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)
CRAIG S. TYLE, 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: 9/30
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Date of reporting period: 9/30/05
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ITEM 1. REPORTS TO STOCKHOLDERS.
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SEPTEMBER 30, 2005
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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
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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(R)
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
offices in over 25 countries, Templeton
offers investors a truly global perspective.
MUTUAL SERIES. Founded in 1949, Mutual
Series is dedicated to a unique style of
value investing, searching aggressively for
opportunity among what it believes are
undervalued stocks, as well as arbitrage
situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work independently
and adhere to different investment approaches,
Franklin, Templeton and Mutual Series funds
typically have distinct portfolios. That's why our
funds can be used to build truly diversified
allocation plans 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, accurate and personal service
that has 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 ................................................... 4
Franklin Growth Fund ..................................................... 13
Franklin Income Fund ..................................................... 24
Franklin U.S. Government
Securities Fund .......................................................... 39
Franklin Utilities Fund .................................................. 52
Financial Highlights and
Statements of Investments ................................................ 63
Financial Statements ..................................................... 110
Notes to
Financial Statements ..................................................... 119
Report of Independent
Registered Public
Accounting Firm .......................................................... 137
Tax Designation .......................................................... 138
Board Members and Officers ............................................... 139
Shareholder Information .................................................. 144
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ANNUAL REPORT
FRANKLIN DYNATECH FUND
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin DynaTech Fund seeks capital
appreciation by investing substantially in the equity securities of companies
emphasizing scientific or technological development or that are in fast-growing
industries.
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PERFORMANCE DATA 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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We are pleased to bring you Franklin DynaTech Fund's annual report for the
fiscal year ended September 30, 2005.
PERFORMANCE OVERVIEW
Franklin DynaTech Fund - Class A posted a +13.49% cumulative total return for
the 12-month period under review. For the same period, the Fund slightly
outperformed its narrow benchmark, the NASDAQ 100 Index, which had a price-only
return of +13.37%, and outperformed the broad Standard & Poor's 500 Composite
Index (S&P 500), which posted a +12.25% cumulative total return.(1) You can find
the Fund's long-term performance data in the Performance Summary beginning on
page 8.
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended September 30, 2005, a maturing domestic economic
expansion was driven by perceived staying power across most industries, sectors
and regions. Gross domestic product (GDP) rose during the period, benefiting
primarily from personal consumption and greater business investment. Demand for
imported goods and materials fueled a widening trade gap. The U.S. dollar
rallied in 2005 driven largely by rising short-term domestic interest rates and
strong economic growth in the U.S. relative to many of its major trading
partners.
(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 66.
4 | Annual Report
Oil prices increased substantially during the period amid concerns about
potential long-term supply limitations in the face of expected strong global
demand growth, especially from China and India. Despite rising commodity prices,
inflation remained relatively contained for the 12 months ended September 30,
2005, as measured by the 2.0% rise for the core Consumer Price Index (CPI).(2)
With controlling inflation at the forefront of its agenda, the Federal Reserve
Board raised the federal funds target rate from 1.75% to 3.75%, and said it
would respond to changes in economic prospects as needed to fulfill its
obligation to maintain price stability. Compared with the rise in short-term
interest rates, long-term interest rates remained relatively stable, supporting
overall robust housing and commercial real estate activity, which contributed to
economic growth.
Many businesses enjoyed their widest profit margins on record, propelled largely
by productivity gains. The labor market firmed as employment increased and the
unemployment rate dropped from 5.4% to 5.1% during the reporting period.(2)
Personal income rose, and hiring rebounded in many industries, bolstered by
healthy business spending and solid business confidence. However, late in the
period consumer sentiment fell amid concerns about rising energy costs.
In this environment, the blue chip stocks of the Dow Jones Industrial Average
posted a one-year total return of +7.23%, while the broader S&P 500 and
technology-heavy NASDAQ Composite Index returned +12.25% and +14.19%.(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. Core CPI excludes food and energy
costs.
(3) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. See footnote 1 for a
description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market. The index is market value weighted and includes more than
3,000 companies.
PORTFOLIO BREAKDOWN
Franklin DynaTech Fund
Based on Total Net Assets
as of 9/30/05
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
Semiconductors 11.3%
Biotechnology 10.8%
Medical Specialties 9.8%
Packaged Software 9.0%
Internet Software & Services 6.2%
Managed Health Care 4.7%
Telecommunications Equipment 4.5%
Computer Processing Hardware 3.9%
Electronic Production Equipment 3.6%
Electronic Equipment & Instruments 3.6%
Data Processing Services 2.8%
Air Freight & Couriers 2.7%
Major Pharmaceuticals 2.4%
Oilfield Services & Equipment 2.3%
Recreational Products 2.0%
Other 20.0%
Short-Term Investments & Other Net Assets 0.4%
Annual Report | 5
TOP 10 HOLDINGS
Franklin DynaTech Fund
9/30/05
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COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
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Intel Corp. 3.9%
SEMICONDUCTORS
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Genentech Inc. 3.5%
BIOTECHNOLOGY
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Microsoft Corp. 3.4%
PACKAGED SOFTWARE
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Amgen Inc. 3.3%
BIOTECHNOLOGY
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Google Inc., A 3.1%
INTERNET SOFTWARE & SERVICES
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UnitedHealth Group Inc. 3.1%
MANAGED HEALTH CARE
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Yahoo! Inc. 2.8%
INTERNET SOFTWARE & SERVICES
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Alcon Inc. (Switzerland) 2.7%
MEDICAL SPECIALTIES
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Motorola Inc. 2.1%
TELECOMMUNICATIONS EQUIPMENT
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Linear Technology Corp. 2.1%
SEMICONDUCTORS
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MANAGER'S DISCUSSION
During the year under review, several Fund holdings generated notable returns
and contributed to Fund performance. In particular, Google surged 144% due to
the strong performance of Internet advertising. The Internet has gained
popularity as an effective medium for advertisers to promote their products.
Google also benefited from their efforts to expand internationally during the
year. Genentech, a biotechnology company, appreciated 61% during the reporting
period. The stock benefited from significantly positive clinical outcomes on two
drugs, Avastin and Herceptin, which help increase cancer patients' life
expectancies. UnitedHealth Group, an owner and manager of a variety of health
care plans and services, gained by further consolidating the health insurance
industry. The stock rose 52% as the company was able to effect greater
efficiency with Internet and other self-help technologies.
Several stocks had negative returns and hurt Fund performance during the
reporting period. The online auction provider eBay dropped 10%, suffering from
decelerated growth, particularly within their U.S. division. Pfizer, a major
producer of pharmaceuticals and hospital products, declined 16% as concerns over
its Cox-II inhibitors (Celebrex and Bextra) surfaced and, separately, reports
linked Viagra to blindness. Pfizer also faced patent challenges to its
blockbuster drug Lipitor. International Game Technology (IGT), a casino game
system designer and manufacturer, performed poorly and was down 24% during the
year under review. The underperformance was partly due to the end of the most
recent slot machine replacement cycle and delayed gaming legislation in
California, Florida and Pennsylvania.
6 | Annual Report
Thank you for your continued participation in 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, CPA
Matthew J. Moberg, CPA
[PHOTO OMITTED] /s/ Robert R. Dean, CFA
Robert R. Dean, CFA
Portfolio Management Team
Franklin DynaTech Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF SEPTEMBER 30, 2005, 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 | 7
PERFORMANCE SUMMARY AS OF 9/30/05
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 reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE INFORMATION
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CLASS A (SYMBOL: FKDNX) CHANGE 9/30/05 9/30/04
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Net Asset Value (NAV) +$ 2.97 $ 24.98 $ 22.01
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CLASS B (SYMBOL: FDNBX) CHANGE 9/30/05 9/30/04
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Net Asset Value (NAV) +$ 2.72 $ 24.15 $ 21.43
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CLASS C (SYMBOL: FDYNX) CHANGE 9/30/05 9/30/04
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Net Asset Value (NAV) +$ 2.69 $ 23.90 $ 21.21
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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) +13.49% -9.24% +135.76%
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Average Annual Total Return(2) +6.98% -3.07% +8.31%
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Value of $10,000 Investment(3) $ 10,698 $ 8,555 $ 22,220
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CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00)
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Cumulative Total Return(1) +12.69% -12.63% -11.35%
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Average Annual Total Return(2) +8.69% -3.04% -2.27%
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Value of $10,000 Investment(3) $ 10,869 $ 8,568 $ 8,779
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CLASS C 1-YEAR 5-YEAR INCEPTION (9/16/96)
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Cumulative Total Return(1) +12.68% -12.55% +99.63%
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Average Annual Total Return(2) +11.68% -2.65% +7.95%
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Value of $10,000 Investment(3) $ 11,168 $ 8,745 $ 19,963
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PERFORMANCE DATA 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.
8 | 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 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 9/30/05
- ----------------------------------------------
1-Year +6.98%
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5-Year -3.07%
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10-Year +8.31%
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CLASS A (10/1/95-9/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN DYNATECH S&P 500 NASDAQ 100
DATE FUND - CLASS A INDEX(4) INDEX(4)
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9/30/1995 $ 9,425 $ 10,000 $ 10,000
10/31/1995 $ 9,609 $ 9,964 $ 10,234
11/30/1995 $ 9,476 $ 10,401 $ 10,148
12/31/1995 $ 9,218 $ 10,602 $ 9,849
1/31/1996 $ 9,225 $ 10,962 $ 10,115
2/29/1996 $ 9,551 $ 11,064 $ 10,645
3/31/1996 $ 9,362 $ 11,170 $ 10,421
4/30/1996 $ 10,127 $ 11,335 $ 11,396
5/31/1996 $ 10,491 $ 11,627 $ 11,834
6/30/1996 $ 10,158 $ 11,671 $ 11,576
7/31/1996 $ 9,551 $ 11,156 $ 10,870
8/31/1996 $ 9,900 $ 11,391 $ 11,342
9/30/1996 $ 10,635 $ 12,032 $ 12,606
10/31/1996 $ 10,832 $ 12,364 $ 12,853
11/30/1996 $ 11,871 $ 13,297 $ 14,255
12/31/1996 $ 11,872 $ 13,034 $ 14,038
1/31/1997 $ 12,754 $ 13,848 $ 15,751
2/28/1997 $ 12,036 $ 13,957 $ 14,536
3/31/1997 $ 11,731 $ 13,384 $ 13,623
4/30/1997 $ 12,254 $ 14,183 $ 14,951
5/31/1997 $ 12,941 $ 15,045 $ 16,388
6/30/1997 $ 13,058 $ 15,719 $ 16,362
7/31/1997 $ 14,331 $ 16,969 $ 18,921
8/31/1997 $ 14,073 $ 16,019 $ 18,359
9/30/1997 $ 14,424 $ 16,896 $ 18,752
10/31/1997 $ 13,714 $ 16,332 $ 17,427
11/30/1997 $ 13,862 $ 17,088 $ 17,955
12/31/1997 $ 13,608 $ 17,381 $ 16,934
1/31/1998 $ 14,075 $ 17,573 $ 18,307
2/28/1998 $ 14,700 $ 18,840 $ 20,410
3/31/1998 $ 14,766 $ 19,804 $ 20,863
4/30/1998 $ 15,050 $ 20,003 $ 21,332
5/31/1998 $ 14,516 $ 19,660 $ 20,374
6/30/1998 $ 15,225 $ 20,458 $ 22,857
7/31/1998 $ 15,300 $ 20,240 $ 23,540
8/31/1998 $ 13,900 $ 17,317 $ 19,490
9/30/1998 $ 14,866 $ 18,426 $ 22,997
10/31/1998 $ 15,275 $ 19,924 $ 23,937
11/30/1998 $ 16,216 $ 21,131 $ 26,628
12/31/1998 $ 17,329 $ 22,348 $ 31,380
1/31/1999 $ 18,678 $ 23,282 $ 36,357
2/28/1999 $ 17,818 $ 22,558 $ 32,906
3/31/1999 $ 18,400 $ 23,461 $ 36,002
4/30/1999 $ 18,451 $ 24,369 $ 36,514
5/31/1999 $ 18,147 $ 23,795 $ 35,716
6/30/1999 $ 19,075 $ 25,114 $ 39,256
7/31/1999 $ 19,058 $ 24,331 $ 38,814
8/31/1999 $ 19,590 $ 24,211 $ 40,967
9/30/1999 $ 19,497 $ 23,548 $ 41,155
10/31/1999 $ 20,290 $ 25,037 $ 45,078
11/30/1999 $ 21,488 $ 25,546 $ 50,706
12/31/1999 $ 23,772 $ 27,050 $ 63,373
1/31/2000 $ 24,012 $ 25,691 $ 61,018
2/29/2000 $ 26,127 $ 25,205 $ 72,929
3/31/2000 $ 26,392 $ 27,669 $ 75,166
4/30/2000 $ 24,962 $ 26,837 $ 64,490
5/31/2000 $ 23,764 $ 26,288 $ 56,814
6/30/2000 $ 25,228 $ 26,936 $ 64,329
7/31/2000 $ 24,783 $ 26,515 $ 61,690
8/31/2000 $ 26,580 $ 28,161 $ 69,693
9/30/2000 $ 24,483 $ 26,675 $ 61,028
10/31/2000 $ 23,858 $ 26,562 $ 56,100
11/30/2000 $ 21,316 $ 24,469 $ 42,841
12/31/2000 $ 20,863 $ 24,589 $ 40,024
1/31/2001 $ 21,915 $ 25,461 $ 44,319
2/28/2001 $ 19,269 $ 23,141 $ 32,616
3/31/2001 $ 18,138 $ 21,676 $ 26,889
4/30/2001 $ 19,321 $ 23,359 $ 31,708
5/31/2001 $ 19,023 $ 23,516 $ 30,763
6/30/2001 $ 18,883 $ 22,944 $ 31,325
7/31/2001 $ 18,287 $ 22,718 $ 28,776
8/31/2001 $ 17,542 $ 21,297 $ 25,120
9/30/2001 $ 16,438 $ 19,577 $ 19,969
10/31/2001 $ 17,192 $ 19,951 $ 23,326
11/30/2001 $ 18,261 $ 21,481 $ 27,279
12/31/2001 $ 18,128 $ 21,669 $ 26,954
1/31/2002 $ 17,986 $ 21,353 $ 26,495
2/28/2002 $ 17,141 $ 20,941 $ 23,231
3/31/2002 $ 17,665 $ 21,729 $ 24,831
4/30/2002 $ 16,714 $ 20,412 $ 21,827
5/31/2002 $ 16,500 $ 20,262 $ 20,653
6/30/2002 $ 15,477 $ 18,819 $ 17,970
7/31/2002 $ 14,677 $ 17,353 $ 16,444
8/31/2002 $ 14,614 $ 17,466 $ 16,107
9/30/2002 $ 13,671 $ 15,570 $ 14,229
10/31/2002 $ 14,828 $ 16,939 $ 16,913
11/30/2002 $ 15,744 $ 17,935 $ 19,076
12/31/2002 $ 14,525 $ 16,882 $ 16,824
1/31/2003 $ 14,365 $ 16,441 $ 16,802
2/28/2003 $ 14,508 $ 16,193 $ 17,258
3/31/2003 $ 14,632 $ 16,349 $ 17,411
4/30/2003 $ 15,602 $ 17,696 $ 18,904
5/31/2003 $ 16,758 $ 18,628 $ 20,474
6/30/2003 $ 17,043 $ 18,866 $ 20,539
7/31/2003 $ 17,656 $ 19,199 $ 21,825
8/31/2003 $ 18,306 $ 19,572 $ 22,923
9/30/2003 $ 17,941 $ 19,365 $ 22,282
10/31/2003 $ 19,169 $ 20,460 $ 24,208
11/30/2003 $ 19,524 $ 20,640 $ 24,343
12/31/2003 $ 20,138 $ 21,721 $ 25,089
1/31/2004 $ 20,574 $ 22,120 $ 25,519
2/29/2004 $ 20,352 $ 22,427 $ 25,131
3/31/2004 $ 20,236 $ 22,089 $ 24,585
4/30/2004 $ 19,898 $ 21,743 $ 23,952
5/31/2004 $ 20,707 $ 22,041 $ 25,060
6/30/2004 $ 20,939 $ 22,469 $ 25,922
7/31/2004 $ 19,204 $ 21,726 $ 23,935
8/31/2004 $ 18,857 $ 21,813 $ 23,393
9/30/2004 $ 19,578 $ 22,049 $ 24,146
10/31/2004 $ 19,996 $ 22,386 $ 25,411
11/30/2004 $ 20,894 $ 23,291 $ 26,860
12/31/2004 $ 21,686 $ 24,083 $ 27,708
1/31/2005 $ 20,396 $ 23,496 $ 25,973
2/28/2005 $ 20,663 $ 23,991 $ 25,826
3/31/2005 $ 20,209 $ 23,566 $ 25,339
4/30/2005 $ 19,853 $ 23,120 $ 24,284
5/31/2005 $ 21,232 $ 23,855 $ 26,366
6/30/2005 $ 21,019 $ 23,889 $ 25,527
7/31/2005 $ 22,095 $ 24,777 $ 27,435
8/31/2005 $ 22,255 $ 24,551 $ 27,034
9/30/2005 $ 22,220 $ 24,750 $ 27,375
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS B 9/30/05
- ----------------------------------------------
1-Year +8.69%
- ----------------------------------------------
5-Year -3.04%
- ----------------------------------------------
Since Inception (2/1/00) -2.27%
- ----------------------------------------------
CLASS B (2/1/00-9/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN DYNATECH S&P 500 NASDAQ 100
DATE FUND - CLASS B INDEX(4) INDEX(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 $ 7,867 $ 8,582 $ 3,957
10/31/2004 $ 8,028 $ 8,713 $ 4,164
11/30/2004 $ 8,388 $ 9,066 $ 4,402
12/31/2004 $ 8,696 $ 9,374 $ 4,541
1/31/2005 $ 8,179 $ 9,146 $ 4,257
2/28/2005 $ 8,278 $ 9,338 $ 4,232
3/31/2005 $ 8,091 $ 9,173 $ 4,153
4/30/2005 $ 7,944 $ 8,999 $ 3,980
5/31/2005 $ 8,491 $ 9,285 $ 4,321
6/30/2005 $ 8,399 $ 9,298 $ 4,183
7/31/2005 $ 8,825 $ 9,644 $ 4,496
8/31/2005 $ 8,880 $ 9,556 $ 4,430
9/30/2005 $ 8,779 $ 9,634 $ 4,486
Annual Report | 9
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS C 9/30/05
- ----------------------------------------------
1-Year +11.68%
- ----------------------------------------------
5-Year -2.65%
- ----------------------------------------------
Since Inception (9/16/96) +7.95%
- ----------------------------------------------
CLASS C (9/16/96-9/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN DYNATECH S&P 500 NASDAQ 100
DATE FUND - CLASS C INDEX(4) INDEX(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
10/31/2004 $ 18,084 $ 19,093 $ 21,206
11/30/2004 $ 18,886 $ 19,866 $ 22,415
12/31/2004 $ 19,579 $ 20,541 $ 23,123
1/31/2005 $ 18,418 $ 20,041 $ 21,675
2/28/2005 $ 18,644 $ 20,462 $ 21,553
3/31/2005 $ 18,218 $ 20,100 $ 21,146
4/30/2005 $ 17,883 $ 19,719 $ 20,266
5/31/2005 $ 19,120 $ 20,346 $ 22,003
6/30/2005 $ 18,911 $ 20,375 $ 21,303
7/31/2005 $ 19,871 $ 21,133 $ 22,895
8/31/2005 $ 19,997 $ 20,940 $ 22,561
9/30/2005 $ 19,963 $ 21,109 $ 22,845
ENDNOTES
SPECIAL RISKS ARE ASSOCIATED WITH INVESTING IN COMPANIES EMPHASIZING SCIENTIFIC
OR TECHNOLOGICAL ADVANCEMENT. THE TECHNOLOGY SECTOR HAS BEEN AMONG THE MARKET'S
MOST VOLATILE SECTORS. 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.
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 3/31/05 VALUE 9/30/05 PERIOD* 3/31/05-9/30/05
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,099.50 $5.42
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.90 $5.22
- -------------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,095.70 $9.35
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.14 $9.00
- -------------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,095.80 $9.30
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.19 $8.95
- -------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
1.03%; B: 1.78%; and C: 1.77%), multiplied by the average account value
over the period, multiplied by 183/365 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 substantially in equity securities of companies that
are leaders in their industries.
- --------------------------------------------------------------------------------
PERFORMANCE DATA 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 for the fiscal
year ended September 30, 2005.
PERFORMANCE OVERVIEW
For the year under review, Franklin Growth Fund - Class A posted a +14.17%
cumulative total return. The Fund outperformed its benchmark, the Standard &
Poor's 500 Composite Index (S&P 500), which returned +12.25% for the same
period.(1) You can find the Fund's long-term performance data in the
Performance Summary beginning on page 17.
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended September 30, 2005, a maturing domestic economic
expansion was driven by perceived staying power across most industries, sectors
and regions. Gross domestic product (GDP) rose during the period, benefiting
primarily from personal consumption and greater business investment. Demand for
imported goods and materials fueled a widening trade gap. The U.S. dollar
rallied in 2005 driven largely by rising short-term domestic interest rates and
strong economic growth in the U.S. relative to many of its major trading
partners.
Oil prices increased substantially during the period amid concerns about
potential long-term supply limitations in the face of expected strong global
demand growth, especially from China and India. Despite rising commodity prices,
inflation remained relatively contained for the 12 months ended September 30,
2005, as measured by the 2.0% rise for the core Consumer Price Index (CPI). (2)
With controlling inflation at the forefront of its agenda, the Federal Reserve
Board raised the federal funds target rate from 1.75% to 3.75%, and said it
would respond to changes in economic prospects as needed to fulfill its
obligation to maintain price stability. Compared with the rise in short-term
interest
(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. Core CPI excludes food and energy
costs.
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 9/30/05*
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Health Technology** 22.6%
Electronic Technology** 20.7%
Producer Manufacturing 19.5%
Technology Services** 10.0%
Consumer Services 5.0%
Transportation 4.0%
Energy Minerals 3.6%
Distribution Services 3.1%
Consumer Non-Durables 2.8%
Commercial Services 2.6%
Process Industries 1.8%
Industrial Services 1.7%
Health Services 1.3%
Consumer Durables 1.0%
Other 0.6%
* Short-Term Investments & Other Net Assets = -0.3% because total liability
exceeds short-term investments, cash and receivables.
** Significant exposure to a single sector may result in greater volatility
for the Fund than a more broadly diversified portfolio. There are specific
risks to investing in technology company stocks, which can be subject to
abrupt or erratic price movements and have been volatile, especially over
the short term.
rates, long-term interest rates remained relatively stable, supporting overall
robust housing and commercial real estate activity, which contributed to
economic growth.
Many businesses enjoyed their widest profit margins on record, propelled largely
by productivity gains. The labor market firmed as employment increased and the
unemployment rate dropped from 5.4% to 5.1% during the reporting period.(2)
Personal income rose, and hiring rebounded in many industries, bolstered by
healthy business spending and solid business confidence. However, late in the
period consumer sentiment fell amid concerns about rising energy costs.
In this environment, the blue chip stocks of the Dow Jones Industrial Average
posted a one-year total return of +7.23%, while the broader S&P 500 and
technology-heavy NASDAQ Composite Index returned +12.25% and +14.19%.(3)
INVESTMENT STRATEGY
We seek to invest in companies that have qualities such as 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
The Fund was nearly fully invested and broadly diversified, with holdings in 102
companies at period-end. We did not have any particular sector strength or
weakness driving Fund performance this year, but instead saw results based
predominantly on individual company performances.
The Fund's top performers for the 12-month reporting period were Apple Computer
and EnCana. The stock of Apple Computer, one of the biggest contributors to the
Fund's overall performance, rose almost 177% propelled by better-than-expected
sales of the company's innovative music-related products
(3) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. See footnote 1 for a
description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market. The index is market value weighted and includes more than
3,000 companies.
14 | Annual Report
such as the iPod, and supported by steady sales of its core computer hardware
and software products. EnCana, a leading independent North American crude oil
and natural gas exploration and production company, experienced robust sales
growth and higher cash flow due largely to high oil and gas commodity prices.
EnCana's stock price appreciated nearly 154% during the year under review. Other
strong contributors to the Fund's results were offshore drilling contractor
Transocean, specialty engineering manufacturer Teleflex, and Genentech, the
large biotechnology firm which has seen surprisingly strong sales in its colon
and breast cancer drugs.
Even though the Fund posted solid gains and outperformed the S&P 500 this fiscal
year, we had some holdings which held back performance. For example, some of our
airline stocks fared poorly in a difficult environment, especially for large
domestic carriers.(4) The recent spike in petroleum prices appeared to be the
final blow that pushed already-troubled Delta Air Lines and Northwest Airlines
(both sold by period-end) into bankruptcy. It has become difficult to profit
under recent business conditions for these and other full-service domestic
airlines -- hamstrung by high fuel costs and competitive airfares across the
industry -- despite the fact that airlines remain vital to national and
international travel. Also, the point-to-point newcomers (as opposed to
hub-and-spoke) to the air travel industry are undercutting their larger
competitors while focusing on limited aircraft types, shorter routes and
specific destinations.
In addition to airlines, there were several other notable detractors from Fund
performance. For example, computer manufacturer Gateway saw stock price declines
in excess of 45% amid heavy competition in the PC and consumer electronics
market, pharmaceuticals maker Merck & Co. was down more than 13% due to a dip in
revenues following the withdrawal of its Vioxx pain medication, and Eastman
Kodak's share price fell about 23% as it worked toward a major shift away from
its dominance in photographic film and into the emerging and highly competitive
digital imaging technology realm. All three companies suffered disappointing
operating results and were among our poorest-performing investments during the
year under review.
TOP 10 HOLDINGS
Franklin Growth Fund
9/30/05
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Genentech Inc. 3.8%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Amgen Inc. 3.4%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Boeing Co. 3.1%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Johnson & Johnson 2.8%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
General Dynamics Corp. 2.7%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
3M Co. 2.7%
PRODUCER MANUFACTURING
- --------------------------------------------------------------------------------
Northrop Grumman Corp. 2.5%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Yahoo! Inc. 2.4%
TECHNOLOGY SERVICES
- --------------------------------------------------------------------------------
Apple Computer Inc. 2.4%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Pfizer Inc. 2.3%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
(4) In the SOI, airline stocks are part of the transportation sector.
Annual Report | 15
We welcome your questions and comments 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
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF SEPTEMBER 30, 2005, 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.
16 | Annual Report
PERFORMANCE SUMMARY AS OF 9/30/05
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 reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- -----------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FKGRX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$ 4.25 $ 34.83 $ 30.58
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-9/30/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $ 0.0787
- -----------------------------------------------------------------------------------------------
CLASS B (SYMBOL: FKGBX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$ 3.96 $ 33.73 $ 29.77
- -----------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FRGSX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$ 3.92 $ 33.43 $ 29.51
- -----------------------------------------------------------------------------------------------
CLASS R (SYMBOL: FGSRX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$ 4.20 $ 34.59 $ 30.39
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-9/30/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $ 0.0149
- -----------------------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FCGAX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$ 4.26 $ 34.89 $ 30.63
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-9/30/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $ 0.1585
- -----------------------------------------------------------------------------------------------
Annual Report | 17
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) +14.17% +1.19% +113.16%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +7.59% -0.94% +7.23%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,759 $9,538 $20,093
- -----------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +13.30% -2.50% +15.38%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +9.30% -0.88% +2.14%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,930 $9,566 $11,538
- -----------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +13.32% -2.54% +97.69%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +12.32% -0.51% +7.05%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,232 $9,746 $19,769
- -----------------------------------------------------------------------------------------------------
CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +13.87% +57.78% +9.78%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +12.87% +16.42% +2.53%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,287 $15,778 $10,978
- -----------------------------------------------------------------------------------------------------
ADVISOR CLASS(4) 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +14.45% +2.43% +119.44%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +14.45% +0.48% +8.18%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,445 $10,243 $21,944
- -----------------------------------------------------------------------------------------------------
PERFORMANCE DATA 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.
18 | 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 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 9/30/05
- ---------------------------------------
1-Year +7.59%
- ---------------------------------------
5-Year -0.94%
- ---------------------------------------
10-Year +7.23%
- ---------------------------------------
CLASS A (10/1/95 - 9/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN GROWTH
DATE FUND - CLASS A S&P 500 INDEX(5)
------------------------------------------------------------
10/1/1995 $ 9,426 $10,000
10/31/1995 $ 9,480 $ 9,964
11/30/1995 $10,015 $10,401
12/31/1995 $10,098 $10,602
1/31/1996 $10,389 $10,962
2/29/1996 $10,611 $11,064
3/31/1996 $10,651 $11,170
4/30/1996 $10,868 $11,335
5/31/1996 $11,076 $11,627
6/30/1996 $10,997 $11,671
7/31/1996 $10,429 $11,156
8/31/1996 $10,720 $11,391
9/30/1996 $11,283 $12,032
10/31/1996 $11,313 $12,364
11/30/1996 $12,024 $13,297
12/31/1996 $11,782 $13,034
1/31/1997 $12,079 $13,848
2/28/1997 $12,104 $13,957
3/31/1997 $11,802 $13,384
4/30/1997 $12,225 $14,183
5/31/1997 $12,899 $15,045
6/30/1997 $13,140 $15,719
7/31/1997 $13,663 $16,969
8/31/1997 $13,205 $16,019
9/30/1997 $13,623 $16,896
10/31/1997 $13,507 $16,332
11/30/1997 $13,814 $17,088
12/31/1997 $13,974 $17,381
1/31/1998 $14,119 $17,573
2/28/1998 $14,712 $18,840
3/31/1998 $15,032 $19,804
4/30/1998 $15,233 $20,003
5/31/1998 $15,016 $19,660
6/30/1998 $15,300 $20,458
7/31/1998 $15,243 $20,240
8/31/1998 $13,959 $17,317
9/30/1998 $14,743 $18,426
10/31/1998 $15,651 $19,924
11/30/1998 $16,213 $21,131
12/31/1998 $16,563 $22,348
1/31/1999 $16,852 $23,282
2/28/1999 $16,673 $22,558
3/31/1999 $17,126 $23,461
4/30/1999 $17,684 $24,369
5/31/1999 $17,468 $23,795
6/30/1999 $18,201 $25,114
7/31/1999 $17,906 $24,331
8/31/1999 $17,979 $24,211
9/30/1999 $17,490 $23,548
10/31/1999 $17,774 $25,037
11/30/1999 $18,000 $25,546
12/31/1999 $18,581 $27,050
1/31/2000 $18,425 $25,691
2/29/2000 $17,995 $25,205
3/31/2000 $19,560 $27,669
4/30/2000 $19,792 $26,837
5/31/2000 $19,872 $26,288
6/30/2000 $20,152 $26,936
7/31/2000 $19,840 $26,515
8/31/2000 $20,712 $28,161
9/30/2000 $19,856 $26,675
10/31/2000 $20,120 $26,562
11/30/2000 $19,598 $24,469
12/31/2000 $19,980 $24,589
1/31/2001 $20,357 $25,461
2/28/2001 $19,336 $23,141
3/31/2001 $17,904 $21,676
4/30/2001 $19,347 $23,359
5/31/2001 $19,644 $23,516
6/30/2001 $18,743 $22,944
7/31/2001 $18,697 $22,718
8/31/2001 $17,847 $21,297
9/30/2001 $15,862 $19,577
10/31/2001 $16,393 $19,951
11/30/2001 $17,950 $21,481
12/31/2001 $18,088 $21,669
1/31/2002 $17,830 $21,353
2/28/2002 $17,704 $20,941
3/31/2002 $18,318 $21,729
4/30/2002 $17,158 $20,412
5/31/2002 $16,820 $20,262
6/30/2002 $15,551 $18,819
7/31/2002 $14,150 $17,353
8/31/2002 $14,179 $17,466
9/30/2002 $12,635 $15,570
10/31/2002 $13,513 $16,939
11/30/2002 $14,437 $17,935
12/31/2002 $13,684 $16,882
1/31/2003 $13,160 $16,441
2/28/2003 $12,862 $16,193
3/31/2003 $12,862 $16,349
4/30/2003 $13,799 $17,696
5/31/2003 $14,701 $18,628
6/30/2003 $15,138 $18,866
7/31/2003 $15,587 $19,199
8/31/2003 $15,932 $19,572
9/30/2003 $15,449 $19,365
10/31/2003 $16,363 $20,460
11/30/2003 $16,570 $20,640
12/31/2003 $17,519 $21,721
1/31/2004 $17,783 $22,120
2/29/2004 $17,864 $22,427
3/31/2004 $17,450 $22,089
4/30/2004 $17,461 $21,743
5/31/2004 $17,743 $22,041
6/30/2004 $18,468 $22,469
7/31/2004 $17,496 $21,726
8/31/2004 $17,346 $21,813
9/30/2004 $17,599 $22,049
10/31/2004 $17,812 $22,386
11/30/2004 $18,854 $23,291
12/31/2004 $19,498 $24,083
1/31/2005 $18,829 $23,496
2/28/2005 $19,158 $23,991
3/31/2005 $19,135 $23,566
4/30/2005 $18,679 $23,120
5/31/2005 $19,418 $23,855
6/30/2005 $19,204 $23,889
7/31/2005 $20,208 $24,777
8/31/2005 $20,133 $24,551
9/30/2005 $20,093 $24,750
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------
CLASS B 9/30/05
- ---------------------------------------
1-Year +9.30%
- ---------------------------------------
5-Year -0.88%
- ---------------------------------------
Since Inception (1/1/99) +2.14%
- ---------------------------------------
CLASS B (01/01/99 - 09/30/05)
[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 $10,184 $ 9,866
10/31/2004 $10,300 $10,017
11/30/2004 $10,895 $10,422
12/31/2004 $11,258 $10,777
1/31/2005 $10,868 $10,514
2/28/2005 $11,049 $10,735
3/31/2005 $11,032 $10,545
4/30/2005 $10,762 $10,345
5/31/2005 $11,179 $10,674
6/30/2005 $11,049 $10,690
7/31/2005 $11,617 $11,087
8/31/2005 $11,569 $10,986
9/30/2005 $11,538 $11,075
Annual Report | 19
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------
CLASS C 9/30/05
- ----------------------------------------
1-Year +12.32%
- ----------------------------------------
5-Year -0.51%
- ----------------------------------------
10-Year +7.05%
- ----------------------------------------
CLASS C (10/01/95 - 09/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN GROWTH
DATE FUND - CLASS C S&P 500 INDEX(5)
------------------------------------------------------------
10/1/1995 $10,000 $10,000
10/31/1995 $10,047 $ 9,964
11/30/1995 $10,610 $10,401
12/31/1995 $10,691 $10,602
1/31/1996 $10,990 $10,962
2/29/1996 $11,221 $11,064
3/31/1996 $11,258 $11,170
4/30/1996 $11,479 $11,335
5/31/1996 $11,694 $11,627
6/30/1996 $11,605 $11,671
7/31/1996 $10,995 $11,156
8/31/1996 $11,295 $11,391
9/30/1996 $11,883 $12,032
10/31/1996 $11,910 $12,364
11/30/1996 $12,650 $13,297
12/31/1996 $12,386 $13,034
1/31/1997 $12,685 $13,848
2/28/1997 $12,706 $13,957
3/31/1997 $12,381 $13,384
4/30/1997 $12,818 $14,183
5/31/1997 $13,517 $15,045
6/30/1997 $13,757 $15,719
7/31/1997 $14,301 $16,969
8/31/1997 $13,805 $16,019
9/30/1997 $14,237 $16,896
10/31/1997 $14,109 $16,332
11/30/1997 $14,418 $17,088
12/31/1997 $14,576 $17,381
1/31/1998 $14,717 $17,573
2/28/1998 $15,326 $18,840
3/31/1998 $15,647 $19,804
4/30/1998 $15,849 $20,003
5/31/1998 $15,615 $19,660
6/30/1998 $15,898 $20,458
7/31/1998 $15,827 $20,240
8/31/1998 $14,489 $17,317
9/30/1998 $15,288 $18,426
10/31/1998 $16,224 $19,924
11/30/1998 $16,789 $21,131
12/31/1998 $17,146 $22,348
1/31/1999 $17,433 $23,282
2/28/1999 $17,234 $22,558
3/31/1999 $17,687 $23,461
4/30/1999 $18,256 $24,369
5/31/1999 $18,024 $23,795
6/30/1999 $18,769 $25,114
7/31/1999 $18,449 $24,331
8/31/1999 $18,515 $24,211
9/30/1999 $17,996 $23,548
10/31/1999 $18,278 $25,037
11/30/1999 $18,499 $25,546
12/31/1999 $19,089 $27,050
1/31/2000 $18,910 $25,691
2/29/2000 $18,462 $25,205
3/31/2000 $20,053 $27,669
4/30/2000 $20,272 $26,837
5/31/2000 $20,345 $26,288
6/30/2000 $20,620 $26,936
7/31/2000 $20,289 $26,515
8/31/2000 $21,169 $28,161
9/30/2000 $20,283 $26,675
10/31/2000 $20,541 $26,562
11/30/2000 $19,992 $24,469
12/31/2000 $20,371 $24,589
1/31/2001 $20,737 $25,461
2/28/2001 $19,692 $23,141
3/31/2001 $18,217 $21,676
4/30/2001 $19,675 $23,359
5/31/2001 $19,964 $23,516
6/30/2001 $19,037 $22,944
7/31/2001 $18,972 $22,718
8/31/2001 $18,104 $21,297
9/30/2001 $16,080 $19,577
10/31/2001 $16,605 $19,951
11/30/2001 $18,175 $21,481
12/31/2001 $18,303 $21,669
1/31/2002 $18,031 $21,353
2/28/2002 $17,895 $20,941
3/31/2002 $18,498 $21,729
4/30/2002 $17,321 $20,412
5/31/2002 $16,967 $20,262
6/30/2002 $15,678 $18,819
7/31/2002 $14,253 $17,353
8/31/2002 $14,277 $17,466
9/30/2002 $12,716 $15,570
10/31/2002 $13,591 $16,939
11/30/2002 $14,513 $17,935
12/31/2002 $13,745 $16,882
1/31/2003 $13,213 $16,441
2/28/2003 $12,899 $16,193
3/31/2003 $12,893 $16,349
4/30/2003 $13,827 $17,696
5/31/2003 $14,720 $18,628
6/30/2003 $15,146 $18,866
7/31/2003 $15,589 $19,199
8/31/2003 $15,920 $19,572
9/30/2003 $15,430 $19,365
10/31/2003 $16,328 $20,460
11/30/2003 $16,523 $20,640
12/31/2003 $17,463 $21,721
1/31/2004 $17,711 $22,120
2/29/2004 $17,788 $22,427
3/31/2004 $17,363 $22,089
4/30/2004 $17,363 $21,743
5/31/2004 $17,635 $22,041
6/30/2004 $18,344 $22,469
7/31/2004 $17,363 $21,726
8/31/2004 $17,203 $21,813
9/30/2004 $17,445 $22,049
10/31/2004 $17,646 $22,386
11/30/2004 $18,663 $23,291
12/31/2004 $19,290 $24,083
1/31/2005 $18,616 $23,496
2/28/2005 $18,929 $23,991
3/31/2005 $18,900 $23,566
4/30/2005 $18,433 $23,120
5/31/2005 $19,148 $23,855
6/30/2005 $18,929 $23,889
7/31/2005 $19,905 $24,777
8/31/2005 $19,822 $24,551
9/30/2005 $19,769 $24,750
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------
CLASS R 9/30/05
- ----------------------------------------
1-Year +12.87%
- ----------------------------------------
3-Year +16.42%
- ----------------------------------------
Since Inception (1/1/02) +2.53%
- ----------------------------------------
CLASS R (10/01/95 - 09/30/05)
[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 $ 9,760 $ 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 $ 7,794 $ 8,008
8/31/2002 $ 7,806 $ 8,061
9/30/2002 $ 6,958 $ 7,185
10/31/2002 $ 7,436 $ 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 $ 7,072 $ 7,473
3/31/2003 $ 7,072 $ 7,545
4/30/2003 $ 7,586 $ 8,167
5/31/2003 $ 8,081 $ 8,596
6/30/2003 $ 8,318 $ 8,706
7/31/2003 $ 8,563 $ 8,860
8/31/2003 $ 8,750 $ 9,032
9/30/2003 $ 8,483 $ 8,937
10/31/2003 $ 8,985 $ 9,442
11/30/2003 $ 9,095 $ 9,525
12/31/2003 $ 9,612 $10,024
1/31/2004 $ 9,755 $10,208
2/29/2004 $ 9,799 $10,350
3/31/2004 $ 9,572 $10,194
4/30/2004 $ 9,575 $10,034
5/31/2004 $ 9,730 $10,171
6/30/2004 $10,123 $10,369
7/31/2004 $ 9,587 $10,026
8/31/2004 $ 9,504 $10,066
9/30/2004 $ 9,641 $10,175
10/31/2004 $ 9,755 $10,331
11/30/2004 $10,323 $10,749
12/31/2004 $10,674 $11,114
1/31/2005 $10,305 $10,843
2/28/2005 $10,483 $11,071
3/31/2005 $10,468 $10,876
4/30/2005 $10,216 $10,669
5/31/2005 $10,620 $11,009
6/30/2005 $10,499 $11,024
7/31/2005 $11,045 $11,434
8/31/2005 $11,004 $11,330
9/30/2005 $10,978 $11,422
20 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------
ADVISOR CLASS(4) 9/30/05
- ----------------------------------------
1-Year +14.45%
- ----------------------------------------
5-Year +0.48%
- ----------------------------------------
10-Year +8.18%
- ----------------------------------------
ADVISOR CLASS (10/01/95 - 09/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN GROWTH
DATE FUND - ADVISOR CLASS S&P 500 INDEX(5)
--------------------------------------------------------------
10/1/1995 $10,000 $10,000
10/31/1995 $10,057 $ 9,964
11/30/1995 $10,624 $10,401
12/31/1995 $10,712 $10,602
1/31/1996 $11,022 $10,962
2/29/1996 $11,257 $11,064
3/31/1996 $11,299 $11,170
4/30/1996 $11,530 $11,335
5/31/1996 $11,750 $11,627
6/30/1996 $11,666 $11,671
7/31/1996 $11,064 $11,156
8/31/1996 $11,373 $11,391
9/30/1996 $11,970 $12,032
10/31/1996 $12,002 $12,364
11/30/1996 $12,756 $13,297
12/31/1996 $12,500 $13,034
1/31/1997 $12,920 $13,848
2/28/1997 $12,952 $13,957
3/31/1997 $12,636 $13,384
4/30/1997 $13,087 $14,183
5/31/1997 $13,808 $15,045
6/30/1997 $14,066 $15,719
7/31/1997 $14,631 $16,969
8/31/1997 $14,141 $16,019
9/30/1997 $14,594 $16,896
10/31/1997 $14,470 $16,332
11/30/1997 $14,808 $17,088
12/31/1997 $14,979 $17,381
1/31/1998 $15,139 $17,573
2/28/1998 $15,774 $18,840
3/31/1998 $16,123 $19,804
4/30/1998 $16,339 $20,003
5/31/1998 $16,112 $19,660
6/30/1998 $16,416 $20,458
7/31/1998 $16,361 $20,240
8/31/1998 $14,984 $17,317
9/30/1998 $15,830 $18,426
10/31/1998 $16,809 $19,924
11/30/1998 $17,417 $21,131
12/31/1998 $17,797 $22,348
1/31/1999 $18,114 $23,282
2/28/1999 $17,921 $22,558
3/31/1999 $18,408 $23,461
4/30/1999 $19,008 $24,369
5/31/1999 $18,787 $23,795
6/30/1999 $19,579 $25,114
7/31/1999 $19,262 $24,331
8/31/1999 $19,347 $24,211
9/30/1999 $18,821 $23,548
10/31/1999 $19,132 $25,037
11/30/1999 $19,381 $25,546
12/31/1999 $20,012 $27,050
1/31/2000 $19,844 $25,691
2/29/2000 $19,387 $25,205
3/31/2000 $21,078 $27,669
4/30/2000 $21,327 $26,837
5/31/2000 $21,420 $26,288
6/30/2000 $21,732 $26,936
7/31/2000 $21,397 $26,515
8/31/2000 $22,340 $28,161
9/30/2000 $21,426 $26,675
10/31/2000 $21,715 $26,562
11/30/2000 $21,154 $24,469
12/31/2000 $21,568 $24,589
1/31/2001 $21,980 $25,461
2/28/2001 $20,884 $23,141
3/31/2001 $19,339 $21,676
4/30/2001 $20,902 $23,359
5/31/2001 $21,229 $23,516
6/30/2001 $20,256 $22,944
7/31/2001 $20,214 $22,718
8/31/2001 $19,302 $21,297
9/30/2001 $17,154 $19,577
10/31/2001 $17,732 $19,951
11/30/2001 $19,425 $21,481
12/31/2001 $19,577 $21,669
1/31/2002 $19,297 $21,353
2/28/2002 $19,166 $20,941
3/31/2002 $19,838 $21,729
4/30/2002 $18,582 $20,412
5/31/2002 $18,223 $20,262
6/30/2002 $16,849 $18,819
7/31/2002 $15,333 $17,353
8/31/2002 $15,370 $17,466
9/30/2002 $13,699 $15,570
10/31/2002 $14,656 $16,939
11/30/2002 $15,663 $17,935
12/31/2002 $14,845 $16,882
1/31/2003 $14,283 $16,441
2/28/2003 $13,959 $16,193
3/31/2003 $13,966 $16,349
4/30/2003 $14,982 $17,696
5/31/2003 $15,968 $18,628
6/30/2003 $16,443 $18,866
7/31/2003 $16,936 $19,199
8/31/2003 $17,310 $19,572
9/30/2003 $16,792 $19,365
10/31/2003 $17,790 $20,460
11/30/2003 $18,015 $20,640
12/31/2003 $19,056 $21,721
1/31/2004 $19,344 $22,120
2/29/2004 $19,438 $22,427
3/31/2004 $18,988 $22,089
4/30/2004 $19,006 $21,743
5/31/2004 $19,320 $22,041
6/30/2004 $20,108 $22,469
7/31/2004 $19,056 $21,726
8/31/2004 $18,893 $21,813
9/30/2004 $19,175 $22,049
10/31/2004 $19,413 $22,386
11/30/2004 $20,553 $23,291
12/31/2004 $21,254 $24,083
1/31/2005 $20,530 $23,496
2/28/2005 $20,895 $23,991
3/31/2005 $20,877 $23,566
4/30/2005 $20,380 $23,120
5/31/2005 $21,191 $23,855
6/30/2005 $20,965 $23,889
7/31/2005 $22,059 $24,777
8/31/2005 $21,990 $24,551
9/30/2005 $21,944 $24,750
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 +75.56% and +6.64%.
