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 811-00537
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FRANKLIN CUSTODIAN FUNDS, INC.
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(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
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(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: 09/30
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Date of reporting period: 09/30/04
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ITEM 1. REPORTS TO STOCKHOLDERS.
[GRAPHIC OMITTED]
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SEPTEMBER 30, 2004
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Franklin DynaTech Fund
Franklin Growth Fund
Franklin Income Fund
Franklin U.S. Government
Securities Fund
Franklin Utilities Fund
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ANNUAL REPORT AND SHAREHOLDER LETTER
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WANT TO RECEIVE
THIS DOCUMENT
FASTER VIA EMAIL?
FRANKLIN Eligible shareholders
CUSTODIAN FUNDS, INC. can sign up for
eDelivery at
franklintempleton.com.
See inside for
details.
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[LOGO]
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.
SPECIALIZED EXPERTISE 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
recognized leader in fixed income investing and
also brings 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. Founded 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.
TRUE DIVERSIFICATION 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.
RELIABILITY YOU CAN TRUST 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.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[GRAPHIC OMITTED]
Not part of the annual report
CONTENTS
Shareholder Letter ....................................................... 1
ANNUAL REPORT
Franklin DynaTech Fund ................................................... 3
Franklin Growth Fund ..................................................... 13
Franklin Income Fund ..................................................... 23
Franklin U.S. Government
Securities Fund .......................................................... 37
Franklin Utilities Fund .................................................. 50
Financial Highlights and
Statements of Investments ................................................ 62
Financial Statements ..................................................... 109
Notes to
Financial Statements ..................................................... 118
Report of Independent
Registered Public
Accounting Firm .......................................................... 136
Tax Designation .......................................................... 137
Board Members
and Officers ............................................................. 138
Shareholder Information .................................................. 142
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ANNUAL REPORT
FRANKLIN DYNATECH FUND
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin DynaTech Fund seeks capital
appreciation by investing mainly in the equity securities of companies
emphasizing scientific or technological development or that are in fast-growing
industries.
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PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
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This annual report for Franklin DynaTech Fund covers the fiscal year ended
September 30, 2004.
PERFORMANCE OVERVIEW
Franklin DynaTech Fund - Class A posted a +9.12% cumulative total return for the
12-month period ended September 30, 2004. For the period under review, the Fund
outperformed its narrow benchmark, the NASDAQ 100 Index, which had a price-only
return of 8.36%, and underperformed the broad Standard & Poor's 500 Composite
Index (S&P 500), which posted a 13.86% cumulative total return for the same
period.(1) You can find the Fund's long-term performance data in the Performance
Summary beginning on page 7.
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended September 30, 2004, the domestic economy grew, with
one-year gross domestic product increasing an estimated 3.9%. Major contributors
to growth included inventory investment, equipment and software spending, and
federal government spending. The economy experienced solid export growth and a
resilient housing market; however, job worries contributed to declining consumer
confidence late in the period, which could be seen in relatively weak consumer
spending and modest retail sales.
Labor market conditions improved during the reporting period. More than one-half
of the jobs lost during the recession and weak economic expansion have been
recovered. The economy created 1.8 million jobs since summer 2003.
(1) Source: Standard & Poor's Micropal. The NASDAQ 100 Index includes 100 of
the largest domestic and international nonfinancial 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. 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 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 NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 65.
Annual Report | 3
PORTFOLIO BREAKDOWN
Franklin DynaTech Fund
Based on Total Net Assets
as of 9/30/04
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
Packaged Software 10.4%
Semiconductors 9.7%
Medical Specialties 8.6%
Biotechnology 8.2%
Other Consumer Services 5.2%
Internet Software & Services 4.6%
Telecommunications Equipment 4.4%
Major Pharmaceuticals 4.1%
Managed Health Care 3.8%
Electronic Production Equipment 3.8%
Data Processing Services 3.2%
Electronic Equipment & Instruments 2.5%
Air Freight & Couriers 2.4%
Information Technology Services 2.3%
Computer Processing Hardware 2.1%
Recreational Products 2.0%
Other 18.3%
Short-Term Investments & Other Net Assets 4.4%
In addition, the unemployment rate fell from 6.1% in September 2003 to 5.4% at
period-end.(2) Services created the most jobs led by leisure and hospitality,
education and health, and business and professional services.
In light of positive economic developments, consumer inflation remained modest
but picked up speed in 2004, with record-high oil prices a dominant theme.
Excluding the volatile food and energy categories, consumer prices increased
2.0% for the 12 months ended September 30, 2004.(2) Consequently, the Federal
Reserve Board (Fed) raised the federal funds target rate during the reporting
period, with quarter percentage point hikes on June 30, August 10 and September
21. As a result of the increases, the federal funds target rate rose from 1.0%
to 1.75%. With core inflation expected to remain relatively low, Fed
policymakers believe they can raise interest rates at a measured pace.
Nonetheless, the Fed said it will respond to changes in economic prospects as
needed to fulfill its obligation to maintain price stability.
Domestic equity markets sustained a rally through early 2004, then flattened and
traded in a fairly narrow range through period-end. Despite continued signs of
enhanced corporate fundamentals, investors appeared cautious due to geopolitical
uncertainty, soaring oil prices and rising short-term interest rates. The S&P
500 rose 13.86% for the 12 months under review, while the technology-heavy
NASDAQ Composite Index gained 6.75%.(3)
INVESTMENT STRATEGY
Based on our independent analysis of individual companies, we search for leading
companies that we believe have a sustainable competitive advantage due to
state-of-the-art and innovative products, technologies, and business models. We
consider such factors as a company's competitive positioning, patents, new
products, market share, industry growth, recent operational execution and
managerial strength. We use a conservative, bottom-up research process to buy
and hold what we consider to be undervalued companies.
(2) Source: Bureau of Labor Statistics.
(3) Source: Standard & Poor's Micropal. See footnote 1 for a description of
the S&P 500. 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 3,000 companies.
4 | Annual Report
MANAGER'S DISCUSSION
Following our strategy during the Fund's fiscal year, we emphasized
opportunities in established industry leaders we believed had a sustainable
competitive advantage. Software, semiconductors, medical technology,
biotechnology and Internet-related companies represented some of the Fund's
largest weightings at period-end.
For example, eBay, a leading provider of Internet auctions, was one of the
strongest contributors to Fund performance in absolute terms as the company's
stock appreciated in value more than 70% due to strong revenue and
earnings-per-share growth during the period. The company has been particularly
successful in matching buyers and sellers in new or scarce markets, as well as
end-of-life and used or vintage markets. QUALCOMM, a designer, developer and
manufacturer of wireless telecommunication products, also helped Fund
performance as the stock appreciated about 88% during the period. The company
experienced growth in its wireless markets and maintained its technological lead
within the CDMA market. UnitedHealth Group, a health maintenance organization
(HMO), also contributed positively to performance. During the Fund's fiscal
year, UnitedHealth Group continued to be a low-cost health care insurer by
taking advantage of its industry leading technology to reduce such
administration costs as customer service and processing and paying claims. The
company also made a few acquisitions during the period.
Despite the Fund's positive return during the reporting period, there were some
detractors from performance. For example, semiconductor manufacturer Intel fell
in value more than 26%, hurting the Funds' results. Merck, a leading
pharmaceutical company, also hindered performance. At the end of the reporting
period, the company recalled its VIOXX drug. As a result of the announcement,
the stock's value declined more than 26% in a day. For the year under review,
the stock fell 32%. Online DVD rental service NetFlix also underperformed. The
company experienced increased customer acquisition costs and competition during
the period and fell 48% from our initial purchase in April 2004.
Throughout the past year, we continued to position the portfolio in higher
quality companies that we believe should perform well over the next several
years. Consistent with our strategy, we looked for companies with new products
and business models whose current market price we believed did not reflect
future growth prospects.
TOP 10 HOLDINGS
Franklin DynaTech Fund
9/30/04
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COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
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eBay Inc. 5.2%
OTHER CONSUMER SERVICES
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Microsoft Corp. 3.6%
PACKAGED SOFTWARE
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UnitedHealth Group Inc. 3.4%
MANAGED HEALTH CARE
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Intel Corp. 3.1%
SEMICONDUCTORS
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Yahoo! Inc. 2.8%
INTERNET SOFTWARE & SERVICES
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Genentech Inc. 2.7%
BIOTECHNOLOGY
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Amgen Inc. 2.3%
BIOTECHNOLOGY
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Gilead Sciences Inc. 2.3%
BIOTECHNOLOGY
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Symantec Corp. 2.2%
PACKAGED SOFTWARE
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QUALCOMM Inc. 2.1%
TELECOMMUNICATIONS EQUIPMENT
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Annual Report | 5
Thank you for your continued participation in the Franklin DynaTech Fund. We
look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Rupert H. Johnson, Jr.
Rupert H. Johnson, Jr.
[PHOTO OMITTED] /s/ Matthew J. Moberg
Matthew J. Moberg, CPA
[PHOTO OMITTED] /s/ Robert R. Dean
Robert R. Dean, CFA
Portfolio Management Team
Franklin DynaTech Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF SEPTEMBER 30, 2004, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS 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 ADVISER 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.
6 | Annual Report
PERFORMANCE SUMMARY AS OF 9/30/04
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
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CLASS A CHANGE 9/30/04 9/30/03
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Net Asset Value (NAV) +$1.84 $22.01 $20.17
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CLASS B CHANGE 9/30/04 9/30/03
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Net Asset Value (NAV) +$1.63 $21.43 $19.80
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CLASS C CHANGE 9/30/04 9/30/03
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Net Asset Value (NAV) +$1.62 $21.21 $19.59
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PERFORMANCE
CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES
CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE
MAXIMUM SALES CHARGES.
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CLASS A 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return(1) +9.12% +0.42% +174.40%
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Average Annual Total Return(2) +2.85% -1.10% +9.97%
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Value of $10,000 Investment(3) $10,285 $9,464 $25,865
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CLASS B 1-YEAR 3-YEAR INCEPTION (2/1/00)
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Cumulative Total Return(1) +8.23% +16.37% -21.33%
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Average Annual Total Return(2) +4.23% +4.27% -5.41%
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Value of $10,000 Investment(3) $10,423 $11,337 $7,714
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CLASS C 1-YEAR 5-YEAR INCEPTION (9/16/96)
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Cumulative Total Return(1) +8.27% -3.26% +77.16%
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Average Annual Total Return(2) +7.27% -0.66% +7.37%
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Value of $10,000 Investment(3) $10,727 $9,674 $17,716
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PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 7
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 any current, applicable, maximum sales charge, 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.
AVERAGE ANNUAL TOTAL RETURN
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CLASS A 9/30/04
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1-Year +2.85%
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5-Year -1.10%
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10-Year +9.97%
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FRANKLIN DYNATECH FUND - CLASS A
Growth of a $10,000 Investment*
(10/1/1994 - 9/30/2004)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN DYNATECH
DATE FUND - CLASS A S&P 500(4) NASDAQ 100**(4)
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10/1/1994 $9,426 $10,000 $10,000
10/31/1994 $9,818 $10,224 $10,487
11/30/1994 $9,636 $9,852 $10,279
12/31/1994 $9,655 $9,998 $10,265
1/31/1995 $9,743 $10,258 $10,291
2/28/1995 $10,006 $10,657 $10,981
3/31/1995 $10,230 $10,971 $11,353
4/30/1995 $10,649 $11,294 $11,922
5/31/1995 $10,961 $11,744 $12,393
6/30/1995 $11,818 $12,017 $13,661
7/31/1995 $12,354 $12,415 $14,444
8/31/1995 $12,218 $12,446 $14,644
9/30/1995 $12,451 $12,971 $14,855
10/31/1995 $12,695 $12,925 $15,203
11/30/1995 $12,520 $13,491 $15,075
12/31/1995 $12,178 $13,751 $14,631
1/31/1996 $12,188 $14,219 $15,027
2/29/1996 $12,619 $14,351 $15,814
3/31/1996 $12,368 $14,489 $15,480
4/30/1996 $13,380 $14,703 $16,929
5/31/1996 $13,860 $15,081 $17,580
6/30/1996 $13,420 $15,139 $17,197
7/31/1996 $12,619 $14,470 $16,149
8/31/1996 $13,079 $14,776 $16,848
9/30/1996 $14,051 $15,607 $18,727
10/31/1996 $14,311 $16,037 $19,093
11/30/1996 $15,683 $17,248 $21,176
12/31/1996 $15,685 $16,906 $20,855
1/31/1997 $16,850 $17,962 $23,399
2/28/1997 $15,901 $18,103 $21,594
3/31/1997 $15,499 $17,361 $20,238
4/30/1997 $16,190 $18,396 $22,210
5/31/1997 $17,097 $19,515 $24,346
6/30/1997 $17,252 $20,389 $24,306
7/31/1997 $18,933 $22,011 $28,108
8/31/1997 $18,592 $20,778 $27,274
9/30/1997 $19,057 $21,916 $27,858
10/31/1997 $18,118 $21,185 $25,889
11/30/1997 $18,314 $22,164 $26,673
12/31/1997 $17,978 $22,545 $25,157
1/31/1998 $18,595 $22,794 $27,196
2/28/1998 $19,420 $24,437 $30,319
3/31/1998 $19,508 $25,687 $30,993
4/30/1998 $19,883 $25,946 $31,690
5/31/1998 $19,178 $25,500 $30,267
6/30/1998 $20,114 $26,535 $33,956
7/31/1998 $20,213 $26,254 $34,969
8/31/1998 $18,363 $22,462 $28,954
9/30/1998 $19,640 $23,901 $34,162
10/31/1998 $20,180 $25,843 $35,560
11/30/1998 $21,424 $27,409 $39,557
12/31/1998 $22,894 $28,987 $46,617
1/31/1999 $24,677 $30,199 $54,010
2/28/1999 $23,540 $29,260 $48,884
3/31/1999 $24,309 $30,431 $53,482
4/30/1999 $24,376 $31,609 $54,244
5/31/1999 $23,975 $30,864 $53,058
6/30/1999 $25,201 $32,575 $58,316
7/31/1999 $25,178 $31,560 $57,660
8/31/1999 $25,881 $31,403 $60,857
9/30/1999 $25,758 $30,544 $61,137
10/31/1999 $26,806 $32,476 $66,966
11/30/1999 $28,388 $33,136 $75,326
12/31/1999 $31,407 $35,086 $94,143
1/31/2000 $31,723 $33,324 $90,645
2/29/2000 $34,517 $32,693 $108,339
3/31/2000 $34,867 $35,890 $111,663
4/30/2000 $32,979 $34,810 $95,802
5/31/2000 $31,395 $34,098 $84,400
6/30/2000 $33,329 $34,939 $95,564
7/31/2000 $32,741 $34,393 $91,643
8/31/2000 $35,116 $36,528 $103,532
9/30/2000 $32,345 $34,600 $90,659
10/31/2000 $31,520 $34,453 $83,339
11/30/2000 $28,161 $31,739 $63,642
12/31/2000 $27,563 $31,895 $59,457
1/31/2001 $28,953 $33,026 $65,837
2/28/2001 $25,457 $30,016 $48,453
3/31/2001 $23,963 $28,116 $39,945
4/30/2001 $25,526 $30,299 $47,103
5/31/2001 $25,132 $30,502 $45,700
6/30/2001 $24,947 $29,760 $46,534
7/31/2001 $24,160 $29,467 $42,747
8/31/2001 $23,176 $27,624 $37,316
9/30/2001 $21,717 $25,394 $29,665
10/31/2001 $22,713 $25,878 $34,652
11/30/2001 $24,125 $27,863 $40,524
12/31/2001 $23,949 $28,107 $40,042
1/31/2002 $23,761 $27,697 $39,359
2/28/2002 $22,645 $27,163 $34,511
3/31/2002 $23,338 $28,184 $36,887
4/30/2002 $22,081 $26,476 $32,425
5/31/2002 $21,799 $26,282 $30,680
6/30/2002 $20,448 $24,410 $26,696
7/31/2002 $19,390 $22,508 $24,428
8/31/2002 $19,308 $22,656 $23,927
9/30/2002 $18,062 $20,196 $21,138
10/31/2002 $19,590 $21,971 $25,125
11/30/2002 $20,800 $23,263 $28,338
12/31/2002 $19,190 $21,897 $24,993
1/31/2003 $18,979 $21,325 $24,960
2/28/2003 $19,167 $21,004 $25,638
3/31/2003 $19,331 $21,206 $25,864
4/30/2003 $20,612 $22,954 $28,083
5/31/2003 $22,140 $24,162 $30,415
6/30/2003 $22,516 $24,471 $30,511
7/31/2003 $23,327 $24,902 $32,422
8/31/2003 $24,184 $25,387 $34,054
9/30/2003 $23,703 $25,118 $33,101
10/31/2003 $25,324 $26,538 $35,963
11/30/2003 $25,794 $26,772 $36,162
12/31/2003 $26,605 $28,175 $37,271
1/31/2004 $27,181 $28,692 $37,910
2/29/2004 $26,887 $29,091 $37,334
3/31/2004 $26,735 $28,652 $36,522
4/30/2004 $26,288 $28,203 $35,581
5/31/2004 $27,357 $28,589 $37,228
6/30/2004 $27,663 $29,144 $38,508
7/31/2004 $25,371 $28,180 $35,556
8/31/2004 $24,913 $28,293 $34,751
9/30/2004 $25,865 $28,599 $35,870
AVERAGE TOTAL RETURN(5)
- ----------------------------------------------
CLASS B 9/30/04
- ----------------------------------------------
1-Year +4.23%
- ----------------------------------------------
3-Year +4.27%
- ----------------------------------------------
Since Inception (2/1/00) -5.41%
- ----------------------------------------------
FRANKLIN DYNATECH FUND - CLASS B
Growth of a $10,000 Investment*
(2/1/2000 - 9/30/2004)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN DYNATECH
DATE FUND - CLASS B S&P 500(4) NASDAQ 100**(4)
----------------------------------------------------------------------------
2/1/2000 $10,000 $10,000 $10,000
2/29/2000 $10,870 $9,811 $11,952
3/31/2000 $10,973 $10,770 $12,319
4/30/2000 $10,374 $10,446 $10,569
5/31/2000 $9,868 $10,232 $9,311
6/30/2000 $10,471 $10,485 $10,543
7/31/2000 $10,278 $10,321 $10,110
8/31/2000 $11,020 $10,962 $11,422
9/30/2000 $10,146 $10,383 $10,002
10/31/2000 $9,879 $10,339 $9,194
11/30/2000 $8,824 $9,524 $7,021
12/31/2000 $8,624 $9,571 $6,559
1/31/2001 $9,053 $9,911 $7,263
2/28/2001 $7,958 $9,008 $5,345
3/31/2001 $7,488 $8,437 $4,407
4/30/2001 $7,968 $9,092 $5,196
5/31/2001 $7,841 $9,153 $5,042
6/30/2001 $7,779 $8,931 $5,134
7/31/2001 $7,528 $8,843 $4,716
8/31/2001 $7,219 $8,290 $4,117
9/30/2001 $6,760 $7,620 $3,273
10/31/2001 $7,062 $7,766 $3,823
11/30/2001 $7,499 $8,361 $4,471
12/31/2001 $7,437 $8,435 $4,417
1/31/2002 $7,378 $8,312 $4,342
2/28/2002 $7,026 $8,151 $3,807
3/31/2002 $7,239 $8,458 $4,069
4/30/2002 $6,842 $7,945 $3,577
5/31/2002 $6,751 $7,887 $3,385
6/30/2002 $6,329 $7,325 $2,945
7/31/2002 $5,995 $6,754 $2,695
8/31/2002 $5,969 $6,799 $2,640
9/30/2002 $5,576 $6,060 $2,332
10/31/2002 $6,046 $6,593 $2,772
11/30/2002 $6,413 $6,981 $3,126
12/31/2002 $5,917 $6,571 $2,757
1/31/2003 $5,848 $6,399 $2,754
2/28/2003 $5,903 $6,303 $2,828
3/31/2003 $5,947 $6,364 $2,853
4/30/2003 $6,340 $6,888 $3,098
5/31/2003 $6,806 $7,251 $3,355
6/30/2003 $6,916 $7,343 $3,366
7/31/2003 $7,158 $7,473 $3,577
8/31/2003 $7,419 $7,618 $3,757
9/30/2003 $7,268 $7,538 $3,652
10/31/2003 $7,760 $7,964 $3,967
11/30/2003 $7,896 $8,034 $3,989
12/31/2003 $8,142 $8,455 $4,112
1/31/2004 $8,311 $8,610 $4,182
2/29/2004 $8,215 $8,730 $4,119
3/31/2004 $8,164 $8,598 $4,029
4/30/2004 $8,025 $8,463 $3,925
5/31/2004 $8,344 $8,579 $4,107
6/30/2004 $8,432 $8,746 $4,248
7/31/2004 $7,727 $8,456 $3,923
8/31/2004 $7,584 $8,490 $3,834
9/30/2004 $7,714 $8,582 $3,957
8 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS C 9/30/04
- ---------------------------------------------
1-Year +7.27%
- ---------------------------------------------
5-Year -0.66%
- ---------------------------------------------
Since Inception (9/16/96) +7.37%
- ---------------------------------------------
FRANKLIN DYNATECH FUND - CLASS C
Growth of a $10,000 Investment*
(9/16/1996 - 9/30/2004)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN DYNATECH
DATE FUND - CLASS C S&P 500(4) NASDAQ 100**(4)
--------------------------------------------------------------------------
9/16/1996 $10,000 $10,000 $10,000
9/30/1996 $10,263 $10,262 $10,520
10/31/1996 $10,439 $10,545 $10,726
11/30/1996 $11,434 $11,342 $11,896
12/31/1996 $11,428 $11,117 $11,716
1/31/1997 $12,279 $11,811 $13,145
2/28/1997 $11,579 $11,904 $12,131
3/31/1997 $11,278 $11,416 $11,369
4/30/1997 $11,767 $12,097 $12,477
5/31/1997 $12,415 $12,833 $13,677
6/30/1997 $12,513 $13,407 $13,655
7/31/1997 $13,726 $14,473 $15,790
8/31/1997 $13,462 $13,663 $15,322
9/30/1997 $13,786 $14,411 $15,650
10/31/1997 $13,101 $13,930 $14,543
11/30/1997 $13,229 $14,575 $14,984
12/31/1997 $12,975 $14,825 $14,132
1/31/1998 $13,392 $14,989 $15,278
2/28/1998 $13,978 $16,069 $17,033
3/31/1998 $14,034 $16,891 $17,411
4/30/1998 $14,299 $17,061 $17,803
5/31/1998 $13,777 $16,768 $17,003
6/30/1998 $14,443 $17,449 $19,075
7/31/1998 $14,499 $17,263 $19,645
8/31/1998 $13,167 $14,770 $16,265
9/30/1998 $14,066 $15,716 $19,191
10/31/1998 $14,443 $16,994 $19,976
11/30/1998 $15,326 $18,023 $22,222
12/31/1998 $16,364 $19,061 $26,188
1/31/1999 $17,626 $19,858 $30,341
2/28/1999 $16,809 $19,241 $27,461
3/31/1999 $17,343 $20,010 $30,045
4/30/1999 $17,383 $20,785 $30,473
5/31/1999 $17,092 $20,295 $29,807
6/30/1999 $17,949 $21,420 $32,760
7/31/1999 $17,925 $20,753 $32,392
8/31/1999 $18,410 $20,650 $34,188
9/30/1999 $18,313 $20,084 $34,345
10/31/1999 $19,041 $21,355 $37,619
11/30/1999 $20,158 $21,789 $42,316
12/31/1999 $22,288 $23,071 $52,887
1/31/2000 $22,501 $21,912 $50,922
2/29/2000 $24,469 $21,498 $60,862
3/31/2000 $24,698 $23,600 $62,729
4/30/2000 $23,350 $22,890 $53,819
5/31/2000 $22,207 $22,422 $47,413
6/30/2000 $23,570 $22,974 $53,685
7/31/2000 $23,138 $22,616 $51,482
8/31/2000 $24,796 $24,020 $58,161
9/30/2000 $22,827 $22,752 $50,930
10/31/2000 $22,231 $22,655 $46,817
11/30/2000 $19,854 $20,871 $35,752
12/31/2000 $19,410 $20,973 $33,401
1/31/2001 $20,381 $21,717 $36,985
2/28/2001 $17,909 $19,738 $27,220
3/31/2001 $16,855 $18,488 $22,440
4/30/2001 $17,942 $19,924 $26,461
5/31/2001 $17,652 $20,057 $25,673
6/30/2001 $17,511 $19,569 $26,142
7/31/2001 $16,947 $19,376 $24,014
8/31/2001 $16,241 $18,165 $20,963
9/30/2001 $15,213 $16,698 $16,665
10/31/2001 $15,901 $17,017 $19,467
11/30/2001 $16,880 $18,322 $22,765
12/31/2001 $16,739 $18,482 $22,494
1/31/2002 $16,605 $18,213 $22,111
2/28/2002 $15,820 $17,861 $19,387
3/31/2002 $16,288 $18,533 $20,722
4/30/2002 $15,403 $17,410 $18,216
5/31/2002 $15,194 $17,282 $17,235
6/30/2002 $14,242 $16,051 $14,997
7/31/2002 $13,498 $14,801 $13,723
8/31/2002 $13,431 $14,898 $13,442
9/30/2002 $12,554 $13,280 $11,875
10/31/2002 $13,615 $14,448 $14,114
11/30/2002 $14,442 $15,297 $15,920
12/31/2002 $13,323 $14,399 $14,041
1/31/2003 $13,164 $14,023 $14,022
2/28/2003 $13,289 $13,812 $14,403
3/31/2003 $13,390 $13,945 $14,530
4/30/2003 $14,275 $15,094 $15,776
5/31/2003 $15,319 $15,888 $17,086
6/30/2003 $15,570 $16,091 $17,140
7/31/2003 $16,121 $16,375 $18,214
8/31/2003 $16,706 $16,694 $19,130
9/30/2003 $16,363 $16,517 $18,595
10/31/2003 $17,474 $17,451 $20,203
11/30/2003 $17,783 $17,604 $20,315
12/31/2003 $18,334 $18,527 $20,938
1/31/2004 $18,719 $18,867 $21,297
2/29/2004 $18,502 $19,129 $20,973
3/31/2004 $18,385 $18,840 $20,517
4/30/2004 $18,067 $18,545 $19,988
5/31/2004 $18,786 $18,799 $20,914
6/30/2004 $18,986 $19,164 $21,633
7/31/2004 $17,399 $18,530 $19,975
8/31/2004 $17,082 $18,605 $19,522
9/30/2004 $17,716 $18,806 $20,151
Annual Report | 9
PERFORMANCE SUMMARY (CONTINUED)
ENDNOTES
INVESTING IN A NON-DIVERSIFIED FUND CONCENTRATING IN THE SCIENTIFIC AND
TECHNOLOGY 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: Prior to 8/3/98, these shares were offered at a lower initial sales
charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. 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 a sales charge.
(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.
(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.
(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 nonfinancial 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.
* FUND PERFORMANCE INCLUDES ALL SALES CHARGES.
** NASDAQ 100 INDEX PERFORMANCE REPRESENTS PRICE CHANGE ONLY AND DOES NOT
INCLUDE THE REINVESTMENT OF DIVIDENDS.
10 | Annual Report
YOUR FUND'S EXPENSES
FRANKLIN DYNATECH FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 11
YOUR FUND'S EXPENSES (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 3/31/04 VALUE 9/30/04 PERIOD* 3/31/04-9/30/04
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 967.50 $4.77
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.15 $4.90
- -------------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 963.60 $8.44
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.40 $8.67
- -------------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 963.70 $8.44
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.40 $8.67
- -------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.97%; B: 1.72%; and C: 1.72%), multiplied by the average account value
over the period, multiplied by 183/366 to reflect the one-half year
period.
12 | Annual Report
FRANKLIN GROWTH FUND
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Growth Fund seeks capital
appreciation by investing mainly in equity securities of companies that are
leaders in their industries.
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Growth Fund's annual report, which covers
the fiscal year ended September 30, 2004.
PERFORMANCE OVERVIEW
Franklin Growth Fund - Class A posted a +13.92% cumulative total return for the
12-month period ended September 30, 2004. The Fund slightly outperformed its
benchmark, the Standard & Poor's 500 Composite Index (S&P 500), which returned
13.86% for the same period.(1) You can find the Fund's long-term performance
data in the Performance Summary beginning on page 16.
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended September 30, 2004, the domestic economy grew, with
one-year gross domestic product increasing an estimated 3.9%. Major contributors
to growth included inventory investment, equipment and software spending, and
federal government spending. The economy experienced solid export growth and a
resilient housing market; however, job worries contributed to declining consumer
confidence late in the period, which could be seen in relatively weak consumer
spending and modest retail sales.
Labor market conditions improved during the reporting period. More than one-half
of the jobs lost during the recession and weak economic expansion have been
recovered. The economy created 1.8 million jobs since summer 2003. In addition,
the unemployment rate fell from 6.1% in September 2003 to 5.4% at period-end.(2)
Services created the most jobs led by leisure and hospitality, education and
health, and business and professional services.
(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.
(2) Source: Bureau of Labor Statistics.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 75.
Annual Report | 13
PORTFOLIO BREAKDOWN
Franklin Growth Fund
Based on Total Net Assets
as of 9/30/04
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Health Technology 22.2%
Producer Manufacturing 20.4%
Electronic Technology 17.8%
Technology Services 11.3%
Consumer Services 4.7%
Transportation 4.1%
Consumer Non-Durables 3.3%
Commercial Services 3.0%
Distribution Services 2.9%
Consumer Durables 2.4%
Energy Minerals 2.3%
Other 5.6%
In light of positive economic developments, consumer inflation remained modest
but picked up speed in 2004, with record-high oil prices a dominant theme.
Excluding the volatile food and energy categories, consumer prices increased
2.0% for the 12 months ended September 30, 2004.(2) Consequently, the Federal
Reserve Board (Fed) raised the federal funds target rate during the reporting
period, with quarter percentage point hikes on June 30, August 10 and September
21. As a result of the increases, the federal funds target rate rose from 1.0%
to 1.75%. With core inflation expected to remain relatively low, Fed
policymakers believe they can raise interest rates at a measured pace.
Nonetheless, the Fed said it will respond to changes in economic prospects as
needed to fulfill its obligation to maintain price stability.
Domestic equity markets sustained a rally through early 2004, then flattened and
traded in a fairly narrow range through period-end. Despite continued signs of
enhanced corporate fundamentals, investors appeared cautious due to geopolitical
uncertainty, soaring oil prices and rising short-term interest rates. The S&P
500 rose 13.86% for the 12 months under review, while the technology-heavy
NASDAQ Composite Index gained 6.75%.(3)
INVESTMENT STRATEGY
We seek to invest in companies that have strong management teams, financials and
industry leadership. The Fund looks for opportunities in new and rapidly growing
businesses and in mature businesses selling at depressed prices but offering
favorable recovery possibilities. 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
During the fiscal year under review, the Fund's performance was helped by
several holdings from diverse industries. Yahoo!, a leading Internet services
provider, increased in value more than 90% during the period. Boeing and Tyco
International also contributed to Fund performance, as did Carnival and Illinois
Tool Works.
(3) Source: Standard & Poor's Micropal. Please see footnote 1 for a
description of the S&P 500. 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 3,000
companies.
14 | Annual Report
Despite the Fund's double-digit performance, there were some detractors from
Fund performance. For example, Intel fell almost 27% in value during the period.
Merck and IAC/InterActiveCorp also dropped in value, hindering the Fund's
return. During the period, we established a new position in Eastman Kodak. At
period-end, the Fund was fully invested and broadly diversified, with holdings
in 110 companies.
We welcome your comments and questions and look forward to serving your
investment needs in the years ahead.
[PHOTO OMITTED] /s/ V. Jerry Palmieri
V. Jerry Palmieri
Portfolio Manager
Franklin Growth Fund
TOP 10 HOLDINGS
Franklin Growth Fund
9/30/04
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
3M Co. 3.1%
PRODUCER MANUFACTURING
- --------------------------------------------------------------------------------
Pfizer Inc. 2.9%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Johnson & Johnson 2.7%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Yahoo! Inc. 2.6%
TECHNOLOGY SERVICES
- --------------------------------------------------------------------------------
Northrop Grumman Corp. 2.6%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Amgen Inc. 2.5%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Genentech Inc. 2.5%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Boeing Co. 2.5%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
General Dynamics Corp. 2.5%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
International Business Machines Corp. 2.3%
TECHNOLOGY SERVICES
- --------------------------------------------------------------------------------
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF SEPTEMBER 30, 2004, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS 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 ADVISER 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 | 15
PERFORMANCE SUMMARY AS OF 9/30/04
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 9/30/04 9/30/03
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.71 $30.58 $26.87
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/03-9/30/04)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.0289
- -----------------------------------------------------------------------------------------------
CLASS B CHANGE 9/30/04 9/30/03
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.45 $29.77 $26.32
- -----------------------------------------------------------------------------------------------
CLASS C CHANGE 9/30/04 9/30/03
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.42 $29.51 $26.09
- -----------------------------------------------------------------------------------------------
CLASS R CHANGE 9/30/04 9/30/03
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.65 $30.39 $26.74
- -----------------------------------------------------------------------------------------------
ADVISOR CLASS CHANGE 9/30/04 9/30/03
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.72 $30.63 $26.91
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/03-9/30/04)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.0945
- -----------------------------------------------------------------------------------------------
16 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
PERFORMANCE
CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY.
