------------------------------
Electronic Components 0.4%
- -------------------------------------------
Oilfield Services & Equipment 0.4%
- -------------------------------------------
Short-Term Investments &
Other Net Assets 8.9%
- -------------------------------------------
quarter. Business spending began to pick up in 2003 as businesses sought to
upgrade or replace aging computer hardware and software. Slowly improving
activity, profitability and cash flow accompanied by substantial new tax
depreciation benefits also enticed businesses to spend more.
An accommodative Federal Reserve Board, in an attempt to bolster the sluggish
economy, continued to cut interest rates during the year under review. The
federal funds target rate fell from 1.75% at the beginning of the reporting
period to 1.00% by period-end. Additionally, the U.S. government injected fiscal
stimulus into the economy, approving another round of tax cuts and rebates that
included dividend tax reductions. However, with unemployment hovering above 6%
and with little new job creation, continued economic recovery was not assured.
On a brighter note, U.S. equity markets, which often serve as a leading
indicator of economic recovery, rallied from 2003's second quarter into
September. Overall, during the Fund's fiscal year stock markets sank and rose
seemingly in response to war news, improving corporate earnings and profit
margins, and mixed unemployment and production data. For the 12-month reporting
period, broad equity indexes posted double-digit gains, with technology stocks
rallying especially strongly to return 53.32% as measured by the Nasdaq
Composite Index. 2
INVESTMENT STRATEGY
Normally, we seek to invest in companies and established industry leaders we
believe have a competitive advantage due to their state-of-the-art products and
technologies. We use a conservative, bottom-up research process to find what we
consider undervalued companies.
MANAGER'S DISCUSSION
During the Fund's fiscal year, we continued to position the portfolio --
consistent with our investment strategy -- toward market-leading companies with
compelling valuations, potential for market leadership, and unique products or
services. Our largest holding during most of the 12-month reporting period was
Intel, a leading provider of semiconductors. From an individual holding
perspective, Intel contributed the most to the Fund's performance as the result
of being up 98% for the year under review. Genentech, a leading biotechnology
company, had favorable news around its drug Avastin. Shares rose more than 145%
for the period. The third largest contribution to the Fund came from eBay, the
leading provider of Internet auctions; it appreciated more than 103% over the
12-month period.
2. Source: Standard & Poor's Micropal. The Nasdaq Composite Index measures all
domestic and international common stocks listed on The Nasdaq Stock Market. The
index is market value-weighted and includes over 4,000 companies.
4 | Annual Report
On a less positive note, Sony, a front-runner in consumer electronics, declined
more than 16% for the period and dragged down Fund performance; we sold it.
Similarly, American International Group, an insurance provider, hurt the Fund's
performance. Motorola--a leading provider of semiconductors and
telecommunications equipment--also negatively affected the Fund.
We look forward to serving your future investment needs. Thank you for your
support and interest in Franklin DynaTech Fund.
[PHOTO OF RUPERT H. JOHNSON, JR.]
/S/Rupert H. Johnson, Jr.
Rupert H. Johnson, Jr.
[PHOTO OF ROBERT R. DEAN]
/S/Robert R. Dean
Robert R. Dean, CFA
Portfolio Management Team
Franklin DynaTech Fund
[SIDEBAR]
TOP 10 HOLDINGS
Franklin DynaTech Fund
9/30/03
- --------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------
Intel Corp. 5.0%
SEMICONDUCTORS
- --------------------------------------
Microsoft Corp. 4.2%
PACKAGED SOFTWARE
- --------------------------------------
Genentech Inc. 3.7%
BIOTECHNOLOGY
- --------------------------------------
eBay Inc. 3.5%
OTHER CONSUMER SERVICES
- --------------------------------------
Amgen Inc. 3.0%
BIOTECHNOLOGY
- --------------------------------------
International Business
Machines Corp. 2.8%
INFORMATION TECHNOLOGY SERVICES
- --------------------------------------
UnitedHealth Group Inc. 2.7%
MANAGED HEALTH CARE
- --------------------------------------
International Game Technology 2.7%
CASINOS & GAMING
- --------------------------------------
Electronic Arts Inc. 2.3%
RECREATIONAL PRODUCTS
- --------------------------------------
Linear Technology Corp. 2.3%
SEMICONDUCTORS
- --------------------------------------
THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF
SEPTEMBER 30, 2003, THE END OF THE REPORTING PERIOD. OUR STRATEGIES AND THE
FUND'S PORTFOLIO COMPOSITION WILL CHANGE DEPENDING ON MARKET AND ECONOMIC
CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN
OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF
EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS
OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE ADVISOR MAKES NO
REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH
HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY
HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY.
Annual Report | 5
Performance Summary as of 9/30/03
FRANKLIN DYNATECH FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects the Fund's dividend income,
capital gain distributions, if any, and any unrealized gains or losses.
PRICE INFORMATION
- -----------------------------------------------------------------------------------------------------
CLASS A CHANGE 9/30/03 9/30/02
- -----------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.80 $20.17 $15.37
- -----------------------------------------------------------------------------------------------------
CLASS B CHANGE 9/30/03 9/30/02
- -----------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.61 $19.80 $15.19
- -----------------------------------------------------------------------------------------------------
CLASS C CHANGE 9/30/03 9/30/02
- -----------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.56 $19.59 $15.03
PERFORMANCE
- -----------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +31.23% +20.68% +158.86%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +23.67% +2.61% +9.33%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $12,367 $11,373 $24,393
- -----------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 3-YEAR INCEPTION (2/1/00)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +30.35% -28.36% -27.32%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +26.35% -11.40% -9.07%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $12,635 $6,955 $7,057
- -----------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (9/16/96)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +30.34% +16.33% +63.63%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +28.06% +2.86% +7.09%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $12,806 $11,515 $16,197
ONGOING MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE; MORE
RECENT RETURNS MAY DIFFER FROM THOSE SHOWN. SINCE MARKETS CAN GO DOWN AS WELL AS
UP, INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH MARKET CONDITIONS,
AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES.
FOR MORE CURRENT PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
6 | Past performance does not guarantee future results. | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charge(s), Fund
expenses, account fees and reinvested distributions. The indexes are unmanaged.
They differ from the Fund in composition and do not pay management fees or
expenses. One cannot invest directly in an index.
CLASS A (10/1/93-9/30/03)
[LINE CHART OMITTED]
Franklin S&P Nasdaq 100
DynaTech Fund 500 4 Index 4
10/93 $9,423 $10,000 $10,000
$9,460 $10,207 $10,216
$9,322 $10,109 $10,106
$9,444 $10,232 $10,407
$9,681 $10,579 $10,818
$9,651 $10,292 $10,770
$9,385 $9,844 $10,007
$9,237 $9,971 $9,753
$9,365 $10,134 $9,899
$9,021 $9,886 $9,414
$9,306 $10,210 $9,672
$9,868 $10,628 $10,397
$9,700 $10,368 $10,291
$10,104 $10,601 $10,793
$9,917 $10,215 $10,578
$9,936 $10,366 $10,563
$10,027 $10,635 $10,591
$10,297 $11,049 $11,301
$10,528 $11,374 $11,684
$10,959 $11,709 $12,269
$11,280 $12,176 $12,754
$12,162 $12,459 $14,058
$12,714 $12,872 $14,865
$12,573 $12,904 $15,071
$12,814 $13,448 $15,288
$13,065 $13,400 $15,646
$12,884 $13,988 $15,514
$12,532 $14,257 $15,057
$12,543 $14,742 $15,464
$12,986 $14,879 $16,274
3/96 $12,728 $15,022 $15,931
$13,769 $15,243 $17,421
$14,264 $15,636 $18,092
$13,810 $15,696 $17,697
$12,986 $15,002 $16,619
$13,460 $15,319 $17,339
$14,460 $16,181 $19,272
$14,728 $16,627 $19,649
$16,140 $17,883 $21,792
$16,141 $17,528 $21,462
$17,340 $18,623 $24,080
$16,364 $18,769 $22,222
$15,950 $17,999 $20,827
$16,661 $19,073 $22,856
$17,595 $20,233 $25,054
$17,754 $21,139 $25,014
$19,484 $22,820 $28,926
$19,134 $21,543 $28,067
$19,611 $22,722 $28,668
$18,646 $21,964 $26,642
$18,847 $22,980 $27,449
$18,501 $23,374 $25,889
$19,136 $23,633 $27,988
$19,986 $25,336 $31,202
$20,076 $26,632 $31,895
$20,461 $26,900 $32,613
$19,736 $26,439 $31,148
$20,699 $27,512 $34,944
$20,801 $27,219 $35,987
$18,898 $23,288 $29,796
9/98 $20,212 $24,780 $35,157
$20,767 $26,794 $36,595
$22,048 $28,417 $40,709
$23,560 $30,054 $47,974
$25,395 $31,310 $55,582
$24,225 $30,337 $50,307
$25,017 $31,550 $55,039
$25,085 $32,772 $55,823
$24,672 $31,999 $54,603
$25,934 $33,774 $60,013
$25,911 $32,721 $59,338
$26,634 $32,559 $62,629
$26,508 $31,667 $62,917
$27,586 $33,670 $68,915
$29,215 $34,355 $77,518
$32,321 $36,377 $96,883
$32,647 $34,550 $93,283
$35,522 $33,896 $111,493
$35,882 $37,210 $114,913
$33,939 $36,091 $98,591
$32,309 $35,352 $86,856
$34,299 $36,224 $98,346
$33,694 $35,658 $94,310
$36,138 $37,872 $106,545
$33,287 $35,873 $93,298
$32,437 $35,721 $85,765
$28,981 $32,907 $65,495
$28,366 $33,068 $61,187
$29,795 $34,241 $67,753
$26,198 $31,121 $49,863
3/01 $24,661 $29,150 $41,108
$26,269 $31,414 $48,474
$25,864 $31,624 $47,030
$25,673 $30,855 $47,889
$24,863 $30,551 $43,992
$23,851 $28,640 $38,402
$22,350 $26,328 $30,529
$23,374 $26,830 $35,661
$24,828 $28,888 $41,704
$24,647 $29,141 $41,207
$24,453 $28,716 $40,505
$23,304 $28,162 $35,516
$24,018 $29,221 $37,961
$22,724 $27,450 $33,369
$22,433 $27,249 $31,573
$21,043 $25,309 $27,473
$19,954 $23,336 $25,139
$19,870 $23,489 $24,624
$18,588 $20,939 $21,753
$20,160 $22,780 $25,856
$21,405 $24,119 $29,163
$19,749 $22,703 $25,721
$19,531 $22,109 $25,687
$19,724 $21,777 $26,384
$19,894 $21,987 $26,617
$21,212 $23,798 $28,901
$22,784 $25,051 $31,300
$23,171 $25,371 $31,399
$24,006 $25,819 $33,366
$24,888 $26,321 $35,045
9/03 $24,393 $26,042 $34,065
CLASS B (2/1/00-9/30/03)
[LINE CHART OMITTED]
Franklin S&P Nasdaq
DynaTech Fund 500 4 100 Index 4
2/00 $10,000 $10,000 $10,000
$10,870 $9,811 $11,952
$10,973 $10,770 $12,319
$10,374 $10,446 $10,569
$9,868 $10,232 $9,311
$10,471 $10,485 $10,543
$10,278 $10,321 $10,110
$11,020 $10,962 $11,422
$10,146 $10,383 $10,002
$9,879 $10,339 $9,194
$8,824 $9,524 $7,021
12/00 $8,624 $9,571 $6,559
$9,053 $9,911 $7,263
$7,958 $9,008 $5,345
$7,488 $8,437 $4,407
$7,968 $9,092 $5,196
$7,841 $9,153 $5,042
$7,779 $8,931 $5,134
$7,528 $8,843 $4,716
$7,219 $8,290 $4,117
$6,760 $7,620 $3,273
$7,062 $7,766 $3,823
11/01 $7,499 $8,361 $4,471
$7,437 $8,435 $4,417
$7,378 $8,312 $4,342
$7,026 $8,151 $3,807
$7,239 $8,458 $4,069
$6,842 $7,945 $3,577
$6,751 $7,887 $3,385
$6,329 $7,325 $2,945
$5,995 $6,754 $2,695
$5,969 $6,799 $2,640
$5,576 $6,060 $2,332
10/02 $6,046 $6,593 $2,772
$6,413 $6,981 $3,126
$5,917 $6,571 $2,757
$5,848 $6,399 $2,754
$5,903 $6,303 $2,828
$5,947 $6,364 $2,853
$6,340 $6,888 $3,098
$6,806 $7,251 $3,355
$6,916 $7,343 $3,366
$7,158 $7,473 $3,577
$7,419 $7,618 $3,757
9/03 $7,057 $7,538 $3,652
Annual Report | Past performance does not guarantee future results. | 7
Performance Summary (CONTINUED)
[SIDEBAR]
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
CLASS C 9/30/03
- --------------------------------------
1-Year +28.06%
- --------------------------------------
5-Year +2.86%
- --------------------------------------
Since Inception (9/16/96) +7.09%
CLASS C (9/16/96-9/30/03)
[LINE CHART OMITTED]
Franklin S&P Nasdaq
DynaTech Fund 500 4 100 Index 4
9/96 $9,899 $10,000 $10,000
$10,159 $10,262 $10,520
$10,333 $10,545 $10,726
$11,318 $11,342 $11,896
$11,312 $11,117 $11,716
$12,155 $11,811 $13,145
$11,461 $11,904 $12,131
$11,163 $11,416 $11,369
$11,648 $12,097 $12,477
$12,289 $12,833 $13,677
$12,386 $13,407 $13,655
$13,587 $14,473 $15,790
$13,326 $13,663 $15,322
$13,646 $14,411 $15,650
$12,968 $13,930 $14,543
$13,095 $14,575 $14,984
$12,843 $14,825 $14,132
$13,256 $14,989 $15,278
$13,836 $16,069 $17,033
$13,892 $16,891 $17,411
$14,154 $17,061 $17,803
$13,638 $16,768 $17,003
6/98 $14,297 $17,449 $19,075
$14,352 $17,263 $19,645
$13,034 $14,770 $16,265
$13,923 $15,716 $19,191
$14,297 $16,994 $19,976
$15,170 $18,023 $22,222
$16,198 $19,061 $26,188
$17,447 $19,858 $30,341
$16,638 $19,241 $27,461
$17,167 $20,010 $30,045
$17,207 $20,785 $30,473
$16,919 $20,295 $29,807
$17,767 $21,420 $32,760
$17,743 $20,753 $32,392
$18,224 $20,650 $34,188
$18,128 $20,084 $34,345
$18,848 $21,355 $37,619
$19,953 $21,789 $42,316
$22,062 $23,071 $52,887
$22,272 $21,912 $50,922
$24,221 $21,498 $60,862
$24,447 $23,600 $62,729
4/00 $23,113 $22,890 $53,819
$21,981 $22,422 $47,413
$23,331 $22,974 $53,685
$22,903 $22,616 $51,482
$24,544 $24,020 $58,161
$22,596 $22,752 $50,930
$22,006 $22,655 $46,817
$19,653 $20,871 $35,752
$19,213 $20,973 $33,401
$20,174 $21,717 $36,985
$17,727 $19,738 $27,220
$16,684 $18,488 $22,440
$17,760 $19,924 $26,461
$17,473 $20,057 $25,673
$17,333 $19,569 $26,142
$16,775 $19,376 $24,014
$16,077 $18,165 $20,963
$15,059 $16,698 $16,665
$15,740 $17,017 $19,467
$16,709 $18,322 $22,765
$16,569 $18,482 $22,494
$16,437 $18,213 $22,111
2/02 $15,660 $17,861 $19,387
$16,123 $18,533 $20,722
$15,246 $17,410 $18,216
$15,040 $17,282 $17,235
$14,097 $16,051 $14,997
$13,361 $14,801 $13,723
$13,295 $14,898 $13,442
$12,427 $13,280 $11,875
$13,477 $14,448 $14,114
$14,296 $15,297 $15,920
$13,188 $14,399 $14,041
$13,031 $14,023 $14,022
$13,155 $13,812 $14,403
$13,254 $13,945 $14,530
$14,130 $15,094 $15,776
$15,164 $15,888 $17,086
$15,412 $16,091 $17,140
$15,958 $16,375 $18,214
$16,536 $16,694 $19,130
9/03 $16,197 $16,517 $18,595
END NOTES
INVESTING IN A NON-DIVERSIFIED FUND CONCENTRATING IN THE SCIENTIFIC AND
TECHNOLOGICAL SECTOR INVOLVES SPECIAL RISKS, INCLUDING THOSE RELATED TO
FLUCTUATIONS IN THE PRICE OF TECHNOLOGY STOCKS AND INCREASED SUSCEPTIBILITY TO
ADVERSE ECONOMIC AND REGULATORY DEVELOPMENTS AFFECTING THE SECTOR. THE
TECHNOLOGY SECTOR HAS BEEN AMONG THE MARKET'S MOST VOLATILE. THE FUND MAY ALSO
INVEST IN SMALL-CAPITALIZATION COMPANIES, WHICH INVOLVE SPECIAL RISKS SUCH AS
RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND MODEST MARKET SHARE. THE
PRICE OF THESE SECURITIES CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM AND
INVESTORS SHOULD EXPECT FLUCTUATION IN THE VALUE OF THEIR INVESTMENT. THE FUND'S
PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS A: Subject to the current, maximum 5.75% initial sales charge. Prior to
8/3/98, Fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1
plan, which affects subsequent performance.
CLASS B: Subject to no initial sales charge, but subject to a contingent
deferred sales charge (CDSC) declining from 4% to 0% over six years. These
shares have higher annual fees and expenses than Class A shares.
CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed
within 18 months of investment. These shares have higher annual fees and
expenses than Class A shares.
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes any current, applicable,
maximum sales charge(s).
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and include any current, applicable, maximum
sales charge(s).
4. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen
for market size, liquidity and industry group representation. Each stock's
weight in the index is proportionate to its market value. The S&P 500 includes
reinvested dividends and is one of the most widely used benchmarks of U.S.
equity performance. The Nasdaq 100 Index includes 100 of the largest domestic
and international non-financial companies listed on The Nasdaq Stock Market
based on market capitalization. The index reflects companies across major
industry groups including computer hardware and software, telecommunications,
retail/wholesale trade and biotechnology. It does not contain financial
companies including investment companies. The Nasdaq 100 Index is calculated
under a modified capitalization-weighted methodology. Index returns are
price-return only and do not include reinvested dividends.
8 | Past performance does not guarantee future results. | Annual Report
Franklin Growth Fund
YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: Franklin Growth Fund seeks capital
appreciation by investing most of its assets in common stocks or convertible
securities believed to offer favorable possibilities for capital appreciation.
[SIDEBAR]
PORTFOLIO BREAKDOWN
Franklin Growth Fund
9/30/03
- ---------------------------------------
% OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- ---------------------------------------
Health Technology 23.0%
- ---------------------------------------
Producer Manufacturing 18.5%
- ---------------------------------------
Electronic Technology 17.2%
- ---------------------------------------
Technology Services 10.6%
- ---------------------------------------
Transportation 5.3%
- ---------------------------------------
Consumer Services 4.9%
- ---------------------------------------
Consumer Non-Durables 3.0%
- ---------------------------------------
Distribution Services 2.8%
- ---------------------------------------
Commercial Services 2.7%
- ---------------------------------------
Retail Trade 2.2%
- ---------------------------------------
Consumer Durables 2.2%
- ---------------------------------------
Energy Minerals 2.0%
- ---------------------------------------
Process Industries 1.8%
- ---------------------------------------
Industrial Services 1.7%
- ---------------------------------------
Health Services 0.7%
- ---------------------------------------
Finance 0.3%
Short-Term Investments &
- ---------------------------------------
Other Net Assets 1.1%
- ---------------------------------------
We are pleased to bring you Franklin Growth Fund's annual report for the fiscal
year ended September 30, 2003.
PERFORMANCE OVERVIEW
For the 12 months under review, Franklin Growth Fund - Class A delivered a
+22.27% cumulative total return, as shown in the Performance Summary beginning
on page 12. The Fund underperformed its benchmark, the Standard & Poor's 500
Composite Index (S&P 500), which returned 24.38% for the same period. 1
ECONOMIC AND MARKET OVERVIEW
During the fiscal year ended September 30, 2003, the U.S. economy expanded
within a relatively muted inflation environment, despite rising energy and
health care costs. Gross domestic product (GDP) grew at annualized rates of 1.4%
in fourth quarter 2002 and first quarter 2003, 3.3% in the second quarter, and
an estimated 7.2% in the third quarter. Much of the momentum resulted from
surging government defense spending and the stalwart consumer, whose steady
participation in retail, vehicle and home sales was supported by tax cuts, cash
raised through aggressive mortgage borrowing, and increasingly attractive price
discounting and financing. Indeed, consumers' contribution to economic output,
which historically accounts for about two-thirds of GDP, rose to a record 70% in
2003's second quarter. Business spending began to pick up in 2003 as businesses
sought to upgrade or replace aging computer hardware and software. Slowly
improving activity, profitability and cash flow accompanied by substantial new
tax depreciation benefits also enticed businesses to spend more.
An accommodative Federal Reserve Board, in an attempt to bolster the sluggish
economy, continued to cut interest rates during the year under review. The
federal funds target rate fell from 1.75% at the beginning of the reporting
period to 1.00%
1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen
for market size, liquidity and industry group representation. Each stock's
weight in the index is proportionate to its market value. The S&P 500 is one of
the most widely used benchmarks of U.S. equity performance. The index is
unmanaged and includes reinvested dividends. One cannot invest directly in an
index, nor is an index representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL
TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF
INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 61.
Annual Report | 9
[SIDEBAR]
TOP 10 HOLDINGS
Franklin Growth Fund
9/30/03
- --------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------
Pfizer Inc. 3.3%
HEALTH TECHNOLOGY
- --------------------------------------
Amgen Inc. 3.2%
HEALTH TECHNOLOGY
- --------------------------------------
3M Co. 3.0%
PRODUCER MANUFACTURING
- --------------------------------------
International Business
Machines Corp. 2.7%
TECHNOLOGY SERVICES
- --------------------------------------
Johnson & Johnson 2.7%
HEALTH TECHNOLOGY
- --------------------------------------
Northrop Grumman Corp. 2.3%
ELECTRONIC TECHNOLOGY
- --------------------------------------
Genentech Inc. 2.2%
HEALTH TECHNOLOGY
- --------------------------------------
General Dynamics Corp. 2.1%
ELECTRONIC TECHNOLOGY
- --------------------------------------
Computer Sciences Corp. 2.0%
TECHNOLOGY SERVICES
- --------------------------------------
Boeing Co. 1.9%
ELECTRONIC TECHNOLOGY
- --------------------------------------
by period-end. Additionally, the U.S. government injected fiscal stimulus into
the economy, approving another round of tax cuts and rebates that included
dividend tax reductions. However, with unemployment hovering above 6% and with
little new job creation, continued economic recovery was not assured.
On a brighter note, U.S. equity markets, which often serve as a leading
indicator of economic recovery, rallied from 2003's second quarter into
September. Overall, during the Fund's fiscal year stock markets sank and rose
seemingly in response to war news, improving corporate earnings and profit
margins, and mixed unemployment and production data. For the 12-month reporting
period, broad equity indexes posted double-digit gains, with technology stocks
rallying especially strongly to return 53.32% as measured by the Nasdaq
Composite Index.2
INVESTMENT STRATEGY
The Fund looks for positive change opportunities primarily in new and rapidly
growing businesses and secondarily in mature businesses selling at depressed
prices but offering favorable recovery possibilities. Additionally, we seek to
invest in companies that have strong management teams, strong financials and
industry leadership. We analyze securities individually and buy stocks of large
and small companies in our effort to maintain a solid and diversified portfolio.
MANAGER'S DISCUSSION
We were nearly fully invested in stocks during the entire reporting period. Of
the Fund's 106 companies held for the entire year, 28 of the 53 that exceeded
the S&P 500's return more than doubled it. On the other hand, 53 of the 106 did
not rise as much as the S&P 500. The Fund holds more aggressive positions than
the benchmark. However, we attribute our slight underperformance relative to the
S&P 500 to our company weightings.
Holdings that produced the highest returns for the Fund were Amgen, Tyco
International, Yahoo!, Genentech, Caterpillar, Ingersoll Rand and Computer
Sciences. The lowest returns came from Lockheed Martin, Teleflex, R.R.
Donnelley, Schering-Plough, Northrop Grumman, General Dynamics and American
Greetings.
2. Source: Standard & Poor's Micropal. The Nasdaq Composite Index measures all
domestic and international common stocks listed on the Nasdaq Stock Market. The
index is market value-weighted and includes over 4,000 companies.
10 | Annual Report
For the Fund's stability, growth and diversification, we favor pharmaceutical
companies because for the most part they manufacture relatively inexpensive
products and may offer investors opportunities to prosper from meaningful new
product introductions. During the past year, however, the industry was
uncharacteristically dormant and did not contribute significantly to Fund
performance. Lackluster action during the period was primarily due to absorption
of the 1990s' large gains, depleted new product pipelines, few big drug
introductions and negative publicity in the press.
[PHOTO]
/S/V. Jerry Palmieri
V. Jerry Palmieri
Portfolio Manager
Franklin Growth Fund
THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF
SEPTEMBER 30, 2003, THE END OF THE REPORTING PERIOD. OUR STRATEGIES AND THE
FUND'S PORTFOLIO COMPOSITION WILL CHANGE DEPENDING ON MARKET AND ECONOMIC
CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN
OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF
EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS
OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE ADVISOR MAKES NO
REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH
HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY
HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY.
Annual Report | 11
Performance Summary as of 9/30/03
FRANKLIN GROWTH FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects the Fund's dividend income,
capital gain distributions, if any, and any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ---------------------------------------------------------------------------------------------------
CLASS A CHANGE 9/30/03 9/30/02
- ---------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.86 $26.87 $22.01
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- ---------------------------------------------------------------------------------------------------
Dividend Income $0.0389
- ---------------------------------------------------------------------------------------------------
CLASS B CHANGE 9/30/03 9/30/02
- ---------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.63 $26.32 $21.69
- ---------------------------------------------------------------------------------------------------
CLASS C CHANGE 9/30/03 9/30/02
- ---------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.59 $26.10 $21.51
- ---------------------------------------------------------------------------------------------------
CLASS R CHANGE 9/30/03 9/30/02
- ---------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.76 $26.74 $21.98
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- ---------------------------------------------------------------------------------------------------
Dividend Income $0.0545
- ---------------------------------------------------------------------------------------------------
ADVISOR CLASS CHANGE 9/30/03 9/30/02
- ---------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.86 $26.91 $22.05
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- ---------------------------------------------------------------------------------------------------
Dividend Income $0.1098
12 |Past performance does not guarantee future results. | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
- -----------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +22.27% +4.79% +131.45%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +15.25% -0.25% +8.11%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,525 $9,877 $21,813
- -----------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 3-YEAR INCEPTION (1/1/99)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +21.35% -23.92% -9.97%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +17.35% -9.58% -2.57%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,735 $7,392 $8,836
- -----------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +21.34% +0.92% +77.01%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +19.12% -0.01% +6.89%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,912 $9,993 $17,524
- -----------------------------------------------------------------------------------------------------
CLASS R 1-YEAR INCEPTION (1/1/02)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +21.92% -15.17%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +20.92% -9.01%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $12,092 $8,483
- -----------------------------------------------------------------------------------------------------
ADVISOR CLASS4 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +22.58% +6.08% +137.11%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +22.58% +1.19% +9.02%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $12,258 $10,608 $23,711
ONGOING MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE; MORE
RECENT RETURNS MAY DIFFER FROM THOSE SHOWN. SINCE MARKETS CAN GO DOWN AS WELL AS
UP, INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH MARKET CONDITIONS,
AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES.
FOR MORE CURRENT PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | Past performance does not guarantee future results. | 13
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charge(s), Fund
expenses, account fees and reinvested distributions. The unmanaged index
includes reinvested dividends. It differs from the Fund in composition and does
not pay management fees or expenses. One cannot invest directly in an index.
[SIDEBAR]
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
CLASS A 9/30/03
- --------------------------------------
1-Year +15.25%
- --------------------------------------
5-Year -0.25%
- --------------------------------------
10-Year +8.11%
CLASS A (10/3/93-9/30/03)
[LINE CHART OMITTED]
Franklin Growth Fund S&P 500 Index 5
10/93 $9,425 $10,000
$9,716 $10,207
$9,735 $10,109
$10,009 $10,232
$10,152 $10,579
$9,846 $10,292
$9,358 $9,844
$9,554 $9,971
$9,717 $10,134
$9,643 $9,886
$9,914 $10,210
$10,423 $10,628
$10,152 $10,368
$10,362 $10,601
$10,090 $10,215
$10,301 $10,366
$10,459 $10,635
$10,885 $11,049
$11,270 $11,374
$11,592 $11,709
$11,846 $12,176
$12,307 $12,459
$12,918 $12,872
$12,897 $12,904
$13,309 $13,448
$13,385 $13,400
3/96 $14,140 $13,988
$14,257 $14,257
$14,669 $14,742
$14,983 $14,879
$15,039 $15,022
$15,346 $15,243
$15,639 $15,636
$15,527 $15,696
$14,725 $15,002
$15,136 $15,319
$15,931 $16,181
$15,973 $16,627
$16,978 $17,883
$16,636 $17,528
$17,055 $18,623
$17,091 $18,769
$16,665 $17,999
$17,261 $19,073
$18,212 $20,233
$18,553 $21,139
$19,292 $22,820
$18,646 $21,543
$19,235 $22,722
$19,072 $21,964
$19,505 $22,980
$19,731 $23,374
$19,935 $23,633
$20,773 $25,336
$21,224 $26,632
$21,508 $26,900
9/98 $21,202 $26,439
$21,603 $27,512
$21,523 $27,219
$19,709 $23,288
$20,816 $24,780
$22,098 $26,794
$22,892 $28,417
$23,386 $30,054
$23,795 $31,310
$23,542 $30,337
$24,181 $31,550
$24,970 $32,772
$24,665 $31,999
$25,698 $33,774
$25,282 $32,721
$25,386 $32,559
$24,695 $31,667
$25,096 $33,670
$25,416 $34,355
$26,236 $36,377
$26,016 $34,550
$25,408 $33,896
$27,619 $37,210
$27,945 $36,091
$28,059 $35,352
$28,454 $36,224
$28,014 $35,658
$29,244 $37,872
$28,036 $35,873
$28,409 $35,721
3/01 $27,672 $32,907
$28,211 $33,068
$28,743 $34,241
$27,301 $31,121
$25,280 $29,150
$27,317 $31,414
$27,736 $31,624
$26,464 $30,855
$26,399 $30,551
$25,199 $28,640
$22,397 $26,328
$23,146 $26,830
$25,344 $28,888
$25,540 $29,141
$25,175 $28,716
$24,997 $28,162
$25,864 $29,221
$24,227 $27,450
$23,749 $27,249
$21,958 $25,309
$19,980 $23,336
$20,020 $23,489
$17,840 $20,939
$19,080 $22,780
$20,385 $24,119
$19,321 $22,703
$18,582 $22,109
$18,160 $21,777
$18,160 $21,987
$19,483 $23,798
9/03 $20,758 $25,051
$21,375 $25,371
$22,008 $25,819
$22,495 $26,321
$21,813 $26,042
[SIDEBAR]
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
CLASS B 9/30/03
- --------------------------------------
1-Year +17.35%
- --------------------------------------
3-Year -9.58%
- --------------------------------------
Since Inception (1/1/99) -2.57%
CLASS B (1/1/99-9/30/03)
[LINE CHART OMITTED]
Franklin Growth Fund S&P 500 Index 5
1/99 $10,000 $10,000
$10,172 $10,418
$10,057 $10,094
$10,324 $10,498
$10,655 $10,905
$10,515 $10,647
$10,951 $11,238
$10,766 $10,887
$10,804 $10,834
$10,502 $10,537
$10,668 $11,203
$10,792 $11,431
$11,134 $12,104
$11,031 $11,496
$10,771 $11,279
3/00 $11,698 $12,381
$11,831 $12,009
$11,873 $11,763
$12,031 $12,053
$11,837 $11,865
$12,352 $12,601
$11,834 $11,936
$11,983 $11,886
$11,665 $10,949
$11,883 $11,003
$12,102 $11,393
$11,491 $10,355
$10,630 $9,699
$11,477 $10,453
$11,648 $10,523
6/01 $11,108 $10,267
$11,070 $10,166
$10,565 $9,530
$9,380 $8,760
$9,687 $8,927
$10,609 $9,612
$10,683 $9,696
$10,522 $9,555
$10,444 $9,371
$10,796 $9,723
$10,108 $9,134
$9,903 $9,067
$9,147 $8,421
$8,319 $7,765
$8,333 $7,816
9/02 $7,420 $6,967
$7,929 $7,580
$8,470 $8,025
$8,018 $7,554
$7,710 $7,357
$7,529 $7,246
$7,526 $7,316
$8,070 $7,919
$8,590 $8,335
$8,839 $8,442
$9,096 $8,591
$9,291 $8,758
9/03 $8,836 $8,665
14 | Past performance does not guarantee future results. | Annual Report
Performance Summary (CONTINUED)
CLASS C (5/1/95-9/30/03)
[LINE CHART OMITTED]
Franklin Growth Fund S&P 500 Index 5
5/95 $9,900 $10,000
$10,135 $10,399
$10,517 $10,640
$11,040 $10,993
$11,011 $11,020
$11,357 $11,485
$11,410 $11,444
$12,051 $11,946
$12,142 $12,176
$12,482 $12,590
$12,744 $12,707
$12,786 $12,829
$13,037 $13,018
$13,281 $13,354
$13,180 $13,404
$12,488 $12,813
$12,828 $13,083
$13,496 $13,819
$13,526 $14,200
$14,367 $15,272
$14,068 $14,970
$14,407 $15,905
$14,431 $16,029
$14,061 $15,372
$14,558 $16,289
$15,351 $17,280
6/97 $15,624 $18,054
$16,242 $19,489
$15,678 $18,398
$16,169 $19,405
$16,024 $18,758
$16,375 $19,626
$16,554 $19,962
$16,715 $20,183
$17,407 $21,638
$17,771 $22,745
$18,000 $22,974
$17,734 $22,579
$18,055 $23,496
$17,975 $23,246
$16,455 $19,889
$17,363 $21,163
$18,426 $22,883
$19,068 $24,269
$19,473 $25,667
$19,799 $26,740
$19,573 $25,909
$20,087 $26,945
$20,734 $27,988
$20,470 $27,329
$21,317 $28,844
$20,953 $27,945
8/99 $21,028 $27,806
$20,439 $27,045
$20,759 $28,756
$21,010 $29,340
$21,680 $31,067
$21,477 $29,506
$20,967 $28,949
$22,775 $31,779
$23,023 $30,823
$23,106 $30,192
$23,418 $30,937
$23,043 $30,453
$24,042 $32,344
$23,036 $30,637
$23,329 $30,507
$22,705 $28,103
$23,136 $28,241
$23,552 $29,243
$22,365 $26,578
$20,689 $24,895
$22,345 $26,828
$22,673 $27,008
$21,621 $26,351
$21,547 $26,092
$20,562 $24,460
$18,262 $22,485
10/01 $18,859 $22,914
$20,642 $24,671
$20,787 $24,887
$20,478 $24,524
$20,323 $24,051
$21,008 $24,956
$19,672 $23,444
$19,269 $23,271
$17,806 $21,614
$16,188 $19,930
$16,214 $20,060
$14,442 $17,882
$15,436 $19,455
$16,483 $20,599
$15,610 $19,389
$15,006 $18,882
$14,650 $18,598
$14,643 $18,777
$15,704 $20,325
$16,718 $21,394
$17,201 $21,668
$17,705 $22,050
$18,081 $22,479
9/03 $17,524 $22,241
[SIDEBAR]
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
CLASS C 9/30/03
- --------------------------------------
1-Year +19.12%
- --------------------------------------
5-Year -0.01%
- --------------------------------------
Since Inception (5/1/95) +6.89%
CLASS R (1/1/02-9/30/03)
[LINE CHART OMITTED]
Franklin Growth Fund S&P 500 Index 5
1/02 $10,000 $10,000
$9,832 $9,854
$9,759 $9,664
$10,098 $10,028
$9,456 $9,420
$9,266 $9,351
6/02 $8,566 $8,685
$7,793 $8,008
$7,806 $8,061
$6,957 $7,185
$7,435 $7,817
$7,945 $8,277
12/02 $7,528 $7,791
$7,239 $7,587
$7,071 $7,473
$7,071 $7,545
$7,585 $8,167
$8,080 $8,596
6/03 $8,318 $8,706
$8,562 $8,860
$8,750 $9,032
9/03 $8,483 $8,937
[SIDEBAR]
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
CLASS R 9/30/03
- --------------------------------------
1-Year +20.92%
- --------------------------------------
Since Inception (1/1/02) -9.01%
Annual Report | Past performance does not guarantee future results. | 15
Performance Summary (CONTINUED)
[SIDEBAR]
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
ADVISOR CLASS 4 9/30/03
- --------------------------------------
1-Year +22.58%
- --------------------------------------
5-Year +1.19%
- --------------------------------------
10-Year +9.02%
ADVISOR CLASS (10/1/93-9/30/03) 4
[LINE CHART OMITTED]
Franklin Growth Fund S&P 500 Index 5
10/93 $10,000 $10,000
$10,309 $10,207
$10,330 $10,109
$10,620 $10,232
$10,771 $10,579
$10,447 $10,292
$9,929 $9,844
$10,138 $9,971
$10,311 $10,134
$10,231 $9,886
$10,519 $10,210
$11,059 $10,628
$10,771 $10,368
$10,995 $10,601
$10,707 $10,215
$10,930 $10,366
$11,098 $10,635
$11,550 $11,049
$11,958 $11,374
$12,300 $11,709
$12,570 $12,176
$13,058 $12,459
$13,706 $12,872
$13,685 $12,904
$14,122 $13,448
$14,202 $13,400
$15,003 $13,988
$15,128 $14,257
$15,565 $14,742
$15,898 $14,879
3/96 $15,957 $15,022
$16,282 $15,243
$16,593 $15,636
$16,475 $15,696
$15,624 $15,002
$16,060 $15,319
$16,904 $16,181
$16,949 $16,627
$18,014 $17,883
$17,652 $17,528
$18,245 $18,623
$18,291 $18,769
$17,843 $17,999
$18,481 $19,073
$19,498 $20,233
$19,863 $21,139
$20,661 $22,820
$19,969 $21,543
$20,607 $22,722
$20,433 $21,964
$20,912 $22,980
$21,152 $23,374
$21,378 $23,633
$22,276 $25,336
$22,768 $26,632
$23,073 $26,900
$22,752 $26,439
$23,181 $27,512
$23,104 $27,219
$21,160 $23,288
9/98 $22,354 $24,780
$23,736 $26,794
$24,595 $28,417
$25,131 $30,054
$25,579 $31,310
$25,308 $30,337
$25,994 $31,550
$26,841 $32,772
$26,530 $31,999
$27,648 $33,774
$27,200 $32,721
$27,320 $32,559
$26,577 $31,667
$27,017 $33,670
$27,369 $34,355
$28,260 $36,377
$28,023 $34,550
$27,377 $33,896
$29,765 $37,210
$30,117 $36,091
$30,247 $35,352
$30,689 $36,224
$30,215 $35,658
$31,548 $37,872
$30,256 $35,873
$30,665 $35,721
$29,871 $32,907
$30,457 $33,068
$31,040 $34,241
$29,492 $31,121
3/01 $27,309 $29,150
$29,517 $31,414
$29,979 $31,624
$28,605 $30,855
$28,544 $30,551
$27,257 $28,640
$24,223 $26,328
$25,040 $26,830
$27,431 $28,888
$27,645 $29,141
$27,250 $28,716
$27,065 $28,162
$28,013 $29,221
$26,241 $27,450
$25,732 $27,249
$23,793 $25,309
$21,653 $23,336
$21,705 $23,489
$19,345 $20,939
$20,696 $22,780
$22,118 $24,119
$20,963 $22,703
$20,170 $22,109
$19,712 $21,777
$19,721 $21,987
$21,157 $23,798
$22,549 $25,051
$23,219 $25,371
$23,915 $25,819
$24,444 $26,321
9/03 $23,711 $26,042
ENDNOTES
HISTORICALLY, THE FUND HAS FOCUSED ON LARGER COMPANIES. THE FUND'S INVESTMENTS
IN FOREIGN COMPANIES CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL,
ECONOMIC AND REGULATORY UNCERTAINTY. THE FUND'S PORTFOLIO INCLUDES INVESTMENTS
IN TECHNOLOGY, WHICH HAS BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS. THE
FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS A: Subject to the current, maximum 5.75% initial sales charge. Prior to
8/3/98, Fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1
plan, which affects subsequent performance.