(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.
Annual Report | 21
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.
22 | 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 3/31/05 VALUE 9/30/05 PERIOD* 3/31/05-9/30/05
- ----------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,050.00 $ 4.83
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,020.36 $ 4.76
- ----------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,045.90 $ 8.72
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,016.55 $ 8.59
- ----------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,046.00 $ 8.67
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,016.60 $ 8.54
- ----------------------------------------------------------------------------------------------------------
CLASS R
- ----------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,048.80 $ 6.16
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,019.05 $ 6.07
- ----------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,051.20 $ 3.60
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,021.56 $ 3.55
- ----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.94%; B: 1.70%; and C: 1.69%; R: 1.20%; and Advisor: 0.70%), multiplied
by the average account value over the period, multiplied by 183/365 to
reflect the one-half year period.
Annual Report | 23
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 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.
- --------------------------------------------------------------------------------
This annual report for Franklin Income Fund covers the fiscal year ended
September 30, 2005.
PERFORMANCE OVERVIEW
Franklin Income Fund - Class A posted a +10.45% cumulative total return for the
12 months under review. The Fund underperformed its benchmark, the Standard &
Poor's 500 Composite Index (S&P 500), which returned +12.25%; outperformed the
Lehman Brothers (LB) U.S. Aggregate Index, which returned +2.80%; and
outperformed its peers as measured by the Lipper Income Funds Classification
Average, which returned +7.76%, for the same period.(1) You can find the Fund's
long-term performance data in the Performance Summary beginning on page 30.
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended September 30, 2005, a maturing domestic economic
expansion was driven by perceived staying power across most industries, sectors
and regions. Gross domestic product (GDP) rose during the period, benefiting
primarily from personal consumption and greater business investment. Demand for
imported goods and materials fueled a widening trade gap. The U.S. dollar
rallied in 2005 driven largely by rising short-term domestic interest rates and
strong economic growth in the U.S. relative to many of its major trading
partners.
(1) Sources: Standard & Poor's Micropal; Lipper Inc. The S&P 500 consists of
500 stocks chosen for market size, liquidity and industry group
representation. Each stock's weight in the index is proportionate to its
market value. The S&P 500 is one of the most widely used benchmarks of
U.S. equity performance. The LB U.S. Aggregate Index represents securi-
ties that are SEC-registered, taxable and dollar denominated. The index
covers the U.S. investment grade fixed-rate bond market, with index
components for government and corporate securities, mortgage pass-through
securities and asset-backed securities. All issues included must have at
least one year to final maturity and must be rated investment grade (Baa3
or better) by Moody's Investors Service. They must be publicly issued,
fixed rate, and have at least par amount outstanding. They must also be
dollar denominated and nonconvertible. 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 Classification Average is calculated by averaging the
total returns of all funds within the Lipper Income Funds classification
in the Lipper Open-End underlying funds universe. Lipper Income Funds are
defined as funds that seek a high level of current income through
investing in income-producing stocks, bonds, and money market instruments.
For the 12-month period ended 9/30/05, there were 241 funds in this
category. Lipper calculations do not include sales charges, but include
reinvestment of any income or distributions. The Fund's performance
relative to the average may have differed if these and other factors had
been considered.
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.
24 | Annual Report
Oil prices increased substantially during the period amid concerns about
potential long-term supply limitations in the face of expected strong global
demand growth, especially from China and India. Despite rising commodity prices,
inflation remained relatively contained for the 12 months ended September 30,
2005, as measured by the 2.0% rise for the core Consumer Price Index (CPI).(2)
With controlling inflation at the forefront of its agenda, the Federal Reserve
Board raised the federal funds target rate from 1.75% to 3.75%, and said it
would respond to changes in economic prospects as needed to fulfill its
obligation to maintain price stability. Compared with the rise in short-term
interest rates, long-term interest rates remained relatively stable, supporting
overall robust housing and commercial real estate activity, which contributed to
economic growth.
Many businesses enjoyed their widest profit margins on record, propelled largely
by productivity gains. The labor market firmed as employment increased and the
unemployment rate dropped from 5.4% to 5.1% during the reporting period.(2)
Personal income rose, and hiring rebounded in many industries, bolstered by
healthy business spending and solid business confidence. However, late in the
period consumer sentiment fell amid concerns about rising energy costs.
In this environment, the blue chip stocks of the Dow Jones Industrial Average
posted a one-year total return of +7.23%, while the broader S&P 500 and
technology-heavy NASDAQ Composite Index returned +12.25% and +14.19%.(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. Core CPI excludes food and energy
costs.
(3) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. See footnote 1 for a
description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market. The index is market value weighted and includes more than
3,000 companies.
Annual Report | 25
TOP 5 COMMON STOCK HOLDINGS
Franklin Income Fund
9/30/05
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Merck & Co. Inc. 2.6%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Pfizer Inc. 2.1%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
FirstEnergy Corp. 1.8%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
Bank of America Corp. 1.6%
FINANCE
- --------------------------------------------------------------------------------
Canadian Oil Sands Trust 1.6%
ENERGY MINERALS
- --------------------------------------------------------------------------------
TOP 5 BOND HOLDINGS
Franklin Income Fund
9/30/05
- --------------------------------------------------------------------------------
% OF TOTAL
NET ASSETS
- --------------------------------------------------------------------------------
General Motors Acceptance Corp. 4.0%
- --------------------------------------------------------------------------------
CCH LLC 3.1%
- --------------------------------------------------------------------------------
Calpine Corp. 2.7%
- --------------------------------------------------------------------------------
Tenet Healthcare Corp. 2.6%
- --------------------------------------------------------------------------------
Ford Motor Credit Corp. 2.2%
- --------------------------------------------------------------------------------
DIVIDEND DISTRIBUTIONS*
Franklin Income Fund
10/1/04-9/30/05
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 1.23 cents 1.33 cents
- -----------------------------------------------------------------------------------------------
November 1.30 cents 1.14 cents 1.20 cents 1.20 cents 1.23 cents 1.33 cents
- -----------------------------------------------------------------------------------------------
December 1.30 cents 1.12 cents 1.19 cents 1.19 cents 1.23 cents 1.33 cents
- -----------------------------------------------------------------------------------------------
January 1.30 cents 1.12 cents 1.19 cents 1.19 cents 1.23 cents 1.33 cents
- -----------------------------------------------------------------------------------------------
February 1.25 cents 1.07 cents 1.14 cents 1.14 cents 1.18 cents 1.28 cents
- -----------------------------------------------------------------------------------------------
March 1.25 cents 1.07 cents 1.15 cents 1.15 cents 1.17 cents 1.28 cents
- -----------------------------------------------------------------------------------------------
April 1.25 cents 1.07 cents 1.15 cents 1.15 cents 1.17 cents 1.28 cents
- -----------------------------------------------------------------------------------------------
May 1.25 cents 1.07 cents 1.15 cents 1.15 cents 1.17 cents 1.28 cents
- -----------------------------------------------------------------------------------------------
June 1.25 cents 1.10 cents 1.16 cents 1.15 cents 1.19 cents 1.28 cents
- -----------------------------------------------------------------------------------------------
July 1.25 cents 1.10 cents 1.16 cents 1.15 cents 1.19 cents 1.28 cents
- -----------------------------------------------------------------------------------------------
August 1.25 cents 1.10 cents 1.16 cents 1.15 cents 1.19 cents 1.28 cents
- -----------------------------------------------------------------------------------------------
September 1.25 cents 1.06 cents 1.14 cents 1.14 cents 1.17 cents 1.28 cents
- -----------------------------------------------------------------------------------------------
TOTAL 15.20 CENTS 13.16 CENTS 13.99 CENTS 13.96 CENTS 14.35 CENTS 15.56 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
During the 12 months under review, improving company fundamentals, stable
financial markets and historically low interest rates benefited high-dividend
paying common stocks, convertible securities and investment and non-investment
grade corporate bonds. We continued to focus our search for opportunities in
these areas. As a result, government and government agency securities played a
lesser role in the Fund's portfolio relative to the recent past (2000-2002) as
concerns of increased inflationary pressures and subsequent higher interest
rates posed greater risk to the potential for attractive total return from these
securities. At the end of the reporting period, government and government agency
securities comprised just 2.6% of the Fund's total net assets.
The spread, or difference in yield, between U.S. Treasury securities and
non-investment grade corporate bonds, as represented by the Lehman Brothers U.S.
High Yield Index, tightened during the year from 3.98 percentage points to
26 | Annual Report
3.69 percentage points.(4) Improved valuations for non-investment grade
corporate bonds partially offset the volatility and gradual rise in overall
interest rates. Consistent with our investment strategy, we took profits in
several portfolio holdings that appreciated and that, in our opinion, no longer
offered attractive current yield and longer-term upside appreciation potential
during the review period. Corporate bonds sold included Allegheny Energy Supply,
Electronic Data Systems, Equistar Chemicals, Lyondell Chemical and Pacific Gas &
Electric. However, despite corporate bonds' favorable overall performance we
continued to look for investment opportunities that offered yield and long-term
appreciation potential in line with our strategy. We added to and initiated new
positions in several companies including General Motors Acceptance Corp., Ford
Motor Credit Company, Tenet Healthcare and Allied Waste Industries.
During the past year, global energy prices were broadly supported by a
combination of factors including solid economic growth in the U.S. and abroad,
geopolitical turmoil in several major oil and natural gas producing regions, and
weather-related disruptions to production. If these trends persist in
conjunction with the industry's continued dilemma of replacing depleted
reserves, we believe the pricing environment for oil and related products should
remain above historical averages. Portfolio positions in integrated oil
companies that may benefit from this environment include Chevron Corp., BP,
Royal Dutch Shell and Canadian Oil Sands Trust. During the period, we also added
shares of Chesapeake Energy convertible preferred stock to the portfolio.
Chesapeake is a leading producer of natural gas in North America with primary
operations onshore. Its stock price appreciated in value as natural gas prices
surged due in part to supply fears following significant damage to the offshore
infrastructure in the Gulf of Mexico.
The Fund's largest sector weighting at fiscal year-end was utilities. We found
utilities attractive due to our assessment of the sector's appealing dividend
yield and stable earnings growth profile. Over the past several years, many
utility companies have adjusted their priorities and moved toward a
back-to-basics operational philosophy, which has meant rebuilding core regulated
businesses while reducing debt and repairing overstretched balance sheets.
Recently, many utility companies found opportunities to invest in building
additional infrastructure, further improving operational efficiency, and
strengthening their environmental controls.
(4) Source: Lehman Brothers Inc. The Lehman Brothers U.S. High Yield Index
covers the universe of fixed rate, non-investment grade debt. The index
includes both corporate and non-corporate sectors.
Annual Report | 27
PORTFOLIO BREAKDOWN
Franklin Income Fund
Based on Total Net Assets
as of 9/30/05
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
Corporate Straight Bonds 29.8%
Utilities Stocks 18.9%
Health Technology Stocks 8.4%
Finance Stocks 7.9%
Corporate Convertible Bonds 5.3%
Energy Minerals Stocks 5.2%
Communications Stocks 3.2%
Zero Coupon & Step-Up Bonds 2.8%
U.S. Government & Agency Securities 2.6%
Consumer Non-Durables Stocks 1.7%
Real Estate Investment Trusts 1.5%
Consumer Durables Stocks 1.3%
Other 6.2%
Short-Term Investments & Other Net Assets 5.2%
Another driving force behind the utilities sector's remarkable performance over
the past year has been its leverage to the commodity markets, in particular,
natural gas. The amount and nature of exposure can vary tremendously between
companies, but those that were able to generate low-cost power via coal or
nuclear fuel, and sell that output in wholesale markets, generated significant
gains. Pipeline and natural gas infrastructure utilities also benefited from
greater asset utilization as well as from their ownership of natural gas
production in most cases.
The Fund increased its utilities exposure by investing in companies that provide
commodity sensitivity and exposure to strong regulated utility franchises.
Examples of such holdings include leading nuclear generation company Exelon, and
Dominion Resources, which has significant operations in oil and gas exploration
and development.
Based on our investment strategy that relies on in-depth fundamental analysis,
our multi-asset class approach can provide us flexibility across a wide range of
potential investments. For example, our analysis of several companies has led to
positions in multiple securities of the same issuer, including Host Marriott,
CMS Energy, Allied Waste Industries and General Mills.
The Fund had some detractors from performance. For example, many of the Fund's
health technology holdings negatively impacted Fund performance. In particular,
shares of major pharmaceutical companies dragged on Fund performance. Despite
the near-term challenges to existing products from generic manufacturers as well
as overall pressures to keep control of health care costs including the
possibility of legislation to boost drug importation, we continued to find the
longer-term value compelling and the dividend yield attractive in the near term.
Sector positions that declined in value included Pfizer, Merck, Wyeth,
Schering-Plough, Bristol-Meyers Squibb and Johnson & Johnson. Also during the
period, the Fund's fixed income investments in Tenet Healthcare suffered a
temporary setback after several of the company's hospitals in the Gulf Coast
region suffered severe damage due to Hurricane Katrina.
28 | Annual Report
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, 2005, 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 | 29
PERFORMANCE SUMMARY AS OF 9/30/05
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 reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- -----------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FKINX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.08 $2.50 $2.42
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-9/30/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.1520
- -----------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0129
- -----------------------------------------------------------------------------------------------
TOTAL $0.1649
- -----------------------------------------------------------------------------------------------
CLASS B (SYMBOL: FBICX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.08 $2.49 $2.41
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-9/30/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.1316
- -----------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0129
- -----------------------------------------------------------------------------------------------
TOTAL $0.1445
- -----------------------------------------------------------------------------------------------
CLASS B1 (SYMBOL: FICBX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.08 $2.50 $2.42
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-9/30/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.1399
- -----------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0129
- -----------------------------------------------------------------------------------------------
TOTAL $0.1528
- -----------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FCISX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.08 $2.51 $2.43
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-9/30/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.1396
- -----------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0129
- -----------------------------------------------------------------------------------------------
TOTAL $0.1525
- -----------------------------------------------------------------------------------------------
30 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
PRICE AND DISTRIBUTION INFORMATION (CONTINUED)
- -----------------------------------------------------------------------------------------------
CLASS R (SYMBOL: FISRX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.08 $2.48 $2.40
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-9/30/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.1435
- -----------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0129
- -----------------------------------------------------------------------------------------------
TOTAL $0.1564
- -----------------------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FRIAX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.08 $2.49 $2.41
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-9/30/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.1556
- -----------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0129
- -----------------------------------------------------------------------------------------------
TOTAL $0.1685
- -----------------------------------------------------------------------------------------------
Franklin Income Fund paid distributions derived from long-term capital gains of
1.29 cents per share in December 2004. The Fund designates such distributions as
capital gain dividends per Internal Revenue Code Section 852 (b)(3).
Annual Report | 31
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) +10.45% +57.52% +146.58%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +5.64% +8.60% +8.98%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,564 $15,109 $23,631
- ------------------------------------------------------------------------------------------------------
Distribution Rate(4) 5.75%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 5.02%
- ------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 3-YEAR INCEPTION (11/1/01)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +9.57% +58.92% +49.97%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +5.57% +15.96% +10.34%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,557 $15,592 $14,697
- ------------------------------------------------------------------------------------------------------
Distribution Rate(4) 5.11%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 4.39%
- ------------------------------------------------------------------------------------------------------
CLASS B1 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +9.90% +53.67% +75.91%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +5.90% +8.69% +8.73%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,590 $15,167 $17,591
- ------------------------------------------------------------------------------------------------------
Distribution Rate(4) 5.47%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 4.74%
- ------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +9.84% +53.34% +134.81%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +8.84% +8.93% +8.91%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,884 $15,334 $23,481
- ------------------------------------------------------------------------------------------------------
Distribution Rate(4) 5.45%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 4.75%
- ------------------------------------------------------------------------------------------------------
CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +10.15% +61.62% +48.15%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +9.15% +17.35% +11.07%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,915 $16,162 $14,815
- ------------------------------------------------------------------------------------------------------
Distribution Rate(4) 5.66%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 4.89%
- ------------------------------------------------------------------------------------------------------
ADVISOR CLASS(6) 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +10.65% +59.01% +151.54%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +10.65% +9.72% +9.66%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,065 $15,901 $25,154
- ------------------------------------------------------------------------------------------------------
Distribution Rate(4) 6.17%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 5.40%
- ------------------------------------------------------------------------------------------------------
PERFORMANCE DATA 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.
32 | 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.
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS A 9/30/05
- -----------------------------------------
1-Year +5.64%
- -----------------------------------------
5-Year +8.60%
- -----------------------------------------
10-Year +8.98%
- -----------------------------------------
CLASS A (10/1/95 - 9/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
LIPPER INCOME
LEHMAN BROTHERS FUNDS
FRANKLIN INCOME S&P 500 U.S. AGGREGATE CLASSIFICATION
DATE FUND - CLASS A INDEX(7) INDEX(7) AVG.(7)
-----------------------------------------------------------------------------
10/1/1995 $ 9,583 $10,000 $10,000 $10,000
10/31/1995 $ 9,604 $ 9,964 $10,130 $ 9,993
11/30/1995 $ 9,752 $10,401 $10,282 $10,241
12/31/1995 $ 9,975 $10,602 $10,426 $10,431
1/31/1996 $10,256 $10,962 $10,495 $10,628
2/29/1996 $10,060 $11,064 $10,313 $10,573
3/31/1996 $10,037 $11,170 $10,241 $10,585
4/30/1996 $10,015 $11,335 $10,184 $10,606
5/31/1996 $10,126 $11,627 $10,163 $10,686
6/30/1996 $10,327 $11,671 $10,299 $10,778
7/31/1996 $10,169 $11,156 $10,328 $10,561
8/31/1996 $10,328 $11,391 $10,310 $10,682
9/30/1996 $10,487 $12,032 $10,490 $10,926
10/31/1996 $10,694 $12,364 $10,722 $11,183
11/30/1996 $10,948 $13,297 $10,906 $11,561
12/31/1996 $11,017 $13,034 $10,805 $11,527
1/31/1997 $11,182 $13,848 $10,838 $11,724
2/28/1997 $11,300 $13,957 $10,865 $11,805
3/31/1997 $11,038 $13,384 $10,744 $11,582
4/30/1997 $11,110 $14,183 $10,905 $11,753
5/31/1997 $11,471 $15,045 $11,008 $12,122
6/30/1997 $11,689 $15,719 $11,139 $12,405
7/31/1997 $12,006 $16,969 $11,439 $12,886
8/31/1997 $11,933 $16,019 $11,342 $12,675
9/30/1997 $12,303 $16,896 $11,509 $13,079
10/31/1997 $12,129 $16,332 $11,676 $12,972
11/30/1997 $12,503 $17,088 $11,730 $13,191
12/31/1997 $12,873 $17,381 $11,848 $13,410
1/31/1998 $12,745 $17,573 $12,000 $13,456
2/28/1998 $12,925 $18,840 $11,991 $13,781
3/31/1998 $13,314 $19,804 $12,032 $14,101
4/30/1998 $13,132 $20,003 $12,095 $14,109
5/31/1998 $13,001 $19,660 $12,210 $14,057
6/30/1998 $13,027 $20,458 $12,313 $14,165
7/31/1998 $12,788 $20,240 $12,339 $14,021
8/31/1998 $11,960 $17,317 $12,540 $13,267
9/30/1998 $12,577 $18,426 $12,834 $13,678
10/31/1998 $12,605 $19,924 $12,766 $13,954
11/30/1998 $13,013 $21,131 $12,838 $14,279
12/31/1998 $12,996 $22,348 $12,877 $14,519
1/31/1999 $12,802 $23,282 $12,969 $14,590
2/28/1999 $12,440 $22,558 $12,742 $14,294
3/31/1999 $12,636 $23,461 $12,813 $14,487
4/30/1999 $13,286 $24,369 $12,854 $14,910
5/31/1999 $13,371 $23,795 $12,741 $14,783
6/30/1999 $13,343 $25,114 $12,701 $14,955
7/31/1999 $13,199 $24,331 $12,646 $14,799
8/31/1999 $13,228 $24,211 $12,640 $14,675
9/30/1999 $13,082 $23,548 $12,787 $14,549
10/31/1999 $13,053 $25,037 $12,834 $14,789
11/30/1999 $12,846 $25,546 $12,833 $14,832
12/31/1999 $12,900 $27,050 $12,771 $15,080
1/31/2000 $12,992 $25,691 $12,729 $14,837
2/29/2000 $12,779 $25,205 $12,883 $14,804
3/31/2000 $12,993 $27,669 $13,053 $15,337
4/30/2000 $13,456 $26,837 $13,016 $15,168
5/31/2000 $13,672 $26,288 $13,010 $15,152
6/30/2000 $13,766 $26,936 $13,280 $15,305
7/31/2000 $13,923 $26,515 $13,401 $15,305
8/31/2000 $14,715 $28,161 $13,595 $15,811
9/30/2000 $15,002 $26,675 $13,681 $15,702
10/31/2000 $14,777 $26,562 $13,771 $15,661
11/30/2000 $14,680 $24,469 $13,996 $15,322
12/31/2000 $15,556 $24,589 $14,256 $15,746
1/31/2001 $15,525 $25,461 $14,489 $16,015
2/28/2001 $15,824 $23,141 $14,615 $15,732
3/31/2001 $15,589 $21,676 $14,689 $15,452
4/30/2001 $15,894 $23,359 $14,628 $15,881
5/31/2001 $16,199 $23,516 $14,716 $15,980
6/30/2001 $15,823 $22,944 $14,771 $15,841
7/31/2001 $15,650 $22,718 $15,102 $15,887
8/31/2001 $15,823 $21,297 $15,275 $15,712
9/30/2001 $15,090 $19,577 $15,453 $15,187
10/31/2001 $15,195 $19,951 $15,776 $15,391
11/30/2001 $15,513 $21,481 $15,558 $15,675
12/31/2001 $15,657 $21,669 $15,460 $15,735
1/31/2002 $15,765 $21,353 $15,585 $15,672
2/28/2002 $15,874 $20,941 $15,736 $15,661
3/31/2002 $16,350 $21,729 $15,474 $15,901
4/30/2002 $16,446 $20,412 $15,774 $15,839
5/31/2002 $16,393 $20,262 $15,908 $15,856
6/30/2002 $15,371 $18,819 $16,046 $15,395
7/31/2002 $14,643 $17,353 $16,239 $14,839
8/31/2002 $15,120 $17,466 $16,514 $15,012
9/30/2002 $14,459 $15,570 $16,781 $14,443
10/31/2002 $14,558 $16,939 $16,705 $14,725
11/30/2002 $15,352 $17,935 $16,700 $15,124
12/31/2002 $15,491 $16,882 $17,045 $15,039
1/31/2003 $15,591 $16,441 $17,060 $14,921
2/28/2003 $15,378 $16,193 $17,296 $14,879
3/31/2003 $15,719 $16,349 $17,282 $14,925
4/30/2003 $16,701 $17,696 $17,425 $15,535
5/31/2003 $17,610 $18,628 $17,750 $16,092
6/30/2003 $17,957 $18,866 $17,715 $16,214
7/31/2003 $17,737 $19,199 $17,119 $16,122
8/31/2003 $18,007 $19,572 $17,233 $16,288
9/30/2003 $18,525 $19,365 $17,689 $16,465
10/31/2003 $19,046 $20,460 $17,524 $16,803
11/30/2003 $19,321 $20,640 $17,566 $16,956
12/31/2003 $20,287 $21,721 $17,745 $17,454
1/31/2004 $20,566 $22,120 $17,887 $17,639
2/29/2004 $20,592 $22,427 $18,081 $17,835
3/31/2004 $20,617 $22,089 $18,216 $17,819
4/30/2004 $20,298 $21,743 $17,742 $17,448
5/31/2004 $20,238 $22,041 $17,671 $17,471
6/30/2004 $20,525 $22,469 $17,771 $17,660
7/31/2004 $20,638 $21,726 $17,947 $17,532
8/31/2004 $21,104 $21,813 $18,290 $17,732
9/30/2004 $21,396 $22,049 $18,339 $17,890
10/31/2004 $21,689 $22,386 $18,493 $18,099
11/30/2004 $22,163 $23,291 $18,346 $18,427
12/31/2004 $22,757 $24,083 $18,514 $18,784
1/31/2005 $22,332 $23,496 $18,631 $18,619
2/28/2005 $22,902 $23,991 $18,521 $18,800
3/31/2005 $22,466 $23,566 $18,426 $18,584
4/30/2005 $22,121 $23,120 $18,675 $18,511
5/31/2005 $22,607 $23,855 $18,877 $18,779
6/30/2005 $23,281 $23,889 $18,980 $18,939
7/31/2005 $23,772 $24,777 $18,807 $19,176
8/31/2005 $23,702 $24,551 $19,048 $19,237
9/30/2005 $23,631 $24,750 $18,852 $19,260
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS B 9/30/05
- -----------------------------------------
1-Year +5.57%
- -----------------------------------------
3-Year +15.96%
- -----------------------------------------
Since Inception (11/1/01) +10.34%
- -----------------------------------------
CLASS B (11/1/01 - 9/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
LIPPER INCOME
LEHMAN BROTHERS FUNDS
FRANKLIN INCOME S&P 500 U.S. AGGREGATE CLASSIFICATION
DATE FUND - CLASS B INDEX(7) INDEX(7) AVG.(7)
------------------------------------------------------------------------------
11/1/2001 $10,000 $10,000 $10,000 $10,000
11/30/2001 $10,186 $10,767 $ 9,862 $10,185
12/31/2001 $10,229 $10,861 $ 9,799 $10,224
1/31/2002 $10,344 $10,703 $ 9,879 $10,183
2/28/2002 $10,411 $10,496 $ 9,975 $10,176
3/31/2002 $10,671 $10,891 $ 9,809 $10,331
4/30/2002 $10,774 $10,231 $ 9,999 $10,291
5/31/2002 $10,731 $10,156 $10,084 $10,302
6/30/2002 $10,006 $ 9,433 $10,171 $10,003
7/31/2002 $ 9,571 $ 8,698 $10,294 $ 9,642
8/31/2002 $ 9,875 $ 8,755 $10,468 $ 9,754
9/30/2002 $ 9,437 $ 7,804 $10,637 $ 9,385
10/31/2002 $ 9,445 $ 8,490 $10,589 $ 9,568
11/30/2002 $ 9,955 $ 8,990 $10,586 $ 9,827
12/31/2002 $10,091 $ 8,462 $10,804 $ 9,772
1/31/2003 $10,098 $ 8,241 $10,814 $ 9,695
2/28/2003 $10,004 $ 8,117 $10,963 $ 9,668
3/31/2003 $10,167 $ 8,195 $10,955 $ 9,697
4/30/2003 $10,851 $ 8,870 $11,045 $10,094
5/31/2003 $11,382 $ 9,337 $11,251 $10,455
6/30/2003 $11,653 $ 9,456 $11,229 $10,535
7/31/2003 $11,502 $ 9,623 $10,851 $10,475
8/31/2003 $11,671 $ 9,810 $10,923 $10,583
9/30/2003 $11,944 $ 9,706 $11,213 $10,698
10/31/2003 $12,273 $10,255 $11,108 $10,917
11/30/2003 $12,496 $10,345 $11,135 $11,017
12/31/2003 $13,057 $10,887 $11,248 $11,341
1/31/2004 $13,228 $11,087 $11,338 $11,461
2/29/2004 $13,290 $11,241 $11,461 $11,588
3/31/2004 $13,242 $11,072 $11,547 $11,578
4/30/2004 $13,082 $10,898 $11,247 $11,337
5/31/2004 $12,979 $11,048 $11,201 $11,352
6/30/2004 $13,210 $11,262 $11,265 $11,474
7/31/2004 $13,219 $10,890 $11,376 $11,392
8/31/2004 $13,508 $10,933 $11,593 $11,521
9/30/2004 $13,687 $11,052 $11,625 $11,624
10/31/2004 $13,866 $11,220 $11,722 $11,760
11/30/2004 $14,160 $11,674 $11,629 $11,973
12/31/2004 $14,531 $12,071 $11,736 $12,205
1/31/2005 $14,306 $11,777 $11,810 $12,098
2/28/2005 $14,602 $12,025 $11,740 $12,215
3/31/2005 $14,313 $11,812 $11,680 $12,075
4/30/2005 $14,082 $11,588 $11,838 $12,028
5/31/2005 $14,381 $11,957 $11,966 $12,202
6/30/2005 $14,803 $11,974 $12,031 $12,306
7/31/2005 $15,107 $12,419 $11,921 $12,459
8/31/2005 $15,053 $12,306 $12,074 $12,499
9/30/2005 $14,697 $12,405 $11,950 $12,514
Annual Report | 33
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS B1 9/30/05
- -----------------------------------------
1-Year +5.90%
- -----------------------------------------
5-Year +8.69%
- -----------------------------------------
Since Inception (1/1/99) +8.73%
- -----------------------------------------
CLASS B1 (1/1/99 - 9/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
LIPPER INCOME
LEHMAN BROTHERS FUNDS
FRANKLIN INCOME S&P 500 U.S. AGGREGATE CLASSIFICATION
DATE FUND - CLASS B1 INDEX(7) INDEX(7) AVG.(7)
------------------------------------------------------------------------------
1/1/1999 $10,000 $10,000 $10,000 $10,000
1/31/1999 $ 9,851 $10,418 $10,071 $10,049
2/28/1999 $ 9,568 $10,094 $ 9,896 $ 9,845
3/31/1999 $ 9,717 $10,498 $ 9,950 $ 9,978
4/30/1999 $10,213 $10,905 $ 9,982 $10,269
5/31/1999 $10,230 $10,647 $ 9,894 $10,182
6/30/1999 $10,248 $11,238 $ 9,863 $10,300
7/31/1999 $10,133 $10,887 $ 9,821 $10,193
8/31/1999 $10,150 $10,834 $ 9,816 $10,107
9/30/1999 $10,035 $10,537 $ 9,930 $10,020
10/31/1999 $10,009 $11,203 $ 9,967 $10,186
11/30/1999 $ 9,845 $11,431 $ 9,966 $10,215
12/31/1999 $ 9,883 $12,104 $ 9,918 $10,386
1/31/2000 $ 9,949 $11,496 $ 9,885 $10,219
2/29/2000 $ 9,782 $11,279 $10,005 $10,196
3/31/2000 $ 9,941 $12,381 $10,137 $10,563
4/30/2000 $10,290 $12,009 $10,108 $10,447
5/31/2000 $10,452 $11,763 $10,103 $10,436
6/30/2000 $10,519 $12,053 $10,313 $10,541
7/31/2000 $10,633 $11,865 $10,407 $10,541
8/31/2000 $11,233 $12,601 $10,558 $10,890
9/30/2000 $11,448 $11,936 $10,624 $10,815
10/31/2000 $11,271 $11,886 $10,694 $10,787
11/30/2000 $11,242 $10,949 $10,869 $10,553
12/31/2000 $11,856 $11,003 $11,071 $10,845
1/31/2001 $11,827 $11,393 $11,252 $11,030
2/28/2001 $12,051 $10,355 $11,350 $10,835
3/31/2001 $11,867 $ 9,699 $11,407 $10,642
4/30/2001 $12,093 $10,453 $11,360 $10,938
5/31/2001 $12,321 $10,523 $11,428 $11,006
6/30/2001 $12,030 $10,267 $11,471 $10,910
7/31/2001 $11,894 $10,166 $11,728 $10,942
8/31/2001 $12,021 $ 9,530 $11,862 $10,821
9/30/2001 $11,460 $ 8,760 $12,000 $10,460
10/31/2001 $11,535 $ 8,927 $12,251 $10,600
11/30/2001 $11,772 $ 9,612 $12,082 $10,796
12/31/2001 $11,877 $ 9,696 $12,006 $10,837
1/31/2002 $11,954 $ 9,555 $12,103 $10,794
2/28/2002 $12,031 $ 9,371 $12,220 $10,786
3/31/2002 $12,388 $ 9,723 $12,017 $10,951
4/30/2002 $12,455 $ 9,134 $12,250 $10,909
5/31/2002 $12,410 $ 9,067 $12,354 $10,921
6/30/2002 $11,630 $ 8,421 $12,461 $10,603
7/31/2002 $11,074 $ 7,765 $12,611 $10,220
8/31/2002 $11,429 $ 7,816 $12,824 $10,340
9/30/2002 $10,925 $ 6,967 $13,032 $9,948
10/31/2002 $10,995 $ 7,580 $12,972 $10,142
11/30/2002 $11,590 $ 8,025 $12,969 $10,417
12/31/2002 $11,690 $ 7,554 $13,237 $10,358
1/31/2003 $11,762 $ 7,357 $13,248 $10,276
2/28/2003 $11,597 $ 7,246 $13,431 $10,248
3/31/2003 $11,849 $ 7,316 $13,421 $10,279
4/30/2003 $12,583 $ 7,919 $13,532 $10,700
5/31/2003 $13,261 $ 8,335 $13,784 $11,083
6/30/2003 $13,517 $ 8,442 $13,757 $11,167
7/31/2003 $13,347 $ 8,591 $13,294 $11,104
8/31/2003 $13,546 $ 8,758 $13,383 $11,218
9/30/2003 $13,929 $ 8,665 $13,737 $11,340
10/31/2003 $14,314 $ 9,155 $13,609 $11,573
11/30/2003 $14,514 $ 9,236 $13,641 $11,678
12/31/2003 $15,234 $ 9,720 $13,780 $12,021
1/31/2004 $15,437 $ 9,898 $13,891 $12,149
2/29/2004 $15,514 $10,036 $14,041 $12,284
3/31/2004 $15,461 $ 9,884 $14,147 $12,273
4/30/2004 $15,215 $ 9,729 $13,778 $12,017
5/31/2004 $15,162 $ 9,863 $13,723 $12,033
6/30/2004 $15,371 $10,054 $13,801 $12,163
7/31/2004 $15,450 $ 9,722 $13,938 $12,075
8/31/2004 $15,793 $ 9,761 $14,203 $12,213
9/30/2004 $16,004 $ 9,866 $14,242 $12,322
10/31/2004 $16,217 $10,017 $14,361 $12,466
11/30/2004 $16,564 $10,422 $14,247 $12,691
12/31/2004 $17,001 $10,777 $14,378 $12,938
1/31/2005 $16,743 $10,514 $14,468 $12,824
2/28/2005 $17,093 $10,735 $14,383 $12,948
3/31/2005 $16,761 $10,545 $14,309 $12,799
4/30/2005 $16,497 $10,345 $14,503 $12,749
5/31/2005 $16,851 $10,674 $14,660 $12,934
6/30/2005 $17,347 $10,690 $14,739 $13,044
7/31/2005 $17,706 $11,087 $14,605 $13,207
8/31/2005 $17,647 $10,986 $14,793 $13,249
9/30/2005 $17,591 $11,075 $14,640 $13,265
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS C 9/30/05
- -----------------------------------------
1-Year +8.84%
- -----------------------------------------
5-Year +8.93%
- -----------------------------------------
10-Year +8.91%
- -----------------------------------------
CLASS C (10/1/95 - 9/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
LIPPER INCOME
LEHMAN BROTHERS FUNDS
FRANKLIN INCOME S&P 500 U.S. AGGREGATE CLASSIFICATION
DATE FUND - CLASS C INDEX(7) INDEX(7) AVG.(7)
------------------------------------------------------------------------------
10/1/1995 $10,000 $10,000 $10,000 $10,000
10/31/1995 $10,017 $ 9,964 $10,130 $ 9,993
11/30/1995 $10,167 $10,401 $10,282 $10,241
12/31/1995 $10,395 $10,602 $10,426 $10,431
1/31/1996 $10,683 $10,962 $10,495 $10,628
2/29/1996 $10,520 $11,064 $10,313 $10,573
3/31/1996 $10,492 $11,170 $10,241 $10,585
4/30/1996 $10,418 $11,335 $10,184 $10,606
5/31/1996 $10,529 $11,627 $10,163 $10,686
6/30/1996 $10,734 $11,671 $10,299 $10,778
7/31/1996 $10,565 $11,156 $10,328 $10,561
8/31/1996 $10,725 $11,391 $10,310 $10,682
9/30/1996 $10,886 $12,032 $10,490 $10,926
10/31/1996 $11,095 $12,364 $10,722 $11,183
11/30/1996 $11,401 $13,297 $10,906 $11,561
12/31/1996 $11,421 $13,034 $10,805 $11,527
1/31/1997 $11,587 $13,848 $10,838 $11,724
2/28/1997 $11,753 $13,957 $10,865 $11,805
3/31/1997 $11,477 $13,384 $10,744 $11,582
4/30/1997 $11,497 $14,183 $10,905 $11,753
5/31/1997 $11,865 $15,045 $11,008 $12,122
6/30/1997 $12,135 $15,719 $11,139 $12,405
7/31/1997 $12,458 $16,969 $11,439 $12,886
8/31/1997 $12,377 $16,019 $11,342 $12,675
9/30/1997 $12,706 $16,896 $11,509 $13,079
10/31/1997 $12,572 $16,332 $11,676 $12,972
11/30/1997 $12,901 $17,088 $11,730 $13,191
12/31/1997 $13,278 $17,381 $11,848 $13,410
1/31/1998 $13,140 $17,573 $12,000 $13,456
2/28/1998 $13,320 $18,840 $11,991 $13,781
3/31/1998 $13,714 $19,804 $12,032 $14,101
4/30/1998 $13,574 $20,003 $12,095 $14,109
5/31/1998 $13,380 $19,660 $12,210 $14,057
6/30/1998 $13,456 $20,458 $12,313 $14,165
7/31/1998 $13,204 $20,240 $12,339 $14,021
8/31/1998 $12,347 $17,317 $12,540 $13,267
9/30/1998 $12,922 $18,426 $12,834 $13,678
10/31/1998 $13,000 $19,924 $12,766 $13,954
11/30/1998 $13,414 $21,131 $12,838 $14,279
12/31/1998 $13,335 $22,348 $12,877 $14,519
1/31/1999 $13,186 $23,282 $12,969 $14,590
2/28/1999 $12,809 $22,558 $12,742 $14,294
3/31/1999 $13,005 $23,461 $12,813 $14,487
4/30/1999 $13,665 $24,369 $12,854 $14,910
5/31/1999 $13,688 $23,795 $12,741 $14,783
6/30/1999 $13,712 $25,114 $12,701 $14,955
7/31/1999 $13,559 $24,331 $12,646 $14,799
8/31/1999 $13,524 $24,211 $12,640 $14,675
9/30/1999 $13,370 $23,548 $12,787 $14,549
10/31/1999 $13,394 $25,037 $12,834 $14,789
11/30/1999 $13,177 $25,546 $12,833 $14,832
12/31/1999 $13,227 $27,050 $12,771 $15,080
1/31/2000 $13,252 $25,691 $12,729 $14,837
2/29/2000 $13,091 $25,205 $12,883 $14,804
3/31/2000 $13,304 $27,669 $13,053 $15,337
4/30/2000 $13,769 $26,837 $13,016 $15,168
5/31/2000 $13,921 $26,288 $13,010 $15,152
6/30/2000 $14,010 $26,936 $13,280 $15,305
7/31/2000 $14,228 $26,515 $13,401 $15,305
8/31/2000 $15,027 $28,161 $13,595 $15,811
9/30/2000 $15,313 $26,675 $13,681 $15,702
10/31/2000 $15,079 $26,562 $13,771 $15,661
11/30/2000 $14,974 $24,469 $13,996 $15,322
12/31/2000 $15,857 $24,589 $14,256 $15,746
1/31/2001 $15,818 $25,461 $14,489 $16,015
2/28/2001 $16,116 $23,141 $14,615 $15,732
3/31/2001 $15,870 $21,676 $14,689 $15,452
4/30/2001 $16,172 $23,359 $14,628 $15,881
5/31/2001 $16,475 $23,516 $14,716 $15,980
6/30/2001 $16,087 $22,944 $14,771 $15,841
7/31/2001 $15,907 $22,718 $15,102 $15,887
8/31/2001 $16,076 $21,297 $15,275 $15,712
9/30/2001 $15,327 $19,577 $15,453 $15,187
10/31/2001 $15,426 $19,951 $15,776 $15,391
11/30/2001 $15,741 $21,481 $15,558 $15,675
12/31/2001 $15,879 $21,669 $15,460 $15,735
1/31/2002 $15,981 $21,353 $15,585 $15,672
2/28/2002 $16,085 $20,941 $15,736 $15,661
3/31/2002 $16,558 $21,729 $15,474 $15,901
4/30/2002 $16,648 $20,412 $15,774 $15,839
5/31/2002 $16,589 $20,262 $15,908 $15,856
6/30/2002 $15,553 $18,819 $16,046 $15,395
7/31/2002 $14,813 $17,353 $16,239 $14,839
8/31/2002 $15,286 $17,466 $16,514 $15,012
9/30/2002 $14,615 $15,570 $16,781 $14,443
10/31/2002 $14,708 $16,939 $16,705 $14,725
11/30/2002 $15,500 $17,935 $16,700 $15,124
12/31/2002 $15,635 $16,882 $17,045 $15,039
1/31/2003 $15,653 $16,441 $17,060 $14,921
2/28/2003 $15,513 $16,193 $17,296 $14,879
3/31/2003 $15,847 $16,349 $17,282 $14,925
4/30/2003 $16,825 $17,696 $17,425 $15,535
5/31/2003 $17,728 $18,628 $17,750 $16,092
6/30/2003 $18,069 $18,866 $17,715 $16,214
7/31/2003 $17,842 $19,199 $17,119 $16,122
8/31/2003 $18,105 $19,572 $17,233 $16,288
9/30/2003 $18,615 $19,365 $17,689 $16,465
10/31/2003 $19,127 $20,460 $17,524 $16,803
11/30/2003 $19,393 $20,640 $17,566 $16,956
12/31/2003 $20,351 $21,721 $17,745 $17,454
1/31/2004 $20,622 $22,120 $17,887 $17,639
2/29/2004 $20,725 $22,427 $18,081 $17,835
3/31/2004 $20,655 $22,089 $18,216 $17,819
4/30/2004 $20,414 $21,743 $17,742 $17,448
5/31/2004 $20,258 $22,041 $17,671 $17,471
6/30/2004 $20,623 $22,469 $17,771 $17,660
7/31/2004 $20,642 $21,726 $17,947 $17,532
8/31/2004 $21,098 $21,813 $18,290 $17,732