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- -----------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +13.92% +0.63% +144.78%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +7.37% -1.06% +8.72%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,737 $9,483 $23,075
- -----------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +13.11% -3.04% +1.84%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +9.11% -0.99% +0.15%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,911 $9,516 $10,089
- -----------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +13.11% -3.06% +100.13%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +12.11% -0.62% +7.64%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,211 $9,694 $20,013
- -----------------------------------------------------------------------------------------------------
CLASS R 1-YEAR INCEPTION (1/1/02)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +13.65% -3.59%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +12.65% -1.32%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,265 $9,641
- -----------------------------------------------------------------------------------------------------
ADVISOR CLASS(4) 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +14.19% +1.88% +151.37%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +14.19% +0.37% +9.66%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,419 $10,188 $25,137
- -----------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 17
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 any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------
CLASS A 9/30/04
- ---------------------------------------
1-Year +7.37%
- ---------------------------------------
5-Year -1.06%
- ---------------------------------------
10-Year +8.72%
- ---------------------------------------
FRANKLIN GROWTH FUND - CLASS A
Growth of a $10,000 Investment*
(10/1/1994 - 9/30/2004)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN GROWTH
DATE FUND - CLASS A S&P 500 INDEX(5)
--------------------------------------------------------------
10/1/1994 $9,427 $10,000
10/31/1994 $9,622 $10,224
11/30/1994 $9,370 $9,852
12/31/1994 $9,566 $9,998
1/31/1995 $9,712 $10,258
2/28/1995 $10,108 $10,657
3/31/1995 $10,465 $10,971
4/30/1995 $10,764 $11,294
5/31/1995 $11,000 $11,744
6/30/1995 $11,428 $12,017
7/31/1995 $11,995 $12,415
8/31/1995 $11,976 $12,446
9/30/1995 $12,359 $12,971
10/31/1995 $12,429 $12,925
11/30/1995 $13,130 $13,491
12/31/1995 $13,239 $13,751
1/31/1996 $13,621 $14,219
2/29/1996 $13,913 $14,351
3/31/1996 $13,965 $14,489
4/30/1996 $14,250 $14,703
5/31/1996 $14,522 $15,081
6/30/1996 $14,418 $15,139
7/31/1996 $13,673 $14,470
8/31/1996 $14,055 $14,776
9/30/1996 $14,794 $15,607
10/31/1996 $14,833 $16,037
11/30/1996 $15,765 $17,248
12/31/1996 $15,448 $16,906
1/31/1997 $15,837 $17,962
2/28/1997 $15,870 $18,103
3/31/1997 $15,474 $17,361
4/30/1997 $16,028 $18,396
5/31/1997 $16,912 $19,515
6/30/1997 $17,228 $20,389
7/31/1997 $17,914 $22,011
8/31/1997 $17,314 $20,778
9/30/1997 $17,861 $21,916
10/31/1997 $17,710 $21,185
11/30/1997 $18,112 $22,164
12/31/1997 $18,322 $22,545
1/31/1998 $18,511 $22,794
2/28/1998 $19,289 $24,437
3/31/1998 $19,709 $25,687
4/30/1998 $19,972 $25,946
5/31/1998 $19,688 $25,500
6/30/1998 $20,060 $26,535
7/31/1998 $19,986 $26,254
8/31/1998 $18,302 $22,462
9/30/1998 $19,330 $23,901
10/31/1998 $20,520 $25,843
11/30/1998 $21,257 $27,409
12/31/1998 $21,716 $28,987
1/31/1999 $22,096 $30,199
2/28/1999 $21,861 $29,260
3/31/1999 $22,455 $30,431
4/30/1999 $23,186 $31,609
5/31/1999 $22,903 $30,864
6/30/1999 $23,863 $32,575
7/31/1999 $23,476 $31,560
8/31/1999 $23,573 $31,403
9/30/1999 $22,931 $30,544
10/31/1999 $23,304 $32,476
11/30/1999 $23,601 $33,136
12/31/1999 $24,362 $35,086
1/31/2000 $24,158 $33,324
2/29/2000 $23,594 $32,693
3/31/2000 $25,646 $35,890
4/30/2000 $25,950 $34,810
5/31/2000 $26,055 $34,098
6/30/2000 $26,422 $34,939
7/31/2000 $26,013 $34,393
8/31/2000 $27,156 $36,528
9/30/2000 $26,034 $34,600
10/31/2000 $26,380 $34,453
11/30/2000 $25,696 $31,739
12/31/2000 $26,197 $31,895
1/31/2001 $26,690 $33,026
2/28/2001 $25,352 $30,016
3/31/2001 $23,475 $28,116
4/30/2001 $25,367 $30,299
5/31/2001 $25,755 $30,502
6/30/2001 $24,574 $29,760
7/31/2001 $24,514 $29,467
8/31/2001 $23,400 $27,624
9/30/2001 $20,797 $25,394
10/31/2001 $21,493 $25,878
11/30/2001 $23,534 $27,863
12/31/2001 $23,716 $28,107
1/31/2002 $23,378 $27,697
2/28/2002 $23,212 $27,163
3/31/2002 $24,017 $28,184
4/30/2002 $22,497 $26,476
5/31/2002 $22,053 $26,282
6/30/2002 $20,389 $24,410
7/31/2002 $18,553 $22,508
8/31/2002 $18,591 $22,656
9/30/2002 $16,566 $20,196
10/31/2002 $17,718 $21,971
11/30/2002 $18,929 $23,263
12/31/2002 $17,941 $21,897
1/31/2003 $17,255 $21,325
2/28/2003 $16,863 $21,004
3/31/2003 $16,863 $21,206
4/30/2003 $18,092 $22,954
5/31/2003 $19,275 $24,162
6/30/2003 $19,848 $24,471
7/31/2003 $20,436 $24,902
8/31/2003 $20,888 $25,387
9/30/2003 $20,255 $25,118
10/31/2003 $21,454 $26,538
11/30/2003 $21,725 $26,772
12/31/2003 $22,969 $28,175
1/31/2004 $23,316 $28,692
2/29/2004 $23,422 $29,091
3/31/2004 $22,879 $28,652
4/30/2004 $22,894 $28,203
5/31/2004 $23,263 $28,589
6/30/2004 $24,214 $29,144
7/31/2004 $22,939 $28,180
8/31/2004 $22,743 $28,293
9/30/2004 $23,075 $28,599
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------
CLASS B 9/30/04
- ---------------------------------------
1-Year +9.11%
- ---------------------------------------
5-Year -0.99%
- ---------------------------------------
Since Inception (1/1/99) +0.15%
- ---------------------------------------
FRANKLIN GROWTH FUND - CLASS B
Growth of a $10,000 Investment*
(1/1/1999 - 9/30/2004)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN GROWTH
DATE FUND - CLASS B S&P 500 INDEX(5)
---------------------------------------------------------
1/1/1999 $10,000 $10,000
1/31/1999 $10,172 $10,418
2/28/1999 $10,057 $10,094
3/31/1999 $10,324 $10,498
4/30/1999 $10,655 $10,905
5/31/1999 $10,515 $10,647
6/30/1999 $10,951 $11,238
7/31/1999 $10,766 $10,887
8/31/1999 $10,804 $10,834
9/30/1999 $10,502 $10,537
10/31/1999 $10,668 $11,203
11/30/1999 $10,792 $11,431
12/31/1999 $11,134 $12,104
1/31/2000 $11,031 $11,496
2/29/2000 $10,771 $11,279
3/31/2000 $11,698 $12,381
4/30/2000 $11,831 $12,009
5/31/2000 $11,873 $11,763
6/30/2000 $12,031 $12,053
7/31/2000 $11,837 $11,865
8/31/2000 $12,352 $12,601
9/30/2000 $11,834 $11,936
10/31/2000 $11,983 $11,886
11/30/2000 $11,665 $10,949
12/31/2000 $11,883 $11,003
1/31/2001 $12,102 $11,393
2/28/2001 $11,491 $10,355
3/31/2001 $10,630 $9,699
4/30/2001 $11,477 $10,453
5/31/2001 $11,648 $10,523
6/30/2001 $11,108 $10,267
7/31/2001 $11,070 $10,166
8/31/2001 $10,565 $9,530
9/30/2001 $9,380 $8,760
10/31/2001 $9,687 $8,927
11/30/2001 $10,609 $9,612
12/31/2001 $10,683 $9,696
1/31/2002 $10,522 $9,555
2/28/2002 $10,444 $9,371
3/31/2002 $10,796 $9,723
4/30/2002 $10,108 $9,134
5/31/2002 $9,903 $9,067
6/30/2002 $9,147 $8,421
7/31/2002 $8,319 $7,765
8/31/2002 $8,333 $7,816
9/30/2002 $7,420 $6,967
10/31/2002 $7,929 $7,580
11/30/2002 $8,470 $8,025
12/31/2002 $8,018 $7,554
1/31/2003 $7,710 $7,357
2/28/2003 $7,529 $7,246
3/31/2003 $7,526 $7,316
4/30/2003 $8,070 $7,919
5/31/2003 $8,590 $8,335
6/30/2003 $8,839 $8,442
7/31/2003 $9,096 $8,591
8/31/2003 $9,291 $8,758
9/30/2003 $9,003 $8,665
10/31/2003 $9,530 $9,155
11/30/2003 $9,647 $9,236
12/31/2003 $10,190 $9,720
1/31/2004 $10,338 $9,898
2/29/2004 $10,382 $10,036
3/31/2004 $10,132 $9,884
4/30/2004 $10,136 $9,729
5/31/2004 $10,293 $9,863
6/30/2004 $10,707 $10,054
7/31/2004 $10,132 $9,722
8/31/2004 $10,043 $9,761
9/30/2004 $10,089 $9,866
18 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------
CLASS C 9/30/04
- ----------------------------------------
1-Year +12.11%
- ----------------------------------------
5-Year -0.62%
- ----------------------------------------
Since Inception (5/1/95) +7.64%
- ----------------------------------------
FRANKLIN GROWTH FUND - CLASS C
Growth of a $10,000 Investment*
(5/1/1995 - 9/30/2004)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN GROWTH
DATE FUND - CLASS C S&P 500 INDEX(5)
------------------------------------------------------
5/1/1995 $10,000 $10,000
5/31/1995 $10,237 $10,399
6/30/1995 $10,623 $10,640
7/31/1995 $11,151 $10,993
8/31/1995 $11,122 $11,020
9/30/1995 $11,472 $11,485
10/31/1995 $11,525 $11,444
11/30/1995 $12,172 $11,946
12/31/1995 $12,264 $12,176
1/31/1996 $12,608 $12,590
2/29/1996 $12,873 $12,707
3/31/1996 $12,915 $12,829
4/30/1996 $13,168 $13,018
5/31/1996 $13,415 $13,354
6/30/1996 $13,313 $13,404
7/31/1996 $12,614 $12,813
8/31/1996 $12,957 $13,083
9/30/1996 $13,632 $13,819
10/31/1996 $13,662 $14,200
11/30/1996 $14,512 $15,272
12/31/1996 $14,209 $14,970
1/31/1997 $14,552 $15,905
2/28/1997 $14,576 $16,029
3/31/1997 $14,203 $15,372
4/30/1997 $14,705 $16,289
5/31/1997 $15,506 $17,280
6/30/1997 $15,781 $18,054
7/31/1997 $16,405 $19,489
8/31/1997 $15,837 $18,398
9/30/1997 $16,332 $19,405
10/31/1997 $16,185 $18,758
11/30/1997 $16,540 $19,626
12/31/1997 $16,721 $19,962
1/31/1998 $16,883 $20,183
2/28/1998 $17,582 $21,638
3/31/1998 $17,950 $22,745
4/30/1998 $18,181 $22,974
5/31/1998 $17,913 $22,579
6/30/1998 $18,237 $23,496
7/31/1998 $18,156 $23,246
8/31/1998 $16,621 $19,889
9/30/1998 $17,539 $21,163
10/31/1998 $18,612 $22,883
11/30/1998 $19,261 $24,269
12/31/1998 $19,669 $25,667
1/31/1999 $19,999 $26,740
2/28/1999 $19,770 $25,909
3/31/1999 $20,290 $26,945
4/30/1999 $20,943 $27,988
5/31/1999 $20,677 $27,329
6/30/1999 $21,532 $28,844
7/31/1999 $21,164 $27,945
8/31/1999 $21,241 $27,806
9/30/1999 $20,645 $27,045
10/31/1999 $20,968 $28,756
11/30/1999 $21,222 $29,340
12/31/1999 $21,899 $31,067
1/31/2000 $21,693 $29,506
2/29/2000 $21,179 $28,949
3/31/2000 $23,005 $31,779
4/30/2000 $23,256 $30,823
5/31/2000 $23,339 $30,192
6/30/2000 $23,654 $30,937
7/31/2000 $23,275 $30,453
8/31/2000 $24,284 $32,344
9/30/2000 $23,269 $30,637
10/31/2000 $23,564 $30,507
11/30/2000 $22,934 $28,103
12/31/2000 $23,369 $28,241
1/31/2001 $23,789 $29,243
2/28/2001 $22,591 $26,578
3/31/2001 $20,898 $24,895
4/30/2001 $22,570 $26,828
5/31/2001 $22,902 $27,008
6/30/2001 $21,839 $26,351
7/31/2001 $21,765 $26,092
8/31/2001 $20,769 $24,460
9/30/2001 $18,446 $22,485
10/31/2001 $19,049 $22,914
11/30/2001 $20,850 $24,671
12/31/2001 $20,996 $24,887
1/31/2002 $20,685 $24,524
2/28/2002 $20,529 $24,051
3/31/2002 $21,220 $24,956
4/30/2002 $19,871 $23,444
5/31/2002 $19,464 $23,271
6/30/2002 $17,985 $21,614
7/31/2002 $16,351 $19,930
8/31/2002 $16,378 $20,060
9/30/2002 $14,588 $17,882
10/31/2002 $15,591 $19,455
11/30/2002 $16,649 $20,599
12/31/2002 $15,768 $19,389
1/31/2003 $15,157 $18,882
2/28/2003 $14,798 $18,598
3/31/2003 $14,791 $18,777
4/30/2003 $15,863 $20,325
5/31/2003 $16,887 $21,394
6/30/2003 $17,375 $21,668
7/31/2003 $17,884 $22,050
8/31/2003 $18,263 $22,479
9/30/2003 $17,701 $22,241
10/31/2003 $18,731 $23,499
11/30/2003 $18,955 $23,705
12/31/2003 $20,033 $24,947
1/31/2004 $20,318 $25,405
2/29/2004 $20,406 $25,758
3/31/2004 $19,918 $25,370
4/30/2004 $19,918 $24,972
5/31/2004 $20,230 $25,314
6/30/2004 $21,044 $25,806
7/31/2004 $19,918 $24,952
8/31/2004 $19,735 $25,052
9/30/2004 $20,013 $25,323
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS R 9/30/04
- ---------------------------------------------
1-Year +12.65%
- ---------------------------------------------
Since Inception (1/1/02) -1.32%
- ---------------------------------------------
FRANKLIN GROWTH FUND - CLASS R
Growth of a $10,000 Investment*
(1/1/2002 - 9/30/2004)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN GROWTH
DATE FUND - CLASS R S&P 500 INDEX(5)
------------------------------------------------------
1/1/2002 $10,000 $10,000
1/31/2002 $9,832 $9,854
2/28/2002 $9,759 $9,664
3/31/2002 $10,098 $10,028
4/30/2002 $9,456 $9,420
5/31/2002 $9,266 $9,351
6/30/2002 $8,566 $8,685
7/31/2002 $7,793 $8,008
8/31/2002 $7,806 $8,061
9/30/2002 $6,957 $7,185
10/31/2002 $7,435 $7,817
11/30/2002 $7,945 $8,277
12/31/2002 $7,528 $7,791
1/31/2003 $7,239 $7,587
2/28/2003 $7,071 $7,473
3/31/2003 $7,071 $7,545
4/30/2003 $7,585 $8,167
5/31/2003 $8,080 $8,596
6/30/2003 $8,318 $8,706
7/31/2003 $8,562 $8,860
8/31/2003 $8,750 $9,032
9/30/2003 $8,483 $8,937
10/31/2003 $8,984 $9,442
11/30/2003 $9,095 $9,525
12/31/2003 $9,613 $10,024
1/31/2004 $9,756 $10,208
2/29/2004 $9,801 $10,350
3/31/2004 $9,573 $10,194
4/30/2004 $9,576 $10,034
5/31/2004 $9,731 $10,171
6/30/2004 $10,124 $10,369
7/31/2004 $9,587 $10,026
8/31/2004 $9,505 $10,066
9/30/2004 $9,641 $10,175
Annual Report | 19
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------
ADVISOR CLASS(4) 9/30/04
- -------------------------------------------
1-Year +14.19%
- -------------------------------------------
5-Year +0.37%
- -------------------------------------------
10-Year +9.66%
- -------------------------------------------
FRANKLIN GROWTH FUND - ADVISOR CLASS
Growth of a $10,000 Investment**
(10/1/1994 - 9/30/2004)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN GROWTH
FUND - ADVISOR
DATE CLASS S&P 500 INDEX(5)
-------------------------------------------------
10/1/1994 $10,000 $10,000
10/31/1994 $10,207 $10,224
11/30/1994 $9,940 $9,852
12/31/1994 $10,147 $9,998
1/31/1995 $10,303 $10,258
2/28/1995 $10,722 $10,657
3/31/1995 $11,101 $10,971
4/30/1995 $11,419 $11,294
5/31/1995 $11,670 $11,744
6/30/1995 $12,123 $12,017
7/31/1995 $12,725 $12,415
8/31/1995 $12,705 $12,446
9/30/1995 $13,111 $12,971
10/31/1995 $13,185 $12,925
11/30/1995 $13,929 $13,491
12/31/1995 $14,045 $13,751
1/31/1996 $14,450 $14,219
2/29/1996 $14,759 $14,351
3/31/1996 $14,814 $14,489
4/30/1996 $15,116 $14,703
5/31/1996 $15,405 $15,081
6/30/1996 $15,295 $15,139
7/31/1996 $14,505 $14,470
8/31/1996 $14,910 $14,776
9/30/1996 $15,694 $15,607
10/31/1996 $15,735 $16,037
11/30/1996 $16,724 $17,248
12/31/1996 $16,388 $16,906
1/31/1997 $16,939 $17,962
2/28/1997 $16,981 $18,103
3/31/1997 $16,566 $17,361
4/30/1997 $17,157 $18,396
5/31/1997 $18,103 $19,515
6/30/1997 $18,441 $20,389
7/31/1997 $19,182 $22,011
8/31/1997 $18,540 $20,778
9/30/1997 $19,133 $21,916
10/31/1997 $18,970 $21,185
11/30/1997 $19,414 $22,164
12/31/1997 $19,638 $22,545
1/31/1998 $19,847 $22,794
2/28/1998 $20,681 $24,437
3/31/1998 $21,138 $25,687
4/30/1998 $21,420 $25,946
5/31/1998 $21,123 $25,500
6/30/1998 $21,522 $26,535
7/31/1998 $21,450 $26,254
8/31/1998 $19,645 $22,462
9/30/1998 $20,754 $23,901
10/31/1998 $22,036 $25,843
11/30/1998 $22,834 $27,409
12/31/1998 $23,332 $28,987
1/31/1999 $23,747 $30,199
2/28/1999 $23,495 $29,260
3/31/1999 $24,134 $30,431
4/30/1999 $24,920 $31,609
5/31/1999 $24,631 $30,864
6/30/1999 $25,669 $32,575
7/31/1999 $25,254 $31,560
8/31/1999 $25,365 $31,403
9/30/1999 $24,675 $30,544
10/31/1999 $25,082 $32,476
11/30/1999 $25,409 $33,136
12/31/1999 $26,237 $35,086
1/31/2000 $26,016 $33,324
2/29/2000 $25,416 $32,693
3/31/2000 $27,634 $35,890
4/30/2000 $27,961 $34,810
5/31/2000 $28,082 $34,098
6/30/2000 $28,492 $34,939
7/31/2000 $28,052 $34,393
8/31/2000 $29,290 $36,528
9/30/2000 $28,090 $34,600
10/31/2000 $28,469 $34,453
11/30/2000 $27,733 $31,739
12/31/2000 $28,276 $31,895
1/31/2001 $28,817 $33,026
2/28/2001 $27,380 $30,016
3/31/2001 $25,354 $28,116
4/30/2001 $27,404 $30,299
5/31/2001 $27,832 $30,502
6/30/2001 $26,556 $29,760
7/31/2001 $26,500 $29,467
8/31/2001 $25,305 $27,624
9/30/2001 $22,488 $25,394
10/31/2001 $23,247 $25,878
11/30/2001 $25,467 $27,863
12/31/2001 $25,665 $28,107
1/31/2002 $25,299 $27,697
2/28/2002 $25,128 $27,163
3/31/2002 $26,008 $28,184
4/30/2002 $24,362 $26,476
5/31/2002 $23,890 $26,282
6/30/2002 $22,090 $24,410
7/31/2002 $20,103 $22,508
8/31/2002 $20,151 $22,656
9/30/2002 $17,960 $20,196
10/31/2002 $19,214 $21,971
11/30/2002 $20,534 $23,263
12/31/2002 $19,462 $21,897
1/31/2003 $18,726 $21,325
2/28/2003 $18,301 $21,004
3/31/2003 $18,309 $21,206
4/30/2003 $19,642 $22,954
5/31/2003 $20,934 $24,162
6/30/2003 $21,556 $24,471
7/31/2003 $22,203 $24,902
8/31/2003 $22,694 $25,387
9/30/2003 $22,014 $25,118
10/31/2003 $23,324 $26,538
11/30/2003 $23,618 $26,772
12/31/2003 $24,983 $28,175
1/31/2004 $25,361 $28,692
2/29/2004 $25,484 $29,091
3/31/2004 $24,893 $28,652
4/30/2004 $24,918 $28,203
5/31/2004 $25,328 $28,589
6/30/2004 $26,362 $29,144
7/31/2004 $24,983 $28,180
8/31/2004 $24,770 $28,293
9/30/2004 $25,137 $28,599
ENDNOTES
HISTORICALLY, THE FUND HAS FOCUSED ON LARGER COMPANIES. THE FUND MAY ALSO INVEST
IN SMALL, RELATIVELY NEW AND/OR UNSEASONED COMPANIES, WHICH INVOLVES ADDITIONAL
RISKS, AS THE PRICE OF THESE SECURITIES CAN BE VOLATILE, PARTICULARLY OVER THE
SHORT TERM. 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: Prior to 8/3/98, these shares were offered at a lower initial
sales charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares 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: Shares are available to certain eligible investors as
described in the prospectus.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(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.
(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.
(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 +53.39% and +5.68%.
(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.
* FUND PERFORMANCE INCLUDES ALL SALES CHARGES.
** PRIOR TO 1/2/97, FUND PERFORMANCE INCLUDES HISTORICAL CLASS A DATA, WHICH
INCLUDES 12B-1 EXPENSES, BUT EXCLUDES SALES CHARGES.
20 | Annual Report
YOUR FUND'S EXPENSES
FRANKLIN GROWTH FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 21
YOUR FUND'S EXPENSES (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -----------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 3/31/04 VALUE 9/30/04 PERIOD* 3/31/04-9/30/04
- -----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,008.60 $4.82
- -----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.20 $4.85
- -----------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,005.10 $8.57
- -----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.45 $8.62
- -----------------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,004.80 $8.57
- -----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.45 $8.62
- -----------------------------------------------------------------------------------------------------------------
CLASS R
- -----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,007.30 $6.07
- -----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.95 $6.11
- -----------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,009.90 $3.57
- -----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.45 $3.59
- -----------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.96%; B: 1.71%; C: 1.71%; R: 1.21%; and Advisor: 0.71%), multiplied by
the average account value over the period, multiplied by 183/366 to
reflect the one-half year period.
22 | Annual Report
FRANKLIN INCOME FUND
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Income Fund seeks to maximize
income while maintaining prospects for capital appreciation through a
diversified portfolio of securities.
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Income Fund's annual report for the fiscal
year ended September 30, 2004.
PERFORMANCE OVERVIEW
Franklin Income Fund - Class A posted a +15.50% cumulative total return for the
12-month period ended September 30, 2004. The Fund outperformed its benchmark,
the Standard & Poor's 500 (S&P 500) Composite Index, which returned 13.86%; the
Lehman Brothers (LB) U.S. Aggregate Index, which returned 3.68%; and the Lipper
Income Funds Objective Average, which returned 9.01%, during the same period.(1)
You can find the Fund's long-term performance data in the Performance Summary
beginning on page 28.
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended September 30, 2004, the domestic economy grew, with
one-year gross domestic product increasing an estimated 3.9%. Major contributors
to growth included inventory investment, equipment and software spending, and
federal government spending. The economy experienced solid export growth and a
resilient housing market; however, job worries contributed to declining consumer
confidence late in the period, which could be seen in relatively weak consumer
spending and modest retail sales.
(1) Sources: Standard & Poor's Micropal; Lehman Brothers Inc.; 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. 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. The Lipper Income Funds Objective Average is
calculated by averaging the total return of all funds within the Lipper
Income Funds classification in the Lipper Open-End underlying fund
universe for the period indicated. Lipper Income Funds are defined as
funds that normally seek a high level of current income through investing
in income-producing stocks, bonds and money market instruments. For the 12
months ended 9/30/04, the Lipper Income Funds Objective Average consisted
of 175 funds. Lipper calculations do not include sales charges. Fund
performance relative to the average may have differed if these or other
factors had been considered. Indexes are unmanaged and include
reinvestment of any income or distributions. 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 NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 85.
Annual Report | 23
TOP 5 STOCK HOLDINGS
Franklin Income Fund
9/30/04
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Ameren Corp. 1.7%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
Dominion Resources Inc. 1.4%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
Ford Motor Co. Capital Trust II 1.4%
CONSUMER DURABLES
- --------------------------------------------------------------------------------
Merck & Co. Inc. 1.4%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Pfizer Inc. 1.3%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
TOP 5 BOND HOLDINGS
Franklin Income Fund
9/30/04
- --------------------------------------------------------------------------------
% OF TOTAL
NET ASSETS
- --------------------------------------------------------------------------------
Charter Communications Holdings LLC 2.9%
- --------------------------------------------------------------------------------
FHLMC 2.4%
- --------------------------------------------------------------------------------
Dynegy Holdings Inc. 2.3%
- --------------------------------------------------------------------------------
GNMA 2.2%
- --------------------------------------------------------------------------------
Calpine Corp. 1.8%
- --------------------------------------------------------------------------------
Labor market conditions improved during the reporting period. More than one-half
of the jobs lost during the recession and weak economic expansion have been
recovered. The economy created 1.8 million jobs since summer 2003. In addition,
the unemployment rate fell from 6.1% in September 2003 to 5.4% at period-end.(2)
Services created the most jobs led by leisure and hospitality, education and
health, and business and professional services.
In light of positive economic developments, consumer inflation remained modest
but picked up speed in 2004, with record-high oil prices a dominant theme.
Excluding the volatile food and energy categories, consumer prices increased
2.0% for the 12 months ended September 30, 2004.(2) Consequently, the Federal
Reserve Board (Fed) raised the federal funds target rate during the reporting
period, with quarter percentage point hikes on June 30, August 10 and September
21. As a result of the increases, the federal funds target rate rose from 1.0%
to 1.75%. With core inflation expected to remain relatively low, Fed
policymakers believe they can raise interest rates at a measured pace.
Nonetheless, the Fed said it will respond to changes in economic prospects as
needed to fulfill its obligation to maintain price stability.
Domestic equity markets sustained a rally through early 2004, then flattened and
traded in a fairly narrow range through period-end. Despite continued signs of
enhanced corporate fundamentals, investors appeared cautious due to geopolitical
uncertainty, soaring oil prices and rising short-term interest rates. The S&P
500 rose 13.86% for the 12 months under review, while the technology-heavy
NASDAQ Composite Index gained 6.75%.(3)
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: Bureau of Labor Statistics.
(3) Source: Standard & Poor's Micropal. See footnote 1 for a description of
the S&P 500. 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 3,000 companies.
24 | Annual Report
DIVIDEND DISTRIBUTIONS*
Franklin Income Fund
10/1/03-9/30/04
- ---------------------------------------------------------------------------------------------------------------
DIVIDEND PER SHARE
-----------------------------------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS B1** CLASS C CLASS R ADVISOR CLASS
- ---------------------------------------------------------------------------------------------------------------
October 1.30 cents 1.14 cents 1.20 cents 1.20 cents 1.24 cents 1.33 cents
- ---------------------------------------------------------------------------------------------------------------
November 1.30 cents 1.14 cents 1.20 cents 1.20 cents 1.24 cents 1.33 cents
- ---------------------------------------------------------------------------------------------------------------
December 1.30 cents 1.13 cents 1.20 cents 1.21 cents 1.24 cents 1.33 cents
- ---------------------------------------------------------------------------------------------------------------
January 1.30 cents 1.13 cents 1.20 cents 1.21 cents 1.24 cents 1.33 cents
- ---------------------------------------------------------------------------------------------------------------
February 1.30 cents 1.13 cents 1.20 cents 1.21 cents 1.24 cents 1.33 cents
- ---------------------------------------------------------------------------------------------------------------
March 1.30 cents 1.13 cents 1.19 cents 1.19 cents 1.23 cents 1.33 cents
- ---------------------------------------------------------------------------------------------------------------
April 1.30 cents 1.13 cents 1.19 cents 1.19 cents 1.23 cents 1.33 cents
- ---------------------------------------------------------------------------------------------------------------
May 1.30 cents 1.13 cents 1.19 cents 1.19 cents 1.23 cents 1.33 cents
- ---------------------------------------------------------------------------------------------------------------
June 1.30 cents 1.14 cents 1.21 cents 1.21 cents 1.23 cents 1.33 cents
- ---------------------------------------------------------------------------------------------------------------
July 1.30 cents 1.14 cents 1.21 cents 1.21 cents 1.23 cents 1.33 cents
- ---------------------------------------------------------------------------------------------------------------
August 1.30 cents 1.14 cents 1.21 cents 1.21 cents 1.23 cents 1.33 cents
- ---------------------------------------------------------------------------------------------------------------
September 1.30 cents 1.14 cents 1.20 cents 1.20 cents 1.23 cents 1.33 cents
- ---------------------------------------------------------------------------------------------------------------
TOTAL 15.60 CENTS 13.62 CENTS 14.40 CENTS 14.43 CENTS 14.81 CENTS 15.96 CENTS
- ---------------------------------------------------------------------------------------------------------------
* All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
** 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.
MANAGER'S DISCUSSION
Overall interest rate levels remained low during the year under review, and we
continued to emphasize opportunities in high-dividend paying common stocks,
convertible securities and corporate bonds. Government and government agency
securities played a lesser role in the portfolio relative to the recent past
(2000-2002), as our concerns over increasing inflationary pressures and
subsequent higher interest rates led us to emphasize corporate securities, which
are affected by sector- and company-specific fundamental conditions.
Investment grade and non-investment grade corporate bonds performed well as
improving fundamentals, stable financial markets and historically low interest
rates contributed to the sector's strong results. In line with the Fund's
investment strategy, we took profits in securities that appreciated and that we
believed no longer offered the combination of attractive current yield and the
potential for longer-term appreciation. For example, the yield difference
between U.S. Treasury securities and non-investment grade corporate bonds
tightened over the course of the year, from 0.77 to 0.27 percentage points, as
represented by the CSFB High Yield Bond Index.(4) During the Fund's fiscal year,
we took profits
(4) 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.
Annual Report | 25
PORTFOLIO BREAKDOWN
Franklin Income Fund
Based on Total Net Assets
as of 9/30/04
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
Corporate Straight Bonds 25.9%
Utilities Stocks 18.2%
Energy Minerals Stocks 5.4%
Health Technology Stocks 4.9%
U.S. Government & Agency Securities 4.5%
Zero Coupon & Step-Up Bonds 4.3%
Finance Stocks 3.7%
Corporate Convertible Bonds 3.1%
Communications Stocks 2.7%
Real Estate Investment Trusts Stocks 2.7%
Consumer Durables Stocks 2.2%
Electronic Technology Stocks 1.7%
Municipal Bonds 1.6%
Industrial Services Stocks 0.9%
Consumer Non-Durables Stocks 0.8%
Technology Services Stocks 0.7%
Other Stocks 2.3%
Short-Term Investments & Other Net Assets 14.4%
from several corporate bond holdings including Amkor Technology, Chesapeake
Energy, Echostar Communications, IMC Global, Tyco International and Venetian
Casino. Despite strong sector performance, we continued to look for
opportunities to add to holdings that we believed still offered the combination
of yield with the potential for long-term capital appreciation. Based on our
strategy, we added to holdings in Charter Communications, Qwest Communications
and Dynegy Holdings.
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 profile from regulated utility
operations. This overweighted position compared with the LB U.S. Aggregate
Index, including holdings in FirstEnergy, Exelon and Ameren, aided Fund
performance. In addition, employing our multi-asset class approach with in-depth
fundamental analysis, we identified opportunities in the utilities sector and
held positions in convertible securities of Sempra Energy and TXU Corp., as well
as corporate bond investments in Allegheny Energy, Pacific Gas & Electric and
Sierra Pacific Resources. During the past fiscal year, we added to Allegheny
Energy and Sierra Pacific Resources corporate bonds and initiated a position
with Pacific Gas & Electric, which aided Fund performance. This flexibility to
apply our fundamental research strength across a wide range of potential
investments can help us meet the Fund's investment goal. With more companies in
the utilities industry pursuing a "back-to-basics" approach focusing on core
regulated businesses, many companies including Exelon, Cinergy and Southern
Company increased their dividends, which helped drive strong relative
performance.
For most of the past year global oil prices rose, fueled by economic growth in
the U.S. and abroad as well as geopolitical turmoil in several major oil-
producing regions. If these trends continue along with the industry's ongoing
challenge to replace depleted reserves, the potential exists for a strong
pricing environment for oil and related products. Therefore, consistent with our
investment strategy, at period-end we held positions in international integrated
oil companies including BP, ChevronTexaco and Royal Dutch Petroleum, as well as
domestic integrated Marathon Oil Company. These positions aided Fund performance
given the rise in share prices as a result of the expected increase in earnings
and cash flow from higher commodity prices.
26 | Annual Report
Health technology investments, particularly stocks of major pharmaceutical
companies, underperformed the overall market and negatively impacted Fund
performance. The health technology industry faced challenges to existing
products from generic manufacturers and overall pressure to keep costs down in
the face of possible drug importation legislation. However, we found the
long-term value of our health technology holdings, including Pfizer, Merck,
Bristol-Myers Squibb, Wyeth, Schering-Plough and Johnson & Johnson, compelling
and their dividend yields attractive in the near term.
Thank you for your continued participation in Franklin Income Fund. We look
forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Edward Perks
Edward Perks, CFA
[PHOTO OMITTED] /s/ Charles B. Johnson
Charles B. Johnson
Portfolio Management Team
Franklin Income Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF SEPTEMBER 30, 2004, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS 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 ADVISER 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 | 27
PERFORMANCE SUMMARY AS OF 9/30/04
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 9/30/04 9/30/03
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.17 $2.42 $2.25
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/03-9/30/04)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.1560
- -----------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0120
- -----------------------------------------------------------------------------------------------
TOTAL $0.1680
- -----------------------------------------------------------------------------------------------
CLASS B CHANGE 9/30/04 9/30/03
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.17 $2.41 $2.24
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/03-9/30/04)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.1362
- -----------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0120
- -----------------------------------------------------------------------------------------------
TOTAL $0.1482
- -----------------------------------------------------------------------------------------------
CLASS B1 CHANGE 9/30/04 9/30/03
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.17 $2.42 $2.25
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/03-9/30/04)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.1440
- -----------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0120
- -----------------------------------------------------------------------------------------------
TOTAL $0.1560
- -----------------------------------------------------------------------------------------------
CLASS C CHANGE 9/30/04 9/30/03
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.17 $2.43 $2.26
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/03-9/30/04)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.1443
- -----------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0120
- -----------------------------------------------------------------------------------------------
TOTAL $0.1563
- -----------------------------------------------------------------------------------------------
28 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
PRICE AND DISTRIBUTION INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------------------------
CLASS R CHANGE 9/30/04 9/30/03
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.17 $2.40 $2.23
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/03-9/30/04)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.1481
- --------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0120
- --------------------------------------------------------------------------------------------------
TOTAL $0.1601
- --------------------------------------------------------------------------------------------------
ADVISOR CLASS CHANGE 9/30/04 9/30/03
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.17 $2.41 $2.24
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/03-9/30/04)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.1596
- --------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0120
- --------------------------------------------------------------------------------------------------
TOTAL $0.1716
- --------------------------------------------------------------------------------------------------
Franklin Income Fund paid distributions derived from long-term capital gains of
1.20 cents ($0.0120) per share in December 2003. The Fund hereby designates such
distributions as capital gain dividends per Internal Revenue Code Section 852
(b)(3).
Annual Report | 29
PERFORMANCE SUMMARY (CONTINUED)
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS B1: CDSC DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED
THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18
MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL
TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- ------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +15.50% +63.55% +154.52%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +10.58% +9.38% +9.31%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,058 $15,656 $24,355
- ------------------------------------------------------------------------------------------------------
Distribution Rate(4) 6.17%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 4.69%
- ------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR INCEPTION (11/1/01)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return6(1) +14.59% +36.87%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +10.59% +10.54%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,059 $13,387
- ------------------------------------------------------------------------------------------------------
Distribution Rate(4) 5.68%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 4.05%
- ------------------------------------------------------------------------------------------------------
CLASS B1 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +14.90% +59.52% +60.06%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +10.90% +9.51% +8.41%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,090 $15,752 $15,906
- ------------------------------------------------------------------------------------------------------
Distribution Rate(4) 5.95%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 4.40%
- ------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +14.85% +59.90% +131.86%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +13.85% +9.84% +9.34%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,385 $15,990 $23,186
- ------------------------------------------------------------------------------------------------------
Distribution Rate(4) 5.93%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 4.40%
- ------------------------------------------------------------------------------------------------------
CLASS R 1-YEAR INCEPTION (1/1/02)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +15.25% +34.49%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +14.25% +11.41%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,425 $13,449
- ------------------------------------------------------------------------------------------------------
Distribution Rate(4) 6.15%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 4.55%
- ------------------------------------------------------------------------------------------------------
ADVISOR CLASS(6) 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +15.74% +65.11% +159.15%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +15.74% +10.55% +9.99%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,574 $16,511 $25,915
- ------------------------------------------------------------------------------------------------------
Distribution Rate(4) 6.62%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 5.05%
- ------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
30 | 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 any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
FRANKLIN INCOME FUND - CLASS A
Total Return Index Comparison
$10,000 Investment* (10/1/94 - 9/30/04)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN INCOME LB U.S. LIPPER
DATE FUND - CLASS A S&P 500(7) AGGREGATE(7) INCOME AVG.(7)
------------------------------------------------------------------------------
10/1/1994 $9,569 $10,000 $10,000 $10,000
10/31/1994 $9,591 $10,224 $9,991 $10,037
11/30/1994 $9,482 $9,852 $9,969 $9,819
12/31/1994 $9,361 $9,998 $10,038 $9,820
1/31/1995 $9,474 $10,258 $10,236 $9,985
2/28/1995 $9,632 $10,657 $10,480 $10,215
3/31/1995 $9,746 $10,971 $10,544 $10,359
4/30/1995 $9,998 $11,294 $10,691 $10,558
5/31/1995 $10,345 $11,744 $11,105 $10,899
6/30/1995 $10,461 $12,017 $11,186 $10,998
7/31/1995 $10,577 $12,415 $11,162 $11,164
8/31/1995 $10,695 $12,446 $11,296 $11,258
9/30/1995 $10,909 $12,971 $11,406 $11,513
10/31/1995 $10,932 $12,925 $11,554 $11,502
11/30/1995 $11,100 $13,491 $11,728 $11,786
12/31/1995 $11,355 $13,751 $11,892 $12,002
1/31/1996 $11,674 $14,219 $11,971 $12,221
2/29/1996 $11,451 $14,351 $11,763 $12,165
3/31/1996 $11,426 $14,489 $11,681 $12,183
4/30/1996 $11,400 $14,703 $11,616 $12,217
5/31/1996 $11,526 $15,081 $11,592 $12,314
6/30/1996 $11,755 $15,139 $11,748 $12,416
7/31/1996 $11,576 $14,470 $11,780 $12,163