CLASS B: Subject to no initial sales charge, but subject to a contingent
deferred sales charge (CDSC) declining from 4% to 0% over six years. These
shares have higher annual fees and expenses than Class A shares.
CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed
within 18 months of investment. These shares have higher annual fees and
expenses than Class A shares.
CLASS R: No initial sales charge, but subject to 1% CDSC for shares redeemed
within 18 months of investment; are available to certain eligible investors as
described in the prospectus. These shares have higher annual fees and expenses
than Class A shares.
ADVISOR CLASS: No initial sales charge or Rule 12b-1 fees; are available to a
limited class of investors.
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes any current, applicable,
maximum sales charge(s).
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and include any current, applicable, maximum
sales charge(s).
4. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not
have sales charges or a Rule 12b-1 plan. Performance quotations for this class
reflect the following methods of calculation: (a) For periods prior to 1/2/97, a
restated figure is used based upon the Fund's Class A performance, excluding the
effect of Class A's maximum initial sales charge, but reflecting the effect of
the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor
Class performance is used reflecting all charges and fees applicable to that
class. Since 1/2/97 (commencement of sales), the cumulative and average annual
total returns of Advisor Class shares were +34.33% and +4.47%.
5. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen
for market size, liquidity and industry group representation. Each stock's
weight in the index is proportionate to its market value. The S&P 500 is one of
the most widely used benchmarks of U.S. equity performance.
16 | Past performance does not guarantee future results. | Annual Report
Franklin Income Fund
YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: Franklin Income Fund seeks to maximize
income while maintaining prospects for capital appreciation through a
diversified portfolio of securities.
[SIDEBAR]
PORTFOLIO BREAKDOWN
Franklin Income Fund
9/30/03
- --------------------------------------
% OF TOTAL
NET ASSETS
- --------------------------------------
Corporate Straight Bonds 29.5%
- --------------------------------------
Utilities Stocks 20.9%
- --------------------------------------
Corporate Convertible Bonds 5.9%
- --------------------------------------
Energy Mineral Stocks 5.7%
- --------------------------------------
Real Estate Stocks 2.8%
- --------------------------------------
Communication Stocks 2.8%
- --------------------------------------
Finance Stocks 2.7%
- --------------------------------------
Consumer Durables Stocks 2.3%
- --------------------------------------
Health Technology Stocks 2.2%
- --------------------------------------
Process Industries Stocks 2.1%
- --------------------------------------
Zero Coupon & Step-Up Bonds 1.4%
- --------------------------------------
Consumer Non-Durables Stocks 1.4%
- --------------------------------------
Municipal Securities 0.9%
- --------------------------------------
U.S. Government & Agency
Securities 0.6%
- --------------------------------------
Foreign Government Bonds 0.1%
- --------------------------------------
Other Stocks 5.6%
- --------------------------------------
Short-Term Investments &
Other Net Assets 13.1%
- --------------------------------------
We are pleased to bring you Franklin Income Fund's annual report, covering the
fiscal year ended September 30, 2003.
PERFORMANCE OVERVIEW
Franklin Income Fund - Class A posted a +28.12% cumulative total return for the
12 months ended September 30, 2003, as shown in the Performance Summary
beginning on page 22. The Fund outperformed its benchmarks, the Standard &
Poor's 500 (S&P 500) Composite Index, which returned 24.38%; the Lehman Brothers
U.S. Aggregate Index, which returned 5.41%; the Lehman Brothers U.S.
Government/Credit Index, which returned 6.51%; and the Lipper Income Funds
Average, which returned 13.88%.1 The Fund changed benchmark indexes from the
Lehman Brothers U.S. Government/Credit Index to Lehman Brothers U.S. Aggregate
Index because the Lehman Brothers U.S. Aggregate Index provides a broader
representation of the bond market and is a more appropriate comparison for the
Fund's portfolio.
ECONOMIC AND MARKET OVERVIEW
During the fiscal year ended September 30, 2003, the U.S. economy expanded
within a relatively muted inflation environment, despite rising energy and
health care costs. Gross domestic product (GDP) grew at annualized rates of 1.4%
in
1. Sources: Standard & Poor's Micropal; Lipper Inc. The S&P 500 consists of 500
stocks chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P 500 is
one of the most widely used benchmarks of U.S. equity performance. The Lehman
Brothers U.S. Aggregate Index includes fixed-rate debt issues rated investment
grade or higher by Moody's, S&P or Fitch, in that order. All issues have at
least one year to maturity and an outstanding par value of at least $100 million
for U.S. government issues and $50 million for all others. All returns are
market value-weighted inclusive of accrued interest. The index is a composite of
the U.S. Government/Credit Index and the Mortgage-Backed Securities Index. Total
return includes price appreciation/depreciation and income as a percentage of
the original investment. The index is rebalanced monthly by market
capitalization. The Lehman Brothers U.S. Government/Credit Index includes
fixed-rate debt issues rated investment grade or higher by Moody's, S&P or
Fitch, in that order. All issues have at least one year to maturity and an
outstanding par value of at least $100 million for U.S. government issues and
$50 million for all others. All returns are market value-weighted inclusive of
accrued interest. The index includes those issues in the Lehman Brothers
Government Bond Index and Corporate Bond Index. The index includes issues of the
U.S. government and agencies thereof, domestic corporate issues and foreign
dollar-denominated issues. Total return includes price appreciation/depreciation
and income as a percentage of the original investment. The index is rebalanced
monthly by market capitalization. As of 9/30/03, the Lipper Income Funds Average
consisted of 149 funds. Lipper calculations do not include sales charges. Fund
performance relative to the average may have differed if such charges had been
considered. The indexes are unmanaged and include reinvested dividends. One
cannot invest directly in an index, nor is an index representative of the Fund's
portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL
TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF
INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 71.
Annual Report | 17
[SIDEBAR]
TOP 5 BOND HOLDINGS
Franklin Income Fund
9/30/03
- -----------------------------------------
% OF TOTAL
NET ASSETS
- -----------------------------------------
Charter Communications Holdings 2.8%
- -----------------------------------------
Calpine Corp. 1.9%
- -----------------------------------------
Dynegy Holdings Inc. 1.7%
- -----------------------------------------
Qwest Capital Funding 1.3%
- -----------------------------------------
Meristar Hospitality Corp. 1.3%
fourth quarter 2002 and first quarter 2003, 3.3% in the second quarter, and an
estimated 7.2% in the third quarter. Much of the momentum resulted from surging
government defense spending and the stalwart consumer, whose steady
participation in retail, vehicle and home sales was supported by tax cuts, cash
raised through aggressive mortgage borrowing, and increasingly attractive price
discounting and financing. Indeed, consumers' contribution to economic output,
which historically accounts for about two-thirds of GDP, rose to a record 70% in
2003's second quarter. Business spending began to pick up in 2003 as businesses
sought to upgrade or replace aging computer hardware and software. Slowly
improving activity, profitability and cash flow accompanied by substantial new
tax depreciation benefits also enticed businesses to spend more.
An accommodative Federal Reserve Board, in an attempt to bolster the sluggish
economy, continued to cut interest rates during the year under review. The
federal funds target rate fell from 1.75% at the beginning of the reporting
period to 1.00% by period-end. Additionally, the U.S. government injected fiscal
stimulus into the economy, approving another round of tax cuts and rebates that
included dividend tax reductions. However, with unemployment hovering above 6%
and with little new job creation, continued economic recovery was not assured.
On a brighter note, U.S. equity markets, which often serve as a leading
indicator of economic recovery, rallied from 2003's second quarter into
September. Overall, during the Fund's fiscal year stock markets sank and rose
seemingly in response to war news, improving corporate earnings and profit
margins, and mixed unemployment and production data. For the 12-month reporting
period, broad equity indexes posted double-digit gains, with technology stocks
rallying especially strongly to return 53.32% as measured by the Nasdaq
Composite Index.2
INVESTMENT STRATEGY
Based on our independent analysis of debt, convertible and equity securities, we
search for undervalued or out-of-favor securities we believe offer opportunities
for income today and significant growth tomorrow. We consider such factors as a
company's experience and managerial strength; its responsiveness to changes in
interest rates and business conditions; debt maturity schedules and borrowing
requirements; a company's changing financial condition and market recognition of
the change; and a security's relative value based on such factors as anticipated
cash flow, interest or dividend coverage, asset coverage, and earnings.
2. Source: Standard & Poor's Micropal. The unmanaged Nasdaq Composite Index
measures all domestic and international common stocks listed on The Nasdaq Stock
Market. The index is market value-weighted and includes over 4,000 companies.
18 | Annual Report
MANAGER'S DISCUSSION
Over the course of the year we gradually reduced the Fund's exposure to
primarily interest rate-sensitive securities including our holdings of
mortgage-backed bonds issued by FNMA, GNMA and FHLMC. The substantial interest
rate decline during 2002, as represented by the benchmark 10-year U.S. Treasury
note, enabled these positions to deliver attractive total return for the
portfolio through the first half of 2003. As a result, we took profits and
redeployed the proceeds into securities we believe had greater potential to help
us meet the Fund's dual objective of income and growth. Other interest
rate-sensitive positions where profit-taking opportunities arose included
corporate bonds, specifically those trading at substantial premiums to their par
value and offering only slightly higher yields than comparable maturity U.S.
Treasuries. Examples included our divestiture of AT&T Wireless 7.875% senior
notes due 2011 and Louisiana Pacific 10.875% senior subordinate notes due 2008,
as improving fundamentals and greater risk tolerance among bond investors led to
a substantial decline in the overall yield these securities offered.
Other corporate bonds, both investment grade and non-investment grade, performed
well as improving fundamentals, stable financial markets (following 2002's
turmoil exacerbated by corporate malfeasance) and overall interest rate declines
contributed to strong results within the sector. During the course of the Fund's
fiscal year, we took profits in securities that appreciated and no longer
offered the combination of attractive current yield and longer-term upside
appreciation, in line with the Fund's investment strategy. For example, the
yield difference between U.S. Treasury securities and non-investment grade
corporate bonds tightened over the course of the year, from 10.64 percentage
points to 5.99 percentage points, as represented by the CSFB High Yield Bond
Index.3 Despite strong performance from the corporate sector, we continued
searching for opportunities to add to holdings that we believe still offered the
combination of yield with the potential for capital appreciation over the long
term. Based on this strategy, we added to holdings in Charter Communications,
Calpine and Dynegy Holdings.
Electric utilities continued to represent the Fund's largest stock sector
weighting at period-end, due to our assessment of the sector's attractive
combination of dividend yield and stable earnings growth from regulated utility
operations. The sector favorably impacted overall Fund performance, as reflected
by the S&P Utilities Index's 22.66% cumulative total return for the one-year
period ended September 30, 2003.4 Over the past several years, utilities have
generally displayed higher-than-normal
[SIDEBAR]
TOP 5 STOCK HOLDINGS
Franklin Income Fund
9/30/03
- ----------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- ----------------------------------------
Ford Motor Co. Capital Trust II 1.6%
CONSUMER DURABLES
- ----------------------------------------
ChevronTexaco Corp. 1.6%
ENERGY MINERALS
- ----------------------------------------
Exelon Corp. 1.5%
UTILITIES
- ----------------------------------------
FirstEnergy Corp. 1.5%
UTILITIES
- ----------------------------------------
American Electric Power Co. Inc. 1.3%
UTILITIES
- ----------------------------------------
3. Source: Credit Suisse First Boston (CSFB). The CSFB High Yield Bond Index is
a trader-priced portfolio constructed to mirror the high yield debt market.
Treasuries, if held to maturity, offer a fixed rate of return and fixed
principal value; their interest payments and principal are guaranteed.
4. Source: Standard & Poor's Micropal. The S&P Utilities Index is a market
capitalization-weighted index that includes utility stocks in the Standard &
Poor's 500 Composite Index. The index is unmanaged and includes reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
Annual Report | 19
[SIDEBAR]
- --------------------------------------------------------------------------------
WHAT IS A MERCHANT POWER PLANT?
A merchant power plant produces power as a commodity, so its income stream
depends on the market price. In contrast, traditional power plants rely on
predetermined rates of return, usually set by a regulatory body, to generate
income.
- --------------------------------------------------------------------------------
DIVIDEND DISTRIBUTIONS
Franklin Income Fund
10/1/02-9/30/03
- --------------------------------------------------------------------------------------
DIVIDEND PER SHARE
-------------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS B1* CLASS C CLASS R ADVISOR CLASS
- --------------------------------------------------------------------------------------
October 1.30 cents 1.17 cents 1.22 cents 1.22 cents 1.25 cents 1.32 cents
- --------------------------------------------------------------------------------------
November 1.30 cents 1.17 cents 1.22 cents 1.22 cents 1.25 cents 1.32 cents
- --------------------------------------------------------------------------------------
December 1.30 cents 1.17 cents 1.23 cents 1.24 cents 1.25 cents 1.32 cents
- --------------------------------------------------------------------------------------
January 1.30 cents 1.17 cents 1.23 cents 1.24 cents 1.25 cents 1.33 cents
- --------------------------------------------------------------------------------------
February 1.30 cents 1.17 cents 1.23 cents 1.24 cents 1.25 cents 1.33 cents
- --------------------------------------------------------------------------------------
March 1.30 cents 1.17 cents 1.21 cents 1.21 cents 1.24 cents 1.32 cents
- --------------------------------------------------------------------------------------
April 1.30 cents 1.17 cents 1.21 cents 1.21 cents 1.24 cents 1.32 cents
- --------------------------------------------------------------------------------------
May 1.30 cents 1.17 cents 1.21 cents 1.21 cents 1.24 cents 1.32 cents
- --------------------------------------------------------------------------------------
June 1.30 cents 1.16 cents 1.22 cents 1.21 cents 1.23 cents 1.33 cents
- --------------------------------------------------------------------------------------
July 1.30 cents 1.16 cents 1.22 cents 1.21 cents 1.23 cents 1.33 cents
- --------------------------------------------------------------------------------------
August 1.30 cents 1.16 cents 1.22 cents 1.21 cents 1.23 cents 1.33 cents
- --------------------------------------------------------------------------------------
September 1.30 cents 1.14 cents 1.20 cents 1.20 cents 1.24 cents 1.33 cents
- --------------------------------------------------------------------------------------
TOTAL 15.60 CENTS 13.98 CENTS 14.62 CENTS 14.62 CENTS 14.90 CENTS 15.90 CENTS
- --------------------------------------------------------------------------------------
*On November 1, 2001, the Fund closed Class B to new investors and changed the
name to Class B1; a new Class B became available to investors.
volatility as the challenges of deregulation and moves toward unregulated
business opportunities -- including merchant power generation and energy
marketing and trading -- proved more difficult than anticipated. Amid these
concerns, we added to positions in numerous holdings including Exelon,
FirstEnergy and Ameren. More recently many in the industry have pursued a
"back-to-basics" approach emphasizing a stable, predictable business model
capable of generating excess cash flow to be deployed for balance sheet
strengthening and dividend increases.
Rebounding economic growth in the U.S. and abroad, combined with heightened
geopolitical turmoil in the Middle East, supported global oil prices for most of
the past year. At period-end, the Fund's positions in international integrated
oil companies included ChevronTexaco, Royal Dutch Petroleum and BP, all of which
favorably contributed to Fund performance through a combination of attractive
dividends yield and share price appreciation.
20 | Annual Report
Thank you for your continued participation in Franklin Income Fund. As always,
we remain committed to our value-oriented approach and will continually search
for new investments across asset classes and industries.
[PHOTO]
/S/Charles B. Johnson
Charles B. Johnson
[PHOTO]
/S/Edward Perks
Edward Perks, CFA
Portfolio Management Team
Franklin Income Fund
THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF
SEPTEMBER 30, 2003, THE END OF THE REPORTING PERIOD. OUR STRATEGIES AND THE
FUND'S PORTFOLIO COMPOSITION WILL CHANGE DEPENDING ON MARKET AND ECONOMIC
CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN
OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF
EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS
OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE ADVISOR MAKES NO
REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH
HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY
HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY.
Annual Report | 21
Performance Summary as of 9/30/03
FRANKLIN INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects the Fund's dividend income,
capital gain distributions, if any, and any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------------------------
CLASS A CHANGE 9/30/03 9/30/02
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.35 $2.25 $1.90
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.1560
- --------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0050
- --------------------------------------------------------------------------------------------------
TOTAL $0.1610
- --------------------------------------------------------------------------------------------------
CLASS B CHANGE 9/30/03 9/30/02
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.34 $2.24 $1.90
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.1398
- --------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0050
- --------------------------------------------------------------------------------------------------
TOTAL $0.1448
- --------------------------------------------------------------------------------------------------
CLASS B1 CHANGE 9/30/03 9/30/02
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.35 $2.25 $1.90
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.1462
- --------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0050
- --------------------------------------------------------------------------------------------------
TOTAL $0.1512
- --------------------------------------------------------------------------------------------------
CLASS C CHANGE 9/30/03 9/30/02
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.35 $2.26 $1.91
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.1462
- --------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0050
- --------------------------------------------------------------------------------------------------
TOTAL $0.1512
22 | Past performance does not guarantee future results. | Annual Report
Performance Summary (CONTINUED)
PRICE AND DISTRIBUTION INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------------------------
CLASS R CHANGE 9/30/03 9/30/02
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.34 $2.23 $1.89
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.1490
- --------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0050
- --------------------------------------------------------------------------------------------------
TOTAL $0.1540
- --------------------------------------------------------------------------------------------------
ADVISOR CLASS CHANGE 9/30/03 9/30/02
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.35 $2.24 $1.89
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.1590
- --------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0050
- --------------------------------------------------------------------------------------------------
TOTAL $0.1640
FRANKLIN INCOME FUND PAID DISTRIBUTIONS DERIVED FROM LONG-TERM CAPITAL GAINS OF
0.5 CENTS ($0.0050) PER SHARE IN DECEMBER 2002. THE FUND HEREBY DESIGNATES SUCH
DISTRIBUTIONS AS CAPITAL GAIN DIVIDENDS PER INTERNAL REVENUE CODE SECTION 852
(B)(3).
Annual Report | Past performance does not guarantee future results. | 23
Performance Summary (CONTINUED)
PERFORMANCE
- -----------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +28.12% +47.29% +117.39%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +22.95% +7.15% +7.60%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $12,295 $14,125 $20,808
- -----------------------------------------------------------------------------------------------------
Distribution Rate 4 6.64%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 5.25%
- -----------------------------------------------------------------------------------------------------
CLASS B 1-YEAR INCEPTION (11/1/01)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +26.58% +19.45%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +22.58% +7.80%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $12,258 $11,545
- -----------------------------------------------------------------------------------------------------
Distribution Rate 4 6.11%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 4.64%
- -----------------------------------------------------------------------------------------------------
CLASS B1 1-YEAR 3-YEAR INCEPTION (1/1/99)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +27.51% +21.69% +39.30%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +23.51% +5.92% +6.92%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $12,351 $11,882 $13,739
- -----------------------------------------------------------------------------------------------------
Distribution Rate 4 6.40%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 4.99%
- -----------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +27.37% +44.05% +101.88%
Average Annual Total Return 2 +25.06% +7.39% +8.58%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $12,506 $14,283 $20,005
- -----------------------------------------------------------------------------------------------------
Distribution Rate 4 6.32%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 4.94%
- -----------------------------------------------------------------------------------------------------
CLASS R 1-YEAR INCEPTION (1/1/02)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +27.31% +16.70%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +26.31% +9.27%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $12,631 $11,670
- -----------------------------------------------------------------------------------------------------
Distribution Rate 4 6.67%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 5.14%
- -----------------------------------------------------------------------------------------------------
ADVISOR CLASS 6 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +28.47% +47.95% +120.88%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +28.47% +8.15% +8.25%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $12,847 $14,795 $22,088
- -----------------------------------------------------------------------------------------------------
Distribution Rate 4 7.13%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 5.63%
ONGOING MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE; MORE
RECENT RETURNS MAY DIFFER FROM THOSE SHOWN. SINCE MARKETS CAN GO DOWN AS WELL AS
UP, INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH MARKET CONDITIONS,
AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES.
FOR MORE CURRENT PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
24 | Past performance does not guarantee future results. | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charge(s), Fund
expenses, account fees and reinvested distributions. The unmanaged indexes
include reinvested dividends. They differ from the Fund in composition and do
not pay management fees or expenses. One cannot invest directly in an index.
CLASS A (10/1/93-9/30/03)
[LINE CHART OMITTED]
Franklin Income S&P LB U.S. Gov't./ LB U.S. Aggregate Lipper
Fund 500 7 Credit Index 7 Index 7 Income Average 7
10/93 $9,572 $10,000 $10,000 $10,000 $10,000
$9,748 $10,207 $10,041 $10,037 $10,104
$9,650 $10,109 $9,927 $9,952 $9,967
$9,867 $10,232 $9,971 $10,006 $10,128
$9,967 $10,579 $10,121 $10,141 $10,347
$9,745 $10,292 $9,901 $9,965 $10,100
$9,357 $9,844 $9,659 $9,719 $9,764
$9,337 $9,971 $9,579 $9,642 $9,787
$9,275 $10,134 $9,561 $9,640 $9,810
$9,212 $9,886 $9,538 $9,619 $9,689
$9,359 $10,210 $9,729 $9,810 $9,899
$9,506 $10,628 $9,733 $9,822 $10,084
$9,442 $10,368 $9,586 $9,678 $9,939
$9,464 $10,601 $9,575 $9,669 $9,975
$9,357 $10,215 $9,558 $9,647 $9,759
$9,238 $10,366 $9,621 $9,714 $9,760
$9,349 $10,635 $9,806 $9,906 $9,924
$9,505 $11,049 $10,033 $10,142 $10,152
$9,617 $11,374 $10,100 $10,204 $10,295
$9,866 $11,709 $10,241 $10,347 $10,493
$10,208 $12,176 $10,670 $10,747 $10,832
$10,322 $12,459 $10,756 $10,826 $10,931
$10,438 $12,872 $10,714 $10,802 $11,096
$10,554 $12,904 $10,851 $10,932 $11,189
$10,764 $13,448 $10,962 $11,038 $11,443
$10,788 $13,400 $11,123 $11,182 $11,431
$10,954 $13,988 $11,306 $11,349 $11,714
$11,205 $14,257 $11,472 $11,509 $11,928
$11,520 $14,742 $11,544 $11,585 $12,146
$11,300 $14,879 $11,299 $11,384 $12,090
3/96 $11,274 $15,022 $11,204 $11,305 $12,109
$11,249 $15,243 $11,127 $11,241 $12,142
$11,374 $15,636 $11,108 $11,218 $12,238
$11,600 $15,696 $11,257 $11,369 $12,340
$11,423 $15,002 $11,283 $11,400 $12,088
$11,600 $15,319 $11,255 $11,381 $12,228
$11,780 $16,181 $11,455 $11,579 $12,508
$12,012 $16,627 $11,722 $11,836 $12,796
$12,297 $17,883 $11,938 $12,038 $13,230
$12,375 $17,528 $11,805 $11,927 $13,186
$12,560 $18,623 $11,819 $11,963 $13,414
$12,693 $18,769 $11,844 $11,993 $13,506
$12,399 $17,999 $11,703 $11,860 $13,250
$12,479 $19,073 $11,875 $12,037 $13,450
$12,885 $20,233 $11,985 $12,151 $13,870
$13,130 $21,139 $12,129 $12,295 $14,193
$13,486 $22,820 $12,500 $12,627 $14,740
$13,404 $21,543 $12,360 $12,519 $14,479
$13,819 $22,722 $12,554 $12,704 $14,933
$13,623 $21,964 $12,755 $12,888 $14,814
$14,044 $22,980 $12,823 $12,948 $15,061
$14,460 $23,374 $12,957 $13,078 $15,310
$14,316 $23,633 $13,140 $13,246 $15,362
$14,519 $25,336 $13,113 $13,236 $15,731
$14,955 $26,632 $13,154 $13,281 $16,094
$14,750 $26,900 $13,220 $13,351 $16,107
$14,603 $26,439 $13,362 $13,477 $16,055
$14,632 $27,512 $13,498 $13,592 $16,189
$14,364 $27,219 $13,508 $13,621 $16,038
$13,434 $23,288 $13,772 $13,842 $15,223
9/98 $14,127 $24,780 $14,166 $14,166 $15,698
$14,158 $26,794 $14,066 $14,091 $15,993
$14,616 $28,417 $14,150 $14,171 $16,360
$14,598 $30,054 $14,185 $14,214 $16,639
$14,380 $31,310 $14,285 $14,315 $16,719
$13,973 $30,337 $13,946 $14,066 $16,388
$14,194 $31,550 $14,015 $14,144 $16,619
$14,924 $32,772 $14,050 $14,188 $17,070
$15,019 $31,999 $13,905 $14,064 $16,916
$14,988 $33,774 $13,862 $14,019 $17,104
$14,826 $32,721 $13,823 $13,960 $16,933
$14,858 $32,559 $13,812 $13,952 $16,802
$14,695 $31,667 $13,937 $14,114 $16,681
$14,662 $33,670 $13,973 $14,167 $16,960
$14,429 $34,355 $13,965 $14,165 $17,031
$14,490 $36,377 $13,880 $14,097 $17,323
$14,593 $34,550 $13,876 $14,051 $17,061
$14,354 $33,896 $14,050 $14,221 $17,073
$14,595 $37,210 $14,253 $14,408 $17,655
$15,114 $36,091 $14,184 $14,367 $17,436
$15,358 $35,352 $14,171 $14,360 $17,413
$15,463 $36,224 $14,460 $14,659 $17,619
$15,639 $35,658 $14,613 $14,792 $17,612
$16,529 $37,872 $14,820 $15,007 $18,207
$16,851 $35,873 $14,875 $15,101 $18,080
$16,598 $35,721 $14,969 $15,201 $18,011
$16,489 $32,907 $15,225 $15,450 $17,617
$17,473 $33,068 $15,525 $15,736 $18,098
$17,438 $34,241 $15,785 $15,993 $18,400
$17,775 $31,121 $15,948 $16,133 $18,067
3/01 $17,510 $29,150 $16,021 $16,214 $17,747
$17,853 $31,414 $15,901 $16,146 $18,226
$18,196 $31,624 $15,993 $16,244 $18,337
$17,773 $30,855 $16,070 $16,305 $18,189
$17,579 $30,551 $16,470 $16,670 $18,243
$17,774 $28,640 $16,681 $16,861 $18,054
$16,949 $26,328 $16,835 $17,057 $17,460
$17,068 $26,830 $17,262 $17,414 $17,701
$17,426 $28,888 $16,979 $17,174 $18,019
$17,587 $29,141 $16,845 $17,065 $18,086
$17,708 $28,716 $16,969 $17,203 $18,010
$17,830 $28,162 $17,113 $17,370 $17,994
$18,365 $29,221 $16,766 $17,081 $18,265
$18,473 $27,450 $17,090 $17,412 $18,200
$18,414 $27,249 $17,248 $17,560 $18,221
$17,266 $25,309 $17,395 $17,712 $17,693
$16,448 $23,336 $17,604 $17,926 $17,065
$16,983 $23,489 $17,999 $18,228 $17,266
$16,241 $20,939 $18,386 $18,523 $16,626
$16,352 $22,780 $18,210 $18,439 $16,930
$17,244 $24,119 $18,221 $18,434 $17,384
$17,400 $22,703 $18,704 $18,815 $17,302
$17,513 $22,109 $18,703 $18,831 $17,169
$17,274 $21,777 $19,037 $19,092 $17,122
$17,656 $21,987 $19,012 $19,077 $17,181
$18,760 $23,798 $19,215 $19,234 $17,871
$19,780 $25,051 $19,761 $19,593 $18,493
$20,170 $25,371 $19,682 $19,554 $18,632
$19,923 $25,819 $18,857 $18,897 $18,503
$20,227 $26,321 $18,981 $19,022 $18,696
9/03 $20,808 $26,042 $19,582 $19,526 $18,920
CLASS B (11/1/01-9/30/03)
[LINE CHART OMITTED]
Franklin Income S&P LB U.S. Aggregate LB U.S. Gov't./ Lipper Income
Fund 500 7 Index 7 Credit Index 7 Average 7
11/1/2001 $10,000 $10,000 $10,000 $10,000 $10,000
11/30/2001 $10,139 $10,767 $9,862 $9,836 $10,180
12/31/2001 $10,182 $10,861 $9,799 $9,758 $10,218
1/31/2002 $10,296 $10,703 $9,879 $9,830 $10,175
2/28/2002 $10,363 $10,496 $9,975 $9,913 $10,166
3/31/2002 $10,622 $10,891 $9,809 $9,712 $10,319
4/30/2002 $10,724 $10,231 $9,999 $9,901 $10,282
5/31/2002 $10,681 $10,156 $10,084 $9,992 $10,294
6/30/2002 $9,960 $9,433 $10,171 $10,077 $9,996
7/31/2002 $9,527 $8,698 $10,294 $10,198 $9,641
8/31/2002 $9,829 $8,755 $10,468 $10,427 $9,755
9/30/2002 $9,393 $7,804 $10,637 $10,651 $9,393
10/31/2002 $9,401 $8,490 $10,589 $10,549 $9,565
11/30/2002 $9,909 $8,990 $10,586 $10,556 $9,821
12/31/2002 $10,044 $8,462 $10,804 $10,835 $9,775
1/31/2003 $10,051 $8,241 $10,814 $10,835 $9,700
2/28/2003 $9,958 $8,117 $10,963 $11,028 $9,673
3/31/2003 $10,120 $8,195 $10,955 $11,014 $9,706
4/30/2003 $10,801 $8,870 $11,045 $11,131 $10,096
5/31/2003 $11,329 $9,337 $11,251 $11,448 $10,448
6/30/2003 $11,599 $9,456 $11,229 $11,402 $10,526
7/31/2003 $11,449 $9,623 $10,851 $10,924 $10,454
8/31/2003 $11,617 $9,810 $10,923 $10,996 $10,562
9/30/2003 $11,545 $9,706 $11,213 $11,344 $10,689
Annual Report | Past performance does not guarantee future results. | 25
Performance Summary (CONTINUED)
[SIDEBAR]
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
CLASS B1 9/30/03
- --------------------------------------
1-Year +23.51%
- --------------------------------------
3-Year +5.92%
- --------------------------------------
Since Inception (1/1/99) +6.92%
CLASS B1 (11/1/99-9/30/03)
[LINE CHART OMITTED]
Franklin Income S&P LB U.S. Aggregate LB U.S. Gov't./ Lipper
Fund 500 7 Index 7 Credit Index 7 Income Average 7
1/99 $10,000 $10,000 $10,000 $10,000 $10,000
$9,851 $10,418 $10,071 $10,071 $10,048
$9,568 $10,094 $9,896 $9,832 $9,849
$9,717 $10,498 $9,950 $9,880 $9,988
$10,213 $10,905 $9,982 $9,905 $10,259
$10,230 $10,647 $9,894 $9,803 $10,166
$10,248 $11,238 $9,863 $9,772 $10,279
$10,133 $10,887 $9,821 $9,745 $10,176
$10,150 $10,834 $9,816 $9,737 $10,098
$10,035 $10,537 $9,930 $9,825 $10,025
$10,009 $11,203 $9,967 $9,851 $10,193
$9,845 $11,431 $9,966 $9,845 $10,235
$9,883 $12,104 $9,918 $9,785 $10,411
$9,949 $11,496 $9,885 $9,782 $10,253
$9,782 $11,279 $10,005 $9,905 $10,260
3/00 $9,941 $12,381 $10,137 $10,048 $10,610
$10,290 $12,009 $10,108 $9,999 $10,479
$10,452 $11,763 $10,103 $9,990 $10,465
$10,519 $12,053 $10,313 $10,194 $10,589
$10,633 $11,865 $10,407 $10,302 $10,584
$11,233 $12,601 $10,558 $10,448 $10,942
$11,448 $11,936 $10,624 $10,487 $10,866
$11,271 $11,886 $10,694 $10,553 $10,824
$11,242 $10,949 $10,869 $10,733 $10,587
$11,856 $11,003 $11,071 $10,945 $10,876
$11,827 $11,393 $11,252 $11,129 $11,058
$12,051 $10,355 $11,350 $11,243 $10,858
$11,867 $9,699 $11,407 $11,295 $10,666
$12,093 $10,453 $11,360 $11,210 $10,954
$12,321 $10,523 $11,428 $11,275 $11,020
6/01 $12,030 $10,267 $11,471 $11,329 $10,931
$11,894 $10,166 $11,728 $11,611 $10,964
$12,021 $9,530 $11,862 $11,760 $10,850
$11,460 $8,760 $12,000 $11,868 $10,493
$11,535 $8,927 $12,251 $12,170 $10,638
$11,772 $9,612 $12,082 $11,970 $10,829
$11,877 $9,696 $12,006 $11,875 $10,869
$11,954 $9,555 $12,103 $11,963 $10,824
$12,031 $9,371 $12,220 $12,064 $10,814
$12,388 $9,723 $12,017 $11,820 $10,977
$12,455 $9,134 $12,250 $12,048 $10,938
$12,410 $9,067 $12,354 $12,160 $10,951
$11,630 $8,421 $12,461 $12,263 $10,633
$11,074 $7,765 $12,611 $12,411 $10,256
$11,429 $7,816 $12,824 $12,689 $10,377
9/02 $10,925 $6,967 $13,032 $12,962 $9,992
$10,995 $7,580 $12,972 $12,838 $10,175
$11,590 $8,025 $12,969 $12,846 $10,447
$11,690 $7,554 $13,237 $13,186 $10,398
$11,762 $7,357 $13,248 $13,186 $10,318
$11,597 $7,246 $13,431 $13,421 $10,290
$11,849 $7,316 $13,421 $13,403 $10,325
$12,583 $7,919 $13,532 $13,546 $10,740
$13,261 $8,335 $13,784 $13,931 $11,114
$13,517 $8,442 $13,757 $13,875 $11,197
$13,347 $8,591 $13,294 $13,294 $11,120
$13,546 $8,758 $13,383 $13,381 $11,236
9/30/03 $13,739 $8,665 $13,737 $13,805 $11,371
[SIDEBAR]
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
CLASS C 9/30/03
- --------------------------------------
1-Year +25.06%
- --------------------------------------
5-Year +7.39%
- --------------------------------------
Since Inception (5/1/95) +8.58%
CLASS C (5/1/95-9/30/03)
[LINE CHART OMITTED]
Franklin Income S&P LB U.S. Aggregate LB U.S. Gov't./ Lipper
Fund 500 7 Index 7 Credit Index 7 Income Average 7
5/95 $9,909 $10,000 $10,000 $10,000 $10,000
$10,228 $10,399 $10,387 $10,419 $10,323
$10,338 $10,640 $10,463 $10,502 $10,417
$10,449 $10,993 $10,440 $10,462 $10,574
$10,561 $11,020 $10,566 $10,596 $10,663
$10,771 $11,485 $10,669 $10,703 $10,905
$10,790 $11,444 $10,807 $10,861 $10,894
$10,951 $11,946 $10,969 $11,039 $11,163
$11,197 $12,176 $11,123 $11,202 $11,368
$11,507 $12,590 $11,197 $11,272 $11,576
$11,331 $12,707 $11,002 $11,033 $11,522
$11,301 $12,829 $10,926 $10,940 $11,540
$11,222 $13,018 $10,864 $10,865 $11,572
$11,341 $13,354 $10,842 $10,847 $11,663
$11,562 $13,404 $10,988 $10,991 $11,760
$11,380 $12,813 $11,018 $11,017 $11,520
$11,552 $13,083 $11,000 $10,990 $11,654
$11,725 $13,819 $11,191 $11,185 $11,921
$11,951 $14,200 $11,439 $11,446 $12,195
$12,281 $15,272 $11,635 $11,657 $12,608
$12,302 $14,970 $11,527 $11,527 $12,567
$12,480 $15,905 $11,562 $11,541 $12,784
$12,660 $16,029 $11,591 $11,565 $12,871
$12,363 $15,372 $11,463 $11,428 $12,628
$12,384 $16,289 $11,634 $11,595 $12,819
$12,780 $17,280 $11,744 $11,703 $13,218
6/97 $13,071 $18,054 $11,884 $11,844 $13,526
$13,419 $19,489 $12,204 $12,206 $14,047
$13,332 $18,398 $12,100 $12,069 $13,799
$13,686 $19,405 $12,278 $12,259 $14,232
$13,542 $18,758 $12,456 $12,455 $14,118
$13,897 $19,626 $12,514 $12,521 $14,354
$14,302 $19,962 $12,640 $12,652 $14,591
$14,153 $20,183 $12,802 $12,830 $14,640
$14,347 $21,638 $12,792 $12,804 $14,992
$14,772 $22,745 $12,836 $12,844 $15,338
$14,622 $22,974 $12,903 $12,908 $15,350
$14,413 $22,579 $13,026 $13,047 $15,301
$14,494 $23,496 $13,136 $13,180 $15,428
$14,223 $23,246 $13,164 $13,190 $15,285
$13,300 $19,889 $13,378 $13,448 $14,508
$13,919 $21,163 $13,692 $13,832 $14,961
$14,003 $22,883 $13,619 $13,735 $15,242
$14,448 $24,269 $13,697 $13,817 $15,591
$14,363 $25,667 $13,738 $13,851 $15,858
$14,204 $26,740 $13,836 $13,949 $15,934
$13,797 $25,909 $13,594 $13,617 $15,618
$14,008 $26,945 $13,670 $13,685 $15,839
$14,719 $27,988 $13,713 $13,719 $16,268
$14,744 $27,329 $13,593 $13,577 $16,121
$14,770 $28,844 $13,550 $13,535 $16,300
$14,605 $27,945 $13,492 $13,498 $16,137
8/99 $14,568 $27,806 $13,485 $13,487 $16,013
$14,401 $27,045 $13,642 $13,608 $15,898
$14,427 $28,756 $13,692 $13,644 $16,163
$14,194 $29,340 $13,691 $13,636 $16,231
$14,247 $31,067 $13,625 $13,553 $16,509
$14,275 $29,506 $13,580 $13,549 $16,259
$14,101 $28,949 $13,745 $13,719 $16,271
$14,330 $31,779 $13,926 $13,917 $16,826
$14,831 $30,823 $13,886 $13,850 $16,617
$14,995 $30,192 $13,879 $13,837 $16,595
$15,091 $30,937 $14,168 $14,119 $16,791
$15,325 $30,453 $14,297 $14,269 $16,784
$16,187 $32,344 $14,504 $14,470 $17,352
$16,495 $30,637 $14,595 $14,525 $17,230
$16,242 $30,507 $14,692 $14,616 $17,165
$16,129 $28,103 $14,932 $14,866 $16,789
$17,080 $28,241 $15,209 $15,159 $17,247
$17,039 $29,243 $15,458 $15,414 $17,535
$17,359 $26,578 $15,592 $15,573 $17,218
$17,095 $24,895 $15,671 $15,644 $16,913
$17,420 $26,828 $15,606 $15,527 $17,370
$17,746 $27,008 $15,700 $15,616 $17,476
$17,329 $26,351 $15,759 $15,691 $17,334
$17,134 $26,092 $16,111 $16,082 $17,386
$17,316 $24,460 $16,296 $16,289 $17,205
$16,509 $22,485 $16,486 $16,438 $16,639
10/01 $16,616 $22,914 $16,831 $16,855 $16,869
$16,955 $24,671 $16,599 $16,579 $17,173
$17,104 $24,887 $16,493 $16,448 $17,236
$17,214 $24,524 $16,627 $16,569 $17,164
$17,326 $24,051 $16,788 $16,710 $17,148
$17,835 $24,956 $16,509 $16,371 $17,407
$17,933 $23,444 $16,829 $16,688 $17,345
$17,869 $23,271 $16,972 $16,842 $17,365
$16,753 $21,614 $17,118 $16,985 $16,862
$15,956 $19,930 $17,325 $17,190 $16,263
$16,465 $20,060 $17,618 $17,575 $16,455
$15,743 $17,882 $17,903 $17,953 $15,845
$15,843 $19,455 $17,821 $17,781 $16,135
$16,696 $20,599 $17,817 $17,792 $16,567
$16,842 $19,389 $18,185 $18,263 $16,489
$16,860 $18,882 $18,200 $18,263 $16,362
$16,710 $18,598 $18,452 $18,588 $16,318
$17,070 $18,777 $18,438 $18,564 $16,373
$18,123 $20,325 $18,590 $18,762 $17,032
$19,096 $21,394 $18,936 $19,295 $17,624
$19,463 $21,668 $18,899 $19,218 $17,757
$19,218 $22,050 $18,264 $18,413 $17,634
$19,502 $22,479 $18,385 $18,534 $17,817
9/30/03 $20,005 $22,241 $18,871 $19,121 $18,031
26 | Past performance does not guarantee future results. | Annual Report
Performance Summary (CONTINUED)
[SIDEBAR]
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
CLASS R 9/30/03
- --------------------------------------
1-Year +26.31%
- --------------------------------------
Since Inception (1/1/02) +9.27%
CLASS R (1/1/02-9/30/03)
[LINE CHART OMITTED]
Franklin S&P LB U.S. Aggregate LB Gov't./Credit Lipper Income
Income Fund 500 7 Index 7 Index 7 Average 7
1/02 $10,000 $10,000 $10,000 $10,000 $10,000
$10,069 $9,854 $10,081 $10,073 $9,958
$10,136 $9,664 $10,179 $10,159 $9,949
$10,390 $10,028 $10,009 $9,953 $10,099
$10,448 $9,420 $10,203 $10,146 $10,063
$10,412 $9,351 $10,290 $10,239 $10,075
6/02 $9,709 $8,685 $10,379 $10,326 $9,783
$9,289 $8,008 $10,504 $10,451 $9,436
$9,590 $8,061 $10,682 $10,685 $9,547
$9,166 $7,185 $10,855 $10,915 $9,193
$9,178 $7,817 $10,805 $10,811 $9,361
$9,681 $8,277 $10,802 $10,817 $9,612
12/02 $9,817 $7,791 $11,025 $11,104 $9,567
$9,829 $7,587 $11,035 $11,103 $9,493
$9,741 $7,473 $11,188 $11,301 $9,467
$9,905 $7,545 $11,179 $11,286 $9,499
$10,577 $8,167 $11,271 $11,407 $9,881
$11,102 $8,596 $11,481 $11,731 $10,225
6/03 $11,319 $8,706 $11,459 $11,684 $10,302
$11,227 $8,860 $11,073 $11,194 $10,231
$11,344 $9,032 $11,147 $11,268 $10,337
9/03 $11,670 $8,937 $11,442 $11,625 $10,461
[SIDEBAR]
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
ADVISOR CLASS 6 9/30/03
- --------------------------------------
1-Year +28.47%
- --------------------------------------
5-Year +8.15%
- --------------------------------------
10-Year +8.25%
ADVISOR CLASS (10/1/93-9/30/03) 6
[LINE CHART OMITTED]
Franklin S&P LB U.S. Aggregate LB Gov't./Credit Lipper Income
Income Fund 500 7 Index 7 Index 7 Average 7
10/93 $10,000 $10,000 $10,000 $10,000 $10,000
$10,184 $10,207 $10,037 $10,041 $10,104
$10,082 $10,109 $9,952 $9,927 $9,967
$10,308 $10,232 $10,006 $9,971 $10,128
$10,413 $10,579 $10,141 $10,121 $10,347
$10,180 $10,292 $9,965 $9,901 $10,100
$9,775 $9,844 $9,719 $9,659 $9,764
$9,754 $9,971 $9,642 $9,579 $9,787
$9,690 $10,134 $9,640 $9,561 $9,810
$9,624 $9,886 $9,619 $9,538 $9,689
$9,777 $10,210 $9,810 $9,729 $9,899
$9,931 $10,628 $9,822 $9,733 $10,084
$9,865 $10,368 $9,678 $9,586 $9,939
$9,888 $10,601 $9,669 $9,575 $9,975
$9,775 $10,215 $9,647 $9,558 $9,759
$9,651 $10,366 $9,714 $9,621 $9,760
$9,767 $10,635 $9,906 $9,806 $9,924
$9,930 $11,049 $10,142 $10,033 $10,152
$10,047 $11,374 $10,204 $10,100 $10,295
$10,307 $11,709 $10,347 $10,241 $10,493
$10,664 $12,176 $10,747 $10,670 $10,832
$10,784 $12,459 $10,826 $10,756 $10,931
$10,904 $12,872 $10,802 $10,714 $11,096
$11,026 $12,904 $10,932 $10,851 $11,189
$11,246 $13,448 $11,038 $10,962 $11,443
$11,270 $13,400 $11,182 $11,123 $11,431
$11,444 $13,988 $11,349 $11,306 $11,714
$11,706 $14,257 $11,509 $11,472 $11,928
$12,035 $14,742 $11,585 $11,544 $12,146
$11,805 $14,879 $11,384 $11,299 $12,090
3/96 $11,779 $15,022 $11,305 $11,204 $12,109
$11,752 $15,243 $11,241 $11,127 $12,142
$11,882 $15,636 $11,218 $11,108 $12,238
$12,119 $15,696 $11,369 $11,257 $12,340
$11,934 $15,002 $11,400 $11,283 $12,088
$12,119 $15,319 $11,381 $11,255 $12,228
$12,307 $16,181 $11,579 $11,455 $12,508
$12,549 $16,627 $11,836 $11,722 $12,796
$12,847 $17,883 $12,038 $11,938 $13,230
$12,929 $17,528 $11,927 $11,805 $13,186
$13,067 $18,623 $11,963 $11,819 $13,414
$13,263 $18,769 $11,993 $11,844 $13,506
$12,957 $17,999 $11,860 $11,703 $13,250
$13,044 $19,073 $12,037 $11,875 $13,450
$13,413 $20,233 $12,151 $11,985 $13,870
$13,728 $21,139 $12,295 $12,129 $14,193
$14,102 $22,820 $12,627 $12,500 $14,740
$14,018 $21,543 $12,519 $12,360 $14,479
$14,397 $22,722 $12,704 $12,554 $14,933
$14,252 $21,964 $12,888 $12,755 $14,814
$14,635 $22,980 $12,948 $12,823 $15,061
$15,132 $23,374 $13,078 $12,957 $15,310
$14,924 $23,633 $13,246 $13,140 $15,362
$15,138 $25,336 $13,236 $13,113 $15,731
$15,596 $26,632 $13,281 $13,154 $16,094
$15,445 $26,900 $13,351 $13,220 $16,107
$15,231 $26,439 $13,477 $13,362 $16,055
$15,325 $27,512 $13,592 $13,498 $16,189
$15,046 $27,219 $13,621 $13,508 $16,038
$14,074 $23,288 $13,842 $13,772 $15,223
9/98 $14,803 $24,780 $14,166 $14,166 $15,698
$14,837 $26,794 $14,091 $14,066 $15,993
$15,319 $28,417 $14,171 $14,150 $16,360
$15,302 $30,054 $14,214 $14,185 $16,639
$15,075 $31,310 $14,315 $14,285 $16,719
$14,650 $30,337 $14,066 $13,946 $16,388
$14,884 $31,550 $14,144 $14,015 $16,619
$15,652 $32,772 $14,188 $14,050 $17,070
$15,687 $31,999 $14,064 $13,905 $16,916
$15,723 $33,774 $14,019 $13,862 $17,104
$15,555 $32,721 $13,960 $13,823 $16,933
$15,523 $32,559 $13,952 $13,812 $16,802
$15,352 $31,667 $14,114 $13,937 $16,681
$15,389 $33,670 $14,167 $13,973 $16,960
$15,147 $34,355 $14,165 $13,965 $17,031
$15,213 $36,377 $14,097 $13,880 $17,323
$15,252 $34,550 $14,051 $13,876 $17,061
$15,074 $33,896 $14,221 $14,050 $17,073
$15,329 $37,210 $14,408 $14,253 $17,655
$15,804 $36,091 $14,367 $14,184 $17,436
$16,062 $35,352 $14,360 $14,171 $17,413
$16,174 $36,224 $14,659 $14,460 $17,619
$16,361 $35,658 $14,792 $14,613 $17,612
$17,298 $37,872 $15,007 $14,820 $18,207
$17,639 $35,873 $15,101 $14,875 $18,080
$17,376 $35,721 $15,201 $14,969 $18,011
$17,339 $32,907 $15,450 $15,225 $17,617
$18,300 $33,068 $15,736 $15,525 $18,098
$18,344 $34,241 $15,993 $15,785 $18,400
$18,701 $31,121 $16,133 $15,948 $18,067
3/01 $18,346 $29,150 $16,214 $16,021 $17,747
$18,788 $31,414 $16,146 $15,901 $18,226
$19,072 $31,624 $16,244 $15,993 $18,337
$18,629 $30,855 $16,305 $16,070 $18,189
$18,428 $30,551 $16,670 $16,470 $18,243
$18,635 $28,640 $16,861 $16,681 $18,054
$17,852 $26,328 $17,057 $16,835 $17,460
$17,896 $26,830 $17,414 $17,262 $17,701
$18,275 $28,888 $17,174 $16,979 $18,019
$18,448 $29,141 $17,065 $16,845 $18,086
$18,663 $28,716 $17,203 $16,969 $18,010
$18,794 $28,162 $17,370 $17,113 $17,994
$19,274 $29,221 $17,081 $16,766 $18,265
$19,478 $27,450 $17,412 $17,090 $18,200
$19,419 $27,249 $17,560 $17,248 $18,221
$18,123 $25,309 $17,712 $17,395 $17,693
$17,351 $23,336 $17,926 $17,604 $17,065
$17,829 $23,489 $18,228 $17,999 $17,266
$17,047 $20,939 $18,523 $18,386 $16,626
$17,167 $22,780 $18,439 $18,210 $16,930
$18,110 $24,119 $18,434 $18,221 $17,384
$18,277 $22,703 $18,815 $18,704 $17,302
$18,398 $22,109 $18,831 $18,703 $17,169
$18,242 $21,777 $19,092 $19,037 $17,122
$18,554 $21,987 $19,077 $19,012 $17,181
$19,722 $23,798 $19,234 $19,215 $17,871
$20,802 $25,051 $19,593 $19,761 $18,493
$21,217 $25,371 $19,554 $19,682 $18,632
$20,959 $25,819 $18,897 $18,857 $18,503
$21,283 $26,321 $19,022 $18,981 $18,696
9/03 $22,088 $26,042 $19,526 $19,582 $18,920
Annual Report | Past performance does not guarantee future results. | 27
Performance Summary (CONTINUED)
ENDNOTES
THE RISKS ASSOCIATED WITH HIGHER YIELDING, LOWER-RATED SECURITIES INCLUDE HIGHER
RISK OF DEFAULT AND LOSS OF PRINCIPAL. THE FUND MAY ALSO INVEST IN FOREIGN
COMPANIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL,
ECONOMIC AND REGULATORY UNCERTAINTY. INTEREST RATE MOVEMENTS MAY AFFECT THE
FUND'S SHARE PRICE AND YIELD. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION
OF THE MAIN INVESTMENT RISKS.
CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to
7/1/94, Fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1
plan, which affects subsequent performance.
CLASS B: Subject to no initial sales charge, but subject to a contingent
deferred sales charge (CDSC) declining from 4% to 0% over six years. These
shares have higher annual fees and expenses than Class A shares.
CLASS B1(formerly Class B): Subject to no initial sales charge, but subject to a
CDSC declining from 4% to 0% over six years. (formerly Class B): These shares
have higher annual fees and expenses than Class A shares. Effective 11/1/01,
closed to new investors.
CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed
within 18 months of investment. These shares have higher annual fees and
expenses than Class A shares.
CLASS R: No initial sales charge, but subject to 1% CDSC for shares redeemed
within 18 months of investment; are available to certain eligible investors as
described in the prospectus. These shares have higher annual fees and expenses
than Class A shares.
ADVISOR CLASS: No initial sales charge or Rule 12b-1 fees; are available to a
limited class of investors.
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes any current, applicable,
maximum sales charge(s).
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and include any current, applicable, maximum
sales charge(s).
4. Distribution rate is based on an annualization of the respective class's
September dividend and the maximum offering price (NAV for Classes B, B1, R and
Advisor) per share on 9/30/03.
5. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 9/30/03.
6. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not
have sales charges or a Rule 12b-1 plan. Performance quotations for this class
reflect the following methods of calculation: (a) For periods prior to 1/2/97, a
restated figure is used based upon the Fund's Class A performance, excluding the
effect of Class A's maximum initial sales charge, but reflecting the effect of
the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor
Class performance is used reflecting all charges and fees applicable to that
class. Since 1/2/97 (commencement of sales), the cumulative and average annual
total returns of Advisor Class shares were +70.85% and +8.26%.
7. Sources: Standard & Poor's Micropal; Lipper Inc. The S&P 500 consists of 500
stocks chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P 500 is
one of the most widely used benchmarks of U.S. equity performance. The LB U.S.
Gov't/Credit Index includes Treasuries, agency securities, publicly issued U.S.
corporate and foreign debentures and secured notes that meet specified maturity,
liquidity and quality requirements. The LB U.S. Aggregate Index includes
fixed-rate debt issues rated investment grade or higher by Moody's, S&P or
Fitch, in that order. All issues have at least one year to maturity and an
outstanding par value of at least $100 million for U.S. government issues and
$50 million for all others. All returns are market value-weighted inclusive of
accrued interest. The index is a composite of the Government/Credit Index and
the Mortgage-Backed Securities Index. Total return includes price
appreciation/depreciation and income as a percentage of the original investment.
The index is rebalanced monthly by market capitalization. As of 9/30/03, the
Lipper Income Funds Average consisted of 149 funds. Lipper calculations do not
include sales charges. Fund performance relative to the average may have
differed if such charges had been considered.
28 | Past performance does not guarantee future results. | Annual Report
Franklin U.S. Government Securities Fund
YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: Franklin U.S. Government Securities
Fund seeks high, current income from a portfolio of U.S. government securities.
[SIDEBAR]
Since 1983, the Fund has invested primarily in Ginnie Mae securities, which
carry a guarantee backed by the full faith and credit of the U.S. government
as to the timely payment of interest and principal. 1 Issued by the Government
National Mortgage Association (GNMA), Ginnie Maes have been among the highest
yielding U.S. government obligations available.
We are pleased to bring you Franklin U.S. Government Securities Fund's annual
report covering the fiscal year ended September 30, 2003.
PERFORMANCE OVERVIEW
During the 12 months under review, Franklin U.S. Government Securities Fund -
Class A posted a +2.66% cumulative total return, as shown in the Performance
Summary beginning on page 33. The Fund - Class A outperformed the Lehman
FRANKLIN U.S. GOVERNMENT SECURITIES FUND -
CLASS A VS. COMPARABLE INVESTMENTS*
Risk vs. Return (10/98-9/03)
Risk Return
- --------------------------------------------------------------------------------
1-Year Treasury Bill 0.92% 4.43%
10-Year Treasury Note 8.03% 5.87%
30-Year Treasury Bond 12.16% 5.50%
Franklin U.S. Government Securities Fund - Class A 2.85% 5.78%
*Source: Standard & Poor's Micropal (Payden & Rygel). Indexes are unmanaged.
Investors cannot invest directly in an index. Average annual total return
represents the average annual change in value of an investment over the period
indicated. These figures assume reinvestment of distributions and do not include
sales charges. Risk is measured by the annualized standard deviation of monthly
total returns. In general, the higher the standard deviation, the greater the
volatility. The value of Treasuries, if held to maturity, is fixed; principal is
guaranteed and interest is fixed. The Fund's Class A shares' average annual
total return does not include the current, maximum 4.25% initial sales charge.
The Fund's investment return and share price will fluctuate with market
conditions, and you may have a gain or loss when you sell your shares. The
figures do not reflect the deduction of taxes that a shareholder would pay on
Fund distributions or the redemption of Fund shares. Past performance does not
guarantee future results.
1. U.S. government securities owned by the Fund, but not shares of the Fund, are
guaranteed by the U.S. government as to timely payment of principal and
interest. The Fund's yield and share price are not guaranteed and will vary with
market conditions.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL
TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF
INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 86.
Annual Report | 29
[SIDEBAR]
YIELD COMPARISON
9/30/03
Franklin U.S. Government Securities Fund - Class A* 3.28%
10-Year Treasury Note* 3.96%
Lipper GNMA Funds Average* 2.27%
Money Market Funds Average* 0.37%
*Sources: Standard & Poor's Micropal; Lipper Inc. Franklin U.S. Government
Securities Fund - Class A shares' yield, calculated as required by the SEC, is
based on earnings of the Fund's portfolio for the 30 days ended 9/30/03. The
value of Treasuries, if held to maturity, is fixed; principal is guaranteed and
interest is fixed. Money funds attempt to maintain a stable net asset value of
$1.00 per share, while shares of Franklin U.S. Government Securities Fund will
fluctuate with market conditions. Lipper averages do not include sales charges.
Brothers Intermediate U.S. Government Bond Index, which returned 2.49%, and the
Lipper GNMA Funds Average, which returned 2.62% for the same period.2 The Fund's
return reflects the effect of management fees and expenses, while indexes do not
have such costs.
ECONOMIC AND MARKET OVERVIEW
Uncertainty about the economy's strength and geopolitical events pushed interest
rates down during the first part of the reporting period. By mid-June, 10-year
U.S. Treasury yields fell to 3.11%, the lowest level in more than 45 years. For
consumers, historically low mortgage rates enabled many homeowners to refinance
their mortgages, and refinancing applications reached their highest levels on
record. Prepayments on mortgage-backed securities increased as well.
Additionally, refinancing activity, stabilized equity markets, rising home
values and improved consumer net worths allowed consumers to continue spending.
In fact, retail sales grew 7.5% in September 2003 from a year earlier, helping
the economy expand.
Many businesses took the opportunity of a lower interest rate environment to
refinance their old debt at more attractive levels. This helped enhance business
operating performance. Credit-related fixed income products also benefited from
this improvement. Additionally, businesses continued to achieve productivity
gains by reducing their labor forces and taking advantage of recent technology
investments. Higher productivity levels helped dampen inflation. In fact, core
inflation (excluding food and energy) for September 2003 increased at a rate of
1.2% compared with the same month a year earlier. Expectations for continued low
inflation contributed to a historically lower overall interest rate environment
during the period.
As some of the immediate perceived risks related to the Iraq war subsided in
late spring, and economic activity and domestic equity markets rebounded,
interest rates rose as investors tolerated more risk in their portfolios. Rising
interest rates led to higher mortgage rates, and prepayments declined.
2. Source: Standard & Poor's Micropal; Lipper Inc. The unmanaged Lehman Brothers
Intermediate U.S. Government Bond Index includes fixed-rate debt issues rated
investment grade or higher by Moody's, S&P or Fitch, in that order. All issues
have at least one year to maturity and an outstanding par value of at least $100
million for U.S. government issues. All returns are market value-weighted
inclusive of accrued interest. The index includes issues of the U.S. government
or any agency thereof. It includes only issues with a remaining term to maturity
of less than 10 years. Total return includes price appreciation/depreciation and
income as a percentage of the original investment. The total return index is
rebalanced monthly by market capitalization. The Lipper GNMA Funds Average
consisted of 66 funds on 9/30/03, and does not include sales charges. Fund
performance relative to the average might have differed if such charges had been
considered. The indexes include reinvested distributions. One cannot invest
directly in an index, nor is an index representative of the Fund's portfolio.
30 | Annual Report
DIVIDEND DISTRIBUTIONS
Franklin U.S. Government Securities Fund
10/1/02-9/30/03
- ----------------------------------------------------------------------------------
DIVIDEND PER SHARE
-----------------------------------------------------------------
MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS
- ----------------------------------------------------------------------------------
October 3.38 cents 3.09 cents 3.09 cents 3.17 cents 3.44 cents
- ----------------------------------------------------------------------------------
November 2.98 cents 2.69 cents 2.69 cents 2.77 cents 3.05 cents
- ----------------------------------------------------------------------------------
December 2.98 cents 2.67 cents 2.68 cents 2.77 cents 3.06 cents
- ----------------------------------------------------------------------------------
January 2.98 cents 2.67 cents 2.68 cents 2.77 cents 3.05 cents
- ----------------------------------------------------------------------------------
February 2.98 cents 2.67 cents 2.68 cents 2.77 cents 3.05 cents
- ----------------------------------------------------------------------------------
March 2.98 cents 2.67 cents 2.71 cents 2.77 cents 3.05 cents
- ----------------------------------------------------------------------------------
April 2.98 cents 2.67 cents 2.71 cents 2.77 cents 3.05 cents
- ----------------------------------------------------------------------------------
May 2.98 cents 2.67 cents 2.71 cents 2.77 cents 3.05 cents
- ----------------------------------------------------------------------------------
June 2.98 cents 2.69 cents 2.66 cents 2.77 cents 3.07 cents
- ----------------------------------------------------------------------------------
July 2.98 cents 2.69 cents 2.66 cents 2.77 cents 3.05 cents
- ----------------------------------------------------------------------------------
August 2.98 cents 2.69 cents 2.66 cents 2.77 cents 3.05 cents
- ----------------------------------------------------------------------------------
September 2.98 cents 2.70 cents 2.67 cents 2.79 cents 3.05 cents
- ----------------------------------------------------------------------------------
TOTAL 36.16 CENTS 32.57 CENTS 32.60 CENTS 33.66 CENTS 37.02 CENTS
INVESTMENT STRATEGY
We seek to invest substantially all of the Fund's assets in Ginnie Mae
obligations. We analyze securities using proprietary models to help us identify
attractive investment opportunities. The Fund's short-term investments include
short-term government securities and cash.
MANAGER'S DISCUSSION
During the Fund's fiscal year, we sought areas of the Ginnie Mae market where we
believed prepayment risk was mispriced, which led us to securities primarily in
the 5% to 7% coupon range. We also purchased some higher coupon securities when
we saw value. Our main focus was coupon and maturity selection in managing the
Fund's duration, or sensitivity to changing interest rates, rather than
predicting interest rate movements. Ginnie Mae mortgage passthroughs have
historically been a lower volatility asset class across interest rate cycles. We
continued to see favorable return characteristics over the past year, as is
evidenced by the Fund's returns.
Annual Report | 31
Thank you for your continued participation in Franklin U.S. Government
Securities Fund. We welcome your comments and questions and look forward to
serving your investment needs in the years to come.
[PHOTO]
/s/Jack Lemein
Jack Lemein
[PHOTO]
/s/Roger A. Bayston, CFA
Roger A. Bayston, CFA
[PHOTO]
/s/T. Anthony Coffey, CFA
T. Anthony Coffey, CFA
Portfolio Management Team
Franklin U.S. Government Securities Fund
THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF
SEPTEMBER 30, 2003, THE END OF THE REPORTING PERIOD. OUR STRATEGIES AND THE
FUND'S PORTFOLIO COMPOSITION WILL CHANGE DEPENDING ON MARKET AND ECONOMIC
CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN
OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF
EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS
OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE ADVISOR MAKES NO
REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH
HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY
HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY.
32 | Annual Report
Performance Summary as of 9/30/03
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects the Fund's dividend income,
capital gain distributions, if any, and any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------------------------
CLASS A CHANGE 9/30/03 9/30/02
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.18 $6.81 $6.99
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.3616
- --------------------------------------------------------------------------------------------------
CLASS B CHANGE 9/30/03 9/30/02
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.18 $6.80 $6.98
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.3257
- --------------------------------------------------------------------------------------------------
CLASS C CHANGE 9/30/03 9/30/02
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.19 $6.78 $6.97
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.3260
- --------------------------------------------------------------------------------------------------
CLASS R CHANGE 9/30/03 9/30/02
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.18 $6.81 $6.99
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.3366
- --------------------------------------------------------------------------------------------------
ADVISOR CLASS CHANGE 9/30/03 9/30/02
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.18 $6.83 $7.01
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.3702
Annual Report | Past performance does not guarantee future results. | 33
Performance Summary (CONTINUED)
PERFORMANCE
- ------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.66% +32.42% +83.83%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -1.70% +4.86% +5.82%
- ------------------------------------------------------------------------------------------------------
Distribution Rate 3 5.03%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 4 3.28%
- ------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 3-YEAR INCEPTION (1/1/99)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.13% +20.52% +28.50%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -1.76% +5.53% +5.08%
- ------------------------------------------------------------------------------------------------------
Distribution Rate 3 4.76%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 4 2.90%
- ------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.00% +28.88% +68.10%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.02% +5.00% +6.23%
- ------------------------------------------------------------------------------------------------------
Distribution Rate 3 4.68%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 4 2.87%
- ------------------------------------------------------------------------------------------------------
CLASS R 1-YEAR INCEPTION (1/1/02)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.29% +9.49%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +1.32% +5.34%
- ------------------------------------------------------------------------------------------------------
Distribution Rate 3 4.92%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 4 3.05%
- ------------------------------------------------------------------------------------------------------
ADVISOR CLASS5 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.79% +33.33% +86.19%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +2.79% +5.92% +6.41%
- ------------------------------------------------------------------------------------------------------
Distribution Rate 3 5.36%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 4 3.54%
ONGOING MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE; MORE
RECENT RETURNS MAY DIFFER FROM THOSE SHOWN. SINCE MARKETS CAN GO DOWN AS WELL AS
UP, INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH MARKET CONDITIONS,
AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES.
FOR MORE CURRENT PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
34 | Past performance does not guarantee future results. | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charge(s), Fund
expenses, account fees and reinvested distributions. The unmanaged indexes
include reinvested distributions. They differ from the Fund in composition and
do not pay management fees or expenses. One cannot invest directly in an index.
The Consumer Price Index (CPI), calculated by the U.S. Bureau of Labor
Statistics, is a commonly used measure of the inflation rate.
CLASS A (10/1/93-9/30/03)
[LINE GRAPH]
Franklin U.S. Government B Intermediate U.S. Lipper GNMA
Securities Fund overnment Bond Index 6 Funds Average 6 CPI 6
10/1/93 $9,574 $10,000 $10,000 $10,000
$9,593 $10,024 $10,026 $10,041
$9,558 $9,974 $9,969 $10,048
$9,631 $10,015 $10,049 $10,048
$9,719 $10,114 $10,145 $10,076
$9,628 $9,975 $10,053 $10,110
$9,358 $9,830 $9,798 $10,145
$9,295 $9,766 $9,727 $10,159
$9,301 $9,773 $9,742 $10,165
$9,258 $9,775 $9,713 $10,200
$9,428 $9,904 $9,874 $10,227
$9,456 $9,932 $9,892 $10,269
$9,327 $9,850 $9,760 $10,296
$9,299 $9,852 $9,729 $10,303
$9,285 $9,809 $9,703 $10,317
$9,372 $9,841 $9,795 $10,317
$9,563 $10,001 $9,982 $10,358
$9,799 $10,193 $10,224 $10,400
$9,844 $10,250 $10,266 $10,434
$9,978 $10,368 $10,401 $10,469
$10,311 $10,661 $10,741 $10,489
$10,373 $10,729 $10,803 $10,510
$10,389 $10,734 $10,797 $10,510
$10,498 $10,822 $10,910 $10,538
$10,592 $10,895 $11,020 $10,558
$10,702 $11,014 $11,125 $10,593
$10,813 $11,149 $11,265 $10,586
$10,940 $11,259 $11,409 $10,579
$11,005 $11,354 $11,474 $10,641
$10,911 $11,234 $11,327 $10,675
$10,864 $11,182 $11,277 $10,731
4/30/96 $10,818 $11,150 $11,230 $10,772
$10,787 $11,144 $11,184 $10,793
$10,918 $11,257 $11,306 $10,799
$10,953 $11,292 $11,345 $10,820
$10,954 $11,305 $11,340 $10,841
$11,138 $11,451 $11,521 $10,875
$11,340 $11,639 $11,753 $10,910
$11,509 $11,779 $11,932 $10,930
$11,443 $11,716 $11,847 $10,930
$11,513 $11,761 $11,921 $10,965
$11,548 $11,780 $11,945 $10,999
$11,515 $11,713 $11,820 $11,027
$11,690 $11,845 $12,002 $11,041
$11,792 $11,937 $12,117 $11,034
$11,931 $12,040 $12,256 $11,048
$12,157 $12,262 $12,507 $11,061
$12,120 $12,215 $12,457 $11,082
$12,261 $12,347 $12,621 $11,110
$12,384 $12,491 $12,751 $11,137
$12,400 $12,519 $12,781 $11,130
$12,525 $12,621 $12,903 $11,116
$12,650 $12,785 $13,033 $11,137
$12,649 $12,772 $13,046 $11,158
$12,702 $12,812 $13,088 $11,178
$12,793 $12,873 $13,157 $11,199
$12,880 $12,961 $13,257 $11,220
$12,931 $13,048 $13,314 $11,234
$13,000 $13,099 $13,370 $11,247
$13,127 $13,346 $13,501 $11,261
$13,292 $13,658 $13,677 $11,275
10/31/98 $13,229 $13,680 $13,611 $11,303
$13,301 $13,639 $13,687 $11,303
$13,353 $13,692 $13,736 $11,296
$13,444 $13,753 $13,816 $11,323
$13,360 $13,564 $13,710 $11,337
$13,433 $13,654 $13,795 $11,371
$13,486 $13,691 $13,847 $11,454
$13,381 $13,607 $13,747 $11,454
$13,315 $13,627 $13,669 $11,454
$13,209 $13,629 $13,586 $11,489
$13,219 $13,648 $13,568 $11,516
$13,432 $13,765 $13,781 $11,571
$13,504 $13,792 $13,831 $11,592
$13,514 $13,802 $13,839 $11,599
$13,463 $13,758 $13,773 $11,599
$13,349 $13,712 $13,661 $11,633
$13,505 $13,826 $13,821 $11,702
$13,704 $13,983 $14,029 $11,799
$13,672 $13,978 $14,004 $11,806
$13,727 $14,015 $14,053 $11,819
$13,953 $14,238 $14,299 $11,881
$14,029 $14,332 $14,358 $11,909
$14,237 $14,493 $14,562 $11,909
$14,359 $14,620 $14,687 $11,971
$14,461 $14,720 $14,775 $11,992
$14,672 $14,936 $14,991 $11,999
$14,884 $15,199 $15,208 $11,992
$15,098 $15,402 $15,439 $12,068
$15,179 $15,543 $15,529 $12,116
$15,260 $15,656 $15,617 $12,143
4/30/01 $15,275 $15,606 $15,591 $12,192
$15,380 $15,671 $15,691 $12,247
$15,418 $15,721 $15,741 $12,267
$15,707 $16,014 $16,040 $12,233
$15,814 $16,156 $16,157 $12,233
$16,014 $16,501 $16,385 $12,288
$16,235 $16,759 $16,604 $12,247
$16,084 $16,559 $16,432 $12,226
$16,026 $16,479 $16,343 $12,178
$16,153 $16,550 $16,500 $12,205
$16,351 $16,687 $16,673 $12,254
$16,146 $16,435 $16,470 $12,323
$16,443 $16,743 $16,773 $12,391
$16,548 $16,859 $16,882 $12,391
$16,678 $17,070 $17,018 $12,398
$16,857 $17,392 $17,214 $12,412
$17,013 $17,591 $17,354 $12,453
$17,145 $17,893 $17,503 $12,474
$17,203 $17,881 $17,527 $12,495
$17,203 $17,739 $17,519 $12,495
$17,401 $18,067 $17,708 $12,467
$17,451 $18,027 $17,743 $12,522
$17,525 $18,231 $17,843 $12,619
$17,525 $18,234 $17,830 $12,695
$17,575 $18,286 $17,875 $12,667
$17,574 $18,573 $17,916 $12,646
$17,625 $18,542 $17,948 $12,660
$17,215 $18,092 $17,557 $12,674
$17,343 $18,125 $17,673 $12,722
9/30/03 $17,601 $18,518 $17,966 $12,764
CLASS B (1/1/99-9/30/03)
[LINE GRAPH]
Franklin U.S. Government LB Intermediate U.S. Lipper GNMA
Securities Fund Government Bond Index 6 Funds Average 6 CPI 6
1/1/99 $10,000 $10,000 $10,000 $10,000
$10,068 $10,045 $10,058 $10,024
$9,986 $9,907 $9,981 $10,037
$10,051 $9,973 $10,042 $10,067
$10,087 $10,000 $10,081 $10,140
$10,005 $9,938 $10,008 $10,140
$9,936 $9,953 $9,951 $10,140
$9,868 $9,954 $9,890 $10,171
$9,856 $9,968 $9,877 $10,195
$10,025 $10,053 $10,032 $10,244
$10,074 $10,073 $10,069 $10,262
$10,062 $10,080 $10,075 $10,268
$10,019 $10,049 $10,026 $10,268
$9,946 $10,015 $9,945 $10,299
$10,042 $10,098 $10,061 $10,360
3/31/00 $10,186 $10,213 $10,213 $10,445
$10,174 $10,209 $10,195 $10,451
$10,210 $10,236 $10,231 $10,464
$10,373 $10,399 $10,410 $10,519
$10,410 $10,468 $10,452 $10,543
$10,560 $10,585 $10,601 $10,543
$10,662 $10,678 $10,692 $10,598
$10,717 $10,751 $10,756 $10,616
$10,869 $10,909 $10,913 $10,622
$11,021 $11,101 $11,071 $10,616
$11,191 $11,249 $11,240 $10,683
$11,230 $11,352 $11,305 $10,726
$11,302 $11,434 $11,369 $10,750
$11,291 $11,398 $11,350 $10,793
5/31/01 $11,364 $11,446 $11,423 $10,842
$11,403 $11,482 $11,459 $10,860
$11,595 $11,696 $11,677 $10,830
$11,669 $11,800 $11,762 $10,830
$11,829 $12,052 $11,928 $10,879
$11,970 $12,240 $12,088 $10,842
$11,871 $12,094 $11,962 $10,824
$11,806 $12,035 $11,898 $10,781
$11,912 $12,087 $12,012 $10,805
$12,035 $12,187 $12,138 $10,848
$11,879 $12,004 $11,990 $10,909
$12,092 $12,228 $12,210 $10,970
$12,164 $12,314 $12,290 $10,970
$12,254 $12,468 $12,389 $10,976
7/31/02 $12,381 $12,703 $12,532 $10,988
$12,490 $12,848 $12,633 $11,025
$12,582 $13,068 $12,742 $11,043
$12,620 $13,059 $12,760 $11,062
$12,614 $12,956 $12,753 $11,062
$12,754 $13,196 $12,891 $11,037
$12,785 $13,166 $12,917 $11,086
$12,834 $13,315 $12,989 $11,171
$12,828 $13,318 $12,980 $11,239
$12,859 $13,355 $13,013 $11,214
$12,871 $13,565 $13,043 $11,196
$12,884 $13,543 $13,066 $11,208
$12,578 $13,214 $12,781 $11,220
$12,667 $13,238 $12,866 $11,263
9/30/03 $12,653 $13,525 $13,079 $11,300
Annual Report | Past performance does not guarantee future results. | 35
Performance Summary (CONTINUED)
[SIDEBAR]
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
CLASS C 9/30/03
- --------------------------------------
1-Year +0.02%
- --------------------------------------
5-Year +5.00%
- --------------------------------------
Since Inception (5/1/95) +6.23%
CLASS C (5/1/95-9/30/03)
[LINE CHART OMITTED]
Franklin U.S. Government LB Intermediate U.S. Lipper GNMA
Securities Fund Government Bond Index 6 Funds Average 6 CPI 6
5/1/95 $9,896 $10,000 $10,000 $10,000
$10,194 $10,282 $10,326 $10,020
$10,249 $10,347 $10,386 $10,039
$10,260 $10,352 $10,381 $10,039
$10,362 $10,438 $10,489 $10,066
$10,454 $10,508 $10,595 $10,086
$10,557 $10,623 $10,695 $10,119
$10,661 $10,753 $10,830 $10,112
$10,780 $10,859 $10,969 $10,105
$10,853 $10,950 $11,031 $10,165
$10,754 $10,834 $10,890 $10,197
$10,687 $10,785 $10,842 $10,250
$10,652 $10,754 $10,796 $10,290
$10,616 $10,748 $10,752 $10,309
$10,725 $10,857 $10,869 $10,316
$10,754 $10,891 $10,907 $10,336
$10,766 $10,903 $10,902 $10,355
$10,930 $11,044 $11,076 $10,388
$11,123 $11,225 $11,299 $10,421
$11,301 $11,361 $11,472 $10,441
$11,214 $11,300 $11,389 $10,441
$11,294 $11,343 $11,461 $10,474
$11,307 $11,361 $11,484 $10,507
$11,269 $11,297 $11,363 $10,533
$11,434 $11,424 $11,538 $10,546
$11,546 $11,513 $11,649 $10,540
$11,675 $11,612 $11,783 $10,553
$11,892 $11,826 $12,025 $10,566
$11,833 $11,781 $11,977 $10,586
9/30/97 $11,966 $11,909 $12,134 $10,612
$12,081 $12,047 $12,259 $10,639
$12,091 $12,074 $12,288 $10,632
$12,208 $12,172 $12,405 $10,619
$12,324 $12,331 $12,530 $10,639
$12,317 $12,318 $12,542 $10,658
$12,363 $12,356 $12,583 $10,678
$12,446 $12,415 $12,649 $10,698
$12,526 $12,501 $12,745 $10,718
$12,569 $12,585 $12,800 $10,731
$12,632 $12,633 $12,854 $10,744
$12,749 $12,872 $12,980 $10,757
$12,905 $13,173 $13,149 $10,770
$12,819 $13,194 $13,086 $10,797
$12,901 $13,154 $13,159 $10,797
$12,946 $13,205 $13,206 $10,790
$13,028 $13,264 $13,283 $10,816
$12,941 $13,082 $13,181 $10,829
$13,006 $13,169 $13,262 $10,862
$13,051 $13,205 $13,313 $10,941
$12,943 $13,124 $13,217 $10,941
$12,874 $13,143 $13,142 $10,941
$12,765 $13,144 $13,061 $10,974
$12,770 $13,163 $13,044 $11,001
9/30/99 $12,970 $13,276 $13,249 $11,053
$13,033 $13,302 $13,297 $11,073
$13,037 $13,311 $13,305 $11,080
$12,982 $13,269 $13,241 $11,080
$12,867 $13,225 $13,134 $11,113
$13,012 $13,334 $13,287 $11,178
$13,198 $13,487 $13,488 $11,271
$13,161 $13,481 $13,464 $11,277
$13,208 $13,517 $13,511 $11,290
$13,420 $13,732 $13,747 $11,350
$13,468 $13,823 $13,804 $11,376
$13,662 $13,978 $14,000 $11,376
$13,795 $14,100 $14,120 $11,435
$13,886 $14,197 $14,205 $11,455
$14,062 $14,405 $14,412 $11,461
$14,260 $14,659 $14,621 $11,455
$14,480 $14,854 $14,843 $11,527
$14,530 $14,991 $14,930 $11,573
$14,624 $15,099 $15,015 $11,600
$14,631 $15,052 $14,989 $11,646
$14,704 $15,114 $15,085 $11,698
$14,755 $15,162 $15,133 $11,718
$15,004 $15,445 $15,421 $11,685
$15,100 $15,582 $15,533 $11,685
$15,307 $15,915 $15,752 $11,738
$15,490 $16,163 $15,963 $11,698
11/30/01 $15,361 $15,970 $15,797 $11,679
$15,276 $15,893 $15,712 $11,633
$15,413 $15,962 $15,863 $11,659
$15,573 $16,094 $16,030 $11,705
$15,370 $15,851 $15,834 $11,771
$15,647 $16,148 $16,125 $11,837
$15,741 $16,260 $16,230 $11,837
$15,858 $16,464 $16,362 $11,843
$16,023 $16,774 $16,550 $11,856
$16,165 $16,965 $16,684 $11,896
$16,307 $17,257 $16,827 $11,916
$16,333 $17,245 $16,851 $11,935
$16,325 $17,109 $16,842 $11,935
$16,507 $17,425 $17,024 $11,909
$16,547 $17,387 $17,058 $11,962
$16,635 $17,583 $17,154 $12,054
$16,604 $17,586 $17,142 $12,126
$16,645 $17,636 $17,185 $12,100
$16,638 $17,913 $17,224 $12,080
$16,678 $17,883 $17,255 $12,093
$16,281 $17,449 $16,879 $12,107
$16,395 $17,481 $16,991 $12,153
9/30/03 $16,635 $17,860 $17,273 $12,192
[SIDEBAR]
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
CLASS R 9/30/03
- --------------------------------------
1-Year +1.32%
- --------------------------------------
Since Inception (1/1/02) +5.34%
CLASS R (1/1/02-9/30/03)
[LINE CHART OMITTED]
Franklin U.S. Government LB Intermediate U.S. Lipper GNMA
Securities Fund Government Bond Index 6 Funds Average 6 CPI 6
1/1/02 $10,000 $10,000 $10,000 $10,000
$10,079 $10,043 $10,096 $10,023
$10,185 $10,126 $10,202 $10,062
$10,068 $9,974 $10,078 $10,119
$10,250 $10,160 $10,263 $10,175
$10,312 $10,231 $10,330 $10,175
$10,390 $10,359 $10,413 $10,181
7/31/02 $10,499 $10,554 $10,533 $10,192
$10,593 $10,675 $10,618 $10,226
$10,672 $10,858 $10,710 $10,243
$10,690 $10,851 $10,725 $10,260
$10,701 $10,765 $10,719 $10,260
$10,822 $10,964 $10,835 $10,238
1/31/03 $10,834 $10,940 $10,857 $10,283
$10,892 $11,063 $10,918 $10,362
$10,889 $11,065 $10,910 $10,424
$10,916 $11,097 $10,937 $10,402
$10,913 $11,271 $10,962 $10,385
$10,925 $11,252 $10,982 $10,396
7/31/03 $10,683 $10,979 $10,743 $10,407
$10,759 $10,999 $10,814 $10,447
9/30/03 $10,949 $11,237 $10,993 $10,481
36 | Past performance does not guarantee future results. | Annual Report
Performance Summary (CONTINUED)
[SIDEBAR]
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
ADVISOR CLASS 5 9/30/03
- --------------------------------------
1-Year +2.79%
- --------------------------------------
5-Year +5.92%
- --------------------------------------
10-Year +6.41%
ADVISOR CLASS (10/1/93-9/30/03) 5
[LINE CHART OMITTED]
Franklin U.S. Government LB Intermediate U.S. Lipper GNMA
Securities Fund Government Bond Index 6 Funds Average 6 CPI 6
10/1/93 $10,000 $10,000 $10,000 $10,000
$10,020 $10,024 $10,026 $10,041
$9,983 $9,974 $9,969 $10,048
$10,060 $10,015 $10,049 $10,048
$10,151 $10,114 $10,145 $10,076
$10,056 $9,975 $10,053 $10,110
$9,774 $9,830 $9,798 $10,145
$9,708 $9,766 $9,727 $10,159
$9,714 $9,773 $9,742 $10,165
$9,670 $9,775 $9,713 $10,200
$9,847 $9,904 $9,874 $10,227
$9,877 $9,932 $9,892 $10,269
$9,742 $9,850 $9,760 $10,296
$9,712 $9,852 $9,729 $10,303
$9,697 $9,809 $9,703 $10,317
$9,789 $9,841 $9,795 $10,317
$9,988 $10,001 $9,982 $10,358
$10,235 $10,193 $10,224 $10,400
$10,281 $10,250 $10,266 $10,434
$10,422 $10,368 $10,401 $10,469
$10,769 $10,661 $10,741 $10,489
$10,834 $10,729 $10,803 $10,510
$10,851 $10,734 $10,797 $10,510
$10,965 $10,822 $10,910 $10,538
$11,063 $10,895 $11,020 $10,558
$11,178 $11,014 $11,125 $10,593
$11,294 $11,149 $11,265 $10,586
$11,426 $11,259 $11,409 $10,579
$11,494 $11,354 $11,474 $10,641
$11,396 $11,234 $11,327 $10,675
$11,347 $11,182 $11,277 $10,731
4/30/96 $11,298 $11,150 $11,230 $10,772
$11,266 $11,144 $11,184 $10,793
$11,404 $11,257 $11,306 $10,799
$11,440 $11,292 $11,345 $10,820
$11,441 $11,305 $11,340 $10,841
$11,633 $11,451 $11,521 $10,875
$11,843 $11,639 $11,753 $10,910
$12,020 $11,779 $11,932 $10,930
$11,952 $11,716 $11,847 $10,930
$12,042 $11,761 $11,921 $10,965
$12,063 $11,780 $11,945 $10,999
$12,029 $11,713 $11,820 $11,027
$12,230 $11,845 $12,002 $11,041
$12,338 $11,937 $12,117 $11,034
$12,484 $12,040 $12,256 $11,048
$12,722 $12,262 $12,507 $11,061
$12,665 $12,215 $12,457 $11,082
$12,832 $12,347 $12,621 $11,110
$12,943 $12,491 $12,751 $11,137
$12,980 $12,519 $12,781 $11,130
$13,112 $12,621 $12,903 $11,116
$13,225 $12,785 $13,033 $11,137
$13,243 $12,772 $13,046 $11,158
$13,300 $12,812 $13,088 $11,178
$13,376 $12,873 $13,157 $11,199
$13,488 $12,961 $13,257 $11,220
$13,542 $13,048 $13,314 $11,234
$13,596 $13,099 $13,370 $11,247
$13,730 $13,346 $13,501 $11,261
$13,924 $13,658 $13,677 $11,275
10/31/98 $13,839 $13,680 $13,611 $11,303
$13,934 $13,639 $13,687 $11,303
$13,990 $13,692 $13,736 $11,296
$14,087 $13,753 $13,816 $11,323
$13,980 $13,564 $13,710 $11,337
$14,058 $13,654 $13,795 $11,371
$14,135 $13,691 $13,847 $11,454
$14,027 $13,607 $13,747 $11,454
$13,938 $13,627 $13,669 $11,454
$13,849 $13,629 $13,586 $11,489
$13,840 $13,648 $13,568 $11,516
$14,085 $13,765 $13,781 $11,571
$14,162 $13,792 $13,831 $11,592
$14,153 $13,802 $13,839 $11,599
$14,100 $13,758 $13,773 $11,599
$14,004 $13,712 $13,661 $11,633
$14,147 $13,826 $13,821 $11,702
$14,357 $13,983 $14,029 $11,799
$14,347 $13,978 $14,004 $11,806
$14,406 $14,015 $14,053 $11,819
$14,644 $14,238 $14,299 $11,881
$14,703 $14,332 $14,358 $11,909
$14,922 $14,493 $14,562 $11,909
$15,074 $14,620 $14,687 $11,971
$15,181 $14,720 $14,775 $11,992
$15,381 $14,936 $14,991 $11,999
$15,629 $15,199 $15,208 $11,992
$15,854 $15,402 $15,439 $12,068
$15,917 $15,543 $15,529 $12,116
$16,028 $15,656 $15,617 $12,143
4/30/01 $16,044 $15,606 $15,591 $12,192
$16,131 $15,671 $15,691 $12,247
$16,218 $15,721 $15,741 $12,267
$16,499 $16,014 $16,040 $12,233
$16,612 $16,156 $16,157 $12,233
$16,824 $16,501 $16,385 $12,288
$17,058 $16,759 $16,604 $12,247
$16,926 $16,559 $16,432 $12,226
$16,842 $16,479 $16,343 $12,178
$16,977 $16,550 $16,500 $12,205
$17,186 $16,687 $16,673 $12,254
$16,973 $16,435 $16,470 $12,323
$17,286 $16,743 $16,773 $12,391
$17,398 $16,859 $16,882 $12,391
$17,536 $17,070 $17,018 $12,398
$17,726 $17,392 $17,214 $12,412
$17,891 $17,591 $17,354 $12,453
$18,057 $17,893 $17,503 $12,474
$18,094 $17,881 $17,527 $12,495
$18,096 $17,739 $17,519 $12,495
$18,306 $18,067 $17,708 $12,467
$18,360 $18,027 $17,743 $12,522
$18,467 $18,231 $17,843 $12,619
$18,468 $18,234 $17,830 $12,695
$18,496 $18,286 $17,875 $12,667
$18,524 $18,573 $17,916 $12,646
$18,553 $18,542 $17,948 $12,660
$18,123 $18,092 $17,557 $12,674
$18,260 $18,125 $17,673 $12,722
9/30/03 $18,619 $18,518 $17,966 $12,764
Annual Report | Past performance does not guarantee future results. | 37
Performance Summary (CONTINUED)
ENDNOTES
THE FUND'S SHARE PRICE AND YIELD MAY BE AFFECTED BY INTEREST RATE MOVEMENTS AND
MORTGAGE PREPAYMENTS. SECURITIES OWNED BY THE FUND, BUT NOT SHARES OF THE FUND,
ARE GUARANTEED BY THE U.S. GOVERNMENT AS TO TIMELY PAYMENT OF PRINCIPAL AND
INTEREST. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN
INVESTMENT RISKS.
CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to
7/1/94, Fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1
plan, which affects subsequent performance.
CLASS B: Subject to no initial sales charge, but subject to a contingent
deferred sales charge (CDSC) declining from 4% to 0% over six years. These
shares have higher annual fees and expenses than Class A shares.
CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed
within 18 months of investment. These shares have higher annual fees and
expenses than Class A shares.
CLASS R: No initial sales charge, but subject to 1% CDSC for shares redeemed
within 18 months of investment; are available to certain eligible investors as
described in the prospectus. These shares have higher annual fees and expenses
than Class A shares.
ADVISOR CLASS: No initial sales charge or Rule 12b-1 fees; are available to a
limited class of investors.
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes any current, applicable,
maximum sales charge(s).
3. Distribution rate is based on an annualization of the respective class's
September dividend and the maximum offering price (NAV for Classes B, R and
Advisor) per share on 9/30/03.
4. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 9/30/03.
5. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not
have sales charges or a Rule 12b-1 plan. Performance quotations for this class
reflect the following methods of calculation: (a) For periods prior to 1/2/97, a
restated figure is used based upon the Fund's Class A performance, excluding the
effect of Class A's maximum initial sales charge, but reflecting the effect of
the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor
Class performance is used reflecting all charges and fees applicable to that
class. Since 1/2/97 (commencement of sales), the cumulative and average annual
total returns of Advisor Class shares were +55.79% and +6.79%.
6. Source: Standard & Poor's Micropal; Lipper Inc. The Lehman Brothers
Intermediate U.S. Government Bond index includes fixed-rate debt issues rated
investment grade or higher by Moody's, S&P or Fitch, in that order. All issues
have at least one year to maturity and an outstanding par value of at least $100
million for U.S. government issues. All returns are market value-weighted
inclusive of accrued interest. The index includes issues of the U.S. government
or any agency thereof. It includes only issues with a remaining term to maturity
of less than 10 years. Total return includes price appreciation/depreciation and
income as a percentage of the original investment. The total return index is
rebalanced monthly by market capitalization. As of 9/30/03, the Lipper GNMA
Funds Average consisted of 66 mutual funds. The Lipper average does not include
sales charges. Fund performance relative to the average might have differed if
such charges had been considered.
38 | Past performance does not guarantee future results. | Annual Report
Franklin Utilities Fund
YOUR FUND'S GOALS AND PRIMARY INVESTMENTS: Franklin Utilities Fund seeks both
capital appreciation and current income from a portfolio of public utility
industry securities.
[SIDEBAR]
PORTFOLIO BREAKDOWN
Franklin Utilities Fund
Based on Total Net Assets as of 9/30/03
Utilities 89.6%
Communications 3.0%
Producer Manufacturing 2.0%
Distribution Services 1.6%
Electronic Technology 1.1%
Finance 0.9%
Short-Term Investments & Other Net Assets 1.8%
We are pleased to bring you Franklin Utilities Fund's annual report for the
fiscal year ended September 30, 2003.
PERFORMANCE OVERVIEW
For the 12 months under review, Franklin Utilities Fund - Class A delivered a
+16.38% cumulative total return, as shown in the Performance Summary beginning
on page 42. The Fund underperformed its benchmark, the Standard & Poor's 500
(S&P 500) Composite Index, which returned 24.38% for the same period. 1
ECONOMIC AND MARKET OVERVIEW
During the fiscal year ended September 30, 2003, the U.S. economy expanded
within a relatively muted inflation environment, despite rising energy and
health care costs. Gross domestic product (GDP) grew at annualized rates of 1.4%
in fourth quarter 2002 and first quarter 2003, 3.3% in the second quarter, and
an estimated 7.2% in the third quarter. Much of the momentum resulted from
surging government defense spending and the stalwart consumer, whose steady
participation in retail, vehicle and home sales was supported by tax cuts, cash
raised through aggressive mortgage borrowing, and increasingly attractive price
discounting and financing. Indeed, consumers' contribution to economic output,
which historically accounts for about two-thirds of GDP, rose to a record 70% in
2003's second quarter. Business spending began to pick up in 2003 as businesses
sought to upgrade or replace aging computer hardware and software. Slowly
improving activity, profitability and cash flow accompanied by substantial new
tax depreciation benefits also enticed businesses to spend more.
An accommodative Federal Reserve Board, in an attempt to bolster the sluggish
economy, continued to cut interest rates during the year under review. The
federal funds target rate fell from 1.75% at the beginning of the reporting
period to 1.00% by period-end. Additionally, the U.S. government injected fiscal
stimulus into the economy, approving another round of tax cuts and rebates that
included
1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen
for market size, liquidity and industry group representation. Each stock's
weight in the index is proportionate to its market value. The S&P 500 is one of
the most widely used benchmarks of U.S. equity performance. The index is
unmanaged and includes reinvested dividends. One cannot invest directly in an
index, nor is an index representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL
TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF
INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 93.
Annual Report | 39
[SIDEBAR]
TOP 10 HOLDINGS
Franklin Utilities Fund
9/30/03
- ------------------------------------------
% OF TOTAL
COMPANY NET ASSETS
- ------------------------------------------
Exelon Corp. 5.1%
- ------------------------------------------
Entergy Corp. 4.7%
- ------------------------------------------
FPL Group Inc. 4.7%
- ------------------------------------------
American Electric Power Co. Inc. 4.5%
- ------------------------------------------
Dominion Resources Inc. 4.4%
- ------------------------------------------
Progress Energy Inc. 4.1%
- ------------------------------------------
Cinergy Corp. 3.8%
- ------------------------------------------
Southern Co. 3.8%
- ------------------------------------------
FirstEnergy Corp. 3.3%
- ------------------------------------------
DTE Energy Co. 2.7%
dividend tax reductions. However, with unemployment hovering above 6% and with
little new job creation, continued economic recovery was not assured.
On a brighter note, U.S. equity markets, which often serve as a leading
indicator of economic recovery, rallied from 2003's second quarter into
September. Overall, during the Fund's fiscal year stock markets sank and rose
seemingly in response to war news, improving corporate earnings and profit
margins, and mixed unemployment and production data. For the 12-month reporting
period, broad equity indexes posted double-digit gains, with technology stocks
rallying especially strongly to return 53.32% as measured by the Nasdaq
Composite Index. 2
INVESTMENT STRATEGY
We search for the best return opportunities available in the global utilities
arena with a specific focus on the U.S. electricity sector. Generally, we look
for companies producing a high percentage of earnings from regulated utility
franchise operations.
MANAGER'S DISCUSSION
Four of the Fund's top 10 holdings at period-end, Exelon, Entergy, FPL Group and
Cinergy, were among our top 10 at the beginning of the reporting period. All
contributed positively to Fund performance during the 12-month period and
represent the type of utilities we prefer. For example, Exelon, the Fund's top
holding as of September 30, 2003, at 5.1% of total net assets, is a
Midwest-based electric utility with a solid track record for operating
performance. Management boosted Exelon's quarterly dividend twice during the
period as the company delivered significant earnings and cash flow results.
Entergy, our second largest holding at 4.7% of total net assets, raised its
dividend following the dividend tax relief legislation passed by Congress in May
2003. We appreciated these two companies' greater level of cash distribution to
shareholders because the utilities industry, which has historically distributed
larger dividends, reduced dividends over the past several years.
Despite our focus on electric utilities, we also increased our weightings in gas
and telephone utilities. On September 30, 2003, we held 13.0% of total net
assets in gas utilities. New positions ONEOK, KeySpan and AGL Resources
contributed positive performance during the Fund's fiscal year. Many of our
holdings, Keyspan included, provide electric and gas services to customers.
2. Source: Standard & Poor's Micropal. The Nasdaq Composite Index measures all
domestic and international common stocks listed on the Nasdaq Stock Market. The
index is market value-weighted and includes over 4,000 companies.
40 | Annual Report
The telecommunications industry experienced deregulation earlier than the
electric and gas industries. Thus, we saw fewer opportunities to pursue our
investment strategy in telecommunications. Our telecommunications weighting,
comprising SBC Communications and Verizon Communications, represented only 3.0%
of the Fund's total net assets as of September 30, 2003. Although Verizon
negatively impacted the Fund during the period under review, we held both
companies for their attractive dividend yields.
DTE Energy is a major holding that negatively affected Fund performance during
the period. DTE, a utility holding company that provides electricity and natural
gas services in Michigan, paid a yearly dividend of $2.06 since 1993. We
remained attracted to this investment based on its dividend payment history.
Thank you for your continued participation in Franklin Utilities Fund. We look
forward to serving your future investment needs.
[PHOTO]
/S/John C. Kohli
John C. Kohli, CFA
Portfolio Manager
Franklin Utilities Fund
THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF
SEPTEMBER 30, 2003, THE END OF THE REPORTING PERIOD. OUR STRATEGIES AND THE
FUND'S PORTFOLIO COMPOSITION WILL CHANGE DEPENDING ON MARKET AND ECONOMIC
CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN
OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF
EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS
OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE ADVISOR MAKES NO
REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH
HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY
HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY.
Annual Report | 41
Performance Summary as of 9/30/03
FRANKLIN UTILITIES FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects the Fund's dividend income,
capital gain distributions, if any, and any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ---------------------------------------------------------------------------------------------------
CLASS A CHANGE 9/30/03 9/30/02
- ---------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.84 $8.80 $7.96
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- ---------------------------------------------------------------------------------------------------
Dividend Income $0.4260
- ---------------------------------------------------------------------------------------------------
CLASS B CHANGE 9/30/03 9/30/02
- ---------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.84 $8.80 $7.96
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- ---------------------------------------------------------------------------------------------------
Dividend Income $0.3901
- ---------------------------------------------------------------------------------------------------
CLASS C CHANGE 9/30/03 9/30/02
- ---------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.83 $8.78 $7.95
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- ---------------------------------------------------------------------------------------------------
Dividend Income $0.3900
- ---------------------------------------------------------------------------------------------------
CLASS R CHANGE 9/30/03 9/30/02
- ---------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.83 $8.79 $7.96
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- ---------------------------------------------------------------------------------------------------
Dividend Income $0.4045
- ---------------------------------------------------------------------------------------------------
ADVISOR CLASS CHANGE 9/30/03 9/30/02
- ---------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.85 $8.84 $7.99
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- ---------------------------------------------------------------------------------------------------
Dividend Income $0.4377
42 |Past performance does not guarantee future results. | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
- ------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +16.38% +11.09% +66.18%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +11.48% +1.25% +4.75%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,148 $10,640 $15,910
- ------------------------------------------------------------------------------------------------------
Distribution Rate 4 4.40%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 4.21%
- ------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 3-YEAR INCEPTION (1/1/99)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +15.88% -3.67% +6.88%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +11.88% -2.07% +1.09%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,188 $9,391 $10,529
- ------------------------------------------------------------------------------------------------------
Distribution Rate 4 4.17%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 3.89%
- ------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +15.77% +8.28% +76.79%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +13.63% +1.41% +6.87%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,363 $10,724 $17,501
- ------------------------------------------------------------------------------------------------------
Distribution Rate 4 4.04%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 3.85%
- ------------------------------------------------------------------------------------------------------
CLASS R 1-YEAR INCEPTION (1/1/02)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +15.96% -2.60%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +14.96% -1.50%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,496 $9,740
- ------------------------------------------------------------------------------------------------------
Distribution Rate 4 4.34%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 4.04%
- ------------------------------------------------------------------------------------------------------
ADVISOR CLASS 6 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +16.61% +11.97% +69.75%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +16.61% +2.29% +5.43%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,661 $11,197 $16,975
- ------------------------------------------------------------------------------------------------------
Distribution Rate 4 4.72%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 4.53%
- ------------------------------------------------------------------------------------------------------
ONGOING MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE; MORE
RECENT RETURNS MAY DIFFER FROM THOSE SHOWN. SINCE MARKETS CAN GO DOWN AS WELL AS
UP, INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH MARKET CONDITIONS,
AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES.
FOR MORE CURRENT PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | Past performance does not guarantee future results. | 43
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charge(s), Fund
expenses, account fees and reinvested distributions. The unmanaged index
includes reinvested dividends. It differs from the Fund in composition and does
not pay management fees or expenses. One cannot invest directly in an index.
[SIDEBAR]
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS A 9/30/03
- -------------------------------------
1-Year +11.48%
- -------------------------------------
5-Year +1.25%
- -------------------------------------
10-Year +4.75%
CLASS A (10/1/93-9/30/03)
[LINE CHART OMITTED]
FRANKLIN UTILITIES FUND S&P 500 7
10/93 $9,574 $10,000
$9,520 $10,207
$9,085 $10,109
$9,204 $10,232
$9,023 $10,579
$8,580 $10,292
$8,288 $9,844
$8,407 $9,971
$7,940 $10,134
$7,679 $9,886
$8,023 $10,210
$8,070 $10,628
$7,865 $10,368
$8,007 $10,601
$8,101 $10,215
$8,128 $10,366
$8,608 $10,635
$8,598 $11,049
$8,474 $11,374
$8,659 $11,709
$9,156 $12,176
$9,157 $12,459
$9,127 $12,872
$9,266 $12,904
$9,767 $13,448
$9,968 $13,400
$10,128 $13,988
$10,621 $14,257
$10,795 $14,742
$10,519 $14,879
3/96 $10,509 $15,022
$10,157 $15,243
$10,271 $15,636
$10,818 $15,696
$10,220 $15,002
$10,367 $15,319
$10,348 $16,181
$10,688 $16,627
$10,837 $17,883
$10,837 $17,528
$10,893 $18,623
$10,983 $18,769
$10,676 $17,999
$10,596 $19,073
$10,927 $20,233
$11,287 $21,139
$11,553 $22,820
$11,299 $21,543
$11,768 $22,722
$11,826 $21,964
$12,611 $22,980
$13,535 $23,374
$13,012 $23,633
$13,219 $25,336
$14,045 $26,632
$13,540 $26,900
$13,368 $26,439
$13,689 $27,512
$13,191 $27,219
$13,640 $23,288
9/98 $14,322 $24,780
$14,057 $26,794
$14,209 $28,417
$14,560 $30,054
$13,785 $31,310
$13,128 $30,337
$12,903 $31,550
$13,716 $32,772
$14,342 $31,999
$13,832 $33,774
$13,630 $32,721
$13,603 $32,559
$13,099 $31,667
$13,331 $33,670
$12,552 $34,355
$12,375 $36,377
$13,081 $34,550
$12,116 $33,896
$12,528 $37,210
$13,273 $36,091
$13,448 $35,352
$12,845 $36,224
$13,377 $35,658
$14,796 $37,872
$16,278 $35,873
$16,203 $35,721
$16,786 $32,907
$17,525 $33,068
$15,726 $34,241
$16,648 $31,121
3/01 $16,865 $29,150
$17,568 $31,414
$17,659 $31,624
$16,769 $30,855
$16,183 $30,551
$16,399 $28,640
$15,621 $26,328
$15,637 $26,830
$15,497 $28,888
$16,108 $29,141
$15,910 $28,716
$15,860 $28,162
$16,765 $29,221
$16,648 $27,450
$16,246 $27,249
$15,524 $25,309
$14,185 $23,336
$14,745 $23,489
$13,670 $20,939
$13,670 $22,780
$13,945 $24,119
$14,420 $22,703
$13,828 $22,109
$13,445 $21,777
$13,925 $21,987
$14,685 $23,798
$15,974 $25,051
$16,028 $25,371
$15,296 $25,819
$15,314 $26,321
9/03 $15,910 $26,042
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS B 9/30/03
- -------------------------------------
1-Year +11.88%
- -------------------------------------
3-Year -2.07%
- -------------------------------------
Since Inception (1/1/99) +1.09%
CLASS B (1/1/99-9/30/03)
[LINE CHART OMITTED]
FRANKLIN UTILITIES FUND S&P 500 7
1/99 $10,000 $10,000
$9,468 $10,418
$9,016 $10,094
$8,859 $10,498
$9,416 $10,905
$9,845 $10,647
$9,487 $11,238
$9,339 $10,887
$9,321 $10,834
$8,964 $10,537
$9,133 $11,203
$8,600 $11,431
$8,479 $12,104
$8,961 $11,496
$8,282 $11,279
3/00 $8,572 $12,381
$9,071 $12,009
$9,190 $11,763
$8,768 $12,053
$9,131 $11,865
$10,088 $12,601
$11,097 $11,936
$11,035 $11,886
$11,433 $10,949
$11,932 $11,003
$10,708 $11,393
$11,325 $10,355
$11,468 $9,699
$11,936 $10,453
$11,998 $10,523
6/01 $11,390 $10,267
$10,982 $10,166
$11,128 $9,530
$10,588 $8,760
$10,599 $8,927
$10,504 $9,612
$10,916 $9,696
$10,770 $9,555
$10,737 $9,371
$11,336 $9,723
$11,257 $9,134
$10,985 $9,067
$10,498 $8,421
$9,570 $7,765
$9,948 $7,816
9/02 $9,225 $6,967
$9,225 $7,580
$9,410 $8,025
$9,719 $7,554
$9,320 $7,357
$9,062 $7,246
$9,375 $7,316
$9,875 $7,919
$10,743 $8,335
$10,782 $8,442
$10,289 $8,591
$10,289 $8,758
9/03 $10,529 $8,665
44 | Past performance does not guarantee future results. | Annual Report
Performance Summary (CONTINUED)
CLASS C (5/1/95-9/30/03)
[LINE CHART OMITTED]
FRANKLIN UTILITIES FUND S&P 500 7
5/95 $9,899 $10,000
$10,492 $10,399
$10,500 $10,640
$10,454 $10,993
$10,613 $11,020
$11,188 $11,485
$11,406 $11,444
$11,578 $11,946
$12,150 $12,176
$12,325 $12,590
$12,021 $12,707
$12,005 $12,829
$11,603 $13,018
$11,721 $13,354
$12,331 $13,404
$11,648 $12,813
$11,816 $13,083
$11,791 $13,819
$12,167 $14,200
$12,337 $15,272
$12,333 $14,970
$12,397 $15,905
$12,487 $16,029
$12,125 $15,372
$12,034 $16,289
$12,398 $17,280
6/97 $12,804 $18,054
$13,106 $19,489
$12,804 $18,398
$13,331 $19,405
$13,397 $18,758
$14,275 $19,626
$15,320 $19,962
$14,727 $20,183
$14,948 $21,638
$15,875 $22,745
$15,304 $22,974
$15,096 $22,579
$15,454 $23,496
$14,891 $23,246
$15,383 $19,889
$16,163 $21,163
$15,849 $22,883
$16,006 $24,269
$16,398 $25,667
$15,524 $26,740
$14,784 $25,909
$14,528 $26,945
$15,428 $27,988
$16,132 $27,329
$15,542 $28,844
$15,299 $27,945
8/99 $15,269 $27,806
$14,698 $27,045
$14,958 $28,756
$14,069 $29,340
$13,865 $31,067
$14,657 $29,506
$13,558 $28,949
$14,033 $31,779
$14,851 $30,823
$15,047 $30,192
$14,353 $30,937
$14,949 $30,453
$16,520 $32,344
$18,174 $30,637
$18,073 $30,507
$18,725 $28,103
$19,543 $28,241
$17,535 $29,243
$18,547 $26,578
$18,783 $24,895
$19,549 $26,828
$19,651 $27,008
$18,654 $26,351
$17,984 $26,092
$18,224 $24,460
$17,356 $22,485
10/01 $17,373 $22,914
$17,200 $24,671
$17,875 $24,887
$17,654 $24,524
$17,599 $24,051
$18,582 $24,956
$18,433 $23,444
$17,987 $23,271
$17,187 $21,614
$15,684 $19,930
$16,304 $20,060
$15,117 $17,882
$15,098 $19,455
$15,421 $20,599
$15,929 $19,389
$15,274 $18,882
$14,850 $18,598
$15,366 $18,777
$16,186 $20,325
$17,611 $21,394
$17,657 $21,668
$16,848 $22,050
$16,867 $22,479
9/03 $17,501 $22,241
[SIDEBAR]
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS C 9/30/03
- -------------------------------------
1-Year +13.63%
- -------------------------------------
5-Year +1.41%
- -------------------------------------
Since Inception (5/1/95) +6.87%
CLASS R (1/1/02-9/30/03)
[LINE CHART OMITTED]
FRANKLIN UTILITIES FUND S&P 500 7
1/02 $10,000 $10,000
$9,876 $9,854
$9,845 $9,664
$10,388 $10,028
$10,315 $9,420
$10,066 $9,351
6/02 $9,621 $8,685
$8,791 $8,008
$9,127 $8,061
$8,468 $7,185
$8,468 $7,817
$8,638 $8,277
12/02 $8,924 $7,791
$8,558 $7,587
$8,320 $7,473
$8,616 $7,545
$9,075 $8,167
$9,874 $8,596
6/03 $9,899 $8,706
$9,446 $8,860
$9,457 $9,032
9/03 $9,740 $8,937
[SIDEBAR]
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS R 9/30/03
- -------------------------------------
1-Year +14.96%
- -------------------------------------
Since Inception (1/1/02) -1.50%
Annual Report | Past performance does not guarantee future results. | 45
Performance Summary (CONTINUED)
[SIDEBAR]
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
ADVISOR CLASS 6 9/30/03
- --------------------------------------
1-Year +16.61%
- --------------------------------------
5-Year +2.29%
- --------------------------------------
10-Year +5.43%
ADVISOR CLASS (10/1/93-9/30/03) 6
[LINE CHART OMITTED]
FRANKLIN UTILITIES FUND S&P 500 7
10/93 $10,000 $10,000
$9,944 $10,207
$9,490 $10,109
$9,613 $10,232
$9,425 $10,579
$8,962 $10,292
$8,657 $9,844
$8,781 $9,971
$8,293 $10,134
$8,021 $9,886
$8,380 $10,210
$8,429 $10,628
$8,215 $10,368
$8,363 $10,601
$8,462 $10,215
$8,490 $10,366
$8,991 $10,635
$8,981 $11,049
$8,851 $11,374
$9,045 $11,709
$9,563 $12,176
$9,565 $12,459
$9,534 $12,872
$9,678 $12,904
$10,202 $13,448
$10,412 $13,400
$10,579 $13,988
$11,094 $14,257
$11,276 $14,742
$10,987 $14,879
3/96 $10,977 $15,022
$10,609 $15,243
$10,728 $15,636
$11,300 $15,696
$10,675 $15,002
$10,829 $15,319
$10,809 $16,181
$11,164 $16,627
$11,320 $17,883
$11,319 $17,528
$11,378 $18,623
$11,472 $18,769
$11,155 $17,999
$11,072 $19,073
$11,417 $20,233
$11,797 $21,139
$12,075 $22,820
$11,797 $21,543
$12,304 $22,722
$12,353 $21,964
$13,174 $22,980
$14,157 $23,374
$13,610 $23,633
$13,826 $25,336
$14,695 $26,632
$14,180 $26,900
$13,987 $26,439
$14,328 $27,512
$13,807 $27,219
$14,263 $23,288
9/98 $15,035 $24,780
$14,758 $26,794
$14,916 $28,417
$15,276 $30,054
$14,478 $31,310
$13,790 $30,337
$13,560 $31,550
$14,411 $32,772
$15,066 $31,999
$14,538 $33,774
$14,312 $32,721
$14,298 $32,559
$13,760 $31,667
$14,018 $33,670
$13,187 $34,355
$13,021 $36,377
$13,761 $34,550
$12,734 $33,896
$13,186 $37,210
$13,968 $36,091
$14,151 $35,352
$13,507 $36,224
$14,081 $35,658
$15,570 $37,872
$17,131 $35,873
$17,052 $35,721
$17,680 $32,907
$18,446 $33,068
$16,557 $34,241
$17,526 $31,121
3/01 $17,759 $29,150
$18,497 $31,414
$18,609 $31,624
$17,664 $30,855
$17,048 $30,551
$17,275 $28,640
$16,465 $26,328
$16,481 $26,830
$16,334 $28,888
$16,983 $29,141
$16,774 $28,716
$16,739 $28,162
$17,679 $29,221
$17,556 $27,450
$17,151 $27,249
$16,381 $25,309
$14,955 $23,336
$15,561 $23,489
$14,436 $20,939
$14,436 $22,780
$14,743 $24,119
$15,230 $22,703
$14,607 $22,109
$14,204 $21,777
$14,714 $21,987
$15,514 $23,798
$16,890 $25,051
$16,952 $25,371
$16,180 $25,819
$16,199 $26,321
9/03 $16,975 $26,042
46 |Past performance does not guarantee future results. | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
SECURITIES ISSUED BY UTILITY COMPANIES ARE PARTICULARLY SENSITIVE TO INTEREST
RATE MOVEMENTS. WHEN INTEREST RATES FALL, UTILITY SECURITIES PRICES TEND TO
RISE; WHEN INTEREST RATES RISE, THEIR PRICES GENERALLY FALL. THE FUND'S
PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to
7/1/94, Fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1
plan, which affects subsequent performance.
CLASS B: Subject to no initial sales charge, but subject to a contingent
deferred sales charge (CDSC) declining from 4% to 0% over six years. These
shares have higher annual fees and expenses than Class A shares.
CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed
within 18 months of investment. These shares have higher annual fees and
expenses than Class A shares.
CLASS R: No initial sales charge, but subject to 1% CDSC for shares redeemed
within 18 months of investment; are available to certain eligible investors as
described in the prospectus. These shares have higher annual fees and expenses
than Class A shares.
ADVISOR CLASS: No initial sales charge or Rule 12b-1 fees; are available to a
limited class of investors.
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes any current, applicable,
maximum sales charge(s).
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and include any current, applicable, maximum
sales charge(s).
4. Distribution rate is based on an annualization of the respective class's
current quarterly dividend and the maximum offering price (NAV for Classes B, R
and Advisor) per share on 9/30/03.
5. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 9/30/03.
6. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not
have sales charges or a Rule 12b-1 plan. Performance quotations for this class
reflect the following methods of calculation: (a) For periods prior to 1/2/97, a
restated figure is used based upon the Fund's Class A performance, excluding the
effect of Class A's maximum initial sales charge, but reflecting the effect of
the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor
Class performance is used reflecting all charges and fees applicable to that
class. Since 1/2/97 (commencement of sales), the cumulative and average annual
total returns of Advisor Class shares were +49.97% and +6.19%.
7. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen
for market size, liquidity and industry group representation. Each stock's
weight in the index is proportionate to its market value. The S&P 500 is one of
the most widely used benchmarks of U.S. equity performance.