9/30/2004 $21,379 $22,049 $18,339 $17,890
10/31/2004 $21,661 $22,386 $18,493 $18,099
11/30/2004 $22,123 $23,291 $18,346 $18,427
12/31/2004 $22,704 $24,083 $18,514 $18,784
1/31/2005 $22,362 $23,496 $18,631 $18,619
2/28/2005 $22,827 $23,991 $18,521 $18,800
3/31/2005 $22,385 $23,566 $18,426 $18,584
4/30/2005 $22,033 $23,120 $18,675 $18,511
5/31/2005 $22,506 $23,855 $18,877 $18,779
6/30/2005 $23,257 $23,889 $18,980 $18,939
7/31/2005 $23,641 $24,777 $18,807 $19,176
8/31/2005 $23,562 $24,551 $19,048 $19,237
9/30/2005 $23,481 $24,750 $18,852 $19,260
34 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS R 9/30/05
- -----------------------------------------
1-Year +9.15%
- -----------------------------------------
3-Year +17.35%
- -----------------------------------------
Since Inception (1/1/02) +11.07%
- -----------------------------------------
CLASS R (1/1/02 - 9/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
LIPPER INCOME
LEHMAN BROTHERS FUNDS
FRANKLIN INCOME S&P 500 U.S. AGGREGATE CLASSIFICATION
DATE FUND - CLASS R INDEX(7) INDEX(7) AVG.(7)
------------------------------------------------------------------------------
1/1/2002 $10,000 $10,000 $10,000 $10,000
1/31/2002 $10,069 $ 9,854 $10,081 $ 9,960
2/28/2002 $10,136 $ 9,664 $10,179 $ 9,953
3/31/2002 $10,390 $10,028 $10,009 $10,105
4/30/2002 $10,448 $ 9,420 $10,203 $10,066
5/31/2002 $10,412 $ 9,351 $10,290 $10,077
6/30/2002 $ 9,709 $ 8,685 $10,379 $ 9,784
7/31/2002 $ 9,289 $ 8,008 $10,504 $ 9,431
8/31/2002 $ 9,590 $ 8,061 $10,682 $ 9,541
9/30/2002 $ 9,166 $ 7,185 $10,855 $ 9,179
10/31/2002 $ 9,178 $ 7,817 $10,805 $ 9,358
11/30/2002 $ 9,681 $ 8,277 $10,802 $ 9,612
12/31/2002 $ 9,817 $ 7,791 $11,025 $ 9,558
1/31/2003 $ 9,829 $ 7,587 $11,035 $ 9,483
2/28/2003 $ 9,741 $ 7,473 $11,188 $ 9,456
3/31/2003 $ 9,905 $ 7,545 $11,179 $ 9,485
4/30/2003 $10,577 $ 8,167 $11,271 $ 9,873
5/31/2003 $11,102 $ 8,596 $11,481 $10,227
6/30/2003 $11,319 $ 8,706 $11,459 $10,304
7/31/2003 $11,227 $ 8,860 $11,073 $10,246
8/31/2003 $11,344 $ 9,032 $11,147 $10,351
9/30/2003 $11,670 $ 8,937 $11,442 $10,464
10/31/2003 $11,997 $ 9,442 $11,335 $10,679
11/30/2003 $12,168 $ 9,525 $11,362 $10,776
12/31/2003 $12,779 $10,024 $11,478 $11,093
1/31/2004 $12,953 $10,208 $11,570 $11,210
2/29/2004 $12,966 $10,350 $11,696 $11,335
3/31/2004 $12,978 $10,194 $11,783 $11,324
4/30/2004 $12,772 $10,034 $11,477 $11,089
5/31/2004 $12,730 $10,171 $11,431 $11,103
6/30/2004 $12,908 $10,369 $11,495 $11,223
7/31/2004 $12,977 $10,026 $11,609 $11,142
8/31/2004 $13,268 $10,066 $11,831 $11,269
9/30/2004 $13,449 $10,175 $11,863 $11,370
10/31/2004 $13,631 $10,331 $11,962 $11,503
11/30/2004 $13,927 $10,749 $11,867 $11,711
12/31/2004 $14,299 $11,114 $11,976 $11,938
1/31/2005 $14,026 $10,843 $12,051 $11,833
2/28/2005 $14,383 $11,071 $11,980 $11,948
3/31/2005 $14,102 $10,876 $11,919 $11,810
4/30/2005 $13,879 $10,669 $12,080 $11,764
5/31/2005 $14,182 $11,009 $12,211 $11,935
6/30/2005 $14,605 $11,024 $12,277 $12,036
7/31/2005 $14,912 $11,434 $12,165 $12,187
8/31/2005 $14,864 $11,330 $12,321 $12,226
9/30/2005 $14,815 $11,422 $12,194 $12,241
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
ADVISOR CLASS(6) 9/30/05
- -----------------------------------------
1-Year +10.65%
- -----------------------------------------
5-Year +9.72%
- -----------------------------------------
10-Year +9.66%
ADVISOR CLASS (10/1/95 - 9/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
LIPPER INCOME
FRANKLIN INCOME LEHMAN BROTHERS FUNDS
FUND - ADVISOR S&P 500 U.S. AGGREGATE CLASSIFICATION
DATE CLASS INDEX(7) INDEX(7) AVG.(7)
------------------------------------------------------------------------------
10/1/1995 $10,000 $10,000 $10,000 $10,000
10/31/1995 $10,022 $ 9,964 $10,130 $ 9,993
11/30/1995 $10,176 $10,401 $10,282 $10,241
12/31/1995 $10,409 $10,602 $10,426 $10,431
1/31/1996 $10,702 $10,962 $10,495 $10,628
2/29/1996 $10,497 $11,064 $10,313 $10,573
3/31/1996 $10,474 $11,170 $10,241 $10,585
4/30/1996 $10,450 $11,335 $10,184 $10,606
5/31/1996 $10,566 $11,627 $10,163 $10,686
6/30/1996 $10,776 $11,671 $10,299 $10,778
7/31/1996 $10,612 $11,156 $10,328 $10,561
8/31/1996 $10,777 $11,391 $10,310 $10,682
9/30/1996 $10,943 $12,032 $10,490 $10,926
10/31/1996 $11,159 $12,364 $10,722 $11,183
11/30/1996 $11,424 $13,297 $10,906 $11,561
12/31/1996 $11,496 $13,034 $10,805 $11,527
1/31/1997 $11,718 $13,848 $10,838 $11,724
2/28/1997 $11,893 $13,957 $10,865 $11,805
3/31/1997 $11,620 $13,384 $10,744 $11,582
4/30/1997 $11,698 $14,183 $10,905 $11,753
5/31/1997 $12,028 $15,045 $11,008 $12,122
6/30/1997 $12,311 $15,719 $11,139 $12,405
7/31/1997 $12,647 $16,969 $11,439 $12,886
8/31/1997 $12,571 $16,019 $11,342 $12,675
9/30/1997 $12,911 $16,896 $11,509 $13,079
10/31/1997 $12,781 $16,332 $11,676 $12,972
11/30/1997 $13,125 $17,088 $11,730 $13,191
12/31/1997 $13,571 $17,381 $11,848 $13,410
1/31/1998 $13,384 $17,573 $12,000 $13,456
2/28/1998 $13,576 $18,840 $11,991 $13,781
3/31/1998 $13,986 $19,804 $12,032 $14,101
4/30/1998 $13,851 $20,003 $12,095 $14,109
5/31/1998 $13,659 $19,660 $12,210 $14,057
6/30/1998 $13,744 $20,458 $12,313 $14,165
7/31/1998 $13,493 $20,240 $12,339 $14,021
8/31/1998 $12,621 $17,317 $12,540 $13,267
9/30/1998 $13,275 $18,426 $12,834 $13,678
10/31/1998 $13,305 $19,924 $12,766 $13,954
11/30/1998 $13,738 $21,131 $12,838 $14,279
12/31/1998 $13,723 $22,348 $12,877 $14,519
1/31/1999 $13,519 $23,282 $12,969 $14,590
2/28/1999 $13,138 $22,558 $12,742 $14,294
3/31/1999 $13,348 $23,461 $12,813 $14,487
4/30/1999 $14,036 $24,369 $12,854 $14,910
5/31/1999 $14,068 $23,795 $12,741 $14,783
6/30/1999 $14,100 $25,114 $12,701 $14,955
7/31/1999 $13,949 $24,331 $12,646 $14,799
8/31/1999 $13,920 $24,211 $12,640 $14,675
9/30/1999 $13,768 $23,548 $12,787 $14,549
10/31/1999 $13,800 $25,037 $12,834 $14,789
11/30/1999 $13,584 $25,546 $12,833 $14,832
12/31/1999 $13,643 $27,050 $12,771 $15,080
1/31/2000 $13,678 $25,691 $12,729 $14,837
2/29/2000 $13,518 $25,205 $12,883 $14,804
3/31/2000 $13,747 $27,669 $13,053 $15,337
4/30/2000 $14,173 $26,837 $13,016 $15,168
5/31/2000 $14,404 $26,288 $13,010 $15,152
6/30/2000 $14,504 $26,936 $13,280 $15,305
7/31/2000 $14,673 $26,515 $13,401 $15,305
8/31/2000 $15,513 $28,161 $13,595 $15,811
9/30/2000 $15,818 $26,675 $13,681 $15,702
10/31/2000 $15,582 $26,562 $13,771 $15,661
11/30/2000 $15,549 $24,469 $13,996 $15,322
12/31/2000 $16,411 $24,589 $14,256 $15,746
1/31/2001 $16,451 $25,461 $14,489 $16,015
2/28/2001 $16,771 $23,141 $14,615 $15,732
3/31/2001 $16,453 $21,676 $14,689 $15,452
4/30/2001 $16,849 $23,359 $14,628 $15,881
5/31/2001 $17,103 $23,516 $14,716 $15,980
6/30/2001 $16,707 $22,944 $14,771 $15,841
7/31/2001 $16,525 $22,718 $15,102 $15,887
8/31/2001 $16,712 $21,297 $15,275 $15,712
9/30/2001 $16,009 $19,577 $15,453 $15,187
10/31/2001 $16,048 $19,951 $15,776 $15,391
11/30/2001 $16,389 $21,481 $15,558 $15,675
12/31/2001 $16,544 $21,669 $15,460 $15,735
1/31/2002 $16,736 $21,353 $15,585 $15,672
2/28/2002 $16,854 $20,941 $15,736 $15,661
3/31/2002 $17,285 $21,729 $15,474 $15,901
4/30/2002 $17,467 $20,412 $15,774 $15,839
5/31/2002 $17,415 $20,262 $15,908 $15,856
6/30/2002 $16,252 $18,819 $16,046 $15,395
7/31/2002 $15,560 $17,353 $16,239 $14,839
8/31/2002 $15,989 $17,466 $16,514 $15,012
9/30/2002 $15,288 $15,570 $16,781 $14,443
10/31/2002 $15,395 $16,939 $16,705 $14,725
11/30/2002 $16,240 $17,935 $16,700 $15,124
12/31/2002 $16,390 $16,882 $17,045 $15,039
1/31/2003 $16,499 $16,441 $17,060 $14,921
2/28/2003 $16,359 $16,193 $17,296 $14,879
3/31/2003 $16,639 $16,349 $17,282 $14,925
4/30/2003 $17,686 $17,696 $17,425 $15,535
5/31/2003 $18,654 $18,628 $17,750 $16,092
6/30/2003 $19,027 $18,866 $17,715 $16,214
7/31/2003 $18,796 $19,199 $17,119 $16,122
8/31/2003 $19,086 $19,572 $17,233 $16,288
9/30/2003 $19,640 $19,365 $17,689 $16,465
10/31/2003 $20,196 $20,460 $17,524 $16,803
11/30/2003 $20,492 $20,640 $17,566 $16,956
12/31/2003 $21,524 $21,721 $17,745 $17,454
1/31/2004 $21,823 $22,120 $17,887 $17,639
2/29/2004 $21,944 $22,427 $18,081 $17,835
3/31/2004 $21,883 $22,089 $18,216 $17,819
4/30/2004 $21,546 $21,743 $17,742 $17,448
5/31/2004 $21,484 $22,041 $17,671 $17,471
6/30/2004 $21,794 $22,469 $17,771 $17,660
7/31/2004 $21,917 $21,726 $17,947 $17,532
8/31/2004 $22,417 $21,813 $18,290 $17,732
9/30/2004 $22,731 $22,049 $18,339 $17,890
10/31/2004 $23,046 $22,386 $18,493 $18,099
11/30/2004 $23,555 $23,291 $18,346 $18,427
12/31/2004 $24,192 $24,083 $18,514 $18,784
1/31/2005 $23,741 $23,496 $18,631 $18,619
2/28/2005 $24,352 $23,991 $18,521 $18,800
3/31/2005 $23,890 $23,566 $18,426 $18,584
4/30/2005 $23,524 $23,120 $18,675 $18,511
5/31/2005 $24,047 $23,855 $18,877 $18,779
6/30/2005 $24,770 $23,889 $18,980 $18,939
7/31/2005 $25,297 $24,777 $18,807 $19,176
8/31/2005 $25,225 $24,551 $19,048 $19,237
9/30/2005 $25,154 $24,750 $18,852 $19,260
Annual Report | 35
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 WILL 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 respective class's
September dividend and the maximum offering price (NAV for Classes B, B1,
C, R and Advisor) per share on 9/30/05.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 9/30/05.
(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 +118.80% and +9.36%.
(7) Sources: Standard & Poor's Micropal; Lipper Inc. The S&P 500 consists of
500 stocks chosen for market size, liquidity and industry group
representation. Each stock's weight in the index is proportionate to its
market value. The S&P 500 is one of the most widely used benchmarks of
U.S. equity performance. The Lipper Income Funds Classification Average is
calculated by averaging the total returns of all funds within the Lipper
Income Funds classification in the Lipper Open-End underlying funds
universe. 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-month period ended 9/30/05,
there were 241 funds in this category. Lipper calculations do not include
sales charges, but include reinvestment of any income or distributions.
The Fund's performance relative to the average may have differed if these
or other factors had been considered.
36 | 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 | 37
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 3/31/05 VALUE 9/30/05 PERIOD* 3/31/05-9/30/05
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,051.90 $3.34
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.81 $3.29
- -------------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,047.70 $7.70
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,017.55 $7.59
- -------------------------------------------------------------------------------------------------------------
CLASS B1
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,049.30 $5.96
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.25 $5.87
- -------------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,049.00 $5.96
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.25 $5.87
- -------------------------------------------------------------------------------------------------------------
CLASS R
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,050.50 $5.19
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.00 $5.11
- -------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,052.80 $2.62
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,022.51 $2.59
- -------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense
waivers, for each class (A: 0.65%; B: 1.50%; B1; 1.16%; C: 1.16%; R:
1.01%; and Advisor: 0.51%), multiplied by the average account value over
the period, multiplied by 183/365 to reflect the one-half year period.
38 | 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 by investing at least 80% of its net assets in U.S.
government securities. The Fund presently invests substantially all of its
assets in Government National Mortgage Association obligations (Ginnie Maes).
- --------------------------------------------------------------------------------
Since 1983, the Fund has invested predominantly 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 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 9/30/05
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
GNMA ......................... 95.5%
Short-Term Investments &
Other Net Assets ............. 4.5%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin U.S. Government Securities Fund's annual
report for the fiscal year ended September 30, 2005.
PERFORMANCE OVERVIEW
Franklin U.S. Government Securities Fund - Class A posted a +2.67% cumulative
total return for the 12 months under review. The Fund outperformed the Lehman
Brothers (LB) U.S. Government: Intermediate Index, which returned
(1) 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 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 100.
Annual Report | 39
FRANKLIN U.S. GOVERNMENT SECURITIES FUND -
CLASS A VS. COMPARABLE INVESTMENTS*
Risk vs. Return (10/00-9/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A CHART IN THE PRINTED MATERIAL.]
RISK RETURN
-----------------------
FRANKLIN US GOVERNMENT SECURITIES FUND - CLASS A 2.70% 5.42%
1-YEAR TREASURY BILL * 0.99% 2.93%
10-YEAR TREASURY NOTE * 8.33% 6.81%
30-YEAR TREASURY BOND * 12.84% 9.41%
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.
+1.31%.(2) In comparison, the Lipper GNMA Funds Classification Average returned
+2.29% 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 44.
(2) Source: Standard & Poor's Micropal; Lipper Inc. The LB U.S. Government:
Intermediate Index includes securities issued by U.S. Treasury or Agency.
These include public obligations of the U.S. Treasury with remaining
maturity of one year or more and publicly issued debt of U.S. governmental
agencies, quasi-federal corporations, and corporate or foreign debt
guaranteed by the U.S. government. All issues included must have one to
ten years to final maturity and must be rated investment grade (Baa3 or
better) by Moody's Investors Service. They must also be dollar denominated
and nonconvertible. 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 GNMA Funds
Classification 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 9/30/05, the Lipper
GNMA Funds Classification Average consisted of 61 funds. 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. The 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.
40 | Annual Report
ECONOMIC AND MARKET OVERVIEW
Overall domestic economic growth remained healthy during the reporting period.
More than two-thirds of U.S. gross domestic product (GDP) is generated by
consumer spending and almost one-fifth by business spending. Since consumer
spending relies on consumers' ability to remain gainfully employed, many
analysts study the employment picture for indications of consumer spending. Over
the past year, nonfarm payroll data, as well as other indexes, showed growing
employment. This along with other factors helped consumer spending increase 6.7%
(not adjusted for inflation) in September 2005 compared with the same month a
year earlier, which supported U.S. economic growth.(3)
Business spending also rose during the reporting period, contributing to
economic growth. Nonresidential investment spending rose in each of the past
year's four quarters, resulting in 7.8% growth for the year under review.(3)
Historically low interest rates continued to allow many companies easy access to
capital, and ample cash also helped some companies to support their spending
plans. Productivity continued to grow, which helped businesses generate more
goods and services without substantially raising inflation.
Oil prices increased substantially during the period amid concerns about
potential long-term supply limitations in the face of expected strong global
demand growth, especially from China and India. Despite rising commodity prices,
inflation remained relatively contained for the 12 months ended September 30,
2005, as measured by the 2.0% rise for the core Consumer Price Index (CPI).(4)
This increase was below the core CPI's 10-year average of 2.2%.(4) However,
acknowledging the economy's strength as well as potential inflationary pressure
from high energy prices, the Federal Reserve Board raised the federal funds
target rate to 3.75% from 1.75% during the 12-month period and indicated
possible "measured" increases would follow. The Fed also noted in its most
recent statement that there would be some temporary economic effects due to
hurricane impacts, but there was some debate about the long-term effects. During
the period, the yield curve flattened, as short- and intermediate-term Treasury
yields rose and longer-term yields fell.
(3) Source: Bureau of Economic Analysis.
(4) Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
Annual Report | 41
YIELD COMPARISON
9/30/05
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
Franklin U.S. Government Securities
Fund - Class A* 4.07%
10-Year Treasury Note* 4.34%
Lipper GNMA Funds Classification Average* 3.74%
Lipper Money Market Funds Classification Average* 2.85%
* 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
9/30/05. 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 Classification
Average is an average of the monthly SEC yields of 62 funds in the Lipper
GNMA Funds classification for the 30 days ended 9/30/05. The Lipper Money
Market Funds Classification Average is an average of the monthly SEC
yields of 319 funds in the Lipper Money Market Funds classification for
the 30 days ended 9/30/05. Lipper averages do not include sales charges.
DIVIDEND DISTRIBUTIONS*
Franklin U.S. Government Securities Fund
10/1/04-9/30/05
- ------------------------------------------------------------------------------------------
DIVIDEND PER SHARE
-------------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS
- ------------------------------------------------------------------------------------------
October 2.78 cents 2.50 cents 2.49 cents 2.58 cents 2.85 cents
- ------------------------------------------------------------------------------------------
November 2.78 cents 2.50 cents 2.49 cents 2.58 cents 2.85 cents
- ------------------------------------------------------------------------------------------
December 2.78 cents 2.48 cents 2.48 cents 2.56 cents 2.85 cents
- ------------------------------------------------------------------------------------------
January 2.78 cents 2.48 cents 2.48 cents 2.56 cents 2.85 cents
- ------------------------------------------------------------------------------------------
February 2.78 cents 2.48 cents 2.48 cents 2.56 cents 2.85 cents
- ------------------------------------------------------------------------------------------
March 2.78 cents 2.49 cents 2.49 cents 2.58 cents 2.84 cents
- ------------------------------------------------------------------------------------------
April 2.78 cents 2.49 cents 2.49 cents 2.58 cents 2.85 cents
- ------------------------------------------------------------------------------------------
May 2.60 cents 2.31 cents 2.31 cents 2.40 cents 2.67 cents
- ------------------------------------------------------------------------------------------
June 2.60 cents 2.31 cents 2.32 cents 2.40 cents 2.67 cents
- ------------------------------------------------------------------------------------------
July 2.60 cents 2.31 cents 2.32 cents 2.40 cents 2.67 cents
- ------------------------------------------------------------------------------------------
August 2.60 cents 2.31 cents 2.32 cents 2.40 cents 2.67 cents
- ------------------------------------------------------------------------------------------
September 2.60 cents 2.31 cents 2.31 cents 2.39 cents 2.67 cents
- ------------------------------------------------------------------------------------------
TOTAL 32.46 CENTS 28.97 CENTS 28.98 CENTS 29.99 CENTS 33.29 CENTS
- ------------------------------------------------------------------------------------------
* All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
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- and small-capitalization stocks. These
time periods include various credit, prepayment, economic and interest rate
cycles.
In the GNMA sector, we used our proprietary research models to uncover areas of
the markets where we believed prepayment risk may have offered value. As the
mortgage-backed securities (MBS) market has evolved, we believe technical
research tools have increased in importance. Consistent with our investment
42 | Annual Report
strategy, we found value in the specified pool market rather than the To Be
Announced (TBA) MBS market.(5) We focused some of our research on the specified
pool market, paying attention to such factors as geographic dispersion and
weighted average coupon differentials of the underlying mortgage pools. We also
looked at the price difference between securities in the GNMA I and GNMA II
programs and found what we believed were attractively priced securities.
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 ahead.
[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
(5) A specified pool consists of previously identified mortgage pools. A TBA
security consists of generic mortgage pools to be determined at the
settlement date.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF SEPTEMBER 30, 2005, 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 | 43
PERFORMANCE SUMMARY AS OF 9/30/05
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 reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- -----------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FKUSX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.15 $6.53 $6.68
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-9/30/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.3246
- -----------------------------------------------------------------------------------------------
CLASS B (SYMBOL: FUGBX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.15 $6.52 $6.67
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-9/30/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.2897
- -----------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FRUGX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.15 $6.50 $6.65
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-9/30/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.2898
- -----------------------------------------------------------------------------------------------
CLASS R (SYMBOL: FUSRX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.15 $6.53 $6.68
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-9/30/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.2999
- -----------------------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FUSAX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.14 $6.55 $6.69
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-9/30/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.3329
- -----------------------------------------------------------------------------------------------
44 | 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) +2.67% +30.20% +76.50%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -1.74% +4.52% +5.39%
- ------------------------------------------------------------------------------------------------------
Distribution Rate(3) 4.57%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(4) 4.07%
- ------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.13% +26.68% +35.07%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -1.78% +4.52% +4.56%
- ------------------------------------------------------------------------------------------------------
Distribution Rate(3) 4.25%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(4) 3.72%
- ------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.14% +26.74% +67.23%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +1.16% +4.85% +5.28%
- ------------------------------------------------------------------------------------------------------
Distribution Rate(3) 4.26%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(4) 3.72%
- ------------------------------------------------------------------------------------------------------
CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.29% +7.86% +15.44%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +1.31% +2.55% +3.91%
- ------------------------------------------------------------------------------------------------------
Distribution Rate(3) 4.39%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(4) 3.88%
- ------------------------------------------------------------------------------------------------------
ADVISOR CLASS(5) 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.95% +31.12% +79.19%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +2.95% +5.57% +6.01%
- ------------------------------------------------------------------------------------------------------
Distribution Rate(3) 4.89%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(4) 4.37%
- ------------------------------------------------------------------------------------------------------
PERFORMANCE DATA 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 | 45
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. 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 9/30/05
- -----------------------------------------
1-Year -1.74%
- -----------------------------------------
5-Year +4.52%
- -----------------------------------------
10-Year +5.39%
- -----------------------------------------
CLASS A (10/1/95 - 9/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN U.S. LEHMAN BROTHERS LIPPER GNMA
GOVERNMENT U.S. GOVERNMENT: FUNDS
SECURITIES FUND - INTERMEDIATE CLASSIFICATION
DATE CLASS A INDEX(6) AVERAGE(6) CPI(6)
- --------------------------------------------------------------------------------
10/1/1995 $ 9,582 $10,000 $10,000 $10,000
10/31/1995 $ 9,681 $10,110 $10,095 $10,033
11/30/1995 $ 9,781 $10,233 $10,221 $10,026
12/31/1995 $ 9,896 $10,334 $10,352 $10,020
1/31/1996 $ 9,955 $10,421 $10,412 $10,078
2/29/1996 $ 9,870 $10,311 $10,281 $10,111
3/31/1996 $ 9,828 $10,264 $10,239 $10,163
4/30/1996 $ 9,785 $10,234 $10,197 $10,202
5/31/1996 $ 9,758 $10,229 $10,156 $10,222
6/30/1996 $ 9,877 $10,332 $10,266 $10,228
7/31/1996 $ 9,908 $10,364 $10,302 $10,248
8/31/1996 $ 9,909 $10,376 $10,297 $10,268
9/30/1996 $10,075 $10,510 $10,460 $10,300
10/31/1996 $10,257 $10,683 $10,670 $10,333
11/30/1996 $10,411 $10,812 $10,832 $10,352
12/31/1996 $10,351 $10,753 $10,757 $10,352
1/31/1997 $10,414 $10,795 $10,826 $10,385
2/28/1997 $10,447 $10,812 $10,847 $10,418
3/31/1997 $10,417 $10,751 $10,738 $10,444
4/30/1997 $10,574 $10,872 $10,901 $10,457
5/31/1997 $10,667 $10,957 $10,999 $10,450
6/30/1997 $10,792 $11,051 $11,126 $10,463
7/31/1997 $10,997 $11,254 $11,352 $10,477
8/31/1997 $10,964 $11,211 $11,310 $10,496
9/30/1997 $11,091 $11,333 $11,461 $10,522
10/31/1997 $11,202 $11,465 $11,576 $10,548
11/30/1997 $11,217 $11,490 $11,603 $10,542
12/31/1997 $11,330 $11,584 $11,715 $10,529
1/31/1998 $11,443 $11,735 $11,833 $10,548
2/28/1998 $11,442 $11,723 $11,847 $10,568
3/31/1998 $11,490 $11,759 $11,887 $10,587
4/30/1998 $11,572 $11,815 $11,950 $10,607
5/31/1998 $11,651 $11,897 $12,043 $10,627
6/30/1998 $11,697 $11,977 $12,097 $10,640
7/31/1998 $11,760 $12,023 $12,145 $10,653
8/31/1998 $11,874 $12,250 $12,267 $10,666
9/30/1998 $12,024 $12,536 $12,425 $10,679
10/31/1998 $11,967 $12,557 $12,364 $10,705
11/30/1998 $12,031 $12,518 $12,433 $10,705
12/31/1998 $12,079 $12,567 $12,478 $10,698
1/31/1999 $12,161 $12,623 $12,550 $10,725
2/28/1999 $12,085 $12,450 $12,452 $10,738
3/31/1999 $12,151 $12,532 $12,531 $10,770
4/30/1999 $12,199 $12,566 $12,578 $10,849
5/31/1999 $12,104 $12,489 $12,493 $10,849
6/30/1999 $12,045 $12,507 $12,424 $10,849
7/31/1999 $11,949 $12,509 $12,350 $10,881
8/31/1999 $11,958 $12,527 $12,332 $10,907
9/30/1999 $12,150 $12,634 $12,525 $10,960
10/31/1999 $12,215 $12,659 $12,567 $10,979
11/30/1999 $12,224 $12,668 $12,575 $10,986
12/31/1999 $12,178 $12,628 $12,515 $10,986
1/31/2000 $12,075 $12,586 $12,416 $11,018
2/29/2000 $12,216 $12,690 $12,558 $11,084
3/31/2000 $12,396 $12,835 $12,749 $11,175
4/30/2000 $12,367 $12,830 $12,728 $11,181
5/31/2000 $12,417 $12,864 $12,771 $11,195
6/30/2000 $12,621 $13,068 $12,993 $11,253
7/31/2000 $12,691 $13,155 $13,046 $11,279
8/31/2000 $12,879 $13,303 $13,230 $11,279
9/30/2000 $12,989 $13,419 $13,345 $11,338
10/31/2000 $13,081 $13,511 $13,426 $11,358
11/30/2000 $13,272 $13,709 $13,624 $11,364
12/31/2000 $13,464 $13,951 $13,822 $11,358
1/31/2001 $13,657 $14,136 $14,035 $11,430
2/28/2001 $13,730 $14,266 $14,122 $11,475
3/31/2001 $13,804 $14,370 $14,204 $11,501
4/30/2001 $13,818 $14,324 $14,177 $11,547
5/31/2001 $13,913 $14,384 $14,269 $11,599
6/30/2001 $13,946 $14,429 $14,317 $11,619
7/31/2001 $14,208 $14,699 $14,595 $11,586
8/31/2001 $14,305 $14,829 $14,704 $11,586
9/30/2001 $14,486 $15,146 $14,913 $11,638
10/31/2001 $14,686 $15,382 $15,116 $11,599
11/30/2001 $14,549 $15,198 $14,956 $11,580
12/31/2001 $14,497 $15,125 $14,875 $11,534
1/31/2002 $14,612 $15,190 $15,019 $11,560
2/28/2002 $14,791 $15,316 $15,179 $11,606
3/31/2002 $14,606 $15,085 $14,989 $11,671
4/30/2002 $14,874 $15,367 $15,269 $11,736
5/31/2002 $14,969 $15,475 $15,370 $11,736
6/30/2002 $15,087 $15,668 $15,497 $11,743
7/31/2002 $15,249 $15,963 $15,679 $11,756
8/31/2002 $15,389 $16,146 $15,807 $11,795
9/30/2002 $15,509 $16,423 $15,950 $11,815
10/31/2002 $15,562 $16,412 $15,967 $11,834
11/30/2002 $15,561 $16,282 $15,958 $11,834
12/31/2002 $15,741 $16,583 $16,133 $11,808
1/31/2003 $15,786 $16,546 $16,165 $11,860
2/28/2003 $15,853 $16,733 $16,261 $11,952
3/31/2003 $15,853 $16,736 $16,249 $12,023
4/30/2003 $15,898 $16,784 $16,288 $11,997
5/31/2003 $15,897 $17,047 $16,329 $11,978
6/30/2003 $15,943 $17,019 $16,360 $11,991
7/31/2003 $15,572 $16,606 $16,008 $12,004
8/31/2003 $15,688 $16,636 $16,116 $12,050
9/30/2003 $15,922 $16,997 $16,385 $12,089
10/31/2003 $15,851 $16,830 $16,303 $12,076
11/30/2003 $15,921 $16,831 $16,352 $12,043
12/31/2003 $16,021 $16,962 $16,465 $12,030
1/31/2004 $16,116 $17,054 $16,545 $12,089
2/29/2004 $16,211 $17,217 $16,653 $12,154
3/31/2004 $16,259 $17,336 $16,708 $12,232
4/30/2004 $15,993 $16,949 $16,427 $12,272
5/31/2004 $15,963 $16,895 $16,381 $12,343
6/30/2004 $16,104 $16,938 $16,504 $12,383
7/31/2004 $16,245 $17,060 $16,629 $12,363
8/31/2004 $16,461 $17,314 $16,847 $12,369
9/30/2004 $16,472 $17,320 $16,854 $12,396
10/31/2004 $16,590 $17,426 $16,964 $12,461
11/30/2004 $16,560 $17,264 $16,908 $12,467
12/31/2004 $16,629 $17,358 $16,992 $12,422
1/31/2005 $16,724 $17,380 $17,075 $12,448
2/28/2005 $16,668 $17,283 $17,016 $12,520
3/31/2005 $16,638 $17,241 $16,975 $12,617
4/30/2005 $16,784 $17,442 $17,131 $12,702
5/31/2005 $16,901 $17,581 $17,230 $12,689
6/30/2005 $16,917 $17,638 $17,268 $12,696
7/31/2005 $16,855 $17,488 $17,196 $12,755
8/31/2005 $17,000 $17,682 $17,331 $12,820
9/30/2005 $16,912 $17,546 $17,240 $12,977
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS B 9/30/05
- -----------------------------------------
1-Year -1.78%
- -----------------------------------------
5-Year +4.52%
- -----------------------------------------
Since Inception (1/1/99) +4.56%
- -----------------------------------------
CLASS B (1/1/99 - 9/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN U.S. LEHMAN BROTHERS LIPPER GNMA
GOVERNMENT U.S. GOVERNMENT: FUNDS
SECURITIES FUND - INTERMEDIATE CLASSIFICATION
DATE CLASS B INDEX(6) AVERAGE(6) CPI(6)
- -------------------------------------------------------------------------------
1/1/1999 $10,000 $10,000 $10,000 $10,000
1/31/1999 $10,068 $10,045 $10,058 $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 $10,012 $10,140
6/30/1999 $ 9,936 $ 9,953 $ 9,957 $10,140
7/31/1999 $ 9,868 $ 9,954 $ 9,897 $10,171
8/31/1999 $ 9,856 $ 9,968 $ 9,883 $10,195
9/30/1999 $10,025 $10,053 $10,038 $10,244
10/31/1999 $10,074 $10,073 $10,072 $10,262
11/30/1999 $10,062 $10,080 $10,078 $10,268
12/31/1999 $10,019 $10,049 $10,029 $10,268
1/31/2000 $ 9,946 $10,015 $ 9,950 $10,299
2/29/2000 $10,042 $10,098 $10,065 $10,360
3/31/2000 $10,186 $10,213 $10,218 $10,445
4/30/2000 $10,174 $10,209 $10,200 $10,451
5/31/2000 $10,210 $10,236 $10,235 $10,464
6/30/2000 $10,373 $10,399 $10,413 $10,519
7/31/2000 $10,410 $10,468 $10,456 $10,543
8/31/2000 $10,560 $10,585 $10,603 $10,543
9/30/2000 $10,662 $10,678 $10,695 $10,598
10/31/2000 $10,717 $10,751 $10,759 $10,616
11/30/2000 $10,869 $10,909 $10,919 $10,622
12/31/2000 $11,021 $11,101 $11,077 $10,616
1/31/2001 $11,191 $11,249 $11,248 $10,683
2/28/2001 $11,230 $11,352 $11,317 $10,726
3/31/2001 $11,302 $11,434 $11,383 $10,750
4/30/2001 $11,291 $11,398 $11,361 $10,793
5/31/2001 $11,364 $11,446 $11,435 $10,842
6/30/2001 $11,403 $11,482 $11,474 $10,860
7/31/2001 $11,595 $11,696 $11,697 $10,830
8/31/2001 $11,669 $11,800 $11,784 $10,830
9/30/2001 $11,829 $12,052 $11,952 $10,879
10/31/2001 $11,970 $12,240 $12,114 $10,842
11/30/2001 $11,871 $12,094 $11,986 $10,824
12/31/2001 $11,806 $12,035 $11,921 $10,781
1/31/2002 $11,912 $12,087 $12,037 $10,805
2/28/2002 $12,035 $12,187 $12,164 $10,848
3/31/2002 $11,879 $12,004 $12,012 $10,909
4/30/2002 $12,092 $12,228 $12,237 $10,970
5/31/2002 $12,164 $12,314 $12,318 $10,970
6/30/2002 $12,254 $12,468 $12,420 $10,976
7/31/2002 $12,381 $12,703 $12,565 $10,988
8/31/2002 $12,490 $12,848 $12,668 $11,025
9/30/2002 $12,582 $13,068 $12,782 $11,043
10/31/2002 $12,620 $13,059 $12,796 $11,062
11/30/2002 $12,614 $12,956 $12,789 $11,062
12/31/2002 $12,754 $13,196 $12,929 $11,037
1/31/2003 $12,785 $13,166 $12,955 $11,086
2/28/2003 $12,834 $13,315 $13,032 $11,171
3/31/2003 $12,828 $13,318 $13,023 $11,239
4/30/2003 $12,859 $13,355 $13,054 $11,214
5/31/2003 $12,871 $13,565 $13,086 $11,196
6/30/2003 $12,884 $13,543 $13,111 $11,208
7/31/2003 $12,578 $13,214 $12,829 $11,220
8/31/2003 $12,667 $13,238 $12,915 $11,263
9/30/2003 $12,850 $13,525 $13,131 $11,300
10/31/2003 $12,788 $13,392 $13,065 $11,287
11/30/2003 $12,839 $13,393 $13,105 $11,257
12/31/2003 $12,914 $13,497 $13,195 $11,245
1/31/2004 $12,985 $13,571 $13,260 $11,300
2/29/2004 $13,056 $13,700 $13,346 $11,361
3/31/2004 $13,089 $13,795 $13,390 $11,434
4/30/2004 $12,868 $13,487 $13,165 $11,470
5/31/2004 $12,839 $13,444 $13,128 $11,538
6/30/2004 $12,946 $13,478 $13,227 $11,574
7/31/2004 $13,054 $13,575 $13,327 $11,556
8/31/2004 $13,222 $13,777 $13,502 $11,562
9/30/2004 $13,225 $13,782 $13,507 $11,586
10/31/2004 $13,315 $13,867 $13,595 $11,647
11/30/2004 $13,285 $13,738 $13,550 $11,653
12/31/2004 $13,334 $13,812 $13,618 $11,611
1/31/2005 $13,404 $13,830 $13,684 $11,635
2/28/2005 $13,354 $13,753 $13,637 $11,702
3/31/2005 $13,323 $13,719 $13,604 $11,794
4/30/2005 $13,435 $13,879 $13,729 $11,873
5/31/2005 $13,523 $13,990 $13,809 $11,861
6/30/2005 $13,549 $14,036 $13,839 $11,867
7/31/2005 $13,474 $13,916 $13,781 $11,922
8/31/2005 $13,583 $14,070 $13,890 $11,983
9/30/2005 $13,507 $13,962 $13,816 $12,129
46 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS C 9/30/05
- -----------------------------------------
1-Year +1.16%
- -----------------------------------------
5-Year +4.85%
- -----------------------------------------
10-Year +5.28%
- -----------------------------------------
CLASS C (10/1/95 - 9/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN U.S. LEHMAN BROTHERS LIPPER GNMA
GOVERNMENT U.S. GOVERNMENT: FUNDS
SECURITIES FUND - INTERMEDIATE CLASSIFICATION
CLASS C INDEX(6) AVERAGE(6) CPI(6)
- -------------------------------------------------------------------------------
10/1/1995 $10,000 $10,000 $10,000 $10,000
10/31/1995 $10,098 $10,110 $10,095 $10,033
11/30/1995 $10,197 $10,233 $10,221 $10,026
12/31/1995 $10,311 $10,334 $10,352 $10,020
1/31/1996 $10,381 $10,421 $10,412 $10,078
2/29/1996 $10,287 $10,311 $10,281 $10,111
3/31/1996 $10,223 $10,264 $10,239 $10,163
4/30/1996 $10,189 $10,234 $10,197 $10,202
5/31/1996 $10,155 $10,229 $10,156 $10,222
6/30/1996 $10,259 $10,332 $10,266 $10,228
7/31/1996 $10,286 $10,364 $10,302 $10,248
8/31/1996 $10,298 $10,376 $10,297 $10,268
9/30/1996 $10,455 $10,510 $10,460 $10,300
10/31/1996 $10,639 $10,683 $10,670 $10,333
11/30/1996 $10,809 $10,812 $10,832 $10,352
12/31/1996 $10,727 $10,753 $10,757 $10,352
1/31/1997 $10,803 $10,795 $10,826 $10,385
2/28/1997 $10,815 $10,812 $10,847 $10,418
3/31/1997 $10,779 $10,751 $10,738 $10,444
4/30/1997 $10,937 $10,872 $10,901 $10,457
5/31/1997 $11,044 $10,957 $10,999 $10,450
6/30/1997 $11,168 $11,051 $11,126 $10,463
7/31/1997 $11,375 $11,254 $11,352 $10,477
8/31/1997 $11,318 $11,211 $11,310 $10,496
9/30/1997 $11,446 $11,333 $11,461 $10,522
10/31/1997 $11,556 $11,465 $11,576 $10,548
11/30/1997 $11,566 $11,490 $11,603 $10,542
12/31/1997 $11,677 $11,584 $11,715 $10,529
1/31/1998 $11,789 $11,735 $11,833 $10,548
2/28/1998 $11,781 $11,723 $11,847 $10,568
3/31/1998 $11,826 $11,759 $11,887 $10,587
4/30/1998 $11,905 $11,815 $11,950 $10,607
5/31/1998 $11,981 $11,897 $12,043 $10,627
6/30/1998 $12,023 $11,977 $12,097 $10,640
7/31/1998 $12,082 $12,023 $12,145 $10,653
8/31/1998 $12,195 $12,250 $12,267 $10,666
9/30/1998 $12,344 $12,536 $12,425 $10,679
10/31/1998 $12,262 $12,557 $12,364 $10,705
11/30/1998 $12,340 $12,518 $12,433 $10,705
12/31/1998 $12,383 $12,567 $12,478 $10,698
1/31/1999 $12,462 $12,623 $12,550 $10,725
2/28/1999 $12,378 $12,450 $12,452 $10,738
3/31/1999 $12,440 $12,532 $12,531 $10,770
4/30/1999 $12,484 $12,566 $12,578 $10,849
5/31/1999 $12,381 $12,489 $12,493 $10,849
6/30/1999 $12,315 $12,507 $12,424 $10,849
7/31/1999 $12,211 $12,509 $12,350 $10,881
8/31/1999 $12,215 $12,527 $12,332 $10,907
9/30/1999 $12,406 $12,634 $12,525 $10,960
10/31/1999 $12,467 $12,659 $12,567 $10,979
11/30/1999 $12,471 $12,668 $12,575 $10,986
12/31/1999 $12,418 $12,628 $12,515 $10,986
1/31/2000 $12,307 $12,586 $12,416 $11,018
2/29/2000 $12,446 $12,690 $12,558 $11,084
3/31/2000 $12,624 $12,835 $12,749 $11,175
4/30/2000 $12,589 $12,830 $12,728 $11,181
5/31/2000 $12,634 $12,864 $12,771 $11,195
6/30/2000 $12,837 $13,068 $12,993 $11,253
7/31/2000 $12,882 $13,155 $13,046 $11,279
8/31/2000 $13,068 $13,303 $13,230 $11,279
9/30/2000 $13,195 $13,419 $13,345 $11,338
10/31/2000 $13,282 $13,511 $13,426 $11,358
11/30/2000 $13,450 $13,709 $13,624 $11,364
12/31/2000 $13,640 $13,951 $13,822 $11,358
1/31/2001 $13,850 $14,136 $14,035 $11,430
2/28/2001 $13,898 $14,266 $14,122 $11,475
3/31/2001 $13,988 $14,370 $14,204 $11,501
4/30/2001 $13,995 $14,324 $14,177 $11,547
5/31/2001 $14,065 $14,384 $14,269 $11,599
6/30/2001 $14,114 $14,429 $14,317 $11,619
7/31/2001 $14,352 $14,699 $14,595 $11,586
8/31/2001 $14,443 $14,829 $14,704 $11,586
9/30/2001 $14,642 $15,146 $14,913 $11,638
10/31/2001 $14,817 $15,382 $15,116 $11,599
11/30/2001 $14,693 $15,198 $14,956 $11,580
12/31/2001 $14,612 $15,125 $14,875 $11,534
1/31/2002 $14,743 $15,190 $15,019 $11,560
2/28/2002 $14,896 $15,316 $15,179 $11,606
3/31/2002 $14,702 $15,085 $14,989 $11,671
4/30/2002 $14,967 $15,367 $15,269 $11,736
5/31/2002 $15,056 $15,475 $15,370 $11,736
6/30/2002 $15,169 $15,668 $15,497 $11,743
7/31/2002 $15,326 $15,963 $15,679 $11,756
8/31/2002 $15,462 $16,146 $15,807 $11,795
9/30/2002 $15,598 $16,423 $15,950 $11,815
10/31/2002 $15,622 $16,412 $15,967 $11,834
11/30/2002 $15,616 $16,282 $15,958 $11,834
12/31/2002 $15,789 $16,583 $16,133 $11,808
1/31/2003 $15,828 $16,546 $16,165 $11,860
2/28/2003 $15,912 $16,733 $16,261 $11,952
3/31/2003 $15,882 $16,736 $16,249 $12,023
4/30/2003 $15,921 $16,784 $16,288 $11,997
5/31/2003 $15,915 $17,047 $16,329 $11,978
6/30/2003 $15,953 $17,019 $16,360 $11,991
7/31/2003 $15,573 $16,606 $16,008 $12,004
8/31/2003 $15,682 $16,636 $16,116 $12,050
9/30/2003 $15,909 $16,997 $16,385 $12,089
10/31/2003 $15,831 $16,830 $16,303 $12,076
11/30/2003 $15,894 $16,831 $16,352 $12,043
12/31/2003 $15,987 $16,962 $16,465 $12,030
1/31/2004 $16,075 $17,054 $16,545 $12,089
2/29/2004 $16,164 $17,217 $16,653 $12,154
3/31/2004 $16,204 $17,336 $16,708 $12,232
4/30/2004 $15,930 $16,949 $16,427 $12,272
5/31/2004 $15,893 $16,895 $16,381 $12,343
6/30/2004 $16,051 $16,938 $16,504 $12,383
7/31/2004 $16,161 $17,060 $16,629 $12,363
8/31/2004 $16,369 $17,314 $16,847 $12,369
9/30/2004 $16,373 $17,320 $16,854 $12,396
10/31/2004 $16,484 $17,426 $16,964 $12,461
11/30/2004 $16,446 $17,264 $16,908 $12,467
12/31/2004 $16,508 $17,358 $16,992 $12,422
1/31/2005 $16,595 $17,380 $17,075 $12,448
2/28/2005 $16,532 $17,283 $17,016 $12,520
3/31/2005 $16,494 $17,241 $16,975 $12,617
4/30/2005 $16,633 $17,442 $17,131 $12,702
5/31/2005 $16,742 $17,581 $17,230 $12,689
6/30/2005 $16,775 $17,638 $17,268 $12,696
7/31/2005 $16,681 $17,488 $17,196 $12,755
8/31/2005 $16,818 $17,682 $17,331 $12,820
9/30/2005 $16,723 $17,546 $17,240 $12,977
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS R 9/30/05
- -----------------------------------------
1-Year +1.31%
- -----------------------------------------
3-Year +2.55%
- -----------------------------------------
Since Inception (1/1/02) +3.91%
- -----------------------------------------
CLASS R (1/1/02 - 9/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN U.S. LEHMAN BROTHERS LIPPER GNMA
GOVERNMENT U.S. GOVERNMENT: FUNDS