8/31/1996 $11,756 $14,776 $11,760 $12,304
9/30/1996 $11,938 $15,607 $11,965 $12,586
10/31/1996 $12,173 $16,037 $12,230 $12,875
11/30/1996 $12,462 $17,248 $12,440 $13,312
12/31/1996 $12,541 $16,906 $12,324 $13,268
1/31/1997 $12,728 $17,962 $12,362 $13,497
2/28/1997 $12,863 $18,103 $12,392 $13,589
3/31/1997 $12,565 $17,361 $12,255 $13,332
4/30/1997 $12,646 $18,396 $12,439 $13,533
5/31/1997 $13,058 $19,515 $12,556 $13,956
6/30/1997 $13,306 $20,389 $12,705 $14,281
7/31/1997 $13,667 $22,011 $13,048 $14,831
8/31/1997 $13,583 $20,778 $12,936 $14,568
9/30/1997 $14,004 $21,916 $13,127 $15,026
10/31/1997 $13,806 $21,185 $13,318 $14,905
11/30/1997 $14,232 $22,164 $13,379 $15,154
12/31/1997 $14,654 $22,545 $13,514 $15,404
1/31/1998 $14,508 $22,794 $13,687 $15,457
2/28/1998 $14,713 $24,437 $13,677 $15,828
3/31/1998 $15,155 $25,687 $13,724 $16,193
4/30/1998 $14,948 $25,946 $13,796 $16,206
5/31/1998 $14,799 $25,500 $13,926 $16,154
6/30/1998 $14,828 $26,535 $14,044 $16,289
7/31/1998 $14,556 $26,254 $14,074 $16,137
8/31/1998 $13,614 $22,462 $14,303 $15,317
9/30/1998 $14,317 $23,901 $14,638 $15,795
10/31/1998 $14,348 $25,843 $14,561 $16,092
11/30/1998 $14,812 $27,409 $14,644 $16,461
12/31/1998 $14,794 $28,987 $14,688 $16,742
1/31/1999 $14,573 $30,199 $14,792 $16,822
2/28/1999 $14,160 $29,260 $14,534 $16,489
3/31/1999 $14,384 $30,431 $14,615 $16,722
4/30/1999 $15,124 $31,609 $14,661 $17,175
5/31/1999 $15,220 $30,864 $14,533 $17,020
6/30/1999 $15,188 $32,575 $14,486 $17,209
7/31/1999 $15,024 $31,560 $14,425 $17,037
8/31/1999 $15,057 $31,403 $14,417 $16,906
9/30/1999 $14,891 $30,544 $14,585 $16,781
10/31/1999 $14,858 $32,476 $14,639 $17,061
11/30/1999 $14,623 $33,136 $14,637 $17,133
12/31/1999 $14,684 $35,086 $14,567 $17,426
1/31/2000 $14,789 $33,324 $14,519 $17,163
2/29/2000 $14,546 $32,693 $14,695 $17,175
3/31/2000 $14,790 $35,890 $14,888 $17,760
4/30/2000 $15,317 $34,810 $14,846 $17,540
5/31/2000 $15,563 $34,098 $14,839 $17,517
6/30/2000 $15,670 $34,939 $15,148 $17,724
7/31/2000 $15,849 $34,393 $15,285 $17,717
8/31/2000 $16,750 $36,528 $15,507 $18,316
9/30/2000 $17,077 $34,600 $15,604 $18,188
10/31/2000 $16,821 $34,453 $15,707 $18,119
11/30/2000 $16,710 $31,739 $15,964 $17,722
12/31/2000 $17,707 $31,895 $16,260 $18,206
1/31/2001 $17,672 $33,026 $16,526 $18,510
2/28/2001 $18,013 $30,016 $16,670 $18,175
3/31/2001 $17,745 $28,116 $16,754 $17,851
4/30/2001 $18,092 $30,299 $16,684 $18,333
5/31/2001 $18,440 $30,502 $16,785 $18,445
6/30/2001 $18,011 $29,760 $16,848 $18,294
7/31/2001 $17,815 $29,467 $17,225 $18,348
8/31/2001 $18,012 $27,624 $17,422 $18,158
9/30/2001 $17,177 $25,394 $17,625 $17,562
10/31/2001 $17,296 $25,878 $17,994 $17,804
11/30/2001 $17,659 $27,863 $17,746 $18,125
12/31/2001 $17,822 $28,107 $17,633 $18,192
1/31/2002 $17,945 $27,697 $17,776 $18,114
2/28/2002 $18,069 $27,163 $17,948 $18,097
3/31/2002 $18,611 $28,184 $17,650 $18,369
4/30/2002 $18,720 $26,476 $17,992 $18,301
5/31/2002 $18,661 $26,282 $18,145 $18,321
6/30/2002 $17,497 $24,410 $18,302 $17,788
7/31/2002 $16,668 $22,508 $18,523 $17,156
8/31/2002 $17,211 $22,656 $18,836 $17,359
9/30/2002 $16,458 $20,196 $19,141 $16,715
10/31/2002 $16,571 $21,971 $19,053 $17,027
11/30/2002 $17,475 $23,263 $19,048 $17,489
12/31/2002 $17,633 $21,897 $19,442 $17,394
1/31/2003 $17,748 $21,325 $19,458 $17,257
2/28/2003 $17,505 $21,004 $19,728 $17,212
3/31/2003 $17,893 $21,206 $19,712 $17,271
4/30/2003 $19,011 $22,954 $19,875 $17,970
5/31/2003 $20,045 $24,162 $20,246 $18,608
6/30/2003 $20,440 $24,471 $20,205 $18,750
7/31/2003 $20,190 $24,902 $19,526 $18,639
8/31/2003 $20,498 $25,387 $19,656 $18,833
9/30/2003 $21,087 $25,118 $20,176 $19,042
10/31/2003 $21,680 $26,538 $19,988 $19,436
11/30/2003 $21,993 $26,772 $20,036 $19,617
12/31/2003 $23,093 $28,175 $20,240 $20,197
1/31/2004 $23,410 $28,692 $20,403 $20,411
2/29/2004 $23,439 $29,091 $20,623 $20,640
3/31/2004 $23,468 $28,652 $20,778 $20,621
4/30/2004 $23,105 $28,203 $20,237 $20,195
5/31/2004 $23,036 $28,589 $20,156 $20,219
6/30/2004 $23,363 $29,144 $20,270 $20,439
7/31/2004 $23,493 $28,180 $20,471 $20,292
8/31/2004 $24,023 $28,293 $20,862 $20,523
9/30/2004 $24,355 $28,599 $20,918 $20,708
FRANKLIN INCOME FUND - CLASS B
Total Return Index Comparison
$10,000 Investment* (11/1/01 - 9/30/04)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN INCOME LB U.S. LIPPER
DATE FUND - CLASS B S&P 500(7) AGGREGATE(7) INCOME AVG.(7)
---------------------------------------------------------------------------
11/1/2001 $10,000 $10,000 $10,000 $10,000
11/30/2001 $10,139 $10,767 $9,862 $10,180
12/31/2001 $10,182 $10,861 $9,799 $10,218
1/31/2002 $10,296 $10,703 $9,879 $10,174
2/28/2002 $10,363 $10,496 $9,975 $10,165
3/31/2002 $10,622 $10,891 $9,809 $10,317
4/30/2002 $10,724 $10,231 $9,999 $10,279
5/31/2002 $10,681 $10,156 $10,084 $10,290
6/30/2002 $9,960 $9,433 $10,171 $9,991
7/31/2002 $9,527 $8,698 $10,294 $9,636
8/31/2002 $9,829 $8,755 $10,468 $9,750
9/30/2002 $9,393 $7,804 $10,637 $9,388
10/31/2002 $9,401 $8,490 $10,589 $9,564
11/30/2002 $9,909 $8,990 $10,586 $9,823
12/31/2002 $10,044 $8,462 $10,804 $9,770
1/31/2003 $10,051 $8,241 $10,814 $9,693
2/28/2003 $9,958 $8,117 $10,963 $9,667
3/31/2003 $10,120 $8,195 $10,955 $9,700
4/30/2003 $10,801 $8,870 $11,045 $10,093
5/31/2003 $11,329 $9,337 $11,251 $10,451
6/30/2003 $11,599 $9,456 $11,229 $10,531
7/31/2003 $11,449 $9,623 $10,851 $10,469
8/31/2003 $11,617 $9,810 $10,923 $10,578
9/30/2003 $11,889 $9,706 $11,213 $10,695
10/31/2003 $12,216 $10,255 $11,108 $10,916
11/30/2003 $12,438 $10,345 $11,135 $11,018
12/31/2003 $12,997 $10,887 $11,248 $11,344
1/31/2004 $13,167 $11,087 $11,338 $11,464
2/29/2004 $13,229 $11,241 $11,461 $11,593
3/31/2004 $13,181 $11,072 $11,547 $11,582
4/30/2004 $13,022 $10,898 $11,247 $11,342
5/31/2004 $12,919 $11,048 $11,201 $11,356
6/30/2004 $13,149 $11,262 $11,265 $11,480
7/31/2004 $13,158 $10,890 $11,376 $11,397
8/31/2004 $13,446 $10,933 $11,593 $11,527
9/30/2004 $13,387 $11,052 $11,625 $11,631
Annual Report | 31
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS B1 9/30/04
- -----------------------------------------
1-Year +10.90%
- -----------------------------------------
5-Year +9.51%
- -----------------------------------------
Since Inception (1/1/99) +8.41%
- -----------------------------------------
FRANKLIN INCOME FUND - CLASS B1
Total Return Index Comparison
$10,000 Investment* (1/1/99 - 9/30/04)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN INCOME LB U.S. LIPPER
DATE FUND - CLASS B1 S&P 500(7) AGGREGATE(7) INCOME AVG.(7)
----------------------------------------------------------------------------
1/1/1999 $10,000 $10,000 $10,000 $10,000
1/31/1999 $9,851 $10,418 $10,071 $10,048
2/28/1999 $9,568 $10,094 $9,896 $9,849
3/31/1999 $9,717 $10,498 $9,950 $9,988
4/30/1999 $10,213 $10,905 $9,982 $10,259
5/31/1999 $10,230 $10,647 $9,894 $10,166
6/30/1999 $10,248 $11,238 $9,863 $10,279
7/31/1999 $10,133 $10,887 $9,821 $10,176
8/31/1999 $10,150 $10,834 $9,816 $10,098
9/30/1999 $10,035 $10,537 $9,930 $10,023
10/31/1999 $10,009 $11,203 $9,967 $10,191
11/30/1999 $9,845 $11,431 $9,966 $10,233
12/31/1999 $9,883 $12,104 $9,918 $10,408
1/31/2000 $9,949 $11,496 $9,885 $10,251
2/29/2000 $9,782 $11,279 $10,005 $10,258
3/31/2000 $9,941 $12,381 $10,137 $10,608
4/30/2000 $10,290 $12,009 $10,108 $10,477
5/31/2000 $10,452 $11,763 $10,103 $10,463
6/30/2000 $10,519 $12,053 $10,313 $10,587
7/31/2000 $10,633 $11,865 $10,407 $10,582
8/31/2000 $11,233 $12,601 $10,558 $10,940
9/30/2000 $11,448 $11,936 $10,624 $10,863
10/31/2000 $11,271 $11,886 $10,694 $10,822
11/30/2000 $11,242 $10,949 $10,869 $10,585
12/31/2000 $11,856 $11,003 $11,071 $10,874
1/31/2001 $11,827 $11,393 $11,252 $11,056
2/28/2001 $12,051 $10,355 $11,350 $10,856
3/31/2001 $11,867 $9,699 $11,407 $10,662
4/30/2001 $12,093 $10,453 $11,360 $10,950
5/31/2001 $12,321 $10,523 $11,428 $11,017
6/30/2001 $12,030 $10,267 $11,471 $10,927
7/31/2001 $11,894 $10,166 $11,728 $10,959
8/31/2001 $12,021 $9,530 $11,862 $10,845
9/30/2001 $11,460 $8,760 $12,000 $10,490
10/31/2001 $11,535 $8,927 $12,251 $10,635
11/30/2001 $11,772 $9,612 $12,082 $10,826
12/31/2001 $11,877 $9,696 $12,006 $10,866
1/31/2002 $11,954 $9,555 $12,103 $10,819
2/28/2002 $12,031 $9,371 $12,220 $10,810
3/31/2002 $12,388 $9,723 $12,017 $10,972
4/30/2002 $12,455 $9,134 $12,250 $10,931
5/31/2002 $12,410 $9,067 $12,354 $10,943
6/30/2002 $11,630 $8,421 $12,461 $10,625
7/31/2002 $11,074 $7,765 $12,611 $10,247
8/31/2002 $11,429 $7,816 $12,824 $10,368
9/30/2002 $10,925 $6,967 $13,032 $9,984
10/31/2002 $10,995 $7,580 $12,972 $10,170
11/30/2002 $11,590 $8,025 $12,969 $10,446
12/31/2002 $11,690 $7,554 $13,237 $10,390
1/31/2003 $11,762 $7,357 $13,248 $10,308
2/28/2003 $11,597 $7,246 $13,431 $10,281
3/31/2003 $11,849 $7,316 $13,421 $10,316
4/30/2003 $12,583 $7,919 $13,532 $10,734
5/31/2003 $13,261 $8,335 $13,784 $11,115
6/30/2003 $13,517 $8,442 $13,757 $11,199
7/31/2003 $13,347 $8,591 $13,294 $11,133
8/31/2003 $13,546 $8,758 $13,383 $11,249
9/30/2003 $13,929 $8,665 $13,737 $11,374
10/31/2003 $14,314 $9,155 $13,609 $11,609
11/30/2003 $14,514 $9,236 $13,641 $11,717
12/31/2003 $15,234 $9,720 $13,780 $12,064
1/31/2004 $15,437 $9,898 $13,891 $12,192
2/29/2004 $15,514 $10,036 $14,041 $12,328
3/31/2004 $15,461 $9,884 $14,147 $12,317
4/30/2004 $15,215 $9,729 $13,778 $12,062
5/31/2004 $15,162 $9,863 $13,723 $12,077
6/30/2004 $15,371 $10,054 $13,801 $12,208
7/31/2004 $15,450 $9,722 $13,938 $12,120
8/31/2004 $15,793 $9,761 $14,203 $12,259
9/30/2004 $15,906 $9,866 $14,242 $12,369
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
Class C 9/30/04
- -----------------------------------------
1-Year +13.85%
- -----------------------------------------
5-Year +9.84%
- -----------------------------------------
Since Inception (5/1/95) +9.34%
- -----------------------------------------
FRANKLIN INCOME FUND - CLASS C
Total Return Index Comparison
$10,000 Investment* (5/1/95 - 9/30/04)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN INCOME LB U.S. LIPPER
DATE FUND - CLASS C S&P 500(7) AGGREGATE(7) INCOME AVG.(7)
---------------------------------------------------------------------------
5/1/1995 $10,000 $10,000 $10,000 $10,000
5/31/1995 $10,298 $10,399 $10,387 $10,323
6/30/1995 $10,409 $10,640 $10,463 $10,417
7/31/1995 $10,521 $10,993 $10,440 $10,574
8/31/1995 $10,633 $11,020 $10,566 $10,663
9/30/1995 $10,845 $11,485 $10,669 $10,905
10/31/1995 $10,864 $11,444 $10,807 $10,894
11/30/1995 $11,026 $11,946 $10,969 $11,163
12/31/1995 $11,274 $12,176 $11,123 $11,368
1/31/1996 $11,586 $12,590 $11,197 $11,576
2/29/1996 $11,409 $12,707 $11,002 $11,522
3/31/1996 $11,378 $12,829 $10,926 $11,540
4/30/1996 $11,299 $13,018 $10,864 $11,572
5/31/1996 $11,419 $13,354 $10,842 $11,663
6/30/1996 $11,641 $13,404 $10,988 $11,760
7/31/1996 $11,458 $12,813 $11,018 $11,520
8/31/1996 $11,631 $13,083 $11,000 $11,654
9/30/1996 $11,805 $13,819 $11,191 $11,921
10/31/1996 $12,033 $14,200 $11,439 $12,195
11/30/1996 $12,365 $15,272 $11,635 $12,608
12/31/1996 $12,386 $14,970 $11,527 $12,567
1/31/1997 $12,565 $15,905 $11,562 $12,784
2/28/1997 $12,747 $16,029 $11,591 $12,871
3/31/1997 $12,448 $15,372 $11,463 $12,628
4/30/1997 $12,469 $16,289 $11,634 $12,819
5/31/1997 $12,867 $17,280 $11,744 $13,218
6/30/1997 $13,160 $18,054 $11,884 $13,526
7/31/1997 $13,511 $19,489 $12,204 $14,047
8/31/1997 $13,423 $18,398 $12,100 $13,799
9/30/1997 $13,780 $19,405 $12,278 $14,232
10/31/1997 $13,635 $18,758 $12,456 $14,118
11/30/1997 $13,992 $19,626 $12,514 $14,354
12/31/1997 $14,400 $19,962 $12,640 $14,591
1/31/1998 $14,250 $20,183 $12,802 $14,640
2/28/1998 $14,445 $21,638 $12,792 $14,992
3/31/1998 $14,873 $22,745 $12,836 $15,338
4/30/1998 $14,722 $22,974 $12,903 $15,350
5/31/1998 $14,512 $22,579 $13,026 $15,301
6/30/1998 $14,593 $23,496 $13,136 $15,428
7/31/1998 $14,320 $23,246 $13,164 $15,285
8/31/1998 $13,391 $19,889 $13,378 $14,508
9/30/1998 $14,014 $21,163 $13,692 $14,961
10/31/1998 $14,099 $22,883 $13,619 $15,242
11/30/1998 $14,547 $24,269 $13,697 $15,591
12/31/1998 $14,461 $25,667 $13,738 $15,858
1/31/1999 $14,301 $26,740 $13,836 $15,934
2/28/1999 $13,891 $25,909 $13,594 $15,618
3/31/1999 $14,104 $26,945 $13,670 $15,839
4/30/1999 $14,820 $27,988 $13,713 $16,268
5/31/1999 $14,845 $27,329 $13,593 $16,121
6/30/1999 $14,871 $28,844 $13,550 $16,300
7/31/1999 $14,705 $27,945 $13,492 $16,137
8/31/1999 $14,668 $27,806 $13,485 $16,013
9/30/1999 $14,500 $27,045 $13,642 $15,895
10/31/1999 $14,526 $28,756 $13,692 $16,160
11/30/1999 $14,291 $29,340 $13,691 $16,228
12/31/1999 $14,345 $31,067 $13,625 $16,505
1/31/2000 $14,373 $29,506 $13,580 $16,256
2/29/2000 $14,198 $28,949 $13,745 $16,267
3/31/2000 $14,428 $31,779 $13,926 $16,822
4/30/2000 $14,933 $30,823 $13,886 $16,614
5/31/2000 $15,098 $30,192 $13,879 $16,592
6/30/2000 $15,194 $30,937 $14,168 $16,788
7/31/2000 $15,430 $30,453 $14,297 $16,781
8/31/2000 $16,298 $32,344 $14,504 $17,348
9/30/2000 $16,608 $30,637 $14,595 $17,227
10/31/2000 $16,353 $30,507 $14,692 $17,161
11/30/2000 $16,239 $28,103 $14,932 $16,786
12/31/2000 $17,197 $28,241 $15,209 $17,244
1/31/2001 $17,156 $29,243 $15,458 $17,532
2/28/2001 $17,478 $26,578 $15,592 $17,214
3/31/2001 $17,212 $24,895 $15,671 $16,908
4/30/2001 $17,539 $26,828 $15,606 $17,365
5/31/2001 $17,867 $27,008 $15,700 $17,470
6/30/2001 $17,448 $26,351 $15,759 $17,327
7/31/2001 $17,251 $26,092 $16,111 $17,379
8/31/2001 $17,435 $24,460 $16,296 $17,198
9/30/2001 $16,622 $22,485 $16,486 $16,634
10/31/2001 $16,730 $22,914 $16,831 $16,864
11/30/2001 $17,071 $24,671 $16,599 $17,167
12/31/2001 $17,221 $24,887 $16,493 $17,231
1/31/2002 $17,332 $24,524 $16,627 $17,157
2/28/2002 $17,445 $24,051 $16,788 $17,141
3/31/2002 $17,957 $24,956 $16,509 $17,399
4/30/2002 $18,056 $23,444 $16,829 $17,334
5/31/2002 $17,991 $23,271 $16,972 $17,353
6/30/2002 $16,868 $21,614 $17,118 $16,848
7/31/2002 $16,065 $19,930 $17,325 $16,250
8/31/2002 $16,578 $20,060 $17,618 $16,442
9/30/2002 $15,851 $17,882 $17,903 $15,832
10/31/2002 $15,951 $19,455 $17,821 $16,128
11/30/2002 $16,810 $20,599 $17,817 $16,565
12/31/2002 $16,957 $19,389 $18,185 $16,476
1/31/2003 $16,975 $18,882 $18,200 $16,345
2/28/2003 $16,824 $18,598 $18,452 $16,303
3/31/2003 $17,187 $18,777 $18,438 $16,358
4/30/2003 $18,247 $20,325 $18,590 $17,021
5/31/2003 $19,227 $21,394 $18,936 $17,625
6/30/2003 $19,596 $21,668 $18,899 $17,759
7/31/2003 $19,350 $22,050 $18,264 $17,654
8/31/2003 $19,635 $22,479 $18,385 $17,838
9/30/2003 $20,188 $22,241 $18,871 $18,036
10/31/2003 $20,744 $23,499 $18,695 $18,409
11/30/2003 $21,032 $23,705 $18,740 $18,580
12/31/2003 $22,071 $24,947 $18,931 $19,130
1/31/2004 $22,364 $25,405 $19,083 $19,333
2/29/2004 $22,476 $25,758 $19,290 $19,550
3/31/2004 $22,400 $25,370 $19,434 $19,532
4/30/2004 $22,139 $24,972 $18,929 $19,128
5/31/2004 $21,970 $25,314 $18,853 $19,151
6/30/2004 $22,366 $25,806 $18,959 $19,359
7/31/2004 $22,386 $24,952 $19,147 $19,220
8/31/2004 $22,881 $25,052 $19,513 $19,439
9/30/2004 $23,186 $25,323 $19,565 $19,614
32 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
Class R 9/30/04
- -----------------------------------------
1-Year +14.25%
- -----------------------------------------
Since Inception (1/1/02) +11.41%
- -----------------------------------------
FRANKLIN INCOME FUND - CLASS R
Total Return Index Comparison
$10,000 Investment* (1/1/02 - 9/30/04)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN INCOME LB U.S. LIPPER
DATE FUND - CLASS R S&P 500(7) AGGREGATE(7) INCOME AVG.(7)
---------------------------------------------------------------------------
1/1/2002 $10,000 $10,000 $10,000 $10,000
1/31/2002 $10,069 $9,854 $10,081 $9,957
2/28/2002 $10,136 $9,664 $10,179 $9,948
3/31/2002 $10,390 $10,028 $10,009 $10,097
4/30/2002 $10,448 $9,420 $10,203 $10,060
5/31/2002 $10,412 $9,351 $10,290 $10,071
6/30/2002 $9,709 $8,685 $10,379 $9,778
7/31/2002 $9,289 $8,008 $10,504 $9,431
8/31/2002 $9,590 $8,061 $10,682 $9,542
9/30/2002 $9,166 $7,185 $10,855 $9,188
10/31/2002 $9,178 $7,817 $10,805 $9,360
11/30/2002 $9,681 $8,277 $10,802 $9,614
12/31/2002 $9,817 $7,791 $11,025 $9,562
1/31/2003 $9,829 $7,587 $11,035 $9,486
2/28/2003 $9,741 $7,473 $11,188 $9,461
3/31/2003 $9,905 $7,545 $11,179 $9,494
4/30/2003 $10,577 $8,167 $11,271 $9,878
5/31/2003 $11,102 $8,596 $11,481 $10,229
6/30/2003 $11,319 $8,706 $11,459 $10,306
7/31/2003 $11,227 $8,860 $11,073 $10,246
8/31/2003 $11,344 $9,032 $11,147 $10,352
9/30/2003 $11,670 $8,937 $11,442 $10,467
10/31/2003 $11,997 $9,442 $11,335 $10,684
11/30/2003 $12,168 $9,525 $11,362 $10,783
12/31/2003 $12,779 $10,024 $11,478 $11,102
1/31/2004 $12,953 $10,208 $11,570 $11,220
2/29/2004 $12,966 $10,350 $11,696 $11,346
3/31/2004 $12,978 $10,194 $11,783 $11,335
4/30/2004 $12,772 $10,034 $11,477 $11,101
5/31/2004 $12,730 $10,171 $11,431 $11,114
6/30/2004 $12,908 $10,369 $11,495 $11,235
7/31/2004 $12,977 $10,026 $11,609 $11,154
8/31/2004 $13,268 $10,066 $11,831 $11,282
9/30/2004 $13,449 $10,175 $11,863 $11,383
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
Advisor Class(6) 9/30/04
- -----------------------------------------
1-Year +15.74%
- -----------------------------------------
5-Year +10.55%
- -----------------------------------------
10-Year +9.99%
- -----------------------------------------
FRANKLIN INCOME FUND - ADVISOR CLASS
Total Return Index Comparison
$10,000 Investment** (10/1/94 - 9/30/04)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN INCOME
FUND - ADVISOR LB U.S. LIPPER
DATE CLASS S&P 500(7) AGGREGATE(7) INCOME AVG.(7)
----------------------------------------------------------------------------
10/1/1994 $10,000 $10,000 $10,000 $10,000
10/31/1994 $10,023 $10,224 $9,991 $10,037
11/30/1994 $9,909 $9,852 $9,969 $9,819
12/31/1994 $9,783 $9,998 $10,038 $9,820
1/31/1995 $9,901 $10,258 $10,236 $9,985
2/28/1995 $10,066 $10,657 $10,480 $10,215
3/31/1995 $10,185 $10,971 $10,544 $10,359
4/30/1995 $10,449 $11,294 $10,691 $10,558
5/31/1995 $10,811 $11,744 $11,105 $10,899
6/30/1995 $10,932 $12,017 $11,186 $10,998
7/31/1995 $11,054 $12,415 $11,162 $11,164
8/31/1995 $11,177 $12,446 $11,296 $11,258
9/30/1995 $11,400 $12,971 $11,406 $11,513
10/31/1995 $11,425 $12,925 $11,554 $11,502
11/30/1995 $11,600 $13,491 $11,728 $11,786
12/31/1995 $11,866 $13,751 $11,892 $12,002
1/31/1996 $12,200 $14,219 $11,971 $12,221
2/29/1996 $11,967 $14,351 $11,763 $12,165
3/31/1996 $11,940 $14,489 $11,681 $12,183
4/30/1996 $11,913 $14,703 $11,616 $12,217
5/31/1996 $12,045 $15,081 $11,592 $12,314
6/30/1996 $12,285 $15,139 $11,748 $12,416
7/31/1996 $12,097 $14,470 $11,780 $12,163
8/31/1996 $12,285 $14,776 $11,760 $12,304
9/30/1996 $12,475 $15,607 $11,965 $12,586
10/31/1996 $12,721 $16,037 $12,230 $12,875
11/30/1996 $13,023 $17,248 $12,440 $13,312
12/31/1996 $13,106 $16,906 $12,324 $13,268
1/31/1997 $13,359 $17,962 $12,362 $13,497
2/28/1997 $13,560 $18,103 $12,392 $13,589
3/31/1997 $13,247 $17,361 $12,255 $13,332
4/30/1997 $13,335 $18,396 $12,439 $13,533
5/31/1997 $13,713 $19,515 $12,556 $13,956
6/30/1997 $14,035 $20,389 $12,705 $14,281
7/31/1997 $14,418 $22,011 $13,048 $14,831
8/31/1997 $14,331 $20,778 $12,936 $14,568
9/30/1997 $14,718 $21,916 $13,127 $15,026
10/31/1997 $14,571 $21,185 $13,318 $14,905
11/30/1997 $14,963 $22,164 $13,379 $15,154
12/31/1997 $15,471 $22,545 $13,514 $15,404
1/31/1998 $15,258 $22,794 $13,687 $15,457
2/28/1998 $15,476 $24,437 $13,677 $15,828
3/31/1998 $15,945 $25,687 $13,724 $16,193
4/30/1998 $15,791 $25,946 $13,796 $16,206
5/31/1998 $15,572 $25,500 $13,926 $16,154
6/30/1998 $15,668 $26,535 $14,044 $16,289
7/31/1998 $15,383 $26,254 $14,074 $16,137
8/31/1998 $14,389 $22,462 $14,303 $15,317
9/30/1998 $15,134 $23,901 $14,638 $15,795
10/31/1998 $15,169 $25,843 $14,561 $16,092
11/30/1998 $15,661 $27,409 $14,644 $16,461
12/31/1998 $15,644 $28,987 $14,688 $16,742
1/31/1999 $15,412 $30,199 $14,792 $16,822
2/28/1999 $14,978 $29,260 $14,534 $16,489
3/31/1999 $15,217 $30,431 $14,615 $16,722
4/30/1999 $16,001 $31,609 $14,661 $17,175
5/31/1999 $16,038 $30,864 $14,533 $17,020
6/30/1999 $16,074 $32,575 $14,486 $17,209
7/31/1999 $15,902 $31,560 $14,425 $17,037
8/31/1999 $15,870 $31,403 $14,417 $16,906
9/30/1999 $15,696 $30,544 $14,585 $16,781
10/31/1999 $15,733 $32,476 $14,639 $17,061
11/30/1999 $15,486 $33,136 $14,637 $17,133
12/31/1999 $15,554 $35,086 $14,567 $17,426
1/31/2000 $15,593 $33,324 $14,519 $17,163
2/29/2000 $15,411 $32,693 $14,695 $17,175
3/31/2000 $15,673 $35,890 $14,888 $17,760
4/30/2000 $16,158 $34,810 $14,846 $17,540
5/31/2000 $16,421 $34,098 $14,839 $17,517
6/30/2000 $16,536 $34,939 $15,148 $17,724
7/31/2000 $16,727 $34,393 $15,285 $17,717
8/31/2000 $17,685 $36,528 $15,507 $18,316
9/30/2000 $18,033 $34,600 $15,604 $18,188
10/31/2000 $17,764 $34,453 $15,707 $18,119
11/30/2000 $17,727 $31,739 $15,964 $17,722
12/31/2000 $18,709 $31,895 $16,260 $18,206
1/31/2001 $18,754 $33,026 $16,526 $18,510
2/28/2001 $19,119 $30,016 $16,670 $18,175
3/31/2001 $18,757 $28,116 $16,754 $17,851
4/30/2001 $19,208 $30,299 $16,684 $18,333
5/31/2001 $19,499 $30,502 $16,785 $18,445
6/30/2001 $19,046 $29,760 $16,848 $18,294
7/31/2001 $18,840 $29,467 $17,225 $18,348
8/31/2001 $19,052 $27,624 $17,422 $18,158
9/30/2001 $18,251 $25,394 $17,625 $17,562
10/31/2001 $18,296 $25,878 $17,994 $17,804
11/30/2001 $18,684 $27,863 $17,746 $18,125
12/31/2001 $18,860 $28,107 $17,633 $18,192
1/31/2002 $19,080 $27,697 $17,776 $18,114
2/28/2002 $19,214 $27,163 $17,948 $18,097
3/31/2002 $19,705 $28,184 $17,650 $18,369
4/30/2002 $19,913 $26,476 $17,992 $18,301
5/31/2002 $19,853 $26,282 $18,145 $18,321
6/30/2002 $18,528 $24,410 $18,302 $17,788
7/31/2002 $17,739 $22,508 $18,523 $17,156
8/31/2002 $18,228 $22,656 $18,836 $17,359
9/30/2002 $17,428 $20,196 $19,141 $16,715
10/31/2002 $17,550 $21,971 $19,053 $17,027
11/30/2002 $18,515 $23,263 $19,048 $17,489
12/31/2002 $18,686 $21,897 $19,442 $17,394
1/31/2003 $18,810 $21,325 $19,458 $17,257
2/28/2003 $18,650 $21,004 $19,728 $17,212
3/31/2003 $18,969 $21,206 $19,712 $17,271
4/30/2003 $20,162 $22,954 $19,875 $17,970
5/31/2003 $21,267 $24,162 $20,246 $18,608
6/30/2003 $21,691 $24,471 $20,205 $18,750
7/31/2003 $21,427 $24,902 $19,526 $18,639
8/31/2003 $21,759 $25,387 $19,656 $18,833
9/30/2003 $22,390 $25,118 $20,176 $19,042
10/31/2003 $23,025 $26,538 $19,988 $19,436
11/30/2003 $23,361 $26,772 $20,036 $19,617
12/31/2003 $24,538 $28,175 $20,240 $20,197
1/31/2004 $24,879 $28,692 $20,403 $20,411
2/29/2004 $25,017 $29,091 $20,623 $20,640
3/31/2004 $24,947 $28,652 $20,778 $20,621
4/30/2004 $24,564 $28,203 $20,237 $20,195
5/31/2004 $24,493 $28,589 $20,156 $20,219
6/30/2004 $24,845 $29,144 $20,270 $20,439
7/31/2004 $24,986 $28,180 $20,471 $20,292
8/31/2004 $25,556 $28,293 $20,862 $20,523
9/30/2004 $25,915 $28,599 $20,918 $20,708
Annual Report | 33
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. THE FUND'S SHARE PRICE AND YIELD MAY BE
AFFECTED BY INTEREST RATE MOVEMENTS. BOND PRICES, AND THUS THE FUND'S SHARE
PRICE, GENERALLY MOVE IN THE OPPOSITE DIRECTION FROM INTEREST RATES. THE FUND'S
PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than
Class A shares.
CLASS B1
(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: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have
differed. These shares have higher annual fees and expenses
than Class A shares.
CLASS R: Shares 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: Shares are available to certain eligible investors as
described in the prospectus.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(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.
(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.
(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,
C, R and Advisor) per share on 9/30/04.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 9/30/04.
(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 +97.74% and +9.20%.
(7) Sources: Standard & Poor's Micropal; Lehman Brothers Inc.; 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. 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. The Lipper Income Funds Objective Average is
calculated by averaging the total return of all funds within the Lipper
Income Funds classification in the Lipper Open-End underlying fund
universe for the period indicated. Lipper Income Funds are defined as
funds that normally seek a high level of current income through investing
in income-producing stocks, bonds and money market instruments. For the 12
months ended 9/30/04, the Lipper Income Funds Objective Average consisted
of 175 funds. Lipper calculations do not include sales charges. Fund
performance relative to the average may have differed if these or other
factors had been considered.
* FUND PERFORMANCE INCLUDES MAXIMUM INITIAL SALES CHARGE.
** PRIOR TO 1/2/97, FUND PERFORMANCE INCLUDES HISTORICAL CLASS A DATA.
34 | Annual Report
YOUR FUND'S EXPENSES
FRANKLIN INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 35
YOUR FUND'S EXPENSES (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ---------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 3/31/04 VALUE 9/30/04 PERIOD* 3/31/04-9/30/04
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,037.80 $3.46
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.60 $3.44
- --------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,033.69 $7.73
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,017.40 $7.67
- --------------------------------------------------------------------------------------------------------
CLASS B1
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,035.20 $6.00
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.10 $5.96
- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,035.00 $6.00
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.10 $5.96
- --------------------------------------------------------------------------------------------------------
CLASS R
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,036.30 $5.24
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.85 $5.20
- --------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,038.80 $2.70
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,022.35 $2.68
- --------------------------------------------------------------------------------------------------------
* Expenses are equal to the Fund's annualized expense ratio for each class
(A: 0.68%; B: 1.52%; B1: 1.18%; C: 1.18%; R: 1.03%; and Advisor: 0.53%),
multiplied by the average account value over the period, multiplied by
183/366 to reflect the one-half year period.
36 | Annual Report
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin U.S. Government Securities
Fund seeks high, current income from a portfolio of U.S. government securities.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO BREAKDOWN
Franklin U.S. Government Securities Fund Based on Total Net
Assets as of 9/30/04
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
GNMA ......................... 97.5%
Short-Term Investments &
Other Net Assets ............. 2.5%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin U.S. Government Securities Fund's annual
report for the fiscal year ended September 30, 2004.
PERFORMANCE OVERVIEW
Franklin U.S. Government Securities Fund - Class A posted a +3.46% cumulative
total return for the 12-month period ended September 30, 2004. The Fund
outperformed the Lehman Brothers Intermediate U.S. Government Bond Index,
(1) U.S. government securities owned by the Fund, but not shares of the Fund,
are guaranteed by the U.S. government, its agency or instrumentalities, 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 NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 99.
Annual Report | 37
FRANKLIN U.S. GOVERNMENT SECURITIES FUND -
CLASS A VS. COMPARABLE INVESTMENTS*
Risk vs. Return (10/99-9/04)
[THE FOLLOWING TABLE WAS REPRESENTED AS A CHART IN THE PRINTED MATERIAL.]
For the 5-Year Period Ended 9/30/04
Risk Return
-------------------------
Franklin US Government Securities Fund - Class A 2.82% 6.28%
1-Year Treasury Bill * 1.01% 3.71%
10-Year Treasury Note * 8.21% 7.74%
30-Year Treasury Bond * 12.56% 9.04%
-------------------------
THE CHART DOES NOT INCLUDE THE FUND'S CURRENT, MAXIMUM 4.25% INITIAL
SALES CHARGE. IF SALES CHARGES WERE INCLUDED, THE RETURNS WOULD HAVE BEEN LOWER.
* 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. Treasuries, if
held to maturity, offer a fixed rate of return and fixed principal value;
interest payments and principal are guaranteed. 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 sale of Fund shares. Past performance does not guarantee future
results.
which returned 1.91%.2 In comparison, the Lipper GNMA Funds Objective Average
returned 2.82% for the same period.(2) The Fund's return reflects the effect of
management fees and expenses, while the index does not have such costs. You can
find the Fund's long-term performance data in the Performance Summary beginning
on page 42.
(2) Sources: Lehman Brothers Inc.; 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. The Lipper GNMA Funds Objective Average is
calculated by averaging the total return for all funds within the Lipper
GNMA Funds classification in the Lipper Open-End underlying funds universe
for the period indicated. Lipper GNMA Funds are defined as funds that
invest primarily in Government National Mortgage Association securities.
For the 12-month period ended 9/30/04, there were 67 funds in this
category. Lipper calculations do not include sales charges. The Fund's
performance relative to the average may have differed if these or other
factors had been considered. Past performance does not guarantee future
results. The indexes are unmanaged and include reinvested interest. One
cannot invest directly in an index, nor is an index representative of the
Fund's portfolio.
38 | Annual Report
ECONOMIC AND MARKET OVERVIEW
Over the past 12 months, the confusing employment picture was a dominant topic.
While the unemployment rate declined to 5.4% on September 30, 2004, and there
was some job growth, job creation according to the most recent nonfarm payroll
statistics disappointed many market participants.3 However, other sources, such
as one from the National Federation of Independent Businesses (NFIB) showed
stronger gains. The NFIB survey was particularly interesting, because small
businesses historically have created about two-thirds of all new U.S. jobs.(4)
As a result, many market participants believed that job growth was not
accurately reflected in the nonfarm payroll numbers. During the year under
review, more jobs combined with income tax reductions helped to increase
consumers' disposable income and allowed them to continue spending. That
spending kept the economy growing.
Increases in business spending also contributed to economic growth. After
steadily declining in 2001 and 2002, business spending posted strong results
during the period. For example, nonresidential investment spending increased
12.5% and 11.7% in the second and third quarters of 2004.(5) Historically low
interest rates during the reporting period allowed many businesses the
opportunity to refinance their old debt at more attractive levels. This helped
enhance business operating performance, and corporate profits reflected this
data. Many corporate debt products also benefited from this improvement.
Productivity continued to grow, which helped businesses generate more goods and
services without substantially raising inflation.
Although energy prices rose 6.7% for the year under review, the core Consumer
Price Index, a measure of inflation excluding food and energy costs, rose a more
subdued 2.0% for the 12 months ended September 30, 2004.(3) Expected inflation
is a key determinant of interest rates, and this environment contributed to the
continued low level of interest rates during the period. The 10-year U.S.
Treasury yield rose modestly from 3.96% at the beginning of the fiscal year to
4.14% on September 30, 2004.
The general interest rate decline over the past few years has helped to provide
a certain amount of stimulus to consumers and businesses. Even with recently
rising interest rates, other sources of economic stimulus remained during the
period, including positive employment data as well as business strength.
YIELD COMPARISON
9/30/04
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Franklin U.S. Government Securities Fund - Class A* 4.11%
10-Year Treasury Note* 4.14%
Lipper GNMA Funds Average* 3.41%
Money Market Funds Average* 0.85%
* 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
9/30/04. Treasuries, if held to maturity, offer a fixed rate of return and
fixed principal value; interest payments and principal are guaranteed.
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. The Lipper GNMA Funds Objective Average
is an average of the monthly SEC yields of 67 funds in the Lipper GNMA
Funds classification for the 30 days ended 9/30/04. The Lipper Money
Market Funds Average is an average of the monthly SEC yields of 400 funds
in the Lipper Money Market Funds classification for the 30 days ended
9/30/04. Lipper averages do not include sales charges.
(3) Source: Bureau of Labor Statistics.
(4) Source: Dennis, William J., Jr., NFIB Research Foundation, "The Public
Reviews Small Business," 8/04.
(5) Source: Bureau of Economic Analysis.
Annual Report | 39
DIVIDEND DISTRIBUTIONS*
Franklin U.S. Government Securities Fund
10/1/03-9/30/04
- ------------------------------------------------------------------------------------------
DIVIDEND PER SHARE
-------------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS
- ------------------------------------------------------------------------------------------
October 2.98 cents 2.70 cents 2.67 cents 2.79 cents 3.05 cents
- ------------------------------------------------------------------------------------------
November 2.98 cents 2.70 cents 2.67 cents 2.79 cents 3.05 cents
- ------------------------------------------------------------------------------------------
December** 4.20 cents 3.90 cents 3.91 cents 3.98 cents 4.27 cents
- ------------------------------------------------------------------------------------------
January 2.98 cents 2.68 cents 2.69 cents 2.76 cents 3.06 cents
- ------------------------------------------------------------------------------------------
February 2.98 cents 2.68 cents 2.69 cents 2.76 cents 3.05 cents
- ------------------------------------------------------------------------------------------
March 2.98 cents 2.68 cents 2.67 cents 2.77 cents 3.04 cents
- ------------------------------------------------------------------------------------------
April 2.98 cents 2.68 cents 2.67 cents 2.77 cents 3.05 cents
- ------------------------------------------------------------------------------------------
May 2.78 cents 2.48 cents 2.47 cents 2.57 cents 2.85 cents
- ------------------------------------------------------------------------------------------
June 2.78 cents 2.49 cents 2.49 cents 2.59 cents 2.84 cents
- ------------------------------------------------------------------------------------------
July 2.78 cents 2.49 cents 2.49 cents 2.59 cents 2.85 cents
- ------------------------------------------------------------------------------------------
August 2.78 cents 2.49 cents 2.49 cents 2.59 cents 2.85 cents
- ------------------------------------------------------------------------------------------
September 2.43 cents 2.15 cents 2.14 cents 2.23 cents 2.49 cents
- ------------------------------------------------------------------------------------------
TOTAL 35.63 CENTS 32.12 CENTS 32.05 CENTS 33.19 CENTS 36.45 CENTS
- ------------------------------------------------------------------------------------------
* All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
** Includes an additional 1.22 cent distribution to meet excise tax
requirements.
INVESTMENT STRATEGY
We seek to invest predominantly in GNMA (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 or cash equivalents.
MANAGER'S DISCUSSION
Our research shows that over the past 5-, 10- and 15-year time periods, GNMAs
have offered attractive risk-adjusted returns when compared with a variety of
asset classes including U.S. Treasuries, Agency debentures, investment grade and
high yield corporate bonds, and large capitalization and small capitalization
stocks. These time periods include various credit, prepayment, economic and
interest rate cycles.
We used our research to uncover areas of the markets where we thought mortgage
risk may have offered value. In the recent interest rate environment, we looked
to add to those positions with valuations that we considered attractive,
consistent with our investment strategy. In terms of coupon, we invested across
a wide spectrum of securities. With the overall decline in mortgage rates during
40 | Annual Report
the reporting period, our holdings provided overall positive total returns for
the Fund.
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 OMITTED] /s/ Jack Lemein
Jack Lemein
[PHOTO OMITTED] /s/ Roger A. Bayston
Roger A. Bayston, CFA
Portfolio Management Team
Franklin U.S. Government Securities Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF SEPTEMBER 30, 2004, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS 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 ADVISER 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 9/30/04
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 9/30/04 9/30/03
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.13 $6.68 $6.81
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/03-9/30/04)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.3563
- -----------------------------------------------------------------------------------------------
CLASS B CHANGE 9/30/04 9/30/03
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.13 $6.67 $6.80
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/03-9/30/04)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.3212
- -----------------------------------------------------------------------------------------------
CLASS C CHANGE 9/30/04 9/30/03
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.13 $6.65 $6.78
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/03-9/30/04)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.3205
- -----------------------------------------------------------------------------------------------
CLASS R CHANGE 9/30/04 9/30/03
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.13 $6.68 $6.81
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/03-9/30/04)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.3319
- -----------------------------------------------------------------------------------------------
ADVISOR CLASS CHANGE 9/30/04 9/30/03
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.14 $6.69 $6.83
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/03-9/30/04)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.3645
- -----------------------------------------------------------------------------------------------
42 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY.
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN
INCLUDES MAXIMUM SALES CHARGES.
- ------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.46% +35.57% +95.22%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -0.91% +5.37% +6.45%
- ------------------------------------------------------------------------------------------------------
Distribution Rate(3) 4.18%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(4) 4.11%
- ------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.92% +31.92% +32.25%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -1.01% +5.37% +4.85%
- ------------------------------------------------------------------------------------------------------
Distribution Rate(3) 3.87%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(4) 3.76%
- ------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.91% +31.97% +73.00%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +1.93% +5.71% +5.99%
- ------------------------------------------------------------------------------------------------------
Distribution Rate(3) 3.86%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(4) 3.76%
- ------------------------------------------------------------------------------------------------------
CLASS R 1-YEAR INCEPTION (1/1/02)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.08% +12.86%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +2.10% +4.51%
- ------------------------------------------------------------------------------------------------------
Distribution Rate(3) 4.01%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(4) 3.91%
- ------------------------------------------------------------------------------------------------------
ADVISOR CLASS(5) 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.42% +36.31% +97.66%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +3.42% +6.39% +7.05%
- ------------------------------------------------------------------------------------------------------
Distribution Rate(3) 4.47%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(4) 4.41%
- ------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 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, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or 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.