Annual Report | Past performance does not guarantee future results.| 47
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN DYNATECH FUND
----------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS A 2003 2002 2001 2000 1999
----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............................. $15.37 $18.76 $28.60 $23.11 $17.84
----------------------------------------------------------
Income from investment operations:
Net investment income (loss)a .................................. (.06) .03 .44 .56 .37
Net realized and unrealized gains (losses) ..................... 4.86 (3.11) (9.70) 5.30 5.14
----------------------------------------------------------
Total from investment operations ................................ 4.80 (3.08) (9.26) 5.86 5.51
----------------------------------------------------------
Less distributions from:
Net investment income .......................................... -- (.29) (.58) (.37) (.24)
Tax return of capital .......................................... -- (.02) -- -- --
Net realized gains ............................................. -- -- -- -- --
----------------------------------------------------------
Total distributions ............................................. -- (.31) (.58) (.37) (.24)
----------------------------------------------------------
Net asset value, end of year .................................... $20.17 $15.37 $18.76 $28.60 $23.11
----------------------------------------------------------
Total return b .................................................. 31.23% (16.83)% (32.86)% 25.57% 31.15%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................. $558,687 $413,309 $530,074 $809,140 $499,471
Ratios to average net assets:
Expenses ....................................................... 1.04% 1.00% .95% .94% 1.00%
Net investment income (loss) ................................... (.40)% .13% 1.93% 1.98% 1.70%
Portfolio turnover rate ......................................... 13.68% 8.11% 4.07% 5.45% 6.49%
<FN>
a Based on average shares outstanding.
b Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
</FN>
48 | Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND (CONTINUED)
------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS B 2003 2002 2001 2000 C
------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......................................... $15.20 $18.57 $28.45 $28.05
------------------------------------------------
Income from investment operations:
Net investment income (loss)a .............................................. (.25) (.12) .25 .28
Net realized and unrealized gains (losses) ................................. 4.84 (3.08) (9.62) .12
------------------------------------------------
Total from investment operations ............................................ 4.59 (3.20) (9.37) .40
------------------------------------------------
Less distributions from:
Net investment income ...................................................... -- (.16) (.51) --
Tax return of capital ...................................................... -- (.01) -- --
------------------------------------------------
Total distributions ........................................................ -- (.17) (.51) --
------------------------------------------------
Net asset value, end of year ................................................ $19.79 $15.20 $18.57 $28.45
------------------------------------------------
Total return b .............................................................. 30.20% (17.51)% (33.37)% 1.43%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................................. $10,406 $5,066 $5,473 $4,749
Ratios to average net assets:
Expenses ................................................................... 1.79% 1.75% 1.70% 1.73%d
Net investment income (loss) ............................................... (1.15)% (.62)% 1.13% 1.43%d
Portfolio turnover rate ..................................................... 13.68% 8.11% 4.07% 5.45%
<FN>
a Based on average shares outstanding.
b Total return does not reflect contingent deferred sales charge, and is not
annualized for periods less than one year.
c For the period February 1, 2000 (effective date) to September 30, 2000.
d Annualized
</FN>
Annual Report | 49
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND (CONTINUED)
----------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS C 2003 2002 2001 2000 1999
----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............................. $15.04 $18.34 $27.95 $22.64 $17.53
----------------------------------------------------------
Income from investment operations:
Net investment income (loss)a .................................. (.25) (.11) .27 .34 .22
Net realized and unrealized gains (losses) ..................... 4.80 (3.05) (9.50) 5.21 5.05
----------------------------------------------------------
Total from investment operations ................................ 4.55 (3.16) (9.23) 5.55 5.27
----------------------------------------------------------
Less distributions from:
Net investment income .......................................... -- (.13) (.38) (.24) (.16)
Tax return of capital .......................................... -- (.01) -- -- --
Net realized gains ............................................. -- -- -- -- --
----------------------------------------------------------
Total distributions ............................................. -- (.14) (.38) (.24) (.16)
----------------------------------------------------------
Net asset value, end of year .................................... $19.59 $15.04 $18.34 $27.95 $22.64
----------------------------------------------------------
Total return b .................................................. 30.25% (17.48)% (33.36)% 24.65% 30.20%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................. $66,952 $51,809 $77,204 $126,313 $73,890
Ratios to average net assets:
Expenses ....................................................... 1.79% 1.74% 1.70% 1.69% 1.75%
Net investment income (loss) ................................... (1.15)% (.61)% 1.19% 1.23% 1.00%
Portfolio turnover rate ......................................... 13.68% 8.11% 4.07% 5.45% 6.49%
<FN>
a Based on average shares outstanding.
b Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
</FN>
50 |See notes to financial statements. | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 91.1%
AIR FREIGHT/COURIERS 2.0%
C.H. Robinson Worldwide Inc. ........................................................ 100,000 $ 3,721,000
United Parcel Service Inc., B ....................................................... 140,000 8,932,000
---------------
12,653,000
---------------
BIOTECHNOLOGY 7.9%
a Amgen Inc. .......................................................................... 300,000 19,371,000
a Chiron Corp. ........................................................................ 150,000 7,753,500
a Genentech Inc. ...................................................................... 290,000 23,240,600
---------------
50,365,100
---------------
BROADCASTING 1.6%
Clear Channel Communications Inc. ................................................... 200,000 7,660,000
a Entercom Communications Corp. ....................................................... 60,000 2,689,200
---------------
10,349,200
---------------
CABLE/SATELLITE TV 1.3%
a Comcast Corp., A .................................................................... 170,000 5,021,800
a Liberty Media Corp., A .............................................................. 300,000 2,991,000
---------------
8,012,800
---------------
CASINOS/GAMING 2.7%
International Game Technology ....................................................... 600,000 16,890,000
---------------
CHEMICALS: SPECIALTY 1.0%
Sigma-Aldrich Corp. ................................................................. 125,000 6,492,500
---------------
COMPUTER COMMUNICATIONS 2.2%
a Cisco Systems Inc. .................................................................. 720,000 14,068,800
---------------
COMPUTER PERIPHERALS .8%
a EMC Corp. ........................................................................... 240,000 3,031,200
a Storage Technology Corp. ............................................................ 75,000 1,810,500
---------------
4,841,700
---------------
COMPUTER PROCESSING HARDWARE 2.4%
a Dell Inc. ........................................................................... 145,000 4,841,550
Hewlett-Packard Co. ................................................................. 450,862 8,728,688
a Sun Microsystems Inc. ............................................................... 430,000 1,423,300
---------------
14,993,538
---------------
DATA PROCESSING SERVICES 4.4%
a Computer Sciences Corp. ............................................................. 190,000 7,138,300
First Data Corp. .................................................................... 300,000 11,988,000
Paychex Inc. ........................................................................ 270,000 9,161,100
---------------
28,287,400
---------------
Annual Report | 51
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
ELECTRONIC COMPONENTS .4%
a Flextronics International Ltd. (Singapore) .......................................... 100,000 $ 1,418,000
a OmniVision Technologies Inc. ........................................................ 30,000 1,267,200
---------------
2,685,200
---------------
ELECTRONIC EQUIPMENT/INSTRUMENTS 3.1%
a Agilent Technologies Inc. ........................................................... 300,000 6,633,000
a JDS Uniphase Corp. .................................................................. 350,000 1,260,000
Rockwell Automation Inc. ............................................................ 250,000 6,562,500
a Waters Corp. ........................................................................ 180,000 4,937,400
---------------
19,392,900
---------------
ELECTRONIC PRODUCTION EQUIPMENT 4.7%
a Applied Materials Inc. .............................................................. 500,000 9,070,000
a KLA-Tencor Corp. .................................................................... 200,000 10,280,000
a Lam Research Corp. .................................................................. 125,000 2,768,750
a Novellus Systems Inc. ............................................................... 100,000 3,375,000
a Teradyne Inc. ....................................................................... 100,000 1,860,000
a Varian Semiconductor Equipment Associates Inc. ...................................... 75,000 2,808,750
---------------
30,162,500
---------------
ELECTRONICS/APPLIANCE STORES .7%
a Best Buy Co. Inc. ................................................................... 100,000 4,752,000
---------------
FINANCIAL CONGLOMERATES 1.4%
Citigroup Inc. ...................................................................... 190,000 8,646,900
---------------
HOUSEHOLD/PERSONAL CARE .5%
Estee Lauder Cos. Inc., A ........................................................... 100,000 3,410,000
---------------
INFORMATION TECHNOLOGY SERVICES 2.8%
International Business Machines Corp. ............................................... 200,000 17,666,000
---------------
INSURANCE BROKERS/SERVICES .6%
a ChoicePoint Inc. .................................................................... 120,000 4,020,000
---------------
INTERNET RETAIL .6%
a Amazon.com Inc. ..................................................................... 45,000 2,176,200
a Interactive Corp. ................................................................... 50,000 1,652,500
---------------
3,828,700
---------------
INTERNET SOFTWARE/SERVICES 1.4%
a Check Point Software Technologies Ltd. (Israel) ..................................... 100,000 1,680,000
a Yahoo! Inc. ......................................................................... 210,000 7,429,800
---------------
9,109,800
---------------
52 | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
MAJOR PHARMACEUTICALS 5.1%
Bristol-Myers Squibb Co. ............................................................ 150,000 $ 3,849,000
Johnson & Johnson ................................................................... 130,000 6,437,600
Merck & Co. Inc. .................................................................... 150,000 7,593,000
Pfizer Inc. ......................................................................... 470,000 14,278,600
---------------
32,158,200
---------------
MANAGED HEALTH CARE 2.7%
UnitedHealth Group Inc. ............................................................. 340,000 17,108,800
---------------
MEDIA CONGLOMERATES 1.3%
a AOL Time Warner Inc. ................................................................ 280,000 4,230,800
News Corp. Ltd., ADR (Australia) .................................................... 120,000 3,936,000
---------------
8,166,800
---------------
MEDICAL DISTRIBUTORS 1.2%
McKesson Corp. ...................................................................... 225,000 7,490,250
---------------
MEDICAL SPECIALTIES 6.3%
Alcon Inc. (Switzerland) ............................................................ 150,000 8,422,500
Medtronic Inc. ...................................................................... 250,000 11,730,000
a Steris Corp. ........................................................................ 75,000 1,726,500
Stryker Corp. ....................................................................... 140,000 10,543,400
a Zimmer Holdings Inc. ................................................................ 140,000 7,714,000
---------------
40,136,400
---------------
OILFIELD SERVICES/EQUIPMENT .4%
Schlumberger Ltd. ................................................................... 50,000 2,420,000
---------------
OTHER CONSUMER SERVICES 4.0%
a Apollo Group Inc., A ................................................................ 40,000 2,641,200
a eBay Inc. ........................................................................... 420,000 22,474,200
---------------
25,115,400
---------------
OTHER PHARMACEUTICALS 1.3%
Teva Pharmaceutical Industries Ltd., ADR (Israel) ................................... 150,000 8,572,500
---------------
PACKAGED SOFTWARE 8.9%
Adobe Systems Inc. .................................................................. 250,000 9,815,000
a Intuit Inc. ......................................................................... 230,000 11,095,200
Microsoft Corp. ..................................................................... 950,000 26,400,500
a Oracle Corp. ........................................................................ 220,000 2,468,400
a Symantec Corp. ...................................................................... 110,000 6,932,200
---------------
56,711,300
---------------
Annual Report | 53
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
RECREATIONAL PRODUCTS 2.3%
a Electronic Arts Inc. ................................................................ 160,000 $ 14,756,800
---------------
SEMICONDUCTORS 11.4%
a Analog Devices Inc. ................................................................. 300,000 11,406,000
Intel Corp. ......................................................................... 1,150,000 31,636,500
a International Rectifier Corp. ....................................................... 70,000 2,620,800
a Intersil Corp. ...................................................................... 100,000 2,380,000
Linear Technology Corp. ............................................................. 400,000 14,324,000
Microchip Technology Inc. ........................................................... 50,000 1,197,000
a Xilinx Inc. ......................................................................... 320,000 9,123,200
---------------
72,687,500
---------------
TELECOMMUNICATIONS EQUIPMENT 3.7%
Motorola Inc. ....................................................................... 680,750 8,148,578
Nokia Corp., ADR (Finland) .......................................................... 330,000 5,148,000
QUALCOMM Inc. ....................................................................... 240,000 9,993,600
---------------
23,290,178
---------------
TOTAL COMMON STOCKS (COST $473,772,049) ............................................. 579,242,166
---------------
SHORT TERM INVESTMENT (COST $32,222,471) 5.1%
b Franklin Institutional Fiduciary Trust Money Market Portfolio ....................... 32,222,471 32,222,471
---------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $505,994,520) .................. 611,464,637
---------------
54 | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT 3.7% (COST $23,765,898)
c Joint Repurchase Agreement, .976%, 10/01/03 (Maturity Value $23,766,542) ............ $ 23,765,898 $ 23,765,898
ABN AMRO Bank, N.V., New York Branch (Maturity Value $2,185,066)
Banc of America Securities LLC (Maturity Value $2,185,066)
Barclays Capital Inc. (Maturity Value $2,185,066)
Bear, Stearns & Co. Inc. (Maturity Value $1,344,656)
BNP Paribas Securities Corp. (Maturity Value $2,185,066)
Deutsche Bank Securities Inc. (Market Value $2,185,066)
Dresdner Kleinwort Wasserstein Securities LLC (Maturity Value $2,353,148)
Goldman, Sachs & Co. (Maturity Value $2,185,066)
Greenwich Capital Markets Inc. (Maturity Value $2,185,066)
Lehman Brothers Inc. (Maturity Value $403,144)
Morgan Stanley & Co. Inc. (Maturity Value $2,185,066)
UBS Securities LLC (Maturity Value $2,185,066)
Collateralized by U.S. Treasury Bills, Notes, and Bonds, and
U.S. Government Agency Securities
---------------
TOTAL INVESTMENTS (COST $529,760,418) 99.9% ......................................... 635,230,535
OTHER ASSETS, LESS LIABILITIES .1% .................................................. 814,472
---------------
NET ASSETS 100.0% ................................................................... $ 636,045,007
---------------
<FN>
a Non-income producing
b See Note 6 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio.
c See Note 1(c) regarding repurchase agreements.
</FN>
Annual Report | See notes to financial statements. | 55
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN GROWTH FUND
------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS A 2003 2002 2001 2000 1999
------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $22.02 $27.81 $36.91 $33.21 $28.58
------------------------------------------------------------------
Income from investment operations:
Net investment income a ................................ .08 .07 .23 .45 .39
Net realized and unrealized gains (losses) ............. 4.81 (5.65) (7.26) 3.96 4.89
------------------------------------------------------------------
Total from investment operations ........................ 4.89 (5.58) (7.03) 4.41 5.28
------------------------------------------------------------------
Less distributions from:
Net investment income .................................. (.04) (.16) (.40) (.45) (.44)
Net realized gains ..................................... -- (.05) (1.67) (.26) (.21)
------------------------------------------------------------------
Total distributions ..................................... (.04) (.21) (2.07) (.71) (.65)
------------------------------------------------------------------
Net asset value, end of year ............................ $26.87 $22.02 $27.81 $36.91 $33.21
------------------------------------------------------------------
Total return b .......................................... 22.27% (20.35)% (20.12)% 13.53% 18.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $1,433,742 $1,249,745 $1,657,387 $2,149,928 $2,119,740
Ratios to average net assets:
Expenses ............................................... 1.06% .96% .91% .93% .89%
Net investment income .................................. .31% .24% .69% 1.27% 1.19%
Portfolio turnover rate ................................. 5.12% 2.16% .29% 8.12% 3.74%
<FN>
a Based on average shares outstanding.
b Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized for periods less than one year.
</FN>
56 | Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND (CONTINUED)
----------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS B 2003 2002 2001 2000 1999C
----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............................. $21.70 $27.46 $36.54 $33.03 $31.45
----------------------------------------------------------
Income from investment operations:
Net investment income (loss)a .................................. (.11) (.14) (.03) .16 .14
Net realized and unrealized gains (losses) ..................... 4.73 (5.57) (7.18) 3.96 1.44
----------------------------------------------------------
Total from investment operations ................................ 4.62 (5.71) (7.21) 4.12 1.58
----------------------------------------------------------
Less distributions from:
Net investment income .......................................... -- -- (.20) (.35) --
Net realized gains ............................................. -- (.05) (1.67) (.26) --
----------------------------------------------------------
Total distributions ............................................. -- (.05) (1.87) (.61) --
----------------------------------------------------------
Net asset value, end of year .................................... $26.32 $21.70 $27.46 $36.54 $33.03
----------------------------------------------------------
Total return b .................................................. 21.29% (20.90)% (20.74)% 12.68% 5.02%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................. $103,499 $75,141 $66,095 $38,353 $17,271
Ratios to average net assets:
Expenses ....................................................... 1.81% 1.71% 1.66% 1.68% 1.65%d
Net investment income (loss) ................................... (.44)% (.51)% (.10)% .45% .57%d
Portfolio turnover rate ......................................... 5.12% 2.16% .29% 8.12% 3.74%
<FN>
a Based on average shares outstanding.
b Total return does not reflect contingent deferred sales charge and is not
annualized for periods less than one year.
c For the period January 1, 1999 (effective date) to September 30, 1999.
d Annualized
</FN>
Annual Report | 57
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND (CONTINUED)
----------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS C 2003 2002 2001 2000 1999
----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............................. $21.51 $27.24 $36.19 $32.58 $28.11
----------------------------------------------------------
Income from investment operations:
Net investment income (loss)a .................................. (.11) (.14) (.02) .18 .14
Net realized and unrealized gains (losses) ..................... 4.69 (5.54) (7.13) 3.91 4.81
----------------------------------------------------------
Total from investment operations ................................ 4.58 (5.68) (7.15) 4.09 4.95
----------------------------------------------------------
Less distributions from:
Net investment income .......................................... -- -- (.13) (.22) (.27)
Net realized gains ............................................. -- (.05) (1.67) (.26) (.21)
----------------------------------------------------------
Total distributions ............................................. -- (.05) (1.80) (.48) (.48)
----------------------------------------------------------
Net asset value, end of year .................................... $26.09 $21.51 $27.24 $36.19 $32.58
----------------------------------------------------------
Total return b .................................................. 21.29% (20.92)% (20.72)% 12.71% 17.71%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................. $259,169 $232,307 $310,650 $374,483 $362,216
Ratios to average net assets:
Expenses ....................................................... 1.82% 1.70% 1.66% 1.68% 1.65%
Net investment income (loss) ................................... (.45)% (.51)% (.06)% .52% .45%
Portfolio turnover rate ......................................... 5.12% 2.16% .29% 8.12% 3.74%
<FN>
a Based on average shares outstanding.
b Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized for periods less than one year.
</FN>
58 | Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND (CONTINUED)
----------------------
YEAR ENDED
SEPTEMBER 30,
CLASS R 2003 2002 B
----------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......................................... $21.98 $31.59
----------------------
Income from investment operations-net realized and unrealized gains (losses) 4.81 (9.61)
----------------------
Less distributions from net investment income ............................... (.05) --
----------------------
Net asset value, end of year ................................................ $26.74 $21.98
----------------------
Total return a .............................................................. 21.92% (30.42)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................................. $14,755 $2,788
Ratios to average net assets:
Expenses ................................................................... 1.31% 1.21%c
Net investment income ...................................................... .06% .02%c
Portfolio turnover rate ..................................................... 5.12% 2.16%
<FN>
a Total return does not reflect contingent deferred sales charge and is not
annualized for periods less than one year.
b For the period January 1, 2002 (effective date) to September 30, 2002.
c Annualized
</FN>
Annual Report | 59
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND (CONTINUED)
---------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS 2003 2002 2001 2000 1999
---------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................... $22.06 $27.86 $36.99 $33.27 $28.63
---------------------------------------------------------
Income from investment operations:
Net investment income a ......................................... .14 .14 .31 .54 .46
Net realized and unrealized gains (losses) ...................... 4.82 (5.65) (7.28) 3.97 4.90
---------------------------------------------------------
Total from investment operations ................................. 4.96 (5.51) (6.97) 4.51 5.36
---------------------------------------------------------
Less distributions from:
Net investment income ........................................... (.11) (.24) (.49) (.53) (.51)
Net realized gains .............................................. -- (.05) (1.67) (.26) (.21)
---------------------------------------------------------
Total distributions .............................................. (.11) (.29) (2.16) (.79) (.72)
---------------------------------------------------------
Net asset value, end of year ..................................... $26.91 $22.06 $27.86 $36.99 $33.27
---------------------------------------------------------
Total return b ................................................... 22.58% (20.14)% (19.94)% 13.84% 18.89%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................................. $41,216 $27,431 $32,498 $39,442 $35,461
Ratios to average net assets:
Expenses ........................................................ .81% .71% .66% .68% .65%
Net investment income ........................................... .56% .49% .94% 1.51% 1.41%
Portfolio turnover rate .......................................... 5.12% 2.16% .29% 8.12% 3.74%
<FN>
a Based on average shares outstanding.
b Total return is not annualized for periods less than one year.
</FN>
60 |See notes to financial statements. | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 98.9%
COMMERCIAL SERVICES 2.7%
a Dun & Bradstreet Corp. ................................................................ 122,000 $ 5,067,880
Equifax Inc. .......................................................................... 400,000 8,908,000
Moody's Corp. ......................................................................... 244,000 13,412,680
a Robert Half International Inc. ........................................................ 300,000 5,850,000
Sabre Holdings Corp., A ............................................................... 800,000 17,192,000
-----------------
50,430,560
-----------------
CONSUMER DURABLES 2.2%
Harley-Davidson Inc. .................................................................. 200,000 9,640,000
Hasbro Inc. ........................................................................... 600,000 11,208,000
Mattel Inc. ........................................................................... 1,000,000 18,960,000
-----------------
39,808,000
-----------------
CONSUMER NON-DURABLES 3.0%
Hershey Foods Corp. ................................................................... 258,200 18,765,976
International Flavors & Fragrances Inc. ............................................... 500,000 16,540,000
Tootsie Roll Industries Inc. .......................................................... 21,198 657,138
V.F. Corp. ............................................................................ 500,000 19,455,000
-----------------
55,418,114
-----------------
CONSUMER SERVICES 4.9%
a AOL Time Warner Inc. .................................................................. 1,350,000 20,398,500
Carnival Corp. ........................................................................ 500,000 16,445,000
Clear Channel Communications Inc. ..................................................... 500,000 19,150,000
Fairmont Hotels & Resorts Inc. (Canada) ............................................... 125,000 3,218,750
Viacom Inc., A ........................................................................ 200,000 7,680,000
Viacom Inc., B ........................................................................ 100,000 3,830,000
The Walt Disney Co. ................................................................... 1,000,000 20,170,000
-----------------
90,892,250
-----------------
DISTRIBUTION SERVICES 2.8%
Cardinal Health Inc. .................................................................. 236,250 13,794,638
Genuine Parts Co. ..................................................................... 461,700 14,765,166
W.W. Grainger Inc. .................................................................... 500,000 23,775,000
-----------------
52,334,804
-----------------
ELECTRONIC TECHNOLOGY 17.2%
a Agilent Technologies Inc. ............................................................. 400,000 8,844,000
a Apple Computer Inc. ................................................................... 500,000 10,315,000
Boeing Co. ............................................................................ 1,000,000 34,330,000
a Cisco Systems Inc. .................................................................... 1,350,000 26,379,000
a Conexant Systems Inc. ................................................................. 300,000 1,698,000
a Dell Inc. ............................................................................. 500,000 16,695,000
a EMC Corp. ............................................................................. 1,000,000 12,630,000
a Gateway Inc. .......................................................................... 500,000 2,830,000
General Dynamics Corp. ................................................................ 500,000 39,030,000
Annual Report | 61
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
ELECTRONIC TECHNOLOGY (CONT.)
Hewlett-Packard Co. ................................................................... 1,116,250 $ 21,610,600
Intel Corp. ........................................................................... 800,000 22,008,000
Lockheed Martin Corp. ................................................................. 500,000 23,075,000
a Micrel Inc. ........................................................................... 25,000 304,750
a Mindspeed Technologies Inc. ........................................................... 100,000 539,000
a Mykrolis Corp. ........................................................................ 270,725 3,286,602
Northrop Grumman Corp. ................................................................ 500,000 43,110,000
Raytheon Co. .......................................................................... 600,000 16,800,000
Rockwell Automation Inc. .............................................................. 100,000 2,625,000
Rockwell Collins Inc. ................................................................. 100,000 2,525,000
a Sun Microsystems Inc. ................................................................. 1,600,000 5,296,000
Texas Instruments Inc. ................................................................ 515,000 11,742,000
a Waters Corp. .......................................................................... 500,000 13,715,000
-----------------
319,387,952
-----------------
ENERGY MINERALS 2.0%
BP PLC, ADR (United Kingdom) .......................................................... 295,200 12,427,920
Encana Corp. (Canada) ................................................................. 342,000 12,441,960
Royal Dutch Petroleum Co., N.Y. shs. (Netherlands) .................................... 280,000 12,376,000
-----------------
37,245,880
-----------------
FINANCE .3%
a ChoicePoint Inc. ...................................................................... 160,000 5,359,997
-----------------
HEALTH SERVICES .7%
a Caremark RX Inc. ...................................................................... 75,625 1,709,125
IMS Health Inc. ....................................................................... 500,000 10,550,000
a Medco Health Solutions Inc. ........................................................... 48,240 1,250,863
-----------------
13,509,988
-----------------
HEALTH TECHNOLOGY 23.0%
Abbott Laboratories ................................................................... 400,000 17,020,000
a Advanced Medical Optics Inc. .......................................................... 88,888 1,596,428
Allergan Inc. ......................................................................... 400,000 31,492,000
a Amgen Inc. ............................................................................ 932,000 60,179,240
Baxter International Inc. ............................................................. 500,000 14,530,000
Bristol-Myers Squibb Co. .............................................................. 640,000 16,422,400
a Edwards Lifesciences Corp. ............................................................ 50,000 1,354,000
Eli Lilly & Co. ....................................................................... 400,000 23,760,000
a Genentech Inc. ........................................................................ 500,000 40,070,000
Johnson & Johnson ..................................................................... 996,000 49,321,920
Merck & Co. Inc. ...................................................................... 400,000 20,248,000
a Millipore Corp. ....................................................................... 400,000 18,424,000
Pall Corp. ............................................................................ 500,000 11,220,000
62 | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
HEALTH TECHNOLOGY (CONT.)
Pfizer Inc. ........................................................................... 2,000,000 $ 60,760,000
Schering-Plough Corp. ................................................................. 1,800,000 27,432,000
Wyeth ................................................................................. 600,000 27,660,000
a Zimmer Holdings Inc. .................................................................. 64,000 3,526,400
-----------------
425,016,388
-----------------
INDUSTRIAL SERVICES 1.7%
a Ionics Inc. ........................................................................... 400,000 9,784,000
Schlumberger Ltd. ..................................................................... 400,000 19,360,000
Transocean Inc. ....................................................................... 77,440 1,548,800
-----------------
30,692,800
-----------------
PROCESS INDUSTRIES 1.8%
Air Products & Chemicals Inc. ......................................................... 500,000 22,550,000
Sigma-Aldrich Corp. ................................................................... 200,000 10,388,000
-----------------
32,938,000
-----------------
PRODUCER MANUFACTURING 18.5%
3M Co. ................................................................................ 800,000 55,256,000
a American Power Conversion Corp. ....................................................... 500,000 8,570,000
ArvinMeritor Inc. ..................................................................... 12,499 222,607
Avery Dennison Corp. .................................................................. 462,000 23,340,240
a CUNO Inc. ............................................................................. 86,200 3,378,187
Deere & Co. ........................................................................... 300,000 15,993,000
a Dionex Corp. .......................................................................... 250,000 9,840,000
Emerson Electric Co. .................................................................. 500,000 26,325,000
Illinois Tool Works Inc. .............................................................. 500,000 33,130,000
Ingersoll Rand Co., A ................................................................. 501,000 26,773,440
Johnson Controls Inc. ................................................................. 200,000 18,920,000
Molex Inc. ............................................................................ 146,483 4,187,949
Molex Inc., A ......................................................................... 146,483 3,594,693
Teleflex Inc. ......................................................................... 500,000 21,715,000
Textron Inc. .......................................................................... 525,000 20,711,250
a Thomas & Betts Corp. 500,000 7,925,000
Tyco International Ltd. ............................................................... 1,550,052 31,667,562
United Technologies Corp. ............................................................. 400,000 30,912,000
-----------------
342,461,928
-----------------
RETAIL TRADE 2.2%
Family Dollar Stores Inc. ............................................................. 200,000 7,978,000
a Interactive Corp. ..................................................................... 600,200 19,836,610
Tiffany & Co. ......................................................................... 350,000 13,065,500
-----------------
40,880,110
-----------------
Annual Report | 63
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
TECHNOLOGY SERVICES 10.6%
Automatic Data Processing Inc. ........................................................ 800,000 $ 28,680,000
Certegy Inc. .......................................................................... 200,000 6,422,000
a Computer Sciences Corp. ............................................................... 1,000,000 37,570,000
International Business Machines Corp. ................................................. 560,000 49,464,800
Microsoft Corp. ....................................................................... 1,000,000 27,790,000
a Oracle Corp. .......................................................................... 500,000 5,610,000
a Sungard Data Systems Inc. ............................................................. 500,000 13,155,000
a Yahoo! Inc. ........................................................................... 800,000 28,304,000
-----------------
196,995,800
-----------------
TRANSPORTATION 5.3%
a Alaska Air Group Inc. ................................................................. 500,000 13,910,000
a AMR Corp. ............................................................................. 1,080,000 12,366,000
a British Airways PLC, ADR (United Kingdom) ............................................. 500,000 14,110,000
Canadian Pacific Railway Ltd. (Canada) ................................................ 250,000 5,902,500
a Continental Airlines Inc., B .......................................................... 500,000 8,290,000
Delta Air Lines Inc. .................................................................. 950,000 12,635,000
KLM Royal Dutch Airlines, N.Y. shs. (Netherlands) ..................................... 500,000 7,790,000
a Northwest Airlines Corp. .............................................................. 500,000 4,850,000
Providence & Worchester Railroad Co. .................................................. 42,000 374,220
Southwest Airlines Co. ................................................................ 65,200 1,154,040
Union Pacific Corp. ................................................................... 300,000 17,451,000
-----------------
98,832,760
-----------------
TOTAL COMMON STOCKS (COST $1,011,122,558) ............................................. 1,832,205,331
-----------------
SHORT TERM INVESTMENT (COST $19,325,482) 1.1%
b Franklin Institutional Fiduciary Trust Money Market Portfolio ......................... 19,325,482 19,325,482
-----------------
TOTAL INVESTMENTS (COST $1,030,448,040) 100.0% ........................................ 1,851,530,813
OTHER ASSETS, LESS LIABILITIES ........................................................ 849,976
-----------------
NET ASSETS 100.0% ..................................................................... $ 1,852,380,789
-----------------
<FN>
a Non-income producing
b See Note 6 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio.
</FN>
64 |See notes to financial statements. | Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN INCOME FUND
--------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS A 2003 2002 2001 2000 1999
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $1.90 $2.16 $2.35 $2.23 $2.34
--------------------------------------------------------------------
Income from investment operations:
Net investment income a ............................. .14 .14 .17 .18 .17
Net realized and unrealized gains (losses) .......... .38 (.21) (.15) .13 (.09)
--------------------------------------------------------------------
Total from investment operations ..................... .52 (.07) .02 .31 .08
--------------------------------------------------------------------
Less distributions from:
Net investment income ............................... (.16) (.17) (.18) (.18) (.18)
Net realized gains .................................. (.01) (.02) (.03) (.01) (.01)
--------------------------------------------------------------------
Total distributions .................................. (.17) (.19) (.21) (.19) (.19)
--------------------------------------------------------------------
Net asset value, end of year ......................... $2.25 $1.90 $2.16 $2.35 $2.23
--------------------------------------------------------------------
Total return b ....................................... 28.12% (4.18)% .58% 14.68% 4.02%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $9,640,156 $6,001,117 $5,960,990 $6,083,135 $6,776,804
Ratios to average net assets:
Expenses ............................................ .73% .72% .73% .76% .73%
Net investment income ............................... 6.63% 6.67% 7.54% 8.01% 7.46%
Portfolio turnover rate .............................. 48.36% 51.16% 28.13% 24.41% 17.35%
<FN>
a Based on average shares outstanding.
b Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
</FN>
Annual Report | 65
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND (CONTINUED)
-------------------------
YEAR ENDED
SEPTEMBER 30,
CLASS B 2003 2002 C
-------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................................ $1.90 $2.15
-------------------------
Income from investment operations:
Net investment income a ...................................................... .12 .11
Net realized and unrealized gains (losses) ................................... .37 (.21)
-------------------------
Total from investment operations .............................................. .49 (.10)
-------------------------
Less distributions from:
Net investment income ........................................................ (.14) (.13)
Net realized gains ........................................................... (.01) (.02)
-------------------------
Total distributions ........................................................... (.15) (.15)
-------------------------
Net asset value, end of year .................................................. $2.24 $1.90
-------------------------
Total return b ................................................................ 26.58% (5.63)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................................... $2,083,783 $558,580
Ratios to average net assets:
Expenses ..................................................................... 1.58% 1.57%d
Net investment income ........................................................ 5.78% 6.01%d
Portfolio turnover rate ....................................................... 48.36% 51.16%
<FN>
a Based on average shares outstanding.
b Total return does not reflect contingent deferred sales charge, and is not
annualized for periods less than one year.
c For the period November 1, 2001 (effective date) to September 30, 2002.
d Annualized
</FN>
66 | Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND (CONTINUED)
----------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS B1 2003 2002 2001 2000 1999C
----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................... $1.90 $2.17 $2.35 $2.24 $2.36
----------------------------------------------------------
Income from investment operations:
Net investment income a ......................................... .13 .13 .16 .17 .12
Net realized and unrealized gains (losses) ...................... .38 (.22) (.14) .12 (.11)
----------------------------------------------------------
Total from investment operations ................................. .51 (.09) .02 .29 .01
----------------------------------------------------------
Less distributions from:
Net investment income ........................................... (.15) (.16) (.17) (.17) (.13)
Net realized gains .............................................. (.01) (.02) (.03) (.01) --
----------------------------------------------------------
Total distributions .............................................. (.16) (.18) (.20) (.18) (.13)
----------------------------------------------------------
Net asset value, end of year ..................................... $2.25 $1.90 $2.17 $2.35 $2.24
----------------------------------------------------------
Total return b ................................................... 27.51% (4.66)% .10% 14.09% .34%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................................. $495,004 $430,226 $446,245 $140,711 $83,031
Ratios to average net assets:
Expenses ........................................................ 1.23% 1.22% 1.23% 1.26% 1.23%d
Net investment income ........................................... 6.13% 6.15% 7.02% 7.49% 7.22%d
Portfolio turnover rate .......................................... 48.36% 51.16% 28.13% 24.41% 17.35%
<FN>
a Based on average shares outstanding.
b Total return does not reflect contingent deferred sales charge, and is not
annualized for periods less than one year.
c For the period January 1, 1999 (effective date) to September 30, 1999.
d Annualized
</FN>
Annual Report | 67
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND (CONTINUED)
------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS C 2003 2002 2001 2000 1999
------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $1.91 $2.17 $2.36 $2.24 $2.34
------------------------------------------------------------------
Income from investment operations:
Net investment income a ............................. .13 .13 .16 .17 .16
Net realized and unrealized gains (losses) .......... .38 (.21) (.15) .13 (.08)
------------------------------------------------------------------
Total from investment operations ..................... .51 (.08) .01 .30 .08
------------------------------------------------------------------
Less distributions from:
Net investment income ............................... (.15) (.16) (.17) (.17) (.17)
Net realized gains .................................. (.01) (.02) (.03) (.01) (.01)
------------------------------------------------------------------
Total distributions .................................. (.16) (.18) (.20) (.18) (.18)
------------------------------------------------------------------
Net asset value, end of year ......................... $2.26 $1.91 $2.17 $2.36 $2.24
------------------------------------------------------------------
Total return b ....................................... 27.37% (4.64)% .09% 14.54% 3.46%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $3,764,372 $1,545,377 $1,080,315 $872,662 $997,438
Ratios to average net assets:
Expenses ............................................ 1.24% 1.21% 1.23% 1.26% 1.23%
Net investment income ............................... 6.12% 6.21% 7.04% 7.51% 6.97%
Portfolio turnover rate .............................. 48.36% 51.16% 28.13% 24.41% 17.35%
<FN>
a Based on average shares outstanding.
b Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
</FN>
68 | Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND (CONTINUED)
-----------------------
YEAR ENDED
SEPTEMBER 30,
CLASS R 2003 2002C
-----------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................................ $1.89 $2.18
-----------------------
Income from investment operations:
Net investment income a .......................................................... .13 .10
Net realized and unrealized gains (losses) ....................................... .37 (.27)
-----------------------
Total from investment operations .................................................. .50 (.17)
-----------------------
Less distributions from:
Net investment income ............................................................ (.15) (.12)
Net realized gains ............................................................... (.01) --
-----------------------
Total distributions ............................................................... (.16) (.12)
-----------------------
Net asset value, end of year ...................................................... $2.23 $1.89
-----------------------
Total return b .................................................................... 27.31% (8.34)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................................... $36,417 $6,350
Ratios to average net assets:
Expenses ......................................................................... 1.08% 1.07%d
Net investment income ............................................................ 6.28% 6.77%d
Portfolio turnover rate ........................................................... 48.36% 51.16%
<FN>
a Based on average shares outstanding.
b Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
c For the period January 1, 2002 (effective date) to September 30, 2002.
d Annualized
</FN>
Annual Report | 69
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND (CONTINUED)
---------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS 2003 2002 2001 2000 1999
---------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................ $1.89 $2.16 $2.34 $2.23 $2.34
---------------------------------------------------------
Income from investment operations:
Net investment income a .......................................... .14 .14 .18 .18 .17
Net realized and unrealized gains (losses) ....................... .38 (.22) (.15) .12 (.09)
---------------------------------------------------------
Total from investment operations .................................. .52 (.08) .03 .30 .08
---------------------------------------------------------
Less distributions from:
Net investment income ............................................ (.16) (.17) (.18) (.18) (.18)
Net realized gains ............................................... (.01) (.02) (.03) (.01) (.01)
---------------------------------------------------------
Total distributions ............................................... (.17) (.19) (.21) (.19) (.19)
---------------------------------------------------------
Net asset value, end of year ...................................... $2.24 $1.89 $2.16 $2.34 $2.23
---------------------------------------------------------
Total return b .................................................... 28.47% (4.50)% 1.21% 14.90% 3.71%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................... $95,009 $30,737 $22,737 $21,220 $23,891
Ratios to average net assets:
Expenses ......................................................... .58% .57% .58% .61% .58%
Net investment income ............................................ 6.78% 6.85% 7.69% 8.16% 7.60%
Portfolio turnover rate ........................................... 48.36% 51.16% 28.13% 24.41% 17.35%
<FN>
a Based on average shares outstanding.
b Total return is not annualized for periods less than one year.
</FN>
70 | See notes to financial statements. | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 33.9%
COMMUNICATIONS 1.8%
a Microcell Telecommunications Inc., B ........................ Canada 154,205 $ 1,829,503
a NII Holdings Inc., B ........................................ United States 106,744 6,371,549
a NTL Inc. .................................................... United States 379,020 17,859,422
SBC Communications Inc. ..................................... United States 5,500,000 122,375,000
a Telecom Argentina Stet - France Telecom SA, B, ADR .......... Argentina 1,700,000 10,931,000
Verizon Communications Inc. ................................. United States 4,000,000 129,760,000
------------------
289,126,474
------------------
CONSUMER NON-DURABLES 1.2%
Altria Group Inc. ........................................... United States 3,250,000 142,350,000
Loews Corp. - Carolina Group ................................ United States 2,046,400 47,067,200
------------------
189,417,200
------------------
ENERGY MINERALS 4.6%
BP PLC, ADR ................................................. United Kingdom 4,000,000 168,400,000
Canadian Oil Sands Trust .................................... Canada 5,600,000 162,673,682
ChevronTexaco Corp. ......................................... United States 3,500,000 250,075,000
Petroleo Brasileiro SA, ADR ................................. Brazil 1,600,000 36,688,000
Royal Dutch Petroleum Co., N.Y. shs. ........................ Netherlands 3,000,000 132,600,000
------------------
750,436,682
------------------
FINANCE 2.7%
Comerica Inc. ............................................... United States 2,500,000 116,500,000
Fleet Boston Financial Corp. ................................ United States 5,400,000 162,810,000
iStar Financial Inc. ........................................ United States 1,586,900 61,809,755
JP Morgan Chase & Co. ....................................... United States 3,000,000 102,990,000
------------------
444,109,755
------------------
HEALTH TECHNOLOGY 1.5%
Bristol-Myers Squibb Co. .................................... United States 7,000,000 179,620,000
Pfizer Inc. ................................................. United States 2,000,000 60,760,000
------------------
240,380,000
------------------
NON-ENERGY MINERALS .6%
AngloGold Ltd., ADR ......................................... South Africa 2,250,000 84,825,000
Olin Corp. .................................................. United States 335,300 5,304,446
------------------
90,129,446
------------------
PROCESS INDUSTRIES 2.1%
Dow Chemical Co. ............................................ United States 2,250,000 73,215,000
E.I. du Pont de Nemours & Co. ............................... United States 3,000,000 120,030,000
Eastman Chemical Co. ........................................ United States 2,000,000 67,000,000
Georgia-Pacific Corp. ....................................... United States 2,500,000 60,600,000
Lyondell Chemical Co. ....................................... United States 1,200,000 15,336,000
------------------
336,181,000
------------------
Annual Report | 71
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
REAL ESTATE .4%
Liberty Property Trust ...................................... United States 800,000 $ 29,584,000
ProLogis .................................................... United States 1,000,000 30,250,000
------------------
59,834,000
------------------
TECHNOLOGY SERVICES
a Anacomp Inc., A ............................................. United States 76,900 1,622,590
------------------
UTILITIES 19.0%
Alliant Energy Corp. ........................................ United States 5,000,000 110,000,000
Ameren Corp. ................................................ United States 4,000,000 171,640,000
American Electric Power Co. Inc. ............................ United States 5,500,000 165,000,000
CenterPoint Energy Inc. ..................................... United States 3,000,000 27,510,000
Cinergy Corp. ............................................... United States 4,500,000 165,150,000
a CMS Energy Corp. ............................................ United States 3,650,000 26,900,500
Consolidated Edison Inc. .................................... United States 500,000 20,380,000
Dominion Resources Inc. ..................................... United States 3,286,600 203,440,540
DTE Energy Co. .............................................. United States 4,759,000 175,559,510
Duke Energy Corp. ........................................... United States 5,500,000 97,955,000
Energy East Corp. ........................................... United States 4,000,000 89,720,000
Exelon Corp. ................................................ United States 3,918,600 248,831,100
FirstEnergy Corp. ........................................... United States 7,500,000 239,250,000
FPL Group Inc. .............................................. United States 1,000,000 63,200,000
Hawaiian Electric Industries Inc. ........................... United States 860,000 37,435,800
KeySpan Corp. ............................................... United States 3,250,000 114,010,000
NiSource Inc. ............................................... United States 3,500,000 69,930,000
ONEOK Inc. .................................................. United States 2,396,900 48,345,473
Pepco Holdings Inc. ......................................... United States 5,500,000 95,040,000
Pinnacle West Capital Corp. ................................. United States 2,426,600 86,144,300
PPL Corp. ................................................... United States 1,480,000 60,606,000
Progress Energy Inc. ........................................ United States 3,200,000 142,272,000
Public Service Enterprise Group Inc. ........................ United States 2,500,000 105,000,000
Sempra Energy ............................................... United States 2,456,600 72,125,776
Southern Co. ................................................ United States 3,250,000 95,290,000
b TECO Energy Inc. ............................................ United States 11,879,500 164,174,690
TXU Corp. ................................................... United States 4,200,000 98,952,000
Xcel Energy Inc. ............................................ United States 4,332,500 67,023,775
------------------
3,060,886,464
------------------
TOTAL COMMON STOCKS (COST $5,047,311,939) ................... 5,462,123,611
------------------
PREFERRED STOCKS .1%
COMMUNICATIONS
a Nortel Inversora SA, B, ADR, pfd. ........................... Argentina 524,000 1,676,800
------------------
HEALTH SERVICES .1%
Fresenius Medical Care Capital Trust II, 7.875%, 2/01/08 .... Germany 12,100,000 12,614,250
------------------
72 | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS (CONT.)