SECURITIES FUND - INTERMEDIATE CLASSIFICATION
DATE CLASS R INDEX(6) AVERAGE(6) CPI(6)
- -------------------------------------------------------------------------------
1/1/2002 $10,000 $10,000 $10,000 $10,000
1/31/2002 $10,109 $10,043 $10,097 $10,023
2/28/2002 $10,215 $10,126 $10,204 $10,062
3/31/2002 $10,098 $ 9,974 $10,076 $10,119
4/30/2002 $10,281 $10,160 $10,265 $10,175
5/31/2002 $10,343 $10,231 $10,333 $10,175
6/30/2002 $10,421 $10,359 $10,418 $10,181
7/31/2002 $10,530 $10,554 $10,540 $10,192
8/31/2002 $10,625 $10,675 $10,627 $10,226
9/30/2002 $10,704 $10,858 $10,722 $10,243
10/31/2002 $10,722 $10,851 $10,734 $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 $10,867 $10,283
2/28/2003 $10,924 $11,063 $10,932 $10,362
3/31/2003 $10,921 $11,066 $10,924 $10,424
4/30/2003 $10,948 $11,097 $10,950 $10,402
5/31/2003 $10,945 $11,271 $10,977 $10,385
6/30/2003 $10,958 $11,252 $10,998 $10,396
7/31/2003 $10,715 $10,979 $10,762 $10,407
8/31/2003 $10,791 $10,999 $10,834 $10,447
9/30/2003 $10,948 $11,237 $11,015 $10,481
10/31/2003 $10,897 $11,127 $10,960 $10,470
11/30/2003 $10,926 $11,128 $10,993 $10,441
12/31/2003 $11,008 $11,215 $11,069 $10,430
1/31/2004 $11,053 $11,276 $11,123 $10,481
2/29/2004 $11,115 $11,383 $11,195 $10,538
3/31/2004 $11,160 $11,462 $11,232 $10,606
4/30/2004 $10,975 $11,206 $11,043 $10,640
5/31/2004 $10,950 $11,170 $11,012 $10,702
6/30/2004 $11,044 $11,198 $11,095 $10,736
7/31/2004 $11,121 $11,280 $11,179 $10,719
8/31/2004 $11,265 $11,447 $11,326 $10,724
9/30/2004 $11,286 $11,452 $11,330 $10,747
10/31/2004 $11,364 $11,522 $11,404 $10,804
11/30/2004 $11,323 $11,414 $11,366 $10,809
12/31/2004 $11,384 $11,476 $11,423 $10,770
1/31/2005 $11,445 $11,491 $11,479 $10,792
2/28/2005 $11,386 $11,427 $11,439 $10,855
3/31/2005 $11,361 $11,399 $11,412 $10,939
4/30/2005 $11,475 $11,532 $11,517 $11,013
5/31/2005 $11,534 $11,624 $11,583 $11,002
6/30/2005 $11,559 $11,662 $11,609 $11,007
7/31/2005 $11,513 $11,562 $11,560 $11,058
8/31/2005 $11,590 $11,691 $11,651 $11,115
9/30/2005 $11,544 $11,601 $11,590 $11,251
Annual Report | 47
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
ADVISOR CLASS(5) 9/30/05
- -----------------------------------------
1-Year +2.95%
- -----------------------------------------
5-Year +5.57%
- -----------------------------------------
10-Year +6.01%
- -----------------------------------------
ADVISOR CLASS (10/1/95 - 9/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN U.S. LEHMAN BROTHERS LIPPER GNMA
GOVERNMENT U.S. GOVERNMENT: FUNDS
SECURITIES FUND - INTERMEDIATE CLASSIFICATION
DATE ADVISOR CLASS INDEX(6) AVERAGE(6) CPI(6)
- --------------------------------------------------------------------------------
10/1/1995 $10,000 $10,000 $10,000 $10,000
10/31/1995 $10,104 $10,110 $10,095 $10,033
11/30/1995 $10,208 $10,233 $10,221 $10,026
12/31/1995 $10,328 $10,334 $10,352 $10,020
1/31/1996 $10,389 $10,421 $10,412 $10,078
2/29/1996 $10,301 $10,311 $10,281 $10,111
3/31/1996 $10,257 $10,264 $10,239 $10,163
4/30/1996 $10,213 $10,234 $10,197 $10,202
5/31/1996 $10,184 $10,229 $10,156 $10,222
6/30/1996 $10,308 $10,332 $10,266 $10,228
7/31/1996 $10,340 $10,364 $10,302 $10,248
8/31/1996 $10,342 $10,376 $10,297 $10,268
9/30/1996 $10,515 $10,510 $10,460 $10,300
10/31/1996 $10,705 $10,683 $10,670 $10,333
11/30/1996 $10,865 $10,812 $10,832 $10,352
12/31/1996 $10,803 $10,753 $10,757 $10,352
1/31/1997 $10,918 $10,795 $10,826 $10,385
2/28/1997 $10,937 $10,812 $10,847 $10,418
3/31/1997 $10,905 $10,751 $10,738 $10,444
4/30/1997 $11,088 $10,872 $10,901 $10,457
5/31/1997 $11,186 $10,957 $10,999 $10,450
6/30/1997 $11,318 $11,051 $11,126 $10,463
7/31/1997 $11,533 $11,254 $11,352 $10,477
8/31/1997 $11,482 $11,211 $11,310 $10,496
9/30/1997 $11,634 $11,333 $11,461 $10,522
10/31/1997 $11,735 $11,465 $11,576 $10,548
11/30/1997 $11,768 $11,490 $11,603 $10,542
12/31/1997 $11,887 $11,584 $11,715 $10,529
1/31/1998 $11,990 $11,735 $11,833 $10,548
2/28/1998 $12,006 $11,723 $11,847 $10,568
3/31/1998 $12,058 $11,759 $11,887 $10,587
4/30/1998 $12,127 $11,815 $11,950 $10,607
5/31/1998 $12,228 $11,897 $12,043 $10,627
6/30/1998 $12,278 $11,977 $12,097 $10,640
7/31/1998 $12,327 $12,023 $12,145 $10,653
8/31/1998 $12,447 $12,250 $12,267 $10,666
9/30/1998 $12,624 $12,536 $12,425 $10,679
10/31/1998 $12,546 $12,557 $12,364 $10,705
11/30/1998 $12,633 $12,518 $12,433 $10,705
12/31/1998 $12,684 $12,567 $12,478 $10,698
1/31/1999 $12,771 $12,623 $12,550 $10,725
2/28/1999 $12,675 $12,450 $12,452 $10,738
3/31/1999 $12,745 $12,532 $12,531 $10,770
4/30/1999 $12,815 $12,566 $12,578 $10,849
5/31/1999 $12,717 $12,489 $12,493 $10,849
6/30/1999 $12,637 $12,507 $12,424 $10,849
7/31/1999 $12,555 $12,509 $12,350 $10,881
8/31/1999 $12,547 $12,527 $12,332 $10,907
9/30/1999 $12,770 $12,634 $12,525 $10,960
10/31/1999 $12,839 $12,659 $12,567 $10,979
11/30/1999 $12,831 $12,668 $12,575 $10,986
12/31/1999 $12,783 $12,628 $12,515 $10,986
1/31/2000 $12,697 $12,586 $12,416 $11,018
2/29/2000 $12,826 $12,690 $12,558 $11,084
3/31/2000 $13,016 $12,835 $12,749 $11,175
4/30/2000 $13,007 $12,830 $12,728 $11,181
5/31/2000 $13,061 $12,864 $12,771 $11,195
6/30/2000 $13,276 $13,068 $12,993 $11,253
7/31/2000 $13,330 $13,155 $13,046 $11,279
8/31/2000 $13,528 $13,303 $13,230 $11,279
9/30/2000 $13,667 $13,419 $13,345 $11,338
10/31/2000 $13,764 $13,511 $13,426 $11,358
11/30/2000 $13,945 $13,709 $13,624 $11,364
12/31/2000 $14,169 $13,951 $13,822 $11,358
1/31/2001 $14,374 $14,136 $14,035 $11,430
2/28/2001 $14,431 $14,266 $14,122 $11,475
3/31/2001 $14,530 $14,370 $14,204 $11,501
4/30/2001 $14,546 $14,324 $14,177 $11,547
5/31/2001 $14,625 $14,384 $14,269 $11,599
6/30/2001 $14,703 $14,429 $14,317 $11,619
7/31/2001 $14,958 $14,699 $14,595 $11,586
8/31/2001 $15,061 $14,829 $14,704 $11,586
9/30/2001 $15,252 $15,146 $14,913 $11,638
10/31/2001 $15,465 $15,382 $15,116 $11,599
11/30/2001 $15,345 $15,198 $14,956 $11,580
12/31/2001 $15,268 $15,125 $14,875 $11,534
1/31/2002 $15,391 $15,190 $15,019 $11,560
2/28/2002 $15,581 $15,316 $15,179 $11,606
3/31/2002 $15,388 $15,085 $14,989 $11,671
4/30/2002 $15,672 $15,367 $15,269 $11,736
5/31/2002 $15,773 $15,475 $15,370 $11,736
6/30/2002 $15,898 $15,668 $15,497 $11,743
7/31/2002 $16,071 $15,963 $15,679 $11,756
8/31/2002 $16,220 $16,146 $15,807 $11,795
9/30/2002 $16,371 $16,423 $15,950 $11,815
10/31/2002 $16,405 $16,412 $15,967 $11,834
11/30/2002 $16,406 $16,282 $15,958 $11,834
12/31/2002 $16,596 $16,583 $16,133 $11,808
1/31/2003 $16,646 $16,546 $16,165 $11,860
2/28/2003 $16,742 $16,733 $16,261 $11,952
3/31/2003 $16,743 $16,736 $16,249 $12,023
4/30/2003 $16,769 $16,784 $16,288 $11,997
5/31/2003 $16,794 $17,047 $16,329 $11,978
6/30/2003 $16,820 $17,019 $16,360 $11,991
7/31/2003 $16,431 $16,606 $16,008 $12,004
8/31/2003 $16,554 $16,636 $16,116 $12,050
9/30/2003 $16,827 $16,997 $16,385 $12,089
10/31/2003 $16,755 $16,830 $16,303 $12,076
11/30/2003 $16,805 $16,831 $16,352 $12,043
12/31/2003 $16,912 $16,962 $16,465 $12,030
1/31/2004 $17,015 $17,054 $16,545 $12,089
2/29/2004 $17,117 $17,217 $16,653 $12,154
3/31/2004 $17,169 $17,336 $16,708 $12,232
4/30/2004 $16,890 $16,949 $16,427 $12,272
5/31/2004 $16,886 $16,895 $16,381 $12,343
6/30/2004 $17,037 $16,938 $16,504 $12,383
7/31/2004 $17,161 $17,060 $16,629 $12,363
8/31/2004 $17,391 $17,314 $16,847 $12,369
9/30/2004 $17,403 $17,320 $16,854 $12,396
10/31/2004 $17,556 $17,426 $16,964 $12,461
11/30/2004 $17,500 $17,264 $16,908 $12,467
12/31/2004 $17,601 $17,358 $16,992 $12,422
1/31/2005 $17,704 $17,380 $17,075 $12,448
2/28/2005 $17,619 $17,283 $17,016 $12,520
3/31/2005 $17,588 $17,241 $16,975 $12,617
4/30/2005 $17,745 $17,442 $17,131 $12,702
5/31/2005 $17,875 $17,581 $17,230 $12,689
6/30/2005 $17,920 $17,638 $17,268 $12,696
7/31/2005 $17,857 $17,488 $17,196 $12,755
8/31/2005 $17,985 $17,682 $17,331 $12,820
9/30/2005 $17,919 $17,546 $17,240 $12,977
48 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
ENDNOTES
THE FUND'S SHARE PRICE AND YIELD WILL BE AFFECTED BY INTEREST RATE MOVEMENTS AND
MORTGAGE PREPAYMENTS. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION FROM
INTEREST RATES. THUS, AS THE PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN
INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. 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 9/30/05.
(4) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 9/30/05.
(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 +65.87% and +5.95%.
(6) Sources: Standard & Poor's Micropal; Lipper Inc. The LB U.S. Government:
Intermediate Index includes securities issued by U.S. Treasury or Agency.
These include public obligations of the U.S. Treasury with remaining
maturity of one year or more and publicly issued debt of U.S. governmental
agencies, quasi-federal corporations, and corporate or foreign debt
guaranteed by the U.S. government. All issues included must have one to
ten years to final maturity and must be rated investment grade (Baa3 or
better) by Moody's Investors Service. They must also be dollar denominated
and nonconvertible. 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 GNMA Funds
Classification 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 9/30/05, the Lipper
GNMA Funds Classification Average consisted of 61 mutual funds. The Lipper
average does not include sales charges or expense subsidization by a
fund's manager. Fund performance relative to the average may have differed
if these or other factors had been considered.
Annual Report | 49
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.
50 | 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 3/31/05 VALUE 9/30/05 PERIOD* 3/31/05-9/30/05
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,016.50 $3.69
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.41 $3.70
- -------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,013.80 $6.36
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.75 $6.38
- -------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,013.90 $6.36
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.75 $6.38
- -------------------------------------------------------------------------------------------------------
CLASS R
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,016.20 $5.61
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.50 $5.62
- -------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,018.60 $3.09
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,022.01 $3.09
- -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.73%; B: 1.26%; C: 1.26%; R: 1.11%; and Advisor: 0.61%), multiplied by
the average account value over the period, multiplied by 183/365 to
reflect the one-half year period.
Annual Report | 51
FRANKLIN UTILITIES FUND
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Utilities Fund seeks both
capital appreciation and current income by investing at least 80% of its net
assets in public utility industry securities.
- --------------------------------------------------------------------------------
PERFORMANCE DATA 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 for the
fiscal year ended September 30, 2005.
PERFORMANCE OVERVIEW
For the 12 months under review, Franklin Utilities Fund - Class A posted a
+28.81% cumulative total return. The Fund outperformed its broad benchmark, the
Standard & Poor's 500 Composite Index (S&P 500), which returned +12.25% for the
same period.(1) The Fund underperformed its narrow benchmark, the S&P 500
Utilities Index, which returned +38.67%.(2) You can find the Fund's long-term
performance data in the Performance Summary beginning on page 56.
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended September 30, 2005, a maturing domestic economic
expansion was driven by perceived staying power across most industries, sectors
and regions. Gross domestic product (GDP) rose during the period, benefiting
primarily from personal consumption and greater business investment. Demand for
imported goods and materials fueled a widening trade gap. The U.S. dollar
rallied in 2005 driven largely by rising short-term domestic interest rates and
strong economic growth in the U.S. relative to many of its major trading
partners.
Oil prices increased substantially during the period amid concerns about
potential long-term supply limitations in the face of expected strong global
demand growth, especially from China and India. Despite these rising commodity
prices, inflation remained relatively contained for the 12 months ended
September 30, 2005, as measured by the 2.0% rise for the core Consumer Price
Index (CPI).(3)
(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: Standard & Poor's Micropal. The S&P 500 Utilities Index is a
market capitalization-weighted index consisting of all utility stocks in
the S&P 500 Index.
(3) Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
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 107.
52 | Annual Report
With controlling inflation at the forefront of its agenda, the Federal Reserve
Board raised the federal funds target rate from 1.75% to 3.75%, and said it
would respond to changes in economic prospects as needed to fulfill its
obligation to maintain price stability. Although short-term interest rates rose,
long-term interest rates remained relatively stable, supporting overall robust
housing and commercial real estate activity, which contributed to economic
growth.
Many businesses enjoyed their widest profit margins on record, propelled largely
by productivity gains. The labor market firmed as employment increased and the
unemployment rate dropped from 5.4% to 5.1% during the reporting period.(3)
Personal income rose, and hiring rebounded in many industries, bolstered by
healthy business spending and solid business confidence. However, late in the
period consumer sentiment fell amid concerns about rising energy costs.
In this environment, the blue chip stocks of the Dow Jones Industrial Average
posted a one-year total return of +7.23%, while the broader S&P 500 and
technology-heavy NASDAQ Composite Index returned +12.25% and +14.19%.(4)
Over the past several years, many utility companies have adjusted their
priorities and moved toward a back-to-basics operational philosophy. This
strategy shift was driven, in large part, by events such as the California
energy crisis, the Enron collapse, and expensive marketing and trading failures.
For many utility companies, back-to-basics has meant rebuilding core regulated
businesses while reducing debt and repairing overstretched balance sheets.
Recently, many utility companies found opportunities to invest in building
additional infrastructure, further improving operational efficiency, and
strengthening their environmental controls, which are viewed by regulators as
long-term gains for utility customers and shareholders alike. Improved
fundamentals followed these developments, along with strong stock performance.
Another driving force behind the utility sector's remarkable performance over
the past year has been its leverage to the commodity markets, in particular,
natural gas. The amount and nature of exposure can vary tremendously between
companies, but those that were able to generate low-cost power via coal or
nuclear fuel, and sell that output in wholesale markets, generated significant
gains. Pipeline and natural gas infrastructure utilities have also benefited
from greater asset utilization as well as from their ownership of natural gas
production in most cases.
(4) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. See footnote 1 for a
description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market. The index is market value weighted and includes more than
3,000 companies.
Annual Report | 53
PORTFOLIO BREAKDOWN
Franklin Utilities Fund Based on Total Net Assets
as of 9/30/05
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Electric Utilities ........................... 83.9%
Gas Distributors ............................. 11.2%
Major Telecommunications ..................... 3.2%
Oil & Gas Pipelines .......................... 1.1%
Short-Term Investments & Other Net Assets .... 0.6%
The utility sector also benefited from a variety of other factors during the
12-month period. Companies continued to implement dividend hikes that helped
them remain competitive with other sources of income; state regulators promoted
healthy utilities, especially those that invested in greater reliability and
service for their customers; and merger and acquisition activity accelerated
this year in advance of the anticipated passage of the federal energy bill,
which contains a provision to rescind outdated merger and acquisition
restraints.
INVESTMENT STRATEGY
We search for the best return opportunities available in the global utilities
arena with a specific focus on the U.S. electricity sector. Generally, we look
for companies producing a high percentage of earnings from regulated utility
franchise operations.
MANAGER'S DISCUSSION
Over the past year, the Fund maintained a solid weighting in electric utility
companies that, in addition to their regulated franchises, have
commodity-sensitive wholesale generating subsidiaries. Strong contributors to
the Fund's 12-month total return included TXU, Edison International and Exelon,
all of which fit this profile. TXU demonstrated extreme sensitivity to natural
gas prices because its low-cost generation portfolio lies within the competitive
Texas market, which is highly dependent on natural gas-fired generation and has
limited interconnectivity with other U.S. power-producing regions. Edison
International and Exelon also own vibrant wholesale generation in the Midwest
and Mid-Atlantic regions of the U.S. in addition to serving their franchise
utility customers. We have an interest in Exelon's merger with Public Service
Enterprise Group, which was announced at the end of 2004 and appeared on track
to close in the first half of 2006. A beneficiary of consolidation was the
Fund's position in Scottish Power, which rose significantly since the May 2005
announcement that Scottish Power had agreed to sell its U.S.-based Pacificorp
subsidiary to MidAmerican Energy.
54 | Annual Report
Fund holdings that detracted from our 12-month performance included our major
telecommunications investments, which represented 3.2% of the Fund's total net
assets at period-end. Investments in Verizon Communications and SBC
Communications failed to keep pace with the industry. Also hurting Fund
performance was our investment in KeySpan, a gas distribution utility company
operating in the Northeast U.S.
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, 2005, 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.
TOP 10 EQUITY HOLDINGS
Franklin Utilities Fund
9/30/05
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Dominion Resources Inc. 5.1%
ELECTRIC UTILITIES, U.S.
- --------------------------------------------------------------------------------
Exelon Corp. 4.6%
ELECTRIC UTILITIES, U.S.
- --------------------------------------------------------------------------------
Entergy Corp. 4.4%
ELECTRIC UTILITIES, U.S.
- --------------------------------------------------------------------------------
FirstEnergy Corp. 4.1%
ELECTRIC UTILITIES, U.S.
- --------------------------------------------------------------------------------
FPL Group Inc. 3.9%
ELECTRIC UTILITIES, U.S.
- --------------------------------------------------------------------------------
Public Service Enterprise Group Inc. 3.8%
ELECTRIC UTILITIES, U.S.
- --------------------------------------------------------------------------------
Edison International 3.5%
ELECTRIC UTILITIES, U.S.
- --------------------------------------------------------------------------------
Cinergy Corp. 3.1%
ELECTRIC UTILITIES, U.S.
- --------------------------------------------------------------------------------
American Electric Power Co. Inc. 3.1%
ELECTRIC UTILITIES, U.S.
- --------------------------------------------------------------------------------
Southern Co. 3.0%
ELECTRIC UTILITIES, U.S.
- --------------------------------------------------------------------------------
Annual Report | 55
PERFORMANCE SUMMARY AS OF 9/30/05
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 reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- -----------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FKUTX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.43 $12.59 $10.16
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-9/30/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.4442
- -----------------------------------------------------------------------------------------------
CLASS B (SYMBOL: FRUBX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.42 $12.57 $10.15
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-9/30/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.3882
- -----------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FRUSX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.42 $12.55 $10.13
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-9/30/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.3880
- -----------------------------------------------------------------------------------------------
CLASS R (SYMBOL: FRURX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.42 $12.57 $10.15
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-9/30/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.4092
- -----------------------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FRUAX) CHANGE 9/30/05 9/30/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.44 $12.64 $10.20
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-9/30/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.4620
- -----------------------------------------------------------------------------------------------
56 | 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 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- -----------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +28.81% +51.59% +152.63%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +23.35% +7.74% +9.24%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $12,335 $ 14,519 $ 24,196
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.07%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 3.04%
- -----------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +28.11% +47.73% +63.91%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +24.11% +7.82% +7.60%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $12,411 $ 14,573 $ 16,391
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 2.72%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 2.68%
- -----------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +28.16% +47.81% +140.11%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +27.16% +8.13% +9.15%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $12,716 $14,781 $24,011
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 2.74%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 2.68%
- -----------------------------------------------------------------------------------------------------
CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +28.35% +78.63% +50.03%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +27.35% +21.33% +11.45%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $12,735 $17,863 $15,003
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 2.93%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 2.83%
- -----------------------------------------------------------------------------------------------------
Advisor Class(6) 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +29.00% +52.73% +158.60%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +29.00% +8.84% +9.97%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $12,900 $15,273 $25,860
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.26%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 3.33%
- -----------------------------------------------------------------------------------------------------
PERFORMANCE DATA 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 | 57
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.
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS A 9/30/05
- ----------------------------------------------
1-Year +23.35%
- ----------------------------------------------
5-Year +7.74%
- ----------------------------------------------
10-Year +9.24%
- ----------------------------------------------
CLASS A (10/1/95 - 9/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN UTILITIES S&P 500 S&P 500
DATE FUND CLASS - A INDEX(7) UTILITIES INDEX(7)
------------------------------------------------------------------------------
10/1/1995 $ 9,578 $10,000 $10,000
10/31/1995 $ 9,774 $ 9,964 $10,146
11/30/1995 $ 9,931 $10,401 $10,259
12/31/1995 $10,415 $10,602 $10,856
1/31/1996 $10,585 $10,962 $11,068
2/29/1996 $10,315 $11,064 $10,726
3/31/1996 $10,305 $11,170 $10,644
4/30/1996 $ 9,960 $11,335 $10,428
5/31/1996 $10,071 $11,627 $10,585
6/30/1996 $10,608 $11,671 $11,165
7/31/1996 $10,022 $11,156 $10,451
8/31/1996 $10,166 $11,391 $10,685
9/30/1996 $10,147 $12,032 $10,781
10/31/1996 $10,480 $12,364 $11,320
11/30/1996 $10,626 $13,297 $11,549
12/31/1996 $10,626 $13,034 $11,473
1/31/1997 $10,681 $13,848 $11,533
2/28/1997 $10,770 $13,957 $11,450
3/31/1997 $10,469 $13,384 $11,080
4/30/1997 $10,390 $14,183 $10,892
5/31/1997 $10,715 $15,045 $11,375
6/30/1997 $11,068 $15,719 $11,718
7/31/1997 $11,329 $16,969 $11,974
8/31/1997 $11,079 $16,019 $11,749
9/30/1997 $11,539 $16,896 $12,248
10/31/1997 $11,596 $16,332 $12,364
11/30/1997 $12,366 $17,088 $13,294
12/31/1997 $13,272 $17,381 $14,302
1/31/1998 $12,759 $17,573 $13,721
2/28/1998 $12,962 $18,840 $14,186
3/31/1998 $13,772 $19,804 $15,109
4/30/1998 $13,277 $20,003 $14,760
5/31/1998 $13,108 $19,660 $14,706
6/30/1998 $13,423 $20,458 $15,269
7/31/1998 $12,935 $20,240 $14,497
8/31/1998 $13,375 $17,317 $14,836
9/30/1998 $14,044 $18,426 $16,010
10/31/1998 $13,784 $19,924 $15,704
11/30/1998 $13,932 $21,131 $15,936
12/31/1998 $14,277 $22,348 $16,423
1/31/1999 $13,517 $23,282 $15,705
2/28/1999 $12,873 $22,558 $15,106
3/31/1999 $12,653 $23,461 $14,867
4/30/1999 $13,449 $24,369 $16,140
5/31/1999 $14,063 $23,795 $17,159
6/30/1999 $13,564 $25,114 $16,557
7/31/1999 $13,365 $24,331 $16,354
8/31/1999 $13,339 $24,211 $16,522
9/30/1999 $12,844 $23,548 $15,727
10/31/1999 $13,072 $25,037 $15,954
11/30/1999 $12,308 $25,546 $14,770
12/31/1999 $12,135 $27,050 $14,915
1/31/2000 $12,827 $25,691 $16,534
2/29/2000 $11,881 $25,205 $15,514
3/31/2000 $12,285 $27,669 $16,030
4/30/2000 $13,015 $26,837 $17,278
5/31/2000 $13,187 $26,288 $18,034
6/30/2000 $12,595 $26,936 $16,961
7/31/2000 $13,117 $26,515 $18,163
8/31/2000 $14,508 $28,161 $20,649
9/30/2000 $15,961 $26,675 $22,545
10/31/2000 $15,888 $26,562 $21,677
11/30/2000 $16,459 $24,469 $21,428
12/31/2000 $17,185 $24,589 $23,446
1/31/2001 $15,420 $25,461 $21,167
2/28/2001 $16,325 $23,141 $21,937
3/31/2001 $16,537 $21,676 $21,789
4/30/2001 $17,226 $23,359 $23,057
5/31/2001 $17,316 $23,516 $22,322
6/30/2001 $16,443 $22,944 $20,543
7/31/2001 $15,868 $22,718 $19,596
8/31/2001 $16,080 $21,297 $19,064
9/30/2001 $15,318 $19,577 $16,856
10/31/2001 $15,333 $19,951 $16,796
11/30/2001 $15,195 $21,481 $15,894
12/31/2001 $15,795 $21,669 $16,309
1/31/2002 $15,600 $21,353 $15,370
2/28/2002 $15,552 $20,941 $15,031
3/31/2002 $16,440 $21,729 $16,860
4/30/2002 $16,325 $20,412 $16,547
5/31/2002 $15,930 $20,262 $15,078
6/30/2002 $15,223 $18,819 $14,007
7/31/2002 $13,910 $17,353 $12,049
8/31/2002 $14,458 $17,466 $12,502
9/30/2002 $13,405 $15,570 $10,887
10/31/2002 $13,405 $16,939 $10,689
11/30/2002 $13,674 $17,935 $10,971
12/31/2002 $14,140 $16,882 $11,417
1/31/2003 $13,559 $16,441 $11,068
2/28/2003 $13,184 $16,193 $10,543
3/31/2003 $13,654 $16,349 $11,060
4/30/2003 $14,399 $17,696 $12,017
5/31/2003 $15,664 $18,628 $13,270
6/30/2003 $15,717 $18,866 $13,421
7/31/2003 $14,999 $19,199 $12,545
8/31/2003 $15,016 $19,572 $12,784
9/30/2003 $15,601 $19,365 $13,354
10/31/2003 $15,884 $20,460 $13,495
11/30/2003 $16,044 $20,640 $13,509
12/31/2003 $16,869 $21,721 $14,415
1/31/2004 $17,156 $22,120 $14,721
2/29/2004 $17,604 $22,427 $15,009
3/31/2004 $17,731 $22,089 $15,159
4/30/2004 $17,206 $21,743 $14,600
5/31/2004 $17,405 $22,041 $14,735
6/30/2004 $17,682 $22,469 $14,963
7/31/2004 $17,865 $21,726 $15,209
8/31/2004 $18,579 $21,813 $15,833
9/30/2004 $18,783 $22,049 $15,970
10/31/2004 $19,560 $22,386 $16,749
11/30/2004 $20,115 $23,291 $17,455
12/31/2004 $20,773 $24,083 $17,915
1/31/2005 $20,960 $23,496 $18,281
2/28/2005 $21,129 $23,991 $18,676
3/31/2005 $21,187 $23,566 $18,887
4/30/2005 $21,659 $23,120 $19,478
5/31/2005 $22,056 $23,855 $19,509
6/30/2005 $23,028 $23,889 $20,646
7/31/2005 $23,390 $24,777 $21,109
8/31/2005 $23,600 $24,551 $21,297
9/30/2005 $24,196 $24,750 $22,146
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS B 9/30/05
- ----------------------------------------------
1-Year +24.11%
- ----------------------------------------------
5-Year +7.82%
- ----------------------------------------------
Since Inception (1/1/99) +7.60%
- ----------------------------------------------
CLASS B (1/1/99 - 9/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN UTILITIES S&P 500 S&P 500
DATE FUND CLASS - B INDEX(7) UTILITIES INDEX(7)
------------------------------------------------------------------------------
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $ 9,468 $10,418 $ 9,562
2/28/1999 $ 9,016 $10,094 $ 9,198
3/31/1999 $ 8,859 $10,498 $ 9,052
4/30/1999 $ 9,416 $10,905 $ 9,827
5/31/1999 $ 9,845 $10,647 $10,448
6/30/1999 $ 9,487 $11,238 $10,081
7/31/1999 $ 9,339 $10,887 $ 9,958
8/31/1999 $ 9,321 $10,834 $10,060
9/30/1999 $ 8,964 $10,537 $ 9,576
10/31/1999 $ 9,133 $11,203 $ 9,714
11/30/1999 $ 8,600 $11,431 $ 8,993
12/31/1999 $ 8,479 $12,104 $ 9,082
1/31/2000 $ 8,961 $11,496 $10,067
2/29/2000 $ 8,282 $11,279 $ 9,446
3/31/2000 $ 8,572 $12,381 $ 9,760
4/30/2000 $ 9,071 $12,009 $10,520
5/31/2000 $ 9,190 $11,763 $10,981
6/30/2000 $ 8,768 $12,053 $10,327
7/31/2000 $ 9,131 $11,865 $11,059
8/31/2000 $10,088 $12,601 $12,573
9/30/2000 $11,097 $11,936 $13,727
10/31/2000 $11,035 $11,886 $13,199
11/30/2000 $11,433 $10,949 $13,047
12/31/2000 $11,932 $11,003 $14,276
1/31/2001 $10,708 $11,393 $12,888
2/28/2001 $11,325 $10,355 $13,357
3/31/2001 $11,468 $ 9,699 $13,267
4/30/2001 $11,936 $10,453 $14,039
5/31/2001 $11,998 $10,523 $13,591
6/30/2001 $11,390 $10,267 $12,508
7/31/2001 $10,982 $10,166 $11,932
8/31/2001 $11,128 $ 9,530 $11,607
9/30/2001 $10,588 $ 8,760 $10,263
10/31/2001 $10,599 $ 8,927 $10,227
11/30/2001 $10,504 $ 9,612 $ 9,677
12/31/2001 $10,916 $ 9,696 $ 9,930
1/31/2002 $10,770 $ 9,555 $ 9,358
2/28/2002 $10,737 $ 9,371 $ 9,152
3/31/2002 $11,336 $ 9,723 $10,266
4/30/2002 $11,257 $ 9,134 $10,075
5/31/2002 $10,985 $ 9,067 $ 9,181
6/30/2002 $10,498 $ 8,421 $ 8,529
7/31/2002 $ 9,570 $ 7,765 $ 7,336
8/31/2002 $ 9,948 $ 7,816 $ 7,612
9/30/2002 $ 9,225 $ 6,967 $ 6,629
10/31/2002 $ 9,225 $ 7,580 $ 6,508
11/30/2002 $ 9,410 $ 8,025 $ 6,680
12/31/2002 $ 9,719 $ 7,554 $ 6,952
1/31/2003 $ 9,320 $ 7,357 $ 6,739
2/28/2003 $ 9,062 $ 7,246 $ 6,420
3/31/2003 $ 9,375 $ 7,316 $ 6,734
4/30/2003 $ 9,875 $ 7,919 $ 7,317
5/31/2003 $10,743 $ 8,335 $ 8,080
6/30/2003 $10,782 $ 8,442 $ 8,172
7/31/2003 $10,289 $ 8,591 $ 7,638
8/31/2003 $10,289 $ 8,758 $ 7,784
9/30/2003 $10,690 $ 8,665 $ 8,131
10/31/2003 $10,873 $ 9,155 $ 8,217
11/30/2003 $10,982 $ 9,236 $ 8,225
12/31/2003 $11,533 $ 9,720 $ 8,777
1/31/2004 $11,730 $ 9,898 $ 8,963
2/29/2004 $12,036 $10,036 $ 9,139
3/31/2004 $12,122 $ 9,884 $ 9,230
4/30/2004 $11,750 $ 9,729 $ 8,890
5/31/2004 $11,874 $ 9,863 $ 8,972
6/30/2004 $12,061 $10,054 $ 9,111
7/31/2004 $12,186 $ 9,722 $ 9,261
8/31/2004 $12,674 $ 9,761 $ 9,641
9/30/2004 $12,798 $ 9,866 $ 9,724
10/31/2004 $13,327 $10,017 $10,198
11/30/2004 $13,693 $10,422 $10,628
12/31/2004 $14,146 $10,777 $10,908
1/31/2005 $14,261 $10,514 $11,131
2/28/2005 $14,375 $10,735 $11,371
3/31/2005 $14,408 $10,545 $11,500
4/30/2005 $14,716 $10,345 $11,860
5/31/2005 $14,973 $10,674 $11,879
6/30/2005 $15,635 $10,690 $12,571
7/31/2005 $15,881 $11,087 $12,853
8/31/2005 $16,010 $10,986 $12,967
9/30/2005 $16,391 $11,075 $13,484
58 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS C 9/30/05
- ----------------------------------------------
1-Year +27.16%
- ----------------------------------------------
5-Year +8.13%
- ----------------------------------------------
10-Year +9.15%
- ----------------------------------------------
CLASS C (10/1/95-9/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN UTILITIES S&P 500 S&P 500
DATE FUND - CLASS C INDEX(7) UTILITIES INDEX(7)
------------------------------------------------------------------------------
10/1/1995 $10,000 $10,000 $10,000
10/31/1995 $10,195 $ 9,964 $10,146
11/30/1995 $10,349 $10,401 $10,259
12/31/1995 $10,860 $10,602 $10,856
1/31/1996 $11,017 $10,962 $11,068
2/29/1996 $10,745 $11,064 $10,726
3/31/1996 $10,731 $11,170 $10,644
4/30/1996 $10,371 $11,335 $10,428
5/31/1996 $10,477 $11,627 $10,585
6/30/1996 $11,022 $11,671 $11,165
7/31/1996 $10,411 $11,156 $10,451
8/31/1996 $10,561 $11,391 $10,685
9/30/1996 $10,539 $12,032 $10,781
10/31/1996 $10,875 $12,364 $11,320
11/30/1996 $11,027 $13,297 $11,549
12/31/1996 $11,023 $13,034 $11,473
1/31/1997 $11,081 $13,848 $11,533
2/28/1997 $11,161 $13,957 $11,450
3/31/1997 $10,838 $13,384 $11,080
4/30/1997 $10,757 $14,183 $10,892
5/31/1997 $11,081 $15,045 $11,375
6/30/1997 $11,445 $15,719 $11,718
7/31/1997 $11,715 $16,969 $11,974
8/31/1997 $11,445 $16,019 $11,749
9/30/1997 $11,916 $16,896 $12,248
10/31/1997 $11,975 $16,332 $12,364
11/30/1997 $12,760 $17,088 $13,294
12/31/1997 $13,693 $17,381 $14,302
1/31/1998 $13,164 $17,573 $13,721
2/28/1998 $13,361 $18,840 $14,186
3/31/1998 $14,190 $19,804 $15,109
4/30/1998 $13,680 $20,003 $14,760
5/31/1998 $13,493 $19,660 $14,706
6/30/1998 $13,813 $20,458 $15,269
7/31/1998 $13,310 $20,240 $14,497
8/31/1998 $13,750 $17,317 $14,836
9/30/1998 $14,447 $18,426 $16,010
10/31/1998 $14,167 $19,924 $15,704
11/30/1998 $14,307 $21,131 $15,936
12/31/1998 $14,657 $22,348 $16,423
1/31/1999 $13,876 $23,282 $15,705
2/28/1999 $13,214 $22,558 $15,106
3/31/1999 $12,986 $23,461 $14,867
4/30/1999 $13,790 $24,369 $16,140
5/31/1999 $14,420 $23,795 $17,159
6/30/1999 $13,892 $25,114 $16,557
7/31/1999 $13,675 $24,331 $16,354
8/31/1999 $13,648 $24,211 $16,522
9/30/1999 $13,137 $23,548 $15,727
10/31/1999 $13,370 $25,037 $15,954
11/30/1999 $12,575 $25,546 $14,770
12/31/1999 $12,393 $27,050 $14,915
1/31/2000 $13,101 $25,691 $16,534
2/29/2000 $12,119 $25,205 $15,514
3/31/2000 $12,543 $27,669 $16,030
4/30/2000 $13,274 $26,837 $17,278
5/31/2000 $13,450 $26,288 $18,034
6/30/2000 $12,830 $26,936 $16,961
7/31/2000 $13,362 $26,515 $18,163
8/31/2000 $14,766 $28,161 $20,649
9/30/2000 $16,244 $26,675 $22,545
10/31/2000 $16,155 $26,562 $21,677
11/30/2000 $16,737 $24,469 $21,428
12/31/2000 $17,468 $24,589 $23,446
1/31/2001 $15,673 $25,461 $21,167
2/28/2001 $16,578 $23,141 $21,937
3/31/2001 $16,789 $21,676 $21,789
4/30/2001 $17,474 $23,359 $23,057
5/31/2001 $17,565 $23,516 $22,322
6/30/2001 $16,673 $22,944 $20,543
7/31/2001 $16,075 $22,718 $19,596
8/31/2001 $16,290 $21,297 $19,064
9/30/2001 $15,513 $19,577 $16,856
10/31/2001 $15,529 $19,951 $16,796
11/30/2001 $15,374 $21,481 $15,894
12/31/2001 $15,977 $21,669 $16,309
1/31/2002 $15,780 $21,353 $15,370
2/28/2002 $15,731 $20,941 $15,031
3/31/2002 $16,609 $21,729 $16,860
4/30/2002 $16,476 $20,412 $16,547
5/31/2002 $16,078 $20,262 $15,078
6/30/2002 $15,363 $18,819 $14,007
7/31/2002 $14,019 $17,353 $12,049
8/31/2002 $14,573 $17,466 $12,502
9/30/2002 $13,512 $15,570 $10,887
10/31/2002 $13,495 $16,939 $10,689
11/30/2002 $13,784 $17,935 $10,971
12/31/2002 $14,237 $16,882 $11,417
1/31/2003 $13,652 $16,441 $11,068
2/28/2003 $13,273 $16,193 $10,543
3/31/2003 $13,735 $16,349 $11,060
4/30/2003 $14,467 $17,696 $12,017
5/31/2003 $15,741 $18,628 $13,270
6/30/2003 $15,782 $18,866 $13,421
7/31/2003 $15,059 $19,199 $12,545
8/31/2003 $15,077 $19,572 $12,784
9/30/2003 $15,644 $19,365 $13,354
10/31/2003 $15,912 $20,460 $13,495
11/30/2003 $16,090 $20,640 $13,509
12/31/2003 $16,881 $21,721 $14,415
1/31/2004 $17,169 $22,120 $14,721
2/29/2004 $17,619 $22,427 $15,009
3/31/2004 $17,744 $22,089 $15,159
4/30/2004 $17,218 $21,743 $14,600
5/31/2004 $17,381 $22,041 $14,735
6/30/2004 $17,656 $22,469 $14,963
7/31/2004 $17,839 $21,726 $15,209
8/31/2004 $18,554 $21,813 $15,833
9/30/2004 $18,736 $22,049 $15,970
10/31/2004 $19,513 $22,386 $16,749
11/30/2004 $20,049 $23,291 $17,455
12/31/2004 $20,713 $24,083 $17,915
1/31/2005 $20,882 $23,496 $18,281
2/28/2005 $21,050 $23,991 $18,676
3/31/2005 $21,097 $23,566 $18,887
4/30/2005 $21,550 $23,120 $19,478
5/31/2005 $21,927 $23,855 $19,509
6/30/2005 $22,897 $23,889 $20,646
7/31/2005 $23,239 $24,777 $21,109
8/31/2005 $23,448 $24,551 $21,297
9/30/2005 $24,011 $24,750 $22,146
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS R 9/30/05
- ----------------------------------------------
1-Year +27.35%
- ----------------------------------------------
3-Year +21.33%
- ----------------------------------------------
Since Inception (1/1/02) +11.45%
- ----------------------------------------------
CLASS R (1/1/02 - 9/30/05)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN UTILITIES S&P 500 S&P 500
DATE FUND CLASS - R INDEX(7) UTILITIES INDEX(7)
------------------------------------------------------------------------------
1/1/2002 $10,000 $10,000 $10,000
1/31/2002 $ 9,796 $ 9,854 $ 9,424
2/28/2002 $ 9,766 $ 9,664 $ 9,216
3/31/2002 $10,303 $10,028 $10,338
4/30/2002 $10,231 $ 9,420 $10,146
5/31/2002 $ 9,984 $ 9,351 $ 9,245
6/30/2002 $ 9,542 $ 8,685 $ 8,589
7/31/2002 $ 8,719 $ 8,008 $ 7,388
8/31/2002 $ 9,052 $ 8,061 $ 7,666
9/30/2002 $ 8,399 $ 7,185 $ 6,675
10/31/2002 $ 8,399 $ 7,817 $ 6,554
11/30/2002 $ 8,568 $ 8,277 $ 6,727
12/31/2002 $ 8,852 $ 7,791 $ 7,001
1/31/2003 $ 8,488 $ 7,587 $ 6,786
2/28/2003 $ 8,253 $ 7,473 $ 6,465
3/31/2003 $ 8,546 $ 7,545 $ 6,781
4/30/2003 $ 9,002 $ 8,167 $ 7,368
5/31/2003 $ 9,793 $ 8,596 $ 8,137
6/30/2003 $ 9,819 $ 8,706 $ 8,229
7/31/2003 $ 9,369 $ 8,860 $ 7,692
8/31/2003 $ 9,381 $ 9,032 $ 7,839
9/30/2003 $ 9,739 $ 8,937 $ 8,188
10/31/2003 $ 9,916 $ 9,442 $ 8,275
11/30/2003 $10,016 $ 9,525 $ 8,283
12/31/2003 $10,523 $10,024 $ 8,839
1/31/2004 $10,691 $10,208 $ 9,026
2/29/2004 $10,972 $10,350 $ 9,203
3/31/2004 $11,053 $10,194 $ 9,295
4/30/2004 $10,725 $10,034 $ 8,952
5/31/2004 $10,837 $10,171 $ 9,035
6/30/2004 $11,012 $10,369 $ 9,175
7/31/2004 $11,126 $10,026 $ 9,326
8/31/2004 $11,571 $10,066 $ 9,708
9/30/2004 $11,690 $10,175 $ 9,792
10/31/2004 $12,173 $10,331 $10,270
11/30/2004 $12,508 $10,749 $10,703
12/31/2004 $12,922 $11,114 $10,985
1/31/2005 $13,027 $10,843 $11,209
2/28/2005 $13,132 $11,071 $11,451
3/31/2005 $13,163 $10,876 $11,581
4/30/2005 $13,457 $10,669 $11,943
5/31/2005 $13,692 $11,009 $11,962
6/30/2005 $14,300 $11,024 $12,659
7/31/2005 $14,513 $11,434 $12,943
8/31/2005 $14,644 $11,330 $13,058
9/30/2005 $15,003 $11,422 $13,579
Annual Report | 59
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
ADVISORY CLASS(6) 9/30/05
- ---------------------------------------------
1-Year +29.00%
- ---------------------------------------------
5-Year +8.84%
- ---------------------------------------------
10-Year +9.97%
- ---------------------------------------------
ADVISOR CLASS (10/1/95 - 9/30/05)(6)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN UTILITIES
FUND - ADVISOR S&P 500 S&P 500
DATE CLASS INDEX(7) UTILITIES INDEX(7)
------------------------------------------------------------------------------
10/1/1995 $10,000 $10,000 $10,000
10/31/1995 $10,205 $ 9,964 $10,146
11/30/1995 $10,369 $10,401 $10,259
12/31/1995 $10,874 $10,602 $10,856
1/31/1996 $11,052 $10,962 $11,068
2/29/1996 $10,769 $11,064 $10,726
3/31/1996 $10,759 $11,170 $10,644
4/30/1996 $10,399 $11,335 $10,428
5/31/1996 $10,516 $11,627 $10,585
6/30/1996 $11,076 $11,671 $11,165
7/31/1996 $10,464 $11,156 $10,451
8/31/1996 $10,614 $11,391 $10,685
9/30/1996 $10,594 $12,032 $10,781
10/31/1996 $10,943 $12,364 $11,320
11/30/1996 $11,095 $13,297 $11,549
12/31/1996 $11,095 $13,034 $11,473
1/31/1997 $11,246 $13,848 $11,533
2/28/1997 $11,340 $13,957 $11,450
3/31/1997 $11,026 $13,384 $11,080
4/30/1997 $10,943 $14,183 $10,892
5/31/1997 $11,285 $15,045 $11,375
6/30/1997 $11,660 $15,719 $11,718
7/31/1997 $11,936 $16,969 $11,974
8/31/1997 $11,660 $16,019 $11,749
9/30/1997 $12,162 $16,896 $12,248
10/31/1997 $12,210 $16,332 $12,364
11/30/1997 $13,022 $17,088 $13,294
12/31/1997 $13,993 $17,381 $14,302
1/31/1998 $13,452 $17,573 $13,721
2/28/1998 $13,666 $18,840 $14,186
3/31/1998 $14,524 $19,804 $15,109
4/30/1998 $14,015 $20,003 $14,760
5/31/1998 $13,824 $19,660 $14,706
6/30/1998 $14,162 $20,458 $15,269
7/31/1998 $13,647 $20,240 $14,497
8/31/1998 $14,098 $17,317 $14,836
9/30/1998 $14,861 $18,426 $16,010
10/31/1998 $14,587 $19,924 $15,704
11/30/1998 $14,743 $21,131 $15,936