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS A 9/30/04
- -----------------------------------------
1-Year -0.91%
- -----------------------------------------
5-Year +5.37%
- -----------------------------------------
10-Year +6.45%
- -----------------------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND - CLASS A
Total Return Index Comparison
$10,000 Investment (10/1/94 - 9/30/04)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN U.S. LEHMAN BROTHERS
GOVERNMENT INTERMEDIATE
SECURITIES FUND - GOVERNMENT LIPPER GNMA
CLASS A BOND INDEX(6) FUNDS AVERAGE(6) CPI(6)
- --------------------------------------------------------------------------------
10/1/1994 $9,574 $10,000 $10,000 $10,000
10/31/1994 $9,544 $10,002 $9,970 $10,007
11/30/1994 $9,530 $9,957 $9,944 $10,020
12/31/1994 $9,619 $9,990 $10,039 $10,020
1/31/1995 $9,815 $10,153 $10,230 $10,060
2/28/1995 $10,058 $10,348 $10,478 $10,100
3/31/1995 $10,104 $10,405 $10,521 $10,134
4/30/1995 $10,242 $10,526 $10,660 $10,167
5/31/1995 $10,583 $10,823 $11,009 $10,187
6/30/1995 $10,647 $10,892 $11,073 $10,207
7/31/1995 $10,664 $10,897 $11,067 $10,207
8/31/1995 $10,775 $10,987 $11,183 $10,234
9/30/1995 $10,872 $11,060 $11,297 $10,254
10/31/1995 $10,985 $11,182 $11,404 $10,288
11/30/1995 $11,098 $11,318 $11,548 $10,281
12/31/1995 $11,229 $11,430 $11,697 $10,274
1/31/1996 $11,295 $11,526 $11,763 $10,335
2/29/1996 $11,199 $11,404 $11,612 $10,368
3/31/1996 $11,151 $11,352 $11,561 $10,422
4/30/1996 $11,103 $11,319 $11,512 $10,462
5/31/1996 $11,071 $11,313 $11,464 $10,482
6/30/1996 $11,207 $11,428 $11,589 $10,489
7/31/1996 $11,242 $11,464 $11,629 $10,509
8/31/1996 $11,243 $11,477 $11,623 $10,529
9/30/1996 $11,432 $11,625 $11,808 $10,562
10/31/1996 $11,639 $11,816 $12,047 $10,596
11/30/1996 $11,813 $11,958 $12,232 $10,616
12/31/1996 $11,745 $11,894 $12,143 $10,616
1/31/1997 $11,817 $11,940 $12,218 $10,649
2/28/1997 $11,853 $11,959 $12,241 $10,683
3/31/1997 $11,819 $11,891 $12,113 $10,710
4/30/1997 $11,998 $12,025 $12,301 $10,723
5/31/1997 $12,104 $12,119 $12,415 $10,716
6/30/1997 $12,245 $12,222 $12,558 $10,730
7/31/1997 $12,478 $12,448 $12,818 $10,743
8/31/1997 $12,440 $12,400 $12,765 $10,763
9/30/1997 $12,584 $12,535 $12,932 $10,790
10/31/1997 $12,711 $12,681 $13,066 $10,817
11/30/1997 $12,728 $12,709 $13,096 $10,810
12/31/1997 $12,856 $12,812 $13,221 $10,797
1/31/1998 $12,984 $12,980 $13,355 $10,817
2/28/1998 $12,983 $12,966 $13,368 $10,837
3/31/1998 $13,037 $13,006 $13,412 $10,857
4/30/1998 $13,130 $13,068 $13,484 $10,877
5/31/1998 $13,220 $13,158 $13,586 $10,897
6/30/1998 $13,272 $13,247 $13,646 $10,910
7/31/1998 $13,343 $13,298 $13,703 $10,924
8/31/1998 $13,473 $13,549 $13,839 $10,937
9/30/1998 $13,643 $13,865 $14,020 $10,950
10/31/1998 $13,578 $13,888 $13,951 $10,977
11/30/1998 $13,652 $13,846 $14,028 $10,977
12/31/1998 $13,705 $13,900 $14,079 $10,971
1/31/1999 $13,799 $13,962 $14,162 $10,997
2/28/1999 $13,712 $13,770 $14,050 $11,011
3/31/1999 $13,787 $13,861 $14,138 $11,044
4/30/1999 $13,842 $13,899 $14,192 $11,124
5/31/1999 $13,734 $13,814 $14,090 $11,124
6/30/1999 $13,667 $13,834 $14,011 $11,124
7/31/1999 $13,558 $13,836 $13,925 $11,158
8/31/1999 $13,568 $13,855 $13,907 $11,185
9/30/1999 $13,787 $13,974 $14,126 $11,238
10/31/1999 $13,860 $14,002 $14,175 $11,258
11/30/1999 $13,871 $14,011 $14,182 $11,265
12/31/1999 $13,818 $13,967 $14,114 $11,265
1/31/2000 $13,701 $13,920 $14,000 $11,299
2/29/2000 $13,861 $14,036 $14,164 $11,365
3/31/2000 $14,065 $14,196 $14,378 $11,459
4/30/2000 $14,033 $14,190 $14,352 $11,466
5/31/2000 $14,089 $14,228 $14,400 $11,479
6/30/2000 $14,321 $14,454 $14,652 $11,539
7/31/2000 $14,400 $14,550 $14,713 $11,566
8/31/2000 $14,613 $14,713 $14,921 $11,566
9/30/2000 $14,738 $14,842 $15,050 $11,627
10/31/2000 $14,842 $14,943 $15,142 $11,647
11/30/2000 $15,059 $15,163 $15,364 $11,653
12/31/2000 $15,277 $15,430 $15,588 $11,647
1/31/2001 $15,496 $15,635 $15,827 $11,720
2/28/2001 $15,579 $15,779 $15,922 $11,767
3/31/2001 $15,663 $15,893 $16,013 $11,794
4/30/2001 $15,678 $15,843 $15,984 $11,841
5/31/2001 $15,786 $15,909 $16,088 $11,894
6/30/2001 $15,824 $15,960 $16,141 $11,914
7/31/2001 $16,121 $16,257 $16,451 $11,881
8/31/2001 $16,231 $16,402 $16,572 $11,881
9/30/2001 $16,436 $16,752 $16,808 $11,934
10/31/2001 $16,663 $17,013 $17,035 $11,894
11/30/2001 $16,508 $16,810 $16,854 $11,874
12/31/2001 $16,449 $16,729 $16,763 $11,827
1/31/2002 $16,579 $16,801 $16,924 $11,854
2/28/2002 $16,783 $16,940 $17,103 $11,901
3/31/2002 $16,572 $16,685 $16,893 $11,968
4/30/2002 $16,877 $16,997 $17,207 $12,035
5/31/2002 $16,985 $17,116 $17,319 $12,035
6/30/2002 $17,118 $17,329 $17,461 $12,041
7/31/2002 $17,302 $17,656 $17,665 $12,055
8/31/2002 $17,462 $17,858 $17,810 $12,095
9/30/2002 $17,597 $18,165 $17,967 $12,115
10/31/2002 $17,657 $18,152 $17,992 $12,135
11/30/2002 $17,657 $18,009 $17,983 $12,135
12/31/2002 $17,860 $18,341 $18,181 $12,108
1/31/2003 $17,911 $18,301 $18,217 $12,162
2/28/2003 $17,988 $18,507 $18,321 $12,256
3/31/2003 $17,987 $18,511 $18,308 $12,329
4/30/2003 $18,039 $18,563 $18,356 $12,303
5/31/2003 $18,038 $18,855 $18,404 $12,282
6/30/2003 $18,090 $18,824 $18,437 $12,296
7/31/2003 $17,669 $18,367 $18,026 $12,309
8/31/2003 $17,801 $18,400 $18,146 $12,356
9/30/2003 $18,066 $18,799 $18,451 $12,396
10/31/2003 $17,985 $18,615 $18,357 $12,383
11/30/2003 $18,065 $18,616 $18,412 $12,349
12/31/2003 $18,179 $18,761 $18,537 $12,336
1/31/2004 $18,286 $18,863 $18,628 $12,396
2/29/2004 $18,394 $19,042 $18,748 $12,463
3/31/2004 $18,448 $19,175 $18,809 $12,544
4/30/2004 $18,147 $18,746 $18,492 $12,584
5/31/2004 $18,113 $18,686 $18,440 $12,657
6/30/2004 $18,273 $18,734 $18,578 $12,697
7/31/2004 $18,433 $18,869 $18,719 $12,677
8/31/2004 $18,678 $19,150 $18,964 $12,684
9/30/2004 $18,690 $19,157 $18,974 $12,711
TOTAL RETURN 86.90% 91.57% 89.74% 27.11%
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS B 9/30/04
- -----------------------------------------
1-Year -1.01%
- -----------------------------------------
5-Year +5.37%
- -----------------------------------------
Since Inception (1/1/99) +4.85%
- -----------------------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND - CLASS B
Total Return Index Comparison
$10,000 Investment (1/1/99 - 9/30/04)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN U.S. LEHMAN BROTHERS
GOVERNMENT INTERMEDIATE
SECURITIES FUND - GOVERNMENT LIPPER GNMA
CLASS B BOND INDEX(6) FUNDS AVERAGE(6) CPI(6)
- --------------------------------------------------------------------------------
1/1/1999 $10,000 $10,000 $10,000 $10,000
1/31/1999 $10,068 $10,045 $10,059 $10,024
2/28/1999 $9,986 $9,907 $9,980 $10,037
3/31/1999 $10,051 $9,973 $10,042 $10,067
4/30/1999 $10,087 $10,000 $10,081 $10,140
5/31/1999 $10,005 $9,938 $10,008 $10,140
6/30/1999 $9,936 $9,953 $9,952 $10,140
7/31/1999 $9,868 $9,954 $9,891 $10,171
8/31/1999 $9,856 $9,968 $9,878 $10,195
9/30/1999 $10,025 $10,053 $10,033 $10,244
10/31/1999 $10,074 $10,073 $10,069 $10,262
11/30/1999 $10,062 $10,080 $10,074 $10,268
12/31/1999 $10,019 $10,049 $10,025 $10,268
1/31/2000 $9,946 $10,015 $9,944 $10,299
2/29/2000 $10,042 $10,098 $10,060 $10,360
3/31/2000 $10,186 $10,213 $10,212 $10,445
4/30/2000 $10,174 $10,209 $10,194 $10,451
5/31/2000 $10,210 $10,236 $10,229 $10,464
6/30/2000 $10,373 $10,399 $10,408 $10,519
7/31/2000 $10,410 $10,468 $10,450 $10,543
8/31/2000 $10,560 $10,585 $10,599 $10,543
9/30/2000 $10,662 $10,678 $10,690 $10,598
10/31/2000 $10,717 $10,751 $10,755 $10,616
11/30/2000 $10,869 $10,909 $10,913 $10,622
12/31/2000 $11,021 $11,101 $11,072 $10,616
1/31/2001 $11,191 $11,249 $11,242 $10,683
2/28/2001 $11,230 $11,352 $11,309 $10,726
3/31/2001 $11,302 $11,434 $11,374 $10,750
4/30/2001 $11,291 $11,398 $11,353 $10,793
5/31/2001 $11,364 $11,446 $11,427 $10,842
6/30/2001 $11,403 $11,482 $11,465 $10,860
7/31/2001 $11,595 $11,696 $11,685 $10,830
8/31/2001 $11,669 $11,800 $11,771 $10,830
9/30/2001 $11,829 $12,052 $11,939 $10,879
10/31/2001 $11,970 $12,240 $12,100 $10,842
11/30/2001 $11,871 $12,094 $11,971 $10,824
12/31/2001 $11,806 $12,035 $11,907 $10,781
1/31/2002 $11,912 $12,087 $12,021 $10,805
2/28/2002 $12,035 $12,187 $12,149 $10,848
3/31/2002 $11,879 $12,004 $11,999 $10,909
4/30/2002 $12,092 $12,228 $12,222 $10,970
5/31/2002 $12,164 $12,314 $12,302 $10,970
6/30/2002 $12,254 $12,468 $12,403 $10,976
7/31/2002 $12,381 $12,703 $12,548 $10,988
8/31/2002 $12,490 $12,848 $12,651 $11,025
9/30/2002 $12,582 $13,068 $12,762 $11,043
10/31/2002 $12,620 $13,059 $12,780 $11,062
11/30/2002 $12,614 $12,956 $12,773 $11,062
12/31/2002 $12,754 $13,196 $12,914 $11,037
1/31/2003 $12,785 $13,166 $12,940 $11,086
2/28/2003 $12,834 $13,315 $13,014 $11,171
3/31/2003 $12,828 $13,318 $13,004 $11,239
4/30/2003 $12,859 $13,355 $13,038 $11,214
5/31/2003 $12,871 $13,565 $13,072 $11,196
6/30/2003 $12,884 $13,543 $13,096 $11,208
7/31/2003 $12,578 $13,214 $12,804 $11,220
8/31/2003 $12,667 $13,238 $12,889 $11,263
9/30/2003 $12,850 $13,525 $13,106 $11,300
10/31/2003 $12,788 $13,392 $13,039 $11,287
11/30/2003 $12,839 $13,393 $13,078 $11,257
12/31/2003 $12,914 $13,497 $13,167 $11,245
1/31/2004 $12,985 $13,571 $13,232 $11,300
2/29/2004 $13,056 $13,700 $13,316 $11,361
3/31/2004 $13,089 $13,795 $13,360 $11,434
4/30/2004 $12,868 $13,487 $13,135 $11,470
5/31/2004 $12,839 $13,444 $13,098 $11,538
6/30/2004 $12,946 $13,478 $13,196 $11,574
7/31/2004 $13,054 $13,575 $13,296 $11,556
8/31/2004 $13,222 $13,777 $13,470 $11,562
9/30/2004 $13,128 $13,782 $13,477 $11,586
TOTAL RETURN 31.28% 37.82% 34.77% 15.86%
44 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------
CLASS C 9/30/04
- -------------------------------------------
1-Year +1.93%
- -------------------------------------------
5-Year +5.71%
- -------------------------------------------
Since Inception (5/1/95) +5.99%
- -------------------------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND - CLASS C
Total Return Index Comparison
$10,000 Investment (5/1/95 - 9/30/04)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN U.S. LEHMAN BROTHERS
GOVERNMENT INTERMEDIATE
SECURITIES FUND - GOVERNMENT LIPPER GNMA
CLASS C BOND INDEX(6) FUNDS AVERAGE(6) CPI(6)
- --------------------------------------------------------------------------------
5/1/1995 $10,000 $10,000 $10,000 $10,000
5/31/1995 $10,302 $10,282 $10,328 $10,020
6/30/1995 $10,358 $10,347 $10,388 $10,039
7/31/1995 $10,368 $10,352 $10,382 $10,039
8/31/1995 $10,471 $10,438 $10,491 $10,066
9/30/1995 $10,565 $10,508 $10,598 $10,086
10/31/1995 $10,669 $10,623 $10,698 $10,118
11/30/1995 $10,773 $10,753 $10,833 $10,112
12/31/1995 $10,894 $10,859 $10,973 $10,105
1/31/1996 $10,968 $10,950 $11,035 $10,165
2/29/1996 $10,868 $10,834 $10,893 $10,197
3/31/1996 $10,800 $10,785 $10,845 $10,250
4/30/1996 $10,764 $10,754 $10,800 $10,290
5/31/1996 $10,728 $10,748 $10,754 $10,309
6/30/1996 $10,838 $10,857 $10,871 $10,316
7/31/1996 $10,867 $10,891 $10,910 $10,336
8/31/1996 $10,879 $10,903 $10,904 $10,355
9/30/1996 $11,045 $11,044 $11,077 $10,388
10/31/1996 $11,240 $11,225 $11,301 $10,421
11/30/1996 $11,420 $11,361 $11,475 $10,441
12/31/1996 $11,332 $11,300 $11,391 $10,441
1/31/1997 $11,413 $11,343 $11,462 $10,474
2/28/1997 $11,426 $11,361 $11,484 $10,507
3/31/1997 $11,388 $11,297 $11,363 $10,533
4/30/1997 $11,555 $11,424 $11,539 $10,546
5/31/1997 $11,668 $11,513 $11,647 $10,540
6/30/1997 $11,798 $11,612 $11,781 $10,553
7/31/1997 $12,017 $11,826 $12,025 $10,566
8/31/1997 $11,958 $11,781 $11,975 $10,586
9/30/1997 $12,092 $11,909 $12,132 $10,612
10/31/1997 $12,209 $12,047 $12,257 $10,639
11/30/1997 $12,219 $12,074 $12,285 $10,632
12/31/1997 $12,337 $12,172 $12,403 $10,619
1/31/1998 $12,454 $12,331 $12,528 $10,639
2/28/1998 $12,447 $12,318 $12,541 $10,658
3/31/1998 $12,494 $12,356 $12,582 $10,678
4/30/1998 $12,577 $12,415 $12,649 $10,698
5/31/1998 $12,658 $12,501 $12,745 $10,718
6/30/1998 $12,702 $12,585 $12,801 $10,731
7/31/1998 $12,765 $12,633 $12,855 $10,744
8/31/1998 $12,884 $12,872 $12,982 $10,757
9/30/1998 $13,041 $13,173 $13,152 $10,770
10/31/1998 $12,954 $13,194 $13,088 $10,797
11/30/1998 $13,037 $13,154 $13,160 $10,797
12/31/1998 $13,082 $13,205 $13,207 $10,790
1/31/1999 $13,166 $13,264 $13,285 $10,816
2/28/1999 $13,077 $13,082 $13,180 $10,829
3/31/1999 $13,143 $13,169 $13,263 $10,862
4/30/1999 $13,189 $13,205 $13,314 $10,941
5/31/1999 $13,080 $13,124 $13,218 $10,941
6/30/1999 $13,010 $13,143 $13,144 $10,941
7/31/1999 $12,900 $13,144 $13,064 $10,974
8/31/1999 $12,904 $13,163 $13,047 $11,001
9/30/1999 $13,107 $13,276 $13,252 $11,053
10/31/1999 $13,171 $13,302 $13,298 $11,073
11/30/1999 $13,175 $13,311 $13,305 $11,080
12/31/1999 $13,119 $13,269 $13,241 $11,080
1/31/2000 $13,002 $13,225 $13,133 $11,113
2/29/2000 $13,149 $13,334 $13,287 $11,178
3/31/2000 $13,337 $13,487 $13,488 $11,271
4/30/2000 $13,300 $13,481 $13,463 $11,277
5/31/2000 $13,348 $13,517 $13,509 $11,290
6/30/2000 $13,562 $13,732 $13,746 $11,350
7/31/2000 $13,610 $13,823 $13,802 $11,376
8/31/2000 $13,807 $13,978 $13,998 $11,376
9/30/2000 $13,940 $14,100 $14,118 $11,435
10/31/2000 $14,032 $14,197 $14,204 $11,455
11/30/2000 $14,210 $14,405 $14,413 $11,461
12/31/2000 $14,410 $14,659 $14,624 $11,455
1/31/2001 $14,633 $14,854 $14,847 $11,527
2/28/2001 $14,684 $14,991 $14,937 $11,573
3/31/2001 $14,778 $15,099 $15,022 $11,600
4/30/2001 $14,786 $15,052 $14,995 $11,646
5/31/2001 $14,859 $15,114 $15,092 $11,698
6/30/2001 $14,911 $15,162 $15,142 $11,718
7/31/2001 $15,162 $15,445 $15,433 $11,685
8/31/2001 $15,259 $15,582 $15,547 $11,685
9/30/2001 $15,469 $15,915 $15,768 $11,738
10/31/2001 $15,654 $16,163 $15,980 $11,698
11/30/2001 $15,523 $15,970 $15,811 $11,679
12/31/2001 $15,438 $15,893 $15,726 $11,633
1/31/2002 $15,576 $15,962 $15,877 $11,659
2/28/2002 $15,738 $16,094 $16,045 $11,705
3/31/2002 $15,533 $15,851 $15,848 $11,771
4/30/2002 $15,812 $16,148 $16,142 $11,837
5/31/2002 $15,907 $16,260 $16,247 $11,837
6/30/2002 $16,026 $16,464 $16,381 $11,843
7/31/2002 $16,192 $16,774 $16,572 $11,856
8/31/2002 $16,335 $16,965 $16,708 $11,896
9/30/2002 $16,479 $17,257 $16,855 $11,916
10/31/2002 $16,505 $17,245 $16,879 $11,935
11/30/2002 $16,498 $17,109 $16,870 $11,935
12/31/2002 $16,681 $17,425 $17,056 $11,909
1/31/2003 $16,722 $17,387 $17,090 $11,962
2/28/2003 $16,811 $17,583 $17,187 $12,054
3/31/2003 $16,779 $17,586 $17,175 $12,126
4/30/2003 $16,821 $17,636 $17,220 $12,100
5/31/2003 $16,814 $17,913 $17,265 $12,080
6/30/2003 $16,854 $17,883 $17,296 $12,093
7/31/2003 $16,453 $17,449 $16,910 $12,107
8/31/2003 $16,568 $17,481 $17,023 $12,153
9/30/2003 $16,808 $17,860 $17,309 $12,192
10/31/2003 $16,725 $17,684 $17,221 $12,179
11/30/2003 $16,792 $17,686 $17,273 $12,146
12/31/2003 $16,890 $17,824 $17,390 $12,133
1/31/2004 $16,984 $17,920 $17,475 $12,192
2/29/2004 $17,077 $18,091 $17,587 $12,258
3/31/2004 $17,120 $18,217 $17,645 $12,337
4/30/2004 $16,830 $17,810 $17,347 $12,377
5/31/2004 $16,791 $17,753 $17,299 $12,449
6/30/2004 $16,958 $17,798 $17,428 $12,488
7/31/2004 $17,074 $17,927 $17,561 $12,469
8/31/2004 $17,294 $18,193 $17,791 $12,475
9/30/2004 $17,300 $18,200 $17,800 $12,502
TOTAL RETURN 73.00% 82.00% 78.00% 25.02%
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------
CLASS R 9/30/04
- -------------------------------------------
1-Year +2.10%
- -------------------------------------------
Since Inception (1/1/02) +4.51%
- -------------------------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND - CLASS R
Total Return Index Comparison
$10,000 Investment (1/1/02 - 9/30/04)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN U.S. LEHMAN BROTHERS
GOVERNMENT INTERMEDIATE
SECURITIES FUND - GOVERNMENT LIPPER GNMA
CLASS R BOND INDEX(6) FUNDS AVERAGE(6) CPI(6)
- --------------------------------------------------------------------------------
1/1/2002 $10,000 $10,000 $10,000 $10,000
1/31/2002 $10,109 $10,043 $10,096 $10,023
2/28/2002 $10,215 $10,126 $10,203 $10,062
3/31/2002 $10,098 $9,974 $10,078 $10,119
4/30/2002 $10,281 $10,160 $10,265 $10,175
5/31/2002 $10,343 $10,231 $10,332 $10,175
6/30/2002 $10,421 $10,359 $10,416 $10,181
7/31/2002 $10,530 $10,554 $10,538 $10,192
8/31/2002 $10,625 $10,675 $10,625 $10,226
9/30/2002 $10,704 $10,858 $10,718 $10,243
10/31/2002 $10,722 $10,851 $10,733 $10,260
11/30/2002 $10,733 $10,765 $10,728 $10,260
12/31/2002 $10,854 $10,964 $10,846 $10,238
1/31/2003 $10,866 $10,940 $10,868 $10,283
2/28/2003 $10,924 $11,063 $10,929 $10,362
3/31/2003 $10,921 $11,066 $10,922 $10,424
4/30/2003 $10,948 $11,097 $10,950 $10,402
5/31/2003 $10,945 $11,271 $10,979 $10,385
6/30/2003 $10,958 $11,252 $10,998 $10,396
7/31/2003 $10,715 $10,979 $10,753 $10,407
8/31/2003 $10,791 $10,999 $10,825 $10,447
9/30/2003 $10,948 $11,237 $11,007 $10,481
10/31/2003 $10,897 $11,127 $10,951 $10,470
11/30/2003 $10,926 $11,128 $10,984 $10,441
12/31/2003 $11,008 $11,215 $11,058 $10,430
1/31/2004 $11,053 $11,276 $11,113 $10,481
2/29/2004 $11,115 $11,383 $11,184 $10,538
3/31/2004 $11,160 $11,462 $11,221 $10,606
4/30/2004 $10,975 $11,206 $11,031 $10,640
5/31/2004 $10,950 $11,170 $11,000 $10,702
6/30/2004 $11,044 $11,198 $11,083 $10,736
7/31/2004 $11,121 $11,280 $11,167 $10,719
8/31/2004 $11,265 $11,447 $11,313 $10,724
9/30/2004 $11,286 $11,452 $11,319 $10,747
TOTAL RETURN 12.86% 14.52% 13.19% 7.47%
Annual Report | 45
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------
ADVISOR CLASS(5) 9/30/04
- -----------------------------------
1-Year +3.42%
- -----------------------------------
5-Year +6.39%
- -----------------------------------
10-Year +7.05%
- -----------------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND - ADVISOR CLASS
Total Return Index Comparison
$10,000 Investment (10/1/94 - 9/30/04)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN U.S. LEHMAN BROTHERS
GOVERNMENT INTERMEDIATE
SECURITIES FUND GOVERNMENT LIPPER GNMA
ADVISOR CLASS BOND INDEX(6) FUNDS AVERAGE(6) CPI(6)
- --------------------------------------------------------------------------------
10/1/1994 $10,000 $10,000 $10,000 $10,000
10/31/1994 $9,969 $10,002 $9,970 $10,007
11/30/1994 $9,954 $9,957 $9,944 $10,020
12/31/1994 $10,048 $9,990 $10,039 $10,020
1/31/1995 $10,252 $10,153 $10,230 $10,060
2/28/1995 $10,506 $10,348 $10,478 $10,100
3/31/1995 $10,554 $10,405 $10,521 $10,134
4/30/1995 $10,698 $10,526 $10,660 $10,167
5/31/1995 $11,054 $10,823 $11,009 $10,187
6/30/1995 $11,121 $10,892 $11,073 $10,207
7/31/1995 $11,139 $10,897 $11,067 $10,207
8/31/1995 $11,255 $10,987 $11,183 $10,234
9/30/1995 $11,356 $11,060 $11,297 $10,254
10/31/1995 $11,474 $11,182 $11,404 $10,288
11/30/1995 $11,593 $11,318 $11,548 $10,281
12/31/1995 $11,729 $11,430 $11,697 $10,274
1/31/1996 $11,798 $11,526 $11,763 $10,335
2/29/1996 $11,698 $11,404 $11,612 $10,368
3/31/1996 $11,648 $11,352 $11,561 $10,422
4/30/1996 $11,598 $11,319 $11,512 $10,462
5/31/1996 $11,565 $11,313 $11,464 $10,482
6/30/1996 $11,706 $11,428 $11,589 $10,489
7/31/1996 $11,743 $11,464 $11,629 $10,509
8/31/1996 $11,744 $11,477 $11,623 $10,529
9/30/1996 $11,941 $11,625 $11,808 $10,562
10/31/1996 $12,157 $11,816 $12,047 $10,596
11/30/1996 $12,339 $11,958 $12,232 $10,616
12/31/1996 $12,268 $11,894 $12,143 $10,616
1/31/1997 $12,398 $11,940 $12,218 $10,649
2/28/1997 $12,419 $11,959 $12,241 $10,683
3/31/1997 $12,385 $11,891 $12,113 $10,710
4/30/1997 $12,592 $12,025 $12,301 $10,723
5/31/1997 $12,703 $12,119 $12,415 $10,716
6/30/1997 $12,852 $12,222 $12,558 $10,730
7/31/1997 $13,098 $12,448 $12,818 $10,743
8/31/1997 $13,040 $12,400 $12,765 $10,763
9/30/1997 $13,211 $12,535 $12,932 $10,790
10/31/1997 $13,326 $12,681 $13,066 $10,817
11/30/1997 $13,364 $12,709 $13,096 $10,810
12/31/1997 $13,499 $12,812 $13,221 $10,797
1/31/1998 $13,616 $12,980 $13,355 $10,817
2/28/1998 $13,635 $12,966 $13,368 $10,837
3/31/1998 $13,693 $13,006 $13,412 $10,857
4/30/1998 $13,772 $13,068 $13,484 $10,877
5/31/1998 $13,887 $13,158 $13,586 $10,897
6/30/1998 $13,943 $13,247 $13,646 $10,910
7/31/1998 $13,998 $13,298 $13,703 $10,924
8/31/1998 $14,135 $13,549 $13,839 $10,937
9/30/1998 $14,336 $13,865 $14,020 $10,950
10/31/1998 $14,248 $13,888 $13,951 $10,977
11/30/1998 $14,347 $13,846 $14,028 $10,977
12/31/1998 $14,404 $13,900 $14,079 $10,971
1/31/1999 $14,503 $13,962 $14,162 $10,997
2/28/1999 $14,393 $13,770 $14,050 $11,011
3/31/1999 $14,473 $13,861 $14,138 $11,044
4/30/1999 $14,553 $13,899 $14,192 $11,124
5/31/1999 $14,441 $13,814 $14,090 $11,124
6/30/1999 $14,350 $13,834 $14,011 $11,124
7/31/1999 $14,259 $13,836 $13,925 $11,158
8/31/1999 $14,249 $13,855 $13,907 $11,185
9/30/1999 $14,502 $13,974 $14,126 $11,238
10/31/1999 $14,581 $14,002 $14,175 $11,258
11/30/1999 $14,571 $14,011 $14,182 $11,265
12/31/1999 $14,516 $13,967 $14,114 $11,265
1/31/2000 $14,418 $13,920 $14,000 $11,299
2/29/2000 $14,566 $14,036 $14,164 $11,365
3/31/2000 $14,781 $14,196 $14,378 $11,459
4/30/2000 $14,771 $14,190 $14,352 $11,466
5/31/2000 $14,832 $14,228 $14,400 $11,479
6/30/2000 $15,077 $14,454 $14,652 $11,539
7/31/2000 $15,138 $14,550 $14,713 $11,566
8/31/2000 $15,364 $14,713 $14,921 $11,566
9/30/2000 $15,520 $14,842 $15,050 $11,627
10/31/2000 $15,631 $14,943 $15,142 $11,647
11/30/2000 $15,836 $15,163 $15,364 $11,653
12/31/2000 $16,091 $15,430 $15,588 $11,647
1/31/2001 $16,323 $15,635 $15,827 $11,720
2/28/2001 $16,388 $15,779 $15,922 $11,767
3/31/2001 $16,501 $15,893 $16,013 $11,794
4/30/2001 $16,518 $15,843 $15,984 $11,841
5/31/2001 $16,608 $15,909 $16,088 $11,894
6/30/2001 $16,697 $15,960 $16,141 $11,914
7/31/2001 $16,987 $16,257 $16,451 $11,881
8/31/2001 $17,103 $16,402 $16,572 $11,881
9/30/2001 $17,322 $16,752 $16,808 $11,934
10/31/2001 $17,562 $17,013 $17,035 $11,894
11/30/2001 $17,426 $16,810 $16,854 $11,874
12/31/2001 $17,340 $16,729 $16,763 $11,827
1/31/2002 $17,478 $16,801 $16,924 $11,854
2/28/2002 $17,695 $16,940 $17,103 $11,901
3/31/2002 $17,474 $16,685 $16,893 $11,968
4/30/2002 $17,796 $16,997 $17,207 $12,035
5/31/2002 $17,913 $17,116 $17,319 $12,035
6/30/2002 $18,055 $17,329 $17,461 $12,041
7/31/2002 $18,250 $17,656 $17,665 $12,055
8/31/2002 $18,420 $17,858 $17,810 $12,095
9/30/2002 $18,591 $18,165 $17,967 $12,115
10/31/2002 $18,630 $18,152 $17,992 $12,135
11/30/2002 $18,631 $18,009 $17,983 $12,135
12/31/2002 $18,847 $18,341 $18,181 $12,108
1/31/2003 $18,902 $18,301 $18,217 $12,162
2/28/2003 $19,013 $18,507 $18,321 $12,256
3/31/2003 $19,014 $18,511 $18,308 $12,329
4/30/2003 $19,043 $18,563 $18,356 $12,303
5/31/2003 $19,072 $18,855 $18,404 $12,282
6/30/2003 $19,101 $18,824 $18,437 $12,296
7/31/2003 $18,659 $18,367 $18,026 $12,309
8/31/2003 $18,800 $18,400 $18,146 $12,356
9/30/2003 $19,109 $18,799 $18,451 $12,396
10/31/2003 $19,027 $18,615 $18,357 $12,383
11/30/2003 $19,085 $18,616 $18,412 $12,349
12/31/2003 $19,206 $18,761 $18,537 $12,336
1/31/2004 $19,323 $18,863 $18,628 $12,396
2/29/2004 $19,438 $19,042 $18,748 $12,463
3/31/2004 $19,497 $19,175 $18,809 $12,544
4/30/2004 $19,180 $18,746 $18,492 $12,584
5/31/2004 $19,176 $18,686 $18,440 $12,657
6/30/2004 $19,347 $18,734 $18,578 $12,697
7/31/2004 $19,488 $18,869 $18,719 $12,677
8/31/2004 $19,749 $19,150 $18,964 $12,684
9/30/2004 $19,766 $19,157 $18,974 $12,711
TOTAL RETURN 97.66% 91.57% 89.74% 27.11%
46 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
ENDNOTES
THE FUND'S SHARE PRICE AND YIELD MAY BE AFFECTED BY INTEREST RATE MOVEMENTS AND
MORTGAGE PREPAYMENTS. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION FROM
INTEREST RATES. SECURITIES OWNED BY THE FUND, BUT NOT SHARES OF THE FUND, ARE
GUARANTEED BY THE U.S. GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES, AS TO
TIMELY PAYMENT OF PRINCIPAL AND INTEREST. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares 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: Shares are available to certain eligible investors as
described in the prospectus.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(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.
(3) Distribution rate is based on an annualization of the respective class's
September dividend and the maximum offering price (NAV for Classes B, C, R
and Advisor) per share on 9/30/04.
(4) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 9/30/04.
(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 +61.12% and +6.35%.
(6) Sources: Lehman Brothers Inc.; Lipper Inc.; Standard & Poor's Micropal.
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 of 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
Objective Average is calculated by averaging the total return for all
funds within the Lipper GNMA Funds classification in the Lipper Open-End
underlying funds universe for the period indicated. Lipper GNMA Funds are
defined as funds that invest primarily in Government National Mortgage
Association securities. For the 12 months ended 9/30/04, the Lipper GNMA
Funds Average consisted of 67 mutual funds. The Lipper average does not
include sales charges. Fund performance relative to the average may have
differed if these or other factors had been considered.
Annual Report | 47
YOUR FUND'S EXPENSES
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
48 | Annual Report
YOUR FUND'S EXPENSES (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ---------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 3/31/04 VALUE 9/30/04 PERIOD* 3/31/04-9/30/04
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,013.10 $3.52
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.50 $3.54
- ---------------------------------------------------------------------------------------------------------
CLASS B
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,010.40 $6.18
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.85 $6.21
- ---------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,010.40 $6.18
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.85 $6.21
- ---------------------------------------------------------------------------------------------------------
CLASS R
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,011.30 $5.43
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.60 $5.45
- ---------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,013.70 $2.92
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,022.10 $2.93
- ---------------------------------------------------------------------------------------------------------
* Expenses are equal to the Fund's annualized expense ratio for each class
(A: 0.70%; B: 1.23%; C: 1.23%; R: 1.08%; and Advisor: 0.58%), multiplied
by the average account value over the period, multiplied by 183/366 to
reflect the one-half year period.
Annual Report | 49
FRANKLIN UTILITIES FUND
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Utilities Fund seeks both
capital appreciation and current income from a portfolio of public utility
industry securities.
- --------------------------------------------------------------------------------
PORTFOLIO BREAKDOWN
Franklin Utilities Fund
Based on Total Net Assets as of 9/30/04
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Utilities ............................... 93.8%
Communications .......................... 2.9%
Commercial Services ..................... 1.1%
Industrial Services ..................... 1.0%
Short-Term Investments
& Other Net Assets ...................... 1.2%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Utilities Fund's annual report, which
covers the fiscal year ended September 30, 2004.
PERFORMANCE OVERVIEW
Franklin Utilities Fund - Class A posted a +20.40% cumulative total return for
the 12-month period ended September 30, 2004. The Fund outperformed its
benchmark, the Standard & Poor's 500 Composite Index (S&P 500), which returned
13.86% for the same period.(1) Given that the Fund invests in only a few sectors
within the S&P 500, the Fund's results are not directly comparable to the
index's. You can find the Fund's long-term performance data in the Performance
Summary beginning on page 54.
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended September 30, 2004, the domestic economy grew, with
one-year gross domestic product increasing an estimated 3.9%. Major contributors
to growth included inventory investment, equipment and soft-
(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 NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 106.
50 | Annual Report
ware spending, and federal government spending. The economy experienced solid
export growth and a resilient housing market; however, job worries contributed
to declining consumer confidence late in the period, which could be seen in
relatively weak consumer spending and modest retail sales.
Labor market conditions improved during the reporting period. More than one-half
of the jobs lost during the recession and weak economic expansion have been
recovered. The economy created 1.8 million jobs since summer 2003. In addition,
the unemployment rate fell from 6.1% in September 2003 to 5.4% at period-end.(2)
Services created the most jobs led by leisure and hospitality, education and
health, and business and professional services.
In light of positive economic developments, consumer inflation remained modest
but picked up speed in 2004, with record-high oil prices a dominant theme.
Excluding the volatile food and energy categories, consumer prices increased
2.0% for the 12 months ended September 30, 2004.(2) Consequently, the Federal
Reserve Board (Fed) raised the federal funds target rate during the reporting
period, with quarter percentage point hikes on June 30, August 10 and September
21. As a result of the increases, the federal funds target rate rose from 1.0%
to 1.75%. With core inflation expected to remain relatively low, Fed
policymakers believe they can raise interest rates at a measured pace.
Nonetheless, the Fed said it will respond to changes in economic prospects as
needed to fulfill its obligation to maintain price stability.
Domestic equity markets sustained a rally through early 2004, then flattened and
traded in a fairly narrow range through period-end. Despite continued signs of
enhanced corporate fundamentals, investors appeared cautious due to geopolitical
uncertainty, soaring oil prices and rising short-term interest rates. The S&P
500 rose 13.86% for the 12 months under review, while the technology-heavy
NASDAQ Composite Index gained 6.75%.(3)
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.
(2) Source: Bureau of Labor Statistics.
(3) Source: Standard & Poor's Micropal. See footnote 1 for a description of
the S&P 500. 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 3,000 companies.
Annual Report | 51
TOP 10 EQUITY HOLDINGS
Franklin Utilities Fund
9/30/04
- --------------------------------------------------------------------------------
% OF TOTAL
COMPANY NET ASSETS
- --------------------------------------------------------------------------------
Dominion Resources Inc. 4.9%
- --------------------------------------------------------------------------------
Entergy Corp. 4.7%
- --------------------------------------------------------------------------------
FPL Group Inc. 4.5%
- --------------------------------------------------------------------------------
TXU Corp. 4.0%
- --------------------------------------------------------------------------------
American Electric Power Co. Inc. 3.9%
- --------------------------------------------------------------------------------
Exelon Corp. 3.8%
- --------------------------------------------------------------------------------
FirstEnergy Corp. 3.6%
- --------------------------------------------------------------------------------
United Utilities PLC, A (U.K.) 3.5%
- --------------------------------------------------------------------------------
PPL Corp. 3.4%
- --------------------------------------------------------------------------------
Progress Energy Inc. 3.3%
- --------------------------------------------------------------------------------
MANAGER'S DISCUSSION
Utilities companies are adjusting their priorities and moving toward an
operational philosophy that encompasses a back-to-basics approach of focusing on
core utility franchises. This strategy shift was driven, in large part, by
events including the California energy crisis, the Enron collapse, and expensive
marketing and trading failures.
With this back-to-basics strategy, many utilities companies are re-emphasizing
their commitment to their shareholders through dividend increases and share
repurchases. For example, three of the Fund's long-standing and significant
holdings raised their dividends during summer 2004. FPL Group increased its
annual dividend almost 10% and Exelon upped its dividend nearly 11%. Dominion
Resources announced a 3% dividend increase, payable in December 2004, which
represented the company's first dividend increase in 10 years. In addition, the
utilities industry began to experience a trend of equity repurchases, as
exemplified by Entergy's recently announced $1.5 billion buy-back program. TXU
is another example, and the stock's 107% return during the past 12 months was
largely fueled by management's willingness to channel excess cash into equity
and debt repurchases.
After several years of turmoil, we were encouraged about prospects for
California utilities, which include PG&E, Edison International and Sempra
Energy. We increased our holdings in these companies during the past fiscal
year, and the return for each was positive. Following the energy crisis in 2000
and 2001, the state's regulatory policy improved with a focus on maintaining a
reliable energy grid for consumers, which we believe may benefit these
companies. PG&E, for example, is the owner of Pacific Gas & Electric, one of the
nation's largest utilities. The state's renewed dedication to its utilities
contributed to the company's recent emergence from bankruptcy.
Because of the path of destruction left by four hurricanes, the summer of 2004
proved to be a difficult season for our four electric utilities holdings with
Florida-based operations: FPL Group, Progress Energy, Southern Company and TECO
Energy. This storm season's effects may be reduced energy usage and expected
2004 earnings, as well as uncertainties related to the utilities' ability to
recover costs associated with the events. As of the end of September, the
companies were still trying to quantify the hurricanes' overall effects. Despite
this near-term issue, we continue to believe that the utilities operating in
Florida are sound investments with solid return potential.
52 | Annual Report
Thank you for your continued participation in Franklin Utilities Fund. We look
forward to serving your future investment needs.
[PHOTO OMITTED] /s/ John C. Kohli
John C. Kohli, CFA
Portfolio Manager
Franklin Utilities Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF SEPTEMBER 30, 2004, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS 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 ADVISER 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 | 53
PERFORMANCE SUMMARY AS OF 9/30/04
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 9/30/04 9/30/03
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.36 $10.16 $8.80
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/03-9/30/04)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.4040
- -----------------------------------------------------------------------------------------------
CLASS B CHANGE 9/30/04 9/30/03
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.35 $10.15 $8.80
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/03-9/30/04)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.3577
- -----------------------------------------------------------------------------------------------
CLASS C CHANGE 9/30/04 9/30/03
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.35 $10.13 $8.78
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/03-9/30/04)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.3581
- -----------------------------------------------------------------------------------------------
CLASS R CHANGE 9/30/04 9/30/03
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.36 $10.15 $8.79
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/03-9/30/04)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.3717
- -----------------------------------------------------------------------------------------------
ADVISOR CLASS CHANGE 9/30/04 9/30/03
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.36 $10.20 $8.84
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/03-9/30/04)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.4178
- -----------------------------------------------------------------------------------------------
54 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY.
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INCLUDE MAXIMUM SALES CHARGES.