PROCESS INDUSTRIES
a,c Asia Pulp & Paper Co. Ltd., 12.00%, pfd. .................. Indonesia 75,000,000 $ 1,312,500
------------------
TOTAL PREFERRED STOCKS (COST $76,153,127) ................... 15,603,550
------------------
CONVERTIBLE PREFERRED STOCKS 14.5%
AEROSPACE/DEFENSE .7%
Goldman Sachs Group Inc. into Lockheed Martin, 8.00%,
cvt. pfd. ................................................. United States 835,000 39,511,365
Lehman Brothers Holdings Inc. into United Technologies Corp.,
6.00%, cvt. pfd. .......................................... United States 1,175,000 81,274,750
------------------
120,786,115
------------------
COMMUNICATIONS 1.0%
Alltel Corp. - Equity Units, 7.75%, cvt. pfd. ............... United States 2,900,000 141,781,000
Dobson Communications Corp., 6.00%, cvt. pfd. ............... United States 49,800 9,711,000
a McLeodUSA Inc., 2.50%, cvt. pfd. ............................ United States 177,366 1,257,525
a Microcell Telecommunications Inc, cvt. pfd. ................. Canada 155,130 1,983,025
------------------
154,732,550
------------------
CONSUMER DURABLES 2.3%
Ford Motor Co. Capital Trust II, 6.50%, cvt. pfd. ........... United States 5,800,000 251,198,000
General Motors Corp., 6.25%, cvt. pfd. ...................... United States 4,300,000 115,885,000
------------------
367,083,000
------------------
CONSUMER NON-DURABLES .2%
Morgan Stanley into Coca-Cola Co., 7.00%, cvt. pfd. ......... United States 650,000 28,439,125
------------------
CONSUMER SERVICES .5%
Goldman Sachs Group Inc. into AOL Time Warner, 6.50%,
cvt. pfd. ................................................. United States 5,650,000 81,054,900
------------------
ELECTRONIC TECHNOLOGY 1.0%
Citigroup Global Markets into Motorola, 8.00%, cvt. pfd. .... United States 1,000,000 64,750,000
Motorola Inc., 7.00%, cvt. pfd. ............................. United States 1,250,000 47,400,000
Solectron Corp., 7.25%, cvt. pfd. ........................... United States 2,800,000 46,676,000
------------------
158,826,000
------------------
ENERGY MINERALS 1.1%
Nuevo Financing I, 5.75%, cvt. pfd., A ...................... United States 1,582,200 59,728,050
a Range Resources Corp., cvt. pfd. ............................ United States 1,000,000 50,750,000
Unocal Corp., 6.25%, cvt. pfd. .............................. United States 1,250,000 64,375,000
------------------
174,853,050
------------------
HEALTH TECHNOLOGY .7%
Goldman Sachs Group Inc. into Wyeth, 7.00%, cvt. pfd. ....... United States 1,400,000 64,927,800
Morgan Stanley into Pfizer Inc., 5.00%, cvt. pfd. ........... United States 1,780,000 54,848,475
------------------
119,776,275
------------------
Annual Report | 73
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (CONT.)
INDUSTRIAL SERVICES 1.2%
Citigroup Global Markets into Tyco International, 7.00%,
cvt. pfd. ................................................. United States 3,000,000 $ 57,750,000
El Paso Energy Capital Trust I, 4.75%, cvt. pfd. ............ United States 290,000 8,737,700
Lehman Brothers Holdings Inc. into Weatherford International,
6.00%, cvt. pfd. .......................................... United States 2,250,000 87,328,125
Williams Cos. Inc., 144A, 5.50%, cvt. pfd. .................. United States 559,000 33,889,375
------------------
187,705,200
------------------
REAL ESTATE 2.4%
Archstone-Smith Trust, 9.16%, cvt. pfd. ..................... United States 1,000,000 35,750,000
Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A .............. United States 2,100,000 47,964,000
Glenborough Realty Trust Inc., 7.75%, cvt. pfd., A .......... United States 3,550,000 85,093,500
Host Marriott Corp., 6.75%, cvt. pfd. ....................... United States 2,670,000 124,304,520
Innkeepers USA Trust, 8.625%, cvt. pfd., A .................. United States 1,968,300 49,404,330
Reckson Associates Realty Corp., 7.625%, cvt. pfd., A ....... United States 1,900,000 47,737,500
------------------
390,253,850
------------------
TECHNOLOGY SERVICES 1.5%
Electronic Data Systems Corp., 7.625%, cvt. pfd. ............ United States 2,000,000 40,920,000
Goldman Sachs Group Inc. into IBM, 8.00%, cvt. pfd. ......... United States 525,000 43,464,225
Morgan Stanley into Accenture Inc., 6.00%, cvt. pfd. ........ United States 6,750,000 150,255,000
------------------
234,639,225
------------------
UTILITIES 1.9%
American Electric Power Co. Inc., 9.25%, cvt. pfd. .......... United States 950,800 42,358,140
CMS Energy Trust I, 7.75%, cvt. pfd. ........................ United States 1,150,000 41,822,050
FPL Group Inc., 8.50%, cvt. pfd. ............................ United States 750,000 42,720,000
Keyspan Corp., 8.75%, cvt. pfd. ............................. United States 800,000 41,840,000
ONEOK Inc., 8.50%, cvt. pfd. ................................ United States 700,000 20,125,000
Sempra Energy, 8.50%, cvt. pfd. ............................. United States 2,000,000 55,340,000
Sierra Pacific Resources Co., 9.00%, cvt. pfd., PIES ........ United States 341,000 10,011,760
b TECO Energy Inc., ACES, 9.50%, cvt. pfd. .................... United States 831,000 15,415,050
TXU Corp., 8.75%, cvt. pfd. ................................. United States 1,300,000 44,655,000
------------------
314,287,000
------------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $2,402,673,783) .... 2,332,436,290
------------------
-------------------
PRINCIPAL AMOUNT D
-------------------
BONDS 29.5%
COMMUNICATIONS 3.1%
Dobson Communications Corp., senior note, 10.875%,
7/01/10 ................................................... United States $ 35,000,000 38,325,000
Nextel Communications Inc., senior disc. note, 9.95%,
2/15/08 ................................................... United States 48,800,000 51,545,000
c Nextlink Communications Inc., senior note, 10.75%, 6/01/09 .. United States 51,000,000 318,750
Qwest Capital Funding, 7.00%, 8/03/09 ....................... United States 130,000,000 116,675,000
Qwest Capital Funding, 7.25%, 2/15/11 ....................... United States 110,000,000 98,450,000
Qwest Corp., 7.20%, 11/10/26 ................................ United States 38,000,000 34,390,000
74 | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT D VALUE
- ---------------------------------------------------------------------------------------------------------------------------
BONDS (CONT.)
COMMUNICATIONS (CONT.)
Time Warner Telecom Inc., senior note, 10.125%, 2/01/11 ..... United States $ 47,400,000 $ 47,518,500
US West Communications Inc., 6.875%, 9/15/33 ................ United States 50,500,000 44,692,500
c WorldCom Inc., 8.00%, 5/15/06 ............................... United States 150,000,000 49,875,000
c WorldCom Inc., 7.50%, 5/15/11 ............................... United States 73,000,000 24,272,500
------------------
506,062,250
------------------
CONSUMER DURABLES 1.3%
General Motors, 8.25%, 7/15/23 .............................. United States 37,200,000 38,999,364
General Motors, 8.375%, 7/15/33 ............................. United States 160,000,000 167,767,200
------------------
206,766,564
------------------
CONSUMER NON-DURABLES .2%
c Compania Alimentos Fargo SA, 13.25%, 8/01/08 ................ Argentina 27,000,000 3,510,000
Revlon Consumer Products Corp., senior sub. note, 8.625%,
2/01/08 ................................................... United States 58,200,000 33,174,000
------------------
36,684,000
------------------
CONSUMER SERVICES 6.4%
c,e Adelphia Communications Corp., senior note, 7.875%,
5/01/09 ................................................... United States 53,600,000 36,850,000
c,e Adelphia Communications Corp., senior note, 10.875%,
10/01/10 .................................................. United States 55,000,000 38,775,000
AOL Time Warner Inc., notes, 6.875%, 5/01/12 ................ United States 27,000,000 30,354,615
c Cablevision SA, 13.75%, 5/01/09 ............................. Argentina 29,300,000 10,694,500
CanWest Media Inc., senior sub. note, 10.625%, 5/15/11 ...... Canada 37,900,000 43,206,000
Charter Communications Holdings II, senior note, 144A,
10.25%, 9/15/10 ........................................... United States 405,400,000 410,467,500
CKE Restaurants Inc., senior sub. note, 9.125%, 5/01/09 ..... United States 16,800,000 16,968,000
Coast Hotel & Casino Inc., senior sub. note, 9.50%, 4/01/09 . United States 38,900,000 41,720,250
CSC Holdings Inc., senior note, B, 7.625%, 4/01/11 .......... United States 113,000,000 113,282,500
CSC Holdings Inc., senior sub. deb., 9.875%, 4/01/23 ........ United States 40,000,000 41,400,000
EchoStar DBS Corp., senior note, 10.375%, 10/01/07 .......... United States 49,000,000 54,757,500
Eldorado Resorts LLC, senior sub. note, 10.50%, 8/15/06 ..... United States 8,000,000 8,120,000
f Lone Cypress Co., sub. note, 11.50%, 8/01/09 ................ United States 23,732,503 25,008,125
Six Flags Inc., senior note, 9.50%, 2/01/09 ................. United States 45,000,000 43,087,500
Universal City Development, senior note, 144A, 11.75%,
4/01/10 ................................................... United States 34,000,000 38,420,000
Venetian Casino/LV Sands, 11.00%, 6/15/10 ................... United States 50,200,000 57,479,000
Young Broadcasting Inc., senior sub. note, 10.00%, 3/01/11 .. United States 23,768,000 25,312,920
------------------
1,035,903,410
------------------
ELECTRONIC TECHNOLOGY 1.9%
Amkor Technology Inc., senior sub. note, 10.50%, 5/01/09 .... United States 60,000,000 64,200,000
Lucent Technologies, 6.45%, 3/15/29 ......................... United States 180,000,000 125,100,000
Sanmina-SCI Corp., A, 10.375%, 1/15/10 ...................... United States 30,000,000 35,325,000
Solectron Corp., senior note, 9.625%, 2/15/09 ............... United States 67,000,000 74,202,500
------------------
298,827,500
------------------
Annual Report | 75
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT D VALUE
- ---------------------------------------------------------------------------------------------------------------------------
BONDS (CONT.)
ENERGY MINERALS .8%
Chesapeake Energy Corp., senior note, 8.125%, 4/01/11 ....... United States $ 50,000,000 $ 54,500,000
Chesapeake Energy Corp., senior note, 9.00%, 8/15/12 ........ United States 15,000,000 16,950,000
Hanover Equipment Trust 01, senior secured note, B, 8.75%,
9/01/11 ................................................... United States 16,200,000 16,767,000
Mission Resources Corp., senior sub. note, C, 10.875%,
4/01/07 ................................................... United States 47,000,000 35,485,000
------------------
123,702,000
------------------
FINANCE .5%
Ford Motor Credit Co., 7.00%, 10/01/13 ...................... United States 85,000,000 85,692,070
------------------
HEALTH SERVICES .7%
Healthsouth Corp., 7.625%, 6/01/12 .......................... United States 75,000,000 64,875,000
Tenet Healthcare Corp., 6.375%, 12/01/11 .................... United States 45,000,000 43,312,500
------------------
108,187,500
------------------
INDUSTRIAL SERVICES 1.4%
Allied Waste North America Inc., 10.00%, 8/01/09 ............ United States 25,000,000 27,218,750
El Paso Corp., senior note, 6.75%, 5/15/09 .................. United States 135,000,000 113,400,000
Tyco International Group, 6.375%, 10/15/11 .................. Luxembourg 50,000,000 51,812,500
Williams Co. Inc., 7.125%, 9/01/11 .......................... United States 30,000,000 29,775,000
------------------
222,206,250
------------------
NON-ENERGY MINERALS .1%
Century Aluminum Co., first mortgage, senior secured note,
11.75%, 4/15/08 ........................................... United States 15,000,000 16,125,000
------------------
PROCESS INDUSTRIES 3.0%
Buckeye Technologies Inc., senior sub. note, 8.50%,
12/15/05 .................................................. United States 22,300,000 22,725,930
Consoltex Group Inc., PIK, 11.00%, 1/31/09 .................. United States 55,919,626 5,592
Equistar Chemicals LP, senior note, 10.125%, 9/01/08 ........ United States 82,000,000 81,590,000
Four M Corp., senior note, B, 12.00%, 6/01/06 ............... United States 30,000,000 30,375,000
Georgia-Pacific Corp., senior sub. note, 9.375%, 2/01/13 .... United States 39,500,000 44,289,375
Graphic Packaging International, 144A, senior sub. note, 9.50%,
8/15/13 ................................................... United States 55,000,000 60,637,500
Huntsman LLC, 144A, 11.625%, 10/15/10 ....................... United States 44,600,000 43,708,000
IMC Global Inc., senior note, 144A, 10.875%, 8/01/13 ........ United States 80,000,000 83,200,000
Lyondell Chemical Co., 9.625%, 5/01/07 ...................... United States 25,000,000 23,875,000
Lyondell Chemical Co., senior note, 10.50%, 6/01/13 ......... United States 71,500,000 68,640,000
c Tjiwi Kimia Finance Mauritius, 10.00%, 8/01/04 .............. Indonesia 87,000,000 30,885,000
------------------
489,931,397
------------------
PRODUCER MANUFACTURING 1.6%
Case New Holland Inc., senior note, 144A, 9.25%, 8/01/11 .... Netherlands 90,000,000 97,200,000
Dana Corp., 7.00%, 3/01/29 .................................. United States 41,000,000 37,105,000
H&E Equipment/Finance, 11.125%, 6/15/12 ..................... United States 26,000,000 22,230,000
Nortek Inc., senior sub. note, 9.875%, 6/15/11 .............. United States 48,500,000 51,531,250
76 | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT D VALUE
- ------------------------------------------------------------------------------------------------------------------------------
BONDS (CONT.)
PRODUCER MANUFACTURING (CONT.)
Outsourcing Services Group Inc., senior sub. note, 11.375%,
3/01/06 ................................................... United States $ 22,000,000 $ 11,660,000
Trench Electric & Trench Inc., senior sub. deb., 10.25%,
12/15/07 .................................................. Canada 30,000,000 30,675,000
------------------
250,401,250
------------------
REAL ESTATE 1.7%
Felcor Lodging LP, 9.50%, 9/15/08 ........................... United States 74,000,000 79,920,000
HMH Properties Inc., 7.875%, 8/01/08 ........................ United States 75,000,000 77,437,500
HMH Properties Inc., senior note, C, 8.45%, 12/01/08 ........ United States 27,200,000 28,458,000
Meristar Hospitality Corp., senior sub. note, 8.75%, 8/15/07 United States 18,000,000 17,865,000
Meristar Hospitality Corp., 9.125%, 1/15/11 ................. United States 72,500,000 76,487,500
------------------
280,168,000
------------------
TRANSPORTATION .3%
Great Lakes Dredge & Dock Corp., senior sub. note, 11.25%,
8/15/08 ................................................... United States 15,100,000 16,024,875
Laidlaw International Inc., senior note, 144A, 10.75%,
6/15/11 ................................................... United States 24,700,000 26,305,500
------------------
42,330,375
------------------
UTILITIES 6.5%
AES Corp., senior note, 8.75%, 6/15/08 ...................... United States 33,000,000 33,247,500
Allegheny Energy Supply, 7.80%, 3/15/11 ..................... United States 43,000,000 36,765,000
Allegheny Energy Supply, 144A, 8.25%, 4/15/12 ............... United States 110,000,000 97,350,000
Aquila Inc., 14.875%, 7/01/12 ............................... United States 97,500,000 122,850,000
Calpine Canada Energy Finance, senior note, 8.50%, 5/01/08 .. Canada 150,000,000 108,750,000
Calpine Corp., senior secured note, 144A, 8.50%, 7/15/10 .... United States 95,000,000 87,875,000
Calpine Corp., senior note, 8.50%, 2/15/11 .................. United States 130,000,000 92,300,000
Calpine Corp., secured note, 144A, 8.75%, 7/15/13 ........... United States 25,000,000 23,000,000
CMS Energy Corp., 9.875%, 10/15/07 .......................... United States 40,000,000 43,000,000
CMS Energy Corp., senior note, 144A, 7.75%, 8/01/10 ......... United States 40,000,000 39,800,000
Dynegy Holdings Inc., 9.875%, 7/15/10 ....................... United States 100,000,000 105,000,000
Dynegy Holdings Inc., senior note, 6.875%, 4/01/11 .......... United States 49,500,000 41,703,750
Dynegy Holdings Inc., senior note, 8.75%, 2/15/12 ........... United States 22,500,000 20,700,000
Dynegy Holdings Inc., secured note, 144A, 10.125%, 7/15/13 .. United States 97,000,000 102,820,000
FirstEnergy Corp., 6.45%, 11/15/11 .......................... United States 60,000,000 62,728,200
Sierra Pacific Resources, 8.75%, 5/15/05 .................... United States 30,000,000 28,125,000
------------------
1,046,014,450
------------------
TOTAL BONDS (COST $4,702,488,665) ........................... 4,749,002,016
------------------
CONVERTIBLE BONDS 5.9%
COMMUNICATIONS .3%
Nextel Communications Inc., cvt., 5.25%, 1/15/10 ............ United States 60,000,000 56,250,000
------------------
CONSUMER DURABLES .1%
K2 Inc., cvt., 144A, 5.00%, 6/15/10 ......................... United States 12,900,000 17,038,836
------------------
Annual Report | 77
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT D VALUE
- ---------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS (CONT.)
CONSUMER SERVICES .5%
c,e Adelphia Communications Corp., junior sub. note, cvt., 6.00%,
2/15/06 ................................................... United States $ 95,000,000 $ 32,775,000
EchoStar Communications Corp., cvt., 4.875%, 1/01/07 ........ United States 55,000,000 56,306,250
------------------
89,081,250
------------------
ELECTRONIC TECHNOLOGY 3.4%
Advanced Micro Devices Inc., cvt., FRN, 4.75%, 2/01/22 ...... United States 70,000,000 62,562,500
Agere Systems Inc., cvt., 6.50%, 12/15/09 ................... United States 14,800,000 19,181,836
Amkor Technology Inc., cvt., 5.00%, 3/15/07 ................. United States 86,000,000 79,227,500
Fairchild Semiconductor Corp., cvt., 5.00%, 11/01/08 ........ United States 15,500,000 15,248,125
Lam Research Corp., cvt., 4.00%, 6/01/06 .................... United States 20,000,000 19,475,000
Nortel Networks Corp., senior note, cvt., 4.25%, 9/01/08 .... Canada 235,000,000 208,562,500
PMC-Sierra Inc., cvt., 3.75%, 8/15/06 ....................... United States 40,000,000 38,500,000
SCI Systems Inc., cvt., sub. note, 3.00%, 3/15/07 ........... United States 100,000,000 91,125,000
Trans-Lux Corp., cvt., sub. note, 7.50%, 12/01/06 ........... United States 8,000,000 7,350,000
------------------
541,232,461
------------------
HEALTH TECHNOLOGY .3%
Enzon Pharmaceuticals Inc., cvt., 4.50%, 7/01/08 ............ United States 13,500,000 11,306,250
ICN Pharmaceuticals Inc., cvt., sub. note, 6.50%, 7/15/08 ... United States 31,000,000 29,566,250
------------------
40,872,500
------------------
INDUSTRIAL SERVICES .1%
Hanover Compressor Co., cvt., 4.75%, 3/15/08 ................ United States 25,200,000 22,774,500
------------------
NON-ENERGY MINERALS .3%
Trizec Hahn Corp. into Barrick Gold, cvt., senior deb., 3.00%,
1/29/21 ................................................... Canada 58,000,000 40,310,000
------------------
REAL ESTATE .7%
Meristar Hospitality Corp., cvt., 9.50%, 4/01/10 ............ United States 95,000,000 115,425,000
------------------
UTILITIES .2%
Sierra Pacific Resources Co., cvt., 144A, 7.25%, 2/14/10 .... United States 19,100,000 26,740,000
------------------
TOTAL CONVERTIBLE BONDS (COST $853,677,358) ................. 949,724,547
------------------
ZERO COUPON/STEP-UP BONDS 1.4%
COMMERCIAL SERVICES .3%
Johnsondiversey Inc., zero cpn. to 5/15/07, 10.67% thereafter,
5/15/13 ................................................... United States 62,000,000 43,400,000
------------------
COMMUNICATIONS
c Nextlink Communications Inc., senior disc. note, zero cpn. to
6/01/04, 12.25% thereafter, 6/01/09 ....................... United States 44,000,000 275,000
------------------
78 | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT D VALUE
- ---------------------------------------------------------------------------------------------------------------------------
ZERO COUPON/STEP-UP BONDS (CONT.)
CONSUMER SERVICES .8%
Charter Communications Holdings LLC, senior disc. note,
zero cpn. to 1/15/06, 13.50% thereafter, 1/15/11 .......... United States $ 90,000,000 $ 56,700,000
Quebecor Media Inc., senior disc. note, zero cpn. to 7/15/06,
13.75% thereafter, 7/15/11 ................................ Canada 55,200,000 47,196,000
Yell Finance BV, senior disc. note, zero cpn. to 8/01/06, 13.50%
thereafter, 8/01/11 ....................................... United Kingdom 26,865,000 24,044,175
------------------
127,940,175
------------------
PROCESS INDUSTRIES .3%
HMP Equity Holdings Corp., zero cpn., 144A, 5/15/08 ......... United States 21,500,000 10,535,000
Huntsman ICI Chemicals, senior disc. note, zero cpn.,
12/31/09 .................................................. United States 111,500,000 44,600,000
------------------
55,135,000
------------------
TOTAL ZERO COUPON/STEP-UP BONDS (COST $256,075,506) ......... 226,750,175
------------------
U.S. GOVERNMENT AND AGENCY SECURITIES .6%
GNMA, 6.00%, 10/15/31 ....................................... United States 20,358,339 21,179,394
GNMA, 6.00%, 1/15/32 ........................................ United States 26,105,615 27,152,722
GNMA, 6.00%, 2/15/32 ........................................ United States 12,668,836 13,176,988
GNMA, 6.00%, 3/15/32 ........................................ United States 6,610,242 6,875,382
GNMA, 6.00%, 4/15/32 ........................................ United States 9,572,288 9,956,236
GNMA, 6.00%, 7/15/32 ........................................ United States 14,852,497 15,448,237
------------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $88,833,528) ........................................ 93,788,959
------------------
FOREIGN GOVERNMENT AND AGENCY SECURITIES
(COST $38,272,973) .1%
Republic of South Africa, 12.00%, 2/28/05 ................... South Africa 150,000,000 ZAR 22,516,583
------------------
MUNICIPAL BONDS .9%
California State GO, 5.00%, 2/01/26 ......................... United States 10,450,000 10,215,606
California State GO, 5.25%, 2/01/28 ......................... United States 24,600,000 24,767,034
California State GO, 5.00%, 2/01/32 ......................... United States 65,250,000 63,012,577
California State GO, 5.00%, 2/01/33 ......................... United States 23,250,000 22,416,953
California State GO, 5.25%, 2/01/33 ......................... United States 28,500,000 28,581,225
------------------
TOTAL MUNICIPAL BONDS (COST $141,604,593) ................... 148,993,395
------------------
TOTAL LONG TERM INVESTMENTS (COST $13,607,091,472) .......... 14,000,939,126
------------------
----------------
SHARES
----------------
SHORT TERM INVESTMENT (COST $149,649,449) .9%
g Franklin Institutional Fiduciary Trust Money Market Portfolio United States 149,649,449 149,649,449
------------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS
(COST $13,756,740,921) .................................... 14,150,588,575
------------------
Annual Report | 79
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT D VALUE
- ---------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 14.0%
h Joint Repurchase Agreement, .976%, 10/01/03
(Maturity Value $2,087,399,264) ........................... United States $ 2,087,342,674 $ 2,087,342,674
ABN AMRO Bank, N.V., New York Branch
(Maturity Value $191,915,488)
Banc of America Securities LLC
(Maturity Value $191,915,488)
Barclays Capital Inc. (Maturity Value $191,915,488)
Bear, Stearns & Co. Inc. (Maturity Value $118,105,050)
BNP Paribas Securities Corp. (Maturity Value $191,915,488)
Deutsche Bank Securities Inc. (Maturity Value $191,915,488)
Dresdner Kleinwort Wasserstein Securities LLC
(Maturity Value $206,652,530)
Goldman, Sachs & Co. (Maturity Value $191,915,488)
Greenwich Capital Markets Inc.
(Maturity Value $191,915,488)
Lehman Brothers Inc. (Maturity Value $35,402,292)
Morgan Stanley & Co. Inc. (Maturity Value $191,915,488)
UBS Securities LLC (Maturity Value $191,915,488)
Collateralized by U.S. Treasury Bills, Notes, and Bonds, and
U.S. Government Agency Securities
i Barclays Capital Inc., 1.08%, 10/01/03,
(Maturity Value $31,953,918) .............................. United States 31,952,959 31,952,959
Collateralized by U.S. Government Agency Securities
i Morgan Stanley & Co. Inc., 1.12%, 10/01/03,
(Maturity Value $40,002,488) .............................. United States 40,001,244 40,001,244
Collateralized by U.S. Government Agency Securities
i Goldman, Sachs & Co., 1.10%, 10/01/03,
(Maturity Value $26,882,642) .............................. United States 26,881,821 26,881,821
Collateralized by U.S. Government Agency Securities
i JP Morgan Securities Inc., 1.10%, 10/01/03,
(Maturity Value $40,002,444) .............................. United States 40,001,222 40,001,222
Collateralized by U.S. Government Agency Securities
i UBS Securities LLC, 1.11%, 10/01/03,
(Maturity Value $35,002,159) .............................. United States 35,001,080 35,001,080
Collateralized by U.S. Government Agency Securities
------------------
TOTAL REPURCHASE AGREEMENTS (COST $2,261,181,000) ........... 2,261,181,000
------------------
TOTAL INVESTMENTS (COST $16,017,921,921) 101.8% ............. 16,411,769,575
OTHER ASSETS, LESS LIABILITIES (1.8)% ....................... (297,028,157)
------------------
NET ASSETS 100.0% ........................................... $ 16,114,741,418
------------------
<FN>
CURRENCY ABBREVIATIONS | ZAR - South African Rand
See glossary of terms on page 96.
a Non-income producing
b See Note 9 regarding holdings of 5% voting securities.
c The fund discontinues accruing income on defaulted securities. See Note 7.
d The principal amount is stated in U.S. dollars unless otherwise indicated.
e See Note 10 regarding other considerations.
f See Note 8 regarding restricted securities.
g See Note 6 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio.
h See Note 1(c) regarding repurchase agreements.
i Collateral for loaned securities. See Note 1(f).
</FN>
80 |See notes to financial statements. | Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
---------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS A 2003 2002 2001 2000 1999
---------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ..................... $6.99 $6.93 $6.63 $6.62 $6.99
---------------------------------------------------------------------
Income from investment operations:
Net investment income a ............................... .28 .38 .41c .43 .44
Net realized and unrealized gains (losses) ............ (.10) .09 .33c .01 (.37)
---------------------------------------------------------------------
Total from investment operations ....................... .18 .47 .74 .44 .07
---------------------------------------------------------------------
Less distributions from net investment income .......... (.36) (.41) (.44) (.43) (.44)
---------------------------------------------------------------------
Net asset value, end of year ........................... $6.81 $6.99 $6.93 $6.63 $6.62
---------------------------------------------------------------------
Total return b ......................................... 2.66% 7.06% 11.52% 6.90% 1.05%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................ $7,286,317 $7,726,914 $7,197,334 $6,852,374 $7,895,906
Ratios to average net assets:
Expenses .............................................. .70% .69% .68% .70% .67%
Net investment income ................................. 4.11% 5.48% 6.12%c 6.62% 6.43%
Portfolio turnover rate ................................ 66.96% 44.62% 19.18% 3.98% 15.04%
<FN>
a Based on average shares outstanding.
b Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
c Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and
Accounting Guide of Investment Companies and began recording all paydown gains
and losses as part of investment income, as required. The effect of this change
was as follows:
Net investment income per share ............................ $(.008)
Net realized and unrealized gains (losses) per share ....... .008
Ratio of net investment income to average net assets ....... (.11)%
</FN>
Annual Report | 81
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
---------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS B 2003 2002 2001 2000 1999 D
---------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................. $6.98 $6.93 $6.63 $6.62 $6.91
---------------------------------------------------------------
Income from investment operations:
Net investment income a ....................................... .25 .34 .37c .39 .30
Net realized and unrealized gains (losses) .................... (.10) .09 .33c .01 (.28)
---------------------------------------------------------------
Total from investment operations ............................... .15 .43 .70 .40 .02
---------------------------------------------------------------
Less distributions from net investment income .................. (.33) (.38) (.40) (.39) (.31)
---------------------------------------------------------------
Net asset value, end of year ................................... $6.80 $6.98 $6.93 $6.63 $6.62
---------------------------------------------------------------
Total return b ................................................. 2.13% 6.37% 10.94% 6.35% .25%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................ $678,814 $559,966 $225,517 $80,167 $51,433
Ratios to average net assets:
Expenses ...................................................... 1.23% 1.22% 1.22% 1.25% 1.22%e
Net investment income ......................................... 3.58% 4.95% 5.51%c 6.07% 5.93%e
Portfolio turnover rate ........................................ 66.96% 44.62% 19.18% 3.98% 15.04%
<FN>
a Based on average shares outstanding.
b Total return does not reflect contingent deferred sales charge, and is not
annualized for periods less than one year.
c Effective October 1, 2000, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide of Investment Companies and began recording
all paydown gains and losses as part of investment income, as required.
The effect of this change was as follows:
Net investment income per share ........................... $(.008)
Net realized and unrealized gains (losses) per share ...... .008
Ratio of net investment income to average net assets ...... (.11)%
d For the period January 1, 1999 (effective date) to September 30, 1999.
e Annualized
</FN>
82 | Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
---------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS C 2003 2002 2001 2000 1999
---------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................. $6.97 $6.91 $6.61 $6.60 $6.97
---------------------------------------------------------------
Income from investment operations:
Net investment income a ....................................... .25 .34 .37c .39 .40
Net realized and unrealized gains (losses) .................... (.11) .10 .33c .01 (.37)
---------------------------------------------------------------
Total from investment operations ............................... .14 .44 .70 .40 .03
---------------------------------------------------------------
Less distributions from net investment income .................. (.33) (.38) (.40) (.39) (.40)
---------------------------------------------------------------
Net asset value, end of year ................................... $6.78 $6.97 $6.91 $6.61 $6.60
---------------------------------------------------------------
Total return b ................................................. 2.00% 6.53% 10.96% 6.36% .50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................ $814,635 $803,049 $422,114 $264,413 $308,961
Ratios to average net assets:
Expenses ...................................................... 1.23% 1.21% 1.22% 1.25% 1.22%
Net investment income ......................................... 3.58% 4.96% 5.55%c 6.08% 5.89%
Portfolio turnover rate ........................................ 66.96% 44.62% 19.18% 3.98% 15.04%
<FN>
a Based on average shares outstanding.
b Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
c Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and
Accounting Guide of Investment Companies and began recording all paydown gains
and losses as part of investment income, as required. The effect of this change
was as follows:
Net investment income per share .......................... $(.008)
Net realized and unrealized gains (losses) per share ..... .008
Ratio of net investment income to average net assets ..... (.11)%
</FN>
Annual Report | 83
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
-----------------------
YEAR ENDED
SEPTEMBER 30,
CLASS R 2003 2002 C
-----------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................................. $6.99 $6.81
-----------------------
Income from investment operations:
Net investment income a ....................................................... .25 .25
Net realized and unrealized gains (losses) .................................... (.09) .22
-----------------------
Total from investment operations ............................................... .16 .47
-----------------------
Less distributions from net investment income .................................. (.34) (.29)
-----------------------
Net asset value, end of year ................................................... $6.81 $6.99
-----------------------
Total return b ................................................................. 2.29% 7.03%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................................ $54,042 $14,042
Ratios to average net assets:
Expenses ...................................................................... 1.08% 1.07%d
Net investment income ......................................................... 3.73% 5.10%d
Portfolio turnover rate ........................................................ 66.96% 44.62%
<FN>
a Based on average shares outstanding.
b Total return does not reflect contingent deferred sales charge, and is not
annualized for periods less than one year.
c For the period January 1, 2002 (effective date) to September 30, 2002.
d Annualized
</FN>
84 | Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
----------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS 2003 2002 2001 2000 1999
----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................... $7.01 $6.94 $6.64 $6.63 $7.00
----------------------------------------------------------
Income from investment operations:
Net investment income a ......................................... .29 .38 .43c .44 .45
Net realized and unrealized gains (losses) ...................... (.10) .11 .32c -- (.37)
----------------------------------------------------------
Total from investment operations ................................. .19 .49 .75 .44 .08
----------------------------------------------------------
Less distributions from net investment income .................... (.37) (.42) (.45) (.43) (.45)
----------------------------------------------------------
Net asset value, end of year ..................................... $6.83 $7.01 $6.94 $6.64 $6.63
----------------------------------------------------------
Total return b ................................................... 2.79% 7.33% 11.63% 7.02% 1.16%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................................. $308,411 $198,437 $19,960 $46,775 $15,544
Ratios to average net assets:
Expenses ........................................................ .58% .57% .57% .60% .57%
Net investment income ........................................... 4.23% 5.60% 6.30%c 6.73% 6.53%
Portfolio turnover rate .......................................... 66.96% 44.62% 19.18% 3.98% 15.04%
<FN>
a Based on average shares outstanding.
b Total return is not annualized for periods less than one year.
c Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit
and Accounting Guide of Investment Companies and began recording all paydown
gains and losses as part of investment income, as required. The effect of this
change was as follows:
Net investment income per share .......................... $(.008)
Net realized and unrealized gains (losses) per share ..... .008
Ratio of net investment income to average net assets ..... (.11)%
</FN>
Annual Report | See notes to financial statements.| 85
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) 98.9%
GNMA I, 5.00%, 4/15/33 - 10/15/33 ............................................ $ 359,743,816 $ 360,840,663
GNMA I, SF, 5.50%, 5/15/28 - 9/15/33 ......................................... 1,994,645,962 2,047,009,100
GNMA I, SF, 6.00%, 9/15/23 - 8/15/33 ......................................... 2,084,525,959 2,168,740,971
GNMA II, 6.00%, 3/20/24 - 11/20/28 ........................................... 35,236,857 36,620,424
GNMA I, SF, 6.50%, 5/15/23 - 3/15/33 ......................................... 1,769,266,125 1,860,298,134
GNMA II, 6.50%, 6/20/24 - 7/20/28 ............................................ 85,953,215 90,126,037
GNMA I, SF, 6.75%, 3/15/26 - 4/15/26 ......................................... 413,790 439,923
GNMA PL, 6.75%, 1/15/34 ...................................................... 34,547,483 34,886,620
GNMA I, SF, 7.00%, 10/15/09 - 2/15/33 ........................................ 1,470,385,172 1,566,136,790
GNMA PL, 7.00%, 9/15/35 ...................................................... 8,638,949 9,282,769
GNMA I, SF, 7.25%, 10/15/25 - 1/15/26 ........................................ 2,222,550 2,380,499
GNMA I, SF, 7.50%, 6/15/05 - 8/15/32 ......................................... 290,926,233 312,737,526
GNMA II, 7.50%, 10/20/22 - 12/20/26 .......................................... 20,130,272 21,503,079
GNMA I, SF, 7.70%, 12/15/20 - 1/15/22 ........................................ 2,405,346 2,615,278
GNMA I, SF, 8.00%, 10/15/07 - 9/15/30 ........................................ 184,335,598 201,050,665
GNMA II, 8.00%, 8/20/16 - 6/20/30 ............................................ 11,404,209 12,310,065
GNMA I, GP, 8.25%, 3/15/17 - 11/15/17 ........................................ 1,039,191 1,141,060
GNMA I, SF, 8.25%, 3/15/27 - 11/15/27 ........................................ 569,300 617,572
GNMA I, SF, 8.50%, 12/15/09 - 6/15/25 ........................................ 33,734,591 37,185,696
GNMA II, 8.50%, 4/20/16 - 6/20/25 ............................................ 6,073,633 6,653,417
GNMA II, 8.75%, 3/20/17 - 7/20/17 ............................................ 141,486 155,741
GNMA I, SF, 9.00%, 10/15/04 - 7/15/23 ........................................ 42,821,820 47,513,935
GNMA II, 9.00%, 5/20/16 - 11/20/21 ........................................... 1,998,962 2,208,652
GNMA I, GP, 9.25%, 5/15/16 - 12/15/16 ........................................ 922,279 1,016,537
GNMA I, SF, 9.50%, 5/15/09 - 2/15/23 ......................................... 25,254,288 27,965,564
GNMA II, 9.50%, 8/20/17 - 4/20/25 ............................................ 1,535,272 1,698,399
GNMA I, GP, 10.00%, 11/15/09 - 8/15/13 ....................................... 971,279 1,076,098
GNMA I, SF, 10.00%, 4/15/12 - 3/15/25 ........................................ 29,331,781 33,257,958
GNMA II, 10.00%, 8/20/15 - 3/20/21 ........................................... 2,673,864 3,019,040
GNMA I, GP, 10.25%, 6/15/18 - 2/15/21 ........................................ 84,374 95,525
GNMA I, SF, 10.50%, 12/15/09 - 10/15/21 ...................................... 22,509,885 25,673,202
GNMA II, 10.50%, 9/20/13 - 3/20/21 ........................................... 5,809,947 6,595,201
GNMA I, GP, 11.00%, 12/15/09 - 3/15/11 ....................................... 1,939,508 2,177,011
GNMA I, SF, 11.00%, 11/15/09 - 5/15/21 ....................................... 21,159,029 24,098,304
GNMA II, 11.00%, 8/20/13 - 1/20/21 ........................................... 1,143,399 1,305,196
GNMA I, GP, 11.25%, 6/15/13 - 1/15/16 ........................................ 673,948 768,407
GNMA I, GP, 11.50%, 1/15/13 - 6/15/13 ........................................ 160,707 183,559
GNMA I, SF, 11.50%, 2/15/13 - 12/15/17 ....................................... 4,804,659 5,524,275
GNMA II, 11.50%, 8/20/13 - 2/20/18 ........................................... 489,250 560,970
GNMA I, GP, 11.75%, 7/15/13 - 12/15/15 ....................................... 146,325 167,821
GNMA I, GP, 12.00%, 3/15/11 - 1/15/13 ........................................ 75,473 86,485
GNMA I, SF, 12.00%, 5/15/11 - 7/15/18 ........................................ 22,249,863 25,797,381
GNMA II, 12.00%, 9/20/13 - 2/20/16 ........................................... 902,214 1,042,403
GNMA I, GP, 12.50%, 4/15/10 - 7/15/10 ........................................ 213,293 244,037
86 | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) (CONT.)