12/31/1998 $15,099 $22,348 $16,423
1/31/1999 $14,310 $23,282 $15,705
2/28/1999 $13,630 $22,558 $15,106
3/31/1999 $13,403 $23,461 $14,867
4/30/1999 $14,244 $24,369 $16,140
5/31/1999 $14,891 $23,795 $17,159
6/30/1999 $14,370 $25,114 $16,557
7/31/1999 $14,146 $24,331 $16,354
8/31/1999 $14,132 $24,211 $16,522
9/30/1999 $13,601 $23,548 $15,727
10/31/1999 $13,856 $25,037 $15,954
11/30/1999 $13,035 $25,546 $14,770
12/31/1999 $12,870 $27,050 $14,915
1/31/2000 $13,602 $25,691 $16,534
2/29/2000 $12,587 $25,205 $15,514
3/31/2000 $13,034 $27,669 $16,030
4/30/2000 $13,806 $26,837 $17,278
5/31/2000 $13,988 $26,288 $18,034
6/30/2000 $13,350 $26,936 $16,961
7/31/2000 $13,918 $26,515 $18,163
8/31/2000 $15,389 $28,161 $20,649
9/30/2000 $16,932 $26,675 $22,545
10/31/2000 $16,855 $26,562 $21,677
11/30/2000 $17,475 $24,469 $21,428
12/31/2000 $18,233 $24,589 $23,446
1/31/2001 $16,366 $25,461 $21,167
2/28/2001 $17,323 $23,141 $21,937
3/31/2001 $17,553 $21,676 $21,789
4/30/2001 $18,283 $23,359 $23,057
5/31/2001 $18,394 $23,516 $22,322
6/30/2001 $17,460 $22,944 $20,543
7/31/2001 $16,851 $22,718 $19,596
8/31/2001 $17,076 $21,297 $19,064
9/30/2001 $16,274 $19,577 $16,856
10/31/2001 $16,290 $19,951 $16,796
11/30/2001 $16,145 $21,481 $15,894
12/31/2001 $16,786 $21,669 $16,309
1/31/2002 $16,579 $21,353 $15,370
2/28/2002 $16,545 $20,941 $15,031
3/31/2002 $17,475 $21,729 $16,860
4/30/2002 $17,353 $20,412 $16,547
5/31/2002 $16,953 $20,262 $15,078
6/30/2002 $16,191 $18,819 $14,007
7/31/2002 $14,781 $17,353 $12,049
8/31/2002 $15,380 $17,466 $12,502
9/30/2002 $14,269 $15,570 $10,887
10/31/2002 $14,269 $16,939 $10,689
11/30/2002 $14,573 $17,935 $10,971
12/31/2002 $15,054 $16,882 $11,417
1/31/2003 $14,438 $16,441 $11,068
2/28/2003 $14,039 $16,193 $10,543
3/31/2003 $14,543 $16,349 $11,060
4/30/2003 $15,334 $17,696 $12,017
5/31/2003 $16,694 $18,628 $13,270
6/30/2003 $16,756 $18,866 $13,421
7/31/2003 $15,993 $19,199 $12,545
8/31/2003 $16,012 $19,572 $12,784
9/30/2003 $16,639 $19,365 $13,354
10/31/2003 $16,921 $20,460 $13,495
11/30/2003 $17,109 $20,640 $13,509
12/31/2003 $17,973 $21,721 $14,415
1/31/2004 $18,278 $22,120 $14,721
2/29/2004 $18,773 $22,427 $15,009
3/31/2004 $18,914 $22,089 $15,159
4/30/2004 $18,356 $21,743 $14,600
5/31/2004 $18,548 $22,041 $14,735
6/30/2004 $18,849 $22,469 $14,963
7/31/2004 $19,063 $21,726 $15,209
8/31/2004 $19,821 $21,813 $15,833
9/30/2004 $20,046 $22,049 $15,970
10/31/2004 $20,871 $22,386 $16,749
11/30/2004 $21,461 $23,291 $17,455
12/31/2004 $22,177 $24,083 $17,915
1/31/2005 $22,376 $23,496 $18,281
2/28/2005 $22,575 $23,991 $18,676
3/31/2005 $22,625 $23,566 $18,887
4/30/2005 $23,147 $23,120 $19,478
5/31/2005 $23,550 $23,855 $19,509
6/30/2005 $24,613 $23,889 $20,646
7/31/2005 $24,999 $24,777 $21,109
8/31/2005 $25,223 $24,551 $21,297
9/30/2005 $25,860 $24,750 $22,146
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 9/30/05.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 9/30/05.
(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 +133.08% and +10.16%.
(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.
The S&P 500 Utilities Index is a market capitalization-weighted index
consisting of all utility stocks in the S&P 500 Index.
60 | Annual Report
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.
Annual Report | 61
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 3/31/05 VALUE 9/30/05 PERIOD* 3/31/05-9/30/05
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,142.00 $4.13
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.21 $3.90
- -------------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,137.90 $6.81
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.70 $6.43
- -------------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,138.20 $6.81
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.70 $6.43
- -------------------------------------------------------------------------------------------------------------
CLASS R
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,138.80 $6.01
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.45 $5.67
- -------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,143.00 $3.33
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.96 $3.14
- -------------------------------------------------------------------------------------------------------------
* 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 183/365 to
reflect the one-half year period.
62 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS
FRANKLIN DYNATECH FUND
-----------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS A 2005 2004 2003 2002 2001
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 22.01 $ 20.17 $ 15.37 $ 18.76 $ 28.60
-----------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a) ..................... (0.01) (0.09) (0.06) 0.03 0.44
Net realized and unrealized gains (losses) .......... 2.98 1.93 4.86 (3.11) (9.70)
-----------------------------------------------------------------------
Total from investment operations ..................... 2.97 1.84 4.80 (3.08) (9.26)
-----------------------------------------------------------------------
Less distributions from:
Net investment income ............................... -- -- -- (0.29) (0.58)
Tax return of capital ............................... -- -- -- (0.02) --
-----------------------------------------------------------------------
Total distributions .................................. -- -- -- (0.31) (0.58)
-----------------------------------------------------------------------
Redemption fees ...................................... --(c) --(c) -- -- --
-----------------------------------------------------------------------
Net asset value, end of year ......................... $ 24.98 $ 22.01 $ 20.17 $ 15.37 $ 18.76
=======================================================================
Total return(b) ...................................... 13.49% 9.12% 31.23% (16.83)% (32.86)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $628,732 $640,120 $558,687 $413,309 $530,074
Ratios to average net assets:
Expenses ............................................ 1.00% 0.97% 1.04% 1.00% 0.95%
Net investment income (loss) ........................ (0.02)% (0.41)% (0.40)% 0.13% 1.93%
Portfolio turnover rate .............................. 17.26% 14.93% 13.68% 8.11% 4.07%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
Annual Report | See notes to financial statements. | 63
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND (CONTINUED)
-----------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS B 2005 2004 2003 2002 2001
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 21.43 $ 19.79 $ 15.20 $ 18.57 $ 28.45
-----------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a)...................... (0.18) (0.25) (0.25) (0.12) 0.25
Net realized and unrealized gains (losses) .......... 2.90 1.89 4.84 (3.08) (9.62)
-----------------------------------------------------------------------
Total from investment operations ..................... 2.72 1.64 4.59 (3.20) (9.37)
-----------------------------------------------------------------------
Less distributions from:
Net investment income ............................... -- -- -- (0.16) (0.51)
Tax return of capital ............................... -- -- -- (0.01) --
-----------------------------------------------------------------------
Total distributions .................................. -- -- -- (0.17) (0.51)
-----------------------------------------------------------------------
Redemption fees ...................................... --(c) --(c) -- -- --
-----------------------------------------------------------------------
Net asset value, end of year ......................... $ 24.15 $ 21.43 $ 19.79 $ 15.20 $ 18.57
=======================================================================
Total return(b) ...................................... 12.69% 8.29% 30.20% (17.51)% (33.37)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $ 19,497 $ 18,824 $ 10,406 $ 5,066 $ 5,473
Ratios to average net assets:
Expenses ............................................ 1.74% 1.72% 1.79% 1.75% 1.70%
Net investment income (loss) ........................ (0.76)% (1.16)% (1.15)% (.62)% 1.13%
Portfolio turnover rate .............................. 17.26% 14.93% 13.68% 8.11% 4.07%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
64 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND (CONTINUED)
-----------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS C 2005 2004 2003 2002 2001
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year) ........
Net asset value, beginning of year ................... $ 21.21 $ 19.59 $ 15.04 $ 18.34 $ 27.95
-----------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a)...................... (0.17) (0.25) (0.25) (0.11) 0.27
Net realized and unrealized gains (losses) .......... 2.86 1.87 4.80 (3.05) (9.50)
-----------------------------------------------------------------------
Total from investment operations ..................... 2.69 1.62 4.55 (3.16) (9.23)
-----------------------------------------------------------------------
Less distributions from:
Net investment income ............................... -- -- -- (0.13) (0.38)
Tax return of capital ............................... -- -- -- (0.01) --
-----------------------------------------------------------------------
Total distributions .................................. -- -- -- (0.14) (0.38)
-----------------------------------------------------------------------
Redemption fees ...................................... --(c) --(c) -- -- --
-----------------------------------------------------------------------
Net asset value, end of year ......................... $ 23.90 $ 21.21 $ 19.59 $ 15.04 $ 18.34
=======================================================================
Total return(b) ...................................... 12.68% 8.27% 30.25% (17.48)% (33.36)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $ 73,587 $ 75,642 $ 66,952 $ 51,809 $ 77,204
Ratios to average net assets:
Expenses ............................................ 1.74% 1.72% 1.79% 1.74% 1.70%
Net investment income (loss) ........................ (0.76)% (1.16)% (1.15)% (0.61)% 1.19%
Portfolio turnover rate .............................. 17.26% 14.93% 13.68% 8.11% 4.07%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
Annual Report | See notes to financial statements. | 65
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005
- ------------------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 99.6%
AEROSPACE & DEFENSE 0.5%
Rockwell Collins Inc. ............................................ United States 75,000 $ 3,624,000
--------------
AIR FREIGHT/COURIERS 2.7%
C.H. Robinson Worldwide Inc. ..................................... United States 150,000 9,618,000
United Parcel Service Inc., B .................................... United States 140,000 9,678,200
--------------
19,296,200
--------------
BIOTECHNOLOGY 10.8%
(a) Amgen Inc. ....................................................... United States 300,000 23,901,000
(a) Biogen Idec Inc. ................................................. United States 100,000 3,948,000
(a) Charles River Laboratories International Inc. .................... United States 140,000 6,106,800
(a) Genentech Inc. .................................................. United States 300,000 25,263,000
(a) Gilead Sciences Inc. ............................................. United States 150,000 7,314,000
(a) Invitrogen Corp. ................................................. United States 150,000 11,284,500
--------------
77,817,300
--------------
BROADCASTING 0.1%
(a) XM Satellite Radio Holdings Inc., A .............................. United States 25,000 897,750
--------------
CABLE/SATELLITE TELEVISION 1.1%
(a) Comcast Corp., A ................................................. United States 175,000 5,036,500
Liberty Global Inc. .............................................. United States 15,000 406,200
(a) Liberty Global Inc., C ........................................... United States 15,000 386,250
(a) Liberty Media Corp., A ........................................... United States 300,000 2,415,000
--------------
8,243,950
--------------
CASINOS/GAMING 0.7%
International Game Technology .................................... United States 200,000 5,400,000
--------------
CHEMICALS: SPECIALTY 1.1%
Sigma-Aldrich Corp. .............................................. United States 125,000 8,007,500
--------------
COMPUTER COMMUNICATIONS 1.2%
(a) Cisco Systems Inc. ............................................... United States 500,000 8,965,000
--------------
COMPUTER PROCESSING HARDWARE 3.9%
(a) Apple Computer Inc. .............................................. United States 150,000 8,041,500
(a) Dell Inc. ........................................................ United States 250,000 8,550,000
Hewlett-Packard Co. .............................................. United States 400,000 11,680,000
--------------
28,271,500
--------------
DATA PROCESSING SERVICES 2.8%
First Data Corp. ................................................. United States 225,000 9,000,000
Paychex Inc. ..................................................... United States 300,000 11,124,000
--------------
20,124,000
--------------
ELECTRONIC EQUIPMENT/INSTRUMENTS 3.6%
(a) Agilent Technologies Inc. ........................................ United States 300,000 9,825,000
(a) Dolby Laboratories Inc., A ....................................... United States 100,000 1,600,000
Rockwell Automation Inc. ......................................... United States 277,500 14,679,750
--------------
26,104,750
--------------
66 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
ELECTRONIC PRODUCTION EQUIPMENT 3.6%
Applied Materials Inc. ........................................... United States 450,000 $ 7,632,000
KLA-Tencor Corp. ................................................. United States 200,000 9,752,000
(a) Lam Research Corp. ............................................... United States 150,000 4,570,500
(a) Varian Semiconductor Equipment Associates Inc. ................... United States 100,000 4,237,000
--------------
26,191,500
--------------
ELECTRONICS/APPLIANCE STORES 1.1%
Best Buy Co. Inc. ................................................ United States 187,500 8,161,875
--------------
FINANCIAL CONGLOMERATES 0.3%
Citigroup Inc. ................................................... United States 50,000 2,276,000
--------------
FINANCIAL PUBLISHING/SERVICES 1.7%
Moody's Corp. .................................................... United States 240,000 12,259,200
--------------
HOSPITAL/NURSING MANAGEMENT 1.1%
(a) United Surgical Partners International Inc. ...................... United States 200,000 7,822,000
--------------
INFORMATION TECHNOLOGY SERVICES 1.8%
(a) Cognizant Technology Solutions Corp., A .......................... United States 150,000 6,988,500
Infosys Technologies Ltd., ADR ................................... India 80,000 5,942,400
--------------
12,930,900
--------------
INSURANCE BROKERS/SERVICES 0.6%
(a) ChoicePoint Inc. ................................................. United States 100,000 4,317,000
--------------
INTERNET SOFTWARE/SERVICES 6.2%
(a) Google Inc., A ................................................... United States 71,600 22,658,536
(b) VistaPrint Ltd. .................................................. Bermuda 112,800 1,720,200
(a) Yahoo! Inc. ...................................................... United States 600,000 20,304,000
--------------
44,682,736
--------------
INVESTMENT BANKS/BROKERS 0.5%
(a),(c) Archipelago Holdings Inc. ........................................ United States 100,000 3,985,000
--------------
MAJOR PHARMACEUTICALS 2.4%
Johnson & Johnson ................................................ United States 150,000 9,492,000
Pfizer Inc. ...................................................... United States 300,000 7,491,000
--------------
16,983,000
--------------
MANAGED HEALTH CARE 4.7%
(a) Caremark Rx Inc. ................................................. United States 225,000 11,234,250
UnitedHealth Group Inc. .......................................... United States 400,000 22,480,000
--------------
33,714,250
--------------
MEDIA CONGLOMERATES 1.1%
(a) Discovery Holding Co., A ......................................... United States 30,000 433,200
News Corp. Ltd., B ............................................... United States 300,000 4,950,000
Time Warner Inc. ................................................. United States 150,000 2,716,500
--------------
8099,700
--------------
Annual Report | 67
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
MEDICAL SPECIALTIES 9.8%
Alcon Inc. ........................................................... Switzerland 150,000 $ 19,182,000
Medtronic Inc. ....................................................... United States 275,000 14,745,500
Stryker Corp. ........................................................ United States 280,000 13,840,400
(a) Varian Medical Systems Inc. .......................................... United States 125,000 4,938,750
(a) Waters Corp. ......................................................... United States 200,000 8,320,000
(a) Zimmer Holdings Inc. ................................................. United States 140,000 9,644,600
--------------
70,671,250
--------------
MEDICAL/NURSING SERVICES 1.1%
(a) VCA Antech Inc. ...................................................... United States 300,000 7,656,000
--------------
MOVIES/ENTERTAINMENT 1.2%
(a) Pixar ................................................................ United States 190,000 8,456,900
--------------
OILFIELD SERVICES/EQUIPMENT 2.3%
(a) FMC Technologies Inc. ................................................ United States 25,000 1,052,750
(a) National-Oilwell Varco Inc. .......................................... United States 40,000 2,632,000
Schlumberger Ltd. .................................................... United States 150,000 12,657,000
--------------
16,341,750
--------------
OTHER CONSUMER SERVICES 1.1%
(a) eBay Inc. ............................................................ United States 200,000 8,240,000
--------------
OTHER PHARMACEUTICALS 1.4%
Teva Pharmaceutical Industries Ltd., ADR ............................. Israel 300,000 10,026,000
--------------
PACKAGED SOFTWARE 9.0%
Adobe Systems Inc. ................................................... United States 475,000 14,178,750
Autodesk Inc. ........................................................ United States 300,000 13,932,000
Microsoft Corp. ...................................................... United States 950,000 24,443,500
(a) NAVTEQ Corp. ......................................................... United States 200,000 9,990,000
SAP AG, ADR .......................................................... Germany 50,000 2,166,500
--------------
64,710,750
--------------
RECREATIONAL PRODUCTS 2.0%
(a) Electronic Arts Inc. ................................................. United States 250,000 14,222,500
--------------
SAVINGS BANKS 0.8%
Golden West Financial Corp. .......................................... United States 100,000 5,939,000
--------------
SEMICONDUCTORS 11.3%
Analog Devices Inc. .................................................. United States 310,000 11,513,400
Intel Corp. .......................................................... United States 1,150,000 28,347,500
(a) International Rectifier Corp. ........................................ United States 180,000 8,114,400
Linear Technology Corp. .............................................. United States 400,000 15,036,000
(a) Marvell Technology Group Ltd. ........................................ Bermuda 110,000 5,072,100
Microchip Technology Inc. ............................................ United States 150,000 4,518,000
Xilinx Inc. .......................................................... United States 320,000 8,912,000
--------------
81,513,400
--------------
68 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
SERVICES TO THE HEALTH INDUSTRY 1.5%
(a) Pharmaceutical Product Development Inc. ...................... United States 175,000 $ 10,064,250
(b) WebMD Health Corp., A ........................................ United States 33,200 818,347
--------------
10,882,597
--------------
TELECOMMUNICATIONS EQUIPMENT 4.5%
(a) Corning Inc. ................................................. United States 150,000 2,899,500
Motorola Inc. ................................................ United States 680,750 15,037,768
Nokia Corp., ADR ............................................. Finland 315,000 5,326,650
QUALCOMM Inc. ................................................ United States 200,000 8,950,000
--------------
32,213,918
--------------
TOTAL COMMON STOCKS (COST $446,591,251) ...................... 719,049,176
--------------
SHORT TERM INVESTMENTS 1.4%
MONEY FUND (COST $5,713,444) 0.8%
(d) Franklin Institutional Fiduciary Trust Money Market
Portfolio .................................................. United States 5,713,444 5,713,444
--------------
----------------
PRINCIPAL AMOUNT
----------------
REPURCHASE AGREEMENTS 0.6%
(e),(f) Banc of America Securities LLC, 3.92%, 10/03/05 (Maturity
Value $400,175) Collateralized by U.S. Government
Agency Securities,5.00%, 7/01/35 ........................... United States $ 400,044 400,044
(e),(f) Barclays Capital Inc., 3.90%, 10/03/05 (Maturity Value
$525,228) Collateralized by U.S. Agency Securities,
5.00%, 6/01/35 ............................................. United States 525,057 525,057
(e),(f) Bear Stearns & Co. Inc., 3.85%, 10/03/05 (Maturity Value
472,201) Collateralized by U.S. Treasury Agency Securities,
2.00% - 8.25%, 3/22/06 - 8/25/05 ........................... United States 472,050 472,050
(e),(f) Citigroup Global Markets Inc., 3.81%, 10/03/05 (Maturity Value
$500,213) Collateralized by U.S. Government Agency
Securities, 0.00% - 13.25%, 10/5/05 - 4/15/32 .............. United States 500,053 500,053
(e),(f) Deutsche Bank Securities Inc., 3.83%, 10/03/05 (Maturity Value
$500,213) Collateralized by U.S. Government Agency
Securities, 2.75% - 5.55%, 12/01/06 - 9/01/20 .............. United States 500,053 500,053
(e),(f) JP Morgan Securities, 3.83%, 10/03/05 (Maturity Value
$562,239) Collateralized by U.S. Agency Securities,
5.00% - 6.00%, 3/01/34 - 4/01/35 ........................... United States 562,060 562,060
(e),(f) JP Morgan Securities, 3.90%, 10/03/05 (Maturity Value
$600,260) Collateralized by U.S. Government Agency
Securities, 0.00% - 8.875%, 12/15/05 - 2/22/28 ............. United States 600,065 600,065
(e),(f) Morgan Stanley & Co. Inc., 3.91%, 10/03/05 (Maturity Value
$541,235) Collateralized by U.S. Agency Securities,
5.00%, 9/01/33 - 7/01/35 ................................... United States 541,059 541,059
--------------
TOTAL REPURCHASE AGREEMENTS (COST $4,100,441) ................ 4,100,441
--------------
TOTAL INVESTMENTS (COST $456,405,136) 101.0% ................. 728,863,061
OTHER ASSETS, LESS LIABILITIES (1.0)% ........................ (7,047,094)
--------------
NET ASSETS 100.0% ............................................ $ 721,815,967
==============
See Selected Portfolio Abbreviations on page 109.
(a) Non-income producing.
(b) See Note 1(d) regarding securities purchased on a when-issued or delayed
delivery basis.
(c) A portion or all of the security is on loan as of September 30, 2005.
See Note 1(f).
(d) See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio.
(e) See Note 1(c) regarding repurchase agreements.
(f) 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 2005 2004 2003 2002 2001
-------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 30.58 $ 26.87 $ 22.02 $ 27.81 $ 36.91
-------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ......................... 0.13 0.06 0.08 0.07 0.23
Net realized and unrealized gains (losses) ....... 4.20 3.68 4.81 (5.65) (7.26)
-------------------------------------------------------------------------
Total from investment operations .................. 4.33 3.74 4.89 (5.58) (7.03)
-------------------------------------------------------------------------
Less distributions from:
Net investment income ............................ (0.08) (0.03) (0.04) (0.16) (0.40)
Net realized gains ............................... -- -- -- (0.05) (1.67)
-------------------------------------------------------------------------
Total distributions ............................... (0.08) (0.03) (0.04) (0.21) (2.07)
-------------------------------------------------------------------------
Redemption fees ................................... --(c) --(c) -- -- --
-------------------------------------------------------------------------
Net asset value, end of year ...................... $ 34.83 $ 30.58 $ 26.87 $ 22.02 $ 27.81
=========================================================================
Total return(b).................................... 14.17% 13.92% 22.27% (20.35)% (20.12)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $ 1,567,675 $ 1,531,871 $ 1,433,742 $ 1,249,745 $ 1,657,387
Ratios to average net assets:
Expenses ......................................... 0.94% 0.98% 1.06% 0.96% 0.91%
Net investment income ............................ 0.40% 0.20% 0.31% 0.24% 0.69%
Portfolio turnover rate ........................... 1.16% 1.56% 5.12% 2.16% 0.29%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 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 2005 2004 2003 2002 2001
-------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 29.77 $ 26.32 $ 21.70 $ 27.46 $ 36.54
-------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a) .................. (0.11) (0.16) (0.11) (0.14) (0.03)
Net realized and unrealized gains (losses) ....... 4.07 3.61 4.73 (5.57) (7.18)
-------------------------------------------------------------------------
Total from investment operations .................. 3.96 3.45 4.62 (5.71) (7.21)
-------------------------------------------------------------------------
Less distributions from:
Net investment income ............................ -- -- -- -- (0.20)
Net realized gains ............................... -- -- -- (0.05) (1.67)
-------------------------------------------------------------------------
Total distributions ............................... -- -- -- (0.05) (1.87)
-------------------------------------------------------------------------
Redemption fees ................................... --(c) --(c) -- -- --
-------------------------------------------------------------------------
Net asset value, end of year ...................... $ 33.73 $ 29.77 $ 26.32 $ 21.70 $ 27.46
=========================================================================
Total return(b) ................................... 13.30% 13.11% 21.29% (20.90)% (20.74)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $ 123,926 $ 121,986 $ 103,499 $ 75,141 $ 66,095
Ratios to average net assets:
Expenses ......................................... 1.69% 1.73% 1.81% 1.71% 1.66%
Net investment income (loss) ..................... (0.35)% (0.55)% (0.44)% (0.51)% (0.10)%
Portfolio turnover rate ........................... 1.16% 1.56% 5.12% 2.16% 0.29%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 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 2005 2004 2003 2002 2001
-------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 29.51 $ 26.09 $ 21.51 $ 27.24 $ 36.19
-------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a) .................. (0.11) (0.16) (0.11) (0.14) (0.02)
Net realized and unrealized gains (losses) ....... 4.03 3.58 4.69 (5.54) (7.13)
-------------------------------------------------------------------------
Total from investment operations .................. 3.92 3.42 4.58 (5.68) (7.15)
-------------------------------------------------------------------------
Less distributions from:
Net investment income ............................ -- -- -- -- (0.13)
Net realized gains ............................... -- -- -- (0.05) (1.67)
-------------------------------------------------------------------------
Total distributions ............................... -- -- -- (0.05) (1.80)
-------------------------------------------------------------------------
Redemption fees ................................... --(c) --(c) -- -- --
-------------------------------------------------------------------------
Net asset value, end of year ...................... $ 33.43 $ 29.51 $ 26.09 $ 21.51 $ 27.24
=========================================================================
Total return(b).................................... 13.32% 13.11% 21.29% (20.92)% (20.72)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $ 270,538 $ 270,131 $ 259,169 $ 232,307 $ 310,650
Ratios to average net assets:
Expenses ......................................... 1.69% 1.73% 1.82% 1.70% 1.66%
Net investment income (loss) ..................... (0.35)% (0.55)% (0.45)% (0.51)% (0.06)%
Portfolio turnover rate ........................... 1.16% 1.56% 5.12% 2.16% 0.29%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 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 2005 2004 2003 2002(d)
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................... $ 30.39 $ 26.74 $ 21.98 $ 31.59
-------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a) ................................. 0.05 (0.02) -- --
Net realized and unrealized gains (losses) ...................... 4.16 3.67 4.81 (9.61)
-------------------------------------------------------------
Total from investment operations ................................. 4.21 3.65 4.81 (9.61)
-------------------------------------------------------------
Less distributions from net investment income .................... (0.01) -- (0.05) --
-------------------------------------------------------------
Redemption fees .................................................. --(c) --(c) -- --
-------------------------------------------------------------
Net asset value, end of year ..................................... $ 34.59 $ 30.39 $ 26.74 $ 21.98
=============================================================
Total return(b) .................................................. 13.87% 13.65% 21.92% (30.42)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................................. $ 27,818 $ 20,060 $ 14,755 $ 2,788
Ratios to average net assets:
Expenses ........................................................ 1.19% 1.23% 1.31% 1.21%(e)
Net investment income (loss) .................................... 0.15% (0.05)% 0.06% 0.02%(e)
Portfolio turnover rate .......................................... 1.16% 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 $0.01 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 2005 2004 2003 2002 2001
--------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 30.63 $ 26.91 $ 22.06 $ 27.86 $ 36.99
--------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ......................... 0.21 0.14 0.14 0.14 0.31
Net realized and unrealized gains (losses) ....... 4.21 3.67 4.82 (5.65) (7.28)
--------------------------------------------------------------------------
Total from investment operations .................. 4.42 3.81 4.96 (5.51) (6.97)
--------------------------------------------------------------------------
Less distributions from:
Net investment income ............................ (0.16) (0.09) (0.11) (0.24) (0.49)
Net realized gains ............................... -- -- -- (0.05) (1.67)
--------------------------------------------------------------------------
Total distributions ............................... (0.16) (0.09) (0.11) (0.29) (2.16)
--------------------------------------------------------------------------
Redemption fees ................................... --(b) --(b) -- -- --
--------------------------------------------------------------------------
Net asset value, end of year ...................... $ 34.89 $ 30.63 $ 26.91 $ 22.06 $ 27.86
==========================================================================
Total return ...................................... 14.45% 14.19% 22.58% (20.14)% (19.94)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $ 221,752 $ 133,332 $ 41,216 $ 27,431 $ 32,498
Ratios to average net assets:
Expenses ......................................... 0.69% 0.73% 0.81% 0.71% 0.66%
Net investment income ............................ 0.65% 0.45% 0.56% 0.49% 0.94%
Portfolio turnover rate ........................... 1.16% 1.56% 5.12% 2.16% 0.29%
(a) Based on average daily shares outstanding.
(b) Amount is less than $0.01 per share.
74 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005
- --------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS 100.3%
COMMERCIAL SERVICES 2.6%
(a) Dun & Bradstreet Corp. ............................................. United States 122,000 $ 8,036,140
Equifax Inc. ....................................................... United States 400,000 13,976,000
Moody's Corp. ...................................................... United States 488,000 24,927,040
Robert Half International Inc. ..................................... United States 300,000 10,677,000
-------------
57,616,180
-------------
CONSUMER DURABLES 1.0%
Eastman Kodak Co. .................................................. United States 500,000 12,165,000
Harley-Davidson Inc. ............................................... United States 200,000 9,688,000
-------------
21,853,000
-------------
CONSUMER NON-DURABLES 2.8%
International Flavors & Fragrances Inc. ............................ United States 100,000 3,564,000
The Hershey Co. .................................................... United States 516,400 29,078,484
Tootsie Roll Industries Inc. ....................................... United States 22,487 713,962
V.F. Corp. ......................................................... United States 500,000 28,985,000
-------------
62,341,446
-------------
CONSUMER SERVICES 5.0%
Carnival Corp. ..................................................... United States 500,000 24,990,000
Clear Channel Communications Inc. .................................. United States 500,000 16,445,000
(a) Expedia Inc. ....................................................... United States 300,100 5,944,981
Fairmont Hotels & Resorts Inc. ..................................... Canada 125,000 4,177,500
Time Warner Inc. ................................................... United States 1,350,000 24,448,500
Viacom Inc., A ..................................................... United States 200,000 6,644,000
Viacom Inc., B ..................................................... United States 100,000 3,301,000
The Walt Disney Co. ................................................ United States 1,000,000 24,130,000
-------------
110,080,981
-------------
DISTRIBUTION SERVICES 3.1%
Cardinal Health Inc. ............................................... United States 300,000 19,032,000
Genuine Parts Co. .................................................. United States 400,000 17,160,000
W.W. Grainger Inc. ................................................. United States 500,000 31,460,000
-------------
67,652,000
-------------
ELECTRONIC TECHNOLOGY 20.7%
(a) Agilent Technologies Inc. .......................................... United States 400,000 13,100,000
(a) Apple Computer Inc. ................................................ United States 1,000,000 53,610,000
Boeing Co. ......................................................... United States 1,000,000 67,950,000
(a) Cisco Systems Inc. ................................................. United States 1,350,000 24,205,500
(a) Conexant Systems Inc. .............................................. United States 300,000 537,000
(a) Dell Inc. .......................................................... United States 500,000 17,100,000
(a) Dionex Corp. ....................................................... United States 250,000 13,562,500
(a) EMC Corp. .......................................................... United States 1,000,000 12,940,000
(a) Entegris Inc. ...................................................... United States 376,307 4,252,269
(a) Gateway Inc. ....................................................... United States 500,000 1,350,000
General Dynamics Corp. ............................................. United States 500,000 59,775,000
Hewlett-Packard Co. ................................................ United States 1,116,250 32,594,500
Intel Corp. ........................................................ United States 800,000 19,720,000
Annual Report | 75
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONT.)
ELECTRONIC TECHNOLOGY (CONT.)
Lockheed Martin Corp. .............................................. United States 500,000 $ 30,520,000
(a) Micrel Inc. ........................................................ United States 25,000 280,750
(a) Mindspeed Technologies Inc. ........................................ United States 100,000 241,000
Northrop Grumman Corp. ............................................. United States 1,000,000 54,350,000
Raytheon Co. ....................................................... United States 600,000 22,812,000
Rockwell Collins Inc. .............................................. United States 100,000 4,832,000
(a) Sun Microsystems Inc. .............................................. United States 1,600,000 6,272,000
Texas Instruments Inc. ............................................. United States 515,000 17,458,500
-------------
457,463,019
-------------
ENERGY MINERALS 3.6%
BP PLC, ADR ........................................................ United Kingdom 295,200 20,914,920
EnCana Corp. ....................................................... Canada 684,000 39,884,040
Royal Dutch Shell PLC, A, ADR ...................................... United Kingdom 280,000 18,379,200
-------------
79,178,160
-------------
FINANCE 0.3%
(a) ChoicePoint Inc. ................................................... United States 160,000 6,907,200
-------------
HEALTH SERVICES 1.3%
(a) Caremark Rx Inc. ................................................... United States 75,625 3,775,956
IMS Health Inc. .................................................... United States 500,000 12,585,000
(a) Medco Health Solutions Inc. ........................................ United States 48,240 2,644,999
Quest Diagnostics Inc. ............................................. United States 200,000 10,108,000
-------------
29,113,955
-------------
HEALTH TECHNOLOGY 22.6%
Abbott Laboratories. ............................................... United States 400,000 16,960,000
(a) Advanced Medical Optics Inc. ....................................... United States 88,888 3,373,300
Allergan Inc. ...................................................... United States 400,000 36,648,000
(a) Amgen Inc. ......................................................... United States 932,000 74,252,440
Baxter International Inc. .......................................... United States 400,000 15,948,000
(a) Biogen Idec Inc. ................................................... United States 400,000 15,792,000
Bristol-Myers Squibb Co. ........................................... United States 300,000 7,218,000
(a) Edwards Lifesciences Corp. ......................................... United States 50,000 2,220,500
Eli Lilly & Co. .................................................... United States 400,000 21,408,000
(a) Genentech Inc. ..................................................... United States 1,000,000 84,210,000
(a) Hospira Inc. ....................................................... United States 40,000 1,638,800
Johnson & Johnson. ................................................. United States 996,000 63,026,880
Merck & Co. Inc. ................................................... United States 500,000 13,605,000
(a) Millipore Corp. .................................................... United States 400,000 25,156,000
Pall Corp. ......................................................... United States 500,000 13,750,000
Pfizer Inc. ........................................................ United States 2,000,000 49,940,000
Schering-Plough Corp. .............................................. United States 100,000 2,105,000
(a) Waters Corp. ....................................................... United States 500,000 20,800,000
Wyeth .............................................................. United States 600,000 27,762,000
(a) Zimmer Holdings Inc. ............................................... United States 64,000 4,408,960
-------------
500,222,880
-------------
76 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONT.)