- -----------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +20.40% +46.24% +143.56%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +15.29% +6.96% +8.84%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,529 $13,997 $23,320
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.81%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 3.70%
- -----------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +19.71% +42.75% +27.95%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +15.71% +7.08% +4.25%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,571 $14,075 $12,703
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.50%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 3.36%
- -----------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +19.76% +42.60% +111.73%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +18.76% +7.36% +8.29%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,876 $14,260 $21,173
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.50%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 3.36%
- -----------------------------------------------------------------------------------------------------
CLASS R 1-YEAR INCEPTION (1/1/02)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +20.02% +16.90%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +19.02% +5.86%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,902 $11,690
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.66%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 3.50%
- -----------------------------------------------------------------------------------------------------
ADVISOR CLASS(6) 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +20.48% +47.40% +148.95%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +20.48% +8.07% +9.55%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $12,048 $14,740 $24,895
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 4.10%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 4.00%
- -----------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 55
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 any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS A 9/30/04
- -----------------------------------------
1-Year +15.29%
- -----------------------------------------
5-Year +6.96%
- -----------------------------------------
10-Year +8.84%
- -----------------------------------------
FRANKLIN UTILITIES FUND - CLASS A
Growth of a $10,000 Investment*
(10/1/1994 - 9/30/2004)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN
UTILITIES FUND
DATE - CLASS A S&P 500(7)
--------------------------------------------------
10/1/1994 $9,575 $10,000
10/31/1994 $9,747 $10,224
11/30/1994 $9,862 $9,852
12/31/1994 $9,895 $9,998
1/31/1995 $10,479 $10,258
2/28/1995 $10,467 $10,657
3/31/1995 $10,316 $10,971
4/30/1995 $10,541 $11,294
5/31/1995 $11,146 $11,744
6/30/1995 $11,148 $12,017
7/31/1995 $11,112 $12,415
8/31/1995 $11,280 $12,446
9/30/1995 $11,891 $12,971
10/31/1995 $12,135 $12,925
11/30/1995 $12,330 $13,491
12/31/1995 $12,930 $13,751
1/31/1996 $13,142 $14,219
2/29/1996 $12,806 $14,351
3/31/1996 $12,794 $14,489
4/30/1996 $12,365 $14,703
5/31/1996 $12,504 $15,081
6/30/1996 $13,170 $15,139
7/31/1996 $12,442 $14,470
8/31/1996 $12,621 $14,776
9/30/1996 $12,597 $15,607
10/31/1996 $13,012 $16,037
11/30/1996 $13,193 $17,248
12/31/1996 $13,193 $16,906
1/31/1997 $13,261 $17,962
2/28/1997 $13,371 $18,103
3/31/1997 $12,997 $17,361
4/30/1997 $12,900 $18,396
5/31/1997 $13,303 $19,515
6/30/1997 $13,741 $20,389
7/31/1997 $14,065 $22,011
8/31/1997 $13,755 $20,778
9/30/1997 $14,326 $21,916
10/31/1997 $14,397 $21,185
11/30/1997 $15,353 $22,164
12/31/1997 $16,478 $22,545
1/31/1998 $15,841 $22,794
2/28/1998 $16,093 $24,437
3/31/1998 $17,098 $25,687
4/30/1998 $16,484 $25,946
5/31/1998 $16,274 $25,500
6/30/1998 $16,666 $26,535
7/31/1998 $16,059 $26,254
8/31/1998 $16,605 $22,462
9/30/1998 $17,436 $23,901
10/31/1998 $17,113 $25,843
11/30/1998 $17,297 $27,409
12/31/1998 $17,725 $28,987
1/31/1999 $16,782 $30,199
2/28/1999 $15,982 $29,260
3/31/1999 $15,709 $30,431
4/30/1999 $16,697 $31,609
5/31/1999 $17,459 $30,864
6/30/1999 $16,840 $32,575
7/31/1999 $16,593 $31,560
8/31/1999 $16,561 $31,403
9/30/1999 $15,946 $30,544
10/31/1999 $16,229 $32,476
11/30/1999 $15,281 $33,136
12/31/1999 $15,066 $35,086
1/31/2000 $15,925 $33,324
2/29/2000 $14,750 $32,693
3/31/2000 $15,252 $35,890
4/30/2000 $16,158 $34,810
5/31/2000 $16,372 $34,098
6/30/2000 $15,637 $34,939
7/31/2000 $16,285 $34,393
8/31/2000 $18,012 $36,528
9/30/2000 $19,816 $34,600
10/31/2000 $19,725 $34,453
11/30/2000 $20,435 $31,739
12/31/2000 $21,335 $31,895
1/31/2001 $19,145 $33,026
2/28/2001 $20,268 $30,016
3/31/2001 $20,531 $28,116
4/30/2001 $21,387 $30,299
5/31/2001 $21,498 $30,502
6/30/2001 $20,414 $29,760
7/31/2001 $19,701 $29,467
8/31/2001 $19,964 $27,624
9/30/2001 $19,017 $25,394
10/31/2001 $19,036 $25,878
11/30/2001 $18,865 $27,863
12/31/2001 $19,610 $28,107
1/31/2002 $19,368 $27,697
2/28/2002 $19,308 $27,163
3/31/2002 $20,410 $28,184
4/30/2002 $20,267 $26,476
5/31/2002 $19,778 $26,282
6/30/2002 $18,899 $24,410
7/31/2002 $17,269 $22,508
8/31/2002 $17,950 $22,656
9/30/2002 $16,642 $20,196
10/31/2002 $16,642 $21,971
11/30/2002 $16,977 $23,263
12/31/2002 $17,555 $21,897
1/31/2003 $16,834 $21,325
2/28/2003 $16,368 $21,004
3/31/2003 $16,952 $21,206
4/30/2003 $17,877 $22,954
5/31/2003 $19,447 $24,162
6/30/2003 $19,513 $24,471
7/31/2003 $18,621 $24,902
8/31/2003 $18,643 $25,387
9/30/2003 $19,369 $25,118
10/31/2003 $19,721 $26,538
11/30/2003 $19,919 $26,772
12/31/2003 $20,944 $28,175
1/31/2004 $21,300 $28,692
2/29/2004 $21,856 $29,091
3/31/2004 $22,014 $28,652
4/30/2004 $21,362 $28,203
5/31/2004 $21,609 $28,589
6/30/2004 $21,953 $29,144
7/31/2004 $22,180 $28,180
8/31/2004 $23,066 $28,293
9/30/2004 $23,320 $28,599
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS B 9/30/04
- -----------------------------------------
1-Year +15.71%
- -----------------------------------------
5-Year +7.08%
- -----------------------------------------
Since Inception (1/1/99) +4.25%
- -----------------------------------------
FRANKLIN UTILITIES FUND - CLASS B
Growth of a $10,000 Investment*
(1/1/1999 - 9/30/2004)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN
UTILITIES FUND
DATE - CLASS B S&P 500(7)
--------------------------------------------------
1/1/1999 $10,000 $10,000
1/31/1999 $9,468 $10,418
2/28/1999 $9,016 $10,094
3/31/1999 $8,859 $10,498
4/30/1999 $9,416 $10,905
5/31/1999 $9,845 $10,647
6/30/1999 $9,487 $11,238
7/31/1999 $9,339 $10,887
8/31/1999 $9,321 $10,834
9/30/1999 $8,964 $10,537
10/31/1999 $9,133 $11,203
11/30/1999 $8,600 $11,431
12/31/1999 $8,479 $12,104
1/31/2000 $8,961 $11,496
2/29/2000 $8,282 $11,279
3/31/2000 $8,572 $12,381
4/30/2000 $9,071 $12,009
5/31/2000 $9,190 $11,763
6/30/2000 $8,768 $12,053
7/31/2000 $9,131 $11,865
8/31/2000 $10,088 $12,601
9/30/2000 $11,097 $11,936
10/31/2000 $11,035 $11,886
11/30/2000 $11,433 $10,949
12/31/2000 $11,932 $11,003
1/31/2001 $10,708 $11,393
2/28/2001 $11,325 $10,355
3/31/2001 $11,468 $9,699
4/30/2001 $11,936 $10,453
5/31/2001 $11,998 $10,523
6/30/2001 $11,390 $10,267
7/31/2001 $10,982 $10,166
8/31/2001 $11,128 $9,530
9/30/2001 $10,588 $8,760
10/31/2001 $10,599 $8,927
11/30/2001 $10,504 $9,612
12/31/2001 $10,916 $9,696
1/31/2002 $10,770 $9,555
2/28/2002 $10,737 $9,371
3/31/2002 $11,336 $9,723
4/30/2002 $11,257 $9,134
5/31/2002 $10,985 $9,067
6/30/2002 $10,498 $8,421
7/31/2002 $9,570 $7,765
8/31/2002 $9,948 $7,816
9/30/2002 $9,225 $6,967
10/31/2002 $9,225 $7,580
11/30/2002 $9,410 $8,025
12/31/2002 $9,719 $7,554
1/31/2003 $9,320 $7,357
2/28/2003 $9,062 $7,246
3/31/2003 $9,375 $7,316
4/30/2003 $9,875 $7,919
5/31/2003 $10,743 $8,335
6/30/2003 $10,782 $8,442
7/31/2003 $10,289 $8,591
8/31/2003 $10,289 $8,758
9/30/2003 $10,690 $8,665
10/31/2003 $10,873 $9,155
11/30/2003 $10,982 $9,236
12/31/2003 $11,533 $9,720
1/31/2004 $11,730 $9,898
2/29/2004 $12,036 $10,036
3/31/2004 $12,122 $9,884
4/30/2004 $11,750 $9,729
5/31/2004 $11,874 $9,863
6/30/2004 $12,061 $10,054
7/31/2004 $12,186 $9,722
8/31/2004 $12,674 $9,761
9/30/2004 $12,703 $9,866
56 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------
CLASS C 9/30/04
- ----------------------------------------
1-Year +18.76%
- ----------------------------------------
5-Year +7.36%
- ----------------------------------------
Since Inception (5/1/95) +8.29%
- ----------------------------------------
FRANKLIN UTILITIES FUND - CLASS C
Growth of a $10,000 Investment*
(5/1/1995 - 9/30/2004)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN
UTILITIES FUND
DATE - CLASS C S&P 500(7)
------------------------------------------------------
5/1/1995 $10,000 $10,000
5/31/1995 $10,598 $10,399
6/30/1995 $10,606 $10,640
7/31/1995 $10,561 $10,993
8/31/1995 $10,721 $11,020
9/30/1995 $11,301 $11,485
10/31/1995 $11,522 $11,444
11/30/1995 $11,695 $11,946
12/31/1995 $12,273 $12,176
1/31/1996 $12,450 $12,590
2/29/1996 $12,143 $12,707
3/31/1996 $12,127 $12,829
4/30/1996 $11,720 $13,018
5/31/1996 $11,840 $13,354
6/30/1996 $12,456 $13,404
7/31/1996 $11,766 $12,813
8/31/1996 $11,936 $13,083
9/30/1996 $11,911 $13,819
10/31/1996 $12,290 $14,200
11/30/1996 $12,462 $15,272
12/31/1996 $12,458 $14,970
1/31/1997 $12,523 $15,905
2/28/1997 $12,613 $16,029
3/31/1997 $12,248 $15,372
4/30/1997 $12,157 $16,289
5/31/1997 $12,523 $17,280
6/30/1997 $12,934 $18,054
7/31/1997 $13,240 $19,489
8/31/1997 $12,934 $18,398
9/30/1997 $13,466 $19,405
10/31/1997 $13,533 $18,758
11/30/1997 $14,420 $19,626
12/31/1997 $15,475 $19,962
1/31/1998 $14,877 $20,183
2/28/1998 $15,100 $21,638
3/31/1998 $16,037 $22,745
4/30/1998 $15,460 $22,974
5/31/1998 $15,249 $22,579
6/30/1998 $15,611 $23,496
7/31/1998 $15,042 $23,246
8/31/1998 $15,540 $19,889
9/30/1998 $16,327 $21,163
10/31/1998 $16,010 $22,883
11/30/1998 $16,169 $24,269
12/31/1998 $16,565 $25,667
1/31/1999 $15,682 $26,740
2/28/1999 $14,934 $25,909
3/31/1999 $14,676 $26,945
4/30/1999 $15,584 $27,988
5/31/1999 $16,296 $27,329
6/30/1999 $15,700 $28,844
7/31/1999 $15,455 $27,945
8/31/1999 $15,424 $27,806
9/30/1999 $14,847 $27,045
10/31/1999 $15,110 $28,756
11/30/1999 $14,211 $29,340
12/31/1999 $14,006 $31,067
1/31/2000 $14,806 $29,506
2/29/2000 $13,696 $28,949
3/31/2000 $14,176 $31,779
4/30/2000 $15,002 $30,823
5/31/2000 $15,200 $30,192
6/30/2000 $14,499 $30,937
7/31/2000 $15,101 $30,453
8/31/2000 $16,687 $32,344
9/30/2000 $18,358 $30,637
10/31/2000 $18,257 $30,507
11/30/2000 $18,915 $28,103
12/31/2000 $19,742 $28,241
1/31/2001 $17,713 $29,243
2/28/2001 $18,736 $26,578
3/31/2001 $18,974 $24,895
4/30/2001 $19,748 $26,828
5/31/2001 $19,851 $27,008
6/30/2001 $18,843 $26,351
7/31/2001 $18,167 $26,092
8/31/2001 $18,409 $24,460
9/30/2001 $17,532 $22,485
10/31/2001 $17,550 $22,914
11/30/2001 $17,375 $24,671
12/31/2001 $18,056 $24,887
1/31/2002 $17,833 $24,524
2/28/2002 $17,778 $24,051
3/31/2002 $18,771 $24,956
4/30/2002 $18,621 $23,444
5/31/2002 $18,170 $23,271
6/30/2002 $17,362 $21,614
7/31/2002 $15,844 $19,930
8/31/2002 $16,470 $20,060
9/30/2002 $15,270 $17,882
10/31/2002 $15,251 $19,455
11/30/2002 $15,578 $20,599
12/31/2002 $16,090 $19,389
1/31/2003 $15,429 $18,882
2/28/2003 $15,001 $18,598
3/31/2003 $15,522 $18,777
4/30/2003 $16,350 $20,325
5/31/2003 $17,790 $21,394
6/30/2003 $17,836 $21,668
7/31/2003 $17,019 $22,050
8/31/2003 $17,039 $22,479
9/30/2003 $17,680 $22,241
10/31/2003 $17,982 $23,499
11/30/2003 $18,184 $23,705
12/31/2003 $19,078 $24,947
1/31/2004 $19,403 $25,405
2/29/2004 $19,912 $25,758
3/31/2004 $20,054 $25,370
4/30/2004 $19,458 $24,972
5/31/2004 $19,643 $25,314
6/30/2004 $19,953 $25,806
7/31/2004 $20,160 $24,952
8/31/2004 $20,968 $25,052
9/30/2004 $21,173 $25,323
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------
CLASS R 9/30/04
- ----------------------------------------
1-Year +19.02%
- ----------------------------------------
Since Inception (1/1/02) +5.86%
- ----------------------------------------
FRANKLIN UTILITIES FUND - CLASS R
Growth of a $10,000 Investment*
(1/1/2002 - 9/30/2004)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN
UTILITIES FUND
DATE - CLASS R S&P 500(7)
--------------------------------------------------
1/1/2002 $10,000 $10,000
1/31/2002 $9,796 $9,854
2/28/2002 $9,766 $9,664
3/31/2002 $10,303 $10,028
4/30/2002 $10,231 $9,420
5/31/2002 $9,984 $9,351
6/30/2002 $9,542 $8,685
7/31/2002 $8,719 $8,008
8/31/2002 $9,052 $8,061
9/30/2002 $8,399 $7,185
10/31/2002 $8,399 $7,817
11/30/2002 $8,568 $8,277
12/31/2002 $8,852 $7,791
1/31/2003 $8,488 $7,587
2/28/2003 $8,253 $7,473
3/31/2003 $8,546 $7,545
4/30/2003 $9,002 $8,167
5/31/2003 $9,793 $8,596
6/30/2003 $9,819 $8,706
7/31/2003 $9,369 $8,860
8/31/2003 $9,381 $9,032
9/30/2003 $9,739 $8,937
10/31/2003 $9,916 $9,442
11/30/2003 $10,016 $9,525
12/31/2003 $10,523 $10,024
1/31/2004 $10,691 $10,208
2/29/2004 $10,972 $10,350
3/31/2004 $11,053 $10,194
4/30/2004 $10,725 $10,034
5/31/2004 $10,837 $10,171
6/30/2004 $11,012 $10,369
7/31/2004 $11,126 $10,026
8/31/2004 $11,571 $10,066
9/30/2004 $11,690 $10,175
Annual Report | 57
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
ADVISOR CLASS(6) 9/30/04
- -------------------------------------
1-Year +20.48%
- -------------------------------------
5-Year +8.07%
- -------------------------------------
10-Year +9.55%
- -------------------------------------
FRANKLIN UTILITIES FUND - ADVISOR CLASS
Growth of a $10,000 Investment**
(10/1/1994 - 9/30/2004)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN
UTILITIES FUND
DATE - ADVISOR CLASS S&P 500(7)
--------------------------------------------------
10/1/1994 $10,000 $10,000
10/31/1994 $10,180 $10,224
11/30/1994 $10,300 $9,852
12/31/1994 $10,334 $9,998
1/31/1995 $10,944 $10,258
2/28/1995 $10,932 $10,657
3/31/1995 $10,774 $10,971
4/30/1995 $11,010 $11,294
5/31/1995 $11,641 $11,744
6/30/1995 $11,643 $12,017
7/31/1995 $11,605 $12,415
8/31/1995 $11,781 $12,446
9/30/1995 $12,419 $12,971
10/31/1995 $12,674 $12,925
11/30/1995 $12,878 $13,491
12/31/1995 $13,505 $13,751
1/31/1996 $13,726 $14,219
2/29/1996 $13,375 $14,351
3/31/1996 $13,362 $14,489
4/30/1996 $12,915 $14,703
5/31/1996 $13,059 $15,081
6/30/1996 $13,755 $15,139
7/31/1996 $12,995 $14,470
8/31/1996 $13,181 $14,776
9/30/1996 $13,157 $15,607
10/31/1996 $13,590 $16,037
11/30/1996 $13,779 $17,248
12/31/1996 $13,779 $16,906
1/31/1997 $13,966 $17,962
2/28/1997 $14,082 $18,103
3/31/1997 $13,693 $17,361
4/30/1997 $13,590 $18,396
5/31/1997 $14,015 $19,515
6/30/1997 $14,482 $20,389
7/31/1997 $14,823 $22,011
8/31/1997 $14,482 $20,778
9/30/1997 $15,103 $21,916
10/31/1997 $15,163 $21,185
11/30/1997 $16,171 $22,164
12/31/1997 $17,378 $22,545
1/31/1998 $16,706 $22,794
2/28/1998 $16,971 $24,437
3/31/1998 $18,038 $25,687
4/30/1998 $17,406 $25,946
5/31/1998 $17,168 $25,500
6/30/1998 $17,588 $26,535
7/31/1998 $16,947 $26,254
8/31/1998 $17,508 $22,462
9/30/1998 $18,456 $23,901
10/31/1998 $18,115 $25,843
11/30/1998 $18,310 $27,409
12/31/1998 $18,751 $28,987
1/31/1999 $17,771 $30,199
2/28/1999 $16,927 $29,260
3/31/1999 $16,645 $30,431
4/30/1999 $17,689 $31,609
5/31/1999 $18,494 $30,864
6/30/1999 $17,846 $32,575
7/31/1999 $17,568 $31,560
8/31/1999 $17,550 $31,403
9/30/1999 $16,891 $30,544
10/31/1999 $17,206 $32,476
11/30/1999 $16,187 $33,136
12/31/1999 $15,983 $35,086
1/31/2000 $16,892 $33,324
2/29/2000 $15,631 $32,693
3/31/2000 $16,186 $35,890
4/30/2000 $17,145 $34,810
5/31/2000 $17,371 $34,098
6/30/2000 $16,580 $34,939
7/31/2000 $17,284 $34,393
8/31/2000 $19,112 $36,528
9/30/2000 $21,028 $34,600
10/31/2000 $20,931 $34,453
11/30/2000 $21,702 $31,739
12/31/2000 $22,643 $31,895
1/31/2001 $20,324 $33,026
2/28/2001 $21,513 $30,016
3/31/2001 $21,799 $28,116
4/30/2001 $22,704 $30,299
5/31/2001 $22,842 $30,502
6/30/2001 $21,683 $29,760
7/31/2001 $20,926 $29,467
8/31/2001 $21,206 $27,624
9/30/2001 $20,210 $25,394
10/31/2001 $20,231 $25,878
11/30/2001 $20,049 $27,863
12/31/2001 $20,846 $28,107
1/31/2002 $20,590 $27,697
2/28/2002 $20,547 $27,163
3/31/2002 $21,701 $28,184
4/30/2002 $21,550 $26,476
5/31/2002 $21,052 $26,282
6/30/2002 $20,108 $24,410
7/31/2002 $18,357 $22,508
8/31/2002 $19,101 $22,656
9/30/2002 $17,721 $20,196
10/31/2002 $17,721 $21,971
11/30/2002 $18,098 $23,263
12/31/2002 $18,695 $21,897
1/31/2003 $17,930 $21,325
2/28/2003 $17,435 $21,004
3/31/2003 $18,062 $21,206
4/30/2003 $19,043 $22,954
5/31/2003 $20,733 $24,162
6/30/2003 $20,808 $24,471
7/31/2003 $19,862 $24,902
8/31/2003 $19,885 $25,387
9/30/2003 $20,663 $25,118
10/31/2003 $21,014 $26,538
11/30/2003 $21,248 $26,772
12/31/2003 $22,320 $28,175
1/31/2004 $22,699 $28,692
2/29/2004 $23,313 $29,091
3/31/2004 $23,489 $28,652
4/30/2004 $22,796 $28,203
5/31/2004 $23,035 $28,589
6/30/2004 $23,408 $29,144
7/31/2004 $23,674 $28,180
8/31/2004 $24,616 $28,293
9/30/2004 $24,895 $28,599
58 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
ENDNOTES
IN ADDITION TO OTHER FACTORS, 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 B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares 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: Shares are available to certain eligible investors as
described in the prospectus.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(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.
(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.
(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, C, R and Advisor) per share on 9/30/04.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 9/30/04.
(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 +80.68% and +7.93%.
(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.
* FUND PERFORMANCE INCLUDES APPLICABLE SALES CHARGES.
** PRIOR TO 1/2/97, FUND PERFORMANCE INCLUDES HISTORICAL CLASS A DATA, WHICH
INCLUDES 12B-1 EXPENSES,BUT EXCLUDES SALES CHARGES.
Annual Report | 59
YOUR FUND'S EXPENSES
FRANKLIN UTILITIES FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
60 | Annual Report
YOUR FUND'S EXPENSES (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ----------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 3/31/04 VALUE 9/30/04 PERIOD* 3/31/04-9/30/04
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,059.30 $3.96
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.15 $3.89
- ----------------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,055.70 $6.53
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.41
- ----------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,055.90 $6.53
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.41
- ----------------------------------------------------------------------------------------------------------------
CLASS R
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,057.60 $5.76
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.40 $5.65
- ----------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,059.90 $3.19
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.90 $3.13
- ----------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.77%; B: 1.27%; C: 1.27%; R: 1.12%; and Advisor: 0.62%), multiplied by
the average account value over the period, multiplied by 183/366 to
reflect the one-half year period.
Annual Report | 61
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS
FRANKLIN DYNATECH FUND
-----------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS A 2004 2003 2002 2001 2000
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 20.17 $ 15.37 $ 18.76 $ 28.60 $ 23.11
-----------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a) ..................... (.09) (.06) .03 .44 .56
Net realized and unrealized gains (losses) .......... 1.93 4.86 (3.11) (9.70) 5.30
-----------------------------------------------------------------------
Total from investment operations ..................... 1.84 4.80 (3.08) (9.26) 5.86
-----------------------------------------------------------------------
Less distributions from:
Net investment income ............................... -- -- (.29) (.58) (.37)
Tax return of capital ............................... -- -- (.02) -- --
-----------------------------------------------------------------------
Total distributions .................................. -- -- (.31) (.58) (.37)
-----------------------------------------------------------------------
Redemption fees ...................................... --(c) -- -- -- --
-----------------------------------------------------------------------
Net asset value, end of year ......................... $ 22.01 $ 20.17 $ 15.37 $ 18.76 $ 28.60
=======================================================================
Total return(b) ...................................... 9.12% 31.23% (16.83)% (32.86)% 25.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $640,120 $558,687 $413,309 $530,074 $809,140
Ratios to average net assets:
Expenses ............................................ .97% 1.04% 1.00% .95% .94%
Net investment income (loss) ........................ (.41)% (.40)% .13% 1.93% 1.98%
Portfolio turnover rate .............................. 14.93% 13.68% 8.11% 4.07% 5.45%
(a) Based on average daily 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) Amount is less than $0.001 per share.
62 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND (CONTINUED)
-----------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS B 2004 2003 2002 2001 2000(d)
-----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 19.79 $ 15.20 $ 18.57 $ 28.45 $ 28.05
-----------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a) ................. (.25) (.25) (.12) .25 .28
Net realized and unrealized gains (losses) ...... 1.89 4.84 (3.08) (9.62) .12
-----------------------------------------------------------------------------
Total from investment operations ................. 1.64 4.59 (3.20) (9.37) .40
-----------------------------------------------------------------------------
Less distributions from:
Net investment income ........................... -- -- (.16) (.51) --
Tax return of capital ........................... -- -- (.01) -- --
-----------------------------------------------------------------------------
Total distributions .............................. -- -- (.17) (.51) --
-----------------------------------------------------------------------------
Redemption fees .................................. --(c) -- -- -- --
-----------------------------------------------------------------------------
Net asset value, end of year ..................... $ 21.43 $ 19.79 $ 15.20 $ 18.57 $ 28.45
=============================================================================
Total return(b) .................................. 8.29% 30.20% (17.51)% (33.37)% 1.43%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 18,824 $ 10,406 $ 5,066 $ 5,473 $ 4,749
Ratios to average net assets:
Expenses ........................................ 1.72% 1.79% 1.75% 1.70% 1.73%(e)
Net investment income (loss) .................... (1.16)% (1.15)% (.62)% 1.13% 1.43%(e)
Portfolio turnover rate .......................... 14.93% 13.68% 8.11% 4.07% 5.45%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
(d) For the period February 1, 2000 (effective date) to September 30, 2000.
(e) Annualized.
Annual Report | See notes to financial statements. | 63
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND (CONTINUED)
----------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS C 2004 2003 2002 2001 2000
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 19.59 $ 15.04 $ 18.34 $ 27.95 $ 22.64
----------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a) ........................ (.25) (.25) (.11) .27 .34
Net realized and unrealized gains (losses) ............. 1.87 4.80 (3.05) (9.50) 5.21
----------------------------------------------------------------------
Total from investment operations ........................ 1.62 4.55 (3.16) (9.23) 5.55
----------------------------------------------------------------------
Less distributions from:
Net investment income .................................. -- -- (.13) (.38) (.24)
Tax return of capital .................................. -- -- (.01) -- --
----------------------------------------------------------------------
Total distributions ..................................... -- -- (.14) (.38) (.24)
----------------------------------------------------------------------
Redemption fees ......................................... --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ............................ $ 21.21 $ 19.59 $ 15.04 $ 18.34 $ 27.95
======================================================================
Total return(b) ......................................... 8.27% 30.25% (17.48)% (33.36)% 24.65%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $ 75,642 $ 66,952 $ 51,809 $ 77,204 $126,313
Ratios to average net assets:
Expenses ............................................... 1.72% 1.79% 1.74% 1.70% 1.69%
Net investment income (loss) ........................... (1.16)% (1.15)% (.61)% 1.19% 1.23%
Portfolio turnover rate ................................. 14.93% 13.68% 8.11% 4.07% 5.45%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
64 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004
- ---------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND SHARES VALUE
- ---------------------------------------------------------------------------------------
COMMON STOCKS 95.6%
AEROSPACE & Defense .1%
Rockwell Collins Inc. ................................. 20,000 $ 742,800
------------
AIR FREIGHT/COURIERS 2.4%
C.H. Robinson Worldwide Inc. .......................... 150,000 6,958,500
United Parcel Service Inc., B ......................... 140,000 10,628,800
------------
17,587,300
------------
BIOTECHNOLOGY 8.2%
(a) Amgen Inc. ............................................. 300,000 17,004,000
(a) Biogen Idec Inc. ....................................... 75,000 4,587,750
(a) Genentech Inc. ......................................... 375,000 19,657,500
(a) Gilead Sciences Inc. ................................... 450,000 16,821,000
(a) Invitrogen Corp. ....................................... 35,000 1,924,650
------------
59,994,900
------------
CABLE/SATELLITE TELEVISION 1.1%
(a) Comcast Corp., A ....................................... 170,000 4,746,400
(a) Liberty Media Corp., A ................................. 300,000 2,616,000
(a) Liberty Media International Inc., A .................... 15,000 500,430
------------
7,862,830
------------
CASINOS/GAMING 1.5%
International Game Technology .......................... 300,000 10,785,000
------------
CATALOG/SPECIALTY DISTRIBUTION .3%
(a) Cabela's Inc., A ....................................... 100,000 2,385,000
------------
CHEMICALS: SPECIALTY 1.0%
Sigma-Aldrich Corp. .................................... 125,000 7,250,000
------------
COMPUTER COMMUNICATIONS 1.8%
(a) Cisco Systems Inc. ..................................... 720,000 13,032,000
------------
COMPUTER PERIPHERALS .3%
(a) Storage Technology Corp. ............................... 95,000 2,399,700
------------
COMPUTER PROCESSING HARDWARE 2.1%
(a) Dell Inc. .............................................. 200,000 7,120,000
Hewlett-Packard Co. .................................... 440,862 8,266,163
------------
15,386,163
------------
DATA PROCESSING SERVICES 3.2%
First Data Corp. ....................................... 300,000 13,050,000
Paychex Inc. ........................................... 360,000 10,854,000
------------
23,904,000
------------
ELECTRONIC COMPONENTS .2%
(a) Flextronics International Ltd. (Singapore) ............. 100,000 1,325,000
------------
Annual Report | 65
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004 (CONTINUED)
- ----------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND SHARES VALUE
- ----------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
ELECTRONIC EQUIPMENT/INSTRUMENTS 2.5%
(a) Agilent Technologies Inc. ............................... 300,000 $ 6,471,000
(a) JDS Uniphase Corp. ...................................... 350,000 1,179,500
Rockwell Automation Inc. ................................ 277,500 10,739,250
-----------
18,389,750
-----------
ELECTRONIC PRODUCTION EQUIPMENT 3.8%
(a) Applied Materials Inc. .................................. 500,000 8,245,000
(a) KLA-Tencor Corp. ........................................ 200,000 8,296,000
(a) Lam Research Corp. ...................................... 150,000 3,282,000
(a) Novellus Systems Inc. ................................... 100,000 2,659,000
(a) Teradyne Inc. ........................................... 200,000 2,680,000
(a) Varian Semiconductor Equipment Associates Inc. .......... 100,000 3,090,000
-----------
28,252,000
-----------
ELECTRONICS/APPLIANCE STORES .9%
Best Buy Co. Inc. ....................................... 125,000 6,780,000
-----------
FINANCIAL CONGLOMERATES 1.0%
Citigroup Inc. .......................................... 170,000 7,500,400
-----------
FINANCIAL PUBLISHING/SERVICES 1.0%
Moody's Corp. ........................................... 100,000 7,325,000
-----------
HOUSEHOLD/PERSONAL CARE .6%
Estee Lauder Cos. Inc., A ............................... 100,000 4,180,000
-----------
INDUSTRIAL CONGLOMERATES .6%
Tyco International Ltd. ................................. 140,000 4,292,400
-----------
INFORMATION TECHNOLOGY SERVICES 2.3%
(a) Cognizant Technology Solutions Corp., A ................. 220,000 6,712,200
International Business Machines Corp. ................... 120,000 10,288,800
-----------
17,001,000
-----------
INSURANCE BROKERS/SERVICES .7%
(a) ChoicePoint Inc. ........................................ 120,000 5,118,000
-----------
INTERNET RETAIL 1.0%
(a) Amazon.com Inc. ......................................... 150,000 6,129,000
(a),(b) Netflix Inc. ............................................ 75,000 1,156,500
-----------
7,285,500
-----------
INTERNET SOFTWARE/SERVICES 4.6%
(a) Ask Jeeves Inc. ......................................... 100,000 3,271,000
(a) Check Point Software Technologies Ltd. (Israel) ......... 150,000 2,545,500
(a) Google Inc., A .......................................... 20,000 2,592,000
(a) InfoSpace Inc. .......................................... 100,000 4,739,000
(a) Yahoo! Inc. ............................................. 600,000 20,346,000
-----------
33,493,500
-----------
66 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004 (CONTINUED)
- ----------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND SHARES VALUE
- ----------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
MAJOR PHARMACEUTICALS 4.1%
Bristol-Myers Squibb Co. .................................. 150,000 $ 3,550,500
Johnson & Johnson ......................................... 130,000 7,322,900
Merck & Co. Inc. .......................................... 150,000 4,950,000
Pfizer Inc. ............................................... 470,000 14,382,000
-----------
30,205,400
-----------
MANAGED HEALTH CARE 3.8%
(a) Caremark Rx Inc. .......................................... 100,000 3,207,000
UnitedHealth Group Inc. ................................... 340,000 25,071,600
-----------
28,278,600
-----------
MEDIA CONGLOMERATES 1.3%
(b) News Corp. Ltd., ADR (Australia) .......................... 150,000 4,930,500
(a) Time Warner Inc. .......................................... 280,000 4,519,200
-----------
9,449,700
-----------
MEDICAL SPECIALTIES 8.6%
Alcon Inc. (Switzerland) .................................. 150,000 12,030,000
Medtronic Inc. ............................................ 275,000 14,272,500
Stryker Corp. ............................................. 280,000 13,462,400
(a) Varian Medical Systems Inc. ............................... 100,000 3,457,000
(a) Waters Corp. .............................................. 200,000 8,820,000
(a) Zimmer Holdings Inc. ...................................... 140,000 11,065,600
-----------
63,107,500
-----------
MEDICAL/NURSING SERVICES 1.0%
(a) VCA Antech Inc. ........................................... 350,000 7,220,500
-----------
MOVIES/ENTERTAINMENT 1.1%
(a) Pixar ..................................................... 100,000 7,890,000
-----------
OILFIELD SERVICES/EQUIPMENT 1.4%
Baker Hughes Inc. ......................................... 20,000 874,400
Schlumberger Ltd. ......................................... 120,000 8,077,200
(a) Smith International Inc. .................................. 20,000 1,214,600
-----------
10,166,200
-----------
OTHER CONSUMER SERVICES 5.2%
(a) eBay Inc. ................................................. 420,000 38,614,800
-----------
OTHER PHARMACEUTICALS 1.1%
Teva Pharmaceutical Industries Ltd., ADR (Israel) ......... 300,000 7,785,000
-----------
PACKAGED SOFTWARE 10.4%
Adobe Systems Inc. ........................................ 260,000 12,862,200
Autodesk Inc. ............................................. 125,000 6,078,750
(a) Cognos Inc. (Canada) ...................................... 75,000 2,664,000
(a) Intuit Inc. ............................................... 180,000 8,172,000
Microsoft Corp. ........................................... 950,000 26,267,500
Annual Report | 67
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND SHARES VALUE
- -------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
PACKAGED SOFTWARE (CONT.)
(a) NAVTEQ Corp. ................................................................ 120,500 $ 4,294,620
(a) Symantec Corp. .............................................................. 300,000 16,464,000
------------
76,803,070
------------
RECREATIONAL PRODUCTS 2.0%
(a) Electronic Arts Inc. ........................................................ 320,000 14,716,800
------------
SAVINGS BANKS .3%
Golden West Financial Corp. ................................................. 20,000 2,219,000
------------
SEMICONDUCTORS 9.7%
Analog Devices Inc. ......................................................... 310,000 12,021,800
(a) Broadcom Corp., A ........................................................... 100,000 2,729,000
Intel Corp. ................................................................. 1,150,000 23,069,000
(a) International Rectifier Corp. ............................................... 180,000 6,174,000
Linear Technology Corp. ..................................................... 400,000 14,496,000
Microchip Technology Inc. ................................................... 150,000 4,026,000
Xilinx Inc. ................................................................. 320,000 8,640,000
------------
71,155,800
------------
TELECOMMUNICATIONS EQUIPMENT 4.4%
Motorola Inc. ............................................................... 680,750 12,280,730
Nokia Corp., ADR (Finland) .................................................. 315,000 4,321,800
QUALCOMM Inc. ............................................................... 400,000 15,616,000
------------
32,218,530
------------
TOTAL COMMON STOCKS (COST $523,187,254) ..................................... 702,103,143
------------
SHORT TERM INVESTMENT (COST $32,637,675) 4.4%
MONEY FUND
(c) Franklin Institutional Fiduciary Trust Money Market Portfolio ............... 32,637,675 32,637,675
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $555,824,929) .......... 734,740,818
------------
68 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS .9%
(d),(e) Barclays Capital Inc., 1.90%, 10/01/04 (Maturity Value $1,000,106) .................... $ 1,000,053 $ 1,000,053
Collateralized by U.S. Government Agency Securities, 0.00%-6.00%, 10/18/04 - 7/26/19
(d),(e) Bear Stearns & Co. Inc., 1.78%, 10/01/04 (Maturity Value $1,000,098) .................. 1,000,049 1,000,049
Collateralized by U.S. Government Agency Securities, 2.25%-10.00%, 5/15/06 - 5/15/29
(d),(e) Bear Stearns & Co. Inc., 1.90%, 10/01/04 (Maturity Value $1,000,106) .................. 1,000,053 1,000,053
Collateralized by Various Asset Backed Securities, 0.00%-9.725%, 1/20/07-5/28/44
(d),(e) J P Morgan Securities, 1.88%, 10/01/04 (Maturity Value $1,030,108) .................... 1,030,054 1,030,054
Collateralized by U.S. Government Agency Securities, 1.80%-7.21%, 12/15/04 - 6/24/14
(d),(e) Merrill Lynch GSI, 1.89%, 10/01/04 (Maturity Value $1,015,106) ........................ 1,015,053 1,015,053
Collateralized by U.S. Government Agency Securities, 0.00%-9.375%, 10/01/04 - 7/15/32
(d),(e) Morgan Stanley & Co. Inc., 1.91%, 10/01/04 (Maturity Value $1,281,136) ................ 1,281,068 1,281,068
Collateralized by U.S. Government Agency Securities, 4.50%-8.00%, 8/01/08 - 9/01/34
-------------
TOTAL REPURCHASE AGREEMENTS (COST $6,326,330) ......................................... 6,326,330
-------------
TOTAL INVESTMENTS (COST $562,151,259) 100.9% .......................................... 741,067,148
OTHER ASSETS, LESS LIABILITIES (.9)% .................................................. (6,481,544)
-------------
NET ASSETS 100.0% ..................................................................... $ 734,585,604
=============
See glossary of terms on page 108.
(a) Non-income producing.
(b) Security on loan. See Note 1(f).
(c) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio.
(d) See Note 1(c) regarding repurchase agreements.
(e) Investments from cash collateral received for loaned securities. See Note
1(f).
Annual Report |See notes to financial statements. | 69
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS
FRANKLIN GROWTH FUND
------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS A 2004 2003 2002 2001 2000
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 26.87 $ 22.02 $ 27.81 $ 36.91 $ 33.21
------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ....................... .06 .08 .07 .23 .45
Net realized and unrealized gains (losses) ..... 3.68 4.81 (5.65) (7.26) 3.96
------------------------------------------------------------------------------
Total from investment operations ................ 3.74 4.89 (5.58) (7.03) 4.41
------------------------------------------------------------------------------
Less distributions from:
Net investment income .......................... (.03) (.04) (.16) (.40) (.45)
Net realized gains ............................. -- -- (.05) (1.67) (.26)
------------------------------------------------------------------------------
Total distributions ............................. (.03) (.04) (.21) (2.07) (.71)
------------------------------------------------------------------------------
Redemption fees ................................. --(c) -- -- -- --
------------------------------------------------------------------------------
Net asset value, end of year .................... $ 30.58 $ 26.87 $ 22.02 $ 27.81 $ 36.91
==============================================================================
Total return(b) ................................. 13.92% 22.27% (20.35)% (20.12)% 13.53%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $1,531,871 $1,433,742 $1,249,745 $1,657,387 $2,149,928
Ratios to average net assets:
Expenses ....................................... .98% 1.06% .96% .91% .93%
Net investment income .......................... .20% .31% .24% .69% 1.27%
Portfolio turnover rate ......................... 1.56% 5.12% 2.16% .29% 8.12%
(a) Based on average daily 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) Amount is less than $0.001 per share.
70 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND (CONTINUED)
--------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS B 2004 2003 2002 2001 2000
--------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 26.32 $ 21.70 $ 27.46 $ 36.54 $ 33.03
--------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a) ................ (.16) (.11) (.14) (.03) .16
Net realized and unrealized gains (losses) ..... 3.61 4.73 (5.57) (7.18) 3.96
--------------------------------------------------------------------------
Total from investment operations ................ 3.45 4.62 (5.71) (7.21) 4.12
--------------------------------------------------------------------------
Less distributions from:
Net investment income .......................... -- -- -- (.20) (.35)
Net realized gains ............................. -- -- (.05) (1.67) (.26)
--------------------------------------------------------------------------
Total distributions ............................. -- -- (.05) (1.87) (.61)
--------------------------------------------------------------------------
Redemption fees ................................. --(c) -- -- -- --
--------------------------------------------------------------------------
Net asset value, end of year .................... $ 29.77 $ 26.32 $ 21.70 $ 27.46 $ 36.54
==========================================================================
Total return(b) ................................. 13.11% 21.29% (20.90)% (20.74)% 12.68%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $ 121,986 $ 103,499 $ 75,141 $ 66,095 $ 38,353
Ratios to average net assets:
Expenses ....................................... 1.73% 1.81% 1.71% 1.66% 1.68%
Net investment income (loss) ................... (.55)% (.44)% (.51)% (.10)% .45%
Portfolio turnover rate ......................... 1.56% 5.12% 2.16% .29% 8.12%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
Annual Report | See notes to financial statements. | 71
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND (CONTINUED)
------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS C 2004 2003 2002 2001 2000
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 26.09 $ 21.51 $ 27.24 $ 36.19 $ 32.58
------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a) ............... (.16) (.11) (.14) (.02) .18
Net realized and unrealized gains (losses) .... 3.58 4.69 (5.54) (7.13) 3.91
------------------------------------------------------------------------------
Total from investment operations ............... 3.42 4.58 (5.68) (7.15) 4.09
------------------------------------------------------------------------------
Less distributions from:
Net investment income ......................... -- -- -- (.13) (.22)
Net realized gains ............................ -- -- (.05) (1.67) (.26)
------------------------------------------------------------------------------
Total distributions ............................ -- -- (.05) (1.80) (.48)
------------------------------------------------------------------------------
Redemption fees ................................ --(c) -- -- -- --
------------------------------------------------------------------------------
Net asset value, end of year ................... $ 29.51 $ 26.09 $ 21.51 $ 27.24 $ 36.19
==============================================================================
Total return(b) ................................ 13.11% 21.29% (20.92)% (20.72)% 12.71%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $ 270,131 $ 259,169 $ 232,307 $ 310,650 $ 374,483
Ratios to average net assets:
Expenses ...................................... 1.73% 1.82% 1.70% 1.66% 1.68%
Net investment income (loss) .................. (.55)% (.45)% (.51)% (.06)% .52%
Portfolio turnover rate ........................ 1.56% 5.12% 2.16% .29% 8.12%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
72 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND (CONTINUED)
------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS R 2004 2003 2002(d)
------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................................. $ 26.74 $ 21.98 $ 31.59
------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a) .................................... (.02) -- --
Net realized and unrealized gains (losses) ......................... 3.67 4.81 (9.61)
------------------------------------------------------
Total from investment operations .................................... 3.65 4.81 (9.61)
------------------------------------------------------
Less distributions from net investment income ....................... -- (.05) --
------------------------------------------------------
Redemption fees ..................................................... --(c) -- --
------------------------------------------------------
Net asset value, end of year ........................................ $ 30.39 $ 26.74 $ 21.98
======================================================
Total return(b) ..................................................... 13.65% 21.92% (30.42)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................................... $ 20,060 $ 14,755 $ 2,788
Ratios to average net assets:
Expenses ........................................................... 1.23% 1.31% 1.21%(e)
Net investment income (loss) ....................................... (.05)% .06% .02%(e)
Portfolio turnover rate ............................................. 1.56% 5.12% 2.16%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
(d) For the period January 1, 2002 (effective date) to September 30, 2002.
(e) Annualized.
Annual Report | See notes to financial statements. | 73
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND (CONTINUED)
-------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS 2004 2003 2002 2001 2000
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 26.91 $ 22.06 $ 27.86 $ 36.99 $ 33.27
-------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................... .14 .14 .14 .31 .54
Net realized and unrealized gains (losses) ... 3.67 4.82 (5.65) (7.28) 3.97
-------------------------------------------------------------------------------
Total from investment operations .............. 3.81 4.96 (5.51) (6.97) 4.51
-------------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (.09) (.11) (.24) (.49) (.53)
Net realized gains ........................... -- -- (.05) (1.67) (.26)
-------------------------------------------------------------------------------
Total distributions ........................... (.09) (.11) (.29) (2.16) (.79)
-------------------------------------------------------------------------------
Redemption fees ............................... --(c) -- -- -- --
-------------------------------------------------------------------------------
Net asset value, end of year .................. $ 30.63 $ 26.91 $ 22.06 $ 27.86 $ 36.99
================================================================================
Total return(b) ............................... 14.19% 22.58% (20.14)% (19.94)% 13.84%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $ 133,332 $ 41,216 $ 27,431 $ 32,498 $ 39,442
Ratios to average net assets:
Expenses ..................................... .73% .81% .71% .66% .68%
Net investment income ........................ .45% .56% .49% .94% 1.51%
Portfolio turnover rate ....................... 1.56% 5.12% 2.16% .29% 8.12%
(a) Based on average daily shares outstanding.
(b) Total return is not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
74 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004
- ----------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND SHARES/WARRANTS VALUE
- ----------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS 100.0%
COMMERCIAL SERVICES 3.0%
(a) Dun & Bradstreet Corp. ......................................... 122,000 $ 7,161,400
Equifax Inc. ................................................... 400,000 10,544,000
Moody's Corp. .................................................. 244,000 17,873,000
Robert Half International Inc. ................................. 300,000 7,731,000
Sabre Holdings Corp., A ........................................ 800,000 19,624,000
-----------
62,933,400
-----------
CONSUMER DURABLES 2.4%
Eastman Kodak Co. .............................................. 500,000 16,110,000
Harley-Davidson Inc. ........................................... 200,000 11,888,000
Hasbro Inc. .................................................... 300,000 5,640,000
Mattel Inc. .................................................... 900,000 16,317,000
-----------
49,955,000
-----------
CONSUMER NON-DURABLES 3.3%
Hershey Foods Corp. ............................................ 516,400 24,121,044
International Flavors & Fragrances Inc. ........................ 500,000 19,100,000
Tootsie Roll Industries Inc. ................................... 21,833 637,960
V.F. Corp. ..................................................... 500,000 24,725,000
-----------
68,584,004
-----------
CONSUMER SERVICES 4.7%
Carnival Corp. ................................................. 500,000 23,645,000
Clear Channel Communications Inc. .............................. 500,000 15,585,000
Fairmont Hotels & Resorts Inc. (Canada) ........................ 125,000 3,415,000
(a) Time Warner Inc. ............................................... 1,350,000 21,789,000
Viacom Inc., A ................................................. 200,000 6,800,000
Viacom Inc., B ................................................. 100,000 3,356,000
The Walt Disney Co. ............................................ 1,000,000 22,550,000
-----------
97,140,000
-----------
DISTRIBUTION SERVICES 2.9%
Cardinal Health Inc. ........................................... 300,000 13,131,000
Genuine Parts Co. .............................................. 461,700 17,720,046
W.W. Grainger Inc. ............................................. 500,000 28,825,000
-----------
59,676,046
-----------
ELECTRONIC TECHNOLOGY 17.8%
(a) Agilent Technologies Inc. ...................................... 400,000 8,628,000
(a) Apple Computer Inc. ............................................ 500,000 19,375,000
Boeing Co. ..................................................... 1,000,000 51,620,000
(a) Cisco Systems Inc. ............................................. 1,350,000 24,435,000
(a) Conexant Systems Inc. .......................................... 300,000 483,000
(a) Dell Inc. ...................................................... 500,000 17,800,000
(a) Dionex Corp. ................................................... 250,000 13,675,000
(a) EMC Corp. ...................................................... 1,000,000 11,540,000
(a) Gateway Inc. ................................................... 500,000 2,475,000
Annual Report | 75
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004 (CONTINUED)
- -----------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND SHARES/WARRANTS VALUE
- -----------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONT.)