GNMA I, SF, 12.50%, 4/15/10 - 8/15/18 ........................................ $ 21,021,780 $ 24,380,378
GNMA II, 12.50%, 10/20/13 - 11/20/15 ......................................... 918,349 1,066,821
GNMA I, GP, 12.75%, 5/15/14 .................................................. 7,072 8,235
GNMA I, SF, 13.00%, 7/15/10 - 1/15/16 ........................................ 22,691,199 26,548,994
GNMA II, 13.00%, 10/20/13 - 9/20/15 .......................................... 695,825 814,878
-----------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) (COST $8,801,457,823) .. 9,037,627,295
-----------------
-----------------
SHARES
-----------------
SHORT TERM INVESTMENT (COST $149,649,450) 1.6%
a Franklin Institutional Fiduciary Trust Money Market Portfolio ................ 149,649,450 149,649,450
-----------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT (COST $8,951,107,273) .......... 9,187,276,745
-----------------
-----------------
PRINCIPAL AMOUNT
-----------------
REPURCHASE AGREEMENT (COST $131,310,000) 1.4%
b Barclays Capital Inc., .95%, 10/01/03 (Maturity Value $131,313,465) .......... $ 131,310,000 131,310,000
-----------------
TOTAL INVESTMENTS BEFORE PAYDOWN RESERVES 101.9% ............................. 9,318,586,745
c RESERVE FOR PAYDOWN GAINS (LOSSES) (.1)% ..................................... (13,805,846)
-----------------
TOTAL INVESTMENTS (COST $9,082,417,273) 101.8% ............................... 9,304,780,899
OTHER ASSETS, LESS LIABILITIES (1.8)% ........................................ (162,561,957)
-----------------
NET ASSETS 100.0% ............................................................ $ 9,142,218,942
-----------------
<FN>
See glossary of terms on page 96.
a See Note 6 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio.
b See Note 1(c) regarding repurchase agreements.
c See Note 1(e) regarding reserve for paydown.
</FN>
Annual Report | See notes to financial statements. | 87
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN UTILITIES FUND
-------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS A 2003 2002 2001 2000 1999
-------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $7.96 $10.02 $10.89 $ 9.58 $11.36
-------------------------------------------------------------------
Income from investment operations:
Net investment income a .................................. .42 .46 .46 .43 .48
Net realized and unrealized gains (losses) ............... .85 (1.60) (.86) 1.69 (1.41)
-------------------------------------------------------------------
Total from investment operations .......................... 1.27 (1.14) (.40) 2.12 (.93)
-------------------------------------------------------------------
Less distributions from:
Net investment income .................................... (.43) (.45) (.45) (.45) (.52)
Net realized gains ....................................... -- (.47) (.02) (.36) (.33)
-------------------------------------------------------------------
Total distributions ....................................... (.43) (.92) (.47) (.81) (.85)
-------------------------------------------------------------------
Net asset value, end of year .............................. $8.80 $ 7.96 $10.02 $10.89 $ 9.58
-------------------------------------------------------------------
Total return b ............................................ 16.38% (12.49)% (4.03)% 24.27% (8.54)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...........................$1,259,886 $1,090,216 $1,349,027 $1,574,897 $1,594,862
Ratios to average net assets:
Expenses ................................................. .83% .80% .79% .83% .80%
Net investment income .................................... 5.00% 4.87% 4.26% 4.74% 4.60%
Portfolio turnover rate ................................... 25.81% 30.60% 34.03% 19.86% 33.99%
<FN>
a Based on average shares outstanding.
b Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
</FN>
88 | Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND (CONTINUED)
-------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS B 2003 2002 2001 2000 1999C
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............................. $7.97 $10.02 $10.90 $ 9.59 $11.08
-------------------------------------------------------------
Income from investment operations:
Net investment income a ........................................ .37 .41 .41 .38 .31
Net realized and unrealized gains (losses) ..................... .85 (1.58) (.87) 1.70 (1.44)
-------------------------------------------------------------
Total from investment operations ................................ 1.22 (1.17) (.46) 2.08 (1.13)
-------------------------------------------------------------
Less distributions from:
Net investment income .......................................... (.39) (.41) (.40) (.41) (.36)
Net realized gains ............................................. -- (.47) (.02) (.36) --
-------------------------------------------------------------
Total distributions ............................................. (.39) (.88) (.42) (.77) (.36)
-------------------------------------------------------------
Net asset value, end of year .................................... $8.80 $ 7.97 $10.02 $10.90 $ 9.59
-------------------------------------------------------------
Total return b .................................................. 15.88% (12.88)% (4.58)% 23.79% (10.37)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................. $95,321 $32,802 $15,212 $8,819 $3,142
Ratios to average net assets:
Expenses ....................................................... 1.34% 1.31% 1.30% 1.34% 1.31%d
Net investment income .......................................... 4.49% 4.44% 3.74% 4.11% 4.12%d
Portfolio turnover rate ......................................... 25.81% 30.60% 34.03% 19.86% 33.99%
<FN>
a Based on average shares outstanding.
b Total return does not reflect contingent deferred sales charge, and is not
annualized for periods less than one year.
c For the period January 1, 1999 (effective date) to September 30, 1999.
d Annualized
</FN>
Annual Report | 89
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND (CONTINUED)
-------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS C 2003 2002 2001 2000 1999
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............................. $7.95 $10.01 $10.88 $ 9.57 $11.35
-------------------------------------------------------------
Income from investment operations:
Net investment income a ........................................ .36 .41 .41 .38 .43
Net realized and unrealized gains (losses) ..................... .86 (1.59) (.87) 1.69 (1.42)
-------------------------------------------------------------
Total from investment operations ................................ 1.22 (1.18) (.46) 2.07 (.99)
-------------------------------------------------------------
Less distributions from:
Net investment income .......................................... (.39) (.41) (.39) (.40) (.46)
Net realized gains ............................................. -- (.47) (.02) (.36) (.33)
-------------------------------------------------------------
Total distributions ............................................. (.39) (.88) (.41) (.76) (.79)
-------------------------------------------------------------
Net asset value, end of year .................................... $8.78 $ 7.95 $10.01 $10.88 $ 9.57
-------------------------------------------------------------
Total return b .................................................. 15.77% (12.90)% (4.50)% 23.65% (9.06)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................. $222,030 $67,428 $44,985 $37,837 $34,697
Ratios to average net assets:
Expenses ....................................................... 1.34% 1.29% 1.30% 1.34% 1.31%
Net investment income .......................................... 4.49% 4.43% 3.76% 4.22% 4.08%
Portfolio turnover rate ......................................... 25.81% 30.60% 34.03% 19.86% 33.99%
<FN>
a Based on average shares outstanding.
b Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
</FN>
90 | Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND (CONTINUED)
--------------------------
YEAR ENDED
SEPTEMBER 30,
CLASS R 2003 2002 C
--------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $7.96 $9.81
--------------------------
Income from investment operations:
Net investment income a .37 .32
Net realized and unrealized gains (losses) .86 (1.85)
--------------------------
Total from investment operations 1.23 (1.53)
--------------------------
Less distributions from net investment income (.40) (.32)
--------------------------
Net asset value, end of year $8.79 $7.96
--------------------------
Total return b 15.96% (16.01)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $1,142 $142
Ratios to average net assets:
Expenses 1.19% 1.16%d
Net investment income 4.64% 4.82%d
Portfolio turnover rate 25.81% 30.60%
<FN>
a Based on average shares outstanding.
b Total return does not reflect contingent deferred sales charge, and is not
annualized for periods less than one year.
c For the period January 1, 2002 (effective date) to September 30, 2002.
d Annualized
</FN>
Annual Report | 91
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND (CONTINUED)
-----------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS 2003 2002 2001 2000 1999
-----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............................. $7.99 $10.05 $10.92 $ 9.61 $11.39
-----------------------------------------------------------
Income from investment operations:
Net investment income a ........................................ .42 .47 .48 .44 .51
Net realized and unrealized gains (losses) ..................... .87 (1.60) (.87) 1.69 (1.42)
-----------------------------------------------------------
Total from investment operations ................................ 1.29 (1.13) (.39) 2.13 (.91)
-----------------------------------------------------------
Less distributions from:
Net investment income .......................................... (.44) (.46) (.46) (.46) (.54)
Net realized gains ............................................. -- (.47) (.02) (.36) (.33)
-----------------------------------------------------------
Total distributions ............................................. (.44) (.93) (.48) (.82) (.87)
-----------------------------------------------------------
Net asset value, end of year .................................... $8.84 $ 7.99 $10.05 $10.92 $ 9.61
-----------------------------------------------------------
Total return b .................................................. 16.61% (12.32)% (3.89)% 24.50% (8.48)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................. $47,167 $15,664 $8,829 $9,234 $8,058
Ratios to average net assets:
Expenses ....................................................... .69% .66% .65% .69% .66%
Net investment income .......................................... 5.14% 5.07% 4.39% 4.87% 4.82%
Portfolio turnover rate ......................................... 25.81% 30.60% 34.03% 19.86% 33.99%
<FN>
a Based on average shares outstanding.
b Total return is not annualized for periods less than one year.
</FN>
92 |See notes to financial statements. | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN UTILITIES FUND SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 80.5%
AGL Resources Inc. ........................................................... 500,000 $ 14,085,000
Allete Inc. .................................................................. 1,200,000 32,856,000
Alliant Energy Corp. ......................................................... 1,000,000 22,000,000
Ameren Corp. ................................................................. 700,000 30,037,000
American Electric Power Co. Inc. ............................................. 1,750,000 52,500,000
a Aquila Inc. .................................................................. 1,000,000 3,380,000
Atmos Energy Corp. ........................................................... 800,000 19,152,000
CenterPoint Energy Inc. ...................................................... 1,500,000 13,755,000
Central Vermont Public Service Corp. ......................................... 414,800 9,200,264
Cinergy Corp. ................................................................ 1,700,000 62,390,000
Constellation Energy Group Inc. .............................................. 600,000 21,468,000
Dominion Resources Inc. ...................................................... 575,000 35,592,500
DTE Energy Co. ............................................................... 1,200,000 44,268,000
Energy East Corp. ............................................................ 1,400,000 31,402,000
Entergy Corp. ................................................................ 1,420,000 76,893,000
Equitable Resources Inc. ..................................................... 425,000 17,467,500
Exelon Corp. ................................................................. 1,300,000 82,550,000
FirstEnergy Corp. ............................................................ 1,700,000 54,230,000
FPL Group Inc. ............................................................... 1,200,000 75,840,000
Great Plains Energy Inc. ..................................................... 450,000 13,644,000
Hawaiian Electric Industries Inc. ............................................ 300,000 13,059,000
KeySpan Corp. ................................................................ 1,100,000 38,588,000
National Grid Transco PLC (United Kingdom) ................................... 3,850,000 24,626,184
Nicor Inc. ................................................................... 550,000 19,327,000
NiSource Inc. ................................................................ 2,100,000 41,958,000
ONEOK Inc. ................................................................... 800,000 16,136,000
Pepco Holdings Inc. .......................................................... 1,888,700 32,636,736
Pinnacle West Capital Corp. .................................................. 575,000 20,412,500
PPL Corp. .................................................................... 122,200 5,004,090
Progress Energy Inc. ......................................................... 1,500,000 66,690,000
Puget Energy Inc. ............................................................ 1,262,600 28,320,118
SBC Communications Inc. ...................................................... 1,300,000 28,925,000
Scottish & Southern Energy PLC (United Kingdom) .............................. 1,640,000 16,566,207
Scottish Power PLC (United Kingdom) .......................................... 6,000,000 35,014,122
Sempra Energy ................................................................ 300,000 8,808,000
a Sierra Pacific Resources Co. ................................................. 1,378,809 6,687,223
Southern Co. ................................................................. 2,100,000 61,572,000
TECO Energy Inc. ............................................................. 375,900 5,194,938
TXU Corp. .................................................................... 1,000,000 23,560,000
UIL Holdings Corp. ........................................................... 274,200 9,594,258
United Utilities PLC (United Kingdom) ........................................ 2,500,007 19,064,682
a United Utilities PLC, A (United Kingdom) ..................................... 1,388,892 6,201,441
Vectren Corp. ................................................................ 900,000 21,258,000
Verizon Communications Inc. .................................................. 600,000 19,464,000
Wisconsin Energy Corp. ....................................................... 300,000 9,171,000
Xcel Energy Inc. ............................................................. 1,200,000 18,564,000
-----------------
TOTAL COMMON STOCKS (COST $1,138,798,095) .................................... 1,309,112,763
-----------------
Annual Report | 93
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN UTILITIES FUND SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS 10.1%
Ameren Corp., 9.75%, cvt. pfd. ............................................... 800,600 $ 22,616,950
American Electric Power Co. Inc., 9.25%, cvt. pfd. ........................... 450,000 20,047,500
CMS Energy Trust I, 7.75%, cvt. pfd. ......................................... 260,000 9,455,420
Dominion Resources Inc., 9.50%, cvt. pfd. .................................... 627,000 35,544,630
Duke Energy Corp., 8.00%, cvt. pfd. .......................................... 1,500,000 21,510,000
PPL Capital Fund Trust I, 7.75%, cvt. pfd., E ................................ 1,661,000 34,914,220
Sierra Pacific Resources Co., 9.00%, cvt. pfd., PIES ......................... 200,000 5,872,000
TXU Corp., 8.75%, cvt. pfd. .................................................. 400,000 13,740,000
-----------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $177,922,586) ....................... 163,700,720
-----------------
------------------
PRINCIPAL AMOUNT
------------------
BONDS 6.8%
CalEnergy Co. Inc., senior note, 8.48%, 9/15/28 .............................. $ 25,000,000 31,782,500
CMS Energy Corp., 9.875%, 10/15/07 ........................................... 8,500,000 9,137,500
Firstenergy Corp., senior note, 7.375%, 11/15/31 ............................. 25,000,000 25,684,000
NiSource Finance Corp., 7.50%, 11/15/03 ...................................... 15,000,000 15,094,110
PPL Capital Funding, 8.375%, 6/15/07 ......................................... 15,000,000 17,519,025
Utilicorp United Inc., FRN senior note, 9.95%, 2/01/11 ....................... 6,000,000 6,060,000
Utilicorp United Inc., senior note, 8.27%, 11/15/21 .......................... 6,100,000 5,093,500
-----------------
TOTAL BONDS (COST $99,121,237) ............................................... 110,370,635
-----------------
CONVERTIBLE BONDS (COST $9,000,000) .8%
Sierra Pacific Resources Co., cvt., 144A, 7.25%, 2/14/10 ..................... 9,000,000 12,600,000
-----------------
TOTAL LONG TERM INVESTMENTS (COST $1,424,841,918) ............................ 1,595,784,118
-----------------
------------------
SHARES
------------------
SHORT TERM INVESTMENT (COST $19,385,138) 1.2%
b Franklin Institutional Fiduciary Trust Money Market Portfolio ................ 19,385,138 19,385,138
-----------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $1,444,227,056) ......... 1,615,169,256
-----------------
94 | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN UTILITIES FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 1.3%
c Barclays Capital Inc., 1.08%, 10/01/03 (Maturity Value $3,448,206) ........... $ 3,448,103 $ 3,448,103
Collateralized by U.S. Government Agency Securities
c CS First Boston Corp., 1.15%, 10/01/03 (Maturity Value $4,000,256) ........... 4,000,128 4,000,128
Collateralized by U.S. Government Agency Securities
c Deutsche Bank Securities Inc., 1.13%, 10/01/03 (Maturity Value $4,000,252) ... 4,000,126 4,000,126
Collateralized by U.S. Government Agency Securities
c Goldman, Sachs & Co., 1.10%, 10/01/03 (Maturity Value $2,741,168) ............ 2,741,084 2,741,084
Collateralized by U.S. Government Agency Securities
c JP Morgan Securities, 1.10%, 10/01/03 (Maturity Value $4,000,243) ............ 4,000,121 4,000,121
Collateralized by U.S. Government Agency Securities
c Morgan Stanley & Co. Inc., 1.12%, 10/01/03 (Maturity Value $2,942,184) ....... 2,942,092 2,942,092
Collateralized by U.S. Government Agency Securities
-----------------
TOTAL REPURCHASE AGREEMENTS (COST $21,131,654) ............................... 21,131,654
-----------------
TOTAL INVESTMENTS (COST $1,465,358,710) 100.7% ............................... 1,636,300,910
OTHER ASSETS, LESS LIABILITIES (.7)% ......................................... (10,754,088)
-----------------
NET ASSETS 100.0% ............................................................ $ 1,625,546,822
-----------------
<FN>
See glossary of terms on page 96.
a Non-income producing
b See Note 6 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio.
c Collateral for loaned securities. See Note 1(f).
</FN>
Annual Report | See notes to financial statements. | 95
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)
GLOSSARY OF TERMS
ACES - Adjustable Convertible Exempt Securities
FRN - Floating Rate Notes
GP - Graduated Payment
PIES - Premium Income Equity Securities
PL - Project Loan
SF - Single Family
96 | Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
September 30, 2003
------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
------------------------------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .................................... $ 505,994,520 $ 1,030,448,040 $ 13,596,697,212
Cost - Non-controlled affiliated issuers ....................... -- -- 160,043,709
------------------------------------------------------
Value - Unaffiliated issuersa .................................. 611,464,637 1,851,530,813 13,970,998,835
Value - Non-controlled affiliated issuers ...................... -- -- 179,589,740
Repurchase agreements, at value and cost ........................ 23,765,898 -- 2,261,181,000
Cash ............................................................ -- 21,523 --
Receivables:
Investment securities sold ..................................... -- -- 148,590,293
Capital shares sold ............................................ 1,935,583 3,984,599 125,017,270
Dividends and interest ......................................... 252,624 1,330,899 126,590,383
------------------------------------------------------
Total assets ............................................... 637,418,742 1,856,867,834 16,811,967,521
------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ................................ -- -- 488,238,877
Capital shares redeemed ........................................ 459,991 1,319,871 16,412,598
Affiliates ..................................................... 701,215 2,161,545 14,916,794
Shareholders ................................................... 97,279 450,241 2,635,134
Unaffiliated transfer agent fees ............................... 85,875 484,188 969,565
Payable upon return of securities loaned [Note 1(f)] ............ -- -- 173,838,326
Other liabilities ............................................... 29,375 71,200 214,809
------------------------------------------------------
Total liabilities .......................................... 1,373,735 4,487,045 697,226,103
------------------------------------------------------
Net assets, at value ...................................... $ 636,045,007 $ 1,852,380,789 $ 16,114,741,418
------------------------------------------------------
Net assets consist of:
Undistributed net investment income ............................. $ -- $ 1,248,169 $ 22,817,197
Net unrealized appreciation (depreciation) ...................... 105,470,117 821,082,773 393,908,355
Accumulated net realized gain (loss) ............................ (78,428,746) (252,009,344) 43,180,159
Capital shares .................................................. 609,003,636 1,282,059,191 15,654,835,707
------------------------------------------------------
Net assets, at value ...................................... $ 636,045,007 $ 1,852,380,789 $ 16,114,741,418
------------------------------------------------------
<FN>
a The Franklin Income Fund includes $169,703,382 of securities loaned. See Note 1(f).
</FN>
Annual Report | 97
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
September 30, 2003
-----------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
-----------------------------------------------------
CLASS A:
Net assets, at value .............................................. $ 558,687,457 $ 1,433,741,711 $ 9,640,156,482
-----------------------------------------------------
Shares outstanding ................................................ 27,694,255 53,366,249 4,282,157,064
-----------------------------------------------------
Net asset value per share a ....................................... $20.17 $26.87 $2.25
-----------------------------------------------------
Maximum offering price per share (net asset value per share / 94.25%,
94.25%, and 95.75%, respectively) ................................. $21.40 $28.51 $2.35
-----------------------------------------------------
CLASS B:
Net assets, at value .............................................. $ 10,405,932 $ 103,498,851 $ 2,083,782,791
-----------------------------------------------------
Shares outstanding ................................................ 525,720 3,932,339 928,365,601
-----------------------------------------------------
Net asset value and maximum offering price per share a ............ $19.79 $26.32 $2.24
-----------------------------------------------------
CLASS B1:
Net assets, at value .............................................. -- -- $ 495,003,553
-----------------------------------------------------
Shares outstanding ................................................ -- -- 219,864,979
-----------------------------------------------------
Net asset value and maximum offering price per share a ............ -- -- $2.25
-----------------------------------------------------
CLASS C:
Net assets, at value .............................................. $ 66,951,618 $ 259,169,414 $ 3,764,372,343
-----------------------------------------------------
Shares outstanding ................................................ 3,418,005 9,932,144 1,664,104,933
-----------------------------------------------------
Net asset value per share a ....................................... $19.59 $26.09 $2.26
-----------------------------------------------------
Maximum offering price per share (net asset value per share / 99%) $19.79 $26.35 $2.28
-----------------------------------------------------
CLASS R:
Net assets, at value .............................................. -- $ 14,754,743 $ 36,417,183
-----------------------------------------------------
Shares outstanding ................................................ -- 551,864 16,306,219
-----------------------------------------------------
Net asset value and maximum offering price per share a ............ -- $26.74 $2.23
-----------------------------------------------------
ADVISOR CLASS:
Net assets, at value .............................................. -- $ 41,216,070 $ 95,009,066
-----------------------------------------------------
Shares outstanding ................................................ -- 1,531,847 42,367,270
-----------------------------------------------------
Net asset value and maximum offering price per share .............. -- $26.91 $2.24
-----------------------------------------------------
<FN>
a Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
</FN>
98 | Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
September 30, 2003
-----------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
-----------------------------------
Assets:
Investments in securities:
Cost .............................................................................. $ 8,951,107,273 $ 1,444,227,056
-----------------------------------
Value a ........................................................................... 9,173,470,899 1,615,169,256
Repurchase agreements, at value and cost ........................................... 131,310,000 21,131,654
Cash ............................................................................... -- 660,961
Receivables:
Investment securities sold ........................................................ 69,927,453 6,622,617
Capital shares sold ............................................................... 7,849,885 3,392,056
Dividends and interest ............................................................ 43,488,813 3,866,628
-----------------------------------
Total assets .................................................................. 9,426,047,050 1,650,843,172
-----------------------------------
Liabilities:
Payables:
Investment securities purchased ................................................... 251,547,656 599,900
Capital shares redeemed ........................................................... 18,682,774 1,419,704
Affiliates ........................................................................ 6,840,470 1,291,779
Shareholders ...................................................................... 4,839,738 609,765
Unaffiliated transfer agent fees .................................................. 743,523 167,095
Funds advanced by custodian ........................................................ 1,014,987 --
Payable upon return of securities loaned [Note 1(f)] ............................... -- 21,131,654
Other liabilities .................................................................. 158,960 76,453
-----------------------------------
Total liabilities ............................................................. 283,828,108 25,296,350
-----------------------------------
Net assets, at value ......................................................... $ 9,142,218,942 $ 1,625,546,822
-----------------------------------
Net assets consist of:
Undistributed net investment income ................................................ $ 24,101,769 $ 774,241
Net unrealized appreciation (depreciation) ......................................... 222,363,626 170,942,200
Accumulated net realized gain (loss) ............................................... (387,706,388) (97,588,658)
Capital shares ..................................................................... 9,283,459,935 1,551,419,039
-----------------------------------
Net assets, at value ......................................................... $ 9,142,218,942 $ 1,625,546,822
-----------------------------------
<FN>
a The Franklin Utilities Fund includes $20,347,258 of securities loaned. See Note 1(f).
</FN>
Annual Report | 99
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
September 30, 2003
-----------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
-----------------------------------
CLASS A:
Net assets, at value ............................................................... $ 7,286,317,142 $ 1,259,885,786
-----------------------------------
Shares outstanding ................................................................. 1,069,524,083 143,107,441
-----------------------------------
Net asset value per share a ........................................................ $6.81 $8.80
-----------------------------------
Maximum offering price per share (net asset value per share / 95.75%) .............. $7.11 $9.19
-----------------------------------
CLASS B:
Net assets, at value ............................................................... $ 678,814,047 $ 95,321,351
-----------------------------------
Shares outstanding ................................................................. 99,774,027 10,833,323
-----------------------------------
Net asset value and maximum offering price per sharea .............................. $6.80 $8.80
-----------------------------------
CLASS C:
Net assets, at value ............................................................... $ 814,635,350 $ 222,030,130
-----------------------------------
Shares outstanding ................................................................. 120,082,221 25,277,379
-----------------------------------
Net asset value per share a ........................................................ $6.78 $8.78
-----------------------------------
Maximum offering price per share (net asset value per share / 99%) ................. $6.85 $8.87
-----------------------------------
CLASS R:
Net assets, at value ............................................................... $ 54,041,572 $ 1,142,106
-----------------------------------
Shares outstanding ................................................................. 7,936,267 129,874
-----------------------------------
Net asset value and maximum offering price per share a ............................. $6.81 $8.79
-----------------------------------
ADVISOR CLASS:
Net assets, at value ............................................................... $ 308,410,831 $ 47,167,449
-----------------------------------
Shares outstanding ................................................................. 45,185,749 5,338,301
-----------------------------------
Net asset value and maximum offering price per share ............................... $6.83 $8.84
-----------------------------------
<FN>
a Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
</FN>
100 | See notes to financial statements. | Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS
for the year ended September 30, 2003
-------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
-------------------------------------------------
Investment income:
Dividends:
Unaffiliated issuers ................................................ $ 2,719,303 $ 23,665,630 $ 311,727,419
Non-controlled affiliated issuers (Note 9) .......................... -- -- 3,908,750
Interest ............................................................. 775,460 -- 527,796,509
-------------------------------------------------
Total investment income ......................................... 3,494,763 23,665,630 843,432,678
-------------------------------------------------
Expenses:
Management fees (Note 3) ............................................. 2,629,072 7,978,241 52,366,332
Distribution fees (Note 3)
Class A ............................................................. 1,190,019 3,354,736 11,094,884
Class B ............................................................. 70,539 888,537 11,552,320
Class B1 ............................................................ -- -- 2,952,918
Class C ............................................................. 579,726 2,475,579 15,629,354
Class R ............................................................. -- 46,602 98,733
Transfer agent fees (Note 3) ......................................... 1,497,994 5,172,921 11,618,767
Custodian fees ....................................................... 4,609 15,396 217,265
Reports to shareholders .............................................. 68,320 557,698 648,329
Registration and filing fees ......................................... 44,812 93,002 764,464
Professional fees .................................................... 34,259 49,779 118,904
Directors' fees and expenses ......................................... 3,564 11,574 71,820
Other ................................................................ 26,236 117,652 632,402
-------------------------------------------------
Total expenses .................................................. 6,149,150 20,761,717 107,766,492
-------------------------------------------------
Net investment income (loss) ................................... (2,654,387) 2,903,913 735,666,186
-------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ............................................... (16,751,832) (76,197,471) 208,900,631
Non-controlled affiliated issuers (Note 9) ......................... -- -- (787,282)
Foreign currency transactions ....................................... 3,180 204 (5,927,509)
-------------------------------------------------
Net realized gain (loss) ....................................... (16,748,652) (76,197,267) 202,185,840
Net unrealized appreciation (depreciation) on:
Investments .......................................................... 163,452,859 408,465,676 1,869,967,307
Translation of assets and liabilities denominated in foreign currencies -- -- 10,002
-------------------------------------------------
Net unrealized appreciation (depreciation) ..................... 163,452,859 408,465,676 1,869,977,309
-------------------------------------------------
Net realized and unrealized gain (loss) ............................... 146,704,207 332,268,409 2,072,163,149
-------------------------------------------------
Net increase (decrease) in net assets resulting from operations ....... $ 144,049,820 $ 335,172,322 $ 2,807,829,335
-------------------------------------------------
Annual Report | 101
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended September 30, 2003
----------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
----------------------------------
Investment income:
Dividends ............................................................................. $ 1,345,046 $ 71,190,807
Interest .............................................................................. 459,014,005 9,477,194
----------------------------------
Total investment income .......................................................... 460,359,051 80,668,001
----------------------------------
Expenses:
Management fees (Note 3) .............................................................. 42,902,198 6,532,837
Distribution fees (Note 3)
Class A .............................................................................. 9,509,881 1,634,873
Class B .............................................................................. 4,344,330 408,371
Class C .............................................................................. 5,756,089 902,243
Class R .............................................................................. 194,929 3,566
Transfer agent fees (Note 3) .......................................................... 10,681,026 2,551,024
Custodian fees ........................................................................ 100,471 59,864
Reports to shareholders ............................................................... 506,781 141,194
Registration and filing fees .......................................................... 360,260 109,538
Professional fees ..................................................................... 175,051 64,646
Directors' fees and expenses .......................................................... 64,652 9,137
Other ................................................................................. 586,534 81,136
----------------------------------
Total expenses ................................................................... 75,182,202 12,498,429
----------------------------------
Net investment income ........................................................... 385,176,849 68,169,572
----------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .......................................................................... 6,367,829 (63,014,662)
Foreign currency transactions ........................................................ -- 81,905
----------------------------------
Net realized gain (loss) ........................................................ 6,367,829 (62,932,757)
Net unrealized appreciation (depreciation) on:
Investments ........................................................................... (153,242,028) 202,302,969
Translation of assets and liabilities denominated in foreign currencies ............... -- (76,804)
----------------------------------
Net unrealized appreciation (depreciation) ...................................... (153,242,028) 202,226,165
----------------------------------
Net realized and unrealized gain (loss) ................................................ (146,874,199) 139,293,408
----------------------------------
Net increase (decrease) in net assets resulting from operations $ 238,302,650 $ 207,462,980
----------------------------------
102 |See notes to financial statements. | Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended September 30, 2003 and 2002
-------------------------------------------------------------------------
FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND
-------------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ................. $ (2,654,387) $ 229,536 $ 2,903,913 $ 2,121,019
Net realized gain (loss) from investments and
foreign currency transactions ............... (16,748,652) (52,117,197) (76,197,267) (175,811,873)
Net unrealized appreciation (depreciation) on
investments ................................. 163,452,859 (46,130,792) 408,465,676 (250,404,911)
-------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ............................. 144,049,820 (98,018,453) 335,172,322 (424,095,765)
Distributions to shareholders from:
Net investment income:
Class A ..................................... -- (8,189,726) (2,180,220) (9,216,613)
Class B ..................................... -- (49,356) -- --
Class C ..................................... -- (545,192) -- --
Class R ..................................... -- -- (9,229) --
Advisor Class ............................... -- -- (137,491) (277,689)
Tax return of capital:
Class A ..................................... -- (427,205) -- --
Class B ..................................... -- (2,575) -- --
Class C ..................................... -- (28,439) -- --
Net realized gains:
Class A ..................................... -- -- -- (2,687,006)
Class B ..................................... -- -- -- (118,205)
Class C ..................................... -- -- -- (513,203)
Advisor Class ............................... -- -- -- (53,163)
-------------------------------------------------------------------------
Total distributions to shareholders ........... -- (9,242,493) (2,326,940) (12,865,879)
Capital share transactions: (Note 2)
Class A ..................................... 18,073,256 (22,511,903) (78,190,367) (66,776,185)
Class B ..................................... 3,561,921 790,980 11,719,589 31,747,529
Class C ..................................... 176,270 (13,585,500) (19,434,571) (12,886,755)
Class R ..................................... -- -- 10,272,806 3,425,769
Advisor Class ............................... -- -- 7,755,631 2,232,450
-------------------------------------------------------------------------
Total capital share transactions .............. 21,811,447 (35,306,423) (67,876,912) (42,257,192)
Net increase (decrease) in net assets .... 165,861,267 (142,567,369) 264,968,470 (479,218,836)
Net assets:
Beginning of year ............................. 470,183,740 612,751,109 1,587,412,319 2,066,631,155
-------------------------------------------------------------------------
End of year ................................... $ 636,045,007 $ 470,183,740 $ 1,852,380,789 $ 1,587,412,319
-------------------------------------------------------------------------
Undistributed net investment income included
in net assets:
End of year .................................. $ -- $ -- $ 1,248,169 $ 656,058
-------------------------------------------------------------------------
Annual Report | 103
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
for the years ended September 30, 2003 and 2002
------------------------------------------------------------------------------
FRANKLIN FRANKLIN
INCOME FUND U.S. GOVERNMENT SECURITIES FUND
------------------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .................... $ 735,666,186 $ 560,451,952 $ 385,176,849 $ 449,643,072
Net realized gain (loss) from investments
and foreign currency transactions ....... 202,185,840 87,316,907 6,367,829 10,846,618
Net unrealized appreciation (depreciation)
on investments and translation of assets
and liabilities denominated in foreign
currencies .............................. 1,869,977,309 (1,116,443,579) (153,242,028) 109,857,655
------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ........... 2,807,829,335 (468,674,720) 238,302,650 570,347,345
Distributions to shareholders from:
Net investment income:
Class A ................................. (550,726,670) (496,910,091) (401,413,321) (433,519,935)
Class B ................................. (73,650,217) (18,682,412) (31,260,885) (19,163,615)
Class B1 ................................ (32,370,788) (36,257,920) -- --
Class C ................................. (160,832,793) (100,240,819) (41,821,072) (29,680,378)
Class R ................................. (1,320,431) (108,411) (1,798,291) (153,411)
Advisor Class ........................... (3,320,435) (2,301,814) (16,202,012) (3,469,800)
Net realized gains:
Class A ................................. (16,155,200) (42,405,430) -- --
Class B ................................. (1,716,893) (389,987) -- --
Class B1 ................................ (1,110,777) (3,471,522) -- --
Class C ................................. (4,321,592) (8,157,764) -- --
Class R ................................. (24,873) -- -- --
Advisor Class ........................... (84,254) (170,087) -- --
------------------------------------------------------------------------------
Total distributions to shareholders ....... (845,634,923) (709,096,257) (492,495,581) (485,987,139)
Capital share transactions: (Note 2)
Class A ................................. 2,373,919,438 872,446,979 (238,733,117) 462,309,921
Class B ................................. 1,325,085,686 629,193,788 137,202,182 328,065,399
Class B1 ................................ (12,337,854) 45,887,505 -- --
Class C ................................. 1,810,160,408 672,956,080 36,448,805 372,809,338
Class R ................................. 26,634,343 6,992,200 41,088,097 13,855,685
Advisor Class ........................... 56,697,121 12,396,021 117,998,378 176,082,110
------------------------------------------------------------------------------
Total capital share transactions .......... 5,580,159,142 2,239,872,573 94,004,345 1,353,122,453
Net increase (decrease) in net assets 7,542,353,554 1,062,101,596 (160,188,586) 1,437,482,659
Net assets:
Beginning of year ......................... 8,572,387,864 7,510,286,268 9,302,407,528 7,864,924,869
------------------------------------------------------------------------------
End of year ............................... $ 16,114,741,418 $ 8,572,387,864 $ 9,142,218,942 $ 9,302,407,528
Undistributed net investment income included
in net assets:
End of year .............................. $ 22,817,197 $ (34,125,473) $ 24,101,769 $ (108,213)
------------------------------------------------------------------------------
104 | Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
for the years ended September 30, 2003 and 2002
---------------------------------
FRANKLIN
UTILITIES FUND
2003 2002
---------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................................................. $ 68,169,572 $ 67,070,608
Net realized gain (loss) from investments and foreign currency transactions ....... (62,932,757) (32,548,364)
Net unrealized appreciation (depreciation) on investments and translation of assets
and liabilities denominated in foreign currencies ................................ 202,226,165 (208,393,294)
---------------------------------
Net increase (decrease) in net assets resulting from operations ............... 207,462,980 (173,871,050)
Distributions to shareholders from:
Net investment income:
Class A .......................................................................... (59,182,929) (61,060,060)
Class B .......................................................................... (3,015,514) (1,085,790)
Class C .......................................................................... (6,581,692) (2,503,014)
Class R .......................................................................... (38,182) (2,324)
Advisor Class .................................................................... (1,485,977) (696,994)
Net realized gains:
Class A .......................................................................... -- (62,032,234)
Class B .......................................................................... -- (754,745)
Class C .......................................................................... -- (2,139,071)
Advisor Class .................................................................... -- (404,012)
---------------------------------
Total distributions to shareholders ................................................ (70,304,294) (130,678,244)
Capital share transactions: (Note 2)
Class A .......................................................................... 55,030,287 21,814,599
Class B .......................................................................... 56,154,888 24,057,068
Class C .......................................................................... 141,064,759 36,339,807
Class R .......................................................................... 924,022 162,442
Advisor Class .................................................................... 28,963,358 10,372,642
---------------------------------
Total capital share transactions ................................................... 282,137,314 92,746,558
Net increase (decrease) in net assets ......................................... 419,296,000 (211,802,736)
Net assets:
Beginning of year .................................................................. 1,206,250,822 1,418,053,558
---------------------------------
End of year ........................................................................ $1,625,546,822 $1,206,250,822
---------------------------------
Undistributed net investment income included in net assets:
End of year ........................................................................ $ 774,241 $ 2,937,161
---------------------------------
Annual Report | See notes to financial statements. | 105
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Custodian Funds, Inc. (the Company) is registered under the Investment
Company Act of 1940 as a diversified, open-end investment company, consisting of
five series (the Funds). The Funds and their investment objectives are:
- --------------------------------------------------------------------------------------------------------
CAPITAL GROWTH GROWTH AND INCOME CURRENT INCOME
- --------------------------------------------------------------------------------------------------------
Franklin DynaTech Fund Franklin Income Fund Franklin U.S. Government Securities Fund
Franklin Growth Fund Franklin Utilities Fund
The following summarizes the Funds' significant accounting policies.
A. SECURITY VALUATION
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the last reported sales price. Over-the-counter securities and listed
securities for which no sale is reported are valued within the range of the
latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Directors.
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
106 | Annual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. REPURCHASE AGREEMENTS
Certain Funds may enter into a joint repurchase agreement whereby their
uninvested cash balance is deposited into a joint cash account to be used to
invest in one or more repurchase agreements. The value and face amount of the
joint repurchase agreement are allocated to the Funds based on their pro-rata
interest. Certain Funds may enter into repurchase agreements which are accounted
for as a loan by the Fund to the seller, collateralized by securities which are
delivered to the Fund's custodian. The market value, including accrued interest,
of the initial collateralization is required to be at least 102% of the dollar
amount invested by the Funds, with the value of the underlying securities marked
to market daily to maintain coverage of at least 100%. At September 30, 2003,
all repurchase agreements held by the Funds had been entered into on that date.
D. SECURITIES PURCHASED ON A WHEN-ISSUED, DELAYED DELIVERY, OR TBA BASIS
The Funds may purchase securities on a when-issued, delayed delivery, or
to-be-announced (TBA) basis, with payment and delivery scheduled for a future
date. These transactions are subject to market fluctuations and are subject to
the risk that the value at delivery may be more or less than the trade date
purchase price. Although the Funds will generally purchase these securities with
the intention of holding the securities, they may sell the securities before the
settlement date. Sufficient assets have been segregated for these securities.
E. RESERVE FOR PAYDOWN GAINS/LOSSES
The Franklin U.S. Government Securities Fund provides estimates, based on
historical experience, for anticipated paydown gains and losses. The reserve is
recorded as a reduction or increase to net assets as noted on the Statement of
Investments and is included in the unrealized appreciation/depreciation shown on
the accompanying financial statements.
F. SECURITIES LENDING
The Franklin Income Fund and the Franklin Utilities Fund loan securities to
certain brokers for which they received cash collateral against the loaned
securities in an amount equal to at least 102% of the market value of the loaned
securities. The collateral is invested in short-term instruments as noted in the
Statement of Investments. These funds received interest income of $1,448,615 and
$70,488, respectively, from the investment of cash collateral, adjusted by
lender fees and broker rebates. The funds bear the risk of loss with respect to
the investment of the collateral. The securities lending agent has agreed to
indemnify the funds in the case of default of any securities borrower.
G. INCOME TAXES
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
Annual Report | 107
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Discounts and premiums
on securities purchased are amortized over the lives of the respective
securities. Dividend income and distributions to shareholders are recorded on
the ex-dividend date.
Common expenses incurred by the Company are allocated among the Funds based on
the ratio of net assets of each Fund to the combined net assets. Other expenses
are charged to each Fund on a specific identification basis.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
I. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
J. GUARANTEES AND INDEMNIFICATIONS
Under the Funds' organizational documents, its officers and trustees are
indemnified against certain liability arising out of the performance of their
duties to the Funds. Additionally, in the normal course of business, the Funds
enter into contracts with service providers that contain general indemnification
clauses. The Funds' maximum exposure under these arrangements is unknown as this
would involve future claims that may be made against the Funds that have not yet
occurred. However, based on experience, the Funds expect the risk of loss to be
remote.