INDUSTRIAL SERVICES 1.7%
Schlumberger Ltd. .................................................. United States 400,000 $ 33,752,000
(a) Transocean Inc. .................................................... United States 77,440 4,747,846
-------------
38,499,846
-------------
PROCESS INDUSTRIES 1.8%
Air Products & Chemicals Inc. ...................................... United States 500,000 27,570,000
Sigma-Aldrich Corp. ................................................ United States 200,000 12,812,000
-------------
40,382,000
-------------
PRODUCER MANUFACTURING 19.5%
3M Co. ............................................................. United States 800,000 58,688,000
American Power Conversion Corp. .................................... United States 500,000 12,950,000
Avery Dennison Corp. ............................................... United States 462,000 24,204,180
Deere & Co. ........................................................ United States 200,000 12,240,000
Emerson Electric Co. ............................................... United States 500,000 35,900,000
Illinois Tool Works Inc. ........................................... United States 500,000 41,165,000
Ingersoll Rand Co., A .............................................. United States 1,002,000 38,306,460
Johnson Controls Inc. .............................................. United States 400,000 24,820,000
Molex Inc. ......................................................... United States 146,483 3,908,167
Molex Inc., A ...................................................... United States 146,483 3,766,078
Teleflex Inc. ...................................................... United States 500,000 35,250,000
Textron Inc. ....................................................... United States 525,000 37,653,000
(a) Thomas & Betts Corp. ............................................... United States 500,000 17,205,000
Tyco International Ltd. ............................................ United States 1,550,052 43,168,948
United Technologies Corp. .......................................... United States 800,000 41,472,000
-------------
430,696,833
-------------
RETAIL TRADE 0.3%
(a) IAC/InterActiveCorp ................................................ United States 300,100 7,607,535
-------------
TECHNOLOGY SERVICES 10.0%
Automatic Data Processing Inc. ..................................... United States 800,000 34,432,000
Certegy Inc. ....................................................... United States 200,000 8,004,000
(a) Computer Sciences Corp. ............................................ United States 1,000,000 47,310,000
International Business Machines Corp. .............................. United States 560,000 44,923,200
Microsoft Corp. .................................................... United States 1,000,000 25,730,000
(a) Oracle Corp. ....................................................... United States 500,000 6,195,000
(a) Yahoo! Inc. ........................................................ United States 1,600,000 54,144,000
-------------
220,738,200
-------------
Annual Report | 77
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONT.)
TRANSPORTATION 4.0%
Air France-KLM, ADR ................................................ France 550,000 $ 9,267,500
(a) Air France-KLM, ADR, wts., 11/05/07 ................................ France 500,000 200,000
(a) Alaska Air Group Inc. .............................................. United States 500,000 14,530,000
(a) AMR Corp. .......................................................... United States 1,080,000 12,074,400
(a) British Airways PLC, ADR ........................................... United Kingdom 500,000 25,860,000
(a) Continental Airlines Inc., B ....................................... United States 500,000 4,830,000
Southwest Airlines Co. ............................................. United States 65,200 968,220
Union Pacific Corp. ................................................ United States 8300,000 21,510,000
--------------
89,240,120
--------------
TOTAL COMMON STOCKS AND WARRANTS (COST $907,096,664) ............... 2,219,593,355
--------------
SHORT TERM INVESTMENT (COST $5,629,829) 0.3%
MONEY FUND 0.3%
(b) Franklin Institutional Fiduciary Trust Money Market Portfolio ...... United States 5,629,829 5,629,829
--------------
TOTAL INVESTMENTS (COST $912,726,493) 100.6% ....................... 2,225,223,184
OTHER ASSETS, LESS LIABILITIES (0.6)% .............................. (13,514,105)
--------------
NET ASSETS 100.0% .................................................. $2,211,709,079
==============
See Selected Portfolio Abbreviations on page 109.
(a) Non-income producing.
(b) See Note 7 regarding investments in the 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 2005 2004 2003 2002 2001
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 2.42 $ 2.25 $ 1.90 $ 2.16 $ 2.35
---------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ....................... 0.14 0.12 0.14 0.14 0.17
Net realized and unrealized gains (losses) ..... 0.10 0.22 0.38 (0.21) (0.15)
---------------------------------------------------------------------------
Total from investment operations .................. 0.24 0.34 0.52 (0.07) 0.02
---------------------------------------------------------------------------
Less distributions from:
Net investment income .......................... (0.15) (0.16) (0.16) (0.17) (0.18)
Net realized gains ............................. (0.01) (0.01) (0.01) (0.02) (0.03)
---------------------------------------------------------------------------
Total distributions ............................... (0.16) (0.17) (0.17) (0.19) (0.21)
---------------------------------------------------------------------------
Redemption fees ................................... --(c) --(c) -- -- --
---------------------------------------------------------------------------
Net asset value, end of year ...................... $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.16
===========================================================================
Total return(b) ................................... 10.45% 15.50% 28.12% (4.18)% 0.58%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $21,934,575 $14,743,190 $ 9,640,156 $ 6,001,117 $ 5,960,990
Ratios to average net assets:
Expenses ....................................... 0.65%(d) 0.68% 0.73% 0.72% 0.73%
Net investment income .......................... 5.54% 5.11% 6.63% 6.67% 7.54%
Portfolio turnover rate ........................... 28.51% 31.90% 48.36% 51.16% 28.13%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) Expenses net of waiver rounds to the same ratio.
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 2005 2004 2003 2002(e)
-----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 2.41 $ 2.24 $ 1.90 $ 2.15
-----------------------------------------------------------
Income from investment operations:
Net investment income(a) ....................... 0.11 0.10 0.12 0.11
Net realized and unrealized gains (losses) ..... 0.11 0.22 0.37 (0.21)
-----------------------------------------------------------
Total from investment operations .................. 0.22 0.32 0.49 (0.10)
-----------------------------------------------------------
Less distributions from:
Net investment income .......................... (0.13) (0.14) (0.14) (0.13)
Net realized gains ............................. (0.01) (0.01) (0.01) (0.02)
-----------------------------------------------------------
Total distributions ............................... (0.14) (0.15) (0.15) (0.15)
-----------------------------------------------------------
Redemption fees ................................... --(c) --(c) -- --
-----------------------------------------------------------
Net asset value, end of year ...................... $ 2.49 $ 2.41 $ 2.24 $ 1.90
===========================================================
Total return(b) ................................... 9.57% 14.59% 26.58% (5.63)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $ 3,922,396 $ 3,486,880 $ 2,083,783 $ 558,580
Ratios to average net assets:
Expenses ....................................... 1.50%(d) 1.53% 1.58% 1.57%(f)
Net investment income .......................... 4.69% 4.26% 5.78% 6.01%(f)
Portfolio turnover rate ........................... 28.51% 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 $0.01 per share.
(d) Expenses net of waiver rounds to the same ratio.
(e) For the period November 1, 2001 (effective date) to September 30, 2002.
(f) 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 2005 2004 2003 2002 2001
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 2.42 $ 2.25 $ 1.90 $ 2.17 $ 2.35
---------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ....................... 0.12 0.11 0.13 0.13 0.16
Net realized and unrealized gains (losses) ..... 0.11 0.21 0.38 (0.22) (0.14)
---------------------------------------------------------------------------
Total from investment operations .................. 0.23 0.32 0.51 (0.09) 0.02
---------------------------------------------------------------------------
Less distributions from:
Net investment income .......................... (0.14) (0.14) (0.15) (0.16) (0.17)
Net realized gains ............................. (0.01) (0.01) (0.01) (0.02) (0.03)
---------------------------------------------------------------------------
Total distributions ............................... (0.15) (0.15) (0.16) (0.18) (0.20)
---------------------------------------------------------------------------
Redemption fees ................................... --(c) --(c) -- -- --
---------------------------------------------------------------------------
Net asset value, end of year ...................... $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.17
===========================================================================
Total return(b) ................................... 9.90% 14.90% 27.51% (4.66)% 0.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $ 493,063 $ 511,471 $ 495,004 $ 430,226 $ 446,245
Ratios to average net assets:
Expenses ....................................... 1.15%(d) 1.18% 1.23% 1.22% 1.23%
Net investment income .......................... 5.04% 4.61% 6.13% 6.15% 7.02%
Portfolio turnover rate ........................... 28.51% 31.90% 48.36% 51.16% 28.13%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) Expenses net of waiver rounds to the same ratio.
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 2005 2004 2003 2002 2001
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 2.43 $ 2.26 $ 1.91 $ 2.17 $ 2.36
---------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ....................... 0.13 0.11 0.13 0.13 0.16
Net realized and unrealized gains (losses) ..... 0.10 0.21 0.38 (0.21) (0.15)
---------------------------------------------------------------------------
Total from investment operations .................. 0.23 0.32 0.51 (0.08) 0.01
---------------------------------------------------------------------------
Less distributions from:
Net investment income .......................... (0.14) (0.14) (0.15) (0.16) (0.17)
Net realized gains ............................. (0.01) (0.01) (0.01) (0.02) (0.03)
---------------------------------------------------------------------------
Total distributions ............................... (0.15) (0.15) (0.16) (0.18) (0.20)
---------------------------------------------------------------------------
Redemption fees ................................... --(c) --(c) -- -- --
---------------------------------------------------------------------------
Net asset value, end of year ...................... $ 2.51 $ 2.43 $ 2.26 $ 1.91 $ 2.17
===========================================================================
Total return(b) ................................... 9.84% 14.85% 27.37% (4.64)% 0.09%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $10,113,365 $ 6,616,891 $ 3,764,372 $ 1,545,377 $ 1,080,315
Ratios to average net assets:
Expenses ....................................... 1.15%(d) 1.18% 1.24% 1.21% 1.23%
Net investment income .......................... 5.04% 4.61% 6.12% 6.21% 7.04%
Portfolio turnover rate ........................... 28.51% 31.90% 48.36% 51.16% 28.13%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) Expenses net of waiver rounds to the same ratio.
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 2005 2004 2003 2002(e)
-----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 2.40 $ 2.23 $ 1.89 $ 2.18
-----------------------------------------------------------
Income from investment operations:
Net investment income(a) ....................... 0.13 0.11 0.13 0.10
Net realized and unrealized gains (losses) ..... 0.10 0.22 0.37 (0.27)
-----------------------------------------------------------
Total from investment operations .................. 0.23 0.33 0.50 (0.17)
-----------------------------------------------------------
Less distributions from:
Net investment income .......................... (0.14) (0.15) (0.15) (0.12)
Net realized gains ............................. (0.01) (0.01) (0.01) --
-----------------------------------------------------------
Total distributions ............................... (0.15) (0.16) (0.16) (0.12)
-----------------------------------------------------------
Redemption fees ................................... --(c) --(c) -- --
-----------------------------------------------------------
Net asset value, end of year ...................... $ 2.48 $ 2.40 $ 2.23 $ 1.89
===========================================================
Total return(b) ................................... 10.15% 15.25% 27.31% (8.34)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $ 122,222 $ 73,165 $ 36,417 $ 6,350
Ratios to average net assets:
Expenses ....................................... 1.00%(d) 1.03% 1.08% 1.07%(f)
Net investment income .......................... 5.19% 4.76% 6.28% 6.77%(f)
Portfolio turnover rate ........................... 28.51% 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 $0.01 per share.
(d) Expenses net of waiver rounds to the same ratio.
(e) For the period January 1, 2002 (effective date) to September 30, 2002.
(f) 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 2005 2004 2003 2002 2001
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 2.41 $ 2.24 $ 1.89 $ 2.16 $ 2.34
---------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ....................... 0.14 0.12 0.14 0.14 0.18
Net realized and unrealized gains (losses) ..... 0.11 0.22 0.38 (0.22) (0.15)
---------------------------------------------------------------------------
Total from investment operations .................. 0.25 0.34 0.52 (0.08) 0.03
---------------------------------------------------------------------------
Less distributions from:
Net investment income .......................... (0.16) (0.16) (0.16) (0.17) (0.18)
Net realized gains ............................. (0.01) (0.01) (0.01) (0.02) (0.03)
---------------------------------------------------------------------------
Total distributions ............................... (0.17) (0.17) (0.17) (0.19) (0.21)
---------------------------------------------------------------------------
Redemption fees ................................... --(b) --(b) -- -- --
---------------------------------------------------------------------------
Net asset value, end of year ...................... $ 2.49 $ 2.41 $ 2.24 $ 1.89 $ 2.16
===========================================================================
Total return ...................................... 10.65% 15.74% 28.47% (4.50)% 1.21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $ 2,280,318 $ 901,149 $ 95,009 $ 30,737 $ 22,737
Ratios to average net assets:
Expenses ....................................... 0.50%(c) 0.53% 0.58% 0.57% 0.58%
Net investment income .......................... 5.69% 5.26% 6.78% 6.85% 7.69%
Portfolio turnover rate ........................... 28.51% 31.90% 48.36% 51.16% 28.13%
(a) Based on average daily shares outstanding.
(b) Amount is less than $0.01 per share.
(c) Expenses net of waiver rounds to the same ratio.
84 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005
- ------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS 43.3%
COMMERCIAL SERVICES 0.2%
Dex Media Inc. .............................................. United States 3,200,000 $ 88,928,000
--------------
COMMUNICATIONS 3.2%
Alltel Corp. ................................................ United States 2,125,200 138,371,772
AT&T Corp. .................................................. United States 5,000,000 99,000,000
BellSouth Corp. ............................................. United States 18,000,000 473,400,000
SBC Communications Inc. ..................................... United States 15,000,000 359,550,000
Verizon Communications Inc. ................................. United States 5,500,000 179,795,000
--------------
1,250,116,772
--------------
CONSUMER NON-DURABLES 1.4%
Altria Group Inc. ........................................... United States 600,000 44,226,000
General Mills Inc. .......................................... United States 10,000,000 482,000,000
--------------
526,226,000
--------------
CONSUMER SERVICES 0.0%(a)
Marriott International Inc., A .............................. United States 1,052 66,276
--------------
ELECTRIC UTILITIES 16.8%
Alliant Energy Corp. ........................................ United States 5,027,770 146,458,940
Ameren Corp. ................................................ United States 8,770,000 469,107,300
American Electric Power Co. Inc. ............................ United States 8,633,800 342,761,860
(b),(c) Aquila Inc. ................................................. United States 25,000,000 99,000,000
CenterPoint Energy Inc. ..................................... United States 5,540,200 82,382,774
Cinergy Corp. ............................................... United States 8,024,500 356,368,045
Consolidated Edison Inc. .................................... United States 3,500,000 169,925,000
Dominion Resources Inc. ..................................... United States 6,023,400 518,855,676
DTE Energy Co. .............................................. United States 5,270,000 241,682,200
Duke Energy Corp. ........................................... United States 6,460,100 188,441,117
Energy East Corp. ........................................... United States 4,530,000 114,110,700
Entergy Corp. ............................................... United States 4,000,000 297,280,000
Exelon Corp. ................................................ United States 4,000,000 213,760,000
FirstEnergy Corp. ........................................... United States 13,500,000 703,620,000
FPL Group Inc. .............................................. United States 4,038,000 192,208,800
Hawaiian Electric Industries Inc. ........................... United States 1,720,000 47,953,600
NSTAR ....................................................... United States 31,000 896,520
Pepco Holdings Inc. ......................................... United States 5,520,500 128,462,035
PG&E Corp. .................................................. United States 9,500,000 372,875,000
Pinnacle West Capital Corp. ................................. United States 4,024,000 177,377,920
PPL Corp. ................................................... United States 4,300,400 139,031,932
Progress Energy Inc. ........................................ United States 7,700,000 344,575,000
Public Service Enterprise Group Inc. ........................ United States 6,023,560 387,676,322
Puget Energy Inc. ........................................... United States 4,137,000 97,136,760
Southern Co. ................................................ United States 12,743,000 455,689,680
TECO Energy Inc. ............................................ United States 9,000,000 162,180,000
TXU Corp. ................................................... United States 20,400 2,302,752
Xcel Energy Inc. ............................................ United States 4,500,000 88,245,000
--------------
6,540,364,933
--------------
Annual Report | 85
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONT.)
ELECTRONIC TECHNOLOGY 0.1%
(b) Solectron Corp. ................................................. United States 5,000,000 $ 19,550,000
--------------
ENERGY MINERALS 4.5%
BP PLC, ADR ..................................................... United Kingdom 3,500,000 247,975,000
(b) Callon Petroleum Co., wts., 12/08/10 ............................ United States 1,537,500 16,143,750
(c) Canadian Oil Sands Trust ........................................ Canada 5,600,000 619,196,006
Chevron Corp. ................................................... United States 7,000,000 453,110,000
Royal Dutch Shell PLC, A, ADR ................................... United Kingdom 6,000,000 393,840,000
(b) Yukos Corp., ADR ................................................ Russia 2,158,000 9,818,900
--------------
1,740,083,656
--------------
FINANCE 5.7%
Bank of America Corp. ........................................... United States 15,000,000 631,500,000
Comerica Inc. ................................................... United States 4,000,000 235,600,000
Fifth Third Bancorp. ............................................ United States 7,149,700 262,608,481
Freddie Mac ..................................................... United States 5,500,000 310,530,000
JPMorgan Chase & Co. ............................................ United States 12,000,000 407,160,000
Marsh & McLennan Cos. Inc. ...................................... United States 3,000,000 91,170,000
MBNA Corp. ...................................................... United States 10,000,000 246,400,000
Montpelier Re Holdings Ltd. ..................................... Bermuda 1,800,000 44,730,000
--------------
2,229,698,481
--------------
GAS UTILITIES 1.9%
Atmos Energy Corp. .............................................. United States 2,235,000 63,138,750
KeySpan Corp. ................................................... United States 5,000,000 183,900,000
NiSource Inc. ................................................... United States 5,057,000 122,632,250
ONEOK Inc. ...................................................... United States 3,996,700 135,967,734
Sempra Energy ................................................... United States 5,164,000 243,017,840
--------------
748,656,574
--------------
HEALTH TECHNOLOGY 7.4%
Bristol-Myers Squibb Co. ........................................ United States 17,000,000 409,020,000
Eli Lilly & Co. ................................................. United States 4,000,000 214,080,000
Johnson & Johnson ............................................... United States 2,000,000 126,560,000
Merck & Co. Inc. ................................................ United States 36,500,000 993,165,000
Pfizer Inc. ..................................................... United States 33,000,000 824,010,000
Wyeth ........................................................... United States 6,500,000 300,755,000
--------------
2,867,590,000
--------------
NON-ENERGY MINERALS 0.8%
AngloGold Ashanti Ltd., ADR ..................................... South Africa 2,250,000 95,490,000
Barrick Gold Corp. .............................................. Canada 4,000,000 116,200,000
Southern Peru Copper Corp. ...................................... United States 1,650,600 92,367,576
--------------
304,057,576
--------------
PROCESS INDUSTRIES 0.6%
Dow Chemical Co. ................................................ United States 3,000,000 125,010,000
Lyondell Chemical Co. ........................................... United States 3,000,000 85,860,000
--------------
210,870,000
--------------
86 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE
- -------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONT.)
REAL ESTATE INVESTMENT TRUSTS 0.6%
Developers Diversified Reality Corp. ..................... United States 3,500,000 $ 163,450,000
Glenborough Realty Trust Inc. ............................ United States 1,250,000 24,000,000
iStar Financial Inc. ..................................... United States 1,432,400 57,911,932
---------------
245,361,932
---------------
TECHNOLOGY SERVICES 0.1%
Electronic Data Systems Corp. ............................ United States 1,686,000 37,833,840
---------------
TOTAL COMMON STOCKS AND WARRANTS (COST $14,268,903,559) .. 16,809,404,040
---------------
PREFERRED STOCK (COST $57,833,250) 0.0%(a)
PROCESS INDUSTRIES 0.0%(a)
(d),(e),(f) Asia Pulp & Paper Co. Ltd., 12.00%, pfd., Perpetual ...... Indonesia 75,000,000 847,500
---------------
CONVERTIBLE PREFERRED STOCKS 9.9%
CONSUMER DURABLES 1.3%
Ford Motor Co. Capital Trust II, 6.50%, cvt. pfd. ........ United States 14,200,000 517,590,000
---------------
CONSUMER NON-DURABLES 0.3%
Lehman Brothers Holdings Inc. into General Mills, 6.25%,
cvt. pfd. ............................................. United States 4,750,000 125,281,250
---------------
ELECTRIC UTILITIES 0.2%
CMS Energy Trust I, 7.75%, cvt. pfd. ..................... United States 1,508,000 75,777,000
---------------
ELECTRONIC TECHNOLOGY 1.1%
(g) Citigroup Funding Inc. into ALTR 7.00%, cvt. pfd. ........ United States 5,000,000 93,125,000
Citigroup Global Markets Holdings into Motorola Inc.,
7.60%, cvt. pfd. ...................................... United States 4,300,000 86,008,600
Goldman Sachs Group into Applied Materials Inc., 7.35%,
cvt. pfd. ............................................. United States 5,500,000 93,417,500
Morgan Stanley into Intel Corp., 6.50%, cvt. pfd. ........ United States 5,000,000 116,325,000
(h) Morgan Stanley into Network Appliance Inc., 7.25%, cvt.
pfd., 144A ............................................ United States 2,000,000 44,890,000
---------------
433,766,100
---------------
(h) ENERGY MINERALS 0.7%
Chesapeake Energy Corp., 5.00%, cvt. pfd., 144A .......... United States 1,750,000 287,875,000
---------------
FINANCE 2.2%
Fannie Mae, 5.375%, cvt. pfd. ............................ United States 7,100 652,134,148
Metlife Inc., 6.375%, cvt. pfd. .......................... United States 6,400,000 180,800,000
---------------
832,934,148
---------------
HEALTH TECHNOLOGY 1.0%
Goldman Sachs Group into Wyeth, 6.25%, cvt. pfd. ......... United States 2,210,000 102,311,950
Morgan Stanley into Biogen Idec Inc., 8.50%, cvt. pfd. ... United States 1,600,000 59,032,000
Morgan Stanley into Forest Laboratories Inc., 6.25%,
cvt. pfd. ............................................. United States 1,360,000 53,985,200
Schering-Plough Corp., 6.00%, cvt. pfd. .................. United States 3,170,000 171,909,100
---------------
387,238,250
---------------
Annual Report | 87
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (CONT.)
INDUSTRIAL SERVICES 1.0%
Allied Waste Industries Inc., 6.25%, cvt. pfd. .................... United States 2,450,000 $ 119,584,500
(h) El Paso Corp., 4.99%, cvt. pfd., 144A ............................. United States 215,000 264,764,760
---------------
384,349,260
---------------
NON-ENERGY MINERALS 0.8%
Freeport-McMoRan Copper & Gold Inc., 5.50%, cvt. pfd. ............. United States 155,000 171,585,000
Lehman Brothers Holdings Inc. into Alcoa Inc., 6.50%, cvt. pfd. ... United States 4,600,000 117,806,000
---------------
289,391,000
---------------
PROCESS INDUSTRIES 0.2%
Lehman Brothers Holdings Inc. into Lyondell Chemical, 8.00%,
cvt. pfd. ...................................................... United States 3,000,000 87,465,000
---------------
PRODUCER MANUFACTURING 0.2%
Goldman Sachs Group into Tyco International Ltd., 7.00%,
cvt. pfd. ...................................................... United States 3,000,000 84,663,000
---------------
REAL ESTATE INVESTMENT TRUSTS 0.9%
Felcor Lodging Trust., 7.80%, cvt. pfd., A ........................ United States 3,000,000 73,890,000
Glenborough Reality Trust Inc., 7.75%, cvt. pfd., A ............... United States 1,333,594 33,499,881
Host Marriot Corp., 6.75%, cvt. pfd. .............................. United States 2,400,000 132,600,000
Lexington Corporate Properties Trust, 6.50%, cvt. pfd. ............ United States 1,200,000 60,000,000
Simon Property Group Inc., 6.00%, cvt., pfd. ...................... United States 799,980 50,478,738
---------------
350,468,619
---------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $3,763,521,843) .......... 3,856,798,627
---------------
-------------------
PRINCIPAL AMOUNT(i)
-------------------
BONDS 29.8%
ALTERNATIVE POWER GENERATION 4.3%
Calpine Canada Energy Finance, senior note, 8.50%, 5/01/08 ........ Canada 600,000,000 361,500,000
Calpine Corp.,
senior note, 7.875%, 4/01/08 ................................... United States 101,818,000 60,581,710
senior note, 8.625%, 8/15/10 ................................... United States 221,000,000 117,130,000
senior note, 8.50%, 2/15/11 .................................... United States 85,000,000 45,475,000
(h) senior secured note, 144A, 8.50%, 7/15/10 ...................... United States 325,000,000 233,187,500
(h) senior secured note, 144A, 9.875%, 12/01/11 ................... United States 20,000,000 14,700,000
(h) senior secured note, 144A, 8.75%, 7/15/13 ...................... United States 135,000,000 95,850,000
Dynegy Holdings Inc.,
(h) secured note, 144A, 9.875%, 7/15/10 ............................ United States 100,000,000 109,500,000
senior note, 6.875%, 4/01/11 ................................... United States 310,000,000 304,575,000
senior note, 8.75%, 2/15/12 .................................... United States 225,500,000 245,795,000
(h) senior secured note, 144A, 10.125%, 7/15/13 .................... United States 95,000,000 106,400,000
---------------
1,694,694,210
---------------
88 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(i) VALUE
- ------------------------------------------------------------------------------------------------------------------------------
BONDS (CONT.)
COMMUNICATIONS 2.7%
Qwest Capital Funding,
7.00%, 8/03/09 .............................................. United States 300,000,000 $ 294,750,000
7.25%, 2/15/11 .............................................. United States 360,000,000 344,700,000
Qwest Communications International Inc., senior note,
7.50%, 2/15/14 .............................................. United States 100,000,000 95,500,000
(h)144A, 7.50%, 2/15/14 ......................................... United States 155,000,000 148,025,000
Qwest Corp., 6.875%, 9/15/33 .................................... United States 75,000,000 65,437,500
Time Warner Telecom Holdings Inc., senior note, 9.25%, 2/15/14 .. United States 50,600,000 51,485,500
Time Warner Telecom Inc., senior note, 10.125%, 2/01/11 ......... United States 43,000,000 44,505,000
---------------
1,044,403,000
---------------
CONSUMER DURABLES 1.4%
Ford Motor Co., 7.45%, 7/16/31 .................................. United States 400,000,000 314,000,000
General Motors Corp., senior deb., 8.375%, 7/15/33 .............. United States 275,000,000 215,875,000
---------------
529,875,000
---------------
CONSUMER SERVICES 3.3%
(d)Adelphia Communications Corp.,
7.875%, 5/01/09 ............................................. United States 23,600,000 17,228,000
senior note, 10.875%, 10/01/10. ............................. United States 35,600,000 26,700,000
Cablevision Systems Corp., senior note, B, 8.00%, 4/15/12 ....... United States 235,000,000 229,125,000
(h)CCH I LLC,
senior note, 144A, 9.92%, 4/01/14 ........................... United States 107,379,061 79,460,505
senior secured note, 144A, 11.00%, 10/01/15 ................. United States 797,919,484 781,961,094
CCH II LLC, senior note, 10.25%, 9/15/10 ........................ United States 600,000 618,000
CSC Holdings Inc., senior note, B, 7.625%, 4/01/11 ............. United States 110,000,000 108,625,000
DIRECTV Holdings LLC, senior note,
8.375%, 3/15/13 ............................................. United States 320,000 350,800
(h)144A, 6.375%, 6/15/15 ........................................ United States 300,000 299,250
Six Flags Inc., senior note, 9.625%, 6/01/14 .................... United States 60,000,000 59,400,000
---------------
1,303,767,649
---------------
ELECTRIC UTILITIES 1.7%
Allegheny Energy Supply Co. LLC, 7.80%, 3/15/11 ................. United States 35,000,000 38,500,000
(c)Aquila Inc., senior note, 14.875%, 7/01/12 ....................... United States 95,400,000 130,698,000
CMS Energy Corp., senior note, 7.75%, 8/01/10 ................... United States 30,000,000 32,400,000
TXU Corp.,
5.55%, 11/15/14 ............................................. United States 210,000,000 200,408,670
6.55%, 11/15/34 ............................................. United States 140,000,000 130,634,280
senior note, Q, 6.50%, 11/15/24 ............................. United States 130,000,000 122,431,270
---------------
655,072,220
---------------
ELECTRONIC TECHNOLOGY 0.6%
Lucent Technologies, 6.45%, 3/15/29 ............................. United States 180,000,000 158,400,000
Sanmina-SCI Corp., senior sub. note, 6.75%, 3/01/13 ............. United States 77,000,000 73,535,000
---------------
231,935,000
---------------
Annual Report | 89
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(i) VALUE
- ------------------------------------------------------------------------------------------------------------------
BONDS (CONT.)
ENERGY MINERALS 0.5%
Callon Petroleum Co., senior note, 9.75%, 12/08/10 ..... United States 117,500,000 $ 123,375,000
Chesapeake Energy Corp., senior note, 6.25%, 1/15/18 ... United States 20,000,000 19,700,000
Mission Resources Corp., senior note, 9.875%, 4/01/11 .. United States 10,000,000 11,000,000
Sonat Inc., senior note, 7.625%, 7/15/11 ............... United States 35,000,000 35,700,000
--------------
189,775,000
--------------
FINANCE 6.2%
Ford Motor Credit Co.,
7.875%, 6/15/10 ..................................... United States 250,000,000 243,511,250
7.375%, 2/01/11 ..................................... United States 370,000,000 354,287,580
7.00%, 10/01/13 ..................................... United States 170,000,000 157,884,610
senior note, 7.25%, 10/25/11 ........................ United States 100,000,000 95,031,900
General Motors Acceptance Corp.,
7.75%, 1/19/10 ...................................... United States 420,000,000 407,472,240
6.875%, 9/15/11 ..................................... United States 800,000,000 728,548,800
6.875%, 8/28/12 ..................................... United States 215,400,000 193,028,987
6.75%, 12/01/14 ..................................... United States 245,000,000 213,458,945
--------------
2,393,224,312
--------------
HEALTH SERVICES 3.3%
DaVita Inc.,
senior note, 6.625%, 3/15/13 ........................ United States 23,600,000 24,013,000
senior sub. note, 7.25%, 3/15/15 .................... United States 37,400,000 38,101,250
HCA Inc., 6.375%, 1/15/15 .............................. United States 70,000,000 69,604,570
HealthSouth Corp., senior note, 7.625%, 6/01/12 ........ United States 135,000,000 126,900,000
Tenet Healthcare Corp., senior note,
6.375%, 12/01/11 .................................... United States 500,000,000 468,750,000
6.50%, 6/01/12 ...................................... United States 225,000,000 210,937,500
7.375%, 2/01/13 ..................................... United States 350,000,000 333,375,000
--------------
1,271,681,320
--------------
INDUSTRIAL SERVICES 3.1%
Allied Waste North America Inc.,
senior note, 7.875%, 4/15/13 ........................ United States 600,000 615,000
senior note, B, 7.375%, 4/15/14 ..................... United States 170,000,000 160,650,000
(h) senior note, 144A, 7.25%, 3/15/15 ................... United States 146,000,000 144,540,000
senior secured note, 6.50%, 11/15/10 ................ United States 110,000,000 107,387,500
senior secured note, 6.125%, 2/15/14 ................ United States 135,000,000 126,900,000
Allied Waste Industries Inc., 7.40%, 9/15/35 ........... United States 30,000,000 26,475,000
El Paso Corp.,
(h) 144A, 7.625%, 8/16/07 ............................... United States 70,000,000 71,575,000
senior note, 7.75%, 1/15/32 ......................... United States 250,000,000 253,125,000
El Paso Energy, senior note, 6.75%, 5/15/09 ............ United States 215,000,000 213,925,000
El Paso Production Holdings, 7.75%, 6/01/13 ............ United States 87,500,000 91,875,000
--------------
1,197,067,500
--------------
NON-ENERGY MINERALS 0.2%
(h) Novelis Inc., senior note, 144A, 7.25%, 2/15/15 ........ Canada 65,000,000 61,750,000
--------------
90 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(i) VALUE
- ----------------------------------------------------------------------------------------------------------------------------
BONDS (CONT.)
PROCESS INDUSTRIES 1.0%
Abitibi-Consolidated Inc., senior note, 8.375%, 4/01/15 .. Canada 70,600,000 $ 69,717,500
Jefferson Smurfit Corp., senior note, 8.25%, 10/01/12 .... United States 40,000,000 37,800,000
Nalco Co., senior sub. note, 8.875%, 11/15/13 ............ United States 500,000 515,625
NewPage Corp., senior secured note, 10.00%, 5/01/12 ...... United States 110,000,000 104,225,000
(e),(f),(j) Pindo Deli Finance Mauritius Ltd., 144A, FRN, 4.675%,
4/29/15 ............................................... Indonesia 113,073 26,403
4/29/18 ............................................... Indonesia 294,012 68,652
Rhodia SA, senior note, 10.25%, 6/01/10 .................. France 170,600,000 181,262,500
(e),(f),(j) Tjiwi Kimia Finance Mauritius, secured note, 144A, FRN,
4.675%,
4/29/15 ............................................... Indonesia 12,883,549 3,946,231
4/29/18 ............................................... Indonesia 33,160,560 10,157,079
--------------
407,718,990
--------------
PRODUCER MANUFACTURING 0.7%
Case New Holland Inc., senior note, 6.00%, 6/01/09 ....... United States 200,000,000 193,000,000
Dana Corp., 7.00%, 3/01/29 ............................... United States 50,000,000 38,325,900
(h) Invensys PLC, senior note, 144A, 9.875%, 3/15/11 ......... United Kingdom 51,100,000 51,036,125
--------------
282,362,025
--------------
REAL ESTATE INVESTMENT TRUSTS 0.5%
Host Marriott LP, senior note,
9.25%, 10/01/07 ....................................... United States 500,000 529,375
7.125%, 11/01/13 ...................................... United States 50,000,000 51,312,500
6.375%, 3/15/15 ....................................... United States 87,000,000 84,825,000
MeriStar Hospitality Corp., 9.125%, 1/15/11 .............. United States 64,500,000 68,692,500
--------------
205,359,375
--------------
TECHNOLOGY SERVICES 0.3%
(h) Sungard Data Systems Inc.,
senior note, 144A, 9.125%, 8/15/13 .................... United States 59,300,000 61,746,125
senior sub. note, 144A, 10.25%, 8/15/15 ............... United States 59,900,000 60,948,250
--------------
122,694,375
--------------
TOTAL BONDS (COST $11,585,599,999) ....................... 11,591,379,976
--------------
CONVERTIBLE BONDS 5.3%
ALTERNATIVE POWER GENERATION 1.1%
Calpine Corp., cvt.,
senior note, 4.75%, 11/15/23 .......................... United States 102,200,000 56,210,000
sub. note, 7.75%, 6/01/15 ............................. United States 450,000,000 383,400,000
--------------
439,610,000
--------------
CONSUMER SERVICES 0.3%
(d) Adelphia Communications Corp., cvt., junior sub. note,
6.00%, 2/15/06 ........................................ United States 75,000,000 2,625,000
Echostar Communications Corp., cvt., sub. note, 5.75%,
5/15/08 ............................................... United States 25,500,000 25,372,500
Six Flags Inc., cvt., 4.50%, 5/15/15 ..................... United States 67,500,000 85,050,000
--------------
113,047,500
--------------
Annual Report | 91
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(i) VALUE
- ---------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS (CONT.)
ELECTRIC UTILITIES 0.3%
CMS Energy Corp, cvt., senior note, 2.875%, 12/01/24 ...... United States 79,000,000 $ 102,055,360
-------------
ELECTRONIC TECHNOLOGY 1.8%
Conexant Systems Inc., cvt., sub. note, 4.00%, 2/01/07 .... United States 270,000,000 261,900,000
Nortel Networks Corp., cvt., senior note, 4.25%, 9/01/08 .. Canada 400,000,000 378,500,000
SCI Systems Inc., cvt., sub. note, 3.00%, 3/15/07 ......... United States 66,000,000 63,855,000
-------------
704,255,000
-------------
FINANCE 0.4%
Bank of America into Analog Devices Inc., cvt., 7.25%,
9/27/06 ................................................ United States 152,520,000 149,698,380
-------------
HEALTH TECHNOLOGY 0.3%
Enzon Pharmaceuticals Inc., cvt., sub. note, 4.50%,
7/01/08 ................................................ United States 112,000,000 102,200,000
-------------
INDUSTRIAL SERVICES 0.2%
Hanover Compressor Co., cvt., senior note, 4.75%,
3/15/08 ................................................ United States 100,000,000 95,875,000
-------------
REAL ESTATE INVESTMENT TRUSTS 0.7%
(h) Host Marriott LP, cvt., senior deb., 144A, 3.25%,
3/15/24 ................................................ United States 140,000,000 154,175,000
Meristar Hospitality Corp., cvt., sub. note, 9.50%,
4/01/10 ................................................ United States 95,000,000 123,500,000
-------------
277,675,000
-------------
TECHNOLOGY SERVICES 0.2%
(h) BearingPoint Inc., cvt., senior sub. note, 144A, 5.00%,
4/15/25 ................................................ United States 50,000,000 68,250,000
-------------
TOTAL CONVERTIBLE BONDS (COST $2,031,327,485) ............. 2,052,666,240
-------------
ZERO COUPON/STEP-UP BONDS 2.8%
ALTERNATIVE POWER GENERATION 0.1%
Calpine Corp, cvt., senior note, zero cpn. to 9/30/09,
6.00% thereafter, 9/30/14 .............................. United States 48,000,000 30,360,000
-------------
COMMERCIAL SERVICES 0.3%
JohnsonDiversey Holdings Inc., senior disc. note, zero
cpn. to 5/17/07, 10.67% thereafter, 5/15/13 ............ United States 150,000,000 111,750,000
-------------
CONSUMER SERVICES 1.4%
(h) CCH I LLC, senior note, 144A, zero cpn. to 5/15/06,
13.50% thereafter, 1/15/14 ............................. United States 329,000,000 273,070,000
11.75% thereafter, 5/15/14 ............................. United States 114,000,000 82,080,000
Dex Media Inc.,
senior disc. note, zero cpn. to 11/15/08, 9.00%
thereafter, 11/15/13 ................................ United States 50,000,000 39,625,000
zero cpn. to 11/15/08, 9.00% thereafter, 11/15/13 ...... United States 210,000,000 166,425,000
-------------
561,200,000
-------------
FINANCE 0.7%
Nalco Finance Holdings, senior note, zero cpn. to 8/01/09,
9.00%thereafter, 2/01/14 ............................... United States 380,000,000 282,150,000
-------------
92 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(i) VALUE
- -------------------------------------------------------------------------------------------------------------------------
ZERO COUPON/STEP-UP BONDS (CONT.)
INDUSTRIAL SERVICES 0.1%
Hanover Compressor Co., sub. note, zero cpn., 3/31/07 ...... United States 36,000,000 $ 32,580,000
--------------
PROCESS INDUSTRIES 0.0%(a)
(e,f) Pindo Deli Finance Mauritius Ltd., zero cpn., 4/29/25 ...... Indonesia 607,466 141,843
(e,f) Tjiwi Kimia Finance Mauritius, secured note, zero cpn.,
4/29/25 .................................................. Indonesia 42,601,657 13,048,888
--------------
13,190,731
--------------
PRODUCER MANUFACTURING 0.2%
(h) Polymer Holdings LLC, senior disc. note, 144A, zero cpn. to
7/15/09,12.00% thereafter, 7/15/14 ....................... United States 100,000,000 72,375,000
--------------
TOTAL ZERO COUPON/STEP-UP BONDS (COST $1,108,692,184)....... 1,103,605,731
--------------
MUNICIPAL BOND SECURITIES 1.1%
California State GO,
5.00%, 2/01/26 .......................................... United States 10,450,000 10,881,585
5.25%, 11/01/26 ......................................... United States 25,000,000 26,745,250
5.25%, 11/01/27 ......................................... United States 20,400,000 21,795,360
5.25%, 2/01/28 .......................................... United States 24,600,000 26,204,166
5.00%, 2/01/32 .......................................... United States 65,250,000 67,595,085
5.00%, 2/01/33 .......................................... United States 126,650,000 130,976,389
Refunding, 5.25%, 2/01/33 ............................... United States 28,500,000 30,275,550
Various Purpose, 5.25%, 11/01/28 ........................ United States 25,000,000 26,674,750
Various Purpose, 5.25%, 11/01/29 ........................ United States 22,500,000 23,991,525
Various Purpose, 5.50%, 11/01/33 ........................ United States 55,300,000 60,772,488
--------------
TOTAL MUNICIPAL BOND SECURITIES (COST $391,654,995) ........ 425,912,148
--------------
MORTGAGE-BACKED SECURITIES 2.6%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 1.4%
FHLMC Gold 30 Year, 5.00%, 5/01/33 - 8/01/34 ............... United States 539,063,791 528,752,567
--------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED
RATE 1.2%
GNMA I SF 30 Year, 5.00%, 4/15/33 - 6/15/34 ................ United States 463,942,078 459,704,932
--------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $988,131,069) ....... 988,457,499
--------------
TOTAL LONG TERM INVESTMENTS (COST $34,195,664,384) ......... 36,829,071,761
--------------
----------
SHARES
----------
SHORT TERM INVESTMENTS 4.5%
MONEY FUND (COST $167,074,435) 0.4%
(k) Franklin Institutional Fiduciary Trust Money Market
Portfolio ............................................... United States 167,074,435 167,074,435
--------------
Annual Report | 93
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(i) VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (COST $1,592,482,555) 4.1%
(l) Joint Repurchase Agreement, 3.668%, 10/03/05
(Maturity Value $1,592,969,324) ..................................... United States 1,592,482,555 $ 1,592,482,555
ABN AMRO Bank, N.V., New York Branch
(Maturity Value $149,691,327)
Banc of America Securities LLC (Maturity Value $149,691,327)
Barclays Capital Inc. (Maturity Value $149,691,327)
Bear, Stearns & Co. Inc. (Maturity Value $95,052,480)
BNP Paribas Securities Corp. (Maturity Value $149,691,327)
Deutsche Bank Securities Inc. (Maturity Value $71,301,309)
Goldman, Sachs & Co. (Maturity Value $149,691,327)
Greenwich Capital Markets Inc. (Maturity Value $90,289,501)
Lehman Brothers Inc. (Maturity Value $134,032,439)
Merrill Lynch Government Securities Inc.
(Maturity Value $149,691,327)
Morgan Stanley & Co. Inc. (Maturity Value $149,691,327)
UBS Securities LLC (Maturity Value $154,454,306)
Collateralized by U.S. Government Agency Securities,
1.875 - 7.25%, 2/15/06 - 8/16/10; (m)U.S. Government Agency
Discount Notes, 10/7/05 - 9/22/08; and U.S. Treasury Notes,
2.50 - 6.875%, 5/15/06 - 7/15/10
---------------
TOTAL INVESTMENTS (COST $35,955,221,374) 99.3% ............................ 38,588,628,751
OTHER ASSETS, LESS LIABILITIES 0.7% ....................................... 277,311,358
---------------
NET ASSETS 100.0% ......................................................... $38,865,940,109
===============
See Selected Portfolio Abbreviations on page 109.
(a) Rounds to less than 0.05% of net assets.
(b) Non-income producing.
(c) See Note 10 regarding holdings of 5% voting securities.