ELECTRONIC TECHNOLOGY (CONT.)
General Dynamics Corp. ......................................... 500,000 $ 51,050,000
Hewlett-Packard Co. ............................................ 1,116,250 20,929,687
Intel Corp. .................................................... 800,000 16,048,000
Lockheed Martin Corp. .......................................... 500,000 27,890,000
(a) Micrel Inc. .................................................... 25,000 260,250
(a) Mindspeed Technologies Inc. .................................... 100,000 200,000
(a) Mykrolis Corp. ................................................. 270,725 2,726,201
Northrop Grumman Corp. ......................................... 1,000,000 53,330,000
Raytheon Co. ................................................... 600,000 22,788,000
Rockwell Automation Inc. ....................................... 100,000 3,870,000
Rockwell Collins Inc. .......................................... 100,000 3,714,000
(a) Sun Microsystems Inc. .......................................... 1,600,000 6,464,000
Texas Instruments Inc. ......................................... 515,000 10,959,200
------------
370,260,338
------------
ENERGY MINERALS 2.3%
BP PLC, ADR (United Kingdom) ................................... 295,200 16,982,856
Encana Corp. (Canada) .......................................... 342,000 15,834,600
Royal Dutch Petroleum Co., N.Y. shs. (Netherlands) ............. 280,000 14,448,000
------------
47,265,456
------------
FINANCE .3%
(a) ChoicePoint Inc. ............................................... 160,000 6,823,997
------------
HEALTH SERVICES .8%
(a) Caremark Rx Inc. ............................................... 75,625 2,425,294
IMS Health Inc. ................................................ 500,000 11,960,000
------------
(a) Medco Health Solutions Inc. .................................... 48,240 1,490,616
------------
15,875,910
------------
HEALTH TECHNOLOGY 22.2%
Abbott Laboratories ............................................ 400,000 16,944,000
(a) Advanced Medical Optics Inc. ................................... 88,888 3,517,298
Allergan Inc. .................................................. 400,000 29,020,000
(a) Amgen Inc. ..................................................... 932,000 52,825,760
Baxter International Inc. ...................................... 500,000 16,080,000
Bristol-Myers Squibb Co. ....................................... 640,000 15,148,800
(a) Edwards Lifesciences Corp. ..................................... 50,000 1,675,000
Eli Lilly & Co. ................................................ 400,000 24,020,000
(a) Genentech Inc. ................................................. 1,000,000 52,420,000
(a) Hospira Inc. ................................................... 40,000 1,224,000
Johnson & Johnson .............................................. 996,000 56,104,680
Merck & Co. Inc. ............................................... 500,000 16,500,000
(a) Millipore Corp. ................................................ 400,000 19,140,000
Pall Corp. ..................................................... 500,000 12,240,000
Pfizer Inc. .................................................... 2,000,000 61,200,000
Schering-Plough Corp. .......................................... 1,800,000 34,308,000
(a) Waters Corp. ................................................... 500,000 22,050,000
76 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004 (CONTINUED)
- -----------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND SHARES/WARRANTS VALUE
- -----------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONT.)
HEALTH TECHNOLOGY (CONT.)
Wyeth .......................................................... 600,000 $ 22,440,000
(a) Zimmer Holdings Inc. ........................................... 64,000 5,058,560
------------
461,916,098
------------
INDUSTRIAL SERVICES 2.0%
(a) Ionics Inc. .................................................... 400,000 10,800,000
Schlumberger Ltd. .............................................. 400,000 26,924,000
(a) Transocean Inc. ................................................ 77,440 2,770,803
------------
40,494,803
------------
PROCESS INDUSTRIES 1.9%
Air Products & Chemicals Inc. .................................. 500,000 27,190,000
Sigma-Aldrich Corp. ............................................ 200,000 11,600,000
------------
38,790,000
------------
PRODUCER MANUFACTURING 20.4%
3M Co. ......................................................... 800,000 63,976,000
American Power Conversion Corp. ................................ 500,000 8,695,000
Avery Dennison Corp. ........................................... 462,000 30,390,360
(a) CUNO Inc. ...................................................... 86,200 4,978,050
Deere & Co. .................................................... 300,000 19,365,000
Emerson Electric Co. ........................................... 500,000 30,945,000
Illinois Tool Works Inc. ....................................... 500,000 46,585,000
Ingersoll Rand Co., A .......................................... 501,000 34,052,970
Johnson Controls Inc. .......................................... 400,000 22,724,000
Molex Inc. ..................................................... 146,483 4,368,123
Molex Inc., A .................................................. 146,483 3,853,968
Teleflex Inc. .................................................. 500,000 21,250,000
Textron Inc. ................................................... 525,000 33,741,750
(a) Thomas & Betts Corp. ........................................... 500,000 13,410,000
Tyco International Ltd. ........................................ 1,550,052 47,524,594
United Technologies Corp. ...................................... 400,000 37,352,000
------------
423,211,815
------------
RETAIL TRADE .6%
(a) IAC/InterActiveCorp ............................................ 600,200 13,216,404
------------
TECHNOLOGY SERVICES 11.3%
Automatic Data Processing Inc. ................................. 800,000 33,056,000
Certegy Inc. ................................................... 200,000 7,442,000
(a) Computer Sciences Corp. ........................................ 1,000,000 47,100,000
International Business Machines Corp. .......................... 560,000 48,014,400
Microsoft Corp. ................................................ 1,000,000 27,650,000
(a) Oracle Corp. ................................................... 500,000 5,640,000
(a) Sungard Data Systems Inc. ...................................... 500,000 11,885,000
(a) Yahoo! Inc. .................................................... 1,600,000 54,256,000
------------
235,043,400
------------
Annual Report | 77
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND SHARES/WARRANTS VALUE
- ---------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONT.)
TRANSPORTATION 4.1%
Air France-KLM, ADR (France) ......................................... 550,000 $ 8,750,500
(a) Air France-KLM, ADR, wts., 5/05/05 (France) .......................... 500,000 485,000
(a) Alaska Air Group Inc. ................................................ 500,000 12,390,000
(a) AMR Corp. ............................................................ 1,080,000 7,916,400
(a) British Airways PLC, ADR (United Kingdom) ............................ 500,000 18,815,000
Canadian Pacific Railway Ltd. (Canada) ............................... 250,000 6,445,000
(a) Continental Airlines Inc., B ......................................... 500,000 4,260,000
(a) Delta Air Lines Inc. ................................................. 1,000,000 3,290,000
(a) Northwest Airlines Corp. ............................................. 500,000 4,105,000
Southwest Airlines Co. ............................................... 65,200 888,025
Union Pacific Corp. .................................................. 300,000 17,580,000
---------------
84,924,925
---------------
TOTAL COMMON STOCKS AND WARRANTS (COST $1,007,732,240) ............... 2,076,111,596
---------------
SHORT TERM INVESTMENT (COST $4,562,321) .2%
MONEY FUND
(b) Franklin Institutional Fiduciary Trust Money Market Portfolio ........ 4,562,321 4,562,321
---------------
TOTAL INVESTMENTS (COST $1,012,294,561) 100.2% ....................... 2,080,673,917
OTHER ASSETS, LESS LIABILITIES (.2)% ................................. (3,294,251)
---------------
NET ASSETS 100.0% .................................................... $ 2,077,379,666
===============
See glossary of terms on page 108.
(a) Non-income producing.
(b) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio.
78 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS
FRANKLIN INCOME FUND
-------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS A 2004 2003 2002 2001 2000
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 2.25 $ 1.90 $ 2.16 $ 2.35 $ 2.23
-------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ................... .12 .14 .14 .17 .18
Net realized and unrealized gains (losses) . .22 .38 (.21) (.15) .13
-------------------------------------------------------------------------------
Total from investment operations ............ .34 .52 (.07) .02 .31
-------------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.16) (.16) (.17) (.18) (.18)
Net realized gains ......................... (.01) (.01) (.02) (.03) (.01)
-------------------------------------------------------------------------------
Total distributions ......................... (.17) (.17) (.19) (.21) (.19)
-------------------------------------------------------------------------------
Redemption fees ............................. --(c) -- -- -- --
-------------------------------------------------------------------------------
Net asset value, end of year ................ $ 2.42 $ 2.25 $ 1.90 $ 2.16 $ 2.35
===============================================================================
Total return(b) ............................. 15.50% 28.12% (4.18)% .58% 14.68%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $14,743,190 $9,640,156 $6,001,117 $5,960,990 $6,083,135
Ratios to average net assets:
Expenses ................................... .68% .73% .72% .73% .76%
Net investment income ...................... 5.11% 6.63% 6.67% 7.54% 8.01%
Portfolio turnover rate ..................... 31.90% 48.36% 51.16% 28.13% 24.41%
(a) Based on average daily 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) Amount is less than $0.001 per share.
Annual Report |See notes to financial statements. | 79
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND (CONTINUED)
------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS B 2004 2003 2002(d)
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................ $ 2.24 $ 1.90 $ 2.15
------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................................... .10 .12 .11
Net realized and unrealized gains (losses) ................... .22 .37 (.21)
------------------------------------------------------------
Total from investment operations .............................. .32 .49 (.10)
------------------------------------------------------------
Less distributions from:
Net investment income ........................................ (.14) (.14) (.13)
Net realized gains ........................................... (.01) (.01) (.02)
------------------------------------------------------------
Total distributions ........................................... (.15) (.15) (.15)
------------------------------------------------------------
Redemption fees ............................................... --(c) -- --
------------------------------------------------------------
Net asset value, end of year .................................. $ 2.41 $ 2.24 $ 1.90
=============================================================
Total return(b) ............................................... 14.59% 26.58% (5.63)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................... $ 3,486,880 $ 2,083,783 $ 558,580
Ratios to average net assets:
Expenses ..................................................... 1.53% 1.58% 1.57%(e)
Net investment income ........................................ 4.26% 5.78% 6.01%(e)
Portfolio turnover rate ....................................... 31.90% 48.36% 51.16%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
(d) For the period November 1, 2001 (effective date) to September 30, 2002.
(e) Annualized.
80 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND (CONTINUED)
--------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS B1 2004 2003 2002 2001 2000
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 2.25 $ 1.90 $ 2.17 $ 2.35 $ 2.24
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ................... .11 .13 .13 .16 .17
Net realized and unrealized gains (losses) . .21 .38 (.22) (.14) .12
--------------------------------------------------------------------------------
Total from investment operations ............ .32 .51 (.09) .02 .29
--------------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.14) (.15) (.16) (.17) (.17)
Net realized gains ......................... (.01) (.01) (.02) (.03) (.01)
--------------------------------------------------------------------------------
Total distributions ......................... (.15) (.16) (.18) (.20) (.18)
--------------------------------------------------------------------------------
Redemption fees ............................. --(c) -- -- -- --
--------------------------------------------------------------------------------
Net asset value, end of year ................ $ 2.42 $ 2.25 $ 1.90 $ 2.17 $ 2.35
===============================================================================
Total return(b) ............................. 14.90% 27.51% (4.66)% .10% 14.09%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 511,471 $ 495,004 $ 430,226 $ 446,245 $ 140,711
Ratios to average net assets:
Expenses ................................... 1.18% 1.23% 1.22% 1.23% 1.26%
Net investment income ...................... 4.61% 6.13% 6.15% 7.02% 7.49%
Portfolio turnover rate ..................... 31.90% 48.36% 51.16% 28.13% 24.41%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
Annual Report | See notes to financial statements. | 81
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND (CONTINUED)
------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS C 2004 2003 2002 2001 2000
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 2.26 $ 1.91 $ 2.17 $ 2.36 $ 2.24
------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................... .11 .13 .13 .16 .17
Net realized and unrealized gains (losses) ... .21 .38 (.21) (.15) .13
------------------------------------------------------------------------------
Total from investment operations .............. .32 .51 (.08) .01 .30
------------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (.14) (.15) (.16) (.17) (.17)
Net realized gains ........................... (.01) (.01) (.02) (.03) (.01)
------------------------------------------------------------------------------
Total distributions ........................... (.15) (.16) (.18) (.20) (.18)
------------------------------------------------------------------------------
Redemption fees ............................... --(c) -- -- -- --
------------------------------------------------------------------------------
Net asset value, end of year .................. $ 2.43 $ 2.26 $ 1.91 $ 2.17 $ 2.36
==============================================================================
Total return(b) ............................... 14.85% 27.37% (4.64)% .09% 14.54%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $6,616,891 $3,764,372 $1,545,377 $1,080,315 $872,662
Ratios to average net assets:
Expenses ..................................... 1.18% 1.24% 1.21% 1.23% 1.26%
Net investment income ........................ 4.61% 6.12% 6.21% 7.04% 7.51%
Portfolio turnover rate ....................... 31.90% 48.36% 51.16% 28.13% 24.41%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
82 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND (CONTINUED)
------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS R 2004 2003 2002(d)
------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................................. $ 2.23 $ 1.89 $ 2.18
------------------------------------------------------
Income from investment operations:
Net investment income(a) ........................................... .11 .13 .10
Net realized and unrealized gains (losses) ......................... .22 .37 (.27)
------------------------------------------------------
Total from investment operations .................................... .33 .50 (.17)
------------------------------------------------------
Less distributions from:
Net investment income .............................................. (.15) (.15) (.12)
Net realized gains ................................................. (.01) (.01) --
------------------------------------------------------
Total distributions ................................................. (.16) (.16) (.12)
------------------------------------------------------
Redemption fees ..................................................... --(c) -- --
------------------------------------------------------
Net asset value, end of year ........................................ $ 2.40 $ 2.23 $ 1.89
======================================================
Total return(b) ..................................................... 15.25% 27.31% (8.34)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................................... $ 73,165 $ 36,417 $ 6,350
Ratios to average net assets:
Expenses ........................................................... 1.03% 1.08% 1.07%(e)
Net investment income .............................................. 4.76% 6.28% 6.77%(e)
Portfolio turnover rate ............................................. 31.90% 48.36% 51.16%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
(d) For the period January 1, 2002 (effective date) to September 30, 2002.
(e) Annualized.
Annual Report | See notes to financial statements. | 83
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND (CONTINUED)
---------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS 2004 2003 2002 2001 2000
---------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 2.24 $ 1.89 $ 2.16 $ 2.34 $ 2.23
---------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............................... .12 .14 .14 .18 .18
Net realized and unrealized gains (losses) ............. .22 .38 (.22) (.15) .12
---------------------------------------------------------------------
Total from investment operations ........................ .34 .52 (.08) .03 .30
---------------------------------------------------------------------
Less distributions from:
Net investment income .................................. (.16) (.16) (.17) (.18) (.18)
Net realized gains ..................................... (.01) (.01) (.02) (.03) (.01)
---------------------------------------------------------------------
Total distributions ..................................... (.17) (.17) (.19) (.21) (.19)
---------------------------------------------------------------------
Redemption fees ......................................... --(c) -- -- -- --
---------------------------------------------------------------------
Net asset value, end of year ............................ $ 2.41 $ 2.24 $ 1.89 $ 2.16 $ 2.34
=====================================================================
Total return(b) ......................................... 15.74% 28.47% (4.50)% 1.21% 14.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $901,149 $ 95,009 $ 30,737 $ 22,737 $ 21,220
Ratios to average net assets:
Expenses ............................................... .53% .58% .57% .58% .61%
Net investment income .................................. 5.26% 6.78% 6.85% 7.69% 8.16%
Portfolio turnover rate ................................. 31.90% 48.36% 51.16% 28.13% 24.41%
(a) Based on average daily shares outstanding.
(b) Total return is not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
84 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004
- ---------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE
- ---------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS 37.6%
COMMERCIAL SERVICES .6%
(a) Dex Media Inc. .................................... United States 7,500,000 $ 158,775,000
--------------
COMMUNICATIONS 2.2%
Alltel Corp. ...................................... United States 227,500 12,492,025
AT&T Corp. ........................................ United States 5,000,000 71,600,000
BellSouth Corp. ................................... United States 1,000,000 27,120,000
MCI Inc. .......................................... United States 1,716,723 28,755,110
(a) NII Holdings Inc., B .............................. United States 320,232 13,196,761
(a) NTL Inc. .......................................... United Kingdom 379,020 23,525,772
SBC Communications Inc. ........................... United States 8,000,000 207,600,000
(a) Telecom Argentina SA, B, ADR ...................... Argentina 1,700,000 18,564,000
Verizon Communications Inc. ....................... United States 4,583,200 180,486,416
--------------
583,340,084
--------------
CONSUMER DURABLES .8%
General Motors Corp. .............................. United States 5,000,000 212,400,000
--------------
CONSUMER NON-DURABLES .8%
Altria Group Inc. ................................. United States 3,250,000 152,880,000
Loews Corp. - Carolina Group ...................... United States 2,717,500 66,225,475
--------------
219,105,475
--------------
ELECTRIC UTILITIES 15.3%
Alliant Energy Corp. .............................. United States 5,000,000 124,400,000
Ameren Corp. ...................................... United States 9,550,000 440,732,500
American Electric Power Co. Inc. .................. United States 6,500,000 207,740,000
CenterPoint Energy Inc. ........................... United States 3,000,000 31,080,000
Cinergy Corp. ..................................... United States 6,111,200 242,003,520
(a) CMS Energy Corp. .................................. United States 3,650,000 34,748,000
Dominion Resources Inc. ........................... United States 5,737,300 374,358,825
DTE Energy Co. .................................... United States 5,250,000 221,497,500
Duke Energy Corp. ................................. United States 5,000,000 114,450,000
Edison International .............................. United States 1,590,300 42,158,853
Energy East Corp. ................................. United States 4,500,000 113,310,000
Exelon Corp. ...................................... United States 4,500,000 165,105,000
FirstEnergy Corp. ................................. United States 8,000,000 328,640,000
FPL Group Inc. .................................... United States 2,561,500 175,001,680
Hawaiian Electric Industries Inc. ................. United States 1,720,000 45,648,800
Pepco Holdings Inc. ............................... United States 5,500,000 109,450,000
Pinnacle West Capital Corp. ....................... United States 1,500,000 62,250,000
PPL Corp. ......................................... United States 2,500,000 117,950,000
Progress Energy Inc. .............................. United States 4,500,000 190,530,000
Public Service Enterprise Group Inc. .............. United States 5,814,500 247,697,700
Puget Energy Inc. ................................. United States 4,100,000 93,070,000
Southern Co. ...................................... United States 7,600,000 227,848,000
TECO Energy Inc. .................................. United States 9,000,000 121,770,000
TXU Corp. ......................................... United States 2,250,000 107,820,000
Xcel Energy Inc. .................................. United States 4,332,500 75,038,900
--------------
4,014,299,278
--------------
Annual Report | 85
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONT.)
ELECTRONIC TECHNOLOGY .4%
Lockheed Martin Corp. ........................................ United States 1,925,600 $ 107,409,968
--------------
ENERGY MINERALS 5.0%
BP PLC, ADR .................................................. United Kingdom 3,500,000 201,355,000
(a) Callon Petroleum Co., wts., 12/08/10 ......................... United States 1,537,500 8,456,250
Canadian Oil Sands Trust ..................................... Canada 6,000,000 259,959,567
ChevronTexaco Corp. .......................................... United States 4,000,000 214,560,000
Marathon Oil Corp. ........................................... United States 4,812,500 198,660,000
(a),(b) Mission Resources Corp. ...................................... United States 3,330,000 20,945,700
Petroleo Brasileiro SA, ADR .................................. Brazil 1,600,000 56,400,000
Royal Dutch Petroleum Co., N.Y. shs. ......................... Netherlands 6,000,000 309,600,000
Yukos Corp., ADR ............................................. Russia 2,158,000 34,484,840
--------------
1,304,421,357
--------------
FINANCE 3.2%
Bank of America Corp. ........................................ United States 4,886,640 211,738,111
Comerica Inc. ................................................ United States 3,500,000 207,725,000
Fifth Third Bancorp .......................................... United States 5,500,000 270,710,000
JP Morgan Chase & Co. ........................................ United States 3,500,000 139,054,999
--------------
829,228,110
--------------
GAS UTILITIES 1.8%
KeySpan Corp. ................................................ United States 3,769,600 147,768,320
NiSource Inc. ................................................ United States 5,000,000 105,050,000
ONEOK Inc. ................................................... United States 3,956,500 102,948,130
Sempra Energy ................................................ United States 3,500,000 126,665,000
--------------
482,431,450
--------------
HEALTH TECHNOLOGY 4.3%
Bristol-Myers Squibb Co. ..................................... United States 10,000,000 236,700,000
Johnson & Johnson ............................................ United States 3,250,000 183,072,500
Merck & Co. Inc. ............................................. United States 11,000,000 363,000,000
Pfizer Inc. .................................................. United States 11,500,000 351,900,000
Wyeth ........................................................ United States 238,100 8,904,940
--------------
1,143,577,440
--------------
NON-ENERGY MINERALS .6%
AngloGold Ashanti Ltd., ADR .................................. South Africa 2,250,000 87,525,000
Barrick Gold Corp. ........................................... Canada 3,500,000 73,640,000
--------------
161,165,000
--------------
PROCESS INDUSTRIES .5%
Dow Chemical Co. ............................................. United States 2,750,000 124,245,000
(a) HMP Equity Holdings Corp., wts., 144A, 5/15/11 ............... United States 21,500 4,955,750
--------------
129,200,750
--------------
86 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONT.)
PRODUCER MANUFACTURING .4%
General Electric Co. ................................................. United States 3,400,000 $ 114,172,000
-------------
REAL ESTATE INVESTMENT TRUSTS 1.6%
Archstone-Smith Trust ................................................ United States 1,000,000 31,640,000
Chelsea Property Group Inc. .......................................... United States 1,300,000 87,230,000
Developers Diversified Realty Corp. .................................. United States 4,750,000 185,962,500
iStar Financial Inc. ................................................. United States 2,586,900 106,657,887
-------------
411,490,387
-------------
TECHNOLOGY SERVICES .1%
Electronic Data Systems Corp. ........................................ United States 1,686,000 32,691,540
-------------
TOTAL COMMON STOCKS AND WARRANTS (COST $8,663,183,902) ............... 9,903,707,839
-------------
PREFERRED STOCK (COST $57,833,250)
PROCESS INDUSTRIES
(c) Asia Pulp & Paper Co. Ltd., 12.00% ................................... Indonesia 75,000,000 1,125,000
-------------
CONVERTIBLE PREFERRED STOCKS 8.6%
COMMUNICATIONS .5%
ALLTEL Corp., 7.75%, cvt. pfd. ....................................... United States 2,400,000 124,224,000
(a) McLeodUSA Inc., 2.50%, cvt. pfd. ..................................... United States 177,366 443,415
-------------
124,667,415
-------------
CONSUMER DURABLES 1.4%
Ford Motor Co. Capital Trust II, 6.50%, cvt. pfd. .................... United States 7,000,000 365,960,000
-------------
CONSUMER SERVICES .2%
Goldman Sachs Group Inc. into Time Warner Inc., 6.50%, cvt. pfd. ..... United States 2,500,000 40,150,000
-------------
ELECTRIC UTILITIES .9%
Aquila Inc., 6.75%, cvt. pfd. ........................................ United States 3,906,200 119,529,720
CMS Energy Trust I, 7.75%, cvt. pfd. ................................. United States 1,150,000 50,887,500
TXU Corp., 8.75%, cvt. pfd. .......................................... United States 1,300,000 67,730,000
-------------
238,147,220
-------------
ELECTRONIC TECHNOLOGY 1.3%
Citigroup Global Markets Holdings into Altera, 9.00%, cvt. pfd. ...... United States 4,000,000 75,000,000
Goldman Sachs into Linear Technology Corp., 7.00%, cvt. pfd. ......... United States 1,400,000 50,517,600
Lehman Brothers Holdings into Solectron Corp., 7.00%, cvt. pfd. ...... United States 3,000,000 60,420,000
Morgan Stanley into INTC, 6.50%, cvt. pfd. ........................... United States 5,000,000 101,775,000
Motorola Inc., 7.00%, cvt. pfd. ...................................... United States 900,000 45,072,000
-------------
332,784,600
-------------
ENERGY MINERALS .4%
Range Resources Corp., 5.90%, cvt. pfd. .............................. United States 600,000 60,750,000
Unocal Corp., 6.25%, cvt. pfd. ....................................... United States 624,981 32,420,889
-------------
93,170,889
-------------
Annual Report | 87
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (CONT.)
FINANCE .5%
Genworth Financial Inc., 6.00%, cvt. pfd., A ............................ United States 3,843,700 $ 111,701,766
Travelers Property Casualty Corp., 4.50%, cvt. pfd., junior sub. note .... United States 1,409,000 31,956,120
--------------
143,657,886
--------------
GAS UTILITIES .2%
Sempra Energy, 8.50%, cvt. pfd. ......................................... United States 2,000,000 63,468,000
--------------
HEALTH TECHNOLOGY .6%
Citigroup Global Markets into Wye Elks, 6.00%, cvt. pfd. ................ United States 1,000,000 37,750,000
Goldman Sachs Group Inc. into Wyeth, 7.00%, cvt. pfd. ................... United States 1,400,000 54,238,800
Schering-Plough Corp., cvt. pfd. ........................................ United States 1,083,200 57,355,440
--------------
149,344,240
--------------
INDUSTRIAL SERVICES .9%
Allied Waste Industries Inc., 6.25%, cvt. pfd. .......................... United States 722,500 36,847,500
Lehman Brothers Holdings Inc. into Rowan Cos. Inc., 6.00%,
cvt. pfd. ............................................................... United States 4,000,000 101,460,000
Lehman Brothers Holdings Inc. into Weatherford International, 6.00%,
cvt. pfd. ............................................................... United States 2,250,000 107,640,000
--------------
245,947,500
--------------
REAL ESTATE INVESTMENT TRUSTS 1.1%
Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A .......................... United States 3,000,000 72,600,000
Glenborough Realty Trust Inc., 7.75%, cvt. pfd., A ...................... United States 2,442,515 61,331,551
Host Marriott Corp., 6.75%, cvt. pfd. ................................... United States 2,500,000 132,870,000
Reckson Associates Realty Corp., 7.625%, cvt. pfd., A ................... United States 1,309,786 34,545,605
--------------
301,347,156
--------------
TECHNOLOGY SERVICES .6%
Morgan Stanley into Accenture Inc., 6.00%, cvt. pfd. .................... United States 6,750,000 170,133,750
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $2,092,707,804) ................ 2,268,778,656
--------------
-------------------
PRINCIPAL AMOUNT(d)
-------------------
BONDS 25.9%
ALTERNATIVE POWER GENERATION 4.9%
Calpine Canada Energy Finance, senior note, 8.50%, 5/01/08 .............. Canada $ 291,000,000 202,245,000
Calpine Corp., senior note, 7.875%, 4/01/08 ............................. United States 104,000,000 70,720,000
Calpine Corp., senior note, 8.625%, 8/15/10 ............................. United States 200,000,000 131,000,000
Calpine Corp., senior note, 8.50%, 2/15/11 .............................. United States 325,000,000 209,625,000
Calpine Corp., senior secured note, 144A, 8.75%, 7/15/13 ................ United States 50,000,000 38,000,000
Calpine Corp., senior secured note, 144A, 9.625%, 10/01/14 .............. United States 25,000,000 24,687,500
Dynegy Holdings Inc., secured note, 144A, 9.875%, 7/15/10 ............... United States 100,000,000 113,500,000
Dynegy Holdings Inc., senior note, 6.875%, 4/01/11 ...................... United States 240,000,000 229,800,000
Dynegy Holdings Inc., senior note, 8.75%, 2/15/12 ....................... United States 147,500,000 154,137,500
Dynegy Holdings Inc., secured note, 144A, 10.125%, 7/15/13 .............. United States 97,000,000 112,035,000
--------------
1,285,750,000
--------------
88 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(d) VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
BONDS (CONT.)
COMMUNICATIONS 2.6%
MCI Inc., senior note, 7.735%, 5/01/14 .................................... United States $ 11,351,000 $ 10,783,450
Qwest Capital Funding, 7.00%, 8/03/09 ..................................... United States 219,000,000 201,480,000
Qwest Capital Funding, 7.25%, 2/15/11 ..................................... United States 245,000,000 219,887,500
Qwest Communications International Inc., senior note, 144A, 7.50%,
2/15/14 ................................................................. United States 108,000,000 99,630,000
Qwest Corp., 6.875%, 9/15/33 .............................................. United States 75,000,000 63,562,500
Time Warner Telecom Inc., senior note, 10.125%, 2/01/11 ................... United States 47,400,000 45,741,000
Time Warner Telecom Inc., senior note, 9.25%, 2/15/14 ..................... United States 52,500,000 52,500,000
--------------
693,584,450
--------------
CONSUMER DURABLES .5%
General Motors, senior deb., 8.375%, 7/15/33 .............................. United States 125,000,000 133,096,000
--------------
CONSUMER NON-DURABLES
(c) Compania Alimentos Fargo SA, 13.25%, 8/01/08 .............................. Argentina 27,000,000 4,455,000
--------------
CONSUMER SERVICES 3.8%
(c) Adelphia Communications Corp., 7.875%, 5/01/09 ............................ United States 23,600,000 20,532,000
(c) Adelphia Communications Corp., senior note, 10.875%, 10/01/10 ............. United States 35,000,000 32,375,000
Cablevision Systems Corp., senior note, 144A, 8.00%, 4/15/12 .............. United States 192,000,000 201,600,000
Charter Communications Holdings LLC, senior note, 8.25%, 4/01/07 .......... United States 214,800,000 196,542,000
Charter Communications Holdings LLC, senior note, 8.625%,
4/01/09 ................................................................. United States 155,000,000 121,287,500
Charter Communications Holdings LLC, senior note, 10.75%,
10/01/09 .................................................................. United States 105,000,000 86,625,000
Charter Communications Holdings LLC, senior disc. note, 9.92%,
4/01/11 ................................................................. United States 160,000,000 124,000,000
CSC Holdings Inc., senior note, B, 7.625%, 4/01/11 ........................ United States 118,000,000 124,932,500
Six Flags Inc., senior note, 9.50%, 2/01/09 ............................... United States 65,000,000 63,862,500
Young Broadcasting Inc., senior sub. note, 10.00%, 3/01/11 ................ United States 23,768,000 24,599,879
--------------
996,356,379
--------------
ELECTRIC UTILITIES 3.8%
Allegheny Energy Supply Co. LLC, 7.80%, 3/15/11 ........................... United States 90,000,000 97,875,000
Allegheny Energy Supply Co. LLC, 144A, 8.25%, 4/15/12 ..................... United States 140,000,000 155,400,000
Aquila Inc., senior note, 6.875%, 10/01/04 ................................ United States 54,000,000 54,000,000
Aquila Inc., senior note, FRN, 9.95%, 2/01/11 ............................. United States 14,000,000 15,470,000
Aquila Inc., senior note, 14.875%, 7/01/12 ................................ United States 97,500,000 131,868,750
CMS Energy Corp., senior note, 144A, 7.75%, 8/01/10 ....................... United States 40,000,000 42,500,000
FirstEnergy Corp., 6.45%, 11/15/11 ........................................ United States 50,000,000 54,621,850
Midwest Generation LLC, senior secured note, 8.75%, 5/01/34 ............... United States 25,000,000 27,375,000
Pacific Gas & Electric Co., 6.05%, 3/01/34 ................................ United States 300,000,000 306,396,600
Sierra Pacific Resources Co., 8.75%, 5/15/05 .............................. United States 114,900,000 118,203,377
--------------
1,003,710,577
--------------
ELECTRONIC TECHNOLOGY 1.1%
Lucent Technologies, 6.45%, 3/15/29 ....................................... United States 180,000,000 146,700,000
PanAmSat Corp., senior note, 144A, 9.00%, 8/15/14 ......................... United States 70,600,000 73,777,000
Annual Report | 89
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(d) VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
BONDS (CONT.)
ELECTRONIC TECHNOLOGY (CONT.)
Xerox Corp., senior note, 6.875%, 8/15/11 ............................... United States $ 74,400,000 $ 78,120,000
------------
298,597,000
------------
ENERGY MINERALS .8%
Callon Petroleum Co., senior note, 9.75%, 12/08/10 ...................... United States 117,500,000 123,962,500
(b) Mission Resources Corp., senior note, 9.875%, 4/01/11 ................... United States 40,000,000 43,000,000
Sonat Inc., senior note, 7.625%, 7/15/11 ................................ United States 35,000,000 34,650,000
------------
201,612,500
------------
FINANCE .6%
Ford Motor Credit Co., 7.00%, 10/01/13 .................................. United States 150,000,000 158,858,400
------------
HEALTH SERVICES 1.8%
HealthSouth Corp., senior note, 7.625%, 6/01/12 ......................... United States 75,000,000 72,937,500
Tenet Healthcare Corp., senior note, 6.375%, 12/01/11 ................... United States 220,000,000 198,550,000
(e) Tenet Healthcare Corp., senior note, 7.375%, 2/01/13 .................... United States 220,000,000 207,900,000
------------
479,387,500
------------
INDUSTRIAL SERVICES 2.0%
Allied Waste North America Inc., senior secured note, 6.125%,
2/15/14 ............................................................... United States 70,000,000 65,625,000
Allied Waste North America Inc., senior note, B, 7.375%, 4/15/14 ........ United States 80,500,000 77,883,750
(e) El Paso Corp., senior note, 6.75%, 5/15/09 .............................. United States 205,000,000 205,000,000
El Paso Corp., senior note, 7.75%, 1/15/32 .............................. United States 110,000,000 96,525,000
El Paso Production Holdings, 7.75%, 6/01/13 ............................. United States 87,500,000 88,156,250
------------
533,190,000
------------
PROCESS INDUSTRIES 1.7%
(f) Consoltex Group Inc., PIK, 10.00%, 7/18/10 .............................. United States 11,075,373 570,493
Equistar Chemicals LP, senior note, 10.125%, 9/01/08 .................... United States 49,800,000 56,398,500
Lyondell Chemical Co., 9.625%, 5/01/07 .................................. United States 82,000,000 89,687,500
Lyondell Chemical Co., senior secured note, 10.50%, 6/01/13 ............. United States 71,500,000 82,940,000
Rhodia SA, senior note, 10.25%, 6/01/10 ................................. France 170,000,000 176,800,000
(c) Tjiwi Kimia Finance Mauritius, senior note, 10.00%, 8/01/04 ............. Indonesia 87,000,000 35,887,500
------------
442,283,993
------------
PRODUCER MANUFACTURING 1.1%
Case New Holland Inc., senior note, 144A, 6.00%, 6/01/09 ................ United States 200,000,000 199,000,000
Dana Corp., 7.00%, 3/01/29 .............................................. United States 41,000,000 41,410,000
Invensys PLC, senior note, 144A, 9.875%, 3/15/11 ........................ United Kingdom 51,100,000 52,633,000
------------
293,043,000
------------
REAL ESTATE INVESTMENT TRUSTS .7%
Felcor Lodging LP, FRN,10.00%, 9/15/08 .................................. United States 10,157,000 10,715,635
HMH Properties Inc., senior secured note, 7.875%, 8/01/08 ............... United States 18,887,000 19,524,436
Host Marriott LP, senior note, 7.125%, 11/01/13 ......................... United States 60,000,000 63,300,000
Meristar Hospitality Corp., 9.125%, 1/15/11 ............................. United States 72,500,000 76,306,250
------------
169,846,321
------------
90 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(d) VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
BONDS (CONT.)
TECHNOLOGY SERVICES .5%
Electronic Data Systems Corp., B, 8/01/13 ................................. United States $ 125,000,000 $ 126,287,625
--------------
TOTAL BONDS (COST $6,560,480,510) ......................................... 6,820,058,745
--------------
CONVERTIBLE BONDS 3.1%
COMMUNICATIONS .2%
Nextel Communications Inc., cvt., 5.25%, 1/15/10 .......................... United States 60,000,000 60,075,000
--------------
CONSUMER SERVICES .3%
(c) Adelphia Communications Corp., cvt., junior sub. note, 6.00%,
2/15/06 ................................................................. United States 75,000,000 20,625,000
Charter Communications Inc., cvt., 5.75%, 10/15/05 ........................ United States 55,000,000 49,225,000
--------------
69,850,000
--------------
ELECTRONIC TECHNOLOGY 1.3%
Conexant Systems Inc., cvt., 4.00%, 2/01/07 ............................... United States 50,000,000 44,217,400
Nortel Networks Corp., cvt., senior note, 4.25%, 9/01/08 .................. Canada 200,000,000 194,000,000
SCI Systems Inc., cvt., sub. note, 3.00%, 3/15/07 ......................... United States 100,000,000 94,500,000
--------------
332,717,400
--------------
HEALTH TECHNOLOGY
Enzon Pharmaceuticals Inc., cvt., 4.50%, 7/01/08 .......................... United States 13,500,000 12,673,125
--------------
INDUSTRIAL SERVICES .3%
Hanover Compressor Co., cvt., 4.75%, 3/15/08 .............................. United States 85,000,000 81,175,000
--------------
REAL ESTATE INVESTMENT TRUSTS 1.0%
Host Marriott LP, cvt., 144A, 3.25%, 3/15/24 .............................. United States 140,000,000 145,496,400
Meristar Hospitality Corp., cvt., 9.50%, 4/01/10 .......................... United States 95,000,000 107,825,000
--------------
253,321,400
--------------
TOTAL CONVERTIBLE BONDS (COST $765,167,011) ............................... 809,811,925
--------------
ZERO COUPON/STEP-UP BONDS 4.3%
COMMERCIAL SERVICES .4%
JohnsonDiversey Holdings Inc., senior disc. note, zero cpn. to 5/17/07,
10.67% thereafter, 5/15/13 .............................................. United States 110,000,000 91,300,000
--------------
CONSUMER SERVICES 1.6%
Charter Communications Holdings LLC, senior disc. note, zero cpn. to
1/15/06, 13.50% thereafter, 1/15/11 ..................................... United States 316,000,000 227,520,000
Dex Media Inc., 144A, zero cpn. to 11/15/08, 9.00% thereafter,
11/15/13 ................................................................ United States 200,000,000 147,500,000
Quebecor Media Inc., senior disc. note, zero cpn. to 7/15/06, 13.75%
thereafter, 7/15/11 ....................................................... Canada 54,700,000 53,059,000
--------------
428,079,000
--------------
FINANCE 1.4%
Nalco Finance Holdings, senior note, 144A, zero cpn. to 8/01/09,
9.00% thereafter, 2/01/14 ............................................... United States 515,000,000 368,225,000
--------------
Annual Report | 91
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(d) VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
ZERO COUPON/STEP-UP BONDS (CONT.)
INDUSTRIAL SERVICES .1%
Hanover Compressor Co., sub. note, zero cpn., 3/31/07 ..................... United States $ 36,000,000 $ 30,600,000
---------------
PROCESS INDUSTRIES .8%
HMP Equity Holdings Corp., senior disc. note, zero cpn., 5/15/08 .......... United States 95,500,000 60,642,500
Huntsman ICI Holdings LLC, senior disc. note, zero cpn., 12/31/09 ......... United States 280,000,000 149,800,000
---------------
210,442,500
---------------
TOTAL ZERO COUPON/STEP-UP BONDS (COST $1,099,906,269) ..................... 1,128,646,500
---------------
AGENCY SECURITIES 4.5%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 2.3%
FHLMC Gold 30 Year, 5.00%, 5/01/33-8/01/34 ................................ United States 613,684,678 620,416,708
---------------
620,416,708
---------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 2.2%
GNMA I 30 Year, SF, 5.00%, 4/15/33-6/15/34 ................................ United States 566,869,338 571,270,486
---------------
571,270,486
---------------
TOTAL AGENCY SECURITIES (COST $1,180,554,016) ............................. 1,191,687,194
---------------
MUNICIPAL BONDS 1.6%
California State GO, 5.00%, 2/01/26 ....................................... United States 10,450,000 10,635,801
California State GO, 5.25%, 11/01/26 ...................................... United States 25,000,000 26,005,250
California State GO, 5.25%, 11/01/27 ...................................... United States 20,400,000 21,143,988
California State GO, 5.25%, 2/01/28 ....................................... United States 24,600,000 25,440,582
California State GO, 5.00%, 2/01/32 ....................................... United States 65,250,000 65,801,362
California State GO, 5.00%, 2/01/33 ....................................... United States 103,400,000 104,313,022
California State GO, 5.00%, 2/01/33 ....................................... United States 23,250,000 23,446,463
California State GO, Refunding, 5.25%, 2/01/33 ............................ United States 28,500,000 29,310,255
California State GO, Various Purpose, 5.25%, 11/01/28 ..................... United States 25,000,000 25,874,500
California State GO, Various Purpose, 5.25%, 11/01/29 ..................... United States 22,500,000 23,253,525
California State GO, Various Purpose, 5.50%, 11/01/33 ..................... United States 55,300,000 58,618,553
---------------
TOTAL MUNICIPAL BONDS (COST $391,474,184) ................................. 413,843,301
---------------
TOTAL LONG TERM INVESTMENTS (COST $20,811,306,946) ........................ 22,537,659,160
---------------
-------------
SHARES
-------------
SHORT TERM INVESTMENT (COST $176,644,842) .7%
MONEY FUND
(g) Franklin Institutional Fiduciary Trust Money Market Portfolio ............. United States 176,644,842 176,644,842
---------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS
(COST $20,987,951,788) .................................................. 22,714,304,002
---------------
92 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(d) VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 13.2%
(h) Joint Repurchase Agreement, 1.803%, 10/01/04
(Maturity Value $3,428,318,476) ...................................... United States $ 3,428,146,799 $ 3,428,146,799
ABN AMRO Bank, N.V., New York Branch
(Maturity Value $341,220,538)
Banc of America Securities LLC (Maturity Value $341,220,538)
Barclays Capital Inc. (Maturity Value $341,220,538)
Bear, Stearns & Co. Inc. (Maturity Value $261,375,000)
BNP Paribas Securities Corp. (Maturity Value $341,220,538)
Deutsche Bank Securities Inc. (Maturity Value $108,883,395)
Goldman, Sachs & Co. (Maturity Value $341,220,538)
Greenwich Capital Markets Inc. (Maturity Value $341,220,538)
Lehman Brothers Inc. (Maturity Value $328,295,777)
Morgan Stanley & Co. Inc. (Maturity Value $341,220,538)
UBS Securities LLC (Maturity Value $341,220,538)
Collateralized by U.S. Government Agency Securities,
0.00%-7.125%, 10/19/04-7/30/09; iU.S. Treasury Bills,
12/30/04; U.S. Treasury Bonds, 10.75%-12.00%,
11/15/04-8/15/05; and U.S. Treasury Notes, 1.875%-6.875%,
11/15/05-8/15/09
(h),(j) Barclays Capital Inc., 1.90%, 10/01/04
(Maturity Value $10,001,056) ......................................... United States 10,000,528 10,000,528
Collateralized by U.S. Government Agency Securities,
0.00%-6.00%, 10/08/04-7/26/19
(h),(j) Bear Stearns & Co. Inc., 1.90%, 10/01/04
(Maturity Value $10,001,056) ......................................... United States 10,000,528 10,000,528
Collateralized by Various Asset Backed Securities,
0.00%-9.725%, 1/20/07-5/28/44
(h),(j) JP Morgan Securities, 1.91%, 10/01/04
(Maturity Value $11,791,252) ......................................... United States 11,790,626 11,790,626
Collateralized by U.S. Government Agency Securities,
4.50%-9.00%, 12/01/13-10/01/34
(h),(j) Merrill Lynch GSI Inc., 1.89%, 10/01/04
(Maturity Value $10,001,050) ......................................... United States 10,000,525 10,000,525
Collateralized by U.S. Government Agency Securities,
0.00%-9.375%, 10/01/04-7/15/32
(h),(j) Morgan Stanley & Co. Inc., 1.91%, 10/01/04
(Maturity Value $10,001,062) ......................................... United States 10,000,531 10,000,531
Collateralized by U.S. Government Agency Securities,
4.50%-8.00%, 8/01/08-9/01/34
---------------
TOTAL REPURCHASE AGREEMENTS (COST $3,479,939,537) ..................... 3,479,939,537
---------------
TOTAL INVESTMENTS (COST $24,467,891,325) 99.5% ........................ 26,194,243,539
OTHER ASSETS, LESS LIABILITIES .5% .................................... 138,501,844
---------------
NET ASSETS 100.0% ..................................................... $26,332,745,383
===============
See glossary of terms on page 108.