2. CAPITAL STOCK
The classes of shares offered within each of the Funds are indicated below. Each
class of shares differs by its initial sales load, contingent deferred sales
charges, distribution fees, voting rights on matters affecting a single class
and its exchange privilege.
- --------------------------------------------------------------------------------------------------------
CLASS A, CLASS B CLASS A, CLASS B, CLASS C, CLASS A, CLASS B, CLASS B1,
& CLASS C CLASS R & ADVISOR CLASS CLASS C, CLASS R & ADVISOR CLASS
- --------------------------------------------------------------------------------------------------------
Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund
Franklin U.S. Government Securities Fund
Franklin Utilities Fund
108 | Annual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
At September 30, 2003, there were 32 billion shares authorized ($.01 par value),
allocated to the Funds as follows (in millions):
----------------------------------------------------------
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN
DYNATECH GROWTH INCOME SECURITIES UTILITIES
FUND FUND FUND FUND FUND
----------------------------------------------------------
Class A .................... 250 250 7,600 2,500 400
Class B .................... 500 750 2,000 1,000 750
Class B1 ................... -- -- 1,000 -- --
Class C .................... 250 250 3,600 2,500 400
Class R .................... -- 1,000 1,000 1,000 1,000
Advisor Class .............. -- 1,000 1,000 1,000 1,000
Transactions in the Funds' shares were as follows:
----------------------------------------------------------------
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------
CLASS A SHARES:
Year ended September 30, 2003
Shares sold ...................... 5,979,321 $ 110,050,574 7,379,824 $ 183,219,424
Shares issued in reinvestment of
distributions ................... -- -- 79,146 1,984,183
Shares redeemed .................. (5,174,158) (91,977,318) (10,859,570) (263,393,974)
----------------------------------------------------------------
Net increase (decrease) .......... 805,163 $ 18,073,256 (3,400,600) $ (78,190,367)
----------------------------------------------------------------
Year ended September 30, 2002
Shares sold ...................... 5,550,267 $ 106,054,120 8,953,204 $ 261,053,690
Shares issued in reinvestment of
distributions ................... 323,435 6,598,020 348,327 10,818,933
Shares redeemed .................. (7,234,225) (135,164,043) (12,138,018) (338,648,808)
----------------------------------------------------------------
Net increase (decrease) .......... (1,360,523) $ (22,511,903) (2,836,487) $ (66,776,185)
----------------------------------------------------------------
CLASS B SHARES:
Year ended September 30, 2003
Shares sold ...................... 299,381 $ 5,444,460 1,190,166 $ 28,759,271
Shares redeemed .................. (107,026) (1,882,539) (721,310) (17,039,682)
----------------------------------------------------------------
Net increase (decrease) .......... 192,355 $ 3,561,921 468,856 $ 11,719,589
----------------------------------------------------------------
Year ended September 30, 2002
Shares sold ...................... 99,271 $ 1,869,582 1,632,576 $ 47,156,309
Shares issued in reinvestment of
distributions ................... 2,467 50,091 3,622 111,554
Shares redeemed .................. (63,080) (1,128,693) (579,378) (15,520,334)
----------------------------------------------------------------
Net increase (decrease) .......... 38,658 $ 790,980 1,056,820 $ 31,747,529
----------------------------------------------------------------
Annual Report | 109
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
----------------------------------------------------------------
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------
CLASS C SHARES:
Year ended September 30, 2003
Shares sold ...................... 775,065 $ 13,737,768 1,813,481 $ 43,685,324
Shares redeemed .................. (802,705) (13,561,498) (2,679,771) (63,119,895)
----------------------------------------------------------------
Net increase (decrease) .......... (27,640) $ 176,270 (866,290) $ (19,434,571)
----------------------------------------------------------------
Year ended September 30, 2002
Shares sold ...................... 441,036 $ 8,305,028 2,341,188 $ 67,032,199
Shares issued in reinvestment of
distributions ................... 26,309 528,291 15,738 480,633
Shares redeemed .................. (1,230,305) (22,418,819) (2,963,679) (80,399,587)
----------------------------------------------------------------
Net increase (decrease) .......... (762,960) $ (13,585,500) (606,753) $ (12,886,755)
----------------------------------------------------------------
CLASS R SHARES:
Year ended September 30, 2003
Shares sold ...................... 502,954 $ 12,216,083
Shares issued in reinvestment of
distributions ................... 365 9,135
Shares redeemed .................. (78,318) (1,952,412)
--------------------------
Net increase (decrease) .......... 425,001 $ 10,272,806
--------------------------
Year ended September 30, 2002 a
Shares sold ...................... 146,795 $ 3,985,062
Shares redeemed .................. (19,932) (559,293)
--------------------------
Net increase (decrease) .......... 126,863 $ 3,425,769
--------------------------
ADVISOR CLASS SHARES:
Year ended September 30, 2003
Shares sold ...................... 580,561 $ 14,712,785
Shares issued in reinvestment of
distributions ................... 5,208 130,503
Shares redeemed .................. (297,671) (7,087,657)
--------------------------
Net increase (decrease) .......... 288,098 $ 7,755,631
--------------------------
Year ended September 30, 2002
Shares sold ...................... 233,419 $ 6,920,264
Shares issued in reinvestment of
distributions ................... 10,474 325,342
Shares redeemed .................. (166,496) (5,013,156)
--------------------------
Net increase (decrease) .......... 77,397 $ 2,232,450
--------------------------
<FN>
a For the period January 1, 2002 (effective date) to September 30, 2002.
</FN>
110 | Annual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
-------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT
FRANKLIN INCOME FUND SECURITIES FUND
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
CLASS A SHARES:
Year ended September 30, 2003
Shares sold ................... 1,420,460,711 $ 2,978,192,401 178,073,164 $ 1,232,868,939
Shares issued in reinvestment
of distributions ............. 166,636,905 340,980,517 35,293,588 243,128,476
Shares redeemed ............... (462,636,792) (945,253,480) (248,820,975) (1,714,730,532)
-------------------------------------------------------------------
Net increase (decrease) ....... 1,124,460,824 $ 2,373,919,438 (35,454,223) $ (238,733,117)
-------------------------------------------------------------------
Year ended September 30, 2002
Shares sold ................... 694,153,524 $ 1,478,573,971 210,759,573 $ 1,451,877,583
Shares issued in reinvestment
of distributions ............. 146,862,863 312,435,854 35,269,132 242,076,771
Shares redeemed ............... (436,991,609) (918,562,846) (179,198,072) (1,231,644,433)
-------------------------------------------------------------------
Net increase (decrease) ....... 404,024,778 $ 872,446,979 66,830,633 $ 462,309,921
-------------------------------------------------------------------
CLASS B SHARES:
Year ended September 30, 2003
Shares sold ................... 663,029,400 $ 1,384,557,403 41,548,785 $ 287,642,126
Shares issued in reinvestment
of distributions ............. 21,203,582 43,812,599 3,141,416 21,609,158
Shares redeemed ............... (50,454,482) (103,284,316) (25,090,330) (172,049,102)
-------------------------------------------------------------------
Net increase (decrease) ....... 633,778,500 $ 1,325,085,686 19,599,871 $ 137,202,182
-------------------------------------------------------------------
Year ended September 30, 2002b
Shares sold ................... 310,395,948 $ 660,909,583 53,145,903 $ 366,091,581
Shares issued in reinvestment
of distributions ............. 5,099,354 10,620,920 1,861,552 12,776,200
Shares redeemed ............... (20,908,201) (42,336,715) (7,396,751) (50,802,382)
-------------------------------------------------------------------
Net increase (decrease) ....... 294,587,101 $ 629,193,788 47,610,704 $ 328,065,399
-------------------------------------------------------------------
CLASS B1 SHARES:
Year ended September 30, 2003
Shares sold ................... 12,538,502 $ 25,859,856
Shares issued in reinvestment
of distributions ............. 8,955,929 18,230,536
Shares redeemed ............... (27,953,932) (56,428,246)
-------------------------------
Net increase (decrease) ....... (6,459,501) $ (12,337,854)
-------------------------------
Year ended September 30, 2002
Shares sold ................... 41,081,481 $ 88,810,144
Shares issued in reinvestment
of distributions ............. 10,155,094 21,645,102
Shares redeemed ............... (31,027,810) (64,567,741)
-------------------------------
Net increase (decrease) ....... 20,208,765 $ 45,887,505
-------------------------------
<FN>
b For the period November 1, 2001 (effective date) to September 30, 2002 for the
Franklin Income Fund.
</FN>
Annual Report | 111
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
-------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT
FRANKLIN INCOME FUND SECURITIES FUND
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
CLASS C SHARES:
Year ended September 30, 2003
Shares sold .................... 951,930,027 $ 2,009,359,415 57,357,026 $ 396,061,501
Shares issued in reinvestment
of distributions .............. 50,130,794 103,732,412 4,055,220 27,836,743
Shares redeemed ................ (147,253,703) (302,931,419) (56,619,048) (387,449,439)
-------------------------------------------------------------------
Net increase (decrease) ........ 854,807,118 $ 1,810,160,408 4,793,198 $ 36,448,805
-------------------------------------------------------------------
Year ended September 30, 2002
Shares sold .................... 385,174,266 $ 823,907,725 76,997,060 $ 529,065,309
Shares issued in reinvestment
of distributions .............. 30,438,475 64,855,000 2,813,177 19,255,671
Shares redeemed ................ (103,269,316) (215,806,645) (25,632,581) (175,511,642)
-------------------------------------------------------------------
Net increase (decrease) ........ 312,343,425 $ 672,956,080 54,177,656 $ 372,809,338
-------------------------------------------------------------------
CLASS R SHARES:
Year ended September 30, 2003
Shares sold .................... 14,633,211 $ 30,251,574 8,174,860 $ 56,511,590
Shares issued in reinvestment
of distributions .............. 632,563 1,303,713 261,116 1,791,684
Shares redeemed ................ (2,327,993) (4,920,944) (2,508,245) (17,215,177)
-------------------------------------------------------------------
Net increase (decrease) ........ 12,937,781 $ 26,634,343 5,927,731 $ 41,088,097
-------------------------------------------------------------------
Year ended September 30, 2002c
Shares sold .................... 3,653,701 $ 7,553,477 2,082,175 $ 14,364,295
Shares issued in reinvestment
of distributions .............. 51,478 103,793 22,194 153,033
Shares redeemed ................ (336,741) (665,070) (95,833) (661,643)
-------------------------------------------------------------------
Net increase (decrease) ........ 3,368,438 $ 6,992,200 2,008,536 $ 13,855,685
-------------------------------------------------------------------
ADVISOR CLASS SHARES:
Year ended September 30, 2003
Shares sold .................... 29,225,067 $ 63,085,044 21,146,530 $ 147,068,753
Shares issued in reinvestment
of distributions .............. 1,253,004 2,564,820 1,903,612 13,126,237
Shares redeemed ................ (4,343,162) (8,952,743) (6,189,973) (42,196,612)
-------------------------------------------------------------------
Net increase (decrease) ........ 26,134,909 $ 56,697,121 16,860,169 $ 117,998,378
-------------------------------------------------------------------
Year ended September 30, 2002
Shares sold .................... 8,683,964 $ 18,350,663 25,694,106 $ 177,748,711
Shares issued in reinvestment
of distributions .............. 932,885 1,971,056 416,646 2,873,117
Shares redeemed ................ (3,922,883) (7,925,698) (659,856) (4,539,718)
-------------------------------------------------------------------
Net increase (decrease) ........ 5,693,966 $ 12,396,021 25,450,896 $ 176,082,110
-------------------------------------------------------------------
<FN>
c For the period January 1, 2002 (effective date) to September 30, 2002.
</FN>
112 | Annual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
--------------------------
FRANKLIN UTILITIES FUND
--------------------------
SHARES AMOUNT
--------------------------
CLASS A SHARES:
Year ended September 30, 2003
Shares sold ....................................................... 25,175,427 $ 211,667,227
Shares issued in reinvestment of distributions .................... 5,384,148 44,381,490
Shares redeemed ................................................... (24,337,215) (201,018,430)
--------------------------
Net increase (decrease) ........................................... 6,222,360 $ 55,030,287
--------------------------
Year ended September 30, 2002
Shares sold ....................................................... 14,035,953 $ 131,501,118
Shares issued in reinvestment of distributions .................... 10,405,962 96,339,850
Shares redeemed ................................................... (22,214,088) (206,026,369)
--------------------------
Net increase (decrease) ........................................... 2,227,827 $ 21,814,599
--------------------------
CLASS B SHARES:
Year ended September 30, 2003
Shares sold ....................................................... 7,731,921 $ 64,628,039
Shares issued in reinvestment of distributions .................... 177,803 1,479,606
Shares redeemed ................................................... (1,194,549) (9,952,757)
--------------------------
Net increase (decrease) ........................................... 6,715,175 $ 56,154,888
--------------------------
Year ended September 30, 2002
Shares sold ....................................................... 2,896,810 $ 26,711,865
Shares issued in reinvestment of distributions .................... 132,490 1,220,320
Shares redeemed ................................................... (428,594) (3,875,117)
--------------------------
Net increase (decrease) ........................................... 2,600,706 $ 24,057,068
--------------------------
CLASS C SHARES:
Year ended September 30, 2003
Shares sold ....................................................... 19,436,624 $ 163,113,516
Shares issued in reinvestment of distributions .................... 415,191 3,452,384
Shares redeemed ................................................... (3,052,249) (25,501,141)
--------------------------
Net increase (decrease) ........................................... 16,799,566 $ 141,064,759
--------------------------
Year ended September 30, 2002
Shares sold ....................................................... 5,194,601 $ 47,292,632
Shares issued in reinvestment of distributions .................... 330,751 3,053,533
Shares redeemed ................................................... (1,542,245) (14,006,358)
--------------------------
Net increase (decrease) ........................................... 3,983,107 $ 36,339,807
--------------------------
CLASS R SHARES:
Year ended September 30, 2003
Shares sold ....................................................... 125,002 $ 1,034,190
Shares issued in reinvestment of distributions .................... 4,296 35,809
Shares redeemed ................................................... (17,198) (145,977)
--------------------------
Net increase (decrease) ........................................... 112,100 $ 924,022
--------------------------
Year ended September 30, 2002d
Shares sold ....................................................... 18,051 $ 164,683
Shares issued in reinvestment of distributions .................... 229 2,002
Shares redeemed ................................................... (506) (4,243)
--------------------------
Net increase (decrease) ........................................... 17,774 $ 162,442
--------------------------
<FN>
d For the period January 1, 2002 (effective date) to September 30, 2002.
</FN>
Annual Report | 113
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
-------------------------
FRANKLIN UTILITIES FUND
-------------------------
SHARES AMOUNT
-------------------------
ADVISOR CLASS SHARES:
Year ended September 30, 2003
Shares sold ........................................................ 3,596,924 $ 30,787,970
Shares issued in reinvestment of distributions ..................... 162,041 1,358,329
Shares redeemed .................................................... (380,448) (3,182,941)
-------------------------
Net increase (decrease) ............................................ 3,378,517 $ 28,963,358
-------------------------
Year ended September 30, 2002
Shares sold ........................................................ 2,584,255 $ 22,986,278
Shares issued in reinvestment of distributions ..................... 101,297 917,654
Shares redeemed .................................................... (1,604,468) (13,531,290)
-------------------------
Net increase (decrease) ............................................ 1,081,084 $ 10,372,642
-------------------------
3. TRANSACTIONS WITH AFFILIATES
Certain officers and directors of the Funds are also officers or directors of
the following entities:
- ---------------------------------------------------------------------------------------
ENTITY AFFILIATION
- ---------------------------------------------------------------------------------------
Franklin Advisers Inc. (Advisers) Investment manager
Franklin Investment Advisory Services Inc. Investment manager
(Investment Advisory)
Franklin Templeton Services LLC (FT Services) Administrative manager
Franklin/Templeton Distributors Inc. (Distributors) Principal underwriter
Franklin/Templeton Investor Services LLC (Investor Services) Transfer Agent
The Funds, except the Franklin Growth Fund, pay an investment management fee to
Advisers, and the Franklin Growth Fund pays an investment management fee to
Investment Advisory, based on the net assets of the Funds as follows:
- ----------------------------------------------------------------------------
ANNUALIZED FEE RATE MONTH-END NET ASSETS
- ----------------------------------------------------------------------------
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million, up to and including $10 billion
.440% Over $10 billion, up to and including $12.5 billion
.420% Over $12.5 billion, up to and including $15 billion
.400% Over $15 billion, up to and including $17.5 billion
Fees are further reduced on net assets over $17.5 billion.
Under an agreement with Advisers and Investment Advisory, FT Services provides
administrative services to the Funds. The fee is paid by Advisers and Investment
Advisory based on average daily net assets, and is not an additional expense of
the Funds.
114 | Annual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
The Funds reimburse Distributors for costs incurred in marketing the Funds'
shares up to a certain percentage per year of their average daily net assets of
each class as follows:
-----------------------------------------------------------
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN
DYNATECH GROWTH INCOME SECURITIES UTILITIES
FUND FUND FUND FUND FUND
-----------------------------------------------------------
Class A ................... .25% .25% .15% .15% .15%
Class B ................... 1.00% 1.00% 1.00% .65% .65%
Class B1 .................. -- -- .65% -- --
Class C ................... 1.00% 1.00% .65% .65% .65%
Class R ................... -- .50% .50% .50% .50%
Distributors paid net commissions on sales of the Funds' shares, and received
contingent deferred sales charges for the year as follows:
-------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
-------------------------------------
Net commissions paid ........................................ $154,494 $1,135,335 $65,012,361
Contingent deferred sales charges ........................... $ 25,113 $ 297,726 $ 3,530,938
-----------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
-----------------------------
Net commissions paid ........................................ $10,513,530 $3,221,637
Contingent deferred sales charges ........................... $ 2,568,474 $ 196,464
The Funds paid transfer agent fees as noted in the Statement of Operations of
which the following amounts were paid to Investor Services:
--------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
--------------------------------------
Transfer agent fees ......................................... $1,168,610 $3,797,348 $7,748,957
-----------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
-----------------------------
Transfer agent fees ......................................... $7,329,487 $1,814,622
Included in professional fees are legal fees of $89,500 that were paid to a law
firm in which a partner is an officer of the Funds.
Annual Report | 115
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
At September 30, 2003, the Funds had tax basis capital losses which may be
carried over to offset future capital gains. Such losses expire as follows:
------------------------------
FRANKLIN FRANKLIN
DYNATECH GROWTH
FUND FUND
------------------------------
Capital loss carryovers expiring in:
2007 ................................................................ $ 677,592 $ --
2008 ................................................................ 394,928 --
2009 ................................................................ 1,170,048 --
2010 ................................................................ 6,843,771 --
2011 ................................................................ 47,180,600 206,696,356
------------------------------
$ 56,266,939 $ 206,696,356
------------------------------
------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
------------------------------
Capital loss carryovers expiring in:
2004 ................................................................ $ 57,539,178 $ --
2005 ................................................................ 50,054,906 --
2006 ................................................................ 28,279,472 --
2007 ................................................................ 18,954,412 --
2008 ................................................................ 21,105,846 --
2009 ................................................................ 46,256,951 --
2010 ................................................................ 11,768,551 --
2011 ................................................................ 33,566,845 54,600,730
------------------------------
$ 267,516,161 $ 54,600,730
------------------------------
On September 30, 2003, the Franklin U.S. Government Securities Fund had expired
capital loss carryovers of $3,698,366, which were reclassified to
paid-in-capital.
At September 30, 2003, the following funds had deferred capital losses occurring
subsequent to October 31, 2002. For tax purposes, such losses will be reflected
in the year ending September 30, 2004.
-------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH U.S. GOVERNMENT UTILITIES
FUND FUND SECURITIES FUND FUND
-------------------------------------------------------------
$16,459,129 $45,312,989 $120,190,227 $21,478,885
At September 30, 2003, the Franklin Income Fund had deferred currency losses
occurring subsequent to October 31, 2002 of $5,927,510. For tax purposes, such
losses will be reflected in the year ending September 30, 2004.
116 | Annual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
The tax character of distributions paid during the years ended September 30,
2003 and 2002, was as follows:
-----------------------------------------------------------
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND
-----------------------------------------------------------
2003 2002 2003 2002
-----------------------------------------------------------
Distributions paid from:
Ordinary income .............. $ -- $ 9,242,493 $ 2,326,940 $ 9,495,518
Long term capital gain ....... -- -- -- 3,370,361
-----------------------------------------------------------
$ -- $ 9,242,493 $ 2,326,940 $ 12,865,879
-----------------------------------------------------------
-------------------------------------------------------------------
FRANKLIN FRANKLIN U.S. GOVERNMENT
INCOME FUND SECURITIES FUND
-------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------------
Distributions paid from:
Ordinary income .............. $ 822,221,334 $ 654,501,467 $492,495,581 $ 485,987,139
Long term capital gain ....... 23,413,589 54,594,790 -- --
-------------------------------------------------------------------
$ 845,634,923 $709,096,257 $492,495,581 $ 485,987,139
-------------------------------------------------------------------
------------------------------
FRANKLIN
UTILITIES FUND
------------------------------
2003 2002
------------------------------
Distributions paid from:
Ordinary income .............. $ 70,304,294 $ 72,292,208
Long term capital gain ....... -- 58,386,036
------------------------------
$ 70,304,294 $ 130,678,244
------------------------------
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities, paydown losses,
foreign currency transactions, and bond premiums and discounts.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, paydown losses, foreign
currency transactions, and bond premiums and discounts.
Annual Report | 117
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
At September 30, 2003, the cost of investments, net unrealized appreciation
(depreciation), undistributed ordinary income and undistributed long term
capital gains for income tax purposes was as follows:
----------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
----------------------------------------------------
Cost of investments .......................... $ 535,463,096 $ 1,030,448,040 $ 16,058,290,073
----------------------------------------------------
Unrealized appreciation ...................... 158,533,633 867,541,129 1,660,438,322
Unrealized depreciation ...................... (58,766,194) (46,458,356) (1,306,958,820)
----------------------------------------------------
Net unrealized appreciation (depreciation) ... $ 99,767,439 $ 821,082,773 $ 353,479,502
----------------------------------------------------
Undistributed ordinary income ................ $ -- $ 1,248,169 $ 62,702,123
Undistributed long term capital gains ........ -- -- 77,517,170
----------------------------------------------------
Distributable earnings ....................... $ -- $ 1,248,169 $ 140,219,293
----------------------------------------------------
-----------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
-----------------------------------
Cost of investments .......................... $ 9,082,417,273 $ 1,487,010,539
-----------------------------------
Unrealized appreciation ...................... 250,397,068 254,449,208
Unrealized depreciation ...................... (14,227,595) (105,158,837)
-----------------------------------
Net unrealized appreciation (depreciation) ... $ 222,363,626 $ 149,290,371
-----------------------------------
Undistributed ordinary income ................ $ 24,101,770 $ 917,026
Undistributed long term capital gains ........ -- --
-----------------------------------
Distributable earnings ....................... $ 24,101,770 $ 917,026
-----------------------------------
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments and securities sold short (excluding
short-term securities) for the year ended September 30, 2003 were as follows:
-------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
-------------------------------------------------
Purchases ............... $ 221,539,152 $ 87,257,151 $ 8,752,730,238
Sales ................... $ 63,002,750 $ 167,044,742 $ 5,124,221,603
118 | Annual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENT TRANSACTIONS (CONTINUED)
-------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
-------------------------------
Purchases ................................... $ 6,541,593,275 $ 612,593,395
Sales ....................................... $ 6,417,703,908 $ 353,897,737
6. INVESTMENTS IN THE FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET
PORTFOLIO
The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund), an open-end investment company managed by
Advisers. Management fees paid by the Funds are reduced on assets invested in
the Sweep Money Fund, in an amount not to exceed the management fees paid by the
Sweep Money Fund.
The Funds earned dividend income from investment in the Sweep Money Fund for the
year ended September 30, 2003, as follows:
-----------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
-----------------------------------
Dividend income .......................... $244,497 $88,935 $1,560,654
----------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
----------------------------
Dividend income .......................... $1,345,046 $128,437
7. CREDIT RISK AND DEFAULTED SECURITIES
The Franklin Income Fund has 36.2% of its portfolio invested in below investment
grade and comparable quality unrated high yield securities, which tend to be
more sensitive to economic conditions than higher rated securities. The risk of
loss due to default by the issuer may be significantly greater for the holders
of high yielding securities because such securities are generally unsecured and
are often subordinated to other creditors of the issuer.
The Franklin Income Fund held defaulted and/or other securities for which the
income has been deemed uncollectible. The Fund discontinues accruing income on
these securities and provides an estimate for losses on interest receivable. At
September 30, 2003, the value of these securities was $229,543,250 representing
1.42% of the Fund's net assets. For information as to specific securities, see
the accompanying Statement of Investments.
Annual Report | 119
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RESTRICTED SECURITIES
At September 30, 2003, investments in securities included issues that are
restricted or illiquid. Restricted securities are often purchased in private
placement transactions, are not registered under the Securities Act of 1933, may
have contractual restrictions on resale, and are valued under methods approved
by the Board of Directors as reflecting fair value. A security may also be
considered illiquid if it lacks a readily available market or if its valuation
has not changed for a certain period of time. At September 30, 2003, the
Franklin Income Fund held investments in restricted and illiquid securities that
were valued under approved methods by the Directors, as follows:
- -------------------------------------------------------------------------------------------------------
PRINCIPAL ACQUISITION
AMOUNT ISSUER DATE COST VALUE
- -------------------------------------------------------------------------------------------------------
$23,732,503 Lone Cypress, sub. note, 11.50%, 8/01/09
(.16% of net assets) ................... 12/02/99 $23,732,503 $25,008,125
9. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" to include
investments in portfolio companies in which a fund owns 5% or more of the
outstanding voting securities. Investments in "affiliated companies" for the
Franklin Income Fund at September 30, 2003 were as shown below.
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES HELD SHARES HELD
AT BEGINNING GROSS GROSS AT END VALUE AT DIVIDEND REALIZED
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR END OF YEAR INCOME GAIN (LOSS)
- ------------------------------------------------------------------------------------------------------------------------------------
TECO Energy Inc. ....................... 250,000 11,750,000 120,500 11,879,500 $164,174,690 $ 1,652,500 $ 501,833
TECO Energy Inc., ACES, 9.50%, cvt. pfd. 1,000,000 -- 169,000 831,000 15,415,050 2,256,250 (1,289,115)
-------------------------------------------
TOTAL NON-CONTROLLED AFFILIATED ISSUERS $179,589,740 $ 3,908,750 $(787,282)
-------------------------------------------
10. OTHER CONSIDERATIONS
Advisers, as the Franklin Income Fund's Manager, may serve as a member of
various bondholders' steering committees, on credit committees, or may represent
the Fund in certain corporate restructuring negotiations. Currently the Manager
serves in one or more of these capacities for Adelphia Communications Corp. As a
result of this involvement, Advisers may be in possession of certain material
non-public information. If the Fund's Manager, while in possession of such
information, seeks to sell any of its holdings in these securities it will
comply with all applicable federal securities laws.
120 | Annual Report
Franklin Custodian Funds, Inc.
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF FRANKLIN CUSTODIAN FUNDS, INC.
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the funds included in this
report constituting the Franklin Custodian Funds, Inc. (hereafter referred to as
the "Funds") at September 30, 2003, the results of each of their operations for
the year then ended, the changes in each of their net assets for each of the two
years in the period then ended and the financial highlights for each of the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
September 30, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
November 4, 2003
Annual Report | 121
Franklin Custodian Funds, Inc.
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Franklin
Income Fund hereby designates $79,120,955 as a capital gain dividend for the
fiscal year ended September 30, 2003.
Under Section 854(b)(2) of the Code, the Funds hereby designate the following
maximum amounts as qualified dividends for purposes of the maximum rate under
Section 1(h)(11) of the Code for the fiscal year ended September 30, 2003.
------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
GROWTH INCOME UTILITIES
FUND FUND FUND
------------------------------------------
$16,831,170 $249,508,484 $54,279,946
In January 2004, shareholders will receive Form 1099-DIV which will include
their share of qualified dividends distributed during the calendar year 2003.
Shareholders are advised to check with their tax advisors for information on the
treatment of these amounts on their individual income tax returns.
Under Section 854(b)(2) of the Code, the Funds hereby designate the following
percentage amounts of the ordinary income dividends as income qualifying for the
dividends received deduction for the fiscal year ended September 30, 2003.
------------------------------
FRANKLIN FRANKLIN FRANKLIN
GROWTH INCOME UTILITIES
FUND FUND FUND
------------------------------
100.00% 20.04% 69.01%
122 | Annual Report
Board Members and Officers
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the Fund, principal occupations during the
past five years and number of portfolios overseen in the Franklin Templeton
Investments fund complex are shown below. Each board member will serve until
that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (71) Director Since 1976 142 Director, Bar-S Foods (meat packing
One Franklin Parkway company).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President,
Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
- ------------------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (71) Director Since 1982 143 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch.
- ------------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (51) Director Since 1998 92 Director, Amerada Hess Corporation
One Franklin Parkway (exploration and refining of oil and
San Mateo, CA 94403-1906 gas); Beverly Enterprises, Inc. (health
care); H.J. Heinz Company (processed
foods and allied products); RTI
International Metals, Inc. (manufacture
and distribution of titanium); and
Canadian National Railway (railroad).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, 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).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 123
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (75) Director Since 1992 142 Director, White Mountains Insurance
One Franklin Parkway Group, Ltd. (holding company); Martek
San Mateo, CA 94403-1906 Biosciences Corporation; MedImmune, Inc.
(biotechnology); Overstock.com (Internet
services); and Spacehab, Inc. (aerospace
services); and FORMERLY, Director, MCI
Communication Corporation (subsequently
known as MCI WorldCom, Inc. and
WorldCom, Inc.) (communications
services) (1988-2002).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company); and FORMERLY, Chairman, White River Corporation
(financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and President, National Association
of Securities Dealers, Inc. (1970-1987).
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (70) Director, Director since 142 None
One Franklin Parkway President and 1969, President
San Mateo, CA 94403-1906 Chief since 1984 and
Executive Chief Executive
Officer- Officer-Investment
Investment Management
Management since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer, Member-Office of the Chairman and Director, Franklin Resources, Inc.; Vice
President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or
trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in
Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
**RUPERT H. JOHNSON, JR. (63) Director and Since 1983 125 None
One Franklin Parkway Vice President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member-Office of the Chairman and Director, Franklin Resources, Inc.; 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; and officer and/or director or trustee, as the case may be, of some of the other
subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
124 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS (58) Vice President Since 1987 Not Applicable None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member-Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory Services,
Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc.
and of 49 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
MARTIN L. FLANAGAN (43) Vice President Since 1995 Not Applicable None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Resources, 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 and Chief Operating
Officer, Templeton Investment Counsel, LLC; President and Director, Franklin Advisers, Inc.; Executive Vice President,
Franklin Investment Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief Financial Officer, Franklin
Advisory Services, LLC; Chairman, Franklin Templeton Services, LLC; and officer and/or director or trustee, as the case may be,
of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (56) Senior Vice Since 2002 Not Applicable None
500 East Broward Blvd. President and
Suite 2100 Chief
Fort Lauderdale, FL Executive
33394-3091 Officer-
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (56) Vice President Since 2000 Not Applicable None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources, Inc.;
officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and
Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000).
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (55) Vice President Since 2000 Not Applicable None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President,
Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory
Services, Inc., Franklin Mutual Advisers, LLC, Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC,
Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.;
and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Deputy Director, Division on Investment Management, Executive Assistant and Senior
Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of
Massachusetts) (until 1979).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 125
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL O. MAGDOL (66) Vice President Since 2002 Not Applicable Director, FTI Banque, Arch
600 Fifth Avenue - AML Chemicals, Inc. and Lingnan
Rockefeller Center Compliance Foundation
New York, NY 10048-0772
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; and officer and/or director, as the case
may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 47 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
KIMBERLEY H. MONASTERIO (39) Treasurer and Treasurer since Not Applicable None
One Franklin Parkway Chief 2000 and Chief
San Mateo, CA 94403-1906 Financial Financial Officer
Officer since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; and officer of 51 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
MURRAY L. SIMPSON (66) Vice President Since 2000 Not Applicable None
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of some
of the subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000);
and Director, Templeton Asset Management Ltd. (until 1999).
- ------------------------------------------------------------------------------------------------------------------------------------
*We base the number of portfolios on each separate series of the U.S. registered
investment companies within the Franklin Templeton Investments fund complex.
These portfolios have a common investment adviser or affiliated investment
advisers.
**Charles B. Johnson and Rupert H. Johnson are considered interested persons of
the Funds under the federal securities laws due to their positions as officers
and directors and major shareholders of Franklin Resources, Inc., which is the
parent company of the Funds' adviser and distributor. Note: Charles B. Johnson
and Rupert H. Johnson, Jr. are brothers.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED
THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED EACH OF EDITH E. HOLIDAY AND HARRIS J. ASHTON AS AN AUDIT COMMITTEE
FINANCIAL EXPERT. THE BOARD BELIEVES THAT MS. HOLIDAY AND MR. ASHTON QUALIFY AS
SUCH AN EXPERT IN VIEW OF THEIR BUSINESS BACKGROUND AND EXPERIENCE. MS. HOLIDAY,
WHO CURRENTLY SERVES AS A DIRECTOR AND TRUSTEE OF VARIOUS COMPANIES AND TRUSTS,
INCLUDING H.J. HEINZ COMPANY WHERE SHE IS AUDIT COMMITTEE CHAIRPERSON, IS
CHAIRPERSON OF THE FUND'S AUDIT COMMITTEE, AND FORMERLY SERVED AS ASSISTANT TO
THE PRESIDENT OF THE UNITED STATES AND SECRETARY OF THE CABINET (1990-1993);
GENERAL COUNSEL TO THE UNITED STATES TREASURY DEPARTMENT (1989-1999); AND
ASSISTANT SECRETARY FOR PUBLIC AFFAIRS AND PUBLIC LIAISON-UNITED STATES TREASURY
DEPARTMENT (1988-1989). MR. ASHTON, WHO IS CURRENTLY A DIRECTOR OF BUSINESS AND
NON-PROFIT ORGANIZATIONS, SERVED AS CHIEF EXECUTIVE OFFICER OF GENERAL HOST
CORPORATION, A NEW YORK STOCK EXCHANGE LISTED COMPANY FROM 1967 TO 1998, AND WAS
A DIRECTOR OF RBC HOLDINGS, INC., A BANK HOLDING COMPANY UNTIL 2002. AS A RESULT
OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVES THAT MS.
HOLIDAY AND MR. ASHTON HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH
PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES,
AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND
LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE
FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR
FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MS.
HOLIDAY AND MR. ASHTON ARE INDEPENDENT DIRECTORS AS THAT TERM IS DEFINED UNDER
THE APPLICABLE SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
126 | Annual Report
Franklin Custodian Funds, Inc.
PROXY VOTING POLICIES AND PROCEDURES
The Fund has established Proxy Voting Policies and Procedures (Policies) that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention:
Proxy Group.
Annual Report | 127
This page intentionally left blank.
Literature Request
For a brochure and prospectus, which contains more complete information,
including charges and expenses, call Franklin Templeton Investments at
1-800/DIAL BEN[R] (1-800/342-5236). Please read the prospectus carefully before
investing or sending money. To ensure the highest quality of service, telephone
calls to or from our service departments may be monitored, recorded and
accessed. These calls can be identified by the presence of a regular beeping
tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund
GLOBAL
Franklin Global Aggressive Growth Fund Franklin Global Growth Fund Mutual
Discovery Fund Templeton Capital Accumulator Fund Templeton Global Long-Short
Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies
Fund Templeton Growth Fund Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II1
VALUE
Franklin Balance Sheet Investment Fund2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund3
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Shares Fund
BLEND
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund4
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Franklin Technology Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
INCOME
Franklin Adjustable U.S. Government Securities Fund5
Franklin's AGE High Income Fund
Franklin Federal Money Fund5, 6
Franklin Floating Rate Daily Access Fund
Franklin Floating Rate Trust7
Franklin Income Fund
Franklin Money Fund5, 6
Franklin Short-Intermediate
U.S. Government Securities Fund5
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund5
Templeton Global Bond Fund
TAX-FREE INCOME8
Double Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund9
Tax-Exempt Money Fund5,6
STATE-SPECIFIC TAX-FREE INCOME8
Alabama
Arizona
California10
Colorado
Connecticut
Florida10
Georgia
Kentucky
Louisiana
Maryland
Massachusetts9
Michigan9
Minnesota9
Missouri
New Jersey
New York10
North Carolina
Ohio9
Oregon
Pennsylvania
Tennessee
Virginia
VARIABLE INSURANCE PRODUCTS FUNDS
Franklin Templeton Variable Insurance
Products Trust11
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders as well as select retirement
plans.
3. Effective June 30, 2003, the fund reopened to all new investors.
4. Upon reaching approximately $350 million in assets, the fund will close to
all investors.
5. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
6. No assurance exists that the fund's $1.00 per share price will be maintained.
It is possible to lose money by investing in the fund.
7. The fund is a continuously offered, closed-end fund. Shares may be purchased
daily; there is no daily redemption. However, each quarter, pending board
approval, the fund will authorize the repurchase of 5%-25% of the outstanding
number of shares. Investors may tender all or a portion of their shares during
the tender period.
8. For investors subject to the alternative minimum tax, a small portion of
these dividends may be taxable. Distributions of capital gains are generally
taxable. 9. Portfolio of insured municipal securities.
10. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA) and
limited-term, intermediate-term and money market portfolios (CA and NY). 11. The
funds of the Franklin Templeton Variable Insurance Products Trust are generally
available only through insurance company variable contracts.
09/03 Not part of the annual report
[LOGO OMITTED]
FRANKLIN(R) TEMPLETON(R)
INVESTMENTS
One Franklin Parkway
San Mateo, CA 94403-1906
WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at franklintempleton.com. See
inside for details.
ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN CUSTODIAN FUNDS, INC.
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN[R]
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301
This report must be preceded or accompanied by the current Franklin Custodian
Funds, Inc., prospectus, which contains more complete information including
charges, expenses and risks.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
FCF A2003 11/03
ITEM 2. CODE OF ETHICS.
(A) THE REGISTRANT HAS ADOPTED A CODE OF ETHICS THAT APPLIES TO ITS PRINCIPAL
EXECUTIVE OFFICERS AND PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER.
(C) N/A
(D) N/A
(F) PURSUANT TO ITEM 10(A), THE REGISTRANT IS ATTACHING AS AN EXHIBIT A COPY OF
ITS CODE OF ETHICS THAT APPLIES TO ITS PRINCIPAL EXECUTIVE OFFICERS FINANCIAL
AND ACCOUNTING OFFICER.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(A)(1) THE REGISTRANT HAS AN AUDIT COMMITTEE FINANCIAL EXPERT SERVING ON ITS
AUDIT COMMITTEE.
(2) THE AUDIT COMMITTEE FINANCIAL EXPERTS ARE EDITH E. HOLIDAY AND HARRIS J.
ASHTON AND THEY ARE "INDEPENDENT" AS DEFINED UNDER THE RELEVANT SECURITIES AND
EXCHANGE COMMISSION RULES AND RELEASES.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. N/A
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 9. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the
Registrant's internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of their evaluation in
connection with the preparation of this Shareholder Report on Form N-CSR.
ITEM 10. EXHIBITS.
(A) CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS.
(B)(1) CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
OF JIMMY D. GAMBILL, CHIEF EXECUTIVE OFFICER - FINANCE AND ADMINISTRATION, AND
KIMBERLEY H. MONASTERIO, CHIEF FINANCIAL OFFICER
(B(2) CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
OF JIMMY D. GAMBILL, CHIEF EXECUTIVE OFFICER - FINANCE AND ADMINISTRATION, AND
KIMBERLEY H. MONASTERIO, CHIEF FINANCIAL OFFICER
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN CUSTODIAN FUNDS, INC.
By /s/Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date December 3, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date December 3, 2003
By /s/Kimberley H. Monasterio
Chief Financial Officer
Date December 3, 2003