(d) See Note 8 regarding defaulted securities.
(e) See Note 11 regarding other considerations.
(f) See Note 9 regarding restricted and illiquid securities.
(g) See Note 1(d) regarding securities purchased on a when-issued or delayed
delivery basis.
(h) Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
the guidelines approved by the Fund's Board of Directors. At September 30,
2005, the value of these securities was $3,268,458,609, representing 8.41%
of net assets.
(i) The principal amount is stated in U.S. dollars unless otherwise indicated.
(j) The coupon rate shown represents the rate at period end.
(k) See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio.
(l) See Note 1(c) regarding joint repurchase agreement.
(m) A portion or all of the security is traded on a discount basis with no
stated coupon rate.
94 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
-------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS A 2005 2004 2003 2002 2001
-------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 6.68 $ 6.81 $ 6.99 $ 6.93 $ 6.63
-------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... 0.28 0.27 0.28 0.38 0.41(d)
Net realized and unrealized gains (losses) ........ (0.11) (0.04) (0.10) 0.09 0.33(d)
-------------------------------------------------------------------------
Total from investment operations ..................... 0.17 0.23 0.18 0.47 0.74
-------------------------------------------------------------------------
Less distributions from net investment income ........ (0.32) (0.36) (0.36) (0.41) (0.44)
-------------------------------------------------------------------------
Redemption fees ...................................... --(c) --(c) -- -- --
-------------------------------------------------------------------------
Net asset value, end of year ......................... $ 6.53 $ 6.68 $ 6.81 $ 6.99 $ 6.93
=========================================================================
Total return(b) ...................................... 2.67% 3.46% 2.66% 7.06% 11.52%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $5,901,449 $6,420,381 $7,286,317 $7,726,914 $7,197,334
Ratios to average net assets:
Expenses .......................................... 0.72% 0.70% 0.70% 0.69% 0.68%
Net investment income ............................. 4.29% 4.09% 4.11% 5.48% 6.12%(d)
Portfolio turnover rate .............................. 29.14% 41.45% 66.96% 44.62% 19.18%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 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 ............................. $ (0.008)
Net realized and unrealized gains (losses) per share ........ 0.008
Ratio of net investment income to average net assets ........ (0.11)%
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 B 2005 2004 2003 2002 2001
-------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 6.67 $ 6.80 $ 6.98 $ 6.93 $ 6.63
-------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... 0.25 0.24 0.25 0.34 0.37(d)
Net realized and unrealized gains (losses) ........ (0.11) (0.05) (0.10) 0.09 0.33(d)
-------------------------------------------------------------------------
Total from investment operations ..................... 0.14 0.19 0.15 0.43 0.70
-------------------------------------------------------------------------
Less distributions from net investment income ........ (0.29) (0.32) (0.33) (0.38) (0.40)
-------------------------------------------------------------------------
Redemption fees ...................................... --(c) --(c) -- -- --
-------------------------------------------------------------------------
Net asset value, end of year ......................... $ 6.52 $ 6.67 $ 6.80 $ 6.98 $ 6.93
=========================================================================
Total return(b) ...................................... 2.13% 2.92% 2.13% 6.37% 10.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $ 478,788 $ 568,276 $ 678,814 $ 559,966 $ 225,517
Ratios to average net assets:
Expenses .......................................... 1.25% 1.23% 1.23% 1.22% 1.22%
Net investment income ............................. 3.76% 3.56% 3.58% 4.95% 5.51%(d)
Portfolio turnover rate .............................. 29.14% 41.45% 66.96% 44.62% 19.18%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 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 ............................. $ (0.008)
Net realized and unrealized gains (losses) per share ........ 0.008
Ratio of net investment income to average net assets ........ (0.11)%
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 C 2005 2004 2003 2002 2001
-------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 6.65 $ 6.78 $ 6.97 $ 6.91 $ 6.61
-------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... 0.25 0.24 0.25 0.34 0.37(d)
Net realized and unrealized gains (losses) ........ (0.11) (0.05) (0.11) 0.10 0.33(d)
-------------------------------------------------------------------------
Total from investment operations ..................... 0.14 0.19 0.14 0.44 0.70
-------------------------------------------------------------------------
Less distributions from net investment income ........ (0.29) (0.32) (0.33) (0.38) (0.40)
-------------------------------------------------------------------------
Redemption fees ...................................... --(c) --(c) -- -- --
-------------------------------------------------------------------------
Net asset value, end of year ......................... $ 6.50 $ 6.65 $ 6.78 $ 6.97 $ 6.91
=========================================================================
Total return(b) ...................................... 2.14% 2.91% 2.00% 6.53% 10.96%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $ 508,539 $ 597,451 $ 814,635 $ 803,049 $ 422,114
Ratios to average net assets:
Expenses .......................................... 1.25% 1.23% 1.23% 1.21% 1.22%
Net investment income ............................. 3.76% 3.56% 3.58% 4.96% 5.55%(d)
Portfolio turnover rate .............................. 29.14% 41.45% 66.96% 44.62% 19.18%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 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 ............................. $ (0.008)
Net realized and unrealized gains (losses) per share ........ 0.008
Ratio of net investment income to average net assets ........ (0.11)%
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. | 97
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
-----------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS R 2005 2004 2003 2002(d)
-----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 6.68 $ 6.81 $ 6.99 $ 6.81
-----------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... 0.26 0.25 0.25 0.25
Net realized and unrealized gains (losses) ........ (0.11) (0.05) (0.09) 0.22
-----------------------------------------------------------
Total from investment operations ..................... 0.15 0.20 0.16 0.47
-----------------------------------------------------------
Less distributions from net investment income ........ (0.30) (0.33) (0.34) (0.29)
-----------------------------------------------------------
Redemption fees ...................................... --(c) --(c) -- --
-----------------------------------------------------------
Net asset value, end of year ......................... $ 6.53 $ 6.68 $ 6.81 $ 6.99
===========================================================
Total return(b)....................................... 2.29% 3.08% 2.29% 7.03%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $ 65,790 $ 59,431 $ 54,042 $ 14,042
Ratios to average net assets:
Expenses .......................................... 1.10% 1.08% 1.08% 1.07%(e)
Net investment income ............................. 3.91% 3.71% 3.73% 5.10%(e)
Portfolio turnover rate .............................. 29.14% 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 $0.01 per share.
(d) For the period January 1, 2002 (effective date) to September 30, 2002.
(e) Annualized.
98 | 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,
ADVISOR CLASS 2005 2004 2003 2002 2001
-------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 6.69 $ 6.83 $ 7.01 $ 6.94 $ 6.64
-------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... 0.29 0.28 0.29 0.38 0.43(c)
Net realized and unrealized gains (losses) ........ (0.10) (0.06) (0.10) 0.11 0.32(c)
-------------------------------------------------------------------------
Total from investment operations ..................... 0.19 0.22 0.19 0.49 0.75
-------------------------------------------------------------------------
Less distributions from net investment income ........ (0.33) (0.36) (0.37) (0.42) (0.45)
-------------------------------------------------------------------------
Redemption fees ...................................... --(b) --(b) -- -- --
-------------------------------------------------------------------------
Net asset value, end of year ......................... $ 6.55 $ 6.69 $ 6.83 $ 7.01 $ 6.94
=========================================================================
Total return ......................................... 2.95% 3.42% 2.79% 7.33% 11.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $ 334,681 $ 340,279 $ 308,411 $ 198,437 $ 19,960
Ratios to average net assets:
Expenses .......................................... 0.60% 0.58% 0.58% 0.57% 0.57%
Net investment income ............................. 4.41% 4.21% 4.23% 5.60% 6.30%(c)
Portfolio turnover rate .............................. 29.14% 41.45% 66.96% 44.62% 19.18%
(a) Based on average daily shares outstanding.
(b) Amount is less than $0.01 per share.
(c) 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 ............................. $ (0.008)
Net realized and unrealized gains (losses) per share ........ 0.008
Ratio of net investment income to average net assets ........ (0.11)%
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. | 99
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005
- --------------------------------------------------------------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 95.5%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 95.5%
GNMA I GP 30 Year, 8.25%, 3/15/17 - 10/15/17 .................................. $ 271,493 $ 293,164
GNMA I GP 30 Year, 9.25%, 5/15/16 - 12/15/16 .................................. 447,411 488,777
GNMA I GP 30 Year, 10.00%, 11/15/09 - 4/15/10 ................................. 455,123 488,562
GNMA I GP 30 Year, 10.25%, 6/15/18 - 5/15/20 .................................. 13,179 14,759
GNMA I GP 30 Year, 11.00%, 12/15/09 - 1/15/11 ................................. 978,672 1,061,634
GNMA I GP 30 Year, 11.25%, 6/15/13 - 1/15/16 .................................. 387,271 426,298
GNMA I GP 30 Year, 11.50%, 2/15/13 - 6/15/13 .................................. 66,199 73,168
GNMA I GP 30 Year, 11.75%, 7/15/13 - 9/15/15 .................................. 62,179 69,984
GNMA I GP 30 Year, 12.00%, 3/15/11 - 1/15/13 .................................. 32,778 36,670
GNMA I GP 30 Year, 12.50%, 4/15/10 - 7/15/10 .................................. 92,401 102,062
GNMA I GP 30 Year, 12.75%, 5/15/14 ............................................ 6,379 7,128
GNMA I SF 15 Year, 6.50%, 5/15/18 - 11/15/28 .................................. 5,541,713 5,770,726
(a) GNMA I SF 30 Year, 5.00%, 2/15/33 - 9/15/35 ................................... 752,977,239 746,264,964
GNMA I SF 30 Year, 5.50%, 5/15/28 - 9/15/35 ................................... 1,588,636,374 1,605,174,905
GNMA I SF 30 Year, 6.00%, 10/15/23 - 5/15/35 .................................. 742,857,676 761,436,799
GNMA I SF 30 Year, 6.50%, 5/15/23 - 2/15/34 ................................... 513,643,451 535,296,565
GNMA I SF 30 Year, 6.75%, 3/15/26 - 4/15/26 ................................... 103,515 108,546
GNMA I SF 30 Year, 7.00%, 10/15/09 - 9/15/32 .................................. 355,569,921 374,835,175
GNMA I SF 30 Year, 7.25%, 11/15/25 - 1/15/26 .................................. 843,119 893,145
GNMA I SF 30 Year, 7.50%, 7/15/16 - 8/15/32 ................................... 96,708,228 103,165,781
GNMA I SF 30 Year, 7.70%, 12/15/20 - 1/15/22 .................................. 867,432 922,417
GNMA I SF 30 Year, 8.00%, 10/15/07 - 9/15/30 .................................. 73,463,278 78,687,380
GNMA I SF 30 Year, 8.25%, 3/15/27 - 11/15/27 .................................. 153,926 166,589
GNMA I SF 30 Year, 8.50%, 12/15/09 - 6/15/25 .................................. 15,332,785 16,785,017
GNMA I SF 30 Year, 9.00%, 11/15/08 - 7/15/23 .................................. 20,013,505 21,880,967
GNMA I SF 30 Year, 9.50%, 5/15/09 - 1/15/23 ................................... 12,741,990 14,049,774
GNMA I SF 30 Year, 10.00%, 4/15/12 - 3/15/25 .................................. 14,793,419 16,612,044
GNMA I SF 30 Year, 10.50%, 12/15/09 - 10/15/21 ................................ 11,649,066 13,127,817
GNMA I SF 30 Year, 11.00%, 11/15/09 - 5/15/21 ................................. 11,343,118 12,478,893
GNMA I SF 30 Year, 11.50%, 3/15/13 - 12/15/17 ................................. 2,658,612 2,956,582
GNMA I SF 30 Year, 12.00%, 5/15/11 - 1/15/18 .................................. 12,728,230 14,446,149
GNMA I SF 30 Year, 12.50%, 4/15/10 - 8/15/18 .................................. 11,653,729 13,033,818
GNMA I SF 30 Year, 13.00%, 7/15/10 - 1/15/16 .................................. 13,031,205 14,667,022
GNMA II GP 30 Year, 8.75%, 3/20/17 - 7/20/17 .................................. 81,353 87,912
GNMA II GP 30 Year, 11.50%, 8/20/13 ........................................... 18,467 20,341
(a) GNMA II SF 30 Year, 4.50%, 10/01/35 ........................................... 42,395,046 40,513,766
GNMA II SF 30 Year, 5.00%, 7/20/33 - 6/20/35 .................................. 211,006,239 208,422,351
GNMA II SF 30 Year, 5.00%, 9/20/33 ............................................ 381,376,218 376,929,379
GNMA II SF 30 Year, 5.00%, 10/20/33 ........................................... 80,395,811 79,458,112
GNMA II SF 30 Year, 5.00%, 11/20/33 ........................................... 76,301,096 75,411,157
GNMA II SF 30 Year, 5.50%, 6/20/34 ............................................ 103,068,211 103,915,561
GNMA II SF 30 Year, 5.50%, 7/20/34 - 8/20/35 .................................. 253,768,590 255,862,639
GNMA II SF 30 Year, 5.50%, 12/20/34 ........................................... 235,788,978 237,727,459
GNMA II SF 30 Year, 5.50%, 1/20/35 ............................................ 73,550,216 74,159,274
GNMA II SF 30 Year, 5.50%, 2/20/35 ............................................ 155,702,739 156,992,090
GNMA II SF 30 Year, 5.50%, 6/20/35 ............................................ 84,715,349 85,416,864
100 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (CONT.)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE (CONT.)
GNMA II SF 30 Year, 6.00%, 10/20/23 - 7/20/35 ................................. $ 359,792,712 $ 367,487,618
GNMA II SF 30 Year, 6.00%, 6/20/34 ............................................ 83,389,838 85,200,298
GNMA II SF 30 Year, 6.00%, 9/20/34 ............................................ 106,748,255 109,063,028
GNMA II SF 30 Year, 6.50%, 6/20/24 - 7/20/35 .................................. 194,887,412 201,973,905
GNMA II SF 30 Year, 7.00%, 2/20/28 - 7/20/33 .................................. 106,059,451 111,051,769
GNMA II SF 30 Year, 7.50%, 10/20/22 - 4/20/32 ................................. 13,199,707 13,995,034
GNMA II SF 30 Year, 8.00%, 8/20/16 - 6/20/30 .................................. 6,328,287 6,751,763
GNMA II SF 30 Year, 8.50%, 4/20/16 - 6/20/25 .................................. 2,949,162 3,214,889
GNMA II SF 30 Year, 9.00%, 7/20/16 - 11/20/21 ................................. 1,040,666 1,134,489
GNMA II SF 30 Year, 9.50%, 8/20/17 - 4/20/25 .................................. 647,394 716,357
GNMA II SF 30 Year, 10.00%, 8/20/15 - 3/20/21 ................................. 1,204,553 1,348,912
GNMA II SF 30 Year, 10.50%, 9/20/13 - 3/20/21 ................................. 3,287,993 3,688,890
GNMA II SF 30 Year, 11.00%, 8/20/13 - 1/20/21 ................................. 531,107 585,626
GNMA II SF 30 Year, 11.50%, 9/20/13 - 2/20/18 ................................. 265,600 294,859
GNMA II SF 30 Year, 12.00%, 9/20/13 - 2/20/16 ................................. 581,671 655,481
GNMA II SF 30 Year, 12.50%, 10/20/13 - 11/20/15 ............................... 468,326 524,519
GNMA II SF 30 Year, 13.00%, 10/20/13 - 9/20/15 ................................ 418,787 471,648
--------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $6,934,242,298) ........................ 6,958,899,271
--------------
----------------
SHARES
----------------
SHORT TERM INVESTMENTS 5.0%
MONEY FUND (COST $167,072,584) 2.3%
(b) Franklin Institutional Fiduciary Trust Money Market Portfolio ................. 167,072,584 167,072,584
--------------
----------------
PRINCIPAL AMOUNT
----------------
REPURCHASE AGREEMENT (COST $201,590,000) 2.7%
(c) Barclays Capital Inc., 3.20%, 10/03/05 (Maturity Value $201,643,757)
Collateralized by U.S. Treasury Notes, 3.125%, 1/31/07 ..................... $ 201,590,000 201,590,000
--------------
TOTAL INVESTMENTS (COST $7,302,904,882) 100.5% ................................ 7,327,561,855
OTHER ASSETS, LESS LIABILITIES (0.5)% ......................................... (38,313,390)
--------------
NET ASSETS 100.0% ............................................................. $7,289,248,465
==============
See Selected Portfolio Abbreviations on page 109.
(a) See Note 1(d) regarding security purchased on a to-be-announced basis.
(b) See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio.
(c) See Note 1(c) regarding repurchase agreement.
Annual Report | See notes to financial statements. | 101
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS
FRANKLIN UTILITIES FUND
-----------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS A 2005 2004 2003 2002 2001
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 10.16 $ 8.80 $ 7.96 $ 10.02 $ 10.89
-----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............................. 0.45 0.43 0.42 0.46 0.46
Net realized and unrealized gains (losses) ........... 2.42 1.33 0.85 (1.60) (0.86)
-----------------------------------------------------------------------
Total from investment operations ........................ 2.87 1.76 1.27 (1.14) (0.40)
-----------------------------------------------------------------------
Less distributions from:
Net investment income ................................ (0.44) (0.40) (0.43) (0.45) (0.45)
Net realized gains ................................... -- -- -- (0.47) (0.02)
-----------------------------------------------------------------------
Total distributions ..................................... (0.44) (0.40) (0.43) (0.92) (0.47)
-----------------------------------------------------------------------
Redemption fees ......................................... --(c) --(c) -- -- --
-----------------------------------------------------------------------
Net asset value, end of year ............................ $ 12.59 $ 10.16 $ 8.80 $ 7.96 $ 10.02
=======================================================================
Total return(b) ......................................... 28.81% 20.40% 16.38% (12.49)% (4.03)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $ 1,986,034 $ 1,450,832 $ 1,259,886 $ 1,090,216 $ 1,349,027
Ratios to average net assets:
Expenses ............................................. 0.78% 0.80% 0.83% 0.80% 0.79%
Net investment income ................................ 3.92% 4.49% 5.00% 4.87% 4.26%
Portfolio turnover rate ................................. 13.53% 16.13% 25.81% 30.60% 34.03%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 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 B 2005 2004 2003 2002 2001
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 10.15 $ 8.80 $ 7.97 $ 10.02 $ 10.90
-----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............................. 0.39 0.38 0.37 0.41 0.41
Net realized and unrealized gains (losses) ........... 2.42 1.33 0.85 (1.58) (0.87)
-----------------------------------------------------------------------
Total from investment operations ........................ 2.81 1.71 1.22 (1.17) (0.46)
-----------------------------------------------------------------------
Less distributions from:
Net investment income ................................ (0.39) (0.36) (0.39) (0.41) (0.40)
Net realized gains ................................... -- -- -- (0.47) (0.02)
-----------------------------------------------------------------------
Total distributions ..................................... (0.39) (0.36) (0.39) (0.88) (0.42)
-----------------------------------------------------------------------
Redemption fees ......................................... --(c) --(c) -- -- --
-----------------------------------------------------------------------
Net asset value, end of year ............................ $ 12.57 $ 10.15 $ 8.80 $ 7.97 $ 10.02
=======================================================================
Total return(b) ......................................... 28.11% 19.71% 15.88% (12.88)% (4.58)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $ 154,277 $ 127,105 $ 95,321 $ 32,802 $ 15,212
Ratios to average net assets:
Expenses ............................................. 1.28% 1.30% 1.34% 1.31% 1.30%
Net investment income ................................ 3.42% 3.99% 4.49% 4.44% 3.74%
Portfolio turnover rate ................................. 13.53% 16.13% 25.81% 30.60% 34.03%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 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 C 2005 2004 2003 2002 2001
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 10.13 $ 8.78 $ 7.95 $ 10.01 $ 10.88
-----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............................. 0.39 0.38 0.36 0.41 0.41
Net realized and unrealized gains (losses) ........... 2.42 1.33 0.86 (1.59) (0.87)
-----------------------------------------------------------------------
Total from investment operations ........................ 2.81 1.71 1.22 (1.18) (0.46)
-----------------------------------------------------------------------
Less distributions from:
Net investment income ................................ (0.39) (0.36) (0.39) (0.41) (0.39)
Net realized gains ................................... -- -- -- (0.47) (0.02)
-----------------------------------------------------------------------
Total distributions ..................................... (0.39) (0.36) (0.39) (0.88) (0.41)
-----------------------------------------------------------------------
Redemption fees ......................................... --(c) --(c) -- -- --
-----------------------------------------------------------------------
Net asset value, end of year ............................ $ 12.55 $ 10.13 $ 8.78 $ 7.95 $ 10.01
=======================================================================
Total return(b) ......................................... 28.16% 19.76% 15.77% (12.90)% (4.50)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $ 435,714 $ 283,747 $ 222,030 $ 67,428 $ 44,985
Ratios to average net assets:
Expenses ............................................. 1.28% 1.30% 1.34% 1.29% 1.30%
Net investment income ................................ 3.42% 3.99% 4.49% 4.43% 3.76%
Portfolio turnover rate ................................. 13.53% 16.13% 25.81% 30.60% 34.03%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
104 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND (CONTINUED)
----------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS R 2005 2004 2003 2002(d)
----------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................... $ 10.15 $ 8.79 $ 7.96 $ 9.81
----------------------------------------------------
Income from investment operations:
Net investment income(a) .......................................... 0.43 0.39 0.37 0.32
Net realized and unrealized gains (losses) ........................ 2.40 1.34 0.86 (1.85)
----------------------------------------------------
Total from investment operations ..................................... 2.83 1.73 1.23 (1.53)
----------------------------------------------------
Less distributions from net investment income ........................ (0.41) (0.37) (0.40) (0.32)
----------------------------------------------------
Redemption fees ...................................................... --(c) --(c) -- --
----------------------------------------------------
Net asset value, end of year ......................................... $ 12.57 $ 10.15 $ 8.79 $ 7.96
====================================================
Total return(b) ...................................................... 28.35% 20.02% 15.96% (16.01)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................................... $ 14,649 $ 1,590 $ 1,142 $ 142
Ratios to average net assets:
Expenses .......................................................... 1.13% 1.15% 1.19% 1.16%(e)
Net investment income ............................................. 3.57% 4.14% 4.64% 4.82%(e)
Portfolio turnover rate .............................................. 13.53% 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 $0.01 per share.
(d) For the period January 1, 2002 (effective date) to September 30, 2002.
(e) Annualized.
Annual Report | See notes to financial statements. | 105
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND (CONTINUED)
-----------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS 2005 2004 2003 2002 2001
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 10.20 $ 8.84 $ 7.99 $ 10.05 $ 10.92
-----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............................. 0.48 0.44 0.42 0.47 0.48
Net realized and unrealized gains (losses) ........... 2.42 1.34 0.87 (1.60) (0.87)
-----------------------------------------------------------------------
Total from investment operations ........................ 2.90 1.78 1.29 (1.13) (0.39)
-----------------------------------------------------------------------
Less distributions from:
Net investment income ................................ (0.46) (0.42) (0.44) (0.46) (0.46)
Net realized gains ................................... -- -- -- (0.47) (0.02)
-----------------------------------------------------------------------
Total distributions ..................................... (0.46) (0.42) (0.44) (0.93) (0.48)
-----------------------------------------------------------------------
Redemption fees ......................................... --(b) --(b) -- -- --
-----------------------------------------------------------------------
Net asset value, end of year ............................ $ 12.64 $ 10.20 $ 8.84 $ 7.99 $ 10.05
=======================================================================
Total return ............................................ 29.00% 20.48% 16.61% (12.32)% (3.89)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $ 110,249 $ 51,586 $ 47,167 $ 15,664 $ 8,829
Ratios to average net assets:
Expenses ............................................. 0.63% 0.65% 0.69% 0.66% 0.65%
Net investment income ................................ 4.07% 4.64% 5.14% 5.07% 4.39%
Portfolio turnover rate ................................. 13.53% 16.13% 25.81% 30.60% 34.03%
(a) Based on average daily shares outstanding.
(b) Amount is less than $0.01 per share.
106 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005
- -------------------------------------------------------------------------------------------------------------
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------
COMMON STOCKS 93.4%
ELECTRIC UTILITIES 77.9%
Alliant Energy Corp. .................................. United States 1,700,000 $ 49,521,000
Ameren Corp. .......................................... United States 1,129,441 60,413,799
American Electric Power Co. Inc. ...................... United States 2,106,309 83,620,467
CenterPoint Energy Inc. ............................... United States 1,262,800 18,777,836
Central Vermont Public Service Corp. .................. United States 169,200 2,961,000
Cinergy Corp. ......................................... United States 1,900,000 84,379,000
Consolidated Edison Inc. .............................. United States 700,000 33,985,000
Dominion Resources Inc. ............................... United States 1,600,000 137,824,000
DTE Energy Co. ........................................ United States 400,000 18,344,000
Duke Energy Corp. ..................................... United States 1,215,400 35,453,218
Edison International .................................. United States 2,000,000 94,560,000
Energy East Corp. ..................................... United States 800,000 20,152,000
Entergy Corp. ......................................... United States 1,600,000 118,912,000
Exelon Corp. .......................................... United States 2,300,000 122,912,000
FirstEnergy Corp. ..................................... United States 2,100,000 109,452,000
FPL Group Inc. ........................................ United States 2,200,000 104,720,000
Hawaiian Electric Industries Inc. ..................... United States 400,000 11,152,000
ITC Holdings Corp. .................................... United States 150,900 4,373,082
National Grid PLC ..................................... United Kingdom 4,987,755 46,790,437
Northeast Utilities ................................... United States 1,400,000 27,930,000
Pepco Holdings Inc. ................................... United States 1,788,700 41,623,049
PG&E Corp. ............................................ United States 1,800,000 70,650,000
Pinnacle West Capital Corp. ........................... United States 1,200,000 52,896,000
PPL Corp. ............................................. United States 2,400,000 77,592,000
Progress Energy Inc. .................................. United States 1,600,000 71,600,000
Public Service Enterprise Group Inc. .................. United States 1,600,000 102,976,000
Puget Energy Inc. ..................................... United States 1,725,000 40,503,000
Scottish & Southern Energy PLC ........................ United Kingdom 1,500,000 27,243,872
Scottish Power PLC .................................... United Kingdom 6,000,000 60,465,526
(a) Sierra Pacific Resources .............................. United States 3,472,473 51,566,224
Southern Co. .......................................... United States 2,300,000 82,248,000
TXU Corp. ............................................. United States 500,000 56,440,000
United Utilities PLC .................................. United Kingdom 6,500,000 75,074,943
Westar Energy Inc. .................................... United States 900,000 21,717,000
Wisconsin Energy Corp. ................................ United States 1,100,000 43,912,000
Xcel Energy Inc. ...................................... United States 2,082,200 40,831,942
--------------
2,103,572,395
--------------
GAS DISTRIBUTORS 11.2%
AGL Resources Inc. .................................... United States 1,100,000 40,821,000
Atmos Energy Corp. .................................... United States 1,000,000 28,250,000
Gaz de France ......................................... France 421,100 14,083,240
KeySpan Corp. ......................................... United States 1,000,000 36,780,000
NiSource Inc. ......................................... United States 2,800,000 67,900,000
ONEOK Inc. ............................................ United States 500,000 17,010,000
Questar Corp. ......................................... United States 303,600 26,753,232
Sempra Energy ......................................... United States 1,000,000 47,060,000
Vectren Corp. ......................................... United States 845,000 23,955,750
--------------
302,613,222
--------------
Annual Report | 107
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
MAJOR TELECOMMUNICATIONS 3.2%
SBC Communications Inc. .......................................... United States 1,900,000 $ 45,543,000
Verizon Communications Inc. ...................................... United States 1,300,000 42,497,000
---------------
88,040,000
---------------
OIL & GAS PIPELINES 1.1%
Kinder Morgan Inc. ............................................... United States 300,000 28,848,000
---------------
TOTAL COMMON STOCKS (COST $1,738,524,184) ........................ . 2,523,073,617
---------------
CONVERTIBLE PREFERRED STOCKS 1.3%
ELECTRIC UTILITIES 1.3%
CMS Energy Trust I, 7.75%, cvt. pfd. ............................. United States 260,000 13,065,000
PNM Resources Inc., 6.75%, cvt. pfd. ............................. United States 400,000 20,900,000
---------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $33,440,520) ............ 33,965,000
---------------
----------------
PRINCIPAL AMOUNT
----------------
BONDS 4.7%
ELECTRIC UTILITIES 4.7%
CalEnergy Co. Inc., senior note, 8.48%, 9/15/28 .................. United States $ 25,000,000 32,317,700
CMS Energy Corp., senior note, 9.875%, 10/15/07 .................. United States 8,500,000 9,286,250
FirstEnergy Corp., senior note, 7.375%, 11/15/31 ................. United States 10,000,000 11,765,600
Northeast Generation Co., senior note, 8.812%, 10/15/26 .......... United States 7,500,000 8,460,098
PPL Capital Funding, 8.375%, 6/15/07 ............................. United States 15,000,000 15,847,365
TXU Corp., senior note, 6.55%, 11/15/34 .......................... United States 40,000,000 37,324,080
Utilicorp United Inc., senior note,
9.95%, 2/01/11 ................................................. United States 6,000,000 6,765,000
8.27%, 11/15/21 ................................................ United States 6,100,000 6,183,875
-------------
TOTAL BONDS (COST $117,172,319) .................................. 127,949,968
-------------
TOTAL LONG TERM INVESTMENTS (COST $1,889,137,023) ................ 2,684,988,585
-------------
---------------
SHARES
---------------
SHORT TERM INVESTMENT (COST $7,987,222) 0.3%
(b) MONEY FUND 0.3%
Franklin Institutional Fiduciary Trust Money Market Portfolio .... United States 7,987,222 7,987,222
---------------
TOTAL INVESTMENTS (COST $1,897,124,245) 99.7% .................... 2,692,975,807
OTHER ASSETS, LESS LIABILITIES 0.3% .............................. 7,946,430
---------------
NET ASSETS 100.0% ................................................ $ 2,700,922,237
===============
See Selected Portfolio Abbreviations on page 109.
(a) Non-income producing.
(b) See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio.
108 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FHLMC - Federal Home Loan Mortgage Corporation
FRN - Floating Rate Note
GNMA - Government National Mortgage Association
GO - General Obligation
GP - Graduated Payment
SF - Single Family
Annual Report | See notes to financial statements. | 109
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
September 30, 2005
-------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
-------------------------------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ....................................... $ 446,591,251 $ 907,096,664 $33,986,139,735
Cost - Non-controlled affiliated issuers (Note 10) -- -- 209,524,649
Cost - Sweep Money Fund (Note 7) .................................. 5,713,444 5,629,829 167,074,435
Cost - Repurchase agreements ...................................... 4,100,441 -- 1,592,482,555
-------------------------------------------------------
Total cost of investments ......................................... $ 456,405,136 $ 912,726,493 $35,955,221,374
=======================================================
Value - Unaffiliated issuers(a).................................... $ 719,049,176 $ 2,219,593,355 $35,980,177,755
Value - Non-controlled affiliated issuers (Note 10)................ -- -- 848,894,006
Value - Sweep Money Fund (Note 7) ................................. 5,713,444 5,629,829 167,074,435
Value - Repurchase agreements ..................................... 4,100,441 -- 1,592,482,555
-------------------------------------------------------
Total value of investments ........................................ 728,863,061 2,225,223,184 38,588,628,751
Cash ................................................................. -- 43,605 --
Receivables:
Investment securities sold ........................................ -- -- 135,265,438
Capital shares sold ............................................... 1,298,615 1,859,005 190,750,992
Dividends and interest ............................................ 226,530 1,772,579 313,641,658
-------------------------------------------------------
Total assets ................................................... 730,388,206 2,228,898,373 39,228,286,839
-------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ................................... 1,934,600 -- 256,028,716
Capital shares redeemed ........................................... 1,551,728 14,270,193 53,886,665
Affiliates ........................................................ 779,533 2,357,126 34,693,543
Funds advanced by custodian .......................................... -- -- 2,234,375
Payable upon return of securities loaned ............................. 4,100,441 -- --
Deferred sales proceeds (Note 11) .................................... -- -- 10,909,154
Accrued expenses and other liabilities ............................... 205,937 561,975 4,594,277
-------------------------------------------------------
Total liabilities .............................................. 8,572,239 17,189,294 362,346,730
-------------------------------------------------------
Net assets, at value ....................................... $ 721,815,967 $ 2,211,709,079 $38,865,940,109
=======================================================
Net assets consist of:
Paid-in capital ...................................................... $ 542,721,868 $ 1,108,917,690 $36,014,010,482
Undistributed net investment income .................................. -- 2,307,104 145,660,727
Net unrealized appreciation (depreciation) ........................... 272,457,925 1,312,496,691 2,633,407,377
Accumulated net realized gain (loss) ................................. (93,363,826) (212,012,406) 72,861,523
-------------------------------------------------------
Net assets, at value ....................................... $ 721,815,967 $ 2,211,709,079 $38,865,940,109
=======================================================
110 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
September 30, 2005
-------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
-------------------------------------------------------
CLASS A:
Net assets, at value ................................................. $ 628,731,861 $ 1,567,674,691 $21,934,575,391
=======================================================
Shares outstanding ................................................... 25,164,599 45,012,785 8,784,219,014
=======================================================
Net asset value per share(b) ......................................... $ 24.98 $ 34.83 $ 2.50
=======================================================
Maximum offering price per share (net asset value per
share / 94.25%, 94.25% and 95.75%, respectively) .................. $ 26.50 $ 36.95 $ 2.61
=======================================================
CLASS B:
Net assets, at value ................................................. $ 19,497,181 $ 123,925,658 $ 3,922,395,880
=======================================================
Shares outstanding ................................................... 807,358 3,674,383 1,576,347,794
=======================================================
Net asset value and maximum offering price per share(b) .............. $ 24.15 $ 33.73 $ 2.49
=======================================================
CLASS B1:
Net assets, at value ................................................. -- -- $ 493,063,052
=======================================================
Shares outstanding ................................................... -- -- 197,423,308
=======================================================
Net asset value and maximum offering price per share(b) .............. -- -- $ 2.50
=======================================================
CLASS C:
Net assets, at value ................................................. $ 73,586,925 $ 270,538,230 $10,113,365,406
=======================================================
Shares outstanding ................................................... 3,079,112 8,091,582 4,027,843,884
=======================================================
Net asset value and maximum offering price per share(b) .............. $ 23.90 $ 33.43 $ 2.51
=======================================================
CLASS R:
Net assets, at value ................................................. -- $ 27,818,419 $ 122,222,078
=======================================================
Shares outstanding ................................................... -- 804,301 49,363,932
=======================================================
Net asset value and maximum offering price per share(b) .............. -- $ 34.59 $ 2.48
=======================================================
ADVISOR CLASS:
Net assets, at value ................................................. -- $ 221,752,081 $ 2,280,318,302
=======================================================
Shares outstanding ................................................... -- 6,356,069 917,113,991
=======================================================
Net asset value and maximum offering price per share(b) .............. -- $ 34.89 $ 2.49
=======================================================
(a) The Franklin DynaTech Fund includes $3,985,000 of securities loaned.
(b) Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Annual Report | See notes to financial statements. | 111
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
September 30, 2005
--------------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
--------------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .............................................. $ 6,934,242,298 $ 1,889,137,023
Cost - Sweep Money Fund (Note 7) ......................................... 167,072,584 7,987,222
Cost - Repurchase agreements ............................................. 201,590,000 --
--------------------------------------
Total cost of investments ................................................ $ 7,302,904,882 $ 1,897,124,245
======================================
Value - Unaffiliated issuers ............................................. $ 6,958,899,271 $ 2,684,988,585
Value - Sweep Money Fund (Note 7) ........................................ 167,072,584 7,987,222
Value - Repurchase agreements ............................................ 201,590,000 --
--------------------------------------
Total value of investments ............................................... 7,327,561,855 2,692,975,807
Receivables:
Investment securities sold ............................................... 49,793,468 58,299
Capital shares sold ...................................................... 5,404,587 9,240,825
Dividends and interest ................................................... 32,195,673 6,068,494
--------------------------------------
Total assets .......................................................... 7,414,955,583 2,708,343,425
--------------------------------------
Liabilities:
Payables:
Investment securities purchased .......................................... 94,756,100 --
Capital shares redeemed .................................................. 24,150,418 4,725,877
Affiliates ............................................................... 5,335,900 2,226,862
Accrued expenses and other liabilities ................................... 1,464,700 468,449
--------------------------------------
Total liabilities ..................................................... 125,707,118 7,421,188
--------------------------------------
Net assets, at value ............................................... $ 7,289,248,465 $ 2,700,922,237
======================================
Net assets consist of:
Paid-in capital ............................................................. $ 7,671,154,985 $ 1,892,109,453
Undistributed net investment income ......................................... 949,733 6,871,929
Net unrealized appreciation (depreciation) .................................. 24,656,973 795,851,562
Accumulated net realized gain (loss) ........................................ (407,513,226) 6,089,293
--------------------------------------
Net assets, at value ............................................... $ 7,289,248,465 $ 2,700,922,237
======================================
112 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
September 30, 2005
--------------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
--------------------------------------
CLASS A:
Net assets, at value ........................................................ $ 5,901,449,480 $ 1,986,033,672
======================================
Shares outstanding .......................................................... 903,489,041 157,797,966
======================================
Net asset value per share(a) ................................................ $ 6.53 $ 12.59
======================================
Maximum offering price per share (net asset value per share / 95.75%) ....... $ 6.82 $ 13.15
======================================
CLASS B:
Net assets, at value ........................................................ $ 478,788,494 $ 154,276,666
======================================
Shares outstanding .......................................................... 73,400,564 12,268,604
======================================
Net asset value and maximum offering price per share(a) ..................... $ 6.52 $ 12.57
======================================
CLASS C:
Net assets, at value ........................................................ $ 508,539,186 $ 435,714,336
======================================
Shares outstanding .......................................................... 78,201,196 34,716,544
======================================
Net asset value and maximum offering price per share(a) ..................... $ 6.50 $ 12.55
======================================
CLASS R:
Net assets, at value ........................................................ $ 65,789,870 $ 14,648,548
======================================
Shares outstanding .......................................................... 10,079,805 1,165,785
======================================
Net asset value and maximum offering price per share(a) ..................... $ 6.53 $ 12.57
======================================
ADVISOR CLASS:
Net assets, at value ........................................................ $ 334,681,435 $ 110,249,015
======================================
Shares outstanding .......................................................... 51,129,872 8,725,547
======================================
Net asset value and maximum offering price per share(a) ..................... $ 6.55 $ 12.64
======================================
(a) Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Annual Report | See notes to financial statements. | 113
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended September 30, 2005
-------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
-------------------------------------------------------
Investment income:
Dividends:
Unaffiliated issuers .............................................. $ 6,787,716 $ 29,124,025 $ 788,093,935
Non-controlled affiliated issuers (Note 10) ....................... -- -- 7,200,154
Sweep Money Fund (Note 7) ......................................... 157,146 78,779 4,086,555
Interest:
Unaffiliated issuers .............................................. -- -- 1,208,447,716
Non-controlled affiliated issuers (Note 10) ....................... -- -- 17,063,936
Income from securities loaned - net .................................. 98,961 -- 124,691
Other income (Note 13) ............................................... 27,651 104,408 679,468
-------------------------------------------------------
Total investment income ........................................ 7,071,474 29,307,212 2,025,696,455
-------------------------------------------------------
Expenses:
Management fees (Note 3a) ............................................ 3,470,695 10,099,817 133,282,748
Distribution fees: (Note 3c)
Class A ........................................................... 1,569,123 3,929,055 27,170,455
Class B ........................................................... 194,764 1,256,761 38,676,586
Class B1 .......................................................... -- -- 3,291,640
Class C ........................................................... 745,727 2,736,525 54,349,278
Class R ........................................................... -- 119,377 498,117
Transfer agent fees (Note 3e) ........................................ 1,549,813 4,192,841 24,253,184
Custodian fees (Note 4) .............................................. 21,144 55,223 757,039
Reports to shareholders .............................................. 269,098 559,460 3,494,707
Registration and filing fees ......................................... 51,954 81,004 1,796,378
Professional fees (Note 3g) .......................................... 28,215 49,978 326,780
Directors' fees and expenses ......................................... 2,933 8,798 124,193
Other ................................................................ 28,158 70,679 877,647
-------------------------------------------------------
Total expenses ................................................. 7,931,624 23,159,518 288,898,752
Expense reductions (Note 4) .................................... (5) (303) (46,156)
Expenses waived/paid by affiliate (Note 3f) .................... -- -- (40,849)
-------------------------------------------------------
Net expenses ................................................. 7,931,619 23,159,215 288,811,747
-------------------------------------------------------
Net investment income (loss) ............................... (860,145) 6,147,997 1,736,884,708
-------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ........................................... (901,292) 33,743,139 383,688,354
Non-controlled affiliated issuers (Note 10) .................... -- -- 24,527,475
Foreign currency transactions ..................................... (3,804) (4,880) 508,375
-------------------------------------------------------
Net realized gain (loss) ................................... (905,096) 33,738,259 408,724,204
-------------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments ....................................................... 93,542,036 244,117,335 893,534,147
Translation of assets and liabilities denominated in foreign
currencies ..................................................... -- -- (111)
-------------------------------------------------------
Net change in unrealized appreciation (depreciation) ....... 93,542,036 244,117,335 893,534,036
-------------------------------------------------------
Net realized and unrealized gain (loss) ................................. 92,636,940 277,855,594 1,302,258,240
-------------------------------------------------------
Net increase (decrease) in net assets resulting from operations ......... $ 91,776,795 $ 284,003,591 $ 3,039,142,948
=======================================================
114 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended September 30, 2005
--------------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
--------------------------------------
Investment income:
Dividends:
Unaffiliated issuers ..................................................... $ -- $ 97,620,143
Sweep Money Fund (Note 7) ................................................ 3,967,130 262,952
Interest .................................................................... 377,056,999 9,533,650
Income from securities loaned - net ......................................... -- 36,498
Other income (Note 13) ...................................................... -- 52,932
--------------------------------------
Total investment income ............................................... 381,024,129 107,506,175
--------------------------------------
Expenses:
Management fees (Note 3a) ................................................... 33,766,656 10,685,551
Distribution fees: (Note 3c)
Class A .................................................................. 7,620,591 2,540,362
Class B .................................................................. 3,400,433 927,191
Class C .................................................................. 3,558,091 2,327,991
Class R .................................................................. 312,327 29,828
Transfer agent fees (Note 3e) ............................................... 9,499,318 2,833,512
Custodian fees (Note 4) ..................................................... 148,761 69,670
Reports to shareholders ..................................................... 1,506,332 490,205
Registration and filing fees ................................................ 166,694 143,470
Professional fees (Note 3g) ................................................. 98,834 53,372
Directors' fees and expenses ................................................ 31,369 8,730
Other ....................................................................... 370,640 68,503
--------------------------------------
Total expenses ........................................................ 60,480,046 20,178,385
Expense reductions (Note 4) ........................................... (19,518) (1,922)
--------------------------------------
Net expenses ........................................................ 60,460,528 20,176,463
--------------------------------------
Net investment income ............................................ 320,563,601 87,329,712
--------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .............................................................. 3,270,275 86,966,351
Foreign currency transactions ............................................ -- (369,187)
--------------------------------------
Net realized gain (loss) ......................................... 3,270,275 86,597,164
--------------------------------------
Net change in unrealized appreciation (depreciation) on investments ......... (126,557,362) 395,798,703
--------------------------------------
Net realized and unrealized gain (loss) ........................................ (123,287,087) 482,395,867
--------------------------------------
Net increase (decrease) in net assets resulting from operations ................ $ 197,276,514 $ 569,725,579
======================================
Annual Report | See notes to financial statements. | 115
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-------------------------------------------------------------------------
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND
-------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
2005 2004 2005 2004
-------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ................... $ (860,145) $ (3,634,884) $ 6,147,997 $ 1,223,391
Net realized gain (loss) from investments and
foreign currency transactions ............... (905,096) (14,029,079) 33,738,259 6,262,419
Net change in unrealized appreciation
(depreciation) on investments ............... 93,542,036 73,445,772 244,117,335 247,296,583
-------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ............. 91,776,795 55,781,809 284,003,591 254,782,393
-------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ..................................... -- -- (3,882,872) (1,532,029)
Class R ..................................... -- -- (10,415) --
Advisor Class ............................... -- -- (732,270) (173,053)
-------------------------------------------------------------------------
Total distributions to shareholders ............... -- -- (4,625,557) (1,705,082)
-------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ..................................... (91,991,179) 31,657,014 (168,604,093) (98,948,884)
Class B ..................................... (1,613,902) 7,768,447 (13,722,938) 4,780,418
Class C ..................................... (10,942,390) 3,332,636 (33,781,675) (22,857,255)
Class R ..................................... -- -- 4,768,742 3,224,209
Advisor Class ............................... -- -- 66,279,985 85,716,783
-------------------------------------------------------------------------
Total capital share transactions .................. (104,547,471) 42,758,097 (145,059,979) (28,084,729)
-------------------------------------------------------------------------
Redemption fees ................................... 1,039 691 11,358 6,295
-------------------------------------------------------------------------
Net increase (decrease) in net assets ... (12,769,637) 98,540,597 134,329,413 224,998,877
Net assets:
Beginning of year ................................. 734,585,604 636,045,007 2,077,379,666 1,852,380,789
-------------------------------------------------------------------------
End of year ....................................... $ 721,815,967 $ 734,585,604 $ 2,211,709,079 $ 2,077,379,666
=========================================================================
Undistributed net investment income included in net
assets:
End of year .................................... $ -- $ -- $ 2,307,104 $ 782,484
=========================================================================
116 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
-------------------------------------------------------------------------
FRANKLIN
FRANKLIN INCOME FUND U.S. GOVERNMENT SECURITIES FUND
-------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
2005 2004 2005 2004
-------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .......................... $ 1,736,884,708 $ 1,044,441,688 $ 320,563,601 $ 339,860,811
Net realized gain (loss) from investments
and foreign currency transactions ........... 408,724,204 451,159,295 3,270,275 2,260,202
Net change in unrealized appreciation
(depreciation) on investments and
translation of assets and liabilities
denominated in foreign currencies ........... 893,534,036 1,332,443,859 (126,557,362) (71,149,291)
-------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations .............. 3,039,142,948 2,828,044,842 197,276,514 270,971,722
-------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ..................................... (1,104,437,012) (798,349,922) (302,745,166) (364,404,705)
Class B ..................................... (206,484,397) (162,621,962) (23,185,787) (29,981,316)
Class B1 .................................... (28,826,258) (31,263,684) -- --
Class C ..................................... (461,493,148) (316,248,066) (24,272,966) (33,894,559)
Class R ..................................... (5,706,119) (3,457,009) (2,810,550) (2,762,490)
Advisor Class ............................... (95,145,372) (28,902,829) (15,327,999) (17,122,309)
Net realized gains:
Class A ..................................... (84,143,096) (55,088,598) -- --
Class B ..................................... (19,751,225) (12,569,134) -- --
Class B1 .................................... (2,705,174) (2,636,974) -- --
Class C ..................................... (37,975,944) (22,715,500) -- --
Class R ..................................... (432,526) (216,288) -- --
Advisor Class ............................... (5,808,100) (943,590) -- --
-------------------------------------------------------------------------
Total distributions to shareholders ............... (2,052,908,371) (1,435,013,556) (368,342,468) (448,165,379)
-------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ..................................... 6,640,381,449 4,294,278,432 (380,358,442) (724,886,754)
Class B ..................................... 317,307,812 1,219,777,152 (77,684,862) (97,262,940)
Class B1 .................................... (34,777,479) (19,911,534) -- --
Class C ..................................... 3,242,801,825 2,514,302,239 (76,479,175) (201,426,271)
Class R ..................................... 46,237,588 33,450,501 7,779,886 6,444,739
Advisor Class ............................... 1,334,835,525 783,062,664 1,208,804 37,919,958
-------------------------------------------------------------------------
Total capital share transactions .................. 11,546,786,720 8,824,959,454 (525,533,789) (979,211,268)
-------------------------------------------------------------------------
Redemption fees ................................... 173,429 13,225 31,088 3,103
-------------------------------------------------------------------------
Net increase (decrease) in net assets ....... 12,533,194,726 10,218,003,965 (696,568,655) (1,156,401,822)
Net assets:
Beginning of year .............................. 26,332,745,383 16,114,741,418 7,985,817,120 9,142,218,942
-------------------------------------------------------------------------
End of year .................................... $38,865,940,109 $26,332,745,383 $ 7,289,248,465 $ 7,985,817,120
=========================================================================
Undistributed net investment income included in
net assets:
End of year ................................. $ 145,660,727 $ 52,657,223 $ 949,733 $ 113,851
=========================================================================
Annual Report | See notes to financial statements. | 117
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
--------------------------------------
FRANKLIN UTILITIES FUND
--------------------------------------
YEAR ENDED SEPTEMBER 30,
2005 2004
--------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ........................................................ $ 87,329,712 $ 77,992,985
Net realized gain (loss) from investments and foreign currency transactions .. 86,597,164 17,758,493
Net change in unrealized appreciation (depreciation) on investments .......... 395,798,703 229,110,659
--------------------------------------
Net increase (decrease) in net assets resulting from operations ........ 569,725,579 324,862,137
--------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ................................................................... (65,898,832) (57,157,619)
Class B ................................................................... (4,861,315) (4,239,501)
Class C ................................................................... (12,160,417) (9,771,431)
Class R ................................................................... (210,458) (51,170)
Advisor Class ............................................................. (3,309,596) (2,242,376)
--------------------------------------
Total distributions to shareholders ............................................ (86,440,618) (73,462,097)
--------------------------------------
Capital share transactions: (Note 2)
Class A ................................................................... 175,567,341 (1,380,506)
Class B ................................................................... (3,086,774) 15,905,081
Class C ................................................................... 76,710,176 25,559,310
Class R ................................................................... 11,865,292 262,939
Advisor Class ............................................................. 41,716,286 (2,434,692)
--------------------------------------
Total capital share transactions ............................................... 302,772,321 37,912,132
--------------------------------------
Redemption fees ................................................................ 4,687 1,274
--------------------------------------
Net increase (decrease) in net assets .................................. 786,061,969 289,313,446
Net assets:
Beginning of year .............................................................. 1,914,860,268 1,625,546,822
--------------------------------------
End of year .................................................................... $ 2,700,922,237 $ 1,914,860,268
======================================
Undistributed net investment income included in net assets:
End of year .................................................................... $ 6,871,929 $ 5,174,244
--------------------------------------
118 | See notes to financial statements. | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Custodian Funds, Inc. (the Custodian Funds) is registered under the
Investment Company Act of 1940 as a diversified, open-end investment company,
consisting of five series (the Funds).