(a) Non-income producing.
(b) See Note 10 regarding holdings of 5% voting securities.
(c) Defaulted securities. See Note 8.
(d) The principal amount is stated in U.S. dollars unless otherwise indicated.
(e) Security on loan. See Note 1(f).
(f) See Note 9 regarding restricted securities.
(g) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio.
(h) See Note 1(c) regarding repurchase agreements.
(i) Security is traded on a discount basis with a zero coupon.
(j) Investments from cash collateral received for loaned securities. See Note
1(f).
Annual Report | See notes to financial statements. | 93
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
-----------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS A 2004 2003 2002 2001 2000
-----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 6.81 $ 6.99 $ 6.93 $ 6.63 $ 6.62
-----------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ......................... .27 .28 .38 .41(d) .43
Net realized and unrealized gains (losses) ....... (.04) (.10) .09 .33(d) .01
-----------------------------------------------------------------------------
Total from investment operations .................. .23 .18 .47 .74 .44
-----------------------------------------------------------------------------
Less distributions from net investment income...... (.36) (.36) (.41) (.44) (.43)
-----------------------------------------------------------------------------
Redemption fees ................................... --(c) -- -- -- --
-----------------------------------------------------------------------------
Net asset value, end of year ...................... $ 6.68 $ 6.81 $ 6.99 $ 6.93 $ 6.63
=============================================================================
Total return(b) ................................... 3.46% 2.66% 7.06% 11.52% 6.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $6,420,381 $7,286,317 $7,726,914 $7,197,334 $6,852,374
Ratios to average net assets:
Expenses ........................................ .70% .70% .69% .68% .70%
Net investment income ........................... 4.09% 4.11% 5.48% 6.12%(d) 6.62%
Portfolio turnover rate ........................... 41.45% 66.96% 44.62% 19.18% 3.98%
(a) Based on average daily 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) Amount is less than $0.001 per share.
(d) Effective October 1, 2000, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for 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)%
Per share data and ratios for prior periods have not been restated to
reflect this change in accounting policy.
94 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
--------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS B 2004 2003 2002 2001 2000
--------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 6.80 $ 6.98 $ 6.93 $ 6.63 $ 6.62
--------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............................ .24 .25 .34 .37(d) .39
Net realized and unrealized gains (losses) .......... (.05) (.10) .09 .33(d) .01
--------------------------------------------------------------------------
Total from investment operations ..................... .19 .15 .43 .70 .40
--------------------------------------------------------------------------
Less distributions from net investment income ........ (.32) (.33) (.38) (.40) (.39)
--------------------------------------------------------------------------
Redemption fees ...................................... --(c) -- -- -- --
--------------------------------------------------------------------------
Net asset value, end of year ......................... $ 6.67 $ 6.80 $ 6.98 $ 6.93 $ 6.63
==========================================================================
Total return(b) ...................................... 2.92% 2.13% 6.37% 10.94% 6.35%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $ 568,276 $ 678,814 $ 559,966 $ 225,517 $ 80,167
Ratios to average net assets:
Expenses ............................................ 1.23% 1.23% 1.22% 1.22% 1.25%
Net investment income ............................... 3.56% 3.58% 4.95% 5.51%(d) 6.07%
Portfolio turnover rate .............................. 41.45% 66.96% 44.62% 19.18% 3.98%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
(d) Effective October 1, 2000, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for 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)%
Per share data and ratios for prior periods have not been restated to
reflect this change in accounting policy.
Annual Report | See notes to financial statements. | 95
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
-------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS C 2004 2003 2002 2001 2000
-------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 6.78 $ 6.97 $ 6.91 $ 6.61 $ 6.60
-------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ........................... .24 .25 .34 .37(d) .39
Net realized and unrealized gains (losses) ......... (.05) (.11) .10 .33(d) .01
-------------------------------------------------------------------------
Total from investment operations .................... .19 .14 .44 .70 .40
-------------------------------------------------------------------------
Less distributions from net investment income ....... (.32) (.33) (.38) (.40) (.39)
-------------------------------------------------------------------------
Redemption fees ..................................... --(c) -- -- -- --
-------------------------------------------------------------------------
Net asset value, end of year ........................ $ 6.65 $ 6.78 $ 6.97 $ 6.91 $ 6.61
=========================================================================
Total return(b) ..................................... 2.91% 2.00% 6.53% 10.96% 6.36%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $ 597,451 $ 814,635 $ 803,049 $ 422,114 $ 264,413
Ratios to average net assets:
Expenses ........................................... 1.23% 1.23% 1.21% 1.22% 1.25%
Net investment income .............................. 3.56% 3.58% 4.96% 5.55%(d) 6.08%
Portfolio turnover rate ............................. 41.45% 66.96% 44.62% 19.18% 3.98%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
(d) Effective October 1, 2000, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for 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)%
Per share data and ratios for prior periods have not been restated to
reflect this change in accounting policy.
96 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
----------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS R 2004 2003 2002(d)
----------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ..................................... $ 6.81 $ 6.99 $ 6.81
----------------------------------------------------
Income from investment operations:
Net investment income(a) .............................................. .25 .25 .25
Net realized and unrealized gains (losses) ............................ (.05) (.09) .22
----------------------------------------------------
Total from investment operations ....................................... .20 .16 .47
----------------------------------------------------
Less distributions from net investment income .......................... (.33) (.34) (.29)
----------------------------------------------------
Redemption fees ........................................................ --(c) -- --
----------------------------------------------------
Net asset value, end of year ........................................... $ 6.68 $ 6.81 $ 6.99
====================================================
Total return(b) ........................................................ 3.08% 2.29% 7.03%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................................ $ 59,431 $ 54,042 $ 14,042
Ratios to average net assets:
Expenses .............................................................. 1.08% 1.08% 1.07%(e)
Net investment income ................................................. 3.71% 3.73% 5.10%(e)
Portfolio turnover rate ................................................ 41.45% 66.96% 44.62%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
(d) For the period January 1, 2002 (effective date) to September 30, 2002.
(e) Annualized.
Annual Report | See notes to financial statements. | 97
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
--------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS 2004 2003 2002 2001 2000
--------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 6.83 $ 7.01 $ 6.94 $ 6.64 $ 6.63
--------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............................ .28 .29 .38 .43(d) .44
Net realized and unrealized gains (losses) .......... (.06) (.10) .11 .32(d) --
--------------------------------------------------------------------------
Total from investment operations ..................... .22 .19 .49 .75 .44
--------------------------------------------------------------------------
Less distributions from net investment income ........ (.36) (.37) (.42) (.45) (.43)
--------------------------------------------------------------------------
Redemption fees ...................................... --(c) -- -- -- --
--------------------------------------------------------------------------
Net asset value, end of year ......................... $ 6.69 $ 6.83 $ 7.01 $ 6.94 $ 6.64
==========================================================================
Total return(b) ...................................... 3.42% 2.79% 7.33% 11.63% 7.02%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $ 340,279 $ 308,411 $ 198,437 $ 19,960 $ 46,775
Ratios to average net assets:
Expenses ............................................ .58% .58% .57% .57% .60%
Net investment income ............................... 4.21% 4.23% 5.60% 6.30%(d) 6.73%
Portfolio turnover rate .............................. 41.45% 66.96% 44.62% 19.18% 3.98%
(a) Based on average daily shares outstanding.
(b) Total return is not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
(d) Effective October 1, 2000, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for 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)%
Per share data and ratios for prior periods have not been restated to
reflect this change in accounting policy.
98 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004
- -----------------------------------------------------------------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) 97.5%
GNMA I 30 Year, GP, 8.25%, 3/15/17 - 11/15/17 ................................. $ 421,749 $ 496,505
GNMA I 30 Year, GP, 9.25%, 5/15/16 - 12/15/16 ................................. 693,476 777,877
GNMA I 30 Year, GP, 10.00%, 11/15/09 - 4/15/10 ................................ 706,186 710,947
GNMA I 30 Year, GP, 10.25%, 6/15/18 - 8/15/20 ................................. 62,936 68,510
GNMA I 30 Year, GP, 11.00%, 12/15/09 - 1/15/11 ................................ 1,423,267 1,474,021
GNMA I 30 Year, GP, 11.25%, 6/15/13 - 1/15/16 ................................. 508,687 546,442
GNMA I 30 Year, GP, 11.50%, 2/15/13 - 6/15/13 ................................. 123,361 132,364
GNMA I 30 Year, GP, 11.75%, 7/15/13 - 12/15/15 ................................ 99,669 107,378
GNMA I 30 Year, GP, 12.00%, 3/15/11 - 1/15/13 ................................. 52,235 55,143
GNMA I 30 Year, GP, 12.50%, 4/15/10 - 7/15/10 ................................. 123,592 128,678
GNMA I 30 Year, GP, 12.75%, 5/15/14 ........................................... 7,347 7,770
GNMA I 30 Year, PL, 6.75%, 1/15/34 ............................................ 34,077,450 34,355,056
GNMA I 30 Year, PL, 7.00%, 9/15/35 ............................................ 8,375,050 8,748,956
GNMA I 30 Year, SF, 5.00%, 2/15/33 - 6/15/34 .................................. 747,232,849 757,403,415
(a) GNMA I 30 Year, SF, 5.50%, 5/15/28 - 8/15/34 .................................. 1,883,804,349 1,874,894,690
(a) GNMA I 30 Year, SF, 6.00%, 10/15/23 - 10/15/34 ................................ 1,032,950,594 1,062,883,788
GNMA I 30 Year, SF, 6.50%, 5/15/23 - 12/15/34 ................................. 801,093,565 836,712,746
GNMA I 30 Year, SF, 6.75%, 3/15/26 - 4/15/26 .................................. 208,783 238,503
GNMA I 30 Year, SF, 7.00%, 10/15/09 - 9/15/32 ................................. 582,034,918 605,799,116
GNMA I 30 Year, SF, 7.25%, 11/15/25 - 1/15/26 ................................. 1,476,912 1,564,946
GNMA I 30 Year, SF, 7.50%, 12/15/05 - 8/15/32 ................................. 143,591,450 155,162,846
GNMA I 30 Year, SF, 7.70%, 12/15/20 - 1/15/22 ................................. 1,166,259 1,276,571
GNMA I 30 Year, SF, 8.00%, 10/15/07 - 9/15/30 ................................. 106,834,166 115,839,257
GNMA I 30 Year, SF, 8.25%, 3/15/17 - 11/15/18 ................................. 33,226 35,101
GNMA I 30 Year, SF, 8.50%, 6/15/16 - 11/15/27 ................................. 21,673,124 23,340,532
GNMA I 30 Year, SF, 9.00%, 11/15/08 - 7/15/23 ................................. 29,025,664 30,940,134
GNMA I 30 Year, SF, 9.50%, 5/15/09 - 1/15/23 .................................. 18,050,088 19,039,195
GNMA I 30 Year, SF, 10.00%, 4/15/12 - 3/15/25 ................................. 20,629,534 22,510,653
GNMA I 30 Year, SF, 10.50%, 12/15/09 - 10/15/21 ............................... 16,295,301 17,645,636
GNMA I 30 Year, SF, 11.00%, 11/15/09 - 5/15/21 ................................ 16,241,556 17,198,846
GNMA I 30 Year, SF, 11.50%, 2/15/13 - 12/15/17 ................................ 3,606,787 3,939,008
GNMA I 30 Year, SF, 12.00%, 5/15/11 - 7/15/18 ................................. 17,418,087 18,938,409
GNMA I 30 Year, SF, 12.50%, 4/15/10 - 8/15/18 ................................. 16,169,404 17,498,400
GNMA I 30 Year, SF, 13.00%, 7/15/10 - 1/15/16 ................................. 18,134,792 19,733,003
GNMA II 30 Year, GP, 8.75%, 3/20/17 - 7/20/17 ................................. 108,818 119,960
GNMA II 30 Year, GP, 11.50%, 8/20/13 .......................................... 21,020 22,497
GNMA II 30 Year, SF, 5.00%, 7/20/33 - 12/20/33 ................................ 746,735,863 754,016,135
(a) GNMA II 30 Year, SF, 5.50%, 1/20/34 - 10/01/34 ................................ 391,085,094 393,696,887
GNMA II 30 Year, SF, 6.00%, 10/20/23 - 9/20/34 ................................ 445,019,207 449,922,143
GNMA II 30 Year, SF, 6.50%, 6/20/24 - 9/20/34 ................................. 298,240,674 303,896,891
GNMA II 30 Year, SF, 7.00%, 2/20/28 - 7/20/33 ................................. 187,937,088 189,939,312
GNMA II 30 Year, SF, 7.50%, 10/20/22 - 4/20/32 ................................ 20,248,780 21,037,658
GNMA II 30 Year, SF, 8.00%, 8/20/16 - 6/20/30 ................................. 9,239,888 9,963,320
GNMA II 30 Year, SF, 8.50%, 4/20/16 - 6/20/25 ................................. 4,162,279 4,556,191
GNMA II 30 Year, SF, 9.00%, 7/20/16 - 11/20/21 ................................ 1,349,535 1,447,150
GNMA II 30 Year, SF, 9.50%, 8/20/17 - 4/20/25 ................................. 1,041,878 1,103,658
GNMA II 30 Year, SF, 10.00%, 1/20/20 - 12/20/20 ............................... 1,667,042 1,797,247
GNMA II 30 Year, SF, 10.50%, 9/20/13 - 3/20/21 ................................ 4,502,008 4,902,433
Annual Report | 99
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) (CONT.)
GNMA II 30 Year, SF, 11.00%, 8/20/13 - 1/20/21 $ 808,244 $ 875,534
GNMA II 30 Year, SF, 11.50%, 9/20/13 - 2/20/18 354,380 382,897
GNMA II 30 Year, SF, 12.00%, 9/20/13 - 2/20/16 710,572 774,989
GNMA II 30 Year, SF, 12.50%, 10/20/13 - 11/20/15 623,124 692,638
GNMA II 30 Year, SF, 13.00%, 10/20/13 - 9/20/15 559,705 623,967
--------------
TOTAL LONG TERM INVESTMENTS (COST $7,638,761,614) 7,789,975,949
--------------
----------------
SHARES
----------------
SHORT TERM INVESTMENT (COST $176,644,842) 2.2%
MONEY FUND
(b) Franklin Institutional Fiduciary Trust Money Market Portfolio 176,644,842 176,644,842
--------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT (COST $7,815,406,456) 99.7% 7,966,620,791
--------------
----------------
PRINCIPAL AMOUNT
----------------
REPURCHASE AGREEMENT (COST $100,075,000) 1.3%
(c) Barclays Capital Inc., 1.625%, 10/01/04 (Maturity Value $100,079,517) $ 100,075,000 100,075,000
--------------
Collateralized by U.S. Treasury Notes, 1.625%, 4/30/05
TOTAL INVESTMENTS (COST $7,915,481,456) 101.0% 8,066,695,791
OTHER ASSETS, LESS LIABILITIES (1.0)% (80,878,671)
--------------
NET ASSETS 100.0% $7,985,817,120
==============
See glossary of terms on page 108.
(a) See Note 1(d) regarding securities purchased on a to-be-announced basis.
(b) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio.
(c) See Note 1(c) regarding repurchase agreements.
100 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS
FRANKLIN UTILITIES FUND
---------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS A 2004 2003 2002 2001 2000
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 8.80 $ 7.96 $ 10.02 $ 10.89 $ 9.58
---------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ...................... .43 .42 .46 .46 .43
Net realized and unrealized gains (losses) .... 1.33 .85 (1.60) (.86) 1.69
---------------------------------------------------------------------------
Total from investment operations ................ 1.76 1.27 (1.14) (.40) 2.12
---------------------------------------------------------------------------
Less distributions from:
Net investment income ......................... (.40) (.43) (.45) (.45) (.45)
Net realized gains ............................ -- -- (.47) (.02) (.36)
---------------------------------------------------------------------------
Total distributions ............................. (.40) (.43) (.92) (.47) (.81)
---------------------------------------------------------------------------
Redemption fees ................................. --(c) -- -- -- --
---------------------------------------------------------------------------
Net asset value, end of year .................... $ 10.16 $ 8.80 $ 7.96 $ 10.02 $ 10.89
===========================================================================
Total return(b) ................................. 20.40% 16.38% (12.49)% (4.03)% 24.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $1,450,832 $1,259,886 $1,090,216 $1,349,027 $1,574,897
Ratios to average net assets:
Expenses ...................................... .80% .83% .80% .79% .83%
Net investment income ......................... 4.49% 5.00% 4.87% 4.26% 4.74%
Portfolio turnover rate ......................... 16.13% 25.81% 30.60% 34.03% 19.86%
(a) Based on average daily 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) Amount is less than $0.001 per share.
Annual Report | See notes to financial statements. | 101
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND (CONTINUED)
------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS B 2004 2003 2002 2001 2000
------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 8.80 $ 7.97 $ 10.02 $ 10.90 $ 9.59
------------------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... .38 .37 .41 .41 .38
Net realized and unrealized gains (losses) ........ 1.33 .85 (1.58) (.87) 1.70
------------------------------------------------------------------
Total from investment operations ................... 1.71 1.22 (1.17) (.46) 2.08
------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (.36) (.39) (.41) (.40) (.41)
Net realized gains ................................ -- -- (.47) (.02) (.36)
------------------------------------------------------------------
Total distributions ................................ (.36) (.39) (.88) (.42) (.77)
------------------------------------------------------------------
Redemption fees .................................... --(c) -- -- -- --
------------------------------------------------------------------
Net asset value, end of year ....................... $ 10.15 $ 8.80 $ 7.97 $ 10.02 $10.90
==================================================================
Total return(b) .................................... 19.71% 15.88% (12.88)% (4.58)% 23.79%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $127,105 $95,321 $32,802 $ 15,212 $8,819
Ratios to average net assets:
Expenses .......................................... 1.30% 1.34% 1.31% 1.30% 1.34%
Net investment income ............................. 3.99% 4.49% 4.44% 3.74% 4.11%
Portfolio turnover rate ............................ 16.13% 25.81% 30.60% 34.03% 19.86%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
102 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND (CONTINUED)
----------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS C 2004 2003 2002 2001 2000
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 8.78 $ 7.95 $ 10.01 $ 10.88 $ 9.57
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............................... .38 .36 .41 .41 .38
Net realized and unrealized gains (losses) ............. 1.33 .86 (1.59) (.87) 1.69
----------------------------------------------------------------------
Total from investment operations ........................ 1.71 1.22 (1.18) (.46) 2.07
----------------------------------------------------------------------
Less distributions from:
Net investment income .................................. (.36) (.39) (.41) (.39) (.40)
Net realized gains ..................................... -- -- (.47) (.02) (.36)
----------------------------------------------------------------------
Total distributions ..................................... (.36) (.39) (.88) (.41) (.76)
----------------------------------------------------------------------
Redemption fees ......................................... --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ............................ $ 10.13 $ 8.78 $ 7.95 $ 10.01 $ 10.88
=======================================================================
Total return(b) ......................................... 19.76% 15.77% (12.90)% (4.50)% 23.65%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $ 283,747 $ 222,030 $ 67,428 $ 44,985 $ 37,837
Ratios to average net assets:
Expenses ............................................... 1.30% 1.34% 1.29% 1.30% 1.34%
Net investment income .................................. 3.99% 4.49% 4.43% 3.76% 4.22%
Portfolio turnover rate ................................. 16.13% 25.81% 30.60% 34.03% 19.86%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
Annual Report | See notes to financial statements. | 103
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND (CONTINUED)
-------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS R 2004 2003 2002(d)
-------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ....................................... $ 8.79 $ 7.96 $ 9.81
-------------------------------------------------
Income from investment operations:
Net investment income(a) ................................................ .39 .37 .32
Net realized and unrealized gains (losses) .............................. 1.34 .86 (1.85)
-------------------------------------------------
Total from investment operations ......................................... 1.73 1.23 (1.53)
-------------------------------------------------
Less distributions from net investment income ............................ (.37) (.40) (.32)
-------------------------------------------------
Redemption fees .......................................................... --(c) -- --
-------------------------------------------------
Net asset value, end of year ............................................. $ 10.15 $ 8.79 $ 7.96
=================================================
Total return(b) .......................................................... 20.02% 15.96% (16.01)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .......................................... $ 1,590 $ 1,142 $ 142
Ratios to average net assets:
Expenses ................................................................ 1.15% 1.19% 1.16%(e)
Net investment income ................................................... 4.14% 4.64% 4.82%(e)
Portfolio turnover rate .................................................. 16.13% 25.81% 30.60%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
(d) For the period January 1, 2002 (effective date) to September 30, 2002.
(e) Annualized.
104 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND (CONTINUED)
----------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS 2004 2003 2002 2001 2000
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 8.84 $ 7.99 $ 10.05 $ 10.92 $ 9.61
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............................... .44 .42 .47 .48 .44
Net realized and unrealized gains (losses) ............. 1.34 .87 (1.60) (.87) 1.69
----------------------------------------------------------------------
Total from investment operations ........................ 1.78 1.29 (1.13) (.39) 2.13
----------------------------------------------------------------------
Less distributions from:
Net investment income .................................. (.42) (.44) (.46) (.46) (.46)
Net realized gains ..................................... -- -- (.47) (.02) (.36)
----------------------------------------------------------------------
Total distributions ..................................... (.42) (.44) (.93) (.48) (.82)
----------------------------------------------------------------------
Redemption fees ......................................... --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ............................ $ 10.20 $ 8.84 $ 7.99 $ 10.05 $ 10.92
======================================================================
Total return(b) ......................................... 20.48% 16.61% (12.32)% (3.89)% 24.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $ 51,586 $ 47,167 $ 15,664 $ 8,829 $ 9,234
Ratios to average net assets:
Expenses ............................................... .65% .69% .66% .65% .69%
Net investment income .................................. 4.64% 5.14% 5.07% 4.39% 4.87%
Portfolio turnover rate ................................. 16.13% 25.81% 30.60% 34.03% 19.86%
(a) Based on average daily shares outstanding.
(b) Total return is not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
Annual Report | See notes to financial statements. | 105
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004
- --------------------------------------------------------------------------------------------------------------------------
FRANKLIN UTILITIES FUND SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 84.2%
(a) Adesa Inc. ..................................................................... 1,250,000 $ 20,537,500
AGL Resources Inc. ............................................................. 500,000 15,385,000
Allete Inc. .................................................................... 416,666 13,541,645
Alliant Energy Corp. ........................................................... 750,000 18,660,000
Ameren Corp. ................................................................... 700,000 32,305,000
American Electric Power Co. Inc. ............................................... 1,700,000 54,332,000
Atmos Energy Corp. ............................................................. 700,000 17,633,000
CenterPoint Energy Inc. ........................................................ 316,300 3,276,868
Central Vermont Public Service Corp. ........................................... 182,800 3,676,108
Cinergy Corp. .................................................................. 1,500,000 59,400,000
Dominion Resources Inc. ........................................................ 900,000 58,725,000
DTE Energy Co. ................................................................. 400,000 16,876,000
Edison International ........................................................... 1,500,000 39,765,000
Energy East Corp. .............................................................. 1,100,000 27,698,000
Entergy Corp. .................................................................. 1,500,000 90,915,000
Equitable Resources Inc. ....................................................... 100,000 5,431,000
Exelon Corp. ................................................................... 2,000,000 73,380,000
FirstEnergy Corp. .............................................................. 1,700,000 69,836,000
FPL Group Inc. ................................................................. 1,250,000 85,400,000
Hawaiian Electric Industries Inc. .............................................. 400,000 10,616,000
KeySpan Corp. .................................................................. 1,000,000 39,200,000
Kinder Morgan Inc. ............................................................. 315,000 19,788,300
National Grid Transco PLC (United Kingdom) ..................................... 5,000,000 42,424,709
Nicor Inc. ..................................................................... 550,000 20,185,000
NiSource Inc. .................................................................. 3,000,000 63,030,000
ONEOK Inc. ..................................................................... 500,000 13,010,000
Pepco Holdings Inc. ............................................................ 1,900,000 37,810,000
(a) PG&E Corp. ..................................................................... 1,000,000 30,400,000
Pinnacle West Capital Corp. .................................................... 600,000 24,900,000
PPL Corp. ...................................................................... 1,400,000 66,052,000
Progress Energy Inc. ........................................................... 1,500,000 63,510,000
Public Service Enterprise Group Inc. ........................................... 550,000 23,430,000
Puget Energy Inc. .............................................................. 1,725,000 39,157,500
SBC Communications Inc. ........................................................ 1,300,000 33,735,000
Scottish & Southern Energy PLC (United Kingdom) ................................ 1,500,000 21,173,848
Scottish Power PLC (United Kingdom) ............................................ 6,000,000 45,935,563
Sempra Energy .................................................................. 850,000 30,761,500
(a) Sierra Pacific Resources Co. ................................................... 1,730,109 15,484,476
Southern Co. ................................................................... 2,100,000 62,958,000
TECO Energy Inc. ............................................................... 200,000 2,706,000
TXU Corp. ...................................................................... 1,150,000 55,108,000
United Utilities PLC (United Kingdom) .......................................... 5,000,000 50,329,794
United Utilities PLC, A (United Kingdom) ....................................... 2,500,000 16,636,919
Vectren Corp. .................................................................. 900,000 22,662,000
Verizon Communications Inc. .................................................... 500,000 19,690,000
Westar Energy Inc. ............................................................. 700,000 14,140,000
Xcel Energy Inc. ............................................................... 1,200,000 20,784,000
--------------
TOTAL COMMON STOCKS (COST $1,236,948,615) ...................................... 1,612,391,730
--------------
106 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------
FRANKLIN UTILITIES FUND SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS 7.8%
Ameren Corp., 9.75%, cvt. pfd ............................................. 800,600 $ 22,216,650
American Electric Power Co. Inc., 9.25%, cvt. pfd ......................... 450,000 20,497,500
Aquila Inc., 6.75%, cvt. pfd .............................................. 468,800 14,345,280
CMS Energy Trust I, 7.75%, cvt. pfd ....................................... 260,000 11,505,000
Dominion Resources Inc., 9.50%, cvt. pfd .................................. 627,000 34,202,850
Duke Energy Corp., 8.00%, cvt. pfd ........................................ 1,500,000 21,810,000
Sierra Pacific Resources Co., 9.00%, cvt. pfd., PIES ...................... 91,100 3,669,508
TXU Corp., 8.75%, cvt. pfd ................................................ 400,000 20,840,000
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $150,080,907) .................... 149,086,788
--------------
----------------
PRINCIPAL AMOUNT
----------------
BONDS 5.8%
CalEnergy Co. Inc., senior note, 8.48%, 9/15/28 ........................... $ 25,000,000 31,815,600
CMS Energy Corp., senior note, 9.875%, 10/15/07 ........................... 8,500,000 9,488,125
Firstenergy Corp., senior note, 7.375%, 11/15/31 .......................... 25,000,000 28,164,925
Northeast Generation Co., senior note, 8.812%, 10/15/26 ................... 7,500,000 8,125,050
Pacific Gas & Electric Co., 6.05%, 3/01/34 ................................ 5,000,000 5,106,610
PPL Capital Funding, 8.375%, 6/15/07 ...................................... 15,000,000 16,678,965
Utilicorp United Inc., senior note, 8.27%, 11/15/21 ....................... 6,100,000 5,917,000
Utilicorp United Inc., senior note, FRN, 9.95%, 2/01/11 ................... 6,000,000 6,630,000
--------------
TOTAL BONDS (COST $96,998,662) ............................................ 111,926,275
--------------
CONVERTIBLE BOND (COST $9,000,000) 1.0%
Sierra Pacific Resources Co., cvt., 144A, 7.25%, 2/14/10 .................. 9,000,000 19,676,250
--------------
TOTAL LONG TERM INVESTMENTS (COST $1,493,028,184) ......................... 1,893,081,043
--------------
----------------
SHARES
----------------
SHORT TERM INVESTMENT (COST $16,978,647) .9%
MONEY FUND
(b) Franklin Institutional Fiduciary Trust Money Market Portfolio ............. 16,978,647 16,978,647
--------------
TOTAL INVESTMENTS (COST $1,510,006,831) 99.7% ............................. 1,910,059,690
OTHER ASSETS, LESS LIABILITIES .3% ........................................ 4,800,578
--------------
NET ASSETS 100.0% ......................................................... $1,914,860,268
==============
See glossary of terms on page 108.
(a) Non-income producing.
(b) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio.
Annual Report | 107
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2004 (CONTINUED)
GLOSSARY OF TERMS
FRN - Floating Rate Notes
GO - General Obligation
GP - Graduated Payment
PIES - Premium Income Equity Securities
PIK - Payment In Kind
PL - Project Loan
SF - Single Family
108 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
September 30, 2004
-------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
-------------------------------------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .................................. $ 523,187,254 $ 1,007,732,240 $20,764,880,046
Cost - Non-controlled affiliated issuers (Note 10) ........... -- -- 46,426,900
Cost - Sweep Money Fund (Note 7) ............................. 32,637,675 4,562,321 176,644,842
=============================================================
Value - Unaffiliated issuers(a) .............................. 702,103,143 2,076,111,596 22,473,713,460
Value - Non-controlled affiliated issuers (Note 10) .......... -- -- 63,945,700
Value - Sweep Money Fund (Note 7) ............................ 32,637,675 4,562,321 176,644,842
Repurchase agreements, at value and cost ...................... 6,326,330 -- 3,479,939,537
Receivables:
Investment securities sold ................................... -- -- 665,702
Capital shares sold .......................................... 1,434,829 1,120,097 169,378,849
Dividends and interest ....................................... 261,285 1,802,296 215,626,493
-------------------------------------------------------------
Total assets ............................................. 742,763,262 2,083,596,310 26,579,914,583
-------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased .............................. -- -- 139,747,307
Capital shares redeemed ...................................... 932,467 3,076,296 29,457,471
Affiliates ................................................... 780,186 2,285,881 24,088,215
Unaffiliated transfer agent fees ............................. 108,239 787,347 1,692,932
Payable upon return of securities loaned ...................... 6,326,330 -- 51,792,738
Other liabilities ............................................. 30,436 67,120 390,537
-------------------------------------------------------------
Total liabilities ........................................ 8,177,658 6,216,644 247,169,200
-------------------------------------------------------------
Net assets, at value .................................... $ 734,585,604 $ 2,077,379,666 $26,332,745,383
=============================================================
Net assets consist of:
Undistributed net investment income (loss) .................... $ -- $ 782,484 $ 52,657,223
Net unrealized appreciation (depreciation) .................... 178,915,889 1,068,379,356 1,726,352,214
Accumulated net realized gain (loss) .......................... (92,458,730) (245,748,485) 73,927,560
Capital shares ................................................ 648,128,445 1,253,966,311 24,479,808,386
-------------------------------------------------------------
Net assets, at value .................................... $ 734,585,604 $ 2,077,379,666 $26,332,745,383
=============================================================
Annual Report | See notes to financial statements. | 109
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
September 30, 2004
-----------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
-----------------------------------------------------
CLASS A:
Net assets, at value .................................................... $ 640,119,541 $ 1,531,871,107 $14,743,190,117
-----------------------------------------------------
Shares outstanding ...................................................... 29,082,358 50,087,260 6,097,530,243
-----------------------------------------------------
Net asset value per share(b) ............................................ $ 22.01 $ 30.58 $ 2.42
-----------------------------------------------------
Maximum offering price per share (net asset value per share / 94.25%,
94.25%, and 95.75%, respectively) ..................................... $ 23.35 $ 32.45 $ 2.53
-----------------------------------------------------
CLASS B:
Net assets, at value .................................................... $ 18,823,957 $ 121,985,567 $ 3,486,879,883
-----------------------------------------------------
Shares outstanding ...................................................... 878,199 4,097,726 1,446,653,787
-----------------------------------------------------
Net asset value and maximum offering price per share(b) ................. $ 21.43 $ 29.77 $ 2.41
-----------------------------------------------------
CLASS B1:
Net assets, at value .................................................... -- -- $ 511,470,684
-----------------------------------------------------
Shares outstanding ...................................................... -- -- 211,486,078
-----------------------------------------------------
Net asset value and maximum offering price per share(b) ................. -- -- $ 2.42
-----------------------------------------------------
CLASS C:
Net assets, at value .................................................... $ 75,642,106 $ 270,130,621 $ 6,616,890,753
-----------------------------------------------------
Shares outstanding ...................................................... 3,566,315 9,153,374 2,722,573,332
-----------------------------------------------------
Net asset value and maximum offering price per share(b) ................. $ 21.21 $ 29.51 $ 2.43
-----------------------------------------------------
CLASS R:
Net assets, at value .................................................... -- $ 20,059,995 $ 73,165,416
-----------------------------------------------------
Shares outstanding ...................................................... -- 660,035 30,504,756
-----------------------------------------------------
Net asset value and maximum offering price per share(b) ................. -- $ 30.39 $ 2.40
-----------------------------------------------------
ADVISOR CLASS:
Net assets, at value .................................................... -- $ 133,332,376 $ 901,148,530
-----------------------------------------------------
Shares outstanding ...................................................... -- 4,352,430 374,240,749
-----------------------------------------------------
Net asset value and maximum offering price per share(b) ................. -- $ 30.63 $ 2.41
-----------------------------------------------------
(a) The Franklin DynaTech Fund and the Franklin Income Fund include $6,054,265
and $49,867,735, respectively of securities loaned. See Note 1(f).
(b) Redemption price is equal to net asset value less any applicable
contingent deferred sales charge and redemption fees retained by the Fund.
110 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
September 30, 2004
------------------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
------------------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .......................................... $ 7,638,761,614 $ 1,493,028,184
Cost - Sweep Money Fund (Note 7) ..................................... 176,644,842 16,978,647
==========================================
Value - Unaffiliated issuers ......................................... 7,789,975,949 1,893,081,043
Value - Sweep Money Fund (Note 7) .................................... 176,644,842 16,978,647
Repurchase agreements, at value and cost .............................. 100,075,000 --
Cash .................................................................. 3,135 --
Receivables:
Investment securities sold ........................................... 3,379,885 167,370
Capital shares sold .................................................. 4,089,276 4,696,623
------------------------------------------
Dividends and interest ............................................... 35,997,880 4,515,798
------------------------------------------
Total assets ..................................................... 8,110,165,967 1,919,439,481
------------------------------------------
Liabilities:
Payables:
Investment securities purchased ...................................... 99,521,641 --
Capital shares redeemed .............................................. 18,021,319 2,739,113
Affiliates ........................................................... 5,858,590 1,504,904
Unaffiliated transfer agent fees ..................................... 699,400 262,667
Other liabilities ..................................................... 247,897 72,529
------------------------------------------
Total liabilities ................................................ 124,348,847 4,579,213
------------------------------------------
Net assets, at value ............................................ $ 7,985,817,120 $ 1,914,860,268
==========================================
Net assets consist of:
Undistributed net investment income ................................... $ 113,851 $ 5,174,244
Net unrealized appreciation (depreciation) ............................ 151,214,335 400,052,859
Accumulated net realized gain (loss) .................................. (412,223,658) (79,699,280)
Capital shares ........................................................ 8,246,712,592 1,589,332,445
------------------------------------------
Net assets, at value ............................................ $ 7,985,817,120 $ 1,914,860,268
==========================================
Annual Report | See notes to financial statements. | 111
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
September 30, 2004
-------------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
-------------------------------------
CLASS A:
Net assets, at value ........................................................... $6,420,380,951 $1,450,832,286
-------------------------------------
Shares outstanding ............................................................. 960,952,823 142,774,689
-------------------------------------
Net asset value per share(a) ................................................... $ 6.68 $ 10.16
-------------------------------------
Maximum offering price per share (net asset value per share / 95.75%) .......... $ 6.98 $ 10.61
-------------------------------------
CLASS B:
Net assets, at value ........................................................... $ 568,275,627 $ 127,104,834
-------------------------------------
Shares outstanding ............................................................. 85,170,711 12,518,103
-------------------------------------
Net asset value and maximum offering price per share(a) ........................ $ 6.67 $ 10.15
-------------------------------------
CLASS C:
Net assets, at value ........................................................... $ 597,450,872 $ 283,746,868
-------------------------------------
Shares outstanding ............................................................. 89,804,096 27,997,355
-------------------------------------
Net asset value and maximum offering price per share(a) ........................ $ 6.65 $ 10.13
-------------------------------------
CLASS R:
Net assets, at value ........................................................... $ 59,431,086 $ 1,589,680
-------------------------------------
Shares outstanding ............................................................. 8,900,912 156,605
-------------------------------------
Net asset value and maximum offering price per share(a) ........................ $ 6.68 $ 10.15
-------------------------------------
ADVISOR CLASS:
Net assets, at value ........................................................... $ 340,278,584 $ 51,586,600
-------------------------------------
Shares outstanding ............................................................. 50,828,541 5,057,333
-------------------------------------
Net asset value and maximum offering price per share(a) ........................ $ 6.69 $ 10.20
-------------------------------------
(a) Redemption price is equal to net asset value less any applicable
contingent deferred sales charge and redemption fees retained by the Fund.
112 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended September 30, 2004
-------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
-------------------------------------------------------
Investment income:
Dividends:
Unaffiliated issuers ................................................. $ 3,744,033 $ 24,332,725 $ 468,211,202
Non-controlled affiliated issuers (Note 10) .......................... -- -- 8,067,578
Sweep Money Fund (Note 7) ............................................ 256,198 162,090 1,331,781
Interest
Unaffiliated issuers ................................................. 103,252 -- 762,340,834
Non-controlled affiliated issuers (Note 10) .......................... -- -- 4,158,707
-------------------------------------------------------
Total investment income .......................................... 4,103,483 24,494,815 1,244,110,102
-------------------------------------------------------
Expenses:
Management fees (Note 3) .............................................. 3,433,798 9,564,865 92,670,752
Distribution fees: (Note 3)
Class A .............................................................. 1,581,932 3,905,255 18,446,943
Class B .............................................................. 156,387 1,202,775 28,672,698
Class B1 ............................................................. -- -- 3,331,449
Class C .............................................................. 761,636 2,818,925 34,605,828
Class R .............................................................. -- 93,695 283,896
Transfer agent fees (Note 3) .......................................... 1,584,788 5,123,536 17,525,027
Custodian fees (Note 4) ............................................... 14,271 41,917 480,023
Reports to shareholders ............................................... 74,851 260,868 801,673
Registration and filing fees .......................................... 61,848 82,800 1,437,573
Professional fees ..................................................... 25,666 57,018 292,004
Directors' fees and expenses .......................................... 3,649 12,384 101,475
Other ................................................................. 39,589 107,412 1,035,035
-------------------------------------------------------
Total expenses ................................................... 7,738,415 23,271,450 199,684,376
Expense reductions (Note 4) ...................................... (48) (26) (15,962)
-------------------------------------------------------
Net expenses .................................................... 7,738,367 23,271,424 199,668,414
-------------------------------------------------------
Net investment income (loss) ................................... (3,634,884) 1,223,391 1,044,441,688
-------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ................................................ (14,029,984) 6,260,859 444,443,460
Non-controlled affiliated issuers (Note 10) ......................... -- -- 6,764,457
Foreign currency transactions ........................................ 905 1,560 (48,622)
-------------------------------------------------------
Net realized gain (loss) ........................................ (14,029,079) 6,262,419 451,159,295
Net change in unrealized appreciation (depreciation) on:
Investments .......................................................... 73,445,772 247,296,583 1,332,504,560
Translation of assets and liabilities denominated in foreign
currencies ......................................................... -- -- (60,701)
-------------------------------------------------------
Net change in unrealized appreciation (depreciation) ............ 73,445,772 247,296,583 1,332,443,859
-------------------------------------------------------
Net realized and unrealized gain (loss) ................................ 59,416,693 253,559,002 1,783,603,154
-------------------------------------------------------
Net increase (decrease) in net assets resulting from operations ........ $ 55,781,809 $ 254,782,393 $ 2,828,044,842
=======================================================
Annual Report | See notes to financial statements. | 113
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended September 30, 2004
---------------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
---------------------------------------
Investment income:
Dividends:
Unaffiliated issuers ............................................................. $ -- $ 84,044,044
Sweep Money Fund (Note 7) ........................................................ 1,253,207 77,557
Interest .......................................................................... 405,476,023 9,785,508
---------------------------------------
Total investment income ...................................................... 406,729,230 93,907,109
---------------------------------------
Expenses:
Management fees (Note 3) .......................................................... 37,759,123 8,294,605
Distribution fees: (Note 3)
Class A .......................................................................... 8,428,112 1,971,182
Class B .......................................................................... 4,012,319 730,490
Class C .......................................................................... 4,504,727 1,688,928
Class R .......................................................................... 281,069 6,456
Transfer agent fees (Note 3) ...................................................... 10,273,782 2,749,277
Custodian fees (Note 4) ........................................................... 180,791 75,623
Reports to shareholders ........................................................... 487,298 145,271
Registration and filing fees ...................................................... 164,372 114,479
Professional fees ................................................................. 151,348 49,612
Directors' fees and expenses ...................................................... 43,702 8,828
Other ............................................................................. 589,907 79,373
---------------------------------------
Total expenses ............................................................... 66,876,550 15,914,124
Expense reductions (Note 4) .................................................. (8,131) --
---------------------------------------
Net expenses ................................................................ 66,868,419 15,914,124
---------------------------------------
Net investment income ...................................................... 339,860,811 77,992,985
---------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ...................................................................... 2,260,202 17,721,559
Foreign currency transactions .................................................... -- 36,934
---------------------------------------
Net realized gain (loss) .................................................... 2,260,202 17,758,493
Net change in unrealized appreciation (depreciation) on investments ............... (71,149,291) 229,110,659
---------------------------------------
Net realized and unrealized gain (loss) ............................................ (68,889,089) 246,869,152
---------------------------------------
Net increase (decrease) in net assets resulting from operations .................... $ 270,971,722 $ 324,862,137
=======================================
114 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended September 30, 2004 and 2003
----------------------------------------------------------------------------
FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND
----------------------------------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ..................... $ (3,634,884) $ (2,654,387) $ 1,223,391 $ 2,903,913
Net realized gain (loss) from investments and
foreign currency transactions ................... (14,029,079) (16,748,652) 6,262,419 (76,197,267)
Net change in unrealized appreciation
(depreciation) on investments ................... 73,445,772 163,452,859 247,296,583 408,465,676
----------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ......................... 55,781,809 144,049,820 254,782,393 335,172,322
Distributions to shareholders from:
Net investment income:
Class A ......................................... -- -- (1,532,029) (2,180,220)
Class R ......................................... -- -- -- (9,229)
Advisor Class ................................... -- -- (173,053) (137,491)
----------------------------------------------------------------------------
Total distributions to shareholders ............... -- -- (1,705,082) (2,326,940)
Capital share transactions: (Note 2)
Class A ......................................... 31,657,014 18,073,256 (98,948,884) (78,190,367)
Class B ......................................... 7,768,447 3,561,921 4,780,418 11,719,589
Class C ......................................... 3,332,636 176,270 (22,857,255) (19,434,571)
Class R ......................................... -- -- 3,224,209 10,272,806
Advisor Class ................................... -- -- 85,716,783 7,755,631
----------------------------------------------------------------------------
Total capital share transactions .................. 42,758,097 21,811,447 (28,084,729) (67,876,912)
Redemption fees ................................... 691 -- 6,295 --
----------------------------------------------------------------------------
Net increase (decrease) in net assets ........ 98,540,597 165,861,267 224,998,877 264,968,470
Net assets:
Beginning of year ................................. 636,045,007 470,183,740 1,852,380,789 1,587,412,319
----------------------------------------------------------------------------
End of year ....................................... $ 734,585,604 $ 636,045,007 $ 2,077,379,666 $ 1,852,380,789
============================================================================
Undistributed net investment income (loss) included
in net assets:
End of year ...................................... $ -- $ -- $ 782,484 $ 1,248,169
============================================================================
Annual Report | See notes to financial statements. | 115
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
for the years ended September 30, 2004 and 2003
--------------------------------------------------------------------------------
FRANKLIN
FRANKLIN INCOME FUND U.S. GOVERNMENT SECURITIES FUND
--------------------------------------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ........................ $ 1,044,441,688 $ 735,666,186 $ 339,860,811 $ 385,176,849
Net realized gain (loss) from investments
and foreign currency transactions ........... 451,159,295 202,185,840 2,260,202 6,367,829
Net change in unrealized appreciation
(depreciation) on investments and
translation of assets and liabilities
denominated in foreign currencies ........... 1,332,443,859 1,869,977,309 (71,149,291) (153,242,028)
--------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ............... 2,828,044,842 2,807,829,335 270,971,722 238,302,650
Distributions to shareholders from:
Net investment income:
Class A ..................................... (798,349,922) (550,726,670) (364,404,705) (401,413,321)
Class B ..................................... (162,621,962) (73,650,217) (29,981,316) (31,260,885)
Class B1 .................................... (31,263,684) (32,370,788) -- --
Class C ..................................... (316,248,066) (160,832,793) (33,894,559) (41,821,072)
Class R ..................................... (3,457,009) (1,320,431) (2,762,490) (1,798,291)
Advisor Class ............................... (28,902,829) (3,320,435) (17,122,309) (16,202,012)
Net realized gains:
Class A ..................................... (55,088,598) (16,155,200) -- --
Class B ..................................... (12,569,134) (1,716,893) -- --
Class B1 .................................... (2,636,974) (1,110,777) -- --
Class C ..................................... (22,715,500) (4,321,592) -- --
Class R ..................................... (216,288) (24,873) -- --
Advisor Class ............................... (943,590) (84,254) -- --
--------------------------------------------------------------------------------
Total distributions to shareholders ........... (1,435,013,556) (845,634,923) (448,165,379) (492,495,581)
Capital share transactions: (Note 2)
Class A ..................................... 4,294,278,432 2,373,919,438 (724,886,754) (238,733,117)
Class B ..................................... 1,219,777,152 1,325,085,686 (97,262,940) 137,202,182
Class B1 .................................... (19,911,534) (12,337,854) -- --
Class C ..................................... 2,514,302,239 1,810,160,408 (201,426,271) 36,448,805
Class R ..................................... 33,450,501 26,634,343 6,444,739 41,088,097
Advisor Class ............................... 783,062,664 56,697,121 37,919,958 117,998,378
--------------------------------------------------------------------------------
Total capital share transactions .............. 8,824,959,454 5,580,159,142 (979,211,268) 94,004,345
Redemption fees ............................... 13,225 -- 3,103 --
--------------------------------------------------------------------------------
Net increase (decrease) in net
assets .................................. 10,218,003,965 7,542,353,554 (1,156,401,822) (160,188,586)
Net assets:
Beginning of year ............................. 16,114,741,418 8,572,387,864 9,142,218,942 9,302,407,528
--------------------------------------------------------------------------------
End of year ................................... $ 26,332,745,383 $ 16,114,741,418 $ 7,985,817,120 $ 9,142,218,942
================================================================================
Undistributed net investment income
included in net assets:
End of year .................................. $ 52,657,223 $ 22,817,197 $ 113,851 $ 24,101,769
================================================================================
116 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
for the years ended September 30, 2004 and 2003
---------------------------------------
FRANKLIN UTILITIES FUND
---------------------------------------
2004 2003
---------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................................................. $ 77,992,985 $ 68,169,572
Net realized gain (loss) from investments and foreign currency transactions ........ 17,758,493 (62,932,757)
Net change in unrealized appreciation (depreciation) on investments ............... 229,110,659 202,226,165
---------------------------------------
Net increase (decrease) in net assets resulting from operations ............... 324,862,137 207,462,980
Distributions to shareholders from:
Net investment income:
Class A ......................................................................... (57,157,619) (59,182,929)
Class B ......................................................................... (4,239,501) (3,015,514)
Class C ......................................................................... (9,771,431) (6,581,692)
Class R ......................................................................... (51,170) (38,182)
Advisor Class .................................................................... (2,242,376) (1,485,977)
---------------------------------------
Total distributions to shareholders ................................................ (73,462,097) (70,304,294)
Capital share transactions: (Note 2)
Class A ......................................................................... (1,380,506) 55,030,287
Class B ......................................................................... 15,905,081 56,154,888
Class C ......................................................................... 25,559,310 141,064,759
Class R ......................................................................... 262,939 924,022
Advisor Class .................................................................... (2,434,692) 28,963,358
---------------------------------------
Total capital share transactions ................................................... 37,912,132 282,137,314
Redemption fees .................................................................... 1,274 --
---------------------------------------
Net increase (decrease) in net assets ......................................... 289,313,446 419,296,000
Net assets:
Beginning of year .................................................................. 1,625,546,822 1,206,250,822
---------------------------------------
End of year ........................................................................ $ 1,914,860,268 $ 1,625,546,822
=======================================
Undistributed net investment income included in net assets:
End of year ....................................................................... $ 5,174,244 $ 774,241
=======================================
Annual Report | See notes to financial statements. | 117
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 are valued at the
last reported sales price. Securities listed or traded on NASDAQ are valued at
their official closing price. Debt securities, other 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 by independent pricing services or
recognized dealers in such securities. Mortgage-backed securities may be valued
by the pricing services using matrix pricing which considers such factors as
prices of comparable quality issues, prepayment speeds, yield, maturity, coupon,
and credit ratings. Foreign securities are valued at the close of trading of the
foreign exchange or the NYSE, whichever is earlier. If events occur that
materially affect the values of securities after the prices or foreign exchange
rates are determined, but prior to 4:00 p.m. Eastern time or the close of
trading on the NYSE, whichever is earlier, or if market quotations are deemed
not readily available or reliable, the securities (including restricted
securities) will be valued at fair value. Investments in open-end mutual funds
are valued at the closing net asset value. Repurchase agreements are valued at
cost. All security valuation procedures are approved 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, income and expense 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.
118 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. REPURCHASE AGREEMENTS
The 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. The 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, 2004, all repurchase
agreements held by the Funds had been entered into on that date.
D. SECURITIES PURCHASED ON A TBA BASIS
The Franklin U.S. Government Securities Fund may purchase securities on a
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 Franklin U.S. Government Securities Fund will
generally purchase these securities with the intention of holding the
securities, it may sell the securities before the settlement date. Sufficient
assets have been segregated for these securities.
E. FOREIGN CURRENCY CONTRACTS
When the Funds purchase or sell foreign securities they may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate on a specified date. Realized and unrealized gains and losses are included
in the Statements of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts.
F. SECURITIES LENDING
The Franklin DynaTech Fund, the Franklin Income Fund, and the Franklin Utilities
Fund loan securities to certain brokers through a securities lending agent 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. The funds received interest income of $37,202, $569,298, and
$1,077,293, 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 and the securities loaned. The securities
lending agent has agreed to indemnify the funds in the case of default of any
securities borrower.
Annual Report | 119
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Sub Chapter M of the Internal
Revenue Code and to distribute substantially all of its taxable income. Fund
distributions to shareholders are determined on an income tax basis and may
differ from net investment income and realized gains for financial reporting
purposes.
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.
Certain income from foreign securities is recorded as soon as information is
available. 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. REDEMPTION FEES
Effective June 1, 2004, redemptions and exchanges of the Funds' shares held five
trading days or less may be subject to the Funds' redemption fee, which is 2% of
the amount redeemed. Such fees are retained by the Funds and accounted for as
additional paid-in capital as noted in the Statements of Changes in Net Assets.
K. GUARANTEES AND INDEMNIFICATIONS
Under the Company's organizational documents, its officers and trustees are
indemnified against certain liability arising out of the performance of their
duties to the Company. Additionally, in the normal course of business, the
Company enters into contracts with service providers that contain general
indemnification clauses. The Company's maximum exposure under these arrangements
is unknown as this would involve future claims that may be made against the
Company that have not yet occurred. However, based on experience, the Company
expects the risk of loss to be remote.
120 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
At September 30, 2004, 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, 2004
Shares sold ............................... 9,014,383 $ 201,786,839 6,395,481 $ 193,229,695
Shares issued in reinvestment
of distributions .......................... -- -- 47,975 1,399,446
Shares redeemed ........................... (7,626,280) (170,129,825) (9,722,445) (293,578,025)
-------------------------------------------------------------------------
Net increase (decrease) ................... 1,388,103 $ 31,657,014 (3,278,989) $ (98,948,884)
=========================================================================
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)
=========================================================================
CLASS B SHARES:
Year ended September 30, 2004
Shares sold ............................... 463,560 $ 10,173,910 731,263 $ 21,476,065
Shares redeemed ........................... (111,081) (2,405,463) (565,876) (16,695,647)
-------------------------------------------------------------------------
Net increase (decrease) ................... 352,479 $ 7,768,447 165,387 $ 4,780,418
=========================================================================
Annual Report | 121
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
-------------------------------------------------------------------
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
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
===================================================================
CLASS C SHARES:
Year ended September 30, 2004
Shares sold ........................................... 917,943 $ 19,881,973 1,305,882 $ 38,083,688
Shares redeemed ....................................... (769,633) (16,549,337) (2,084,652) (60,940,943)
-------------------------------------------------------------------
Net increase (decrease) ............................... 148,310 $ 3,332,636 (778,770) $(22,857,255)
===================================================================
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)
===================================================================
CLASS R SHARES:
Year ended September 30, 2004
Shares sold ................................................................................... 254,043 $ 7,608,802
Shares redeemed ............................................................................... ------------------------------
Net increase (decrease) ....................................................................... 108,171 $ 3,224,209
==============================
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
==============================
ADVISOR CLASS SHARES:
Year ended September 30, 2004
Shares sold ................................................................................... 2,942,725 $ 89,412,412
Shares issued in reinvestment of distributions ................................................ 5,745 167,517
Shares redeemed ............................................................................... (127,887) (3,863,146)
------------------------------
Net increase (decrease) ....................................................................... 2,820,583 $ 85,716,783
==============================
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
==============================
122 | 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, 2004
Shares sold ........................... 2,247,241,860 $ 5,316,264,931 86,401,010 $ 578,723,039
Shares issued in reinvestment
of distributions ...................... 226,682,607 533,294,345 33,946,772 226,702,288
Shares redeemed ....................... (658,551,288) (1,555,280,844) (228,919,042) (1,530,312,081)
------------------------------------------------------------------------------------
Net increase (decrease) ............... 1,815,373,179 $ 4,294,278,432 (108,571,260) $ (724,886,754)
====================================================================================
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)
====================================================================================
CLASS B SHARES:
Year ended September 30, 2004
Shares sold ........................... 580,969,805 $ 1,367,704,171 8,827,015 $ 59,118,085
Shares issued in reinvestment
of distributions ...................... 46,346,237 108,838,135 3,121,214 20,832,270
Shares redeemed ....................... (109,027,856) (256,765,154) (26,551,545) (177,213,295)
------------------------------------------------------------------------------------
Net increase (decrease) ............... 518,288,186 $ 1,219,777,152 (14,603,316) $ (97,262,940)
====================================================================================
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
====================================================================================
CLASS B1 SHARES:
Year ended September 30, 2004
Shares sold ........................... 6,809,085 $ 16,060,956
Shares issued in reinvestment
of distributions ...................... 8,043,400 18,919,939
Shares redeemed ....................... (23,231,386) (54,892,429)
--------------------------------------
Net increase (decrease) ............... (8,378,901) $ (19,911,534)
======================================
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)
======================================
Annual Report | 123
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, 2004
Shares sold ........................... 1,255,981,744 $ 2,984,372,367 14,861,247 $ 99,281,128
Shares issued in reinvestment
of distributions .................... 91,955,343 217,651,704 3,312,543 22,050,949
Shares redeemed ....................... (289,468,688) (687,721,832) (48,451,915) (322,758,348)
-----------------------------------------------------------------------------------
Net increase (decrease) ............... 1,058,468,399 $ 2,514,302,239 (30,278,125) $ (201,426,271)
===================================================================================
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
===================================================================================
CLASS R SHARES:
Year ended September 30, 2004
Shares sold ........................... 19,381,084 $ 45,663,790 3,748,305 $ 25,113,231
Shares issued in reinvestment
of distributions .................... 1,500,196 3,505,433 411,848 2,748,659
Shares redeemed ....................... (6,682,743) (15,718,722) (3,195,508) (21,417,151)
-----------------------------------------------------------------------------------
Net increase (decrease) ............... 14,198,537 $ 33,450,501 964,645 $ 6,444,739
===================================================================================
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
===================================================================================
ADVISOR CLASS SHARES:
Year ended September 30, 2004
Shares sold ........................... 335,191,629 $ 790,679,833 10,246,929 $ 68,640,458
Shares issued in reinvestment
of distributions .................... 11,426,569 26,885,121 2,127,795 14,230,250
Shares redeemed ....................... (14,744,719) (34,502,290) (6,731,932) (44,950,750)
-----------------------------------------------------------------------------------
Net increase (decrease) ................ 331,873,479 $ 783,062,664 5,642,792 $ 37,919,958
===================================================================================
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
===================================================================================
124 | 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, 2004
Shares sold .............................................................. 18,406,095 $ 176,356,055
Shares issued in reinvestment of distributions ........................... 4,465,126 42,773,250
Shares redeemed .......................................................... (23,203,973) (220,509,811)
-------------------------------------
Net increase (decrease) .................................................. (332,752) $ (1,380,506)
=====================================
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
=====================================
CLASS B SHARES:
Year ended September 30, 2004
Shares sold .............................................................. 3,179,780 $ 30,167,433
Shares issued in reinvestment of distributions ........................... 230,148 2,206,595
Shares redeemed .......................................................... (1,725,148) (16,468,947)
-------------------------------------
Net increase (decrease) .................................................. 1,684,780 $ 15,905,081
=====================================
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
=====================================
CLASS C SHARES:
Year ended September 30, 2004
Shares sold .............................................................. 9,181,623 $ 87,063,153
Shares issued in reinvestment of distributions ........................... 515,325 4,924,301
Shares redeemed .......................................................... (6,976,972) (66,428,144)
-------------------------------------
Net increase (decrease) .................................................. 2,719,976 $ 25,559,310
=====================================
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
=====================================
CLASS R SHARES:
Year ended September 30, 2004
Shares sold .............................................................. 91,198 $ 872,504
Shares issued in reinvestment of distributions ........................... 5,281 50,695
Shares redeemed .......................................................... (69,748) (660,260)
-------------------------------------
Net increase (decrease) .................................................. 26,731 $ 262,939
=====================================
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
=====================================
Annual Report | 125
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, 2004
Shares sold ........................................................... 3,628,361 $ 34,881,431
Shares issued in reinvestment of distributions ........................ 159,863 1,540,703
Shares redeemed ....................................................... (4,069,192) (38,856,826)
-----------------------------------
Net increase (decrease) ............................................... (280,968) $ (2,434,692)
===================================
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
===================================
3. TRANSACTIONS WITH AFFILIATES
Certain officers and directors of the Funds are also officers and/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
A. MANAGEMENT FEES
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 month-end net assets of the Funds as follows:
- --------------------------------------------------------------------------------
Annualized Fee Rate 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
.380% Over $17.5 billion, up to and including $20.0 billion
.360% In excess of $20 billion
B. ADMINISTRATIVE FEES
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 of the Funds, and is not an
additional expense of the Funds.
126 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES
The Funds reimburse Distributors for costs incurred in marketing the Funds'
shares under a Rule 12b-1 plan 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%
Under the Class A distribution plan, costs exceeding the maximum for the current
plan year cannot be reimbursed in subsequent periods.
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Funds of the following commission transactions
related to the sale of the Funds' shares for the year:
--------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
--------------------------------------------
Sales charges received .............................................. $174,864 $462,440 $16,419,737
Contingent deferred sales charges retained .......................... $ 40,133 $255,642 $ 6,227,247
-----------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
-----------------------------
Sales charges received ............................................................. $ 853,545 $272,848
Contingent deferred sales charges retained ......................................... $2,015,412 $253,057
E. TRANSFER AGENT FEES
The Funds paid transfer agent fees as noted in the Statements of Operations of
which the following amounts were paid to Investor Services:
-------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
-------------------------------------------
Transfer agent fees ................................................. $1,253,620 $3,825,943 $10,997,341
Annual Report | 127
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
E. TRANSFER AGENT FEES (CONTINUED)
------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
------------------------------
Transfer agent fees ................................................. $7,446,628 $1,852,018
Included in professional fees are legal fees of $42,354 that were paid to a law
firm in which a partner is an officer of the Funds.
4. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an arrangement with their custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Funds' custodian expenses. During the year ended September 30, 2004, the
custodian fees were reduced as noted in the Statements of Operations.
5. INCOME TAXES
At September 30, 2004, the following 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
2012 ............................................................... 21,838,085 39,052,129
------------------------------
$78,105,024 $245,748,485
==============================
-------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
-------------------------------
Capital loss carryovers expiring in:
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 .............................................................. 33,556,845 54,600,730
2012 .............................................................. 129,102,166 7,780,480
-------------------------------
$339,079,149 $ 62,381,210
===============================
128 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
On September 30, 2004, the Franklin U.S. Government Securities Fund had expired
capital loss carryovers of $57,539,178, which were reclassified to paid-in
capital.
At September 30, 2004, the Franklin DynaTech Fund and the Franklin U.S.
Government Securities Fund had deferred capital losses occurring subsequent to
October 31, 2003 of $13,880,328 and $73,144,508, respectively. For tax purposes,
such losses will be reflected in the year ending September 30, 2005.
At September 30, 2004, the Franklin Income Fund had deferred currency losses
occurring subsequent to October 31, 2003 of $16,670,944. For tax purposes, such
losses will be reflected in the year ending September 30, 2005.
The tax character of distributions paid during the years ended September 30,
2004 and 2003, was as follows:
----------------------------------------------------------------------
FRANKLIN GROWTH FUND FRANKLIN INCOME FUND
----------------------------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------------------------
Distributions paid from:
Ordinary income ....................... $ 1,705,082 $ 2,326,940 $1,340,843,472 $822,221,334
Long term capital gain ................ -- -- 94,170,084 23,413,589
----------------------------------------------------------------------
$ 1,705,082 $ 2,326,940 $1,435,013,556 $845,634,923
======================================================================
----------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT
SECURITIES FUND FRANKLIN UTILITIES FUND
----------------------------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------------------------
Distributions paid from
ordinary income ....................... $448,165,379 $ 492,495,581 $ 73,462,097 $ 70,304,294
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions,
defaulted securities, paydown losses, excise taxes and bond premiums and
discounts.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions, wash
sales, paydown losses and bond premiums and discounts.
Annual Report | 129
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
At September 30, 2004, the cost of investments, net unrealized appreciation
(depreciation), undistributed ordinary income and undistributed long term
capital gains for income tax purposes were as follows:
-----------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
-----------------------------------------------------------
Cost of investments ................................... $ 562,624,637 $ 1,012,294,561 $ 24,501,910,748
===========================================================
Unrealized appreciation ............................... $ 222,822,069 $ 1,110,705,662 $ 2,549,306,911
Unrealized depreciation ............................... (44,379,558) (42,326,306) (856,974,120)
-----------------------------------------------------------
Net unrealized appreciation (depreciation) ............ $ 178,442,511 $ 1,068,379,356 $ 1,692,332,791
===========================================================
Undistributed ordinary income ......................... $ -- $ 782,484 $ 109,897,960
Undistributed long term capital gains ................. -- -- 96,273,525
-----------------------------------------------------------
Distributable earnings ................................ $ -- $ 782,484 $ 206,171,485
===========================================================
--------------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
--------------------------------------
Cost of investments ..................................................... $ 7,915,481,455 $ 1,529,660,022
======================================
Unrealized appreciation ................................................. $ 168,905,056 $ 416,545,206
Unrealized depreciation ................................................. (17,690,721) (36,145,538)
--------------------------------------
Net unrealized appreciation (depreciation) .............................. $ 151,214,335 $ 380,399,668
======================================
Undistributed ordinary income-distributable earnings .................... $ 113,851 $ 8,017,897
======================================
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term securities) for the
year ended September 30, 2004, were as follows:
----------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
----------------------------------------------------------
Purchases ............................................. $ 165,880,859 $ 31,928,505 $12,423,982,774
Sales ................................................. $ 102,434,597 $ 41,483,585 $ 5,837,368,304
-------------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
-------------------------------------
Purchases ............................................................... $ 3,457,450,388 $ 334,823,798
Sales ................................................................... $ 4,502,722,795 $ 284,310,915
130 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENTS IN 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.
8. CREDIT RISK AND DEFAULTED SECURITIES
The Franklin Income Fund has 28.8% 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 fund held defaulted securities and/or other securities for which the income
has been deemed uncollectible. At September 30, 2004, the value of these
securities was $114,999,500, representing 0.4% of the fund's net assets. The
fund discontinues accruing income on securities for which income has been deemed
uncollectible and provides an estimate for losses on interest receivable. For
information as to specific securities, see the accompanying Statement of
Investments.
9. RESTRICTED SECURITIES
At September 30, 2004, investments in securities included issues that are
restricted and 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, 2004, the
Franklin Income Fund held an investment in restricted and illiquid securities
that was valued under approved methods by the Directors, as follows:
- -------------------------------------------------------------------------------------------------------
ACQUISITION
PRINCIPAL AMOUNT ISSUER DATE COST VALUE
- -------------------------------------------------------------------------------------------------------
$11,075,373 Consoltex Group Inc., PIK, 10.00%,
7/18/10 ................................. 2/11/02 $49,893,991 $570,493
Annual Report | 131
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. HOLDINGS 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, 2004, were as shown below.
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES HELD SHARES HELD
AT BEGINNING GROSS GROSS AT END
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR
- ----------------------------------------------------------------------------------------------------------------------
Mission Resources Corp. .................................... -- 3,330,000 -- 3,330,000
Mission Resources Corp., senior sub.
note, C, 10.875%, 4/01/07 ................................ 47,000,000 -- 47,000,000 --
Mission Resources Corp., senior note,
9.875%, 4/01/11 .......................................... -- 40,000,000 -- 40,000,000
TECO Energy Inc. ........................................... 11,879,500 -- 2,879,500 9,000,000
TECO Energy Inc., ACES,
9.50% cvt. pfd ........................................... 831,000 -- 831,000 --
- ---------------------------------------------------------------------------------------------------------------------
VALUE REALIZED
AT END INVESTMENT GAIN
NAME OF ISSUER OF YEAR INCOME (LOSS)
- ---------------------------------------------------------------------------------------------------------------------
Mission Resources Corp. ....................................... $20,945,700 $ -- $ --
Mission Resources Corp., senior sub.
note, C, 10.875%, 4/01/07 ................................... -- 2,271,485 3,271,404
Mission Resources Corp., senior note,
9.875%, 4/01/11 ............................................. 43,000,000 1,887,222 --
TECO Energy Inc. .............................................. (a) 7,410,000 9,354,264
TECO Energy Inc., ACES,
9.50% cvt. pfd .............................................. -- 657,578 (5,861,211)
---------------------------------------------
TOTAL AFFILIATED SECURITIES (.24% OF NET ASSETS) ........... $63,945,700 $ 12,226,285 $ 6,764,457
=============================================
(a) As of September 30, 2004, no longer an affiliate.
11. REGULATORY MATTERS
MASSACHUSETTS ADMINISTRATIVE PROCEEDING
On September 20, 2004, Franklin Resources, Inc. (Franklin Resources, Inc. and
its subsidiaries are referred to collectively as the "Company") announced that
an agreement has been reached by two of its subsidiaries, Franklin Advisers,
Inc. ("Franklin Advisers") and Franklin Templeton Alternative Strategies, Inc.
("FTAS"), with the Securities Division of the Office of the Secretary of the
Commonwealth of Massachusetts (the "State of Massachusetts") related to an
administrative complaint filed on February 4, 2004. The administrative complaint
addressed one instance of market timing that was also a subject of the August 2,
2004 settlement that Franklin Advisers reached with the SEC, as described below.
Under the terms of the settlement consent order issued by the State of
Massachusetts, Franklin Advisers and FTAS have consented to the entry of a
cease-and-desist order and agreed to pay a $5 million administrative fine to the
State of Massachusetts. The consent order has multiple sections, including
"Statements of Fact" and "Violations of Massachusetts Securities Laws." The
Company admitted the "Statements of Fact." The Company did not admit or deny the
"Violations of the Massachusetts Securities Laws." While Franklin Advisers and
FTAS did not admit or deny engaging in any wrongdoing, the Company believes that
it is in its best interest and the interests of its funds' shareholders to
settle this issue now and move forward.
On October 25, 2004, the State of Massachusetts filed an administrative
complaint against Franklin Resources, Inc. ("FRI") alleging a violation of the
Massachusetts Uniform Securities law (the "Act") in connection with having filed
on September 20, 2004, an allegedly false and
132 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. REGULATORY MATTERS (CONTINUED)
MASSACHUSETTS ADMINISTRATIVE PROCEEDING (CONTINUED)
misleading report on Form 8-K with the SEC. The Massachusetts administrative
complaint seeks an order calling for FRI to cease and desist from further
violations of the Act and to pay an administrative fine in an amount to be
determined.
FRI's SEC filing of September 20, 2004 described the settlement consent order
with the State of Massachusetts and reported while "Franklin Advisers and FTAS
did not admit or deny engaging in any wrongdoing, the Company believes that it
is in the best interest of the Company and its funds' shareholders to settle
this issue now and move forward." The October 25, 2004 State of Massachusetts
administrative complaint alleges that this description of the settlement consent
order was materially false and misleading under Massachusetts law. FRI's
management disagrees with the allegation made in this administrative complaint
and continues to believe that the description of the terms of the settlement
consent order issued by the State of Massachusetts is neither false nor
misleading.
U.S. SECURITIES AND EXCHANGE COMMISSION (SEC) SETTLEMENT
On August 2, 2004, the Company announced that an agreement has been reached by
Franklin Advisers with the SEC that resolves the issues resulting from the SEC's
investigation of market timing activity and the SEC issued an "Order instituting
administrative and cease-and-desist proceedings pursuant to sections 203(e) and
203(k) of the Investment Advisers Act of 1940 and sections 9(b) and 9(f) of the
Investment Company Act of 1940, making findings and imposing remedial sanctions
and a cease-and-desist order" (the "Order"). The SEC's Order concerns the
activities of a limited number of third parties that ended in 2000 and those
that are the subject of the Massachusetts administrative complaint described
above.
Under the terms of the SEC's Order, pursuant to which Franklin Advisers neither
admits nor denies any wrongdoing, Franklin Advisers has agreed to pay $50
million, of which $20 million is a civil penalty, to be distributed to
shareholders of certain funds in accordance with a plan to be developed by an
Independent Distribution Consultant. At this time, it is unclear which funds
will receive distributions or which shareholders of any particular fund will
receive distributions. The SEC Order also requires Franklin Advisers to, among
other things, enhance and periodically review compliance policies and
procedures.
OTHER GOVERNMENTAL INVESTIGATIONS
As part of ongoing investigations by the SEC, the U.S. Attorney for the Northern
District of California, the New York Attorney General, the California Attorney
General, the U.S. Attorney for the District of Massachusetts, the Florida
Department of Financial Services and the Commissioner of Securities, the West
Virginia Attorney General, the Vermont Department of Banking, Insurance,
Securities, and Health Care Administration and the National Association of
Securities Dealers, relating to certain practices in the mutual fund industry,
including late trading, market timing and payments to securities dealers who
sell fund shares, the Company
Annual Report | 133
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. REGULATORY MATTERS (CONTINUED)
OTHER GOVERNMENTAL INVESTIGATIONS (CONTINUED)
and its subsidiaries, as well as certain current or former executives and
employees of the Company, have received requests for information and/or
subpoenas to testify or produce documents. The Company and its current employees
have been providing documents and information in response to these requests and
subpoenas. In addition, the Company has responded to requests for similar kinds
of information from regulatory authorities in some of the foreign countries
where the Company conducts its global asset management business.
The staff of the SEC has also informed the Company that it is considering
recommending a civil action or proceeding against Franklin Advisers and Franklin
Templeton Distributors, Inc. ("FTDI") concerning payments to securities dealers
who sell fund shares (commonly referred to as "revenue sharing"). The staff of
the California Attorney General's Office ("CAGO") also has advised the Company
that the California Attorney General is authorized to bring a civil action
against the Company and FTDI arising from the same events. Even though the
Company currently believes that the charges the SEC staff and CAGO staff are
contemplating are unwarranted, it also believes that it is in the best interest
of the Company's and funds' shareholders to resolve these issues voluntarily, to
the extent the Company can reasonably do so. The Company continues to have
discussions towards resolving these governmental investigations.
OTHER LEGAL PROCEEDINGS
The Funds, in addition to other entities within Franklin Templeton Investments,
including the Company and certain of its subsidiaries, other funds, and current
and former officers, employees, and directors have been named in multiple
lawsuits in different federal courts in Nevada, California, Illinois, New York
and Florida, alleging violations of various federal securities laws and seeking,
among other things, monetary damages and costs. Specifically, the lawsuits claim
breach of duty with respect to alleged arrangements to permit market timing
and/or late trading activity, or breach of duty with respect to the valuation of
the portfolio securities of certain funds managed by Company subsidiaries,
resulting in alleged market timing activity. The majority of these lawsuits
duplicate, in whole or in part, the allegations asserted in the Massachusetts
administrative complaint described above. The lawsuits are styled as class
actions or derivative actions on behalf of either the named funds or the
Company.
Various subsidiaries of the Company have also been named in multiple lawsuits
filed in state courts in Illinois alleging breach of duty with respect to
valuation of the portfolio securities of certain funds managed by such
subsidiaries.
134 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. REGULATORY MATTERS (CONTINUED)
OTHER LEGAL PROCEEDINGS (CONTINUED)
In addition, the Company and certain of its subsidiaries, as well as certain
current and former officers, employees, and directors have been named in
multiple lawsuits alleging violations of various securities laws and pendent
state law claims relating to the disclosure of directed brokerage payments
and/or payment of allegedly excessive advisory, commission, and distribution
fees. These lawsuits are styled as class actions and derivative actions brought
on behalf of certain funds.
The Company's management strongly believes that the claims made in each of these
lawsuits are without merit and intends to vigorously defend against them.
The Company cannot predict with certainty the eventual outcome of the foregoing
governmental investigations or class actions or other lawsuits. If the Company
finds that it bears responsibility for any unlawful or inappropriate conduct
that caused losses to the Funds, it is committed to making the Funds or their
shareholders whole, as appropriate.
Annual Report | 135
FRANKLIN CUSTODIAN FUNDS, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 the Franklin Custodian Funds, Inc.
(hereafter referred to as the "Funds") at September 30, 2004, 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 the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits 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, 2004, by
correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
November 12, 2004
136 | Annual Report
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 $112,926,440 as a capital gain dividend for the
fiscal year ended September 30, 2004.
Under Section 854(b)(2) of the Code, the Franklin Growth Fund, the Franklin
Income Fund and the Franklin Utilities Fund hereby designate up to a maximum of
$24,488,315, $311,491,446 and $66,635,057, respectively, as qualified dividends
for purposes of the maximum rate under Section 1(h)(11) of the Code for the
fiscal year ended September 30, 2004.
In January 2005, shareholders will receive Form 1099-DIV which will include
their share of qualified dividends distributed during the calendar year 2004.
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 following 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, 2004.
----------------------------------
FRANKLIN FRANKLIN FRANKLIN
GROWTH INCOME UTILITIES
FUND FUND FUND
----------------------------------
100.00% 21.01% 74.75%
Annual Report | 137
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 (72) Director Since 1976 140 Director, Bar-S Foods (meat
One Franklin Parkway packing 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 (72) Director Since 1982 141 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 (52) Director Since 1998 96 Director, Amerada Hess
One Franklin Parkway Corporation (exploration and
San Mateo, CA 94403-1906 refining of oil and gas); 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).
- ------------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (76) Director Since 1992 140 Director, White Mountains
One Franklin Parkway Insurance Group, Ltd. (holding
San Mateo, CA 94403-1906 company); Martek Biosciences
Corporation; MedImmune, Inc.
(biotechnology); and
Overstock.com (Internet
services); and FORMERLY,
Director, MCI Communication
Corporation (subsequently
known as MCI WorldCom, Inc.
and WorldCom, Inc.)
(communications services)
(1988-2002) and Spacehab, Inc.
(aerospace services)
(1994-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
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).
- ------------------------------------------------------------------------------------------------------------------------------------
138 | Annual Report
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 (71) Director, Director since 140 None
One Franklin Parkway President 1969, President
San Mateo, CA 94403-1906 and 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, 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. (64) Director and Since 1983 123 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.
- ------------------------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS (59) 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.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (52) Chief Compliance Since July 2004 Not Applicable None
One Franklin Parkway Officer
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Director, Global Compliance, Franklin Resources, Inc.,
and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
LAURA FERGERSON (42) Treasurer Since July 2004 Not Applicable None
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 34 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and
Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton
Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 139
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
MARTIN L. FLANAGAN (44) Vice President Since 1995 Not Applicable None
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Co-President and Chief Executive Officer, 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 (57) Senior Vice Since 2002 Not Applicable None
500 East Broward Blvd. President
Suite 2100 and Chief
Fort Lauderdale, FL 33394-3091 Executive
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 (57) 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 (56) 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 Alternative Strategies, Inc., 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 of 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).
- ------------------------------------------------------------------------------------------------------------------------------------
140 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
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 (67) Vice President Since 2002 Not Applicable Director, FTI Banque, Arch
600 Fifth Avenue -AML Compliance Chemicals, Inc. and Lingnan
Rockefeller Center 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 48 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
MURRAY L. SIMPSON (67) 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).
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (52) Chief Financial Since May 2004 Not Applicable None
500 East Broward Blvd. Officer and
Suite 2100 Chief Accounting
Fort Lauderdale, FL 33394-3091 Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Senior Vice President, Franklin Templeton Services,
LLC; and FORMERLY, Managing Director, RSM McGladrey, Inc.; and Partner, McGladrey & Pullen, LLP.
- ------------------------------------------------------------------------------------------------------------------------------------
* 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 to be 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' advisers 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.
Annual Report | 141
FRANKLIN CUSTODIAN FUNDS, INC.
SHAREHOLDER INFORMATION
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. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the Securities and Exchange Commission's
website at sec.gov and reflect the 12-month period beginning July 1, 2003, and
ending June 30, 2004.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
142 | Annual Report
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LITERATURE REQUEST
TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT 1-800/DIAL BEN(R)
(1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD CAREFULLY
CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE
INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY
READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE,
WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE
DEPARTMENTS. 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
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 Cap Growth Fund II(1)
Franklin Small-Mid Cap Growth Fund
VALUE
Franklin Balance Sheet
Investment Fund(2)
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(2)
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund(3)
Mutual Shares Fund
BLEND
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund(4)
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 Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio
Allocation Fund
Franklin Templeton Founding Funds
Allocation Fund
Franklin Templeton Perspectives
Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
INCOME
Franklin Adjustable U.S. Government Securities Fund(5)
Franklin's AGE High Income Fund
Franklin Federal Money Fund(5), (6)
Franklin Floating Rate Daily Access Fund
Franklin Floating Rate Trust(3)
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund(5), (7)
Franklin Money Fund(5), (6)
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund(5)
Templeton Global Bond Fund
TAX-FREE INCOME(8)
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(9)
Tax-Exempt Money Fund(5), (6)
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term
Tax-Free Income Fund
Federal Intermediate-Term
Tax-Free Income Fund
New York Intermediate-Term
Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California(10)
Colorado
Connecticut
Florida(10)
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(9)
Michigan(9)
Minnesota(9)
Missouri
New Jersey
New York(10)
North Carolina
Ohio(9)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance
Products Trust(11)
(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 and select retirement
plans.
(3) 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.
(4) Upon reaching approximately $350 million in assets, the fund intends to
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) Although the fund seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the fund.
(7) Formerly Franklin Short-Intermediate U.S. Government Securities Fund.
Effective 9/1/04, the fund's name changed; its investment goal and
strategy remained the same.
(8) For investors subject to the alternative minimum tax, a small portion of
fund 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.
09/04 Not part of the annual report
[LOGO](R)
FRANKLIN(R) TEMPLETON(R) One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
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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
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
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 A2004 11/04
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 11(A), the Registrant is attaching as an exhibit a copy of
its code of ethics that applies to its principal executive officers and
principal 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.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the principal
accountant in connection with statutory and regulatory filings or engagements
were $282,505 for the fiscal year ended September 30, 2004 and $222,504 for the
fiscal year ended September 30, 2003.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of Item 4.
The aggregate fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the investment adviser that provides ongoing services to the registrant that are
reasonably related to the performance of the audit of the their financial
statements were $48,619 for the fiscal year ended September 30, 2004 and $3,619
for the fiscal year ended September 30, 2003. The services for which these fees
were paid included attestation services.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant not reported in
paragraphs (a)-(c) of Item 4 were $14,811 for the fiscal year ended September
30, 2004 and $0 for the fiscal year ended September 30, 2003. The services for
which these fees were paid included review of materials provided to the fund
Board in connection with the investment management contract renewal process.
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant not reported
in paragraphs (a)-(c) of Item 4 were $85,189 for the fiscal year ended September
30, 2004 and $12,000 for the fiscal year ended September 30, 2003. The services
for which these fees were paid included review of materials provided to the fund
Board in connection with the investment management contract renewal process and
a review of an ICI transfer agent survey.
(e) (1) The registrant's audit committee is directly responsible for approving
the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to the
Fund by the auditors;
(iii)pre-approval of all non-audit related services to be provided to the
registrant by the auditors to the registrant's investment adviser or to any
entity that controls, is controlled by or is under common control with the
registrant's investment adviser and that provides ongoing services to the
registrant where the non-audit services relate directly to the operations or
financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a designated
member or members of the committee; provided the policies and procedures are
detailed as to the particular service and the committee is informed of each
service and such policies and procedures do not include delegation of audit
committee responsibilities, as contemplated under the Securities Exchange Act of
1934, to management; subject, in the case of (ii) through (iv), to any waivers,
exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs
(b)-(d) of Item 4 were pre-approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services
rendered by the principal accountant to the registrant and the registrant's
investment adviser and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant were $148,619 for the fiscal year ended September 30, 2004 and
$15,619 for the fiscal year ended September 30, 2003.
(h) No disclosures are required by this Item 4(h)
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A
ITEM 6. SCHEDULE OF INVESTMENTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT
INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have
been no changes to the procedures by which shareholders may recommend nominees
to the Registrant's Board of Trustees that would require disclosure herein.
ITEM 10. 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 11. EXHIBITS.
(A) Code of Ethics
(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
Galen G. Vetter, 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
Galen G. Vetter, 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 November 29, 2004
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 November 29, 2004
By /s/Galen G. Vetter
Chief Financial Officer
Date November 29, 2004