The following summarizes the Funds' significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Investments in open-end mutual funds are valued at the closing net asset
value.
Corporate debt securities, government securities, mortgage pass-through
securities, and other mortgage-backed securities generally trade in the
over-the-counter market rather than on a securities exchange. The Fund may
utilize independent pricing services, quotations from bond dealers, and
information with respect to bond and note transactions, to assist in determining
a current market value for each security. The Fund's pricing services may use
valuation models or matrix pricing which considers information with respect to
comparable bond and note transactions, quotations from bond dealers, or by
reference to other securities that are considered comparable in such
characteristics as rating, interest rate and maturity date, option adjusted
spread models, prepayment projections, interest rate spreads and yield curves,
to determine current value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Funds have procedures to determine the fair value of individual securities
and other assets for which market prices are not readily available or which may
not be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Funds. If such an event occurs, the securities may be
valued using fair value procedures, which may include the use of independent
pricing services. All security valuation procedures are approved by the Fund's
Board of Directors.
Annual Report | 119
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Directors.
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 on the
Statement of Operations.
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.
C. REPURCHASE AGREEMENTS
Certain Funds may enter into a joint repurchase agreement whereby their
uninvested cash balance is deposited into a joint cash account with other funds
managed by the investment manager or an affiliate of the investment manager and
is used to invest in one or more repurchase agreements. The value and face
amount of the joint repurchase agreement are allocated to the funds based on
their pro-rata interest. Certain Funds may enter into repurchase agreements
which are accounted for as a loan by the fund to the seller, collateralized by
securities which are delivered to the Fund's custodian. The market value,
including accrued interest, of the initial collateralization is required to be
at least 102% of the dollar amount invested by the Funds, with the value of the
underlying securities marked to market daily to maintain coverage of at least
100%. Repurchase agreements are valued at cost. At September 30, 2005, all
repurchase agreements held by the Funds had been entered into on that date.
D. SECURITIES PURCHASED ON A WHEN-ISSUED, DELAYED DELIVERY, OR TBA BASIS
The Funds may purchase securities on a when-issued, delayed delivery, or
to-be-announced (TBA) basis, with payment and delivery scheduled for a future
date. These transactions are subject to market fluctuations and are subject to
the risk that the value at delivery may be more or less than the trade date
purchase price. Although the Funds will generally purchase these securities with
the intention of holding the securities, they may sell the securities before the
settlement date. Sufficient assets have been segregated for these securities.
120 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 on these
contracts are included in the Statement 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, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
F. SECURITIES LENDING
The Franklin DynaTech Fund, Franklin Income Fund and 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 receive interest income 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. At September 30, 2005, the Franklin Income Fund and
Franklin Utilities Fund had no securities on loan.
G. INCOME TAXES
No provision has been made for U.S. income taxes because each Fund's policy is
to continue to qualify as a regulated investment company under the Internal
Revenue Code and to distribute to shareholders substantially all of its taxable
income and net realized gains.
H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income is recorded on the ex-dividend date. Distributions to
shareholders are recorded on the ex-dividend date and are determined according
to income tax regulations (tax basis). Distributable earnings determined on a
tax basis may differ from earnings recorded in accordance with generally
accepted accounting principles. These differences may be permanent or temporary.
Permanent differences are reclassified among capital accounts to reflect their
tax character. These reclassifications have no impact on net assets or the
results of operations. Temporary differences are not reclassified, as they will
reverse in subsequent periods.
Common expenses incurred by the Custodian Funds are allocated among the Funds
based on the ratio of net assets of each Fund to the combined net assets of the
Custodian Funds. Fund specific expenses are charged directly to the fund that
incurred the expense.
Annual Report | 121
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
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
A short-term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the Funds and accounted for as an addition to paid-in
capital.
K. GUARANTEES AND INDEMNIFICATIONS
Under the Custodian Funds' organizational documents, their officers and
directors are indemnified by the Custodian Funds against certain liabilities
arising out of the performance of their duties to the Custodian Funds.
Additionally, in the normal course of business, the Custodian Funds enter into
contracts with service providers that contain general indemnification clauses.
The Custodian Fund's maximum exposure under these arrangements is unknown as
this would involve future claims that may be made against the Custodian Funds
that have not yet occurred. However, based on experience, the Custodian Funds
expect the risk of loss to be remote.
2. CAPITAL STOCK
The classes of shares offered within each of the Funds are indicated below.
Effective March 1, 2005, Class B shares are only offered to existing Class B
shareholders in the form of reinvested distributions and certain exchanges from
other Franklin Templeton Class B shares. 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
122 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
At September 30, 2005, there were 44.2 billion shares authorized ($0.01 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 15,200 2,500 400
Class B ............................................. 500 750 2,000 1,000 750
Class B1 ............................................ -- -- 1,000 -- --
Class C ............................................. 250 250 7,200 2,500 400
Class R ............................................. -- 1,000 1,000 1,000 1,000
Advisor Class ....................................... -- 1,000 2,000 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, 2005
Shares sold ............................. 5,939,499 $ 140,943,371 4,972,706 $ 165,487,177
Shares issued in reinvestment
of distributions ...................... -- -- 106,686 3,548,371
Shares redeemed ......................... (9,857,258) (232,934,550) (10,153,867) (337,639,641)
-------------------------------------------------------------------------
Net increase (decrease) ................. (3,917,759) $ (91,991,179) (5,074,475) $ (168,604,093)
=========================================================================
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)
=========================================================================
CLASS B SHARES:
Year ended September 30, 2005
Shares sold ............................. 133,963 $ 3,049,030 242,741 $ 7,743,683
Shares redeemed ......................... (204,804) (4,662,932) (666,084) (21,466,621)
-------------------------------------------------------------------------
Net increase (decrease) ................. (70,841) $ (1,613,902) (423,343) $ (13,722,938)
=========================================================================
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
=========================================================================
CLASS C SHARES:
Year ended September 30, 2005
Shares sold ............................. 482,114 $ 10,909,830 886,979 $ 28,487,942
Shares redeemed ......................... (969,317) (21,852,220) (1,948,771) (62,269,617)
-------------------------------------------------------------------------
Net increase (decrease) ................. (487,203) $ (10,942,390) (1,061,792) $ (33,781,675)
=========================================================================
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)
=========================================================================
Annual Report | 123
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
-------------------------------------
FRANKLIN GROWTH FUND
-------------------------------------
SHARES AMOUNT
-------------------------------------
CLASS R SHARES:
Year ended September 30, 2005
Shares sold ................................................................... 301,713 $ 9,964,493
Shares issued in reinvestment of distributions ................................ 313 10,387
Shares redeemed ............................................................... (157,760) (5,206,138)
-------------------------------------
Net increase (decrease) ....................................................... 144,266 $ 4,768,742
=====================================
Year ended September 30, 2004
Shares sold ................................................................... 254,043 $ 7,608,802
Shares redeemed ............................................................... (145,872) (4,384,593)
-------------------------------------
Net increase (decrease) ....................................................... 108,171 $ 3,224,209
=====================================
ADVISOR CLASS SHARES:
Year ended September 30, 2005
Shares sold ................................................................... 2,738,052 $ 91,354,618
Shares issued in reinvestment of distributions ................................ 21,696 721,407
Shares redeemed ............................................................... (756,109) (25,796,040)
-------------------------------------
Net increase (decrease) ....................................................... 2,003,639 $ 66,279,985
=====================================
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
=====================================
--------------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT
FRANKLIN INCOME FUND SECURITIES FUND
--------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------
CLASS A SHARES:
Year ended September 30, 2005
Shares sold ................................ 3,233,548,786 $ 7,991,126,134 80,655,804 $ 532,927,988
Shares issued on merger
(Note 12) ................................ 22,580,678 57,129,115 -- --
Shares issued in reinvestment
of distributions ......................... 310,204,492 763,747,314 29,003,758 191,550,552
Shares redeemed ............................ (879,645,185) (2,171,621,114) (167,123,344) (1,104,836,982)
--------------------------------------------------------------------------
Net increase (decrease) .................... 2,686,688,771 $ 6,640,381,449 (57,463,782) $ (380,358,442)
==========================================================================
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)
==========================================================================
CLASS B SHARES:
Year ended September 30, 2005
Shares sold ................................ 216,067,791 $ 530,027,930 2,734,327 $ 18,126,694
Shares issued in reinvestment
of distributions ......................... 58,417,660 143,410,552 2,446,399 16,142,982
Shares redeemed ............................ (144,791,444) (356,130,670) (16,950,873) (111,954,538)
--------------------------------------------------------------------------
Net increase (decrease) .................... 129,694,007 $ 317,307,812 (11,770,147) $ (77,684,862)
==========================================================================
124 | 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 B SHARES: (CONTINUED)
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 ........................ 43,346,237 108,838,135 3,121,214 20,832,270
Shares redeemed ............................ (109,027,856) (256,765,154) (26,551,545) (177,213,295)
--------------------------------------------------------------------------
Net increase (decrease) .................... 515,288,186 $ 1,219,777,152 (14,603,316) $ (97,262,940)
==========================================================================
CLASS B1 SHARES:
Year ended September 30, 2005
Shares sold ................................ 2,378,752 $ 5,860,213
Shares issued in reinvestment
of distributions ........................ 7,165,232 17,644,463
Shares redeemed ............................ (23,606,754) (58,282,155)
---------------------------------
Net increase (decrease) .................... (14,062,770) $ (34,777,479)
=================================
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)
=================================
CLASS C SHARES:
Year ended September 30, 2005
Shares sold ................................ 1,587,994,257 $ 3,945,015,780 11,343,153 $ 74,643,597
Shares issued in reinvestment
of distributions ........................ 128,622,410 318,755,436 2,413,285 15,876,049
Shares redeemed ............................ (411,346,115) (1,020,969,391) (25,359,338) (166,998,821)
--------------------------------------------------------------------------
Net increase (decrease) .................... 1,305,270,552 $ 3,242,801,825 (11,602,900) $ (76,479,175)
==========================================================================
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)
==========================================================================
CLASS R SHARES:
Year ended September 30, 2005
Shares sold ................................ 26,352,002 $ 64,518,265 4,180,818 $ 27,602,806
Shares issued in reinvestment
of distributions ........................ 2,379,605 5,812,421 421,527 2,782,416
Shares redeemed ............................ (9,872,431) (24,093,098) (3,423,452) (22,605,336)
--------------------------------------------------------------------------
Net increase (decrease) .................... 18,859,176 $ 46,237,588 1,178,893 $ 7,779,886
==========================================================================
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 3,505,433 413,848 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
==========================================================================
Annual Report | 125
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
--------------------------------------------------------------------------
ADVISOR CLASS SHARES:
Year ended September 30, 2005
Shares sold ................................ 525,718,339 $ 1,292,792,031 13,517,268 $ 89,567,508
Shares issued in reinvestment
of distributions ........................ 38,816,130 95,287,128 1,992,298 13,178,931
Shares redeemed ............................ (21,661,227) (53,243,634) (15,208,235) (101,537,635)
--------------------------------------------------------------------------
Net increase (decrease) .................... 542,873,242 $ 1,334,835,525 301,331 $ 1,208,804
==========================================================================
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
==========================================================================
-------------------------------------
FRANKLIN UTILITIES FUND
-------------------------------------
SHARES AMOUNT
-------------------------------------
CLASS A SHARES:
Year ended September 30, 2005
Shares sold ................................................................... 34,569,804 $ 400,170,506
Shares issued in reinvestment of distributions ................................ 4,305,025 49,165,990
Shares redeemed ............................................................... (23,851,552) (273,769,155)
-------------------------------------
Net increase (decrease) ....................................................... 15,023,277 $ 175,567,341
=====================================
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)
=====================================
CLASS B SHARES:
Year ended September 30, 2005
Shares sold ................................................................... 1,759,896 $ 19,743,236
Shares issued in reinvestment of distributions ................................ 224,565 2,562,564
Shares redeemed ............................................................... (2,233,960) (25,392,574)
-------------------------------------
Net increase (decrease) ....................................................... (249,499) $ (3,086,774)
=====================================
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
=====================================
CLASS C SHARES:
Year ended September 30, 2005
Shares sold ................................................................... 12,226,563 $ 139,657,945
Shares issued in reinvestment of distributions ................................ 495,205 5,658,566
Shares redeemed ............................................................... (6,002,579) (68,606,335)
-------------------------------------
Net increase (decrease) ....................................................... 6,719,189 $ 76,710,176
=====================================
126 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
---------------------------
FRANKLIN UTILITIES FUND
---------------------------
SHARES AMOUNT
---------------------------
CLASS C SHARES: (CONTINUED)
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
===========================
CLASS R SHARES:
Year ended September 30, 2005
Shares sold ............................................................. 1,167,612 $ 13,713,510
Shares issued in reinvestment of distributions .......................... 17,357 204,087
Shares redeemed ......................................................... (175,789) (2,052,305)
---------------------------
Net increase (decrease) ................................................. 1,009,180 $ 11,865,292
===========================
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
===========================
ADVISOR CLASS SHARES:
Year ended September 30, 2005
Shares sold ............................................................. 5,741,424 $ 65,649,487
Shares issued in reinvestment of distributions .......................... 243,650 2,814,290
Shares redeemed ......................................................... (2,316,860) (26,747,491)
---------------------------
Net increase (decrease) ................................................. 3,668,214 $ 41,716,286
===========================
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)
===========================
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
directors of the Custodian Funds are also officers and/or directors of the
following subsidiaries:
- --------------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- --------------------------------------------------------------------------------------------
Franklin Advisers Inc. (Advisers) Investment manager
Franklin Investment Advisory Services Inc. (Investment Advisory) Investment manager
Franklin Templeton Services LLC (FT Services) Administrative manager
Franklin Templeton Distributors Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services LLC (Investor Services) Transfer agent
Annual Report | 127
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
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 each of the Funds as
follows:
- -----------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- -----------------------------------------------------------------------------
0.625% Up to and including $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $10 billion
0.440% Over $10 billion, up to and including $12.5 billion
0.420% Over $12.5 billion, up to and including $15 billion
0.400% Over $15 billion, up to and including $17.5 billion
0.380% Over $17.5 billion, up to and including $20.0 billion
0.360% 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 each of the Funds, and is not an
additional expense of the Funds.
C. DISTRIBUTION FEES
The Funds' Board of Directors has adopted distribution plans for each share
class, with the exception of Advisor class, pursuant to Rule 12b-1 under the
1940 Act. Under the Funds' reimbursement distribution plans, the Funds reimburse
Distributors for costs incurred in connection with the sale and distribution of
each Fund's shares up to a certain percentage per year of their average daily
net assets as follows:
------------------------------------------------------------
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN
DYNATECH GROWTH INCOME SECURITIES UTILITIES
FUND FUND FUND FUND FUND
------------------------------------------------------------
Class A .................................... 0.25% 0.25% 0.15% 0.15% 0.15%
Under the Class A reimbursement distribution plans, costs exceeding the maximum
for the current plan year cannot be reimbursed in subsequent periods.
128 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
Under the Funds' compensation distribution plans, the Funds pay Distributors for
costs incurred in connection with the sale and distribution of each Fund's
shares up to a certain percentage per year of their average daily net assets of
each class as follows:
------------------------------------------------------------
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN
DYNATECH GROWTH INCOME SECURITIES UTILITIES
FUND FUND FUND FUND FUND
------------------------------------------------------------
Class B ..................................... 1.00% 1.00% 1.00% 0.65% 0.65%
Class B1 .................................... -- -- 0.65% -- --
Class C ..................................... 1.00% 1.00% 0.65% 0.65% 0.65%
Class R ..................................... -- 0.50% 0.50% 0.50% 0.50%
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Funds of the following commission transactions
related to the sales and redemptions of the Funds' shares for the year:
--------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
--------------------------------------
Net sales charges received(a) ..................................... $ 130,196 $ 402,985 $ 24,481,717
Contingent deferred sales charges retained ........................ $ 81,129 $ 289,985 $ 7,831,556
-----------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
-----------------------------
Net sales charges received(a) .............................................. $ 711,575 $ 525,245
Contingent deferred sales charges retained ................................. $ 1,235,116 $ 236,658
(a) Net of commissions paid to unaffiliated broker/dealers.
E. TRANSFER AGENT FEES
The Funds paid transfer agent fees as noted in the Statement of Operations of
which the following amounts were retained by Investor Services:
--------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
--------------------------------------
Transfer agent fees ............................................... $1,183,332 $3,616,592 $ 14,782,855
------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
------------------------------
Transfer agent fees ........................................................ $ 6,751,943 $ 1,907,961
Annual Report | 129
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
F. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENTS
Effective May 1, 2005, Advisers agreed in advance to voluntarily waive a portion
of management fees for the Franklin Income Fund, as noted in the Statement of
Operations, in the form of additional breakpoints based on month-end net assets
of the fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.355% Over $35 billion, up to and including $50 billion
0.350% In excess of $50 billion
G. OTHER AFFILIATED TRANSACTIONS
Included in professional fees are legal fees of $157,706 that were paid to a law
firm in which a partner is an officer of the Custodian Funds.
4. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an arrangement with its 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, 2005, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
At September 30, 2005, the Funds had tax basis capital losses which may be
carried over to offset future capital gains, if any. During the year ended
September 30, 2005, the Franklin Growth Fund and the Franklin Utilities Fund
utilized $33,743,139 and $62,723,916, respectively, of capital loss
carryforwards.
At September 30, 2005, the Franklin Income Fund had $9,351,401 of tax basis
capital losses from the merged Franklin Multi-Income Trust which may be carried
over to offset future capital gains, subject to certain limitations. During the
year ended September 30, 2005, the fund utilized $368,131 of such capital loss
carryforwards.
130 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
At September 30, 2005, the capital loss carryforwards were as follows:
-------------------------------------------------------------
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT
DYNATECH GROWTH INCOME SECURITIES
FUND FUND FUND FUND
-------------------------------------------------------------
Capital loss carryforwards expiring in:
2006 ......................................... $ -- $ -- $ -- $ 28,279,472
2007 ......................................... 677,592 -- -- 18,954,412
2008 ......................................... 394,928 -- -- 21,105,846
2009 ......................................... 1,170,048 -- -- 46,256,951
2010 ......................................... 6,843,771 -- 4,507,154 11,768,551
2011 ......................................... 47,180,600 172,953,217 4,348,077 33,556,845
2012 ......................................... 21,838,085 39,052,129 496,170 129,102,166
2013 ......................................... 14,781,620 -- -- 74,283,298
-------------------------------------------------------------
$ 92,886,644 $ 212,005,346 $ 9,351,401 $ 363,307,541
=============================================================
For tax purposes, realized capital losses, realized currency losses, and
ordinary income losses occurring subsequent to October 31, may be deferred and
treated as occurring on the first day of the following fiscal year. At September
30, 2005, the Franklin U.S. Government Securities Fund deferred realized capital
losses of $44,205,685. At September 30, 2005, the Franklin DynaTech Fund,
Franklin Growth Fund and Franklin Utilities Fund deferred realized currency
losses of $3,804, $7,060 and $369,187, respectively. At September 30, 2005, the
Franklin Income Fund and Franklin Utilities Fund deferred ordinary income losses
of $11,931,281 and $4,624,565, respectively.
On September 30, 2005, the Franklin U.S. Government Securities Fund had expired
capital loss carryovers of $50,054,906, which were reclassified to paid-in
capital.
The tax character of distributions paid during the years ended September 30,
2005 and 2004, was as follows:
-----------------------------------------------------------------
FRANKLIN GROWTH FUND FRANKLIN INCOME FUND
-----------------------------------------------------------------
2005 2004 2005 2004
-----------------------------------------------------------------
Distributions paid from:
Ordinary income .............................. $ 4,625,557 $ 1,705,082 $ 1,902,092,306 $ 1,340,843,472
Long term capital gain ....................... -- -- 150,816,065 94,170,084
-----------------------------------------------------------------
$ 4,625,557 $ 1,705,082 $ 2,052,908,371 $ 1,435,013,556
=================================================================
-----------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT
SECURITIES FUND FRANKLIN UTILITIES FUND
-----------------------------------------------------------------
2005 2004 2005 2004
-----------------------------------------------------------------
Distributions paid from
ordinary income ............................. $ 368,342,468 $ 448,165,379 $ 86,440,618 $ 73,462,097
Annual Report | 131
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
At September 30, 2005, 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 ................................... $ 456,878,514 $ 912,726,493 $ 35,958,958,925
===========================================================
Unrealized appreciation ............................... $ 284,594,738 $ 1,329,580,592 $ 4,156,270,822
Unrealized depreciation ............................... (12,610,191) (17,083,901) (1,526,600,996)
-----------------------------------------------------------
Net unrealized appreciation (depreciation) ............ $ 271,984,547 $ 1,312,496,691 $ 2,629,669,826
===========================================================
Undistributed ordinary income ......................... $ -- $ 2,307,104 $ 160,237,327
Undistributed long term capital gains ................. -- -- 89,284,658
-----------------------------------------------------------
Distributable earnings ................................ $ -- $ 2,307,104 $ 249,521,985
===========================================================
--------------------------------------
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
--------------------------------------
Cost of investments ..................................................... $ 7,302,904,882 $ 1,899,645,711
======================================
Unrealized appreciation ................................................. $ 71,058,942 $ 822,588,837
Unrealized depreciation ................................................. (46,401,969) (29,258,741)
--------------------------------------
Net unrealized appreciation (depreciation) .............................. $ 24,656,973 $ 793,330,096
======================================
Undistributed ordinary income ........................................... $ 949,733 $ 7,684,872
Undistributed long term capital gains ................................... -- 13,029,665
--------------------------------------
Distributable earnings .................................................. $ 949,733 $ 20,714,537
======================================
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities, foreign currency
transactions, paydown losses and bond discounts and premiums.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, paydown losses and bond discounts and premiums.
132 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended September 30, 2005, were as follows:
----------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
----------------------------------------------------------
Purchases ............................................. $ 123,324,029 $ 25,214,568 $21,386,639,101
Sales ................................................. $ 198,888,224 $ 159,176,208 $ 8,503,843,830
-------------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
-------------------------------------
Purchases ............................................................... $ 2,144,049,038 $ 617,539,957
Sales ................................................................... $ 573,807,169 $ 308,345,484
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 41.6% of its portfolio invested in below investment
grade and comparable quality unrated high yield securities, which tend to be
more sensitive to economic conditions than higher rated securities. The risk of
loss due to default by the issuer may be significantly greater for the holders
of high yielding securities because such securities are generally unsecured and
are often subordinated to other creditors of the issuer.
The Franklin Income Fund held defaulted securities and/or other securities for
which the income has been deemed uncollectible. At September 30, 2005, the value
of these securities was $47,400,500, representing 0.12% 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 AND ILLIQUID SECURITIES
At September 30, 2005, investments in securities included issues that are
restricted and illiquid. Restricted securities are often purchased in private
placement transactions, and cannot be sold
Annual Report | 133
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. RESTRICTED AND ILLIQUID SECURITIES (CONTINUED)
without prior registration under the Securities Act of 1933, unless the sale is
pursuant to an exemption under the 1933 Act. The Fund has registration rights
for all restricted securities held at period end. The issuer generally incurs
all registration costs.
A security may 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,
2005, the Franklin Income Fund held investments in restricted and illiquid
securities, valued in accordance with procedures approved by the fund's Board of
Directors as reflecting fair value, as follows:
- ---------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT/ ACQUISITION
SHARES ISSUER DATE COST VALUE
- ---------------------------------------------------------------------------------------------------------
75,000,000 Asia Pulp & Paper Co. Ltd., 12.00%, pfd.,
Perpetual ............................... 7/18/00 $57,833,250 $847,500
$ 607,466 Pindo Deli Finance Mauritius Ltd., zero cpn.,
4/29/25 ................................. 4/30/05 141,151 141,843
$ 113,073 Pindo Deli Finance Mauritius Ltd., 144A, FRN,
4.675%, 4/29/15 ......................... 4/30/05 26,274 26,403
$ 294,012 Pindo Deli Finance Mauritius Ltd., 144A, FRN,
4.675%, 4/29/18 ......................... 4/30/05 68,317 68,652
$42,601,657 Tjiwi Kimia Finance Mauritius, secured note,
zero cpn., 4/29/25 ...................... 4/30/05 12,984,985 13,048,888
$12,883,549 Tjiwi Kimia Finance Mauritius, secured note,
144A, FRN, 4.675%, 4/29/15 .............. 4/30/05 3,926,906 3,946,231
$33,160,560 Tjiwi Kimia Finance Mauritius, secured note,
144A, FRN, 4.675%, 4/29/18 .............. 4/30/05 10,107,339 10,157,079
------------
TOTAL RESTRICTED SECURITIES (0.07% of Net
Assets) ............................................................ $ 28,236,596
============
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, 2005 were as shown below.
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT/ PRINCIPAL
SHARES AMOUNT/
HELD AT SHARES VALUE REALIZED
BEGINNING GROSS GROSS HELD AT END AT END INVESTMENT GAIN
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR OF YEAR INCOME (LOSS)
- ----------------------------------------------------------------------------------------------------------------------------------
Aquila Inc. ...................... -- 30,328,830 5,328,830 25,000,000 $ 99,000,00 $ -- $ 2,662,282
Aquila Inc., senior note, 14.875%,
7/01/12 ....................... $97,500,000 400,000 2,500,000 95,400,000 130,698,000 14,340,905 1,066,622
Canadian Oil Sands Trust ......... 6,000,000 -- 400,000 5,600,000 619,196,006 7,200,154 4,979,247
Mission Resources Corp. .......... 3,330,000 -- 3,330,000 -- -- -- 12,827,824
Mission Resources Corp.,
senior note, 9.875%, 4/01/11 .. $40,000,000 -- 30,000,000 10,000,000 (a) 2,723,031 2,991,500
-----------------------------------------
TOTAL AFFILIATED SECURITIES
(2.2% of Net Assets) ..... $848,894,006 $24,264,090 $24,527,475
=========================================
(a) As of September 30, 2005, no longer an affiliate.
134 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. OTHER CONSIDERATIONS
Subject to certain terms and conditions, the Franklin Income Fund has agreed to
sell its holdings in Asia Pulp & Paper Co. Ltd., Pindo Deli Finance Mauritius
Ltd. and Tjiwi Kimia Finance Mauritius in November 2006. Until the completion of
the sale, the transaction is being accounted for as a secured borrowing with a
pledge of collateral and any preliminary sales proceeds received are deferred
until the completion of the transaction.
12. ACQUISITIONS/MERGERS
On August 4, 2005, the Franklin Income Fund acquired the net assets of the
Franklin Multi-Income Trust pursuant to a plan of reorganization approved by the
Franklin Multi-Income Trust's shareholders. The merger was accomplished by a
tax-free exchange of 22,580,678 Class A shares of the Fund (valued at $2.53 for
the net assets of the Franklin Multi-Income Trust which aggregated $57,129,115,
including $13,521,127 of unrealized appreciation (depreciation). The merger was
accounted for as a pooling-of-interests without restatement for financial
reporting purposes. The combined net assets of the Fund immediately after the
merger were $37,481,139,819.
13. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, relating to certain practices in the
mutual fund industry, including late trading, market timing and marketing
support payments to securities dealers who sell fund shares, Franklin Resources,
Inc. and certain of its subsidiaries (collectively, the "Company"), entered into
settlements with certain of those regulators.
Specifically, the Company entered into settlements with the Securities and
Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC
Order") and marketing support payments to securities dealers who sell fund
shares (the "December 13, 2004 SEC Order") and with the California Attorney
General's Office ("CAGO") concerning marketing support payments to securities
dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the
settlements with the SEC and the CAGO, the Company retained an Independent
Distribution Consultant ("IDC") to develop a plan for distribution of the
respective settlement monies. The CAGO approved the distribution plan under the
CAGO Settlement and, in accordance with the terms and conditions of that
settlement, the monies were disbursed to the relevant funds and are recorded as
other income in the current period. The SEC has not yet approved the
distribution plan pertaining to the December 13, 2004 SEC Order. When approved,
disbursements of settlement monies will be made promptly to the relevant funds,
in accordance with the terms and conditions of that order. The IDC continues to
develop the plan of distribution under the August 2, 2004 SEC Order that
resolved the SEC's market timing investigation.
Annual Report | 135
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. REGULATORY MATTERS (CONTINUED)
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, directors, and/or
employees, have been named in private lawsuits (styled as shareholder class
actions, or as derivative actions on behalf of either the named funds or
Franklin Resources, Inc.) relating to the industry practices described above.
The lawsuits were filed in different courts throughout the country. Many of
those suits are now pending in a multi-district litigation in the United States
District Court for the District of Maryland.
The Company and fund management strongly believe that the claims made in each of
the private lawsuits referenced above are without merit and intends to defend
against them vigorously. The Company cannot predict with certainty the eventual
outcome of these lawsuits, nor whether they will have a material negative impact
on the Company. If it is determined that the Company 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.
136 | Annual Report
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 each of Franklin DynaTech Fund,
Franklin Growth Fund, Franklin Income Fund, Franklin U.S. Government Securities
Fund and Franklin Utilities Fund, portfolios of Franklin Custodian Funds, Inc.
(hereafter referred to as the "Funds") at September 30, 2005, 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, 2005, by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
November 10, 2005
Annual Report | 137
FRANKLIN CUSTODIAN FUNDS, INC.
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Funds
designate the maximum amount allowable but no less than the following amounts as
capital gain dividends for the fiscal year ended September 30, 2005:
------------------------------------
FRANKLIN FRANKLIN
INCOME UTILITIES
FUND FUND
------------------------------------
$ 143,988,403 $ 13,029,665
Under Section 854(b)(2) of the Code, the Funds designate the maximum amount
allowable but no less than the following maximum amounts as qualified dividends
for purposes of the maximum rate under Section 1(h)(11) of the Code for the
fiscal year ended September 30, 2005.
-----------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
GROWTH INCOME UTILITIES
FUND FUND FUND
-----------------------------------------------
$ 29,277,583 $ 551,347,735 $ 87,442,179
In January 2006, shareholders will receive Form 1099-DIV which will include
their share of qualified dividends distributed during the calendar year 2005.
Shareholders are advised to check with their tax advisors for information on the
treatment of these amounts on their individual income tax returns.
Under Section 854(b)(2) of the Code, the Funds 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, 2005.
-----------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
GROWTH INCOME UTILITIES
FUND FUND FUND
-----------------------------------------------
100% 27.97% 81.79%
138 | Annual Report
FRANKLIN CUSTODIAN FUNDS, INC.
BOARD MEMBERS AND OFFICERS
The name, year of birth 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
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (1932) Director Since 1976 141 Director, Bar-S Foods (meat packing
One Franklin Parkway company).
San Mateo, CA 94403-1906
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief
Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
- -----------------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (1932) Director Since 1982 142 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 (until 2002) (Consultant (2003)).
- -----------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (1952) Director Since 1998 137 Director, Amerada Hess Corporation
One Franklin Parkway (exploration and refining of oil and
San Mateo, CA 94403-1906 gas), H.J. Heinz Company (processed
foods and allied products), RTI
International Metals, Inc.(manufacture
and distribution of titanium), Canadian
National Railway (railroad), and White
Mountains Insurance Group, Ltd.(holding
company).
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary
of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 139
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (1928) Director Since 1992 141 Director, Martek Biosciences
One Franklin Parkway Corporation, MedImmune, Inc.
San Mateo, CA 94403-1906 (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), White Mountains
Insurance Group, Ltd. (holding com-
pany) (1987-2004) and Spacehab, Inc.
(aerospace services) (1994-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company) (2001-2004);
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).
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK A. OLSON (1932) Director Since June 101 Director, White Mountains Insurance
One Franklin Parkway 2005 Group, Ltd. (holding company), Amerada
San Mateo, CA 94403-1906 Hess Corporation (exploration and
refining of oil and gas) and Sentient
Jet (private jet service); and
FORMERLY, Director, Becton Dickinson
and Company (medical technology),
Cooper Industries, Inc. (electrical
products and tools and hardware),
Health Net, Inc. (formerly, Foundation
Health) (integrated managed care), The
Hertz Corporation, Pacific Southwest
Airlines, The RCA Corporation, Unicom
(formerly, Commonwealth Edison) and
UAL Corporation (airlines).
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer
(1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
- ------------------------------------------------------------------------------------------------------------------------------------
140 | Annual Report
INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (1933) Director, Director since 141 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 43 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
**RUPERT H. JOHNSON, JR. (1940) Director Since 1983 125 None
One Franklin Parkway and Vice
San Mateo, CA 94403-1906 President
- ------------------------------------------------------------------------------------------------------------------------------------
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.; 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 46 of
the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS (1945) Vice Since 1987 Not Applicable Not Applicable
One Franklin Parkway 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.; Executive Vice President, Franklin Advisers, 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 46 of the investment companies in Franklin
Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Since 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of 48 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 141
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
LAURA FERGERSON (1962) Treasurer Since 2004 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 32 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).
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President
Suite 2100 and Chief
Fort Lauderdale, Executive
FL 33394-3091 Officer -
Finance and
Administration
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 48 of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources,
Inc.; officer of 48 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 (1947) Vice President Since 2000 Not Applicable Not Applicable
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, LLC,
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 48 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).
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL O. MAGDOL (1937) Vice President Since 2002 Not Applicable Not Applicable
600 Fifth Avenue - AML
Rockefeller Center Compliance
New York, NY 10020-1032
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, Franklin Templeton
Institutional Suisse SA, Arch Chemicals, Inc. and Lingnan Foundation; and officer and/or director, 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.
- ------------------------------------------------------------------------------------------------------------------------------------
142 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
MURRAY L. SIMPSON (1937) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President, Franklin Resources, Inc.; officer and/or director, as the case may be, of some of the subsidiaries of
Franklin Resources, Inc. and of 48 of the investment companies in Franklin Templeton Investments; and FORMERLY, General Counsel,
Franklin Resources, Inc.; Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited
(until 2000); and Director, Templeton Asset Management Ltd. (until 1999).
- ------------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since October Not Applicable Not Applicable
One Franklin Parkway 2005
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Senior Vice President, Franklin Resources, Inc.; officer of 48 of the investment companies in Franklin
Templeton Investments; and formerly, Partner, Shearman & Sterling, LLP (2004-2005); and general Counsel, Investment Company
Institute (ICI) (1997-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Financial Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Officer and
Suite 2100 Chief Accounting
Fort Lauderdale, Officer
FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 48 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and
1991-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
* 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 | 143
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 U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. 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.
144 | Annual Report
LITERATURE REQUEST
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 Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II(1)
VALUE
Franklin Balance Sheet Investment Fund(2)
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(2)
Franklin MidCap Value Fund
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
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(4)
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund(4)
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund(4)
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME(5)
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(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(7)
Colorado
Connecticut
Florida(7)
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(6)
Michigan(6)
Minnesota(6)
Missouri
New Jersey
New York(7)
North Carolina
Ohio(7)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance
Products Trust(8)
(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) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
(5) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
(6) Portfolio of insured municipal securities.
(7) 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).
(8) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
09/05 Not part of the annual report
[LOGO](R)
FRANKLIN(R) TEMPLETON(R) One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
|_| WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at franklintempleton.com.
See inside for details.
ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN CUSTODIAN FUNDS, INC.
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301
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 A2005 11/05
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 12(a)(1), 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 $241,951 for the fiscal year ended September 30, 2005 and $273,501 for the
fiscal year ended September 30, 2004.
(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 their financial statements
were $0 for the fiscal year ended September 30, 2005 and $48,579 for the fiscal
year ended September 30, 2004. 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.
The aggregate 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 were $19,591 for the fiscal year ended
September 30, 2005 and $0 for the fiscal year ended September 30, 2004. The
services for which these fees were paid included tax compliance and advice.
(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 $0 for the fiscal year ended September 30,
2005 and $23,814 for the fiscal year ended September 30, 2004. 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 $4,500 for the fiscal year ended September
30, 2005 and $136,186 for the fiscal year ended September 30, 2004. 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
the review of the 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 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 $24,091 for the fiscal year ended September 30, 2005 and
$208,579 for the fiscal year ended September 30, 2004.
(h) The registrant's audit committee of the board of trustees has considered
whether the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.
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. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT
COMPANIES. N/A
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT
INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 10. 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 Directors that would require disclosure herein.
ITEM 11. 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 12. EXHIBITS.
(a) (1) Code of Ethics
(a) (2) 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) 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
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date November 21, 2005
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
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date November 21, 2005
By /s/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Financial Officer
Date November 21, 2005